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Research Seminars

Finance, Insurance & Real Estate

Each semester, the Finance department schedules several free seminars where current research relevant to the field of Finance is presented and discussed. Contact John Martin for more information.

Click a semester listed below to see the seminars for that semester. Some of the seminars have downloadable papers associated with the presentation.


Time and Place Presenter Topic
September 5, 2014
11:00 am - 12:15 pm
Graduate Office Conference Room
Steve C. Lim
TCU,
Antonio J. Macias
Baylor University,
Thomas Moeller
TCU
Title: Intangible Assets and Capital Structure

Abstract: Tangible assets, many of which can be easily collateralized, support debt. Accordingly, the amount of tangible assets is well-established as a principal driver of leverage. As investing is shifting more and more from tangible to intangible assets, it becomes crucial to understand to what extent intangible assets support debt. Analyzing this question empirically has been largely unfeasible due to the lack of information about firms¹ self-created intangible assets. We take advantage of a recent accounting rule change on mergers and acquisitions that provides the details on the market value of identifiable intangible assets. In our sample, both tangible and intangible assets are positively related to leverage. Intangible assets have the strongest effect on leverage in technology firms and in firms with low tangible asset intensity. On a per dollar basis, intangible assets support approximately half as much debt as tangible assets.
October 24, 2014
11:00am - 12:15pm
Graduate Office Conference Room
James Doran
Portfolio Manager,
Implied Capital, LP
Title: Volatility as an Asset Class: Holding Volatility in a Portfolio
Abstract: The ability to hedge market downturns without sacrificing upside returns has long been sought by investors. We examine alternative methods of hedging the S&P 500 with assets that mimic the VIX index in hopes of taking advantage of the asymmetric relationship between volatility and returns. If the VIX were directly investable, adding VIX to an S&P 500 portfolio results in significantly improved performance over the buy-and-hold index portfolio. Given the inability to directly trade VIX, we consider a number of positions which may be utilized to mimic VIX holdings. VIX futures are too expensive to provide an effective hedge and results in negative abnormal returns. VIX calls, while a relatively new product, provide encouraging initial performance as a portfolio addition or overlay. Alternatively, we deconstruct VIX to find the relevant S&P 500 options which drive VIX movement. A synthetic VIX portfolio is then formed using S&P 500 options and this position captures returns similar to the VIX index, but is still subject to extreme crash risk. This shows the difficulty in capturing the positive skewedness, or non-linear response of VIX to S&P 500 movements.
November 7, 2014
11:00am - 12:30pm
Financial Markets Center
Shane Underwood
University of Alabama
Title: The Only Fund in Town? Geographic Segmentation in the U.S. Mutual Fund Market
Abstract: This study examines the role of geographic competition in the mutual fund industry. We begin with the premise that investors exhibit local preferences in their investment choices, creating geographic segmentation in the mutual fund market. We examine how local competition affects the level of fees charged, as well as the propensity to cut fees in response to entry by other funds. We find that funds located in regions with few competing funds charge higher fees than funds located in more crowded regions. We also find that funds respond to local competition in making the decision to cut their management fees to a much greater degree than they respond to non-local competition. Finally, we examine abnormal returns of funds and find that funds in less competitive areas do not seem to exhibit the skill necessary to command higher fees. Our results suggest that although the mutual fund industry exhibits the characteristics of a competitive industry, this competition appears to be heavily driven by local factors.
November 14, 2014
11:00 am - 12:15 pm
Graduate Office Conference Room
Ted Moorman
Hankamer School of Business
Baylor University
Title: A collection of research ideas on exposing financial fraud
Abstract: Research ideas on exposing financial fraud are discussed as related to the following possible range of topics: home foreclosure and mortgage servicing, credit ratings and securitization, conflicts of interest in investment banking, excessive speculation by financial institutions, and asset market manipulation.

Time and Place Presenter Topic
March 20, 2014
3:30 - 5:00pm
Graduate Office Conference Room
David T. Ng
Dyson School
Cornell University
Title: Predicting Time-varying Value Premium Using the Implied Cost of Capital: Implications for Countercyclical Risk, Mispricing and Style Investing

Abstract: We estimate an implied value premium (IVP) using the implied cost of capital approach. The implied value premium is the difference between the implied costs of capital of value stocks and growth stocks and is a direct estimate of the difference in expected returns between value stocks and growth stocks. We use IVP to predict future realized value premium controlling for a variety of countercyclical measures of risk that have been used in the predictability literature. We find that IVP is the best predictor of realized value premium during the 1977-2011 time period from horizons ranging from one month to 36 months compared to the value spread, default spread, term spread, and consumption-to-wealth ratio. IVP strongly predicts (in the time-series) the difference in abnormal price reactions around future quarterly earnings announcements of value stocks and growth stocks, and the predictive power of IVP is stronger during periods of extreme mispricing. Since risk is unlikely to change unexpectedly over a matter of days, the ability of IVP to predict price reactions around earnings announcements is strongly supportive of the mispricing story as at least one major source of the predictable time variation in value premium. There is mixed evidence for the countercyclical risk explanation in the data.
March 7, 2014
11:00am - 12:30pm
Graduate Office Conference Room
John Griffin
McCombs School of Business
UT Austin
Title: The Causes of the 2007 Real Estate Crisis
Abstract: This is a very early stage paper (only tables).
February 13, 2014
3:30 - 5:00pm
Graduate Office Conference Room
Antonio Macias
Neeley School of Business
TCU
Title: Signaling and Risk Allocation in Merger Agreements
Abstract: Acquirers and targets allocate interim risk in merger agreements through the Material Adverse Change (MAC) clause and its exclusions. While virtually all acquisitions have a MAC clause, there is large cross-sectional variation in the numbers and types of MAC exclusions. MAC exclusions can address firm-specific or market-wide adverse changes. Fewer MAC exclusions imply broader abandonment options for acquirers. Using comprehensive hand-collected data, we find that both acquirer and target announcement returns are higher with broader firm-specific abandonment options. Broad firm-specific abandonment options are credible signals for higher target quality and are more prevalent when information asymmetries are likely high.
February 6, 2014
3:30 - 5:00pm
Graduate Office Conference Room
Brian Young
Mississippi State University
Title: Relative Performance Evaluation in Executive Compensation Contracts
Abstract: Using data that include specific contractual details of Relative Performance Evaluation
(RPE) contracts granted to executives for 1,833 firms for the period 1998 to 2012, we develop new methods to characterize RPE awards and measure their value and incentive properties. The frequency in the use of these awards has grown over time with 37% of the firms in our sample granting an RPE award in 2012. When RPE awards are used they are typically granted to the five named executive officers and they represent about 32% of total recipient compensation. RPE awards are more likely to be used at firms with diversified business lines, less concentrated industries, greater exposure to systematic risk, larger size, lower M/B, higher dividend yield, fewer insiders on the board, greater institutional ownership, and that engage a compensation consultant. The typical award is a rank-order tournament based on three year stock returns compared to a select group of 13 peers (median) and is paid out with stock. Payout functions typically include regions of concavity, convexity, explicit inelasticity, and implicit inelasticity. The median firm achieves target payout 89% of the time but ex-post payouts are significantly higher on average when the award is paid in stock. We also find that RPE awards convey to executives the incentive to increase shareholder wealth. RPE awards of stock contingent on either stock or accounting performance and RPE awards of cash contingent on accounting performance convey the incentive to increase firm risk, while RPE cash awards do not.
January 23, 2014
3:30 - 5:00pm
Graduate Office Conference Room
Jim Garven
Hankamer School of Business
Baylor University
Title: On the Use of Web 2.0 Technologies for Enhancing Course Delivery
Abstract: Jim Garven has been an academic blogger since 2004 and has made effective use of course websites dating as far back as 1994. Jim will share his latest efforts in using blogs and social media networks such as Facebook and Twitter to enhance his teaching.

