WORKING PAPERS
Financial Restatement and the Cost of Debt, with Tao-Hsien Dolly King and Keejae P. Hong. (Job Market Paper)
This paper is the first to study the effect of accounting restatements on a firm’s cost of debt capital. We focus on firms with overstated or understated operating cash flows as revealed through a subsequent restatement. Our results indicate that restatement announcements have a significant impact on the firm’s cost of debt. Firms with understated operating cash flows experience a reduced cost of debt capital after the announcements, supporting the notion that the restatement signals a firm’s favorable performance. On the other hand, the change in cost of debt for firms with overstated operating cash flow is generally insignificant. We further find that the effect is most pronounced for noncallable debt and bonds with shorter maturity. Multivariate results confirm that a positive change in operating cash flows lead to a significant drop in the cost of debt capital after controlling for bond and firm characteristics, bond market systematic factors, equity market risk factors, and time fixed effects.
Standalone Firms, Conglomerates, and Bonds Returns, with Tao-Hsien Dolly King and George Xiang.
- Presented at 2015 Midwest Finance Association Annual Meeting
Over the past two decades, an increasing number of corporations become large conglomerates by expanding into multiple industries. In this paper, we investigate whether this trend yields any impact on bondholder return based on a sample of investment grade bonds from 1994-2013. We find that bonds issued by standalone corporations have a significantly higher return than bonds issued by conglomerates. The difference in return holds after controlling for bond characteristics and market systematic factors. We find support for two possible explanations for the return differential. Conglomerate bonds may have lower liquidity risk due to the issuers’ broader reputation across industry sectors. The results show that the difference in return is most significant for illiquid bonds. In addition, standalone firms are more sensitive to market shocks, which may lead to greater return volatility. We find a significant drop in return when an issuer first ventures from single to multiple industries, but the diversification effect diminishes quickly once the firm is a conglomerate.
Active Institutional Holdings and Dividend Payout Policy, with Dmitry A. Shapiro and Anan Zhuang.
- Presented at 2014 Financial Management Association Annual Meeting
- Presented at 2014 UNC-Charlotte Graduate Research Symposium
- Summer Research Grant Award, Belk College of Business, UNC-Charlotte, 2014
Over the past two decades, an increasing number of corporations become large conglomerates by expanding into multiple industries. In this paper, we investigate whether this trend yields any impact on bondholder return based on a sample of investment grade bonds from 1994-2013. We find that bonds issued by standalone corporations have a significantly higher return than bonds issued by conglomerates. The difference in return holds after controlling for bond characteristics and market systematic factors. We find support for two possible explanations for the return differential. Conglomerate bonds may have lower liquidity risk due to the issuers’ broader reputation across industry sectors. The results show that the difference in return is most significant for illiquid bonds. In addition, standalone firms are more sensitive to market shocks, which may lead to greater return volatility. We find a significant drop in return when an issuer first ventures from single to multiple industries, but the diversification effect diminishes quickly once the firm is a conglomerate.
WORK IN PROGRESS
Voluntary Disclosure and the Cost of Debt, with Tao-Hsien Dolly King and Keejae Hong.
In this paper we investigate how voluntary disclosure of management earnings forecast affects a firm’s cost of debt. Prior literature on voluntary disclosure and a firm’s cost of capital mainly focuses on the cost of equity. We develop and test the following hypothesis: managerial earnings forecast reduces information asymmetry, thus reduces the cost of debt. Furthermore, the effect on the cost of debt capital is asymmetric: the magnitude of change in bond prices after unfavorable forecasts is larger than that after favorable forecasts.
PUBLICATIONS
Sailu Li, X. Jin, X. Zhang, and Y. K. Zou, “Digitally Controlled Programmable Variable Optical Attenuator”, Microwave and Optical Technology Letters, Wiley Periodicals, Inc. Vol.48, No.6, P1019-1021, Jun. 2006.