Satish Thosar

Contested Tender Offers: An Estimate of the Hazard Function

In this paper, the authors estimate the hazard function for firms that are targets in unsolicited tender offers. The data support a Weibull-gamma specification and imply a hazard rate that increases sharply in the initial period following the bid announcement, after which it declines steadily. In explaining the hazard, the authors find that the initial bid premium has no explanatory power, while the onset of an auction and the proportion of institutional ownership in the target firm significantly enhance the hazard. Legal and financial restructuring actions by target management are effective in reducing the hazard, thereby prolonging the contest.

The Medium-Term Aftermarket in High-Tech IPOs: Patterns and Implications

A number of theoretical models, loosely characterized under the rubric of behavioral finance, suggest that price convergence to value is far from instantaneous and possibly involves interplay between noise and informed traders. These models are motivated by documented anomalous patterns in equity markets and assume some form of psychological bias that affects investor behavior. With the benefit of hindsight it seems clear that the technology sector went through a bubble-like pattern in the late 1990s and that investor biases (if indeed they exist and can be inferred) may have been even more pronounced. Accordingly, our study focuses on the medium-term aftermarket in high-tech US IPOs during this period. Using both ordered logit regression and split-population hazard modeling approaches, we document momentum and reversal patterns that are consistent with the predictions of some behavioral finance models. Our findings indicate that momentum variables are important while fundamental variables have at best weak explanatory power.

Risk Aversion and the Investment Horizon: A New Perspective on the Time Diversification Debate

Investment managers generally subscribe to the principle of time diversification. This implies that a larger portion of the portfolio should be devoted to risky assets as the investment horizon increases. In contrast, academics have shown that for investors with utility functions characterized by constant relative risk aversion, the optimal asset-allocation strategy is independent of the investment horizon. The relative risk aversion in these studies is assumed to be constant both with respect to wealth as well as investment horizon. We suggest a utility function that explicitly captures the notion that individuals are more risk tolerant when the investment horizon is long, thereby validating the intuitively appealing time diversification argument.

Multiple bids as a consequence of target management resistance: A count data approach

In this article, we focus on the question of target management resistance and the incidence of subsequent bids. A Poisson count data model is used where the dependent variable represents the number of bids (count) received and the independent variables comprise target management actions and firm specific characteristics. Of the target management actions considered, legal defense and the entry of a white knight are associated with additional bids. With respect to firm specific characteristics, we find that a high initial bid premium deters subsequent bids. Firm size is also significant and has an interesting relationship with the number of bids received. Larger target firms tend to receive more bids; however, the number of bids tails off for firms with assets exceedng

A Valuation Framework for Rent-to-Own Housing Contracts

12 billion.

Pay-for-performance incentives in the finance sector and the financial crisis

The housing market crash in 2007 followed by a banking crisis and deep recession led to many underwater mortgages and a large shadow inventory of unsold properties. An innovative mechanism that may be playing a role in lowering inventories is the emergence of rent-to-own (RTO) housing contracts. RTO is potentially an attractive alternative to traditional financing for would-be buyers who cannot qualify for a mortgage due to an inadequate credit score, insufficient savings etc. These transactions, however, carry risks for both renters and owners. In this paper, we explore the contours of an RTO arrangement and suggest a binomial tree option valuation framework. In particular, we solve for the zero-profit purchase price at national and metro levels. We evaluate cases where the buyer can and cannot prematurely terminate the contract. We also consider scenarios in which both seller and buyer have deadweight costs that affect the contract outcome in a Nash bargaining framework. To the best of our knowledge, our model is the first analytical attempt to focus on the RTO housing contract.

The Role of Investor Sentiment in theIPO Aftermarket

Purpose - The purpose of this paper is to investigate executive compensation in the finance sector during the periods surrounding the crisis with a view to determining whether compensation incentives were associated with excessive risk taking. Design/methodology/approach - The authors compare pay-for-performance sensitivity (PFPS) parameters for the finance sector before, during, and after the financial crisis. The authors also employ the technology sector as a comparison benchmark. Findings - The authors find that CEO compensation is strongly associated with the accounting-based return on assets performance measure in the finance sector particularly in the pre-crisis period; the relationship is amplified in larger firms. In contrast, the technology sector exhibits PFPS only for the market-based stockholder return measure with smaller firms displaying greater sensitivity. Originality/value - From a public policy perspective, it is desirable that PFPS for senior executives in the finance sector is muted. This is due to the risk-shifting incentives specific to the sector whereby profits flow to managers/stockholders while catastrophic losses can be socialized through taxpayer funded bailouts. The findings imply that compensation practices in the finance sector remain a potential concern for systemic stability. In addition to academics and practitioners, the paper may be of interest to financial regulators. In the authors opinion they should consider monitoring PFPS in addition to capital ratios, credit default swap spreads, and other metrics in their risk containment strategies.

Auctions versus book-built IPOs in Japan: A comparison of aftermarket volatility

This article uses two price signals on the cusp of an IPO, price revision (change from pre-offer to offer price) and initial return (change from offer to market open price), as proxies of investor sentiment, which appears to have potent and lingering effects over a six-month aftermarket window. For instance, firms that rank high on our investor optimism scale exhibit considerable initial price momentum and sharp reversals. The article shows that a mechanical trading strategy designed to exploit aftermarket patterns generates economically significant risk-adjusted returns compared to a buy-andhold benchmark. Robustness checks indicate that it is important to implement the strategy as early as possible and the key driver is the serial dependence in aftermarket returns.