Janet Kiholm Smith

Evidence on the Determinants of Credit Terms Used in Interfirm Trade

Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firms basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two-part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness. Copyright The American Finance Association 1999.

Public Information, IPO Price Formation, and Long-run Returns : Japanese Evidence

We use a sample of JASDAQ IPOs to study the effects of public information on offer price formation, initial returns, and long-run returns. Underwriters begin reporting anticipated offer prices of Japanese IPOs at an earlier point than in the US. The observable portion of the price formation process begins with an original price that is established before the roadshow, continues through establishment of the filing range, and concludes with the offer price. Neither price adjustment--from the original price to the midpoint of the range, or from the midpoint to the offer price--fully reflects public information from as long as four months before the IPO. As in the US, price adjustments are asymmetric. Prices adjust more fully in response to negative than to positive public information. It appears that adjustments are limited by an implicit agreement between the issuer and the underwriter that originates before marketing of the offer begins. The agreement reflects an expectation that the offer price will be based on the relative market values of public companies up to four months before the IPO. We find that one-year aftermarket returns are significantly lower when initial returns are high. Initial returns under-adjust relative to public information that is revealed before the IPO and the under-adjustment is substantially reversed in the aftermarket. The evidence connects the implicit contracting theory with the argument that offer prices are based partly on expected value at the time of early price discussions. As a result, it can explain episodes of substantial underpricing that are sustained over periods of several months. The paper also documents that over-allotment options affect price formation by enabling issuers to select significantly narrower filing ranges and to price more fully, so that initial returns are lower.

Are NBA Fans Becoming Indifferent to Race? Evidence From the 1990s

Previous work found the racial composition of NBA teams to be positively correlated with the racial composition of their metropolitan markets in the 1980s. We find continued evidence of this relationship during the 1990s, with accompanying revenue gains from the inclusion of White players on teams located in whiter areas. And, as the number of White players declined significantly throughout the decade, the revenue product of a White player actually increased on the margin. The tendency for top-performing White players in the NBA to locate in cities with larger White populations also is consistent with their higher marginal value in such locations.

Banking Relationships and Access to Equity Capital Markets: Evidence from Japan’s Main Bank System

We study the role of banking relationships in IPO underwriting using a sample of 484 Japanese IPOs. Among other issues, we consider whether bank relationships lead to increased access to public equity markets, especially for smaller, lesser-known firms. When a firm in Japan goes public, it can engage an investment bank that is related through a common main bank, or can select an alternative investment bank. The main bank relationship can be an efficient way for the investment bank to acquire information generated by the main bank, but may give rise to conflicts of interest. We use data from two different investment banking regimes in Japan (a hybrid auction-method regime and a book-building regime) and find that main bank relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs switch to non-related investment banks that are capable of managing large offerings. While we find evidence that investment banks seek to exploit bargaining power with related issuers, we also find that issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of offer proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.

Production of Licensing Legislation: An Economic Analysis of Interstate Differences

ors Airplane pilots Accountants Auctioneers Architects Boiler inspectors Attorneys Cemetery brokers Barbers Collection agents Beauticians Debt adjusters Chiropodists Dry cleaners Chiropractors Egg graders Contractors Electricians Dental hygienists Electrologists Dentists Elevator inspectors Embalmers Harbor pilots Engineers, professional Insurance adjusters Funeral directors Investment advisers Homeopaths Landscape architects Insurance brokers, agents Masseurs Librarians Meat graders Midwives Medical technicians Miners and inspectors Milk graders Naturopaths Motor vehicle dealers Nurses, practical Nurses, public health Nurses, registered Nurserymen Opticians Nursing home administrators Optometrists Pest controllers Osteopaths Private investigators Pharmacists Psychiatric technicians Physical therapists Psychoanalysts Physicians Social workers Plumbers Tree surgeons Psychologists Well diggers Real estate brokers, salesmen Reporters, certified shorthand Sanitarians

