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ARTICLES Information,
Trading and Product Market Interactions: Cross-Sectional Implications of
Informed Trading, 2008, Journal of Finance
63(1), 379-413. Convertible Bond Arbitrage, Liquidity
Externalities and Stock Prices (with Darwin Choi and Mila Getmansky) 2008, Journal
of Financial Economics (Forthcoming) In the context of convertible bond issuance, we
examine the impact of arbitrage activity on underlying equity markets. In
particular, we use changes in equity short interest following convertible
bond issuance to identify convertible bond arbitrage activity and analyze its
impact on stock market liquidity and prices for the period 1993 to 2006.
There is considerable evidence of arbitrage-induced short selling resulting
from issuance. Moreover, we find strong evidence that this activity is
systematically related to liquidity improvements in the stock. These results
are robust to controlling for the potential endogeneity of arbitrage
activity. CURRENT
WORKING PAPERS This paper examines the potential role of
convertible bond arbitrageurs as suppliers of capital to issuers. We link the
time series of aggregate convertible bond issuance to convertible bond
arbitrage hedge fund flows, returns and a proxy for arbitrageurs’ use
of leverage. We find that issuance is positively and significantly
related to increases in all three of these measures of capital supply. In
order to interpret this finding, we employ an identification strategy that
uses price-quantity pairs to distinguish changes in supply variables that are
due to shifts in convertible bond market supply conditions versus demand
conditions. We find significant sensitivity of issuance to both supply- and
demand-driven flows; however, variation in demand conditions appears to be
most important. Dynamic Competition, Innovation and Strategic
Financing (with Matthew
Spiegel) July 2008 This paper models the interactions among
product market innovation, product market competition, and corporate
financing decisions in the context of a dynamic duopoly. One competitor faces
an opportunity to adopt a new technology. If adopted, the firm must also
determine whether it will obtain public or private financing. Our results
allow us to relate current firm and industry characteristics to these
decision variables. In particular, larger, more profitable firms with small
rivals have greatest incentives to innovate. The private versus public
financing decision depends mainly on the magnitude of the technological
improvement and length of the period during which private financing extends
the innovator’s product market advantage. Due to the model’s
formulation it is both tractable and amenable to empirical estimation. Tests
bear out several of the model’s predictions. An example of which is the
relationship between ease with which firms can entice away each others
customers and the relative advantages to public or private financing. We use the Korean
Financial Crisis as a natural laboratory for examining interactions among
firm diversification, equilibrium capital structure and tail probability
events. When the crisis hit in 1997, several major firms, including a large
number of highly leveraged conglomerates (Chaebols), experienced
bankruptcies. In a simple model, we show how diversified Chaebols are able to
obtain higher levels of equilibrium debt than non-Chaebol firms (ceteris
paribus) due to protective effects of cosigners. In the event of an
unanticipated shock, the model predicts a systematic change in relative
bankruptcy risks of Chaebol firms. To examine this implication, we first
estimate a model of equilibrium debt determination for a sample of Korean
manufacturing firms for the years 1991-1994. We then introduce a new
empirical methodology that allows us to decompose equilibrium debt into
demand, supply and Chaebol-specific factors. To improve our understanding of
the mechanisms driving the widespread failures, we use decomposed debt to
estimate a bankruptcy prediction model for the post-crisis period. Our main
finding is that benefits from shared risks may, in fact, lead to shared
vulnerability: the primary cause of bankruptcies of Chaebol firms was not
idiosyncratic leverage, but instead leverage systematically related to their
greater equilibrium access to debt during normal times. News, Disagreement and Trading Location (with Sudheer Chava) May 2007 We examine the determinants of trading in
corporate bonds, options and equities at the individual firm level. In particular, we
exploit variation in security type, timing relative to information releases
and news content to test the hypothesis in Cao and Ou-Yang (2007) that options markets
can be the preferred venues for trade when traders disagree. Our results
indicate that event period trading in equity markets is driven by asymmetric
information, disagreement and liquidity. In contrast, but consistent with Cao and
Ou-Yang, trading in options appears to be driven more by disagreement about
firm-specific information and less by asymmetric information. In bond markets, the evidence
suggests that trading is driven mainly by liquidity needs.
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