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Debt, Equity, and Information

Journal of Mathematical Economics, 50 (2014): 54-62.

Most firms issue financial assets such as debt or equity (e.g. bonds or stock) to outside investors. While these financial assets differ greatly in their characteristics, their diversity has received little attention in the literature. Filling this important gap in the literature, this paper views debt and equity as financial contracts and asks why they are optimal instead of other financial contracts. By endogenizing the bankruptcy process, this paper shows how debt and equity arise as a consequence of an optimal allocation of cash-flow rights and monitoring rights, and how equity leads to dividend signaling.

Working Papers

Are Financial Constraints Priced? Evidence from Textual Analysis

Revise & Resubmit, Review of Financial Studies
Second Prize at CQAsia 2014 Academic Competition

Working paper (with Toni M. Whited); current version: March 6, 2017

We construct novel measures of financial constraints using textual analysis and investigate their impact on stock returns. Our different measures capture access to general external finance, equity markets, and debt markets. In all cases, constrained firms earn higher returns, which move together and cannot be explained by the Fama and French (2015) factor model. A trading strategy based on financial constraints is most profitable for large, liquid stocks. These results are strongest if we measure financial constraints via access to debt markets. We construct a financial constraints factor based on this measure, which earns an annualized risk-adjusted excess return of 6.5%.

Financial Media, Price Discovery, and Merger Arbitrage

Internet Appendix

Winning paper of the Hong Kong Asian Capital Markets Research Prize 2013 of the Hong Kong Society of Financial Analysts (HKSFA) and the CFA Institute

Working paper (with Josef Zechner); current version: November 13, 2016

Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices underreact to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced.

The Role of the Media in Takeovers: Theory and Evidence

Best paper award semifinalist (corporate finance), 2011 FMA Annual Meeting

Working paper; current version: February 26, 2015
A previous version of this paper was circulated under the title "Takeovers and the Media."

Using text-based media content, this paper develops and empirically confirms a theory that explains how the media predicts takeover outcomes. It shows that positive media content about the acquirer predicts takeover success. Relative to other predictors proposed in the literature, the media measure is the most important explanatory variable in terms of marginal effect, significance, and goodness of fit.

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