Yawen Jiao

Institutional Trading, Information Production, and the SEO Discount: A Model of Seasoned Equity Offerings

We develop a model of the seasoned equity offering (SEO) process, starting from the SEO announcement, through pre-offer trading, and ending in the offering itself. We use our model to advance a new rationale for the existence of the SEO discount and SEO underpricing, and to analyze the role of institutional investors in SEOs. We show that the SEO discount is positively related to the extent of information asymmetry a firm faces, and SEOs with greater pre-offer net buying by institutional investors have higher institutional allocations, greater oversubscription, and lower SEO discounts. Furthermore, our model predicts a positive link between the pre-offer net buying by institutional investors and the magnitude of SEO underpricing and the long-run post-SEO operating performance.

Business Ties and Information Advantage: Evidence from Mutual Fund Trading

This paper examines whether ties to portfolio firms’ management via pension business relationships provides mutual funds with an informational advantage. Funds become related to portfolio companies when fund families serve as trustees for firms’ employee pension plans. Selling by related funds is more likely to be motivated by an information advantage than their buying, because the latter is heavily influenced by the desire to secure pension inflows. We find that stocks with larger net-sales by related funds experience lower future returns. Information appears related to firm fundamentals, as the return predictability of related funds’ selling concentrates in stocks with negative future earnings surprises. Consistent with an information based explanation, the predictive power of related funds’ selling for future returns is more pronounced when information uncertainty about the stock is higher. Our results contribute to a growing literature that shows the sources of informed trading by institutions.

Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand

The existing literature treats the short side (i.e., short selling) and long side of hedge fund trading (i.e., changes in holdings) independently. The two sides, however, complement each other in revealing important economic motivations of trading: opposite changes in short interest and hedge fund holdings are likely to be driven by information, whereas simultaneous increases (decreases) in short interest and hedge fund holdings may be motivated by hedging (unwinding) considerations. We use this intuition to identify informed demand, and document that it exhibits highly significant predictive power on returns: stocks with informed long demand can outperform stocks with informed short demand by approximately 10% per year. We also find that informed demand forecasts future firm fundamentals (e.g., ROA, earnings surprise, analyst revision) but that it is less related to mutual fund flows or liquidity provision. These findings suggest that information discovery about firm fundamentals could be among the most important drivers for informed demand.

Corporate Pensions and Financial Distress

We examine the role of corporate pension plans in determining how firms restructure in financial distress. Both defined benefit (DB) and defined contribution (DC) plans can have significant exposures to the company’s own stock, imposing significant losses on employees if the firm defaults and/or files for bankruptcy. We find that firms with DB plans typically have little exposure to the stock prior to default; the degree of underfunding increases significantly as firms near default, but is not related to restructuring types (bankruptcies versus out of court restructurings). In contrast, large exposures to company stock in DC plans often are not reduced prior to default. High levels of own-company stock ownership are positively related to default and bankruptcy probabilities. Our evidence suggests a link between employee-ownership related managerial entrenchment and default risk.

Social Preference, Product Market Competition, and Firm Value

This paper analyzes how customers’ social preference (SP) affects firm value and performance through product market competition. We construct a score measuring a firm’s effort of catering to customers’ social preference and find it is positively related to firm value in competitive industries but not in noncompetitive industries. This result is robust to a variety of model specifications and tests addressing simultaneity issues. We identify two channels for this effect to arise. First, higher SP scores lead to superior operating and competition performance in competitive industries. Second, higher SP scores lower financial distress risk in presence of competition pressures. The results suggest social investments can benefit financial performance if used as a product differentiation strategy.

Investor Preference and Stock Price Underreaction: Evidence from Post Earnings Announcement Drift

This paper shows investors’ preference for right-skewed, lottery-like payoffs can eliminate price underreaction to extremely good earnings news. Such news enhance investors’ preference for lottery-like stocks, leading to preference-based trades that accelerate price adjustments. We find PEAD disappears for stocks with strong ex ante lottery-like features and extremely good earnings news. Arbitrage does not explain this finding because it persists when arbitrage costs and information asymmetry are high. Corroborating the disappearance of PEAD, the above stocks also experience greater price reactions to earnings news. Consistent with the prevalence of lottery preference among individual investors, we find they purchase more lottery-like stocks upon extremely good earnings news and the attenuation of PEAD is concentrated in stocks with greater net-buys by them around earnings announcements.