Mark H. Liu

Corporate Payout Policy in Dual-Class Firms

We examine corporate payout policy in dual-class firms. The expropriation hypothesis predicts that dual-class firms pay out less to shareholders because entrenched managers want to maximize the value of assets under control and the associated private benefits. The pre-commitment hypothesis predicts that dual-class firms pay out more to shareholders because firms use corporate payouts as a pre-commitment device to mitigate agency costs. Our results support the pre-commitment hypothesis. Dual-class firms have higher cash dividend payments and total payouts, and they use more regular cash dividends rather than special dividends or repurchases, compared to their propensity-matched single-class firms. Dual-class firms with severe free cash flow-related agency problems and few growth opportunities rely even more on corporate payouts as a pre-commitment mechanism. We also rule out the alternative explanation that dual-class firms pay out more because super-voting shareholders lack the ability to generate home-made dividends by selling shares since super-voting shares are often non-tradable or very illiquid.

Analysts' Incentives to Produce Industry-Level Versus Firm-Specific Information

Using stock returns around recommendation changes to measure the information produced by analysts, I find that analysts produce more firm-specific than industry-level information. Analysts produce more firm-specific information on stocks with higher idiosyncratic return volatilities. The amount of industry information produced by analysts increases with the absolute value of the stock’s industry beta and decreases with the stock’s idiosyncratic volatility. Other stocks in the industry also respond to the recommendation change, and the magnitude of the response increases with the absolute value of the industry beta of the recommended stock and that of other stocks in the industry. I also offer results on how investors may use analyst research more effectively and potentially improve their investment performance.

Antitakeover provisions in corporate spin-offs.

We analyze the relation between antitakeover provisions (ATPs) and the performance of spin-off firms. We find that firms protected by more ATPs before spin-offs have higher abnormal announcement returns and greater improvements in post-spin-off operating performance than firms with fewer ATPs. Further, firms that reduce the number of ATPs after spin-offs have greater improvements in operating performance than firms that do not reduce the number of ATPs. Finally, CEOs of pre-spin-off firms tend to retain more ATPs in parent firms and assign fewer ATPs to the spun-off units if they remain as the CEOs of the parents but not the spun-off units. Overall, our results indicate a positive relation between ATPs and the value gains to spin-offs. 2009 Elsevier B.V. All rights reserved.

Do Investment Banks Listen to Their Own Analysts

To what extent conflicts of interest affect the investment value of sell-side analyst research is an ongoing debate. We approach this issue from a new direction by investigating how asset-management divisions of investment banks use stock recommendations issued by their own analysts. Based on holdings changes around initiations, upgrades, and downgrades from 1993 to 2003, we find that these bank-affiliated investors follow recommendations from sell-side analysts in general, increasing (decreasing) their relative holdings following positive (negative) recommendations. More importantly, these investors respond more strongly to recommendations issued by their own analysts than to those issued by analysts affiliated with other banks, especially for recommendations on small and low-analyst-coverage firms. Thus, we find that investment banks “eat their own cooking,” showing that these presumably sophisticated institutional investors view sell-side recommendations as having investment value, particularly when the recommendations come from their own analysts.

Independent Institutional Investors and Equity Returns

We find that the well-documented positive relation between institutional ownership and future equity returns comes almost entirely from independent institutional trading (i.e., change in equity ownership by independent institutions). Not only does independent institutional trading predict future stock returns with no long-run price reversal, it is also positively related to future earnings surprises (relative to analyst expectations) and earnings announcement abnormal returns. In contrast, grey institutions (which have existing or potential business relationships with firms in which they invest) have no such predictive power. Furthermore, the predictive power of independent institutional trading on future stock returns exists only among firms with high information asymmetry, but not among firms with low information asymmetry. Overall, our findings suggest that independent institutions have information advantages over grey institutions in the equity market.

Industry Information and the 52-Week High Effect

We find that the 52-week high effect (George and Hwang, 2004) cannot be explained by standard risk factors. Instead, it is more consistent with investor underreaction caused by anchoring bias: the presumably more sophisticated institutional investors suffer less from this bias and buy (sell) stocks close to (far from) their 52-week highs. Further, the effect is mainly driven by investor underreaction to industry instead of firm-specific information. The extent of underreaction is more for positive than for negative industry information. The 52-week high strategy works best among stocks with high factor model R-squares and high industry betas (i.e., stocks whose values are more affected by industry factors and less affected by firm-specific information). An industry 52-week high strategy to buy (sell) industries whose total capitalizations are close to (far from) their 52-week highs outperforms an idiosyncratic 52-week high strategy to buy stocks with prices close to their 52-week highs and short stocks in the same industry with prices far from their 52-week highs.

