Michael J. Schill

Sailing in Rough Water: Market Volatility and Corporate Finance

This paper examines how market volatility affects corporate financing transactions. Firms face substantial uncertainty with respect to the price, demand, and after-market costs associated with raising public capital. The ability to effectively hedge this risk is critical to the efficient financing of firm capital needs. Using monthly US equity-related financing transactions from 1970 to 1998, I find that market volatility dampens financing transactions, particularly among small or unseasoned firms. Periods of above normal market volatility are associated with a significant 13% decline in the frequency of initial public offering (IPO) transactions and a 21% decline in the number of IPO dollars raised. Increased market volatility generates greater underwriting fees but does not affect IPO underpricing. The findings are most consistent with Mandelker and Raviv’s [J. Finance 32 (1977) 683] model of costly distribution risk bearing. D 2003 Elsevier B.V. All rights reserved. JEL classification: G14; G24; G32

Financial Policies and Hedging

While firms commonly benchmark corporate financial policies against industry peers, empirically, some firms consistently deviate to pursue “rogue” policies with either a conservative or an aggressive bias. Using a panel of large U.S. firms between 1975 and 2008, we study the incidence, joint frequency distribution, and valuation effect of conservative and aggressive financial policies across four policy dimensions: leverage, payout, liquidity, and risk management. Consistent with a hedging effect, we find that conservative (aggressive) financial policies are generally associated with higher (lower) valuations. In addition, consistent with hedging theories, we find that firms with high growth opportunities which also face financial constraints benefit more from conservative financial policies. We also observe a time-variation in the valuation effects. For example, we find that conservative liquidity policies are associated with lower valuation benefits during periods of high economic growth while most aggressive policies are associated with even lower valuations as the average level of the policy increases. Finally, our tests of joint rogue policies provide evidence consistent with agency explanations. For example, firms which pursue both conservative leverage and conservative liquidity policies are valued at a discount, even though those that pursue a conservative leverage or a conservative liquidity policy on its own are valued at a premium.

Market and Regional Segmentation and Risk Premia in the First Era of Financial Globalization

We study market segmentation effects using data on U.S. railroads that list their bonds in New York and London between 1873 and 1913. This sample provides a unique setting for such analysis because of the precision offered by bond yields in cost of capital estimation, the geography-specific nature of railroad assets, and ongoing substantial technological change. We document a significant reduction in market segmentation over time. While New York bond yields exceeded those in London in the 1870s, this premium disappeared by the early 1900s. However, the segmentation premium persisted in the more remote regions of the United States. Received June 18, 2015; editorial decision October 4, 2017 by Editor Robin Greenwood.

Multi-Market Trading and Cross-Asset Integration

We study how listing in multiple markets affects the dynamics between firms’ credit default swap (CDS) and stock returns. We find that cross-listing increases (i) the sensitivity of CDS to stock returns; (ii) the integration of CDS with world equity and bond markets; and (iii) the statistical synchronicity of CDS and stock prices. Our results are stronger for firms with greater media attention, analyst and CDS coverage, Google search intensity, and for listings in familiar markets. We suggest that a firm’s presence in global equity markets comes with an improvement in the credit-equity integration through a reduction of informational frictions.

Investment and the Term Structure of Stock Returns

We propose that the time delay inherent in firm investment is what creates the time delay in stock returns observed in the momentum and reversal regularities. We provide intuition for our hypothesis and show empirically that indeed the momentum and reversal effects occur not in isolation, but are concurrent with systematic patterns in firm investment. For example, winners only continue to win when there is also subsequent investment, and losers only continue to lose when there is also subsequent disinvestment. Although our paper is about understanding the nature of the price pattern delay rather than examining a trading strategy, our tests suggest ways to enhance trading returns. Our results provide novel evidence on a potential source of delay in momentum and reversals regularities.

The Post-Deal Returns of Acquiring Firms: Evidence of an Investment-based Explanation

This paper examines an investment-based explanation for the poor post-deal returns associated with acquisitions. Using a large sample of U.S. firms, we find that the post-deal abnormal stock returns, operating returns, and analyst forecast errors associated with acquisitions are similar to those of other firms that grow organically at the same rate. Moreover, acquisitions that are not associated with balance sheet expansion do not experience poor returns. This observation calls into question a large existing literature by asserting that the distinguishing characteristic associated with acquiring firms is simply their tendency to expand their balance sheet. Our evidence is most consistent with a model where investors systematically and symmetrically overcapitalize acquired and organic growth. The findings reframe our understanding of both the merger and asset growth literature.

EMI Group PLC

This case examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The EMI case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. The case contrasts EMI’s storied success with artists such as the Beatles, the Beach Boys, Pink Floyd, and Norah Jones with its recent inability to succeed in financial markets. In light of takeover threats and restructuring costs, EMI’s CFO Martin Stewart must recommend EMI’s dividend policy.

The Procter & Gamble Company: Investmentin Crest Whitestrips Advanced Seal

A financial analyst for Procter & Gamble must report on the prospects and implications of a new teeth-whitening product. Beyond a realistic profit-and-loss forecast and baseline net present value, he must determine which pricing and marketing strategy is most likely to maximize value for shareholders.