Time and Place Presenter Topic
November 7, 2013
3:30 - 4:30pm
Graduate Office Conference Room
Spencer Case
Hankamer School of Business
Baylor University
Title: Withdrawn IPOs: The Case of Equity Carve-outs
Abstract: This study specifically examines a subclass of IPOs (know as equity carve-outs) that are withdrawn by the parent firm, as well as the stock price behavior associated with completed equity carve-outs. This experimental design provides a unique insight on withdrawn IPOs not found in existing studies. The announcement of a carve-out withdrawal is associated with a significant negative mean excess return. I find that stock returns are negative between an announcement and a withdrawal, and are insignificant between an announcement and a completion. While previous research finds that the original equity carve-out announcements result in positive mean excess returns to the parent firm, I find that this is true only for those firms where the carve-out is not subsequently withdrawn. The mean announcement return for carve-outs that are later withdrawn is not significantly different from zero. Since other types of withdrawn IPOs are largely unobservable due to lack of market data, there are wide implications for withdrawn IPOs by non-publicly traded entities.
November 5, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Jordan Nickerson
McCombs School of Business
UT Austin
Title: Market Forces and CEO Pay: Shocks to CEO Demand Induced by IPO Waves

Abstract: I developed a simple model of wages set in competitive equilibrium and derive predictions regarding the response of wages when an inelastic supply of CEO labor cannot match an increase in demand. The model predicts that the CEO pay-size elasticity increases when more firms compete for a fixed supply of managers, a prediction robust to a broad class of distributions commonly used. I then empirically test this prediction using industry-level IPO waves. Consistent with the model's prediction, I find that pay-size elasticity increases by 5.9% following a one standard deviation increase in an industry's IPO activity after controlling for firm performance, which equates to an average increase in compensation of $412,100. This effect is stronger in industries which require more specialized skills and prior industry experience, which have less sales overlap from other industries, and have less correlated returns with other industries. Furthermore, I find that increased IPO activity leads to a greater likelihood of executive transitions between firms. Finally, I find support for IPO activity drawing down the talent pool of an industry, leading to a 49.5% increase in the likelihood of a firm hiring a successor from outside the industry relative to an industry insider. Overall, these findings point to the substantial role market forces play in the determination of CEO pay.
October 25, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Thomas Moeller
TCU
Title: Learning about target firms and pricing of acquisitions
Abstract: We analyze the effects of learning about target firms on acquisition pricing. Newly public firms should be more opaque than established firms with long track records. An acquirer with superior information about a newly public firm can negotiate a favorable takeover price because less informed potential acquirers have a bidding handicap. Consistent with the effects of learning, acquirer announcement returns decrease and takeover premiums increase with the length of time since the targets' initial public offerings. Our results provide new insights into the determinants of acquirer announcement returns and the effects of learning on acquisition pricing. Moreover, the target's listing status alone does not seem to fully explain why acquirer announcement returns in acquisitions of public targets are significantly lower than in acquisitions of private targets.
September 30, 2013
11:00am - 12:00pm
Financial Markets Center
Jack Cooney
Texas Tech University
Title: TBA
Abstract:
September 20, 2013
11:00am - 12:00pm
Graduate Office Conference Room
David Morehead
Baylor University
University Endowment Fund
Title: The Baylor Endowment from the perspective of the Director of Investments
Abstract: David Morehead joined the Baylor University Office of Investments in 2011, and currently serves as the Director of Investments. Previously, he was a senior portfolio manager at Lotsoff Capital Management, where he managed securities across the corporate capital structure, and a partner at Highview Capital Management, where he focused on public and private energy investments. Prior to this, he was a portfolio manager at Ritchie Capital Management, responsible for a generalist corporate relative value and distressed portfolio and spent time performing equity research on the transportation/logistics and specialty retail sectors at William Blair & Company. Mr. Morehead also held roles at Bank of America, where he was responsible for the risk management of the bank's interest rate derivatives desk, and First Trust Advisors, where he advised community banks on their investment portfolios. David Morehead graduated summa cum laude from Wheaton College and earned his MBA in finance and entrepreneurship with honors from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst (CFA) designation.

Time and Place Presenter Topic
May 3, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Ted Moorman
Hankamer School of Business
Baylor University
Title: Predicting Stock Returns with the Single Index Model
Abstract: Based on a number of advancements in portfolio theory, a simple and flexible application of the single index model in Sharpe (1963) is used to select an optimal portfolio from a large cross-section of stocks. The approach provides evidence of return predictability, according to a number of metrics (certainty equivalent returns, factor model alphas, Sharpe ratios, etc.). Predictability is time-varying, correlated across model parameters, with structural breaks occurring around declining economic and market conditions. Cross-sectional predictability is attributed primarily to the inverse relation between idiosyncratic volatility and returns, which more risk seeking investors tend to load on.
April 19, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Soku Byoun
Baylor University
Title: Corporate Cash Holdings and Capital Structures over the Financial Flexibility Demand Cycle

Abstract: Firms demand financial flexibility in order to match future financial resources and investment opportunities. In a framework that integrates the interplay between financial flexibility demand and current financial decisions, new predictions about firms' cash holding and leverage policies emerge: firms that are in the stage of financial flexibility building have low leverage and large cash holdings; firms that are in the stage of utilizing financial flexibility have high leverage and low cash holdings; finally, mature firms that are in the stage of recharging financial flexibility have moderate leverage and cash holdings. We find evidence consistent with this prediction.
March 28, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Steve Moyer
Distressed Alpha
formerly Distressed Debt Analyst for Pimco
Title: Hawker Beechcraft Distressed Debt Investment Analysis
Abstract: This is a case study discussion taught by the case writer (Steve Moyer) to students and interested faculty. Steve was formerly the distressed debt analyst at Pimco (the world's largest debt security investor). The case has been presented at both the University of Chicago and University of Texas.
Slides from presentation
February 22, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Barbara Ostidiek
Rice University
Title: Optimizing the Performance of Sample Mean-Variance Efficient Portfolios
Abstract: We propose a comprehensive empirical strategy for optimizing the out-of-sample performance of sample mean-variance efficient portfolios. After constructing a sample objective function that accounts for the impact of estimation risk, specification errors, and transaction costs on portfolio performance, we maximize the function with respect to a set of tuning parameters to obtain plug-in estimates of the optimal portfolio weights. The methodology offers considerable flexibility in specifying objectives, constraints, and modeling techniques. Moreover, the resulting portfolios have well-behaved weights, reasonable turnover, and substantially higher Sharpe ratios and certainty-equivalent returns than benchmarks such as the 1/N portfolio and S&P 500 index.
January 18, 2013
11:00am - 12:00pm
Graduate Office Conference Room
Bill Reichenstein
Baylor University
Title: Two Key Concepts for Wealth Management and Beyond
Abstract: Many of the ideas in this presentation have implications for faculty. Should you save in the 403(b) or Roth 403(b)? Should you convert funds from tax-deferred accounts to Roth IRA? Suppose a retiree has funds in tax-deferred account (e.g., 403(b)), tax-exempt account, and taxable account. How can he withdraw funds from these accounts just using the tax code and make the portfolio last several years longer? Finally, I suggest what I believe is a better way to calculate the portfolio's asset allocation-a method that is part of multiple financial planning software products available or under development.

