Michael G. Hertzel

Earnings and risk changes around stock repurchase tender offers

Abstract This paper provides evidence that repurchase tender offer announcements convey favorable information about the level and riskiness of future earnings. We show that analysts revise their forecasts of earnings per share upward following repurchase announcements. Repurchase announcement stock price reactions are positively correlated with revisions in short-term forecasts, but not correlated with revisions in long-term forecasts. Thus, the information is primarily about transitory changes in earnings. We also provide evidence that equity betas decline after repurchases. Our findings indicate that the equity beta decreases are due to decreases in the underlying riskiness of the firms assets.

Behavioral and Rational Explanations of Stock Price Performance Around SEOS: Evidence from a Decomposition of Market-to-Book Ratios

We examine the extent to which investment opportunities and/or mispricing motivate equity issuance and contribute to post-issue stock underperformance. We decompose market-to-book ratios into misvaluation and growth option components and find that issuing firms are both overvalued and have greater growth opportunities relative to nonissuers. Firms with greater growth opportunities invest more in capital expenditures and research and development (R&D) after issuance but do not experience lower post-issue stock returns. In contrast, issuing firms with greater mispricing tend to decrease long-term debt and/or increase cash holdings and do earn lower returns. Our findings are consistent with behavioral explanations for post-issue stock price underperformance.

Inference from Streaks in Random Outcomes: Experimental Evidence on Beliefs in Regime Shifting and the Law of Small Numbers

Using data generated from laboratory experiments, we test and compare the empirical accuracy of two models that focus on judgment errors associated with processing information from random sequences. We test for regime-shifting beliefs of the type theorized in Barberis et al. (Barberis, N., A. Shleifer, R. Vishny. 1998. A model of investor sentiment. J. Financial Econom.49(3) 307--343) and for beliefs in the “law of small numbers” as modeled in Rabin (Rabin, M. 2002. Inference by believers in the law of small numbers. Quart. J. Econom.117(3) 775--816). In our experiments, we show subjects randomly generated sequences of binary outcomes and ask them to provide probability assessments of the direction of the next outcome. Inconsistent with regime-shifting beliefs, we find that subjects are not more likely to predict that the current streak will continue the longer the streak. Instead, consistent with Rabin (2002), subjects are more likely to expect a reversal following short streaks and continuation after long streaks. Results of a “test-of-fit” analysis based on structural estimation of each model also favor the model in Rabin. To provide more insight on Rabin, we use an additional experimental treatment to show that as the perception of the randomness of the outcome-generating process increases, subjects are more likely to predict reversals of current streaks.

Why Do Hedge Funds Avoid Disclosure? Evidence from Confidential 13F Filings

We study a sample of Form 13F filings where fund advisors seek confidential treatment for some, or all, of their 13(f)-reportable positions. Consistent with the hypothesis that managers seek confidentiality to protect proprietary information we find that confidential positions earn positive and significant abnormal returns over the post-filing confidential period. We also find that managers are more likely to seek confidential treatment of illiquid positions that are more susceptible to front-running. Overall, our analysis highlights important benefits of reduced disclosure that are relevant to the current policy debate on hedge fund transparency.

The volatility of asset returns during trading and nontrading hours: some evidence from the foreign exchange markets

Abstract This paper presents the ratio of the hourly return variance during trading-time to the hourly return variance during nontrading-time for live currency futures contracts. We find that: (1) hourly return variances are greater during trading-time than during nontrading-time, (2) hourly return variances are greater during weeknight nontrading-time than during weekend nontrading-time and (3) the variance ratios are generally highest for the Canadian dollar contracts, lower for the European currency contracts, and lowest for the Japanese yen contracts. The results suggests that the timing of business hours is an important determinant of the timing of currency futures return volatility.

External Governance and Debt Structure

This paper examines how external governance pressure provided by both the product market and the market for corporate control affects the type of debt that firms issue. Consistent with a governance substitution effect, we find that (i) an exogenous increase in governance pressure from the product market has a significant negative impact on the use of bank financing over public debt issuance, and (ii) an exogenous decrease in governance pressure from the takeover market has a significant positive impact on the use of bank financing. Tests using changes in the strictness of loan covenants provides corroborative evidence. Also consistent with bank specialness in providing governance, we find that a bank loan issue causally increases total factor productivity of firms by 1% to 1.6% per year over a bond issue for up to four years after the issuance. We interpret these findings as consistent with the notion that firms endogenously substitute among alternative governance mechanisms in devising a governance structure that allows external capital to be raised at the lowest possible cost and that demand for creditor governance depends on the relative strength of alternative external governance mechanisms.