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ESSAYS ON THE INTERACTION OF MISPRICING AND FIRMS’ CORPORATE DECISIONS

초록/요약

In general, this dissertation addresses the question: How mispricing affects firm’s corporate decisions through market timing? More specifically, by arguing that insiders are informed traders who act opportunistically to exploit any discrepancy in the stock price, we consider insider trades as a good proxy for mispricing and we attempt to test whether this mispricing have different implications on the security choices, capital structure, and investment decisions. Chapter 1 presents the literature review of the different measures used before to capture mispricing and market timing. Chapter 2 explores the importance of equity market timing in securities issuance/repurchase decision by using insider trade as a proxy for market timing. By identifying overvalued firms as those whose insiders are net sellers and undervalued firms as those whose insiders are net buyers, the results reveal that even after controlling for firm’s characteristics and even in absence of financial needs, misvaluation plays an important role in security issuance decisions. However, the results show that only equity issuance transactions are timed to equity market conditions, while other financial transactions do not exhibit timing patterns. The importance of target ratio in security issuance choice is driven by the subsample of equity issues accompanied by debt reductions. Chapter 3 examines the relationship between market timing and the capital structure in the short and the long run. By controlling for a wide range of determinants of capital structure, the results show that overvalued firms issue substantially more equity and xiiilower their leverage ratios by more than undervalued firms. However, in contrast to Baker and Wurgler (2002), the negative impact of overvaluation on leverage ratio is not persistent. Although equity issuance transactions are timed to equity market conditions, they do not have long lasting impact on the capital structure. The long lasting effect of past securities issues on capital structure is due to that fact that firms slowly adjust toward their target levels. Overall, although equity issues are timed to period of stock overvaluation, they have no significant lasting effect on capital structure. These results suggest that firms can engage in equity market timing even if they have target debt ratios. Chapter 4 explores whether stock mispricing affects investment decisions by testing the market timing hypothesis on both tangible and intangible investments. Capital and R&D expenditures are positively related to equity issues driven by market timing. Inconsistent with the prediction, market timing has a stronger effect on capital expenditures as compared to R&D. On the other hand, R&D expenses are mainly financed by equity regardless whether these equity issues are timed or not. Consistent with the prediction, the study shows that the relationship between mispricing and investment (especially R&D) is more obvious for financially constrained firms and equity dependent firms as measured by total assets, dividend payout and WW index. The importance of financial constraints on R&D is consistent with our previous findings that R&D are mainly financed by equity. However, results based on KZ index are contradictory, suggesting the inability of this index to truly measure financial constraints.