Time and Place Presenter Topic
November 30, 2012
11:00am - 12:00pm
Graduate Office Conference Room
Steve Green
Hankamer School of Business
Baylor University
Title: Thirty-Two Cents on the Dollar: An Econometric Case Study of a Large Tuition Increase
Abstract: Prior to the 2002-03 academic year, Baylor University's posted tuition rates were considerably lower than those of many comparably ranked private universities. In that year, as part of a major strategic plan known as "Baylor 2012", the tuition rate for new students was increased by nearly 40%. This paper reports the results of a counterfactual study based on a simultaneous equation econometric model of Baylor finances. The major finding of the paper is that by 2011, total net tuition revenue had risen by about 32% percent of the amount that might have been expected from a naïve forecast made in 2002. The main factor eroding revenue growth was a significant rise in unfunded scholarships (price discounts). Lower enrollment than would have otherwise been the case was also a factor, but of lesser importance than the increased price discounting.
November 15, 2012
3:30 - 5:00pm
Graduate Office Conference Room
Jeff Sohl
University of New Hampshire
John Becker-Blease
Title: The Sources of Legitimacy for New Venture Angel Investors
Abstract: One of the most difficult resources for entrepreneurs to access is financial capital. Most high-growth ventures require resources beyond the means of the average entrepreneur and are not appropriate to support the use of debt. Although external equity is the primary source of funds, information asymmetries impede entrepreneurs' access to this market. We examine the relation between the legitimacy of an entrepreneurial venture and its access to early-stage equity capital from angel investors. We employ three measures of legitimacy, including sociopolitical regulatory, sociopolitical normative, and cognitive as well as a fourth based on the industry of operation. Previous research has suggested that legitimacy is important for resource acquisition including personnel and technology and that the link between legitimacy and resource acquisition can be particularly important for new ventures. However, given its importance, comparatively little empirical research has investigated the relation between legitimacy and access to capital.
October 5, 2012
11:00am - 12:00pm
Graduate Office Conference Room
Ted Moorman
Hankamer School of Business
Baylor University
Title: Ancient Future Portfolio Optimization: How a Portfolio Rule from Antiquity Can be Optimal According to Modern Investment Criteria and the Implications for Improving Portfolio Rules
Abstract: I find that a naïve combination of portfolio rules often outperforms theoretically optimal combinations of rules in out of sample tests. I present a model giving the conditions for which a naïve allocation maximizes certainty equivalent returns. Based on insights from the model, I present a portfolio optimization method that minimizes the variance of the combined portfolio, subject to the constraint that the return is at least as large as a nominal value above the return from a naïve allocation. Compared to other combination rules, this method always outperforms a naïve allocation by at least 100 basis points across data sets.
September 27, 2012
3:30 - 5:00pm
Graduate Office Conference Room
Sam Curcuruto
Techsmith
Title: An overview of Lecture Capture Video Software using Camtasia Studio
Abstract: Lecture capture software is being used across all levels of the curriculum. The Khan Academy has popularized one such software package known as Camtasia Studio. In this seminar we will learn how easy it is to record, edit, and post lecture capture videos. If you are not familiar with this topic you may find a visit to the Khan Academy website very informative.
September 7, 2012
11:00am - 12:00pm
Graduate Office Conference Room
Mike Stegemoller
Hankamer School of Business
Baylor University
Title: The Changing Nature of Investment Banking Relationships
Abstract: We examine the nature of bank-firm relationships from 1996 to 2009. Our sample consists of all CRSP firms from this period and both their security issuances and merger and acquisition activity. From studying this combination of data along with the accompanying role of investment banks in these transactions we are better able to understand the extent of bank-firm relationships, the strength of these relationships, and how these relationships change over our sample period.
August 31, 2012
2:00 - 3:00pm
Graduate Office Conference Room
Jim Garven
Hankamer School of Business
Baylor University
Jim Hilliard
University of Georgia
Title: Optimism Bias and the Demand for Health Insurance
Abstract: We explore the demand for insurance in a case where it is commonly assumed that consumers underinsure; specifcally, in the health insurance market. Our theory is based on a simple binomial model of the demand for insurance in which consumers make either rational or biased assessments concerning the likelihood of future health outcomes. From this model, we derive an insurance demand equation from which we obtain empirically testable predictions based upon comparative static analysis. Empirical results largely support the theory, in that health insurance demand increases in family income and risk, but decreases in the level of optimism bias.

Time and Place Presenter Topic
April 20, 2012
2:30 - 4:00pm
Graduate Office Conference Room
Jim Hilliard
University of Georgia
Linda Klein
Uinversity of Connecticut
Title: Insurance Company Capital Structure Swaps and Shareholder Wealth
Abstract: A new model is developed for optimal capital structure swaps for insurance companies under conditions of asymmetric information or comparative advantage. We examine the opportunity for insurers to increase shareholder wealth by issuing equity or selling policies when managers' private information reveals intrinsic firm values that differ from market values. In such situations, managers may use the proceeds of an equity or debt issue to purchase reinsurance or retire equity with cash generated from selling new policies. Indeed, the model suggests that the optimal decision may involve issuing equity when private information suggests that equity prices are low. The model can be used to find the optimal capital structure that maximizes the increase in intrinsic wealth of the long-term or retaining shareholders when market values deviate from fundamentals.
April 12, 2012
3:30 - 5:00pm
Graduate Office Conference Room
Jonathan M. Karpoff
University of Washington
Scott Lee
Texas A&M University
Gerald S. Martin
American University
Title: The Impact of Anti-Bribery Enforcement Actions on Targeted Firms
Abstract: Firms prosecuted for foreign bribery experience significant costs. Their share values decline by 3.11%, on average, on the first day that news of the bribery enforcement action is reported, and by 8.98% over all announcements related to the enforcement action. Fines, internal investigation costs, and losses associated with financial restatements account for 3.20% of the cumulative loss in share values, suggesting that the remainder, 5.78%, could be attributed to a reputational impact. Closer inspection, however, indicates that most bribery enforcement actions are co-mingled with charges of financial misrepresentation and fraud, and that most of these firms' costs are due to the financial violations, not the bribery charges per se. Excluding cases in which the bribery charges are accompanied by charges of financial fraud, the mean initial loss in share value drops to -1.60%, and the cumulative loss to -3.55%. Focusing on bribery-related announcements that are not contaminated by contemporaneous charges for financial misrepresentation, the magnitude of the initial loss drops further, to -0.47%, and is statistically insignificant. These results indicate that the financial deterrents to bribery come primarily from the direct costs imposed by regulators, and not from an impact to the firm's reputation with counterparties.

