Takeover Defenses at IPO Firms

Laura Casares Field, Pennsylvania State University
Jonathan M. Karpoff, Washington State University

Contrary to widespread belief, many firms deploy anti-takeover defenses before they go public. The authors propose to document the use of takeover defenses in IPO firms, the characteristics of IPO firms that deploy defenses, and the defenses’ effects on acquisition likelihood and takeover premiums. Work to date indicates that IPO managers deploy takeover defenses particularly when their personal benefits are high and they can shift costs of takeover protection to non-management pre-IPO shareholders. The presence of a takeover defense in IPO firms is negatively related to acquisition likelihood, yet has no impact on takeover premiums for firms that are acquired.

The International Costs of Equity Trading in Emerging Markets

David A. Lesmond, Tulane University

Over the past decade, world stock market capitalization rose from $4.7 trillion to $15.2 trillion, and emerging market capitalization rose from less than 4% to 13% of total world capitalization in 1995. World Bank estimates of net long-term financial flows to developing countries in 1995 was over $45 billion from a mere $0.1 billion in 1985. While risk, volatility, and correlation have been analyzed for emerging markets, no study has attempted to measure the trading costs or measure the liquidity based risk factors that arise from liquidity concerns. The dramatic increase in both market value and international financial flows in emerging economies underscores the importance in determining the costs of trading securities in these economies and other risk measures that result from that trade. The researchers will obtain trading cost estimates for both securities listed in emerging markets as well as their American Depositor Receipt (ADR) or Global Depositor Receipt (GDR) counterpart, where they apply, to gauge trading cost magnitudes and differences. Additionally, they will estimate liquidity risk to gauge potential price impact effects of informed trading. The study will examine over 30 different emerging country exchanges to provide a very comprehensive characterization of global trading costs.

Stocks Are Special Too: An Analysis of the Costs of Short-Selling

Christopher Geczy, University of Pennsylvania
David Musto, University of Pennsylvania
Adam Reed, University of Pennsylvania

The authors propose to analyze the price of borrowing a given security using methods developed to leverage a proprietary base of short interest rebate data collected from large hypothecators of equities. They posit a number of factors to explain the cost of borrowing securities for the purposes of short-selling and they develop a corresponding empirical model for it. They will use this model to estimate the potential profit funds may expect to make by lending their shares. The results will also directly characterize the inherent costs that security borrowers face. Finally, the data and methods utilized in the study will permit exploration of the link between short-selling activity and borrowing costs.

Commonality in Order Flow, Returns and Trading Costs: Causes and Effects

Jarrad Harford, University of Oregon
Aditya Kaul, University of Oregon

The authors will examine common factors in order flow, returns and trading costs by comparing such commonalities through time and across stocks in the S&P 500 index and the rest of the universe. They will document the magnitude of order flow commonalities induced by institutional trading, as well as the growth in such commonalities over the past 15 years. They will also document the effects of these commonalities on prices and trading costs. Finally, they will examine whether market-makers in electronic markets (notably, NASDAQ) are better able to monitor contemporaneous trading activity in other S&P 500 stocks than is the specialist.

Family Values and the Star Phenomenon

Vikram Nanda, University of Michigan
Z. Jay Wang, Universityof Michigan
Lu Zheng, University of Michigan

Most mutual funds belong to fund families. The authors propose to investigate the impact of family structure on fund strategy to attract investor funds — and, in turn, the effect of such strategies on the size and nature of the fund family. Preliminary results indicate that there is a strong positive spillover effect of a star performer, resulting in higher cash inflow for other funds in the family as well. A family can raise the probability of obtaining a star performer by increasing family size and making the fund returns more negatively correlated. Factors that increase the odds of producing a star are also ones associated with a lower average performance.