Tianming Zhang

Bonus-Driven Repurchases

Using a large hand-collected database of chief executive officer (CEO) bonus structures, we find that when a CEO’s bonus is directly tied to earnings per share (EPS), his company is more likely to conduct a buyback. This effect is especially pronounced when a company’s EPS is right below the threshold for a bonus award. Share repurchasing increases the probability the CEO receives a bonus and the magnitude of that bonus, but only when bonus pay is EPS based. Bonus-driven repurchasing firms do not exhibit positive long-run abnormal returns.

Capital Structure and Employee Pay: An Empirical Analysis

Tradeoff theory points to direct bankruptcy costs as the main reason for the observed low leverage in corporate capital structure. However, the empirical evidence does not justify direct bankruptcy costs as a sufficient disincentive to issue debt. Recent theoretical models suggest that indirect bankruptcy costs arising from human capital can be one disincentive to the use of debt. We empirically test the impact of leverage on labor costs, and explore whether human capital costs are large enough to limit the use of debt. We conduct our analysis using two measures of labor costs: the magnitude of CEO compensation and the average employee pay. In both simple OLS and instrumental variable regressions, we find that leverage has a significantly positive impact on CEOs’ cash, equity-based, and total compensation. To identify causality, we study the compensation of new CEOs who are hired from outside. We show that the pay of a newly hired CEO is positively affected by leverage. We also find that the leverage ratio has a significant and positive impact on average employee pay, in OLS, instrument variable regression, and Heckman two-step analysis. We show that the incremental total labor expenses associated with an increase in leverage is large enough to offset the incremental tax benefits of debt. In addition, the impact of leverage on average employee pay is positive and significant for old economy firms, but not for new economy firms; leverage has a significant and positive influence on CEOs’ cash, equity-based, and total compensation in old economy firms, although it does not have a significant influence on CEOs’ total or equity-based compensation in new economy firms. Overall, our analysis provides empirical support for the notion that labor costs limit the use of debt.

Odd Lot Trading and Earnings Announcements

This study investigates odd lot trading, both odd lot trades and odd lot orders, around quarterly earnings announcements to determine whether or not odd lot traders are informed regarding the information contained in earnings announcements. We find that pre-announcement odd lot order imbalances are not positively correlated with post-announcement returns and that odd lot traders do not successfully trade around earnings announcements to earn positive market adjusted returns. Portfolios long stocks highly bought by odd lot traders in the pre-announcement period and short stocks highly-sold by odd lot traders do not outperform the market. Our results are robust when controlling for non-event negative correlations between odd lot order imbalances and returns, and controlling for earnings management practices. We conclude that odd lot traders are not in possession of earnings announcement information prior to its release to the public.

Does Share Buyback Deter Takeovers? From Ex Ante to Ex Post

Billett and Xue (2007) document that the ex ante (pre-repurchase) takeover probability has a positive and significant impact on share repurchases, but there is no evidence that share repurchases are indeed associated with fewer ex post takeover bids. We examine whether share buyback deters takeovers ex post, controlling for the ex ante takeover probability. We find that, buying back shares is indeed effective in deterring the ex post takeover bids among the firms with high ex ante takeover likelihood. Furthermore, firms with higher ex ante takeover likelihood pay a higher average price to buy back shares, which is consistent with firms using share buyback to deter takeovers.