Murali Jagannathan

Financial Flexibility and The Choice Between Dividends and Stock Repurchases

This paper measures the growth in open market stock repurchases and the manner in which stock repurchases and dividends are used in U.S. corporations. Stock repurchases and dividends are used at different times from one another, by different kinds of firms. Stock repurchases are very pro-cyclical, while dividends increase steadily over time. Dividends are paid by firms with higher “permanent” operating cash flows, while repurchases are used by firms with higher “temporary”, non-operating cash flows. Repurchasing firms also have much more volatile cash flows and distributions. Finally, firms repurchase stock following poor stock market performance and increase dividends following good performance. These results are consistent with the view that the flexibility inherent in repurchase programs is one reason why they are sometimes used instead of dividends.

The incidence and determinants of multiple corporate directorships

Contrary to the concerns of the Council of Institutional Investors and other shareholder activists, it is reported that the incidence of multiple board memberships appointments by corporate directors is low, with only 4% of the sample holding three or more seats. It is found that directors in regulated industries hold fewer board memberships than those in unregulated businesses. Firm size, board size, firm performance and corporate growth opportunities positively influence the number of directorships held by individual directors. It is further discovered that increased equity ownership of the firm by the board is associated with fewer external appointments by the board members. It is concluded that proposals to limit the number of directorships held by an individual may be ill-advised.

Accounting, Finance and Adverse Selection: Illustrations and Applications

Accounting is often viewed from a legalistic rather than economic perspective. Finance, on the other hand, is deeply rooted in economic theory, but at its heart is built on assumptions of frictionless markets. Neither perspective fully incorporates the rich economic environment in which we find the practice of accounting and finance; a market setting rife with information inefficiencies. We illustrate and review one such inefficiency, adverse selection. Adverse selection results when market participants have different levels of information about an attribute of payoff relevance. In such cases, less informed parties transact in a market where the profile of assets for sale or employees for hire is worse than the population as a whole. In general, adverse selection causes a loss of social welfare and, in extreme cases, may cause the breakdown of an entire market. Each illustration is based on one of the seminal papers written by the Nobel Laureates of 2001, recognized for their work on adverse selection. We then trace the insights into the accounting and finance literatures. We consider both disciplines jointly, because accounting information is often useful in mitigating the market inefficiencies studied in finance.