Myron B. Slovin

Alternative flotation methods, adverse selection, and ownership structure: evidence from seasoned equity issuance in the U.K

We examine valuation effects of announcements of seasoned equity issuance and assess the impact of the choice of flotation method in the U.K. Rights offerings are predominant, but in 1986, British firms gained the flexibility to conduct placings, which are comparable to U.S. firm commitment offerings. A placing is a fixed-price bought deal that increases ownership dispersion.Placings generate significantly positive share price effects, whereas rights offerings have large negative valuation effects that become more adverse after 1985. We conclude that the option to conduct placings enhances the ability of firms to signal their quality and to use a seasoned equity offering to reduce ownership concentration.

Firm size and the information content of bank loan announcements

Abstract We examine share price responses to announcements of bank credit agreements for exchange listed and NASDAQ firms and test whether there are systematic differences between large and small capitalization firms. For small firms both renewals and initiations of loan agreements generate significantly positive share price effects. In contrast, for large firms there is little evidence that bank credit announcements convey information to the capital market. Our results are consistent with arguments of Fama and Diamond that it is primarily small, less prestigious firms that receive benefits from screening and monitoring services associated with bank loans.

An analysis of contagion and competitive effects at commercial banks

Abstract We examine whether an adverse event at one bank generates externalities for the banking industry, and assess whether the population of commercial banks is homogeneous. We find dividend reductions are negative events for both announcing money center and regional banks, but only reductions at money center banks have negative, contagion-type externalities. Dividend reductions at regional banks have positive competitive effects on geographic rivals. Regulatory enforcement actions induce negative valuation effects that are idiosyncratic to targeted banks, but actions against regional banks generate positive competitive effects on geographic rivals. Our evidence suggests that regional banking markets are not contestable.

External monitoring and its effect on seasoned common stock issues

Abstract This paper demonstrates that the market reaction to announcements of seasoned stock offerings varies with the presence of outside agents - accounting firms, commercial banks, and underwriters - who monitor the firm. The stock price reaction is a positive function of the quantity of bank debt in a firms financial structure, the quality of the firms investment banker, and the quality of the public accounting firm that serves as its external auditor. The evidence supports theoretical models that imply external agents audit, monitor, and certify decisions to issue seasoned common stock.

Market Structure, Informed Trading, and Analysts' Recommendations

We examine stock price behavior in response to initial coverage, buy recommendations that are pre-released to important clients before the stock market opens, and find a strong positive valuation effect at the open. On average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for NASDAQ stocks to reflect the private information contained in these analyst recommendations, so when informational asymmetry is high, the centralized call market is more efficient than a competitive, but fragmented dealer market. Public news release leaves share prices unaltered. Overall, competition among informed traders causes private information to be rapidly incorporated into stock prices.

Bank lending and initial public offerings

Abstract In this paper we test the hypothesis that banking relations are a signal about firm value. We argue that bank processing of asymmetric information and external monitoring of corporate activities reduce the ex ante uncertainty of investors about firm value. We demonstrate that the existence of bank debt and/or lines of credit lowers the expected initial return associated with initial public offerings. The empirical results are robust with respect to the inclusion of variables which reflect other mechanisms that can ameliorate ex ante uncertainty. Our work adds to the body of evidence that supports the hypothesis that intermediaries provide valuable asset services to corporate borrowers.

Informational externalities of seasoned equity issues: Differences between banks and industrial firms

Abstract We examine share-price reactions of commercial bank common stock issues and find negative effects on rival commercial and investment banking firms. In comparison, we find no such intra-industry effects for equity issues by industrial firms. Our results support theoretical models in which bank loan portfolios impound asymmetric information about client firms, so that adverse individual bank announcements generate external information effects on other banks. A policy implication of these results is that regulatory pressures applied to individual banks induce spillover costs for the commercial and investment banking industries. Our evidence also indicates that the legal separation of commercial and investment banking activities is artificial.

Valuation effects of commercial bank securities offerings: A test of the information hypothesis

Abstract This paper provides event study evidence on securities issuance by commercial banks, a set of firms in which capital structure is regulated. The evidence supports the information hypothesis of securities issuance but also indicates that capital regulation interferes with information transfer. We find that: one, the negative impact of equity issues on bank stock prices is much weaker than for non-financial firms; two, the impact of securities issuance is uniformly less negative after the imposition of stricter capital requirements in 1981; and three, the impact of securities issuance is further attenuated after 1981 for non-multinational banks, which faced more specific capital requirements than multinational banks.

Corporate commercial paper, note issuance facilities, and shareholder wealth

Abstract In this paper, we hypothesize that the financial market regards the issuance of securities through a note issuance facility or a commercial paper program backed by a standby letter of credit as a favorable signal about the issuing firm. This is due to the certification role played by banks. We demonstrate that announcements of commercial paper programs backed by these formal backstop facilities have a statistically significant positive effect on shareholder wealth. This result is in contrast to issues of other types of securities studied in the literature which have been shown to induce nonpositive effects on shareholder wealth. The initiation of commercial paper programs without this backing has little effect on shareholder wealth. Finally, we demonstrate that the quality of the credit ratings associated with these issues of commercial paper has little effect on abnormal returns. Thus, our results cannot be explained by the pattern of these ratings.

The economics of parent-subsidiary mergers:: an empirical analysis

Abstract We examine parent-subsidiary mergers, transactions that do not entail arms length bargaining or a change in control. These mergers are typically followed by considerable restructuring of subsidiaries. Minority and parent returns are not significantly different from returns at third party buyouts of parent-controlled subsidiaries, transactions that entail arms length negotiations and a change in control. Buyer returns are negative, consistent with overbidding. We conclude that parent-subsidiary mergers facilitate corporate restructuring, foster the reallocation of resources toward higher valued uses, and increase value for both parent and subsidiary.