Summarization of The Journal of Finance August 2005

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Summarization of The Journal of Finance (August
2005)

• Zhou Yun
• 3/11/2005

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The limits of Financial Globalization

• Author Rene M.Stulz, Ohio State University.
• Conclusion The impact of financial globalization
  has been surprisingly limited. The country
  attributes are still critical to financial
  decision-making.
• Reason
• 1. Existing the twin agency problems
• 2. When these twin agency problems are
  significant, diffuse ownership is inefficient and
  corporate insiders must co-invest with other
  investors, retaining substantial equity.

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The limits of Financial Globalization

• 3. The resulting ownership concentration limits
  economic growth, financial development, and the
  ability of a country to take advantage of
  financial globalization.
• Details
• 1. the traditional international finance explores
  the implications for asset prices, portfolios,
  and corporate finance of exogenous cross-border
  barriers to international investment in models in
  which the country irrelevance proposition holds
  when barriers are removed

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The limits of Financial Globalization

• 2. the traditional approach to international
  finance have proved useful in characterizing the
  impact on asset prices and portfolio choice of
  barriers to international investment.
• 3. however, it cannot explain why countries
  remain relevant for finance because explicit
  barriers are now much lower and it dose not shed
  much light on the nature of the implicit barriers.

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The limits of Financial Globalization

• 4. This paper developed a new model to explains
  the limited impact of globalization, provides a
  foundation for a new theory of international
  finance that recognizes countries re relevant
  even in the absence of cross-border barriers to
  international investment.
• 5. In the formulation of this model, all
  investors risk expropriation by the state and
  corporate insiders which are managers

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The limits of Financial Globalization

• or controlling shareholders.
• 6. Efficient contracting dictates that when the
  risks of expropriation by corporate insiders and
  the state are higher, corporate insider must
  co-invest more with other investors in
  equilibrium. These risks are country-specific
  because subject to constraints and trade-offs
  that depend on country characteristics.

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The limits of Financial Globalization

• When the expropriation risks are significant, it
  is optimal for corporate ownership to be highly
  concentrated, which limits economic growth,
  risk-sharing, financial development.
• This approach has important implications for all
  the international finance puzzles including the
  Home Bias, H-F Paradox and Lucas paradox.

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Rational IPO Waves

• Authors Lubos Pastor and Pietro Veronesi
  University of Chicago
• Conclusion
• 1.this paper develop a model of optimal IPO
  timing in which IPO waves are caused by declines
  in expected market return, increases in expected
  aggregate profitability of IPOs.
• 2.this paper finds that IPO waves tend to be
  preceded by high market returns and followed by
  low market returns.

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Rational IPO Waves

• Theoretical model
• Two agent inventors and investors.
• They have identical information and preferences
  but different endowments
• Investors are endowed with a stream of
  consumption good. Inventors are endowed with the
  ability to invent patentable ideas that can
  deliver abnormal profits.
• The inventor can decide to make the investment to
  use the patent into production. To finance this
  investment, the inventors firm issues equity to
  investors in a IPO

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Rational IPO Waves

• Empirical test
• Dependant variable IPO volume
• Independant variables
• ER expected market return
• MKT realized market return
• MVOL market return volatility
• RF risk-free rate
• M/B the aggregate M/B ratio

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Rational IPO Waves

• NEWMB is the difference between the return
  volatility of a new firm and market volatility.
• IPOthe number of firms went public this quarter
• Results
• 1. the IPO volume is strongly negatively related
  to recent changes in the equity premium.
• 2. IPO volume is higher when equity analysts
  upgrade their forecasts of long-term earnings
  growth
• 3. IPO volume is positively related to recent
  changes in the excess volatility of new firms

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Do insiders learn from outsiders? Evidence from
mergers and acquisitions

• Conclusion the companies seem to have higher
  incentive to learn from the market when canceling
  the announced deal is easier or when the market
  has more information that the companies do not
  know
• Details
• This paper finds that the market reaction to a
  merger and acquisition announcement predicts
  whether the companies later consummate the deal.

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Do insiders learn from outsiders? Evidence from
mergers and acquisitions

• The relation cannot be explained by the markets
  anticipation of the closing decision or its
  perception of the deal quality at the
  announcement. Merging companies appear to extract
  information from the market reaction and later
  consider it in closing the deal.

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Do insiders learn from outsiders? Evidence from
mergers and acquisitions

• Empirical method Probit model
• Independent variables
• TRAIT represents the deal characteristics that
  hypothesized to co-vary with the merging
  companies incentive to learn from market.
• SYNERGY the expected deal synergy estimated by
  the market at the announcement
• TRAITSYNERGY

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Do insiders learn from outsiders? Evidence from
mergers and acquisitions

• This paper estimates the SYNERGY from the deal
  announcement return (DCAR), which is the
  value-weighted average of the bidders and the
  targets cumulative abnormal returns around the
  announcement.
• The method for testing learning builds on a
  regression of the deal completion decision on the
  stock return around the MA announcement.

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• Thanks for your attention!