1. Share Repurchases and Managerial Reference Points (with Nicholas Clarke and Dylan Norris)
The Financial Review, forthcoming
Abstract: Corporate repurchase activity increases as a firm’s current stock price declines in relation to the price at which it previously repurchased shares. This relation holds up to various empirical specifications and robustness tests. The effect weakens around stock splits, is asymmetric in stock gains and losses, and strengthens when prior repurchases are larger than the sample median. The results suggest a behavioral pattern in which managers use prior repurchase prices as reference points for current repurchases.
Keywords: Reference Point, Stock Repurchases, Behavioral Finance
JEL Codes: G32, G41
Presentations: 2021 Academy of Behavioral Finance & Economics Annual Meeting*, Middle Tennessee State University*, 2021 Southern Finance Association Annual Meeting*, 2022 Annual Meeting of the Southwestern Finance Association*, Illinois State University*, University of Alabama in Huntsville*
2. Short Squeezes (with Zhiqian Jiang, Baixiao Liu, and Wei Xu)
Revise and Resubmit, Financial Analysts Journal
Abstract: We investigate the prevalence and persistence of short squeezes and the corresponding economic consequences on the stocks being squeezed. Using daily short sale data, we provide evidence that a short squeeze on average subsides within seven trading days and can be driven by both the capital constraint of the short sellers and the short sale constraint of the underlying stocks. The risk of being squeezed is higher during major macroeconomic events. Further analyses reveal that squeezed stocks experience an increase in the demand for and the cost of borrowing the shares and in trading volume, idiosyncratic volatility, and abnormal returns.
Keywords: Short Selling, Short Squeeze, Short Sale Constraint, Price Reversal
JEL Codes: G12, G14
Presentations: Peking University*, Purdue University*, 2022 Annual Meeting of the Southwestern Finance Association
3. The Effect of Short Sale Restrictions on Corporate Managers (with Baixiao Liu and John McConnell)
Abstract: This paper studies the effect of short selling on corporate managers from 2002 through 2010. We examine how the exemption of short sale uptick tests due to the Regulation SHO pilot program affects managers’ decisions to abandon value-reducing acquisition attempts. We find that when deciding whether to abandon value-reducing acquisition attempts during the program, managers of pilot firms, whose stocks are less subject to short selling impediments, are more sensitive to stock price changes than managers of nonpilot firms. We find no difference in managers’ sensitivity prior to nor post SHO. These results indicate that, despite their dislike of short sellers, managers believe that the level of informativeness from capital markets is superior when short sellers are less impeded.
Keywords: Short Sale Restrictions, Short Selling, Regulation SHO, Pilot Program
JEL Codes: G14, G18, G30, G34
Abstract: This study examines whether the corporate cultural similarity between a target and an acquiring firm influences the acquiring managers’ decision to abandon a corporate acquisition attempt conditional on the acquiring firm's stock price reaction at the announcement of the deal. The findings suggest that higher cultural similarity decreases the propensity of acquiring managers to listen to the stock market. We use the inclusion in the annual list of the 100 Best Corporate Citizens as an exogenous shock to establish a causal link. We interpret the findings to imply that acquiring managers are subject to a confirmatory bias that leads them to give an overly optimistic valuation to target firms that share similar corporate culture. Therefore, cultural similarity between a target and an acquiring firm could have detrimental effects on the acquiring firm.
Keywords: Corporate Acquisition, Corporate Similarity, Managerial Learning
JEL Codes: G30, G32, G34, M14
Presentations: Cal State Fullerton, Cornerstone Research, 2021 Eastern Finance Association Annual Meeting, Miami University, Florida State University, Ohio University, University of Richmond
5. Analysts' Accuracy Following an Increase in Uncertainty: Evidence From the Art Market (with Spencer Barnes and Brandon Mendez)
Abstract: Financial economists have long been interested in asset price uncertainty. This study utilizes the art market as an exogenous setting to explore how an increase in price uncertainty (i.e., the death of an artist) impacts the accuracy and forecast error of analysts' estimates. We find that in the year following an artist's death, analysts' accuracy decreases by 14%, and their forecast error increases by 11%. Additional analysis indicates that the effect is due to both a decrease in the estimation range as well as an increase in the forecast bias of analysts. These findings suggest that analysts perform poorly following an increase in uncertainty which is pertinent for many real asset markets.
Keywords: Price Uncertainty, Alternative Assets, Cultural Finance
JEL Codes: G11, G14, Z11
Presentations: 2022 Annual Meeting of the Southwestern Finance Association*, 2021 Harvard Rising Scholars Conference*, 2021 Ph.D. Project Finance & Economics Doctoral Students Association Conference at the American Finance Association Conference*
6. Do Large Share Repurchases Attract Activist Investors? (with Don Autore, Nicholas Clarke, and Matthew Gustafson )
Abstract: Firms that make large open-market share repurchases are more frequent targets of activist investors. In a sample of about 35,000 firm-years during 2005-2018, large repurchases (over 10% of shares outstanding) are associated with a 37% greater likelihood that the repurchasing firm is the target of an activist investor in the following year, all else equal. This effect is driven by firms with market capitalizations under $2.5 billion, for which there is a 57% increased likelihood. This association is not mechanically driven by a reduced share count. The targeted firms are poor performers but experience exceptionally positive stock performance while the activist is present. Like other activist events, large-repurchase-linked activist engagements are associated with an increased likelihood of being acquired or experiencing CEO turnover. We conjecture that activists may target large repurchasers because the sharply reduced share count makes it cheaper to acquire a given ownership stake in the firm.
Keywords: Share Repurchases, Activist Investors
JEL Codes: G32, G35