Sung C. Bae

Multinational corporations versus domestic corporations: a comparative study of R&D investment activities

Abstract This paper empirically examines the effect of the degree of a firms multinationality on the firms R&D activities. In particular, based on the Internalization (and the Eclectic) approach to the development of multinational corporations this paper examines whether R&D investment influences the market value of firms differently between domestic corporations (DCs) and multinational corporations (MNCs). This paper further investigates how differently firm-related factors based on the Tobins Q theory affect a firms R&D investment between DCs and MNCs. The results show that R&D expenditures as a percentage of sales are, on average, significantly greater for MNCs than for DCs, indicating that MNCs are on average more R&D intensive. After controlling for firm and market-related factors, R&D expenditures are found to have a persistently positive effect on the market value of both DCs and MNCs, with a more pronounced effect for MNCs. These findings are consistent with the predictions by the Internalization theory. The results further show that there exist notable differences in R&D determinants between DCs and MNCs. While prior-year R&D expenditures and cash flows are significantly positively related to current-year R&D expenditures for both DCs and MNCs, prior-year debt ratio has a significant negative impact on DCs’ current-year R&D expenditures, but has little impact on MNCs’ R&D expenditures. These results suggest that a firms degree of multinationality plays an important role in determining the firms R&D expenditures.

Event Risk Bond Covenants, Agency Costs of Debt and Equity, and Stockholder Wealth

We examine the effect of risk covenants in bond indentures on agency costs of debt and equity and stockholder wealth by testing two competing hypotheses for issuing event risk-protected bonds: the stockholder wealth enhancement hypothesis and the managerial entrenchment hypothesis. We find that the issuance of event risk-protected bonds has a more positive impact on stockholder wealth than the issuance of non-protected bonds. Regression analysis indicates that more positive stockholder gains are associated with firms characterized by higher agency costs of debt. These findings suggest that the presence of event risk covenants increases stockholder wealth primarily by lowering a firms agency costs of debt.

Determinants of Underwriter Participation in Initial Public Offerings of Common Stock: An Empirical Study

This paper examines an optimal underwriter participation model and develops testable hypotheses regarding the influence of certain factors on the degree of underwriter participation in initial public offerings (IPOs) of common stock. The issue of underwriter participation is important primarily due to the tradeoff between foregone underwriter compensation and underwriting risk reduction. The results of this paper indicate that factors related to the issue, issuing firm, underwriter, and IPO market conditions all are important determinants of the participation decision. Interestingly, the results also show that the importance of these factors is not consistent across underwriter prestige groups. In particular, factors external to underwriters (e.g., the issuing firm and market characteristics) are more important for explaining nonprestigious underwriter participation, while factors related to underwriters themselves play a more important role for explaining prestigious underwriter participation. Copyright Blackwell Publishers Ltd 1999.

The Impact of Information Release on Stock Price Volatility and Trading Volume: The Rights Offering Case

This paper examines whether information released via rights offering announcements induces changes in price volatility and trading volume of underlying stock. The results of this paper provide support for the release of new information via offering announcements and evidence of its effects on price volatility and volume of underlying stock. Specifically, utilization of the announced information by investors is evidenced by greater trading volume following the announcement date than during the pre-announcement period. We interpret this result to mean that informedness dominates consensus. However, stock price volatility decreased from the pre-announcement period to the post-expiration period of rights offerings.

An Empirical Analysis of Exchange Ratio Determination Models for Merger: A Note

This paper examines the empirical validity of two exchange ratio determination models for merger, the Larson and Gonedes (LG) PE model and the Yagil dividend growth model. These two models formulate exchange ratios as a function of a different factor: expected post-merger price-earnings multiple and expected post-merger dividend growth, respectively. While the LG model has been tested in previous studies, the Yagil model has yet been subject to empirical testing. This paper finds empirical support for the LG model but finds weak support for the Yagil model. In particular, the results show that the number of stock mergers that result in wealth gains for both acquiring and target firms and hence conform to the rationality assumption of each model is substantially greater for the LG model than for the Yagil model. Regression analysis provides confirmatory evidence on the empirical validity of the LG model that PE-related variables play a more significant role in explaining the actual exchange ratios than growth-related variables. Copyright Blackwell Publishers Ltd 2000.

