Oded Sarig

BOND PRICE DATA AND BOND MARKET LIQUIDITY

This paper attempts to characterize liquidity-driven noise in the CRSP Government Bond price data set by comparing these price records to the independently collected Shearson Lehman Brothers (SLB) Bond Data Base. We argue that discrepancies between the data sets are due largely to liquidity-driven price errors, and we show that they are systematically related to certain bond characteristics. On the other hand, these discrepancies are small in magnitude and are approximately mean zero. We examine data filters based on observable bond characteristics and show that these filters can reduce the noise in price records while preserving their mean zero nature. The effects of these errors on performance evaluation are investigated by comparing results using filtered and unfiltered data.

Financial Signalling by Committing to Cash Outflows

We analyze a model in which firms signal their quality by using financial policies to commit to cash outflows. Two financial policies may be used: dividend and debt-service obligations. We find sufficient conditions for the informational equilibrium to entail concommitant use of both dividends and leverage in the cost-minimizing combination of the commitment signal. In this equilibrium, better firms pay higher dividends and are more highly levered than lower quality firms.

Do investors prefer round stock prices? Evidence from Israeli IPO auctions

Abstract We find round number clustering in orders submitted by investors in Israeli IPO auctions. Explanations offered for price clustering, such as dealer collusion or implicit agreement to simplify negotiations, cannot explain price clustering in this market. Therefore, this is direct evidence that investors prefer round numbers.

On Mergers, Divestments, and Options: A Note

In this note, a loss shared by the security holders of merging firms is pointed out: separate corporate entities provide double protection against future negative cash flows that are partof any production process (e.g., when customer or employee liabilities exceed future income), independent of whether or not debt is used in the corporate capital structure. A merger involvesa relinquishment of this double protection in return for a less valuable single protection: limited liability in the merged corporation against combined negative cash flows.

Real and nominal effects of central bank monetary policy

Abstract We examine the impact of monetary policy using Israeli data on nominal and indexed bonds, which allow us to decompose nominal interest rates into inflation expectations and ex ante real interest rates. We find that a monetary policy shock, introduced by raising the overnight rate the Bank of Israel charges member banks, raises real interest rates but lowers inflation expectations. Long-term real interest rates are less impacted than short-term rates. Lastly, monetary shocks affect the exchange rate between the Israeli currency and the US dollar. Our estimates are robust to numerous modifications to the basic VAR model.

Risk, returns, and values in the presence of differential taxation

Abstract We show that there exist separate security market lines (SMLs) for debt and equity securities in an equilibrium with differential taxation of debt and equity. We characterize the conditions under which these SMLs have the same price of risk (with different intercepts) and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method. We explore the implications of our results for cost of capital calculations: How to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation.

Hot hands and equilibrium

Past literature suggests that success rates in professional basketball are independent of past performance and this has been interpreted as evidence that the commonly shared belief in Hot Hands (HH) is a cognitive illusion. This is often cited as evidence of biased decision making, even when financial stakes are high. We argue that this interpretation ignores changes in both teams’ behaviour after the detection of an HH player. We derive testable hypotheses that differentiate between HH as a real phenomenon and a cognitive illusion. Analysing an entire NBA season, our results are consistent with HH being a real phenomenon.

Dividend effects in Israel: a puzzle

Abstract We examine whether stock returns on ex-dividend days in the Tel Aviv Stock Exchange (TASE) reflect the differential taxation of dividends and capital gains. TASE data offer significant advantages over data used by prior studied: less frictional trading and identifiable tax rates. We find that stock prices on the TASE on ex-dividend days exhibit significant abnormal returns. Surprisingly, we find no evidence of short-term trading around ex-dividend days to exploit these profit opportunities.

Expected inflation, unexpected inflation, and relative price dispersion: An empirical analysis

Abstract Using inflation expectations extracted from index bond prices, we examine the relations between expected inflation, unexpected inflation and relative price dispersion in stable and volatile monetary regimes. We find that expected inflation is positively related to relative price dispersion in the high inflation period, and that inflation shocks are positively related to relative price dispersion in the low inflation period.

To Be (Public) or Not to Be (Public): A New Test

We propose a new test of motives to be a public firm that is based on the observation that firms can become public by issuing either equity or debt. Thus, one can examine the determinants of the private-public decision by comparing firms that are public with equity to firms that are public with debt. The advantage of this approach is the availability of standardized COMPUSTAT data about both types of public firms. We find that there are many firms that are public only with debt (Public Debt firms) and that they are significantly different from firms that are public only with Equity (Public Equity firms). Specifically, Public Equity firms have higher sales volatility, volatility of returns on assets, and R&D intensity, and lower fraction of assets in place than Public Debt firms. This suggests that Public Equity firms are exposed to more information asymmetry than Public Debt firms. We find the same differences for financially unconstrained firms. We also find that firms with significant investments and R&D intensity are more likely to be public with equity than with debt. Examining firms around the time they transition from being private to being public, we find that transitioning firms have abundant cash and pay significant dividends both before and after the transition. Lastly, Public Debt firms are more profitable than Public Equity firms. We interpret our results as indicating that agency and information collection motives dominate information asymmetry considerations in the private-public decision.