Signal Of Firm Quality Research Articles

Equity issues when in distress

AbstractWe investigate the role of financial distress in the seasoned equity market. We find that distressed firms comprise about 40% of SEOs and these distressed issuers have worse abnormal announcement returns than non‐distressed issuers. Stock return volatility is an important determinant for announcement returns for non‐distressed SEO issuers but not for distressed SEO issuers. Signals of firm quality are associated with better announcement returns, larger issues, increased investment, improved operating performance, and lower likelihood of delisting for distressed SEO firms as compared to non‐distressed firms. Our findings suggest equity finance is valuable for financially distressed firms with strong growth prospects.

Patenting Matters, Not Patents: Firm Market Value in Indian Manufacturing

This article looks at the association between firm market value and patenting activity in the Indian manufacturing sector, using a matched panel dataset of 380 firms spanning 22 industry groups over the period 2001–2010. To see whether the very act of patenting matters or not we introduce variation through an indicator variable indicating a firm’s patenting status, whereas to see whether having a larger number of patents matters for firm value we employ a patent stock variable. Differences in the response of firm market value to variations in these two different ways of capturing patents provide evidence for the signalling role of patents in the context of Indian manufacturing. The empirical investigations indicate that while firms that use patents to protect their innovations have a significantly higher market value than firms that do not, an increase in the number of patents granted to a firm is associated with higher market value only for firms at the lowest end of the market value distribution. The results are consistent with the explanation that patents serve as signals of firm quality.

Equity Issues When in Distress

We investigate the role of financial distress in the seasoned equity market. We find that distressed firms comprise about 40% of SEOs and these distressed issuers have worse abnormal announcement returns than non-distressed issuers. Stock return volatility is an important determinant for announcement returns for non-distressed SEO issuers but not for distressed SEO issuers. Signals of firm quality are associated with better announcement returns, larger issues, increased investment, improved operating performance, and lower likelihood of delisting for distressed SEO firms as compared to non-distressed firms. Our findings suggest equity finance is valuable for financially distressed firms with strong growth prospects.

Looking for a service opening: Building reputation by leveraging international activities and host country context

We explore how a country’s economic openness impacts firm-level signal interpretation when stakeholders assess firm reputation, arguing that host country norms influence the reference frames of assessors. In more open economies, regional MNCs’ international activities are more valued as signals of firm quality–indicating effective cross-border deployment of ownership advantages. Latin America’s unique development trajectory has resulted in groupings of both more open and more restrictive countries, creating a valuable setting to test our theory. Further, we suggest that the positive regional MNC impact on reputation is stronger for knowledge intensive business services given high uncertainty levels in such industries.

“A” Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality

This paper considers when a firm’s deliberately chosen name can signal meaningful information. The average plumbing firm whose name begins with A or a number receives five times more service complaints than other firms and also charges higher prices. Relatedly, plumbers with A names advertise more in the Yellow Pages and on Google, and doing so is positively correlated with receiving complaints. As the use of A names is more prevalent in larger markets, I reconcile these findings with a simple model in which firms have different qualities and consumers have heterogeneous search costs.

Is IPO Appraisal a Misleading Signal of Firm Quality?

Is IPO Appraisal a Misleading Signal of Firm Quality?

Credit Lines and Capital Adequacy

I show how capital regulations, by imposing a low or zero cost on undrawn credit lines, can lead to ex post misallocation of credit across different borrowers following a market shock. This effect is in addition to the liquidity impact of credit line drawdowns highlighted by previous literature. In a theoretical model, I examine why capital regulations give the bank an incentive to offer more credit lines than it would optimally want to support, fully drawn, on its balance sheet. I draw implications for both capital regulations and monetary policy. I also show suggestive empirical evidence consistent with this mechanism. When undrawn, credit lines generate surplus but face low cost: they generate surplus by providing a signal of firm quality to the market yet face low or zero capital requirements under Basel I and II. A bank has an incentive to build up exposure to credit lines in order to benefit from surplus in the good state. However, this will constrain its ability to provide credit to other borrowers when credit market turmoil causes firms to draw heavily on existing lines. I show how banks will reduce exposure if a sufficiently high capital charge is imposed on undrawn lines. I present implications for countercyclical capital regulation; a lower capital requirement in the bad state will serve to reduce misallocation in the bad state. I also show that a low interest rate in the good state will worsen misallocation in the bad state; if agents anticipate interest rates will be low in good times, banks will increase their exposure ex ante in order to benefit from the surplus generated in good times.

