Research

SELECTED PAPERS

IPO firms face strong concerns about proprietary disclosure, prompting regulators to allow submission of IPO registration statements confidentially under the JOBS Act. Prior research documents severe underpricing and other asymmetric information costs associated with obscuring information prior to an IPO. Nonetheless, the vast majority of eligible firms elect the confidential filing provision. In this study, we examine reducing non-shareholder litigation risk as a specific and quantifiable benefit that justify the use of this provision. We show that firms that publicly submit their registration with the SEC experience a 25% increase in non-shareholder lawsuits during the pre-IPO period. In contrast, a matched sample of firms that utilize the confidential filing provision do not experience such an increase. The difference between the two groups is concentrated among lawsuits in which the plaintiff is a business, rather than an individual, and among lawsuits that are more likely to be meritless. We find no disproportionate increase in non-shareholder lawsuits for the confidential filers following the IPO, which suggests that withholding information before the IPO period mitigates, rather than delays, opportunistic litigation.

 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.

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.
 
  •  Creditor Control Rights and Managerial Risk Shifting, 2017

Recent studies argue that creditors increase their influence over borrowing firms following loan covenant violations, resulting in significant changes in firms’ policies. These creditor-induced changes arguably benefit shareholders by limiting managerial discretion, alleviating shareholder-debtholder conflicts. I revisit this argument and examine the relation between volatility and firm investment around covenant violations. I find that the negative relation between volatility and firm investment reverses following violations, consistent with the risk-taking behavior. This behavior is more pronounced when borrowers have strong bargaining power and when managers have strong risk-taking incentives (high vega and equity ownership). I also show that firm risk significantly increases following violations. These findings indicate that covenant violations do not necessarily lead to stronger congruence between shareholder and debtholder incentives.

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.