Subramanian Rama Iyer

Economic Shocks and Share Repurchases

The external environment affects firm payout policies. A firm’s behavior during positive and negative external shocks could be different from what theories have postulated. Several theories have been proposed for share repurchases. Using the financial crisis and quantitative easing period as a background, we test these theories. Based on our empirical tests, we find firms that have higher cash flows, lower leverage, fewer financial constraints, pay smaller/or no dividends, or higher takeover probabilities are more likely to announce repurchase programs across both periods. However, the popular motives for share repurchase are inconsistent in explaining related aspects such as size of the repurchase program, actual share repurchases, and completion.

Director Networks and Credit Ratings

We explore the impact of director social capital on credit ratings. Social capital is often associated with trust and cultivated through one’s personal networks. We show that firms which employ well-connected directors benefit with a higher credit rating. This result is amplified for firms that add connected directors to a board with lower social capital. The benefit is also shown to be greater during times of economic uncertainty. Furthermore, connected boards lead a firm to higher rating than their Z-scores would otherwise predict. Finally, we show that the results are pronounced around the investment grade threshold. Taken together, this paper shows the economic benefits firms enjoy when they hire connected directors to their board. Our results confirm that the causality runs from the connected boards to firm credit rating.

The Information Content of an Increase in Federal Funds Rate from a Zero Lower Bound Environment

There has been much debate within the FOMC committee on when to raise the target rate from the 0 to 25 basis points range (zero lower bound) and the information conveyed to the financial community. This paper uses a recursive vector autoregressive model to examine the impact of an increase in effective federal funds rate (and shadow rate), from the zero lower bound, on corporate and municipal bond credit default swap (CDS) spreads. Our simulation indicates that on average, a 25 basis point increase in effective federal funds rate (shadow rate) results in a decrease of 59% (24%) in CDS spreads, thereby conveying good news about the economy. This reaction, however, is observed only for investment grade bonds. There are no significant changes in the CDS spreads on below investment grade bonds and buy and hold abnormal stock returns following a rate increase. Further, given that the Federal Reserve is targeting a 2% annual inflation rate, if the current annualized rate is 1.5%, we estimate that a 25 basis point increase in effective rate (shadow rate) would result in an annual inflation rate of 2.2% (1.9%) annual inflation rate. We interpret the rate increase as a weak but positive signal of economic recovery.

Cash flow volatility and investor sentiment

The purpose of this paper is to test whether investors take flight to safety when sentiment is low. In other words, do safe firms perform better than risky firms following periods of low sentiment.,Using cash flow volatility and the percent of bullish investors as proxies for risk and investor sentiment the paper tests the relationship between sentiment and returns conditional on risk this performance. Second, a cross-sectional analysis is conducted based on individual firm characteristics and sentiment to explain annual returns.,The paper finds that there is a negative relationship between investor sentiment and the return of risky companies, which is contrary to prior studies. All told, risky companies perform worse following periods of high investor sentiment.,This paper presents evidence contrary to extant literature and that there is no concerted flight to safety. Investor sentiment has little influence on safe stocks.

Share Repurchases and the Flexibility Hypothesis

Extant research finds that firms are increasingly substituting dividends with share repurchases. This substitution effect is largely attributable to the flexibility offered by share repurchases but not by dividends. Without fear of an adverse market reaction, firms can choose not to repurchase shares, which is not possible with dividends. Using the financial crisis as a natural experiment, we test whether repurchases are more flexible than dividends. We document that the proportion of repurchasing firms that reduced repurchase payouts is greater than the proportion of dividend payers that reduced their dividends during the financial crisis period. This extends to total payout reductions (dividends plus repurchases) as well between the two groups of firms. We also find that the propensity to reduce payouts between repurchasers and dividend payers exists even after controlling for several control variables. We also find that the market performance of repurchase-reducing firms is better than that of dividend-reducing firms over the financial crisis period, indicating that the markets do not penalize repurchasing firms more than dividend-reducing firms. Finally, we find that the operating performance of share repurchasers is better than dividend payers during the financial crisis and post-crisis periods. Overall, we conclude that share repurchases are more flexible than dividends.