Soku Byoun

Stock vs. stock-warrant units: evidence from seasoned offerings

Abstract Recent theories based on sequential financing and information signaling reveal a special role for warrants. Data from initial public offerings (IPOs) of stock-warrant units have been used to test the theories, and we extend the analysis to seasoned offerings. Consistent with predictions from both families of theories, we find that issues made by smaller and younger firms are more likely to involve stock-warrant units, and firms with greater stock price volatility are more likely to issue units in seasoned offerings. Moreover, firms with relatively high levels of long-term debt, and those whose issues are underwritten by less prestigious underwriters are more likely to employ stock-warrant unit financing. Consistent with information signaling, we find that firms with high managerial ownership are more likely to issue units. Firms that include warrants in their stock offerings are predicted to have experienced higher abnormal stock returns than if they had issued shares alone. Thus, consistent with both theoretical explanations, some firms can reduce capital costs by adding warrants to shares in seasoned offerings.

Risk Management with Leverage: Evidence from Project Finance

We examine capital structures of 2,572 project-financed investments in 124 countries for the period 1997–2006. In contrast to the general prediction of the trade-off theory, we find that project companies use more leverage when project risk is high, but they use less leverage in the presence of risk-reducing features including offtake agreements. Project companies use less leverage and instead rely more on offtake agreements when the control benefits of cash flow from the project are high, suggesting that leverage and contract structures in the project company are important hedging mechanisms.

Information Content of Unsolicited Credit Ratings: Evidence from Japanese Firms

Unsolicited ratings are credit ratings of firms that have not requested rating evaluation and therefore do not pay fees. Accordingly, unsolicited ratings are issued solely by the discretion of rating agencies based on public information. Given the controversy surrounding unsolicited ratings raised by Japanese firms and some studies, we examine whether the market extracts any new information from unsolicited ratings. We find that unsolicited ratings typically are of speculative grade rather than investment grade; induce significant announcement period abnormal returns for downgrades; and have greater impact for speculative-grade ratings than investment-grade ratings. Keiretsu affiliation of Japanese firms does not mitigate the negative market reaction to unsolicited rating downgrades. Our results suggest that high-quality firms signal through solicited ratings while low-quality firms are revealed through unsolicited ratings.

Does Corporate Board Diversity Affect Corporate Payout Policy

This paper investigates whether board diversity has a significant impact on corporate payout decisions. Previous studies exclusively focus on examining the relation between a measure of firm performance and board diversity. The major advantage of our study is to investigate the direct impact of board diversity on a major corporate decision - i.e., dividend payout policy. We find that firms with diverse boards are more likely to pay dividends and tend to pay larger dividends than those with non-diverse boards. After controlling for various firm characteristics and exploring alternative explanations for the positive association between board diversity and dividend payout policy, our results suggest that board diversity has a significant impact on dividend payout policy. The impact of board diversity on dividend payout policy is particularly conspicuous for firms with potentially greater agency problems of free cash flow, suggesting that diverse board helps mitigate the free cash flow problem. Our findings are consistent with the argument that board diversity enhances the monitoring function of directors for the benefit of shareholders. We also show that significantly larger portion of firms pay dividends after they added a diverse director to their boards and that firms pay significantly higher dividends after adding a diverse director for the first time. However, the change in dividend payout ratio is not significant when firms add another diverse director to their already diverse boards. Also, the benefits of board diversity are not materialized when directors share the same gender or ethnic tie with the CEO. Our findings have an important implication for policies aiming to increase the number of diverse directors in corporate boardrooms. What makes the significant difference is not the sheer number of diverse directors in the board but the diversity they bring to the board.

Arbitrage opportunities and efficiency of an option market at its initial stage: The case of KOSPI 200 options in Korea

The KOSPI 200 options at its initial stage generated a significant number of violations in no-arbitrage conditions which involve both options and the underlying index. However, when the arbitrage conditions are formed independent of the underlying index, the average size of violation is not large and few arbitrage opportunities exist. There are more frequent violations on near-maturity days, with in-the-money options and larger violation sizes during opening and closing hours. The arbitrage opportunities remain intact even after realistic transaction costs are taken into account and index futures prices are used instead of the stock index in an alternative specification.

Smooth Goodness-of-Fit Specification Tests Under the Lagrange Multiplier Principle

This article generalizes Neymans smooth test for the goodness-of-fit hypothesis using orthogonal polynomials of the density function under the null hypothesis, and derives a Lagrange Multiplier (LM) statistic based on the generalized form of the smooth test. Under the null hypothesis, using the joint limiting normality of the orthogonal functions imbedded into the smooth alternative density function and the restricted parameter estimators, the covariance matrix of the LM statistic can be estimated. The procedure of constructing monic orthogonal polynomials from a given moment function is developed. This procedure is applied to examples of testing for normal, Poisson, and gamma distributions.

The lead-lag relation between spot and option markets and implied volatility in option prices

We show that if a lead-lag relation exists between the option and spot markets, the implied volatility in option prices can be biased depending on the level of the true volatility; that is, the higher the true volatility, the more upward biased the implied volatility will be. We then test the theoretical conjecture, using intraday transactions data of the S&P 500 stock index and its options. The empirical results show that the S&P 500 index option market leads the cash index, and that the bias of the implied volatility due to the lead-lag relation is statistically significant, confirming our theoretical conjecture.