Payout Policy under Heterogeneous Beliefs: A Theory of Dividends versus Stock Repurchases, Price Impact, and Long-Run Stock Returns

We analyze a firm’s choice between dividends and stock repurchases in an environment of heterogeneous beliefs and short sale constraints. We study a setting in which the insiders of a firm, owning a certain fraction of its equity and having a certain amount of cash to distribute to shareholders, choose between paying out cash dividends and buying back equity, as well as the scale of investment in their firm’s new project. Outside equity holders in the firm have heterogeneous beliefs about the probability of success of the firm’s project and therefore its long-run prospects; they may also disagree with firm insiders about this probability. We show that, depending on the beliefs of firm insiders versus outsiders, the firm may distribute value through cash dividends alone; through a repurchase alone; or through a combination of a cash dividend and a stock repurchase. We also show that, in many situations, it is optimal for firm insiders to underinvest in the firm’s positive net present value project and undertake a stock repurchase with the amount of cash saved by underinvesting. We then analyze the price impact of a cash dividend versus a share repurchase, where the price impact is defined as the abnormal return to the firm’s equity upon the actual payment of a cash dividend or the implementation of a share repurchase respectively (rather than upon the announcement of these events). Finally, we analyze the long-run returns to a firm’s equity following dividend payments and stock repurchases. Our model generates a number of testable predictions different from asymmetric information models of a firm’s choice between dividends versus stock repurchases. *College of Business, University of Texas at San Antonio, TX 78249. Phone: (210) 458 6837. Fax: (210) 458 6320. E-mail: onur.bayar@utsa.edu **Carroll School of Management, Boston College, MA 02467. Phone: (617) 552 3980. Fax: (617) 552 0431. E-mail: chemmanu@bc.edu ***School of Management, University of Kentucky, KY 40506. Phone: (859) 257 9842. Fax: (859) 257 9688. E-mail: mark.liu@uky.edu This paper is scheduled to be presented at the 2014 American Finance Association meetings in Philadelphia. For helpful comments and discussions, we thank Jeff Pontiff, David Chapman, Jonathan Reuter, Oguzhan Karakas, Alice Bonaime, Chris Clifford, Will Gerken, Kristine Hankins, Palani-Rajan Kadapakkam, Lalatendu Misra, John Wald, and seminar participants at Boston College and University of Kentucky. We alone are responsible for any errors or omissions.We analyze a firms choice between dividends and stock repurchases in an environment of heterogeneous beliefs and short sale constraints. We study a setting in which the insiders of a firm, owning a certain fraction of its equity and having a certain amount of cash to distribute to shareholders, choose between paying out cash dividends and buying back equity, as well as the scale of investment in their firms new project. Outside equity holders in the firm have heterogeneous beliefs about the probability of success of the firms project and therefore its long-run prospects; they may also disagree with firm insiders about this probability. We show that, depending on the beliefs of firm insiders versus outsiders, the firm may distribute value through cash dividends alone; through a repurchase alone; or through a combination of a cash dividend and a stock repurchase. We also show that, in many situations, it is optimal for firm insiders to underinvest in the firms positive net present value project and undertake a stock repurchase with the amount of cash saved by underinvesting. We then analyze the price impact of a cash dividend versus a share repurchase, where the price impact is defined as the abnormal return to the firms equity upon the actual payment of a cash dividend or the implementation of a share repurchase respectively (rather than upon the announcement of these events). Finally, we analyze the long-run returns to a firms equity following dividend payments and stock repurchases. Our model generates a number of testable predictions different from asymmetric information models of a firms choice between dividends versus stock repurchases.

How to Motivate Fundamental Innovation: Subsidies versus Prizes and the Role of Venture Capital

We analyze the roles of entrepreneurs, venture capitalists (VC), and the government in financing fundamental innovations, defined as those with positive social value net of development costs, but negative net present values to innovating firms. We first analyze the case where the entrepreneur, with or without VC financing, develops innovations. We then analyze government support of innovation and the governments optimal choice between subsidies and innovation prizes. We also analyze the optimal interactions between government subsidies and VC financing, and show that it is optimal for the government to channel subsidies partially through VCs, providing a rationale for government-funded VCs.

Organizational Structure and Corporate Payout Policy

We examine how organizational structure affects corporate payout policies. Conglomerates (multi-segment firms) pay out more than pure plays (single-segment firms) in both cash dividends and total payouts (defined as cash dividends plus share repurchases). Further, corporate payouts increase as the cross-segment correlation (cash flow or investment) in a conglomerate decreases. The above effects are more pronounced for regular cash dividends than for special cash dividends or stock repurchases. To address the endogeneity issues, we also examine corporate payout changes around M&As. Corporate payouts increase after M&As, especially among M&As in which acquirers and targets are less correlated (earnings or investments). The results suggest that retaining earnings to keep financial slack is an important consideration when firms make corporate payout decisions.

Idiosyncratic Return Volatility and Price Informativeness: Evidence from Stock Splits

Whether higher idiosyncratic return volatility means more or less informative stock prices is an ongoing debate. All the existing literature relies on cross-sectional evidence, which makes it hard to isolate the effects of price informativeness on idiosyncratic volatility from other effects. I circumvent this problem by investigating how price informativeness and idiosyncratic volatility change for the same firm around stock splits. I find a strong negative relation between the change in idiosyncratic volatility and the change in the stock ownership by the more sophisticated institutional investors (especially short-term investors, independent investors, and transient investors, who are the most sophisticated among institutional investors). There is also a negative relation between the change in idiosyncratic volatility and the change in five other commonly used price informativeness measures. Overall, I find that an increase in price informativeness is associated with a decrease in idiosyncratic volatility.