UNDERPRICING DALAM PENAWARAN SAHAM PERDANA DAN PENAWARAN SAHAM SUSULAN

Underpricing has become a subject for various examinations in initial public offerings (IPO) context. Underpricing is known as one of three anomalies surrounding IPO setting. A number of theories have been put forward to explain why such phenomenon occurs. One of them is that underpricing is used as a signal of firm quality, hoping that when the firm is going to reissue stock in the future, namely right issue or seasoned equity offerings (SEO), it will gain positive response from the market. This study aims at examining a sample of 85 IPOs and SEOs whether underpricing could signal firm quality when making right issue during 1990-2006 at the Indonesian Stock Exchange. Consistent with other capital market studies, results show that, on average, IPO firms are significantly underpriced as much as 22.35 percent, whilst for SEOs the average underpricing is 13.35 percent. The level of underpricing between IPOs and SEOs is not significantly different from zero. IPO firms experiencing higher underpricing will experience lower underpricing in SEO. Overall, the finding does not support the hypothesis that IPO underpricing is used as signal for firm quality undertaking SEO. Keywords: underpricing, IPO, SEO, signaling hypothesis Dalam konteks penawaran saham perdana (initial public offering=IPO ), underpricing telah menjadi suatu subjek berbagai penelitian. Underpricing merupakan salah satu dari tiga anomaly dalam penawaran saham perdana. Sejumlah teori sudah diajukan untuk menjelaskan fenomena tersebut. Salah satu teori yang ada menyatakan bahwa underpricing digunakan sebagai salah satu sinyal atas kualitas perusahaan dengan makna bahwa jika suatu saat perusahaan menerbitkan kembali sahamnya, yang dikenal dengan sebutan penawaran saham susulan (seasoned equity offering=SEO) , maka perusahaan akan memperoleh respon positif di pasar. Penelitian ini bertujuan untuk menguji teori sinyal, yaitu apakah underpricing dapat menjadi sinyal saat perusahaan melakukan SEO, dengan sampel sebanyak 85 perusahaan yang melakukan IPO dan SEO tahun 1990-2006 di Pasar Modal Indonesia. Konsisten dengan temuan di pasar modal lain, hasil penelitian menunjukkan bahwa secara rata-rata perusahaan yang melakukan IPO mengalami underpricing sebesar 22,35 persen, sedangkan saat SEO, tingkat underpricing nya sebesar 13,35 persen. Tingkat underpricing saat IPO dengan saat SEO secara statistik adalah tidak berbeda. Perusahaan dengan tingkat underpricing lebih tinggi saat IPO akan mengalami tingkat underpricing lebih rendah saat SEO. Secara keseluruhan, hasil penelitian belum berhasil mendukung teori sinyal dalam IPO. Kata Kunci: underpricing , IPO, SEO, hipotesis sinyal.

'A' Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality

This paper considers when a firm's deliberately chosen name can signal meaningful information about its quality, focusing specifically on a setting in which it does: plumbing firms with names that begin with an A or a number receive five times more service complaints, on average. In addition, firms use names beginning with an A or a number more often in larger markets, and those that do have higher prices. These results reflect consumers' search decisions and extend to online platforms: plumbing firms that advertise on Google receive more complaints, which contradicts prior theoretical predictions but fits the setting considered here.

Patents and the survival of Internet-related IPOs

We examine the effect of patenting on the survival prospects of 356 Internet-related firms that made an initial public offering on the NASDAQ at the height of the stock market bubble of the late 1990s. By March 2005, almost 2/3 of these firms had delisted from the exchange. Changes in the legal environment in the US in the 1990s made it much easier to obtain patents on software, and ultimately, on business methods, though less than 1/2 of the firms in our sample obtained, or attempted to obtain, patents. For those that did, we hypothesize that patents conferred competitive advantages that translate into higher probability of survival, though they may also simply be a signal of firm quality. Controlling for other determinants of firm survival, patenting is positively associated with survival. Quite different processes appear to govern exit via acquisition compared to exit via delisting from the exchange due to business failure. Firms that applied for more patents were less likely to be acquired, though if they obtain unusually highly cited patents they may be a more attractive acquisition target. These findings do generally not hold true for “business method” patents, which do not appear to confer a survival advantage.

Product Innovation and Survival in a High-Tech Industry

We investigate the relationship between product innovation and firm survival for a sample of 121 firms in a high-tech industry. We find that location near the technological frontier is an important determinant of firm survival. Firms that are located near the frontier are also more likely to be acquired than to exit by liquidation if they cannot survive as free-standing enterprises. This suggests that product location in the technology space acts as a signal of firm quality. Greater RD in the event that the firm does exit, however, its R&D efforts do not significantly influence whether it exits via acquisition or exits via liquidation.

