Connie X. Mao

Stock Market Liberalization and the Information Environment

We document beneficial associations between openness to foreign equity investors and the information environment in emerging stock markets. Openness is reflected in legal, regulatory, and cross-listing events, the fraction of stock available to foreign investors, and the size of U.S. portfolio flows. We find that firm-specific information, analyst coverage, and value-added by analysts increase with openness to foreign equity investment while earnings management tends to decline. Large changes in earnings-related information variable are attributed to foreign analysts who increase their presence, activity, and contribution after openness increases. Across a detailed sample of Korean firms, however, such effects are dampened for firms that rate poorly on governance.

Corporate use of interest rate swaps: Theory and evidence

We develop a simply theory on interest rate swaps based on the difference between bank loans and public debts. While restrictive covenants of bank loans help reduce agency costs, banks also have natural disadvantages in bearing interest rate risk due to their floating liabilities. A firm that wants a fixed-rate loan can borrow a floating-rate loan from a bank and enter an interest rate swap to hedge the interest rate risk. Consistent with our theory, we find empirically that fixed-rate swap payers generally have lower credit ratings, higher leverage ratios, higher percentages of long-term floating-rate loans, and are more likely to use bank loans than floating-rate swap payers. 2003 Elsevier Science B.V. All rights reserved. JEL classification: G21; G32

Exchange rate regimes and stock return volatility: some evidence from Asia's silver era

Abstract We study the impact of switching between silver, gold, and paper money standards on stock returns from seven small open economies from 1873 to 1941. Paper currency regimes are often associated with higher stock market volatility and higher correlations between markets. Indicators of global economic activity and export commodity prices typically explain a greater fraction of stock return behavior than currency related factors. There is little evidence that adoption or abandonment of the traditional currency, silver, has an impact on stock return volatility and cross-market correlation.

Corporate Risk Management under Information Asymmetry: CORPORATE RISK MANAGEMENT UNDER INFORMATION ASYMMETRY

This paper examines the financial and operational hedging activities of US pharmaceutical and biotech firms that are subject to a high level of information asymmetry stemming from R&D investments during 2001–2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under�?investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry�?specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity�?based industries without addressing information asymmetry.

Locals, Foreigners, and Multi-Market Trading of Equities: Some Intraday Evidence

Binding foreign ownership limits fragment stock trading in Thailand into distinct markets for locals and foreigners. Foreigners (locals) who buy on the local (foreign) board lose dividends and voting rights (pay a price premium). We observe a surprising amount of cross-market activity among orders and trades from 1999. Cross-market investors submit orders strategically when liquidity is high, trade on patterns in stock returns and prices across markets, and fill their orders at relatively beneficial prices. Holding period returns based on cross-market trades appear particularly profitable. The dual market structure permits traders to profit from their information and trading skill while contributing to price discovery.

Does Syndicate Pressure Affect Analysts’ Incentive to Produce Information? Evidence from Recommended Firms’ Securities Class Action Lawsuits

We propose that syndicate pressure distorts unaffiliated analysts’ incentive to produce information. To examine this newly proposed conflict of interest problem, we separate unaffiliated analysts into two types. The first type is the analysts employed by syndicate banks, which do not have direct underwriting relationships with the recommended firms but have participated in the affiliated main banks’ syndicates (the underwriters of recommended firms). The second type is independent banks, which do not have underwriting relationships with the recommended firms or syndication relationships with the main banks. Syndicate pressure refers to syndicate banks’ analysts being cooperative or acting like main banks’ analysts so as to enhance their banks’ chance to participate in future underwriting syndicates. We further distinguish syndicate bank types by their roles as co-managers or co-lead syndicate members because co-managers tend to be smaller underwriters and do not have the same capacity to organize their own syndicates as co-lead syndicate banks. Therefore, co-manager partners are more susceptible to syndicate pressure than co-lead syndicate banks. Using a novel event, the securities class action lawsuits, we are able identify unique private information production periods prior to the public’s knowledge of the wrongdoings. Therefore, we can examine the timeliness of private information dissemination by various types of analysts. Consistent with the “syndicate pressure” hypothesis, we find that unaffiliated analysts employed by co-manager syndicate banks issue downgrade revisions no sooner than those employed by the affiliated main banks. On the other hand, unaffiliated analysts employed by co-lead syndicate banks and independent banks issue downgrade revisions significantly more promptly than those of main banks. In addition, we document that Global Settlement appears to improve analysts’ independence, particularly among main banks, which are subject to the greatest level of conflicts of interest, and co-manager syndicate banks, which are susceptible to syndicate pressure from main banks.

Costs of Performance Pricing Loans

We examine how monitoring costs and costs of financial distress affect the use of performance pricing provisions in bank loan contracts. We find that firms that are easier to monitor, such as those with better accounting quality, lower information opacity, or a stronger prior relationship with the lender are more likely to have performance pricing loans. The likelihood of using performance pricing is significantly reduced after financial restatement events. Conditional on using performance pricing loans, firms with lower (higher) accounting quality are more likely to have credit rating (accounting) based performance pricing loans. Finally, we find that the use of performance pricing decreases in the likelihood of financial distress. Our results are robust to various alternative measures of accounting quality, information opacity, as well as default risk. Our results are consistent with the notion that the quality of accounting information has a significant influence on the design of financial contracts.

Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R

We investigate how chief executive officers’ (CEOs) risk incentive (VEGA) affects firm innovation. To establish causality, we exploit compensation changes instigated by the FAS 123R accounting regulation in 2005 that mandated stock option expensing at fair values. Our identification tests indicate a positive and causal effect of CEOs’ VEGA on innovation activities. Furthermore, dampened managerial risk-taking incentive after the implementation of FAS 123R leads to a significant reduction in innovation related to firms’ core business and explorative inventions. It implies that managers diversify their innovation portfolios and decrease explorative inventions to curtail business risk when their risk-taking incentive is reduced.

How Much Liquidity Insurance Do Credit Lines Provide

A substantial literature treats credit lines as a form of committed liquidity insurance. We provide evidence that challenges this perspective. Borrowing rates hold for a relatively short period of time and firms that draw on a line of credit face higher interest rates and more stringent contract terms upon renewal than do similar firms that did not draw on credit lines. Moreover, banks have considerable capacity for forcing renegotiation and thereby limiting a firm’s benefit from drawing on a credit line. As a consequence, firms that rely heavily on credit lines for liquidity insurance may forgo positive NPV projects. We find that bank reputation and prior lending relationships improve the efficiency of credit lines.

Are Indexed Bonds Really Inflation Proof? A Model of Real and Nominal Term Structures when Money has Real Effects

This paper studies the general behavior of the nominal and real term structures of interest rates in a general equilibrium framework. A central bank is introduced in the model as an agent facing a tradeoff between inflation and output and choosing a monetary policy variable. Prices and output are jointly determined in our model endogenously. Two multi-factor nominal and real term structure models are given as examples to illustrate the general model. In our economies, inflation indexed bonds are not completely inflation proof, but are still subject to the influence of inflation uncertainties. The models offer us an empirical framework that can be studied with indexed bond data and nominal bond data together in a single estimation.