JEL classification: G38; K22; K42; L51; M41
Keywords: Bribery, FCPA, penalties, financial misrepresentation, fraud
March 22, 2012
3:30 - 5:00pm
Graduate Office Conference Room
Vince Kaminski
Rice University
Title: Credit Risk Management Past Dodd-Frank and MF Global
Abstract: Not available.
March 8, 2012
3:30 - 5:00pm
Graduate Office Conference Room
Ted Moorman
Hankamer School of Business
Baylor University
Title: Outperforming Naive Diversification: The Importance of Estimation Error and Estimation Error Reducing Strategies
Abstract: I examine out-of-sample performance for 13 portfolio selection rules. A short-sale constrained Sharpe ratio rule and an optimal combination of the naive 1/N (equal weight) rule and the Kan and Zhou (2007) rule generate higher average utilities than the 1/N rule in most cases. Other estimation error reducing rules frequently outperform the 1/N rule. A short-sale constrained random allocation rule may be a preferable benchmark to the 1/N rule, since it performs similarly to the 1/N rule and like most rules, has non-constant weights. In-sample utilities are inappropriate benchmarks, since they can be much greater than true utilities, especially at short horizons.
February 21, 2012
1:30 - 5:00pm
Graduate Office Conference Room
Jeff Sandefer
Entrepreneur and Founder of the Acton School of Business, Austin, TX
Tom Gilligan
Dean of the McCombs School of Business, UT-Austin
Chew and John McCormack
Morgan Stanley, NY
Title: The Future of Business Education
Schedule:
1:30-3:00 pm: Panel Discussion on the Future of Business Education (participants include Don Chew (moderator), Dean Gilligan, John McCormack, and Jeff Sandefer
3:00-3:30 pm: Break
3:30-5:00 pm: Case Discussion led by Jeff Sandefer
February 16, 2012
3:30 - 5:00pm
Graduate Office Conference Room
Neil A. Doherty
Wharton
Jim Garven
Baylor University
Sven Sinclair
Social Security Administration
Title: Noise Hedging and Executive Compensation
Abstract: We address two apparent paradoxes of risk management: (1) managers hedge in order to avoid negative earnings surprises, yet they tend to hedge risks uninformative of the value of the company; and (2) the presence of options in managers' compensation distorts their incentive to hedge, inducing them to expose the company to too much risk. Our model is based on informational asymmetry between insiders (managers) and outsiders (investors). Investors derive information about company value from net cash flows (earnings), but the information revealed through earnings depends on the risk management strategy pursued by managers. Fully revealing earnings information is in the investors' interest, so they design a compensation package to induce managers to make the earnings fully informative. With appropriate assumptions, we show that managers will select the efficient hedge strategy if their compensation includes stock options. Our model also provides a rational explanation for the observed vigorous response of stock prices to modest earnings surprises. Results based upon the analysis of Compustat and Execucomp data provide empirical support for our model; other things equal, firms that offer their CEO's proportionately higher options-related compensation exhibit stronger stock price responses to changes in earnings and tend to have higher Tobin's q's.

Presentation: pdf format
January 20, 2012
1:30 - 3:00pm
Graduate Office Conference Room
Robert Wiltbank
Willamette University
University and Research Fellow at the Darden School, UVA
Title: Returns to Angel Investors in Groups
Abstract: Entrepreneurs and investors regularly wonder what the returns are in angel investing. The completion of this research project provides robust data on this subject that has never before been available. Our findings in this study are based on the largest data set of accredited angel investors collected to date, with information on exits from 539 angels. These investors have experienced 1,137 "exits" (acquisitions or Initial Public Offerings that provided positive returns, or firm closures that led to negative returns) from their venture investments during the last two decades, with most exits occurring since 2004.

Presentation: pdf format

Time and Place Presenter Topic
November 17, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Kyle Tippins
Texas A&M University
Title: The Sources of Cash and Its Marginal Value
Abstract: The marginal value to shareholders of a dollar of cash holdings of a firm depends on the source of the dollar: $1.00 of cash has a value of $1.27 when it is from operations, $0.79 when from financing, and $0.47 when from investing. There is also large variation in the sign-adjusted values of increases and decreases of cash across the sources. Shareholders of financially constrained or distressed firms value incremental cash holdings from almost any source more highly than do shareholders of other firms, but differences exist across the sources of cash within each subsample. The results shed light on several questions about the value of firms' cash holdings.
November 3, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Ted Moorman
Hankamer School of Business
Baylor University
Title: Tests of Immediacy Pricing Using Short-Term Reversals
Abstract: Theoretically, the price of immediate trade is reflected in the magnitude of short-term reversals (Grossman and Miller (1988)). We find that short term reversals are largest among stocks that experience low volume levels, large increases in volume, and large increases in the spread between high and low prices. Consistent with the model of Chacko, Jurek, and Stafford (2008), this evidence indicates that reversals are largest when immediacy is in short supply but increasingly demanded, and when future transaction prices become more uncertain. Our results are generally consistent with market prices as a mechanism to allocate liquidity to where it is most needed.
October 13, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Darius Miller
SMU
Title: Why do U.S. securities laws matter to non-US firms? Evidence from private class-action lawsuits
Abstract: A continuing controversy is whether U.S. securities laws are enforced against foreign firms, since public enforcement actions by the SEC are infrequent and often result in insignificant penalties. We examine private enforcement actions of U.S. securities laws against foreign firms and document that 269 securities class-action lawsuits were filed from 1996 to 2008. We also document the severity of the penalties imposed on foreign firms and show that while the lawsuit settlement amounts are large, the monetary penalties levied by the market are even larger. During the three-day period surrounding the lawsuit filing date, there is a significant negative stock price reaction of -6.21%, which translates to an average loss of $392 million dollars. Aggregating over all firms, the total dollar loss is $73 billion. We even find that foreign firms without a U.S. presence experience significant valuation losses. Our results provide evidence that enforcement actions of U.S. securities laws against foreign firms are neither uncommon nor economically insignificant events.
October 6, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Mitch Taylor
Principal, Cooper Investment Partners
Title: Building a buyout fund
Abstract: This is not an academic presentation but a report from a private equity investor who has raised capital for a buyout fund and executed on a recent buyout that he will describe in some detail.

