Jim Hsieh

A Theory of Merger-Driven IPOs

We propose a model that links a firm’s decision to go public with its subsequent takeover strategy. A private bidder does not know its true valuation, which affects its gain from a potential takeover. Consequently, a private bidder pursues suboptimal restructuring policy. An alternative route is to complete an initial public offering first. An IPO reduces valuation uncertainty, leading to more efficient acquisition strategy, therefore enhancing firm value. We calibrate the model using data on IPOs and M&As. The resulting comparative statics generate several novel qualitative and quantitative predictions, which complement the predictions of other theories linking IPOs and M&As. For example, the time it takes a newly public firm to attempt an acquisition of another firm is expected to increase in the degree of valuation uncertainty prior to the firm’s IPO and it is expected to decrease in the valuation surprise realized at the time of the IPO. We test these and other empirical predictions of the model and find strong support for them.

Short Selling and the Cross-Section of CorporateBond Returns

This article studies the effect of short selling in the equity market on corporate bond returns. We show that firms with heavily shorted shares or large short-trade sizes experience significantly negative future bond returns. Further tests indicate that the relationship between short-trade size and subsequent bond returns is more consistent with stealth trading of short sellers. The impact of short selling on bond returns is robust to various controls for risk, liquidity, and other pricing factors. In examining the information source of short selling, we find that firms associated with heavy shorting activities or large short-trade sizes are likely to subsequently experience negative earnings surprises, higher credit risk, and reduced dividends. The evidence provides little support for the overvaluation argument. Overall, the results are consistent with the proposition that short trades in the equity market exert important valuation consequences in the corporate bond market.