Further Evidence on Corporate Bonds with Event-Risk Covenants: Inferences from Standard and Poor's and Moody's Bond Ratings

This paper considers potential differences in the appraisal of event-risk covenants by the two rating agencies, SP the difference, however, is not statistically significant. Regression analysis shows that the S&P event-risk rankings are significantly, positively related to bond yield spreads, indicating that the market values event-risk covenants and that greater yield spreads are associated with lower event- risk protection. Regression analysis further shows that the event-risk rankings in a regression model, in conjunction with the Moodys bond ratings, are also significantly related to bond yield spreads. Overall, the results indicate that the market views the event-risk covenants as important, but that Moodys does not perceive these covenants to be strong enough to provide a rationale to upgrade its bond ratings. This evidence is consistent with the observation that the majority of event-risk covenants, as ranked by S&P, provide weak or little protection to bondholders.

Corporate social responsibility, credit rating, and private debt contracting: new evidence from syndicated loan market

We examine the impact of corporate social responsibility (CSR) activities on loan spreads of syndicated bank loans, with a particular interest in how CSR and credit ratings are interrelated as a joint determinant of loan spreads. Focusing on private debt contracts, we show that both CSR strengths and concerns are related to their loan spreads. CSR strengths work to lower firm risk, hence reducing the loan spread, whereas CSR concerns increase firm risk, thus increasing the loan spread. Once we include detailed credit rating information in the models, however, CSR concerns lose significance, but CSR strengths remain significantly related to the loan spread. We also find that both CSR strengths and CSR concerns are related to loan spread for non-rated firms, but the CSR concern effect is stronger than the CSR strength effect for these firms. A further test shows that firm risk measured by stock return volatility plays as a direct channel through which a firm’s CSR activities affect loan spreads, whose result lends further support to our main results. Overall, our results provide strong evidence that CSR matters to the pricing of loan contracts beyond credit rating information and the results remain robust to the possible firm size effect and the endogeneity issues.

Tests of the Efficiency of the U.S. Rights Offering Market: An Option Pricing Approach

The efficiency of the U.S. market for stock purchase rights is empirically analyzed in an options framework, in which prices of rights, given the prices of underlying stock, are examined with regard to the possibilities of actually earning above-normal profits, considering the risk taken. Two neutral hedging tests for market efficiency, along with a simple buy-and-exercise trading strategy, are applied to daily traded rights data. Results from ex-post hedging tests suggest that the trading strategy based on the rights valuation model is able to differentiate between overpriced and underpriced rights so as to generate substantial book profits. The positive ex-ante hedge return, found to exist empirically, is completely eliminated once transaction costs are introduced, lending support for the efficient U.S. rights offering market on an after-transaction cost basis.

The impact of corporate social responsibility activities on corporate financing: a case of bank loan covenants

ABSTRACT We examine the impact of corporate social responsibility (CSR) activities on the intensity of loan covenants, one of the most important nonpricing terms of syndicated loan contracts. Undocumented in the existing literature, we offer new evidence that while CSR strengths have little impact on loan covenants, CSR concerns lead to stricter loan covenants. These asymmetric results suggest that while lenders view CSR strengths as discretionary, they are more concerned about value-destroying CSR concerns, which induces the lenders to screen out firms engaging in nonsocially responsible activities and penalize these firms with stricter loan covenants. Combined with the evidence on the CSR-loan spread association in the existing literature, our results provide strong evidence that CSR matters to both pricing and nonpricing terms of loan contracts.

Equity Ownership Determination in Foreign Direct Investments of Developing Economies: The Case of Korean Outward FDIs

In this paper, we develop an international joint venture model and examine the equity ownership determination of Korean outward FDIs, one of the major developing economies (DEs), into both developed countries (DCs) and other DEs. We do this by explicitly considering the cost of technology leakage and the potential profits from FDI projects. Our results show that the relation between equity ownership and technology level depends on both the host country and industry sector. Regarding the host country, this relation is positive for FDIs into DEs but negative for FDIs into DCs. Regarding industry, this relation is positive and insignificant for the manufacturing sector but negative and significant for the nonmanufacturing sector. Combined together, these results indicate that Korean firms benefit most from competitive advantages through their FDIs into the manufacturing sector of DEs. In contrast, such competitive advantages of Korean firms diminish in their FDIs into DCs regardless of the industry sector.