Time and Place Presenter Topic
April 29, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Soku Byoun
Baylor University
Kiyoung Chang
Uinversity of South Florida
Young Sang Kim
Northern Kentucky University
Title: Does Corporate Board Diversity Affect Corporate Payout Policy
Abstract: This paper investigates whether board diversity has a significant impact on corporate payout decision. Previous studies exclusively focus on examining the relation between a measure of firm performance and board diversity. The advantage of our study is to investigate the direct impact of board diversity on a major corporate decision---i.e., dividend payout policy. We find that firms with diverse boards are more likely to pay dividends and tend to pay larger dividends than those with non-diverse boards. After controlling for various firm characteristics and exploring alternative explanations for the positive association between board diversity and dividend payout policy, our results suggest that board diversity has a significant impact on dividend payout policy. The impact of board diversity on dividend payout policy is particularly conspicuous for firms with potentially greater agency problems of free cash flow, suggesting that diverse board helps mitigate the free cash flow problem. Our findings are consistent with the argument that board diversity enhances the monitoring function of directors for the benefit of shareholders. We also show that significantly larger portion of firms pay dividends after they added a diverse director to their boards and that firms pay significantly higher dividends after adding a diverse director for the first time. However, the change in dividend payout ratio is not significant when firms add another diverse director to their already diverse boards. Also, the benefits of board diversity are not materialized when directors share the same gender or ethnic tie with the CEO. Our findings have an important implication for policies aiming to increase the number of diverse directors in corporate boardrooms. What makes the significant difference is not the sheer number of diverse directors in the board but the diversity they bring to the board.
April 15, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Chuck North
Baylor University
Ernest Fletcher
Baylor University
Title: Ability, Effort, and Student Performance in Introductory Finance
Abstract: We study the determinants of students' grades in an introductory finance course, including both ability and effort. We begin with the paradox that students who report longer study hours earn lower grades on average than students who report spending fewer hours studying for the class. Using a theoretical model of returns to effort featuring students of heterogeneous ability, we show how such a negative correlation could arise: in short, high ability students are able to earn high grades with less study time, while lower ability students earn lower grades even though they spend more time studying. We use a sample of university students in an introductory finance class to test our model's predictions and to examine other potential determinants of grades in introductory finance.
April 1, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Steve Green
Baylor University
John Martin
Baylor University
Steve Rich
Baylor University
Title: Managed vs. Unmanaged Changes in the Capital Structures of Firms with Extreme Leverage: Is the extreme use of financial leverage a choice?
Abstract: In this paper we study the capital structures of highly levered firms. Specifically, we differentiate between intentional or managed changes in the firm’s use of financial leverage versus unmanaged changes that are beyond the direct control of management. We find that the financial leverage (book and market) of extreme leverage firms rises rapidly in the years immediately prior to their identification as extreme-leverage firms, and the increase in leverage is not the result of managerial decisions to issue debt or repurchase common stock. Instead, firms become extremely levered primarily because of circumstances that are beyond the direct control of management. We conclude that firms do not become highly levered because it is their optimal capital structure. Consequently, any attempt to explain their use of financial leverage using capital structure theory cannot succeed.
February 25, 2011
3:30 - 5:00pm
Graduate Office Conference Room
David Robinson
Duke University
NBER, SIFR
Berk A. Sensoy
Ohio State University
Title: Private Equity in the 21st Century: Cash Flows, Performance, and Contract Terms from 1984-2010
Abstract: Using detailed quarterly cash flow data for a large sample of private equity funds from 1984-2010, we examine cross-sectional and time-series cash flow performance of private equity funds across a range of asset classes, including venture capital, buyout, real estate, distressed debt, and funds-of-funds. Our data also include key features of the management contracts, specifically carried interest, management fees, and general partner capital commitments, allowing us to investigate the determinants of contractual terms and to link contractual terms to performance. The data reveal important facts about the private equity market in the 21st century. On average, our sample private equity funds have outperformed the S&P 500 on a net-of-fee basis by about 15%, or about 1.5% per year. Performance varies considerably across fund types and over time. Larger funds require larger percentage capital commitments from the general partners (GPs), consistent with concerns about GP incentives in large funds. Larger funds also charge lower management fees, and obtain higher carried interest, consistent with learning about GP ability. Management fees, but not carried interest, are higher during fundraising boom periods, even controlling for fund size, suggesting that the fixed/variable mix of GP compensation shifts toward fixed components during fundraising booms, consistent with increased GP bargaining power in booms. In marked contrast to the mutual fund literature, there is no relation between management fee and carry terms and net-of-fee performance, suggesting that GPs with higher fees earn them in the form of higher gross-of-fee performance. There is some evidence that funds with lower GP capital commitments outperform. Conclusions about private equity performance over time differ markedly depending on whether performance is measured in absolute terms (IRR) or adjusted for the performance of the S&P 500 (PME). In particular, funds raised during hot markets underperform in terms of IRR, but not in terms of PME. Capital calls and distributions are both more likely and larger when public equity valuations rise and when liquidity conditions tighten. During the financial crisis and ensuing recession of 2007-2009, the component of calls unexplained by macroeconomic factors spiked, distributions plummeted, and the sensitivity of calls and distributions to underlying macroeconomic conditions changed considerably.
January 28, 2011
3:30 - 5:00pm
Graduate Office Conference Room
Sandy Leeds
University of Texas, Austin
David Van Hoose
Baylor University
Title: The Fiscal Mess We're in: Where We go from here?
Abstract: This will be an informal panel discussion led by the two scholars. Sandy is a clinical professor at the University of Texas at Austin who writes an investment news letter that is widely followed and read. In addition, he runs the student managed fund in the McCombs school. David is a member of the Baylor economics department faculty and a recognized scholar on monetary economics.

Time and Place Presenter Topic
December 2, 2010
3:30 - 5:00pm
Graduate Office Conference Room
Malcolm Wardlaw
University of Texas at Austin
Title: The Effect of Bank Distress on the Investment of Its Corporate Borrowers
Abstract: This paper examines how changes in the health of an individual bank affect the investment behavior of its current borrowers. I find that, after controlling for aggregate credit availability and bank conditions, firms reduce their investment when the health of their primary bank deteriorates. This effect is only present while the firm maintains an active relationship, and does not appear to be driven by changes in region or industry specific investment opportunities.
November 18, 2010
3:30 - 5:00pm
Graduate Office Conference Room
Mike Stegemoller
Hankamer School of Business
Baylor University
Title: TBA
Abstract: Not Available.
October 14, 2010
3:30 - 5:00pm
Graduate Office Conference Room
Tim Sheng
Mathematics Department
Baylor University
Title: Financial Derivatives and Computations from Mathematics
Abstract: Financial derivatives account for more than half of financial instruments in the modern market being the fundamental tool for risk hedging in portfolio management. Many complex exotic options have been designed and put into market for various needs. Those products typically involve multiple assets with long time horizons and, consequently, there has been a considerable demand of accurate models and efficient computational techniques for treating nonlinearities and complexities in pricing and hedging financial derivatives. This talk will focus on some latest achievements from the mathematical sides for financial derivative computations. At the same time, we will propose possible collaborated teaching and research in the exciting fields.
September 9, 2010
3:30 - 5:00pm
Graduate Office Conference Room
Soku Byoun
Baylor University
Zhaoxia Xu
Polytechnic Institute of New York University
Title: Internal Finance, Predation, and Financial Crisis
Abstract: We find that firms relying on internal funds prior to the 2007-8 financial crisis increase external financing and investment during the crisis, while firms relying on external finance experience significant contractions in their financing and investment. We further show that internal finance dependent firms increase their market share relative to their external finance dependent competitors during the crisis. Our findings suggest that internal finance dependent firms raise more external capital and expand investment during the crisis in order to exploit their financially weakened competitors, consistent with the "long-purse" theory of predation. We find that firms relying on internal funds prior to the 2007-8 financial crisis increase external financing and investment during the crisis, while firms relying on external finance experience significant contractions in their financing and investment. We further show that internal finance dependent firms increase their market share relative to their external finance dependent competitors during the crisis. Our findings suggest that internal finance dependent firms raise more external capital and expand investment during the crisis in order to exploit their financially weakened competitors, consistent with the "long-purse" theory of predation.

