Research

We explore how rival firms respond when firms in their industry violate debt covenants. We find that rival firms increase advertising expense, and that this increase is proportional to the size of industry violators’ pre-existing market share. We also find that rival firm product-market share increases in the industry market share of violators, and that this relation is more pronounced when products are more substitutable. Rival firm operating performance also increases in proportion to the industry market share of violators. Overall, these findings suggest that the increased creditor control associated with covenant violations has a significant influence on rival firms and product-market competition.

Do managers time the market when they make merger decisions? Merger and acquisition waves seem to correspond with market tides, cresting with bull markets. A contentious debate exists over whether this trend indicates managerial market timing ability. Pseudo market timing, introduced by Schultz (2003, Journal of Finance 58, 483–517), provides an alternative hypothesis to explain abnormal performance following events even when managers cannot time the market. I find that acquiring firms which use stocks as the method of payment exhibit negative long-run abnormal returns in event-time, but not in calendar time. Simulations reveal that even when ex ante expected abnormal returns are zero (i.e. managers have no market timing ability), median ex post performance for acquirers is significantly negative when event-time is used. These findings support pseudo market timing as an explanation for acquiring firm underperformance in the context of stock mergers.

 Dynamic pricing may lead to better supply-demand match by approaching from the demand side in a price dependent market. When the inventory is scarce, a price change hedges for more effective use of available inventory. We study a temporary price change policy for a non-perishable product that is continuously reviewed for replenishment. While a regular competitive market price is charged under reasonable inventory levels, during the leadtime of a replenishment order, the firm may apply a temporary price increase. The aim is to increase expected profits by raising revenues from available units, while lowering the demand rate to incur lower stock-out costs for unsatisfied demand. Our interest is to gain insight about the benefits of such a temporary pricing policy and its effects on regular replenishment policy by simultaneously optimizing for regular replenishment and price change decision variables. Through extensive numerical analyses, we show that significant increases in expected profits can be obtained over a conventional single price policy. Significant improvements in profits are attainable even with more simplified policies where a sequential optimization of replenishment and price change is made instead of a computationally challenging simultaneous optimization.