New Insights into Rights Offerings as Signals of Firm Quality: Evidence from Australia*

Australian companies can choose among three different types of rights offerings: full standby (also known as “fully underwritten”); uninsured (or “non‐underwritten”); and partial standby (“partly underwritten”). At the same time, each of these three kinds of rights offerings can be either renounceable or non‐renounceable, with the former providing securities that can be sold while in the latter case the rights are forfeited if not exercised.The main argument of this paper is that managers effectively signal the quality of their company through their choice of rights issue method. Consistent with this argument, the authors summarize the findings of their own research showing that high‐quality companies tend to choose full standby rights issues, with the full backing of an underwriter playing a “certifying” role for investors. By contrast, low‐quality firms tend to use partial standby issues with large subscription price discounts, while companies of intermediate‐quality choose uninsured rights issues. The authors also provide evidence that full standby rights issues are positively correlated with expected shareholder takeup, while both partial standby and uninsured issues have a negative correlation with takeup. Consistent with the above findings, the market response is most positive (or least negative) in the case of non‐renounceable, full standby rights issues with relatively low price discounts. The market reaction is most negative for non‐renounceable, partial standby issues with high price discounts.

The Strategy of Going Public: How UK Firms Choose Their Listing Contracts

Abstract: UK firms going public have a choice between public offers and placings. This choice has important implications in terms of who bears the risk of the issue failing and of its costs. We find that firms with higher ex ante uncertainty choose a placing contract. Highly reputable sponsors and creditor screening serve as signals of firm quality, enabling such firms to choose a public offer. Large and multinational firms usually choose a public offer whereas there is some evidence that very small issues choose a placing. Finally, the ‘hotness’ of the IPO market increases the probability of placings.

Adverse-selection versus signaling: evidence from the pricing of Chinese IPOs

Because of the high economic uncertainty inherent in the privatization process, financial markets in China are characterized by large information asymmetry. Using data of 587 firm-commitment initial public offerings (IPOs) between January 1994 and December 1999, I investigate whether IPO underpricing is related to pre-IPO information asymmetry and whether and to what extent underpricing serves as a signal of firm quality. I find that: (1) Underpricing is correlated with proxies of ex ante uncertainty, including the size of offerings, insider ownership, disclosure practice, market conditions and allocation mechanism. (2) To some extent, underpricing can be explained in terms of a strategy for firms to signal their value to investors. However, the market-feedback hypothesis has more explanatory power than the signaling hypothesis. My empirical results are largely consistent with “winner’s curse” and signaling models.

The Role of Lockups in Initial Public Offerings

This paper explores the role of investment banks and lock-up provisions in the market for new equity issues. In a sample of 2,794 IPOs, we test three potential explanations for the existence of lock-ups: (i) lock-ups serve as a signal of firm quality; (ii) lock-ups are a commitment device to alleviate moral hazard problems; and (iii) lock-ups serve as a mechanism for underwriters to extract additional compensation from the issuing firm. Our results support the commitment hypothesis. Insiders of firms that are associated with greater potential for moral hazard in the aftermarket lock-up their shares for a longer period of time. We also find that insiders of firms that have experienced larger excess returns, that are backed by venture capitalists, or that go public with high quality underwriters, are more likely to be released from the lock-up restrictions. In addition, we find that the average abnormal return at lock-up expiration is -2%. The price drop associated with this expiration is substantially higher for firms that are venture-backed.

The Role of Lockups in Initial Public Offerings

In a sample of 2,794 initial public offerings (IPOs), we test three potential explanations for the existence of IPO lockups: lockups serve as (i) a signal of firm quality, (ii) a commitment device to alleviate moral hazard problems, or (iii) a mechanism for underwriters to extract additional compensation from the issuing firm. Our results support the commitment hypothesis. Insiders of firms that are associated with greater potential for moral hazard lockup their shares for a longer period of time. Insiders of firms that have experienced larger excess returns, are backed by venture capitalists, or go public with high-quality underwriters are more likely to be released from the lockup restrictions. An initial public offering (IPO) often represents the first opportunity that a firm’s founders and initial investors have to begin the process of realizing the value for their ownership stake in the firm. 1 We explore one particular aspect that regulates this cashing out by insiders, namely the structure of, the price reaction to, and the compliance with investment banker lockups, which restrict the ability of the firm’s management and prepublic investors from selling their stock in the aftermarket for a period of time after the IPO. Our article provides three contributions on going public and financial markets. First, we explore why prepublic insiders agree to long holding periods after the IPO. We test three potential explanations: (i) lockups as a signal of quality, (ii) as a commitment device to alleviate moral hazard problems, and (iii) as a means for investment banks to extract additional compensation from issuing firms. Our analysis supports the commitment hypothesis. Specifically, investment banks impose longer lockups when the moral hazard in the aftermarket is higher. We conduct several tests of the signaling hypothesis and find no support for the idea that insiders signal their “quality” by locking