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Volume 59: Issue 2 (April 2004)


Diversification Discount or Premium? New Evidence from the Business Information Tracking Series

Pages: 479-506  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00640.x  |  Cited by: 315

Belén Villalonga

I use the Business Information Tracking Series (BITS), a new census database that covers the whole U.S. economy at the establishment level, to examine whether the finding of a diversification discount is an artifact of segment data. BITS data allow me to construct business units that are more consistently and objectively defined than segments, and thus more comparable across firms. Using these data on a sample that yields a discount according to segment data, I find a diversification premium. The premium is robust to variations in the sample, business unit definition, and measures of excess value and diversification.


Optimal Diversification: Reconciling Theory and Evidence

Pages: 507-535  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00641.x  |  Cited by: 67

Joao Gomes, Dmitry Livdan

In this paper we show that the main empirical findings about firm diversification and performance are consistent with the maximization of shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of synergies. By explicitly linking the diversification strategies of the firm to differences in size and productivity, our model provides a natural laboratory to investigate several aspects of the relationship between diversification and performance. Specifically, we show that our model can rationalize the evidence on the diversification discount (Lang and Stulz (1994)) and the documented relation between diversification and productivity (Schoar (2002)).


Private Benefits of Control: An International Comparison

Pages: 537-600  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00642.x  |  Cited by: 775

Alexander Dyck, Luigi Zingales

We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as −4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra‐legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors.


Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation

Pages: 601-621  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00643.x  |  Cited by: 122

Masako Ueda

Why do some start‐up firms raise funds from banks and others from venture capitalists? To address this question, I study a model in which the venture capitalist can evaluate the entrepreneur's project more accurately than the bank but can also threaten to steal it from the entrepreneur. Consistent with evidence regarding venture capital finance, the model implies that the characteristics of a firm financing through venture capitalists are relatively little collateral, high growth, high risk, and high profitability. The model also suggests that tighter protection of intellectual property rights encourages entrepreneurs to finance through venture capitalists.


An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases

Pages: 623-650  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00644.x  |  Cited by: 250

Allan C. Eberhart, William F. Maxwell, Akhtar R. Siddique

We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development (R&D) expenditures by a significant amount. We find consistent evidence of a misreaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long‐term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).


The Information Content of Share Repurchase Programs

Pages: 651-680  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00645.x  |  Cited by: 226

Gustavo Grullon, Roni Michaely

Contrary to the implications of many payout theories, we find that announcements of open‐market share repurchase programs are not followed by an increase in operating performance. However, we find that repurchasing firms experience a significant reduction in systematic risk and cost of capital relative to non‐repurchasing firms. Further, consistent with the free cash‐flow hypothesis, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in cost of capital.


Liquidity Externalities and Adverse Selection: Evidence from Trading after Hours

Pages: 681-710  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00646.x  |  Cited by: 61

Michael J. Barclay, Terrence Hendershott

This paper examines liquidity externalities by analyzing trading costs after hours. There is less than 1/20 as many trades per unit time after hours as during the trading day. The reduced trading activity results in substantially higher trading costs: quoted and effective spreads are three to four times larger than during the trading day. The higher spreads reflect greater adverse selection and order persistence, but not higher dealer profits. Because liquidity provision remains competitive after hours, the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day.


Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?

Pages: 711-753  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00647.x  |  Cited by: 294

Nicolas P. B. Bollen, Robert E. Whaley

This paper examines the relation between net buying pressure and the shape of the implied volatility function (IVF) for index and individual stock options. We find that changes in implied volatility are directly related to net buying pressure from public order flow. We also find that changes in implied volatility of S&P 500 options are most strongly affected by buying pressure for index puts, while changes in implied volatility of stock options are dominated by call option demand. Simulated delta‐neutral option‐writing trading strategies generate abnormal returns that match the deviations of the IVFs above realized historical return volatilities.


News Arrival, Jump Dynamics, and Volatility Components for Individual Stock Returns

Pages: 755-793  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00648.x  |  Cited by: 179

John M. Maheu, Thomas H. McCurdy

This paper models components of the return distribution, which are assumed to be directed by a latent news process. The conditional variance of returns is a combination of jumps and smoothly changing components. A heterogeneous Poisson process with a time‐varying conditional intensity parameter governs the likelihood of jumps. Unlike typical jump models with stochastic volatility, previous realizations of both jump and normal innovations can feed back asymmetrically into expected volatility. This model improves forecasts of volatility, particularly after large changes in stock returns. We provide empirical evidence of the impact and feedback effects of jump versus normal return innovations, leverage effects, and the time‐series dynamics of jump clustering.


Option Pricing on Stocks in Mergers and Acquisitions

Pages: 795-829  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00649.x  |  Cited by: 13

Ajay Subramanian


Default Risk in Equity Returns

Pages: 831-868  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00650.x  |  Cited by: 548

Maria Vassalou, Yuhang Xing

This is the first study that uses Merton's (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the book‐to‐market (BM) effect. Both exist only in segments of the market with high default risk. Default risk is systematic risk. The Fama–French (FF) factors SMB and HML contain some default‐related information, but this is not the main reason that the FF model can explain the cross section of equity returns.


International Evidence on Institutional Trading Behavior and Price Impact

Pages: 869-898  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00651.x  |  Cited by: 126

Chiraphol N. Chiyachantana, Pankaj K. Jain, Christine Jiang, Robert A. Wood

This study characterizes institutional trading in international stocks from 37 countries during 1997 to 1998 and 2001. We find that the underlying market condition is a major determinant of the price impact and, more importantly, of the asymmetry between price impacts of institutional buy and sell orders. In bullish markets, institutional purchases have a bigger price impact than sells; however, in the bearish markets, sells have a higher price impact. This differs from previous findings on price impact asymmetry. Our study further suggests that price impact varies depending on order characteristics, firm‐specific factors, and cross‐country differences.


Trading Activity and Price Volatility in the Municipal Bond Market

Pages: 899-931  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00652.x  |  Cited by: 27

Chris Downing, Frank Zhang

Utilizing a comprehensive database of transactions in municipal bonds, we investigate the volume–volatility relation in the municipal bond market. We find a positive relation between the number of transactions and a bond's price volatility. In contrast to previous studies, we find a negative relation between average deal size and price volatility. These results are found to be robust throughout the sample. Our results are inconsistent with current theoretical models of the volume–volatility relation. These inconsistencies may arise because current models fail to account for the effects of overall market liquidity on the costs of large transactions.


Toward a National Market System for U.S. Exchange-listed Equity Options

Pages: 933-962  |  Published: 3/2004  |  DOI: 10.1111/j.1540-6261.2004.00653.x  |  Cited by: 45

Robert Battalio, Brian Hatch, Robert Jennings

In its response to the 1975 Congressional mandate to implement a national market system for financial securities, the Securities and Exchange Commission (SEC) initially exempted the option market. Recent dramatic changes in the structure of the option market prompted the SEC to revisit this issue. We examine a sample of actively traded, multiply listed equity options to ask whether this market's characteristics appear consistent with the goals of producing economically efficient transactions and facilitating “best execution.” We find marked changes between June 2000, when quotes are often ignored, and January 2002, when the market more closely resembles a national market.