Jaime F. Zender

Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure

We find that the majority of variation in leverage ratios is driven by an unobserved timeinvariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity. Eccles School of Business, University of Utah; The Wharton School, University of Pennsylvania, and Leeds School of Business, University of Colorado. We are especially grateful for helpful comments from our referee and associate editor. We also thank Franklin Allen, Heitor Almeida, Yakov Amihud, Lincoln Berger, Alon Brav, Mark Flannery, Murray Frank, Sara Ghafurian, William Goetzmann, Vidhan Goyal, John Graham, Mark Leary, Andrew Metrick, Roni Michaely, Vinay Nair, Darius Palia, Mitchell Petersen, Rob Stambaugh, Ivo Welch, Toni Whited, Bilge Yilmaz; seminar participants at University of Arizona, Babson College, Boston College, Cornell University, Drexel University, Harvard University, University of Colorado, University of Maryland, University of Michigan, University of North Carolina, University of Pennsylvania, Queens University, the University of Western Ontario; and conference participants at the 2005 Five-Star Conference, 2005 Hong Kong University of Science and Technology Finance Symposium, 2006 NBER Corporate Finance Conference, and 2006 Western Finance Association for helpful discussions. Roberts gratefully acknowledges financial support from a Rodney L. White Grant and an NYSE Research Fellowship. A fundamental question in financial economics is: How do firms choose their capital structures? Indeed, this question is at the heart of the “capital structure puzzle” put forward by Myers (1984) in his AFA presidential address. Attempts to answer this question have generated a great deal of discussion in the finance literature. Many studies, both before and after Myers’ pronouncement, identify a number of factors that purport to explain variation in corporate capital structures. However, after decades of research, how much do we really know? More precisely, how much closer have previously identified determinants and existing empirical models moved us toward solving the capital structure puzzle? And, given this progress, how can we move still closer to ultimately providing a more complete understanding of capital structure decisions? The goal of this paper is to address these questions. Specifically, we quantify the extent to which existing determinants govern cross-sectional and time-series variation in observed capital structures by examining the evolution of corporate leverage ratios. In doing so, we are not only able to assess the progress of existing empirical work, but more importantly, we are also able to characterize what existing determinants appear to miss – the gap in our understanding of what determines heterogeneity in capital structure. Our analysis, while shedding light on several issues, also presents some new challenges to understanding how firms choose their capital structures. We begin by showing that leverage ratios exhibit two prominent features that are unexplained by previously identified determinants (e.g., size, profitability, market-tobook, industry, etc.) or changes in sample composition (e.g., firm exit). These features are illustrated in Figure 1 (see Section II), which shows the future evolution of leverage ratios for four portfolios constructed by sorting firms according to their current leverage

Auctions of divisible goods with endogenous supply

Abstract Uniform-price auctions are studied in which the seller may cancel part of the supply after observing the bids. This feature eliminates many of the ‘collusive seeming’ equilibria of the auction. In equilibrium the seller always sells the full quantity.

The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations

In an incomplete contracting environment, bankruptcy is considered to be a renegotiation of the firms financial contracts. An optimal bankruptcy law is derived as optimal restrictions on the environment within which the claimants to a distressed firm bargain. The law is used as a commitment device to ensure actions that are ex ante optimal but not subgame perfect. We show that the bankruptcy court can use two types of mechanisms to implement the optimal bankruptcy outcome: direct restrictions on the bargaining game between the claimants, and the use of a “restricted auction.” In both cases, the restrictions prevent the strategic use of bankruptcy by firms not in financial distress, provide for truthful revelation of information so that distress results in an ex post efficient allocation of resources, and establish a bias toward the manager in reorganizations that provides correct ex ante decision making incentives.

Optimal bankruptcy law and firm-specific investments

In this paper we characterize an optimal bankruptcy law that takes into consideration the incentives of managers to invest in firm-specific human capital. We show that the optimal bankruptcy law is biased towards the management team, and may be implemented by the use of a ‘restricted auction’ mechanism, in which creditors have the right to refuse bankruptcy, but are not allowed to bid for the firm. The bankruptcy law is needed as a commitment device to implement the optimal outcome.

