Jayant R. Kale

The Dividend Initiation Decision of Newly Public Firms: Some Evidence on Signaling with Dividends

We track the dividend initiation (DI) decisions from a sample of 6,588 firms that went public during the period 1979–2005 and find that 873 of them initiated dividends. Our primary objective is to determine whether information signaling can explain the DI decision. We find that variables suggested by the dividend-signaling models of John and Williams (1985) and Allen, Bernardo, and Welch (2000) are significant determinants of the DI decision and the associated announcement-period stock price effect. We also find support for the residual, agency, tax, clientele, transaction costs, catering, and life-cycle explanations of dividend policy.

Product Market Linkages, Manager Quality, and Mutual Fund Performance

Mutual funds typically invest a disproportionately large portion of their portfolio in one industry (main industry). We present a simple theoretical model to demonstrate that better mutual fund managers make larger investments in the important supplier/customer industries related to the main industry. Consistent with our theory, empirical tests on a large sample of mutual funds show that investment in related industries is positively associated with fund performance and plays a more significant role in explaining fund performance than investment in the main industry. Furthermore, the positive relation between main investment and fund performance obtains only when related investment is high. Copyright 2013, Oxford University Press.We examine whether mutual fund managers use information on the economic linkages between an industry and its supplier and customer industries. We analyze a mutual fund’s investment in its main industry--the industry where it invests the largest amount of money, and in related industries--the important supplier/customer industries of the main industry. We find that fund managers invest significantly more than the market average in both main and related industries. Investments in related industries relate positively to investments in the main industry and to the closeness of the linkages between the main and related industries. We also find that larger proportions of information-driven trades (“buys” when there is net outflow and “sells” when there is net inflow) are in main and related industry stocks. Finally, we present evidence that funds with higher main and related investments exhibit higher return-based and holding-based performance. Our findings suggest that the positive effect on abnormal fund performance is driven primarily by the level of investments in the related industries. Taken together, our findings indicate that fund managers who use information derived from product market suppliercustomer interrelations have ability and/or exert effort. ∗ Both authors are at the Department of Finance, J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia – 30303. The e-mail address and phone number for Huang are lxhuang@gsu.edu and 404-413-7346 and for Kale are jkale@gsu.edu and 404-413-7345. We thank Vikas Agarwal, Mark Chen, Gerry Gay, Rob Hansen, Simi Kedia, Omesh Kini, Lubomir Litov, Reza Mahani, Vikram Nanda, Andy Puckett, Chip Ryan, Clemens Sialm, Isabel Tkatch, Baozhong Yang, and seminar participants at Alexandria University (Egypt), Cairo University (Egypt), Georgia Institute of Technology, Georgia State University, Goa Institute of Management (India), Lousiana State University, and Tulane University for comments. The responsibility for all remaining errors is ours.

Contracting with Nonfinancial Stakeholders and Corporate Capital Structure: The Case of Product Warranties

We investigate the relation between a firm’s product warranty level and its leverage. We find that leverage relates negatively to the warranty level and that this relation is robust to controls for endogeneity and self-selection into offering warranties. The negative warranty-leverage relation obtains only in the subsample of firms in the manufacturing industries. We also show that firms with warranties have the lowest debt levels, firms without warranties but operating in industries where other firms offer warranties on average carry higher debt, and firms in industries where no firm offers a warranty have the highest debt levels.

Do Indian Business Group Owned Mutual Funds Maximize Value for Their Investors

The manager of an Indian business group (BG) fund can have access to private information on its own BG firms and their industries. However, since the fund belongs to a BG, the fund manager may also have incentives to undertake investments that benefit the BG firm managers and not its fund investors. In this paper, we examine the relation between a business group (BG) mutual fund’s return performance and its ownership levels in (i) its own BG firms, and in (ii) the rivals of its BG firms that operate in the same industries. Using return and portfolio holdings data on a survivorship-bias free sample of Indian BG mutual funds for the period 2002-2010 we find that the relation between a BG fund’s risk-adjusted returns and its ownership in its own BG firms or firms in BG industries is roughly in the form of an inverted “V,” i.e., funds underperform whenever they increase or decrease their investment in group firms or rival firms beyond what a typical fund invests in these firms. The effect is stronger for underinvestment. This finding for BG firms suggests opportunistic behavior on the part of the BG fund manager.