Time and Place Presenter Topic
April 9, 2010
3:30 - 5:00pm
Trading Room
David VanHoose
Baylor University
Title: Who Should Regulate Banks?
Abstract: Informal talk addressing issues of bank regulation that were brought to a head with the financial crisis of 2007- ?
March 19, 2010
3:30 - 5:00pm
Trading Room
Vince Kaminski
Rice University
Title: The Future of Energy Markets
Abstract: An informal discussion of the future of energy markets and commodity prices from the perspective of someone who has spent their professional life monitoring and analyzing these markets.
February 19, 2010
3:30 - 5:00pm
Trading Room
Brian Webb
UBS AgriVest LLC
Title: Investors get Real
Abstract: The ongoing financial crisis has brought on increasing concerns about inflation and this, in turn, has increased the interest of institutional investors (pension funds, endowments, etc.) in real assets such as farmland, commercial real estate, and infrastructure.
January 29, 2010
3:30 - 5:00pm
Trading Room
Lew Spellman
University of Texas at Austin
Title: The Sovereign Risk Consequences of Attempting to Maintain "Permanent Consumption" in the Face of Global Imbalances
Abstract: Global imbalances between the developed and developing world, now two decades in the making, is straining the developed world's ability to place sovereign debt in order to maintain consumption levels and fund the entitlement of its aging populations. As the financial crisis morphs into 2010, market risk assessments are now focusing on the fiscal strains of the developed world's accumulating sovereign debt as a response to the global meltdown and their underlying demographics. The fiscal strain is causing wide differences in expectations among investors as to future outcomes for economic growth, inflation, dollar valuation, private default and P/E ratios. Sovereign risk has many dimensions and sends tremors through various financial markets altering accustomed valuations and sends capital to unaccustomed places.

Time and Place Presenter Topic
November 19, 2009
4:00 - 5:30pm
Trading Room
John Martin
Baylor University
Steve Rich
Baylor University
Title: Extreme Leverage and the Determinants of Capital Structure
Abstract: (this is a first draft working paper that has not been completed at the time of the preparation of the schedule)
November 13, 2009
9:00 - 11:00am
Trading Room
Werner H. Erhard
Independent
Michael Jensen
Harvard University
Steve Zaffron
CEO, Vanto Group
Title: Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality
Abstract: We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, quality of life, and value-creation for all entities, and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology, yet its major role in productivity and performance has been largely hidden or unnoticed, or even ignored by economists and others.
September 24, 2009
3:30 - 5:00pm
Trading Room
Spencer Case
Baylor University
Title: The Effect of Option Listings: Evidence from American Depository Receipts
Abstract: This paper extends previous research into the effect of option listing on underlying securities and the factors influencing their selection for option listing. Unlike the U.S. domestic equities market, the short sale constraint differs widely across ADRs due to country specific legal restrictions on short selling and options availability. Our results show that U.S. options exchanges have no preference for listing ADRs that are subject to higher short sale constraints or ADRs with higher volatility. The exchanges do tend to list ADRs with high relative volume and market capitalization. Using a control sample, we find no decrease in volatility or increase in short interest with option listing. The abnormal return upon option introduction is less negative when the ADR is less short sale constrained, consistent with option listings mitigating short sales constraints.

Time and Place Presenter Topic
April 9, 2009
3:30 - 5:00pm
Trading Room
Alan Crane
PhD student, University of Texas
Title: The Litigation Environment of a Firm and its Impact on Financial Policy
Abstract: Several studies have documented the impact of litigation on shareholders. However, little is known about how firm managers respond to this costly reality. I test whether a firm's litigation environment impacts its overall financial policy. Using actual lawsuits, I construct a proxy for the changing litigation environment by industry. I find that higher litigation exposure leads firms to choose higher leverage by actively repurchasing shares. These repurchases coincide with a decrease in cash holdings and an increase in short term liabilities. Furthermore, these results appear to be stronger in firms that are financially distressed and face a higher chance of bankruptcy due to litigation. These results are consistent with the idea that firms take action in the face of increased legal risk to shield their assets from potential fees, judgments and settlements due to litigation.
March 26, 2009
3:30 - 5:00pm
Trading Room
Soku Byoun
Baylor University
Jaemin Kim
San Diego State University
Sehyun Yoo
San Diego State University
Title: Capital Structure in Project Finance
Abstract: Project finance is arranged when a particular facility or a related set of assets is capable of generating cash flows as an independent economic unit (Finnerty (2007)). A significant amount of capital has been spent worldwide on project finance in recent years; in 2004, firms around the world financed $234 billion of capital expenditures through project finance, and in the United States alone, the dollar amount was $34 billion (Esty (2004, 2005)). This compares to $24 billion investments by venture capitalists, and $73 billion raised through initial public offerings in the U.S. in 2004. This study examines to what extent project companies' financial policies are structured in connection with other contractual arrangements that affect the risk of and control over operating cash flows from their projects.
February 12, 2009
3:30 - 5:00pm
Trading Room
Vince Kaminski
Rice University
Title: Risk management and its discontents
Abstract: This presentation will review the current status and practice of risk management in US and European financial institutions. The central question is: "To what extent the failures of risk management can be blamed for the unprecedented financial crisis of 2008?"
January 30, 2009
3:30 - 5:00pm
Trading Room
Douglas Cook
University of Alabama
Title: On the nature of corporate capital structure persistence and convergence
Abstract: Lemmon, Roberts, and Zender (2008) provide evidence suggesting that corporate capital structures are surprisingly persistent; that firm fixed effects account for a significant portion of the observed variation in corporate capital structures; and that there is a pattern of convergence of corporate capital structures over event time. We argue that Lemmon, Roberts, and Zender’s evidence is consistent with corporate capital structures following a nonlinear process, dictated in part by the definition of capital structure and in part by the growth pattern of firms. We find evidence consistent with these arguments. Specifically, we provide evidence that corporate capital structures follow a nonlinear process that is also followed by their determinants and that unobserved firm heterogeneity (fixed effects) is less important and prior explanatory variables are more important than suggested by Lemmon, Roberts, and Zender’s evidence.