Competition and Cooperation in Divisible Good Auctions: An Experimental Examination

An experimental approach is used to examine the performance of three different multi-unit auction designs: discriminatory, uniform-price with fixed supply, and uniform-price with endogenous supply. We find that the strategies of the individual bidders and the aggregate demand curves are inconsistent with theoretically identified equilibrium strategies. The discriminatory auction is found to be more susceptible to collusion than are the uniform-price auctions, and so contrary to theoretical predictions and previous experimental results, the discriminatory auction provides the lowest average revenue. Consistent with theoretical predictions, bidder demands are more elastic with reducible supply or discriminatory pricing than in the uniform-price auction with fixed supply. Despite a lack of a priori differences across bidders, the discriminatory auction results in significantly more symmetric allocations.

Do Incentives Matter? Managerial Contracts for Dual-Purpose Funds

We examine the contracts used to compensate the managers of the seven dual‐purpose investment companies that existed between 1967 and 1985 to determine whether financial incentives in fluence real behavior in the predicted way. The compensation contracts for these funds provided explicit incentives for the production of both capital gains and current income. We model the behavior that an expected compensation‐maximizing agent would exhibit when faced with such contracts and derive several testable implications. Our empirical results are consistent with the theoretical predictions, and so we are able to use this relatively clean setting to contribute to the growing literature concerned with determining the impact of incentive contracts on behavior. A unique and interesting aspect of this study is that the nature of these organizations allows us to provide evidence that the market understood and priced the behavior induced by these contracts.

When Less (Potential Demand) Is More (Revenue): Asymmetric Bidding Capacities in Divisible Good Auctions

We show that asymmetry in bidders’ capacity constraints plays an important role in inhibiting collusion and promoting competitive outcomes in multi-unit auctions in which the final value of the good is common knowledge. This effect appears to be related to the increased difficulty of coordination when there are significant differences between bidders. Due to its impact on collusive outcomes, asymmetry in bidding capacities has a more powerful impact on the seller’s revenue than does the auction type. Consistent with the finding in Sade, Schnitzlein, and Zender (2006) that the discriminatory auction is more susceptible to collusion than the uniform-price auction, asymmetry in capacity constraints has a greater impact in discriminatory auctions.

Divisible Good Auctions with Asymmetric Information: An Experimental Examination

An experimental approach is used to compare bidding behavior and auction performance in uniform-price and discriminatory auctions when there is incomplete information concerning the common value of the auctioned good. In a symmetric information environment, the different auction formats provide the same average revenue. However, when information is asymmetric the discriminatory auction results in higher average revenue than the uniform-price auction. The volatility of revenue is higher in the uniform-price auctions in all treatments. The results, therefore, provide support for the use of the discriminatory format. Subject characteristics and measures of experience in recent auctions are found to be useful in explaining bidding behavior.

A Simple-But-Powerful Test for Long-Run Event Studies

Testing for long-run abnormal performance has become an increasingly important part of the finance literature. We propose a test for abnormal performance in long-run event studies using the buy and hold abnormal return (BHAR). We augment the control firm approach of Barber and Lyon (1997) by using multiple control firms to create multiple correlated BHARs for each sample firm. Using the control firm structure allows us to avoid the new listing, rebalancing, and skewness biases. Further, despite the correlation amongst the BHARs, using multiple control firms allows us to increase the power of the test beyond that of existing tests. Finally, we show that our test is well-specified in both random and nonrandom samples.

On the Persistence of Overconfidence: Evidence from Multi-Unit Auctions

We analyze pre and post-task confidence in an experiment in which subjects bid in multi-unit common value auctions. Subjects return for a second session, so we are able to assess how performance affects the evolution of confidence. Those with low confidence prior to the first session underestimate performance while those with high confidence overestimate performance. Although the change in pre-experiment confidence from session one to session two is close to zero, the dispersion in confidence increases. For those with moderate initial confidence, the change in confidence depends significantly on performance in session one. For those with high initial confidence, the change in confidence does not depend on performance, and the correlation between confidence prior to session two and confidence prior to session one is significantly higher than for those with neutral or low confidence. Subjects with high initial confidence also base their perception of post-experiment relative performance primarily on pre-experiment confidence: an effect not present in the moderate and low confidence groups. Based on a pre-experiment survey, we also find that those with high initial confidence are more likely to have prior experience trading stocks or options.