José-Miguel Gaspar

Idiosyncratic Volatility and Product Market Competition

This Paper investigates the link between a firm’s competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct and inter-related ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. At the same time, a high degree of market power implies lower information uncertainty for investors and therefore lower return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility, and confirm the important link between stock market performance and the competitive environment of firms.

The Role of Commonality between CEO and Divisional Managers in Internal Capital Markets

We study the role played by the informal links, or “connections,” between the chief executive officer (CEO) and the divisional managers of conglomerate organizations. Using data on a large sample of multisegment U.S. corporations from 1996 to 2004, we show that segments run by connected managers receive more investment and exhibit lower sensitivity to cash flow shortfalls (and exhibit higher sensitivity to other segments’ cash flow). At the firm level, having more connected managers presiding over segments with high Tobin’s Q improves resource allocation and increases firm value. These findings are consistent with the hypothesis that the mutual trust associated with connections reduces the need for wasteful reallocation of resources across divisions of conglomerate firms.

Liquidity Externalities and Buyout Delisting Activity

We study the impact on industry liquidity of delistings resulting from leveraged buyout activity. Using data on U.S. LBOs during the 1985-2008 period, we uncover evidence of negative liquidity externalities. We find that the liquidity of firms in the same industry as the LBO target drops during the month of the LBO delisting. This temporary decrease is especially strong for industry firms highly correlated with the LBO firm. It is also stronger in industries characterized by higher information asymmetry and higher information heterogeneity, and in cases in which the information disclosed by the LBO firm before it goes private is more precise. Overall, our findings are consistent with the hypothesis that financial market participants use cross-asset information arising from correlated order flow and prices in their trading decisions. Delistings induced by LBO activity bring about temporary greater information asymmetry, which results in a negative transitory impact on liquidity at the industry level.