Issuer Quality Research Articles

Industry Screening: Evidence from Seasoned Equity Offerings

Investors may rely on industries to judge the quality of seasoned equity Offerings. In this paper, we propose an industry screening hypothesis where poorer industrial growth prospects deter lower-quality firms from issuing equity. We expect issuer quality to be negatively associated with industry growth opportunities. Our empirical evidence shows that low-growth industry issuers outperform those from high-growth industries in their announcement period cumulative abnormal returns and post-issue operating performance. These results are robust against alternative explanations. We interpret these findings as evidence for the existence of the industry screening eect.

Wanna Dance? How Firms and Underwriters Choose Each Other

We develop and test a theory explaining the equilibrium matching of issuers and underwriters. We assume that issuers and underwriters associate by mutual choice, and that underwriter ability and issuer quality are complementary. Our model implies that matching is positive assortative, and that matches are based on firms' and underwriters' elative characteristics at the time of issuance. The model predicts that the market share of top underwriters and their average issue quality varies inversely with issuance volume. Various cross-sectional patterns in underwriting spreads are consistent with equilibrium matching. We find strong empirical confirmation of our theory.

Impact of the Penny Stock Reform Act of 1990 on the Initial Public Offering Market

Abstract The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings that were priced below $5. The regulation had the cosmetic effect of reducing the number of initial public offerings priced below $5 but had no substantive impact on issuer quality. Delisting risk, which is a measure of issuer quality, did not decline significantly in the post‐PSRA period. Instead, abnormal returns earned by a portfolio of nonpenny stocks declined significantly in the post‐PSRA period. We present evidence that attributes the decline in abnormal returns to the migration of speculative issuers into the nonpenny range.

Correlated Default Risk

Using a comprehensive and unique data set from Moody's, we examine correlations between default risk for over 7,000 U.S. public firms. This is the first paper to empirically document the correlation structure both in the time-series and in the cross-section across almost all U.S. non-financial firms. We find that default probabilities of issuers vary over time, and are positively correlated. Moreover, the correlations across firms also vary over time systematically, in a manner that is related to an economy-wide level of default risk. Joint default risk increases as the default risk in the economy increases. Our results also suggest that the magnitude of joint default depends on the quality of issuers; highest quality issuers have higher default correlations than medium grade firms.

Credit Spread Arbitrage in Emerging Eurobond Markets

In the corporate emerging Eurobond fixed-income market there are two main sources of credit risk: sovereign risk and the relative credit quality of issuers of the eurobonds. This article presents a model to estimate, in a one-step procedure, both the term structure of interest rates and the credit spread function of a diversified international portfolio of Eurobonds with different credit ratings. The estimated term structures can be used to analyze credit spread arbitrage opportunities in Eurobond markets. Numerical examples in the Argentinean, Brazilian, and Mexican Eurobond markets illustrate the practical use of the methodology.