Gonul Colak

Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections

We analyze IPO activity under political uncertainty surrounding gubernatorial elections in the U.S. There are fewer IPOs originating from a state when it is scheduled to have an election. To establish identification, we develop a neighboring-states method that uses bordering states without elections as a control group. The dampening effect of elections on IPO activity is stronger for firms with more concentrated businesses in their home states, firms that are more dependent on government contracts (particularly state contracts), and harder-to-value firms. This dampening effect is related to lower IPO offer prices (hence higher costs of capital) during election years.

Changes in Cash Holdings Around the S&P 500 Additions

We analyze the changes in cash holding policies of S&P 500 firms from before to after their inclusion in the index. One year after inclusion, their mean industry-adjusted cash holdings decline by nearly 32% from the year before inclusion. Several factors explain this decline. The precautionary motive for cash subsides due to these firms becoming more visible, less uncertain, and less constrained to raise cheap external capital. Corporate governance deteriorates after inclusion due to increased managerial entrenchment, which leads to a reduction in cash as suggested by the free cash flow hypothesis. Most index firms face diminishing investment opportunities and decreasing capital expenditures, which implies a lesser need for cash holdings related to the transaction motive.

Comovements in Corporate Waves

This paper analyzes the common factor that drives the cyclical movements in the corporate event waves. We show that this common corporate factor is closely linked to the economic business cycles. We, first, document the statistical and the time-series properties of the corporate event waves to determine the commonalities, the interdependence, and the comovements between them. We show that all the waves have similar ARMA and ARCH characteristics. Moreover, we conjecture that there are two major factors forming a corporate event wave: a systematic (or common) factor and a wave-specific (or idiosyncratic) factor. To study the common dynamics and the common factor, we propose a factor model with ARMA and ARCH properties, and develop a novel Bayesian estimation method for this model. We find that the percentages of the wave series that are driven by the common factor range from 3.54% for the IPO wave to the 67.5% for the divestitures wave. We also check whether the estimated common factor can be proxied by any major macroeconomic or financial variable. We find that the best proxy candidates are the variables closely associated with the business cycle: the industrial production (aggregate output), the inverse of the long-term interest rates (10-year T-bond yields), and the S&P 500 index (stock market levels).

Compensation Contagion: The Role of Peer Benchmarking

We show that increases in CEO compensation at new S&P 500 members affect CEO compensation at other firms through compensation peer benchmarking. This compensation contagion propagates via three channels. Direct competition for managerial talent forces firms to respond to peers’ pay increases. Star chasing, which involves adding new S&P 500 members to compensation peer groups to justify higher pay, is associated with weak corporate governance. The peer-of-peer channel relies on indirect compensation peers and is most influential overall. Interestingly, we find minimal downward pressure on CEO compensation from companies removed from the S&P 500, confirming the asymmetric nature of contagion.