Douglas O. Cook

Repudiation Risk and Restitution Costs: Toward Understanding Premiums on Insured Deposits

This paper contains a theoretical development of the relationship of CD premiums to both the risks of the CD issuer and the third party government guarantor of those deposits. The theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and/or the restitution of the depositors claim could be costly. The empirical analysis of the premiums for insured CDs indicates that during the years preceding the ultimate collapse of the FSLIC, the market priced the risk of both the guarantor as well as the firm. The guarantor risk pricing was responsive to the insolvency of the guarantor, the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts. During this eventful time period CD premiums rose to 187 basis points and averaged 79 and 54 basis points. Copyright 1994 by Ohio State University Press.

Bondholder Wealth Effects of Management Buyouts

We study the impact of 29 management buyouts (MBOs) announced during the years 1981-1989 on the value of the firms outstanding nonconvertible bonds. Using two methodologies-market-adjusted retums and mean-adjusted returns we provide evidence confirming the presence of significant bondholder wealth losses of about 3% associated with the announcement of MBOs. This evidence is in conflict with that provided by Marais, Schipper, and Smith, but is consistent with the results of the recent studies by Asquith and Wizman, and Warga and Welch. The magnitude of the losses in our study is similar to that reported by Asquith and Wizman. For example, the set of our firms which contained no dividend and leverage restrictions experienced an average loss of 6.5%, whereas, for a similar partition, Asquith and Wizman reported an average loss of 5.2%. Our findings are not sensitive to the choice of methodology employed. Furthermore, our findings indicate that bond price reactions are sensitive to the presence of restrictive covenants and maturity.

Lender Certification Premiums

The announcement of a bank loan by a borrowing firm has been shown to have a positive effect on the market value of the borrowers claims. This is consistent with a lenders implied endorsement of the borrower - an endorsement that has value to the borrower. In this paper, we investigate whether the lender is able to extract a premium loan rate or certification premium in return. We find empirical evidence that in the absence of collateral reputable lenders are able to exact a certification premium.

Firm and Guarantor Risk, Risk Contagion and the Interfirm Spread Among Insured Deposits

We develop a model of third party guaranteed debt and show that interest rate premiums are multiplicatively related to firm and guarantor risk. We apply the model to thrifts issuing CDs guaranteed by the FSLIC and then estimate firm probabilities of insolvency and guarantor risk across 20 observed months. This time period spans the insolvency of the guarantor followed by two recapitalizations. The relative stability in firm risk across time offers no evidence of generalized risk contagion among firms. We attribute elevated CD premiums and rate spreads to increases in guarantor risk rather than changes in firm risk.

A study of the corporate governance of thrifts

We study corporate governance within the thrift industry during a period of industry distress and legally mandated regulatory vigilance. We find evidence consistent with the Office of Thrift Supervision displacing the disciplinary role of takeovers in the market for thrift control. Poorer prior thrift performance is associated with a greater likelihood of censure while better prior performance is associated with a greater likelihood of acquisition. For thrifts that are not censured or acquired, there is no relationship between current performance and managerial turnover. Replacement due to retirement rather than board discipline explains most of these turnovers. This result is consistent with the notion that regulation may deter board disciplinary behavior, also suggested by Kole and Lehr [Journal of Financial Economics 52 (1999) 79].

Corporate Transparency and Firm Growth: Evidence from Real Estate Investment Trusts

Using a panel data set of Real Estate Investment Trusts (REITs), we find corporate transparency to be positively associated with REIT growth. These results suggest that greater transparency facilitates firm growth by relaxing information‐based constraints on external financing. The magnitude of this effect is larger in the equity market than in the debt market. Moreover, the sensitivity of investment to cash flows is decreasing in transparency, evidence that transparency relaxes liquidity constraints. Finally, we find more transparent REITs are less likely to crash.

Attention: A Better Way to Measure SEO Marketing Impact

Empirical studies find that marketing efforts can reduce the offer price discount in SEO by attracting more investors’ attention. However, existing measures of investors’ attention are all indirect. This article contributes to the field of SEO marketing the first direct attention measure, the user search frequency index from Google Insight for Search (GIS). We find that a one-point increase in pre-issue GIS index indicates about 3% reduction in offer price discount. More importantly, this effect is not weakened after including all previously found indirect measures, confirming the uniqueness of this direct measure. Last but not least, significant differences between IPO and SEO suggest that this measure works more effectively for SEO.

Why Do Some Companies Leave? Evidence on the Factors that Drive Inversions

Corporate inversions have gone through periods of intense scrutiny over the last several years with politicians and much of the media calling out these companies for being greedy and unpatriotic, while the CEOs defend their actions as being necessary to stay competitive in a global economy where US corporations face the highest statutory tax rate in the developed world. Despite all this attention, there is very little evidence in the academic literature regarding the factors that influence a company’s decision to invert. In this paper we gather a unique sample of 80 inversion announcements to examine this issue. We find no evidence that the firms that choose to invert have abnormally high effective tax rates, instead we find evidence of “tax aggressive” behavior even before these companies invert. We do find evidence that inversions are more likely in highly competitive industries. We also find evidence for a number of board and CEO characteristics that seem to affect the probability that a firm will invert.

CEO Selection and Executive Appearance

Using an objective measure of executive facial attractiveness we find that shareholders value beauty. Specifically, more attractive executives are associated with a higher abnormal return around the announcement of their appointment as CEO. These findings are strongest for insider appointments and relatedly, more attractive facial features increase the likelihood of an executive winning a tournament and being selected as CEO. We also find that facial beauty is more important when there is a larger pool of qualified candidates with similar tangible skills and it is less important in firms where unique or technical skills are more valuable. Lastly, we find some evidence that females are held to a higher standard of beauty than males. These results indicate that beauty is an important executive trait that has significant labor market implications. JEL classification: G30, G32, G34, G35We use an impartial scientific-based measure of executive facial attractiveness and find that being more attractive increases the likelihood of winning a CEO tournament. Attractiveness is most influential when there is a large pool of similarly qualified candidates. New CEO attractiveness is associated with improved long-run performance through the channel of increased sales. More attractive inside executives are associated with higher abnormal returns around their CEO selection announcement. Finally, we discover evidence that females are held to a higher standard of beauty. In sum, facial attractiveness is an important executive trait with significant labor market and corporate finance implications.