Jeremy Goh

Cross-sectional variation in the stock market reaction to bond rating changes

Abstract Previous research has found that the stock market reacts negatively to bond rating downgrades and that downgrades tend to follow periods of negative returns, indicating that at least some downgrades are partially predictable. Hypothesizing that the reaction to a downgrade depends on both the implications for cash flows and the degree of surprise, we explore how the reaction to downgrade announcements varies across bond issues. We find that the equity market reacts much more negatively to bond rating downgrades to and within the speculative bond category than to downgrades within the investment grade category. Within the speculative category, the reaction is stronger, the lower the old and new ratings are. The reaction to multiple-level downgrades is not very different from that to single-level downgrades. The market reaction is also stronger if the firm has experienced negative pre-downgrade abnormal returns. Our evidence indicates that downgrades are viewed by the market as providing information on likely future earnings before interest charges, not just likely future interest charges. It is also consistent with Billetts (1996) hypothesis that low rated debt makes a firm less attractive as a takeover target.

Is a Convertible Bond Call Really Bad News

We test and reject the hypothesis that managers call in-the-money convertibles when they view a decline in the value of the firm as likely. Inconsistent with this view, we find that insiders generally buy equity before conversion-forcing calls. Also, analysts tend to raise their earnings forecasts following a call. Thus, our evidence supports the alternative hypothesis that the price decline immediately following conversion-forcing calls is a purely transitory decline caused by the anticipated increase in the supply of equity. Indeed, our evidence confirms that the initial price decline is reversed in the weeks following the announcement. Copyright 2001 by University of Chicago Press.

Earnings Management Surrounding Seasoned Bond Offerings: Do Managers Mislead Ratings Agencies and the Bond Market?

We study earnings management (EM) efforts surrounding seasoned bond offerings using discretionary current accruals. We find that issuers tend to inflate earnings performance prior to an offering. In order for EM efforts to effectively mislead ratings agencies and the bond market, they must lead to inflated bond ratings and decreased offering yields. Regression results indicate the opposite; aggressive EM efforts are associated with lower initial ratings and higher offering yields. We also find a statistically lower proportion of subsequent downgrades for firms with the most aggressive EM efforts, which is inconsistent with these firms’ inflated initial ratings. While some firms may attempt to mislead ratings agencies and market participants by window-dressing earnings, these efforts appear to be counterproductive.

Corporate Governance, Shareholder Rights, and Shareholder Rights Plans: Poison, Placebo, or Prescription?

We examine the effect of poison pill adoptions on firm value, controlling for the adopting firms preexisting corporate governance structure. We find that only companies with the most democratic governance structures, defined as those with the fewest preexisting protective governance provisions, experience significantly positive abnormal stock returns and significantly positive abnormal revisions in five-year earnings growth rate forecasts. Moreover, regression results indicate that abnormal returns and forecast revisions are significantly related to governance structure and not to board composition or subsequent merger activity.

Forecasting Government Bond Risk Premia Using Technical Indicators

While economic variables have been used extensively to forecast bond risk premia, little attention has been paid to technical indicators which are widely used by practitioners. In this paper, we study the predictive ability of a variety of technical indicators vis-a-vis the economic variables. We find that technical indicators have significant in both in- and out-of-sample forecasting power. Moreover, we find that using information from both technical indicators and economic variables increases the forecasting performance substantially. We also find that the economic value of bond risk premia forecasts from our methodology is comparable to that of equity risk premium forecasts.

The Interaction Effects of CEO Power, Social Connections and Incentive Compensation on Firm Value

We study the relation between company value and the interplay between CEO power, CEO equity incentives and the friendliness of the board of directors. Following Bebchuk, Cremers and Peyer (2011), we measure CEO power as the proportion paid to the CEO of the total compensation paid to the top five executives of the firm. We find that strong CEO equity incentives and the presence of a friendly board of directors both individually moderate the negative effect of CEO power on Tobin’s q. Moreover, these variables also work together. We find that firm value tends to increase when equity incentives are combined with a friendly board. We conclude that the negative effects of CEO power on firm value are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors.

The Impact of Investor Protection Law on Takeovers: The Case of Leveraged Buyouts

This paper examines the impact of investor protection on the value creation of LBOs. We find that target shareholders’ wealth gain is higher in countries with better investor protection. The impact of investor protection on takeover premium is larger for LBO than non-LBO transactions. We also find evidence suggesting that club LBOs are not priced lower than non-club deals after accounting for endogeneity problem. These results suggest that investor protection law may act as an important safeguard for minority shareholders in LBO transactions.