Michael O'Connor Keefe

The influence of cash flow volatility on capital structure and the use of debt of different maturities

The empirical literature on the relationship between capital structure and firm cash flow volatility is inconclusive. We explore this relationship using several measures of a firms cash flow volatility and econometric methods that account for the non-linear relationship of proportional variables. Overall, our evidence indicates that ceteris paribus a one standard deviation increase from the mean of cash flow volatility implies an approximately 24% decrease in the long-term debt ratio, a 26% decrease in probability of holding debt with over 10years to maturity, and a 39% increase in the probability of holding neither short nor long term debt.

Is the Relationship between Investment and Conditional Cash Flow Volatility Ambiguous, Asymmetric or Both?

We investigate the effect of cash flow volatility on investment. Our evidence suggests that financially constrained firms decrease investment (i) when experiencing persistently high volatility; (ii) when experiencing both high volatility and negative cash flow growth realisations; and (iii) when holding low cash levels and experiencing both high volatility and a negative cash flow growth realisations. In financially unconstrained firms, the above effects are either not found or are of relatively low economic importance. Overall, our findings lend support to the financial flexibility literature and tend to contradict predictions of the real options literature.

Does the effect of revealed private information on initial public offering (IPO) first trading day return differ by IPO market heat

By IPO market regime, I decompose the effect of revealed private information on the initial return of IPOs (initial public offerings) into adjusted and unadjusted private information and find (i) investment banks partially adjust the offer price in return for revealed private information in all but the non�?hot IPO market; (ii) the economic importance of private information associated with IPOs (and hence agency costs) is procyclical; and (iii) industry information spillovers between IPOs occur only in the hot and very�?hot IPO markets.

Board of Director Compensation in China: To Pay or Not to Pay? How Much to Pay?

Over the period 2005 through 2015, we find that director compensation in Chinese listed firms is influenced by both director characteristics and ownership structure. We measure director compensation by both the propensity to be paid and the level of compensation. For independent directors, we find that director busyness, tenure, and ownership concentration positively influence and state-ownership negatively influences director compensation. For non-independent directors, we find that tenure positively influences and that both state-ownership and related directors negatively influence director compensation. Lastly, our evidence suggests that women directors in China are not underpaid.

A Theory of Political Connections Through Lender Compensation, Enforcement, and Social Objectives on Interest Rates, Access to Credit, and Investment

I model the effect of political connections through the channels of lender compensation contract enforcement, and social objectives on financial outcomes such as interest rates, default rates, financial constraints, investment decisions, and the manager’s decision about whether to be politically connected or unconnected. The model shows that the effect of political connections on financial outcomes depends upon the relative importance of each channel. By demonstrating the influence of each channel, the model helps explain many contradictory empirical findings about the relationship between political connections and financial outcomes.

Seasonal Affective Disorder and IPO Underpricing: Updated Evidence

Using several proxies for seasonal affective disorder (SAD), we find that SAD negatively affects IPO first trading day return (underpricing) during the 1981-1989 and 1999-2000 periods, but not during the 1990-1998 and 2001-2007 periods. During those periods when SAD affects IPO underpricing, firm exposure mitigates the negative effect of SAD. In addition, over the years 1981-2000, we find a negative effect of SAD on the offer price revision of the IPO during bookbuilding, which suggests pre-market investors adjust for SAD effects during the bookbuilding process.

The Seasonal Affective Disorder: The Seasons versus the Length of Night

Kamstra et al. (2003, 2011) offer measures of the prevalence of the seasonal affective disorder based on the hours of night and the medical incidence of the disorder in the North American population. Simpler measures are constructed by Kliger et al. (2012) using variables based upon the four seasons. Applying correlation analysis and factor analysis, we find these two sets of measures are empirical substitutes. We suggest researchers use the simpler seasonal mood variables of Kliger et al. rather than the more complicated measures of Kamstra et al. when examining the influence of the seasonal affective disorder on asset prices.

The Effect of Differences of Opinion and Market Conditions on the Pricing of IPOs by Investment Banks

I model the pricing decision of an investment bank that manages a book-built IPO and faces a stochastic downward sloping demand curve for the firm’s IPO shares. The model distinguishes between the effect of differences of opinion and valuation uncertainty on the pricing decision of the investment bank and hence average IPO initial returns. Without relying upon information asymmetries between agents, the model predicts several empirical regularities: average positive initial returns, the ubiquitous use of the over-allotment option, partial adjustment of offer prices to observable information, and extreme initial returns in a bubble. The model provides insight into the how investment banks interpret and price information. For example, news stories about the IPO firm attract potential new investors, many of which are plausibly sentiment investors. My model shows two effects of news stories on the stochastic demand curve. First, the new investors cause an outward shift out in the demand curve. Second, the new investors, many of whom are sentiment investors, increase valuation uncertainty. The investment bank raises the offer price due to the shift in demand caused by news stories, but only partially because of the increase in valuation uncertainty.

Integrating Financial Crises into the Finance or Economics Curriculum

Economic and finance courses tend to rely upon rational expectation models. These models do not explain excessive speculation and subsequent financial crashes, yet these crises shape our financial institutions. In order to address this gap in the curriculum, I integrate the study of financial crises into a Financial Markets and Institutions class. Specifically, I identify 10 books related to money and financial crises that are thematically related, but which differ by historical period and economic perspective. I assign each student a book to read and define a set of deliverables that are spaced out over the semester. These deliverables include a book review, thesis statement, article/literature review, chart or figure, draft paper, and final paper, and culminate in a final presentation to the class. The project serves several purposes. First, the students improve their writing and presentation skills. Second, the students gain an appreciation for the historical context of different financial crises. Lastly, the students develop critical thinking skills.