Time and Place Presenter Topic
October 24, 2008
1:30 - 3:00pm
Trading Room
David Van Hoose
Baylor University
Title: Interest on Reserves, Bank Behavior, and Sweep Accounts
Abstract: The Financial Services Regulatory Relief Act (FRSSA) of 2006 authorizes the Federal Reserve to pay interest on reserves held by depository institutions at Federal Reserve banks beginning in October 2011. This paper evaluates the likely balance-sheet effects of the payment of interest on reserves, including impacts on banks’ propensity to sweep funds from transaction deposits subject to reserve requirements to non-transaction deposits with no reserve requirement. It also explores conditions under which the Federal Reserve’s setting of the interest rate on reserves could induce banks to halt sweeping activities.
September 29, 2008
1:30 - 3:00pm
Trading Room
Mitchell Taylor
Principal with Kroll Zolfo Cooper (KZC)
Title: The corporate bankruptcy process
Abstract: This is not a paper presentation, per se. Instead we have the opportunity to draw upon the experiences Mitch has had in the bankruptcy process through his work in liquidating the Enron estate, selling the Blue Bird Bus company, and in running the bankruptcy process for one of the largest mortgage companies in America.
September 4, 2008
1:30 - 3:00pm
Graduate Conference Center
Michael Froehls
Met Life International
Head of Customer Service & Operations, Strategy & Implementation for Latin America, Europe, and India
Title: Global US corporations: Are they losing competitiveness?
Abstract: This is not a traditional paper presentation but is an opportunity to hear from someone who has been involved in strategy and finance at the corporate level for many years with MetLife, Allianz SE, Citigroup, and McKinsey and Company. I’ve asked Michael to talk about the challenges he sees to the U.S. economy.

Time and Place Presenter Topic
April 24, 2008
3:30 - 5:00pm
Trading Room
Alexander Butler
UT Dallas
Jess Cornaggia
PhD student, UT Dallas
Title: Does Access to Finance Improve Productivity? Evidence from a Natural Experiment
Abstract: We study the relation between access to finance and productivity at the county level. We exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a differences-in-differences-indifferences testing approach and find that production increases the most over the sample period in counties with relatively strong access to finance, even in comparison to a control group. This result is statistically significant, and robust to a variety of controls, alternative variables, and tests. Our findings show how access to finance can have a positive impact on productivity, and speak to the larger role of finance in economic growth.
March 27, 2008
3:30 - 5:00pm
5th floor Cashion
Richard Derring
Opal Consulting
Sharon Tennyson
Cornell University
Title: The Impact of Rate Regulation on Claims: Evidence from Massachusetts Automobile Insurance
Abstract: Rate regulation has a long history in insurance markets. In many states an important goal of regulation is to reduce price variation across purchasers, and specifically to reduce price levels for high-risk purchasers. That feature of rate regulation leads to price cross-subsidies from low-risk purchasers to high-risk purchasers. Consumers who are charged higher prices in order to finance cross-subsidies to high-risks may be less likely to purchase insurance and to reduce participation in insured activities. These adverse selection effects will lead to a higher proportion of high-risk consumers and a higher proportion of insurance purchased by high-risks. In addition, because cross-subsidies reduce the links between insurance risk and insurance prices, all consumers face reduced incentives for loss prevention and safety investments due to moral hazard.

The article tests the hypothesis that insurance price subsidies lead to higher insurance cost growth. To squarely focus on the impact of regulatory price subsidies rather than that of price regulation more generally, the paper makes use of data from the Massachusetts private passenger automobile insurance market. Cross-subsidies were explicitly built into the rate structure through rules that limit rate differentials and differences in rate increases across driver rating categories. Two approaches were taken to study the potential loss cost reaction to the inefficient Massachusetts cross-subsidies that began in systematic form in 1977 and continue through 2007. The first approach compared Massachusetts to all other states on demographic, regulatory and liability coverage levels. Loss cost levels that were 44 to 50 percent above the expected level were found for Massachusetts during the 1978-1995 periods when premiums charged were those fixed by the state and included explicit cross subsidies from low risk drivers to high risk drivers. A second approach considered changing cost levels across Massachusetts by studying loss cost changes by town and relating those changes to subsidy providers and subsidy receivers. Subsidy data for 1999-2007, with underlying accident year data for 1993-2004, showed a significant and positive (relative) growth in loss costs for towns that were subsidy receivers in line with the theory of underlying incentives for adverse selection and moral hazard.
February 8, 2008
1:30 - 3:00pm
Trading Room
Steve Magee
University of Texas
Chris Magee
Bucknell University - visiting at Texas A&M University
Title: The United States is a Small Country in World Trade
Abstract: Despite being the largest country in world trade and thus presumably having high optimal tariffs, the United States has been a champion of free trade since the 1930’s, with low and declining levels of protection. This paradox suggests that the United States is failing to exploit its monopsony power by levying optimal tariffs. We use data on world output and trade flows and find that the influence of U.S. tariffs on world prices is negligible in most industries. In the median manufacturing industry, U.S. tariffs reduce world prices by only 0.12%. We also find that optimal tariffs are typically small (3.6% in the median manufacturing industry) and are lower than existing U.S. tariffs in most industries. It is no puzzle that the United States has long been a champion of free trade – U.S. tariffs raise domestic prices, but with negligible reductions in world prices.

