Konan Chan

Economic Sources of Gain in Stock Repurchases

Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.

The IPO Derby: Are There Consistent Losers and Winners on This Track?

Recent studies have documented that various factors such as discretionary accounting accruals, underwriter reputation, venture capital backing, and firm size will affect the long-run performance of IPOs. However, it is not clear whether the return predictability of these attributes are the manifestation of one phenomenon, or independent results. In this study, we use univariate and multivariate analyses on these factors to trace the sources of return predictability. We find that these previously identified effects are not the same phenomenon, though correlated to some extent. The results show that a confluence of these determinants is more important than any individual factor in explaining the IPO long-run performance. We also identify a subset of IPOs that outperform their benchmark and another subset that consistently underperforms.

Informational Content of Options Trading on Acquirer Announcement Return

This study examines the informational content of options trading on acquirer announcement returns. We show that implied volatility spread predicts positively on the cumulative abnormal return (CAR), and implied volatility skew predicts negatively on the CAR. The predictability is much stronger around actual merger and acquisition (M&A) announcement days, compared with pseudo-event days. The prediction is weaker if pre-M&A stock price has incorporated part of the information, but stronger if acquirer’s options trading is more liquid. Finally, we find that higher relative trading volume of options to stock predicts higher absolute CARs. The relation also exists among the target firms.

Market-Based Evaluation for Models to Predict Bond Ratings

Previous studies have examined different statistical models to predict corporate bond ratings. However, these papers use agency ratings as the benchmark to assess models and ignore the evidence that agency ratings may not be accurate in a timely manner. In this paper, we propose a new approach which incorporates ex-post bond returns to evaluate rating prediction models. Relative rating strength portfolios, formed by buying under-rated bonds with agency ratings lower than model ratings and selling over-rated bonds with agency ratings higher than model ratings, are employed to test the performance of different statistical models in rating predictions. Our results show that one version of multiple discriminant analysis model can generate a statistically significant abnormal return of 5% over a 5-year horizon. The ordered probit model which is believed to possess theoretical advantages in classifying bonds does not perform better. This suggests that using traditional measures to evaluate models can be misleading. The existence of a profitable trading strategy also raises the concern of market efficiency in the corporate bond market.

Market Reaction, Managerial Response, and the Classification of SEOs

The registration date of a seasoned equity offering marks the beginning of the offering process and serves to galvanize further scrutiny and information gathering about the issuer. We posit that the market reaction to this new additional information influences issuers’ decisions about their SEOs. Consistent with this view, we develop a parsimonious ex ante measure that successfully separates stock offerings designed to time the market (Regular offers) from those presumably used for bona fide corporate reasons such as to fund investments (Improved offers). Improved offerings, where the dollar offer size exceeds the amount filed initially at registration, record a significantly positive price reaction on the offer date and do not underperform their benchmark in the post-issuance period. Conversely, Regular offers underperform in both instances. Further, Improved SEO firms make higher investments and generate stronger institutional demand compared to Regular SEOs.

Price Run-Ups, Portfolio Rebalancing Needs, and Stock Splits

After experiencing significant stock price run-ups, a firm becomes overweight in its shareholders’ portfolios, subjecting them to excessive firm-specific risk and creating portfolio rebalancing needs. If the firm cannot attract sufficient buying interests, selling pressure from rebalancing leads to undervaluation. The firm can resolve the undervaluation problem by splitting its shares to attract new investors to better facilitate shareholders’ portfolio rebalancing. Since undervaluation attracts informed trading and makes listed options more appealing, we analyze stock price behavior and relative trading of options over stock surrounding stock splits and find compelling evidence consistent with our portfolio-rebalancing hypothesis of stock splits.

Market Reaction, Revised Proceeds, and the Classification of Seasoned Equity Offerings

Registrations of SEOs serve to galvanize information gathering about issuers. We posit that market reaction to new information influences issuers’ decision about their final offer size. The offer size relative to the amount filed initially is a parsimonious measure which helps predict subsequent firm performance. Improved offerings, whose offer size exceeds the amount registered originally, record significantly positive price reaction on the offer date and do not underperform post-issuance. Conversely their complement, Regular offers, experience significantly negative reaction on the offer date and underperform their benchmark following issuance. Improved SEO firms make relatively higher investments and generate stronger institutional demand.