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목차

PREFACE = 1
CHAPTER1. MARKET TIMING PROXIES = 5
1.1. Introduction = 5
1.2. Mispricing Proxies = 6
1.2.1. Mispricing Proxies Previously Used to Test Market Timing = 7
1.2.2. Other Mispricing Proxies = 13
1.3. Adverse Selection Proxies = 22
1.4. Conclusion = 26
CHAPTER2. MARKET TIMING AND SECURITY CHOICES = 27
2.1. Introduction = 27
2.2. Literature Review = 32
2.2.1. Pecking Order Theory = 32
2.2.2. Static Tradeoff Theory = 33
2.2.3. Market Timing Theory = 34
2.3. Methodology and Hypotheses = 39
2.4. Data = 41
2.4.1. Data Sources and Sample Construction = 41
2.4.2. Definition and Construction of Insider Trading = 45
2.5. Insider Trading = 50
2.5.1. Descriptive statistics = 50
2.5.2. Insider Selling as a Proxy for Timing Attempts? = 52
2.6. Market Timing and Security Choice Decision = 57
2.6.1. Summary Statistics = 57
2.6.2. Pecking Order Model: Deficit Regression Interacted with Misvaluation = 63
2.6.3. Binomial Logit regression = 71
2.6.4. Multinomial Logit Regression = 79
2.7. Conclusion = 85
CHAPTER3. MARKET TIMING AND CAPITAL STRUCTURE = 88
3.1. Introduction = 88
3.2. Literature review = 93
3.3. Methodology and Hypotheses = 98
3.4. Data = 101
3.5. Effect of Equity Market Timing on Capital Structure = 102
3.5.1. Descriptive Statistics = 102
3.5.2. Determinants of Leverage -Baker and Wurgler’s Replication = 104
3.5.3. Determinants of Leverage = 109
3.5.4. Determinants of Annual Changes in Leverage = 114
3.5.5. Determinants of Annual Changes in Leverage-2 stages regression = 120
3.6. Persistency = 126
3.6.1. Leverage Changes around Financial Transactions = 127
3.6.2. Market to Book Changes around Securities Issues = 133
3.6.3. Effects of Past Securities Issues = 138
3.6.4. Effect of Historical Financing Activities and Market conditions on Leverage = 141
3.6.5. Cumulative Changes in Leverage Regressions = 144
3.7. Partial Adjustment Models = 147
3.7.1. Partial Adjustment Regression . = 147
3.7.2. Post Adjustment Subsample = 155
3.8. Conclusion = 157
CHAPTER4. MARKET TIMING AND INVESTMENT = 160
4.1. Introduction = 160
4.2. Literature review: Investment-Mispricing sensitivities = 166
4.2.1. Manager’s Market Timing Hypothesis = 167
4.2.2. Manager’s Catering Hypothesis = 168
4.2.3. Manager’s Confusion About the Future State of the Industry Hypothesis = 169
4.3. Methodology and Hypotheses = 173
4.4. Data = 174
4.4.1. Data Sources and Sample Construction = 174
4.4.2. Investment Variables = 174
4.4.3. Proxies for Mispricing = 175
4.4.4. Control Variables = 176
4.4.5. Degree of Financial Constraints (Equity Dependence) = 177
4.5. How Misvaluation Affects Investment: Univariate Tests = 181
4.5.1. Descriptive Statistics = 182
4.5.2. Full Sample Tests = 185
4.5.3. Financial Constraints and The Sensitivity of Investment to Mispricing = 186
4.5.3.1. KZ index Grouping = 187
4.5.3.2. Firm Size Grouping = 188
4.5.3.3. Dividend Payout Grouping = 189
4.5.3.4. WW index Grouping = 191
4.6. Multivariate Tests: Investment-Market Timing Relations = 192
4.6.1. Investment-M/B Sensitivities: Full Sample = 192
4.6.2. Investment Sensitivities to Direct Proxy for Mispricing: Full Sample = 198
4.6.2.1. Robustness = 200
4.6.3. Investment Sensitivities to Direct Proxy for Mispricing: Subsamples Tests = 201
4.6.3.1. KZ index Grouping = 203
4.6.3.2. Size Grouping = 204
4.6.3.3. Dividend Payout Grouping = 205
4.6.3.4. WW index Grouping = 206
4.6.3.5. Robustness = 208
4.7. Is Mispricing ?Investment Relationship a One Sided or Two Sided Phenomenon? = 208
4.8. Conclusion = 212
REFERENCES = 216
APPENDICES = 234
Appendix 2.A: Industry Classification of 4-Digit SIC codes = 234
Appendix 2.B: Definition of variables = 237
Appendix 2.C: Robustness Tests for the Binomial Logit Regression = 240
Appendix 2.D: Robustness Tests for the Multinomial Logit Regression = 241
Appendix 3.A: Robustness for Changes in Leverage around financial transactions = 244
Appendix 3.B: Robustness for Market to Book Ratios around the Event Year = 245
Appendix 4.A: Empirical Results Testing the Catering Hypothesis = 246
Appendix 4.B: Robustness of the Firm Investment Decision and Market timing = 247
Appendix 4.C: Robustness of Equity Dependence and the Link between Investment and Market Timing = 248
LIST OF TABLES
Table 2.1: Summary Statistics = 51
Table 2.2: Market timing Effects on Issuance Decisions = 54
Table 2.3: Comparison of Net Insider Buyers- and Net Insider Sellers-Firms = 56
Table 2.4: Distribution of sample security issue by year = 58
Table 2.5: Sample Characteristics by transaction type = 61
Table 2.6: Deficit Regressions with the Interaction of Misvaluation = 67
Table 2.7: Leverage Regressions with conventional variables and misvaluation, interacted with financing deficit = 70
Table 2.8: Determinants of the Debt-Equity Choice = 77
Table 2.9: Multinomial Logit Regression of Securities Issuance Decisions = 83
Table 3.1: Summary Statistics = 103
Table 3.2: Pearson Correlation Coefficients = 103
Table 3.3: Determinants of Leverage (Baseline Results) = 108
Table 3.4: Determinants of Leverage = 112
Table 3.5: Short term Impact of Market Timing on Capital Structure = 118
Table 3.6: Determinants of Leverage: 2-stages regressions = 124
Table 3.7: Decomposition of Leverage: 2-stages regressions = 125
Table 3.8: Changes in Leverage around financial transactions = 129
Table 3.9: Market to Book Ratios around the Event Year = 136
Table 3.10: Effects of Past Securities Issues on Leverage = 140
Table 3.11: Effects of Historical financing Activities and Market Conditions on Leverage = 143
Table 3.12: Cumulative Changes in Leverage Regressions = 146
Table 3.13: Speed of Adjustment toward Target Leverage = 151
Table 3.14: Speed of Adjustment toward Target Leverage (Alternative Estimation) = 154
Table 3.15: Post Adjustment Subsample = 156
Table 4.1: Summary Statistics = 179
Table 4.2: Capital and R&D Expenditures and Valuations by Year = 183
Table 4.3: Correlations between variables (1993-2006) = 184
Table 4.4: Correlation between Financial Constraints Proxies (1993-2006) = 185
Table 4.5: Investment Activities of Firms Sorted by Market Timers: Full Sample = 186
Table 4.6: Investment Activities of Market timers Sorted by Financial Constraints = 190
Table 4.7: Investment-M/B Sensitivities (Baseline Regression Model): Full Sample = 195
Table 4.8: Investment-M/B Sensitivities (Augmented Regression Model): Full Sample = 197
Table 4.9: Firm Investment Decision and Market Timing (Augmented Regression Model): Full Sample = 201
Table 4.10: Equity Dependence and the Link between Investment and Market timing (Augmented Regression Model) = 206
Table 4.11: Mispricing ?Investment Relationship = 210

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