Time and Place Presenter Topic
November 16, 2007
1:30 - 3:00pm
Financial Markets Center
John Sulaeman
University of Texas
Title: Do Shareholder Preferences Affect Corporate Policies?
Abstract: This paper examines the preferences of institutional investors for firm policies and the effects of these preferences on firm decisions. I find that institutions exhibit systematic differences in their preferences for financial and investment policies of the firms they invest in. Furthermore, I find that these preferences are associated with subsequent changes in the financial and investment policies of firms. In particular, a firm is more likely to decrease (increase) its leverage ratio if its current leverage is higher (lower) than the preferences of its institutional shareholders. Moreover, firms that change their leverage ratios in the opposite direction of their shareholders' preferences experience lower stock returns relative to firms that change their leverage ratios in the direction of those preferences. A firm is also more likely to increase (decrease) its investment if its current investment ratio is lower (higher) than the revealed preferences of its institutional shareholders. Overall, the evidence is consistent with institutional preferences influencing the firms in their portfolios.
November 1, 2007
3:30 - 5:00pm
Financial Markets Center
Stuart Gillan
Texas Tech University
Title: What Matters in Corporate Governance? Evidence from the Directors' and Officers' Liability Insurance Market
Abstract: We examine whether or not aspects of corporate governance that commonly appear in governance reforms and best practice recommendations are priced in the marketplace. We do so by using information about the price of firms' Directors' and Officers' (D&O) liability insurance. D&O liability insurance protects corporate directors and officers by covering expenses and damages in the event that the firm is sued. Given that insurers are at risk if client firms are sued, they have incentives to assess both the client's litigation risk and the quality of governance mechanisms that clients use to mitigate this risk. We find that standard best-practice recommendations pertaining to board structure are not priced, thus casting doubt on the efficacy of recent governance reforms.
October 5, 2007
1:30 - 3:00pm
Financial Markets Center
Soku Byoun
Baylor University
Title: Financial Flexibility, Leverage, and Firm Size
Abstract: We examine financial flexibility as an alternative explanation to existing capital structure theories. We find that small firms have lower leverage ratios, not because of internally generated funds (as implied by the pecking order theory) but because of additional equity financing (consistent with our financial flexibility hypothesis). This finding can not be explained by either the pecking order theory or the tradeoff theory; the pecking order may be reversed for small firms that prefer external equity to debt financing, while the tradeoff theory may miss some important aspects of capital structure decisions. We argue that small firms maintain low leverage by issuing equity and building up cash holdings for financial flexibility. Debt covenants often carry restrictions on financing and investment decisions that are especially cumbersome for small, growing firms. Equity financing allows small firms to raise cash without impeding financial flexibility. Consistent with this argument, we find small firms build up cash holdings through external equity in order to preserve financial flexibility. Once we account for financial flexibility, the positive relationship between firm size and leverage found in previous studies is unclear. We also show that the relation between the bond rating and leverage is pretty much disappears once we consider the flexibility concern.
September 20, 2007
3:30 - 5:00pm
Financial Markets Center
James R. Garven
Baylor University
Martin F. Grace
Georgia State University
Title: Adverse Selection in Reinsurance Markets
Abstract: The reinsurance literature has a rich theoretical heritage, and in recent years a number of important empirical contributions have been made. This paper adds to that literature by testing Jean-Baptiste and Santomero's (2000) adverse selection hypotheses after controlling for factors that are known from previous studies to influence the demand for reinsurance. Our tests involve a data panel consisting of U.S. property-liability insurance firms which reported to the National Association of Insurance Commissioners (NAIC) during the period 1995-2000. Journal of Economic Literature Classification Numbers: G22, G13, L15, D81.

Time and Place Presenter Topic
May 4, 2007
1:30 - 3:00pm
Financial Markets Center
Doug Ramsey
PhD and CFO, EXCO Resources (NYSE: XCO)
Title: Living thru the IPO Process
Abstract: Not available
April 11, 2007
3:00 - 4:30pm
Graduate Conference Room
Louis Ederington
University of Oklahoma
Title: What Attracts Bidders to Online Auctions and What is their Price Impact?
Abstract: Based on eBay auctions of classic comic books, we explore what attracts bidders to individual online auctions. Seventy percent of the variation in the number of bidders across auctions is predictable based on characteristics of the item for sale, the seller, and the auction design. Not surprisingly, high minimum bids discourage bidders while longer auctions attract slightly more. We also find that the presence of a secret reserve price sharply reduces the number of bidders while third party certification attracts more. Seller reputation as measured by feedback ratings has a statistically significant impact on the number of bidders. Overall, our results support the hypotheses that bidding is fairly costly and that bidder's value transparency. Holding issue, seller, and auction characteristics constant, an additional bidder is associated with a price increase of between 2.3% and 4.3%. While secret reserve prices sharply reduce the number of bidders, they have little impact on what individual bidders are willing to bid while third party certification of the auctioned item increases both the number and level of bids. On the other hand, the condition of the item being auctioned has a relatively minor impact on the number of bidders but strongly impacts their bids.
March 30, 2007
3:00 - 4:30pm
Financial Markets Center
Jay Hartzell
University of Texas
Alan Crane
University of Texas
Title: The Disposition Effect in Corporate Investment Decisions: Evidence from Real Estate Investment Trusts
Abstract: While several studies have documented behavioral biases in the behavior of individual investors, very little is known about the existence or effects of such biases in corporations. We utilize the unique nature of Real Estate Investment Trusts (REITs) to test for the presence of one of the most widely discussed biases, the disposition effect. Using property level REIT data, we find strong statistical evidence consistent with the existence of the disposition effect among REIT management – REITs tend to sell winners and hold losers. In addition, we find evidence that this effect is stronger for smaller properties and that firms showing the strongest evidence of the disposition effect tend to be smaller firms with lower insider ownership. Finally, we examine implications of this behavior for shareholders. We find no evidence of mean reversion in property returns that would make the disposition effect optimal; if anything, the returns go in the opposite direction implying that property performance suffers by retaining losers. Our results also indicate that companies that show greater tendencies toward the disposition effect may sell winner properties at lower prices relative to other winner properties of a similar type and size. Overall, our evidence suggests that some REIT managers’ behavior is consistent with the disposition effect and that this behavior can have negative implications for investors.

Keywords: REITs, Disposition effect
March 23, 2007
1:30 - 3:00pm
Financial Markets Center
John Griffin
University of Texas
Alok Kumar
Michael Yates
Title: Measuring Short-Term International Stock Market Efficiency
Abstract: Using standard tests of weak and semi-strong form efficiency, this paper compares and contrasts the degree of information efficiency of stock prices in 56 markets around the world. In our tests of weak form efficiency we examine the sensitivity of stock returns to market-wide, size-portfolio, and firm-specific past price information. Within countries these measures consistently yield the result that small firms are less efficiently priced than large firms; but across countries, they lead to the surprising finding that emerging markets are at least as efficient as developed markets. These findings are remarkably similar at the daily and weekly horizon and after a host of controls for trading frequency and other possible explanations. To examine semi-strong form efficiency, we compare post-earnings announcement drift in emerging and developed markets and find similar abnormal returns. We also examine the Morck, Yeung, and Yu (2000) proposed efficiency measure, R2, and, unlike our other efficiency measures, find that it performs poorly within countries, while across countries it is not associated with institutional quality variables as originally proposed. Overall, we find that emerging markets are just as efficient as developed markets at incorporating simple forms of public information into prices and no evidence that better country-level legal, regulatory, and governance characteristics are positively related to higher levels of efficiency.
February 9, 2007
1:30 - 3:00pm
Graduate Conference Room
Soku Byoun
Baylor University
Title: Financial Flexibility, Leverage, and Firm Size
Abstract: We find that small firms have lower leverage ratios, not because of internally generated funds or additional debt financing (as implied by the pecking order theory) but because of additional equity financing (consistent with our financial flexibility hypothesis). This finding can be explained by neither of the pecking order theory and the tradeoff theory---the pecking order may be reversed for small firms that prefer external equity to debt financing while the tradeoff theory may miss out some important aspects of capital structure decisions. We argue that small firms maintain low leverage by issuing equity and building up cash holdings for financial flexibility. Debt covenant often carry restrictions on financing and investment decisions that are especially cumbersome for small, growing firms. Equity financing allows small firms to raise cash without impeding financial flexibility. Consistent with this argument, we find small firms build up cash holdings in order to preserve financial flexibility through external equity. Once we account for financial flexibility, the positive relationship between firm size and leverage found in previous studies becomes unclear.

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