James P. Weston

Small business lending and bank consolidation: is there cause for concern?

Small banks are a major source of credit for small businesses. As banking consolidation continues, will a resulting decline in the presence of small banks adversely affect the availability of that credit?

What Drove the Increase in Idiosyncratic Volatility during the Internet Boom

Aggregate idiosyncratic volatility spiked nearly fivefold during the Internet boom of the late 1990s, dwarfing in magnitude a moderately increasing trend. While some researchers argue that this rise in idiosyncratic risk was the result of changes in the characteristics of public firms, others argue that it was driven by the changing sentiment of irrational traders. We present evidence that the marketwide decline in maturity of the typical public firm can explain most of the increase in firm-specific risk during the Internet boom. Controlling for firm maturity, we find no evidence that investor sentiment drives idiosyncratic risk throughout the Internet boom.

The Real Effects of Short-Selling Constraints

We use a regulatory experiment (Regulation SHO) that relaxes short-selling constraints on a random sample of U.S. stocks to test whether capital market frictions have an effect on stock prices and corporate decisions. We find that an increase in short-selling activity causes prices to fall, and that small firms react to these lower prices by reducing equity issues and investment. These results not only provide evidence that short-selling constraints affect asset prices, but also confirm that short-selling activity has a causal impact on financing and investment decisions.

Religion and Corporate (Mis)Behavior

We provide evidence that religiosity deters unethical corporate behavior. Firms headquartered in highly religious counties are less likely to backdate options, grant excessive compensation packages to their managers, practice aggressive earnings management, and be the target of class action securities lawsuits. Our results are strongest for locations with greater concentrations of Protestants, and especially of Mainline Protestants. Finally, we find that a regulatory change designed to curb option backdating has had a much larger effect in less religious counties, suggesting that in this case regulation and religion are substitute mechanisms for monitoring and control.

Corporate Financing Decisions, Managerial Market Timing, and Real Investment

Both market timing and investment-based theories of corporate financing predict underperformance after firms raise capital, but only market timing predicts that the composition of financing (equity compared to debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time-series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns while measures of managerial market timing are not.

The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds

We show that higher institutional ownership causes firms to pay more dividends. Our identification relies on a discontinuity in ownership around Russell index thresholds. Our estimates indicate that a one-percentage-point increase in institutional ownership causes a

Firm Age and Fluctuations in Idiosyncratic Risk

7 million (8%) increase in dividends. We also find differences in shareholder proposals and voting patterns that suggest that even nonactivist institutions play an important role in monitoring firm behavior. The effect of institutional ownership on dividends is stronger for firms with higher expected agency costs.We show that higher institutional ownership causes firms to pay more dividends and repurchase more shares. Our identification strategy relies on a discontinuity in ownership based on the annual composition of the Russell 1,000 and 2,000 indices. We also find evidence of a causal effect on proxy voting, corporate investment, R&D, and equity issuance. Overall, results support agency models where concentrated ownership lowers the marginal cost of delegated monitoring.

Electronic Communication Networks and Liquidity on the Nasdaq

This paper presents empirical evidence that fluctuations in idiosyncratic risk are largely driven by the age characteristics of the firms composing the market. Consistent with previous studies, we find that the age of the typical firm at its IPO date has fallen dramatically from nearly 40 years old in the early 1960s to less than 5 years old by the late 1990s. Since younger firms tend to be riskier, this systematic decline in the average age of the typical public firm, combined with the increasing number of firms going public over the last 30 years, has caused the increase in idiosyncratic risk over the last four decades. We show that after controlling for the proportion of young firms in the market, this time period exhibits no trend in the time series of idiosyncratic risk. Moreover, we find some evidence of a negative trend in idiosyncratic risk after controlling for other measures of firm maturity.

Comovement and Investment Banking Networks

This paper examines the growth of electronic communication networks (ECNs) and their impact on the liquidity of Nasdaq stocks. I find that the recent growth of trading through ECNs has resulted in tighter bid-ask spreads, greater depths, and less concentrated markets. Overall, our results support the hypothesis that electronic communication networks have improved Nasdaq liquidity.

A Note on Nonsense Predictive Regressions Arising from Structural Breaks

We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the notion that investment banks serve as information hubs for segmented groups of investors, the stock prices of firms that use the same lead underwriter during their equity offerings tend to move together. We also find that when firms switch underwriters between their initial public offering (IPO) and a seasoned equity offering (SEO), they comove less with the stocks associated with the old bank and more with the stocks associated with the new bank. This change in comovement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership.