Marc L. Lipson

Information, trading, and volatility

We examine the effects of trading and information flows on the short-run behavior of stock prices by comparing the behavior of stock return volatility during trading and nontrading periods. We define nontrading periods as periods when exchanges and businesses are open but traders endogenously choose not to trade. After correcting for the bid/ask bounce and stickiness in quotes, we find that a large proportion of daily stock return volatility occurs without trades, especially for large firms. Furthermore, we provide new evidence that public (versus private) information is the major source of short-term return volatility.

Liquidity and Capital Structure

We examine the relation between equity market liquidity and capital structure. We find that firms with more liquid equity have lower leverage and prefer equity financing when raising capital. For example, after sorting firms into size quintiles and then into liquidity quintiles, the average debt-to-asset ratio of the most liquid quintiles is about 38% while the average for the least liquid quintiles is 55%. Similar results are observed in panel analyses with clustered errors and using instrumental variables. Our results are consistent with equity market liquidity lowering the cost of equity and, therefore, inducing a greater reliance on equity financing.

Dividend Initiations and Earnings Surprises

This paper examines the performance of newly public firms and compares those firms that initiated dividends with those that did not. Earnings increases following the dividend initiation and earnings surprises for initiating firms are more favorable than those for noninitiating firms. Furthermore, had noninitiating firms declared dividends that matched the dividend yield, dividend-to-sales ratio, or dividend-to-assets ratio of initiating firms, the promised dividend would have equaled about 8.5% of earnings, significantly above the 5% level for initiating firms. In contrast to DeAngelo, DeAngelo, and Skinner (1996), these results suggest that dividends signal differences in performance between otherwise comparable fims.

Market microstructure and corporate finance

Abstract This article provides a brief overview of the importance of market microstructure research and identifies existing areas of research that focus on links between microstructure and corporate finance. Each of the special issue articles is then summarized with particular attention given to the research contribution of the article and to the links explored between microstructure and corporate finance.

Can Financial Markets Inform Operational Improvement Efforts? Evidence from the Airline Industry

We investigate whether stock price movements can inform operations managers as to where they should focus improvement efforts. We examine how unexpected performance along several dimensions of service quality---on-time performance, long delays and cancellations, lost bags, and denied boardings---impacts contemporaneous stock returns. Prior research suggests that airlines buffer their flight schedules and engage in expensive employee incentive programs to increase the likelihood of on-time arrival. We find that only long delays are penalized by the market, and we identify a number of carrier-specific factors that alter the financial impact of long delays. We find that the penalty a carrier faces for long delays is significantly higher if it operates a high percentage of short-haul or connecting flights, or if its competitors incur fewer long delays in the same time period. Our findings suggest that developing ways to curtail long delays is a useful future research area.

Carded Graphics, LLC: Sheeter Replacement Decision

A growing folding carton company is contemplating the replacement of an old machine with a new one. The case challenge is to develop a cash flow forecast and determine the proper discount rate for the machine replacement. In addition to increased capacity and reduced waste, the new machine offers strategic advantages to the firm in its chosen market niche. Issues related to operations are central to appreciating the importance and implications of this capital investment: Operating excellence is a key competitive advantage for this firm. A teaching note and student and instructor Excel spreadsheets are available to accompany the case for instructors.