DECISIONS TO RETAIN ATTORNEYS AND FILE LAWSUITS: AN EXAMINATION OF THE COMPARATIVE NEGLIGENCE RULE IN ACCIDENT LAW

The article examines the impact on litigation behavior of a basic feature of tort reform--replacement of the standard of contributory negligence with comparative negligence. We focus on the differential impact of the two negligence standards on incentives to hire attorneys and litigate claims. The evidence is based on a large sample of auto injury accident claims during a period of considerable cross-state variation in liability rules. We find that, on average, comparative negligence provides stronger incentives to hire attorneys and file lawsuits and is associated with higher dollar awards. The average claimant in a contributory negligence state is predicted to have a 36.0 percent likelihood of obtaining representation compared to 47.3 percent in a comparative state. The joint probabilities of representation and filing are 12.5 percent in contributory negligence states versus 21.2 in comparative states. Other findings support the view that litigation is sometimes used as a variance-increasing strategy.

What's in Your 403(B)? Academic Retirement Plans and the Costs of Underdiversification

Many college and university 403(b) plans restrict investment choices to the funds offered by TIAA-CREF, the current manager of over half of all 403(b) contributions. In the face of 2006 Internal Revenue Code changes some sponsors are dropping alternatives to TIAA-CREF. Using historical data, we study the efficiency of the TIAA-CREF opportunity set relative to a larger set that includes several standard index funds. Assuming optimal rebalancing, depending on loss-aversion, financial sophistication, and diversification constraints, over a forty-year work-life, an employee who is restricted to TIAA-CREF could lose more than half of terminal wealth, compared to investing in the expanded menu. Even when a naïve diversification strategy of equally weighting (1/n) all available funds is used, the expanded menu outperforms the restricted portfolio by about one-third over the employees work-life.

Risk Taking in Competition: Evidence from Match Play Golf Tournaments

We test hypotheses regarding risk taking behavior of competitors in settings characterized by one-on-one, single elimination tournaments. We draw data from 579 professional golf matches and over 18,000 holes from 2003 to 2013 in tournaments where match-play scoring is used rather than stroke-play. Because of the uniqueness of the data, we are able to provide clean empirical tests of how risk taking is affected by horizon effects (holes remaining), peer effects arising from heterogeneity in player abilities, match status (whether behind or ahead), and the difficulty of the task/project (hole). The findings are applicable to corporate settings where only a few rivals compete for a prize, such as a winning bid, a promotion, market share dominance, and patents. Other applications include litigation contests and political elections.

Contract Law, Mutual Mistake, and Incentives to Produce and Disclose Information

SEVERAL doctrines in the law excuse contractual performance on the grounds that the promise arose from misinformation: for example, fraud, failure to disclose, frustration of purpose, and mutual mistake. The focus of this article is on mutual mistake, where both parties to a contract share the same erroneous belief as to fact. On its face, the mutual mistake doctrine appears puzzling-Why is it not more efficient for caveat emptor to apply so the buyer bears the risk of mistake? Would not such an assignment of rights encourage more informed, careful negotiation of a contract? This article responds to these questions with a model of contract term selection in bargaining situations where transactors have incentives to misrepresent product quality or where efficient production of information is an issue.

LOSS AVERSION AND MANAGERIAL DECISIONS: EVIDENCE FROM MAJOR LEAGUE BASEBALL

Previous research indicates that management changes are important events for organizations, partly because they lead to reversals of poor prior decisions. An unanswered question is why replacing the manager seems to be necessary for reversing poor decisions. One explanation is that managers have an irrational behavioral aversion to admitting mistakes (loss aversion). We test this hypothesis with a research design that mitigates many of the measurement problems associated with investment decisions in traditional corporate settings, and that allows us to distinguish agency cost from loss aversion as explanations. Using Major League Baseball data, we find that new managers, compared to continuing managers, are more likely to divest low-performing players. Moreover, when the manager is new and the previous manager was responsible for acquiring a player who is under-performing, the likelihood of player divestiture is significantly higher relative to low performers acquired by earlier managers. Experience of the acquiring manager does not affect the likelihood that the manager retains a low performer, suggesting that it is loss aversion, and not career concerns, that motivates acquiring managers to retain low performers. The findings suggest that loss aversion plays a significant role in managerial decisions and managerial turnover.