Scott C. Linn

Are cash acquisitions associated with better postcombination operating performance than stock acquisitions

Abstract This study examines the relation between the change in operating performance of firms which merge and whether the acquiring firm offered cash or stock as the method-of-payment. We examine how operating performance changed for a sample of 413 combinations. The results indicate that the change in performance of the merged firms is significantly larger for cases in which the acquiring company offered cash as compared to stock offers. The results are not sensitive to whether the combination involved a tender offer or a negotiated merger, to offer size, industry relatedness between the bidders and the targets businesses or bidder leverage.

Fuzzy Inductive Reasoning, Expectation Formation and the Behavior of Security Prices

This paper extends the Santa Fe Artificial Stock Market Model (SFASM) studied by LeBaron, Arthur and Palmer (1999, Journal of Economic Dynamics and Control 23, 1487-1516) in two important directions. First, some might question whether it is reasonable to assume that traders are capable of handling a large number of rules, each with numerous conditions, as is assumed in the SFASM. We demonstrate that similar results can be obtained even after severely limiting the reasoning process. We show this by allowing agents the ability to compress information into a few fuzzy notions which they can in turn process and analyze with fuzzy logic. Second, LeBaron et al. have reported that the kurtosis of their simulated stock returns is too small as compared to real data. We demonstrate that with a minor modification to how traders go about deciding which of their prediction rules to rely on when making demand decisions, the model can in fact produce return kurtosis that is comparable to that of actual returns data.

Price Dispersion in a Model with Middlemen and Oligopolistic Market Makers: A Theory and an Application to the North American Natural Gas Market

We develop a microstructure model of a market for a homogeneous good in which trade amongst heterogeneous consumers and producers is intermediated by middlemen and oligopolistic market makers (gatekeepers). Market makers post bid and ask prices which are freely observable. Middlemen stand ready to trade at bid and ask prices they quote on a private basis to consumers or producers who identify these intermediaries via a costly search process. We model competition between market makers as a two-stage game: capacity setting in the first stage and bid and ask price setting in the second stage. We characterize the equilibrium market structure of intermediaries and the distribution of prices in equilibrium. Our main focus is the effect on prices that emerges following a change in the market structure of intermediation, specifically through the exit of a market maker. Exit of a market maker initially results in a shift of trade from market makers as a whole to middlemen resulting in an increase in price dispersion. Following transition to the new market structure with fewer market makers, price dispersion returns to its pre-exit level when total trade passing through the remaining market makers is roughly equal to the pre-exit level. We present an empirical study of price dispersion in the North American natural gas market for the period before and following the exit of Enron, a major market maker in late 2001. The empirical evidence supports the main propositions of our theory: price dispersion jumped 4-fold immediately following Enrons exit but returned to its pre-exit level within roughly 2 months following the exit date.

Middlemen and Oligopolistic Market Makers

This paper studies the endogenous structure of intermediation when heterogeneous intermediaries choose between becoming a middleman or a market maker, and the relation between the equilibrium market structure and price dispersion. We obtain three main results: First, middlemen and oligopolistic market makers can coexist in the market equilibrium. All market makers publicly post unique ask and bid prices. These prices serve as the high and low bounds, respectively, for the ask and bid prices of middlemen, when capacity cost is sufficiently large. Second, more efficient intermediaries choose to become market makers, whereas less efficient intermediaries choose to become middlemen. Third, if the fixed cost of capacity installation for market makers increases, the number of market makers declines, whereas the number of middlemen increases. As a result, both ask prices and bid prices become more dispersed.

Corporate governance and executive perquisites

Purpose - The purpose of this paper is to examine the relation between executive perquisite consumption and indicators of corporate governance after the Securities and Exchange Commission (SEC) expanded the disclosure requirements related to perquisites. Design/methodology/approach - This study uses ordinary least squares and Tobit regressions to examine the dollar value of perquisites consumed, the number of perquisites consumed and the types of perquisites consumed. Findings - The analysis shows that firms with weak corporate governance are more likely to award perquisites to executives. Firms characterized as being more prone to the presence of agency problems are associated with greater levels of perquisite consumption. Finally, there is evidence that not all perquisite consumptions can be attributed to an agency problem. Efficiently operating firms are associated with greater levels of perquisite consumption as are larger firms. Research limitations/implications - The authors examine firms in the period immediately after the SEC initiated the expanded disclosures. This may limit the generalizability of the results to other exchange-listed firms that changed their perquisite policy as a result of the rule change. Originality/value - The paper extends the literature on corporate governance and mandatory corporate disclosure by investigating the association between corporate governance characteristics and perquisite consumption. This paper examines this relation immediately after the SEC expanded the disclosures surrounding perquisites to provide the public with more transparent disclosures.

