Donna L. Paul

Stock Liquidity and Investment Opportunities: Evidence from Index Additions

We examine the relation between stock liquidity and investment opportunities in a sample of firms experiencing an exogenous liquidity shock. We find a positive relation between changes in capital expenditures and changes in stock liquidity, indicating that stock liquidity influences corporate investment decisions. This relation is robust to alternative measures of growth opportunities, and is consistent with a liquidity premium in equity returns. That is, an increase in liquidity effectively expands the set of positive NPV projects because it reduces the cost of capital. The results suggest that liquidity-enhancing events benefit shareholders by increasing the pool of viable growth opportunities.

Board Composition and Corrective Action: Evidence from Corporate Responses to Bad Acquisition Bids

This study investigates the role of corporate boards following large declines in share value surrounding acquisition announcements. The results indicate that firms with independent boards are less likely to complete these value-decreasing bids, suggesting that boards influence corporate responses to information in stock prices. Board independence is also associated with unusually high frequencies of asset restructuring for bids that are completed, suggesting that independent boards promote restructuring in mergers the market believes are difficult to integrate. These results complement existing evidence on the boards ex-ante role in averting bad outcomes by showing that independent boards intervene following value-decreasing events.

Strategic investments by US firms in transition economies

Studies in international business have considered both theoretical and empirical analyses of investment strategies by multinational firms in transition economies. However, there is scant research on the impact of firm-specific factors on the likelihood, timing, and mode-of-entry decisions in these economies. We provide evidence on three aspects of the strategic decisions by US firms to invest in transition economies. First, we find that firms entering the region have greater advertising intensity and sales growth than industry peers that did not enter the region, suggesting that market-seeking considerations motivate expansion. Second, we find that earlier entry is undertaken by firms with fewer industry competitors and higher sales growth, suggesting that the desire to secure market share ahead of competitors motivates entry timing. Finally, we investigate the choice of entry mode into the region, and find that firms from concentrated industries are more likely to enter the region with high-equity commitment, consistent with market-seeking motives. We also find that firms incorporate the degree of progress with market-oriented reforms in making decisions concerning entry timing and mode. Journal of International Business Studies (2008) 39, 249–266. doi:10.1057/palgrave.jibs.8400334

Does Inclusion in a Smaller S&P Index Create Value?

This study finds overall increases in equity value surrounding addition to the S&P SmallCap and MidCap indexes from 1996 to 2003 and investigates sources of the value gains. Following addition, there are significant increases in proxy variables for stock liquidity and investor recognition, and changes in these variables are impounded into the permanent component of announcement share price revisions. We also find that changes in capital investment intensity are increasing in changes in stock liquidity, consistent with a reduction in the cost of capital following index addition.

Leadership positioning among U.S. firms investing in China

This study investigates leadership positioning by U.S. firms in China using the awareness, motivation, capability (AMC) perspective. We define leadership as first in industry to invest in China, and find that leaders have characteristics associated with higher AMC, evidenced by pre-existing multinational experience, higher product market orientation, smaller scale of operations, and higher input cost structure. Notably, the motivation to lower input costs and the prior capability in multinational operations mattered only for the first wave of firms leading industry investment earlier in time, while firms with smaller scale of operations exhibited a preference to lead investment in less popular provinces. Overall, these results provide a unique view on how AMC characteristics influence international investment decisions, suggesting that firms both strategically lead and strategically follow. In additional analysis, we examine how leaders and followers positioned themselves with respect to ownership, and find that leaders were more likely to choose entry modes that offered ownership control over flexibility, consistent with internalization theories.