Rumors in Financial Markets

This paper develops a dynamic model of asset price behavior based upon the arrival and diffusion of rumors in a securities market. The model is based upon a time-homogeneous pure birth process in which the number of informed and uninformed traders varies probabilistically over time as learning occurs. Traders become informed by observing the original source of information or through communication with an individual who has ‘heard’ the information already, both of which are probabilistic events. Price changes result from trades that occur when an individual hears and acts on the information. Rumors can contain true or false information.False rumors ultimately are corrected. Results from simulating the model yield log price changes -- similar to actual intraday common stock returns.

Complexity and the Character of Stock Returns: Empirical Evidence and a Model of Asset Prices Based on Complex Investor Learning

Empirical evidence on the distributional characteristics of common stock returns indicates: (1) A power-law tail index close to three describes the behavior of the positive tail of the survivor function of returns (pr(r > x) ∼ x -α), a reflection of fat tails; (2) general linear and nonlinear dependencies exist in the time series of returns; (3) the time-series return process is characterized by short-run dependence (short memory) in both returns as well as their volatility, the latter usually characterized in the form of autoregressive conditional heteroskedasticity; and (4) the time-series return process probably does not exhibit long memory, but the squared returns process does exhibit long memory. We propose a model of complex, self-referential learning and reasoning amongst economic agents that jointly produces security returns consistent with these general observed facts and which are supported here by empirical results presented for a benchmark sample of 50 stocks traded on the New York Stock Exchange. The market we postulate is populated by traders who reason inductively while compressing information into a few fuzzy notions that they can in turn process and analyze with fuzzy logic. We analyze the implications of such behavior for the returns on risky securities within the context of an artificial stock market model. Dynamic simulation experiments of the market are conducted, from which market-clearing prices emerge, allowing us to then compute realized returns. We test the effects of varying values of the parameters of the model on the character of the simulated returns. The results indicate that the model proposed in this paper can jointly account for the presence of a power-law characterization of the positive tail of the survivor function of returns with exponent on the order of three, for autoregressive conditional heteroskedasticity, for long memory in volatility, and for general nonlinear dependencies in returns.

Evidence on the Determinants of Cash Holdings By Private and Public Companies

We examine the determinants of cash holdings in private and public companies. Using a sample of more than 280,000 U.K. private firms and 970,000 firm-year observations from the 1994-2010 period we show that cash holdings in private firms support both the trade-off theory and the financing hierarchy theory. The results indicate that cash holdings in private firms decrease significantly with size, net working capital and leverage. The evidence also shows that private firms that pay dividends hold more cash and that cash holdings increase significantly with capital expenditures and cash flow volatility. We also examine the relation between cash holdings and ownership and management structures in private firms. We find that firms with less severe agency problems hold significantly more cash than private firms associated with more severe agency problems. We also present results for publicly traded companies. We find that both private and public firms adjust cash holdings to target levels but adjustments tend to be greater for private companies.

The price effects of secondary offerings of senior securities and warrants

Abstract We examine the abnormal price reactions for the securities of firms whose senior securities and warrants are sold in secondary offerings during the period 1965–1986. In our sample, secondary offers by insiders reveal adverse information about firm value while trades by other investors do not. This evidence is consistent with the hypothesis that secondary offers are made by informed traders with superior information about a firms value and by investors who trade for liquidity reasons alone. No evidence in support of the price pressure hypothesis is found.

Arbitrage and Its Physical Limits

We extend the Limits to Arbitrage literature by studying how physical constraints affect financial arbitrage in commodity markets. Using the U.S. crude oil market as our experimental setting, we document substantial economically significant violations of the no-arbitrage futures pricing conditions due to storage capacity constraints at the WTI futures delivery hub. We also find evidence of financial constraints. Our findings are robust to different measures of physical constraints, and controls for potential effects of U.S. Oil Fund rolls. Our results highlight the importance of both physical and financial arbitrage limits in pricing commodity futures. We also contribute to the Theory of Storage literature, which has largely ignored storage limits, by documenting the effects of finite storage capacity.