local gambling preferences and corporate innovative success
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Local Gambling Preferences and Corporate Innovative Success. This paper is about…. St. Peter’s Basilica . Steve Jobs Apple Inc. Factors Affecting Innovations (I) . Factors Affecting Innovations (II) . Characteristics of Corporate Innovations. Large Payoff High Probability of Failure. - PowerPoint PPT PresentationTRANSCRIPT
Local Gambling Preferences and
Corporate Innovative Success
This paper is about….St. Peter’s Basilica
Steve Jobs Apple Inc.
Factors Affecting Innovations (I) Underlying
Factor Impact on Innovation Authors
CEO Overconfidence Positive Hirshleifer, Low, and
Teoh (2012) Galasso and Simcoe
(2013) Institutional Ownership Positive Aghion, Van Reenan,
and Zingales (2013)
Product Market Competition
Positive (Competitive Firms)
Negative (Laggard Firms
Aghion, Bloom, Blundell, Griffith, and
Howitt (2005)
No. of Financial Analysts Negative He and Tian (2013)
Non-Executive
Employee Stock Options
Positive
Chang, Fu, Low, and Zhang (2013)
Accounting Conservatism Negative Chang, Hilary, Kang,
and Zhang (2013)
Stock Liquidity
Negative Fang, Tian, and Tice (2013)
Banking Deregulation
Negative (Intrastate Deregulation)
Positive (Interstate Deregulation)
Chava, Oettl,
Subramanian, and Subramanian (2013)
Factors Affecting Innovations (II) Underlying
Factor Impact on Innovation Authors
Individualism Positive Gorodnichenko and Roland (2011)
Religion (CP Ratio) Positive Adhikari and Agrawal (2013)
Corporate Income Taxes
Tax Decrease: Positive
Tax Increase: Negative
Atanassove and Liu (2014)
Economic Policy Uncertainty
High Uncertainty: Negative
Bhattacharya, Hsu, Tian, and Xu (2014); Mukherjee, Singh,
and Zaldokas (2013)
Corporate Governance Positive Becker-Blease
(2011)
CEO Connections Positive Faleye, Kovacs, and
Venkateswaran (2012)
Board Friendliness
Positive
Kang, Liu, Low, and
Zhang (2012)
Hostile Take-Overs Negative Antanassove (2013); Sapra, Subramanian,
and Subramanian (2013)
Corporate Diversification
Not Necessarily Negative
Cardinal and Opler (1995)
Corporate Ownership
Concentrated Ownership: Positive Diffuse Ownership:
Negative
Francis and Smith (1995)
Characteristics of Corporate Innovations
–Large Payoff–High Probability of Failure
Geographical Variation of Corporate R&D
Top and Bottom Five States
for R&D ExpenditureTop Five
New MexicoMassachusetts
MarylandWashingtonConnecticut
Bottom Five WyomingLouisianaNevada
ArkansasOklahoma
R&D Spending and State Lotteries
NM MA MD WA CT WY OK NV LA AK0
200
400
600
Lotte
ry S
ales
per
Cap
ita
Most R&D Intensive States Least R&D Intensive States
Characteristics of Gambling Attitude
– Overstating Small Probability of Success
– Understating High Probability of Failure
In Contrast,Characteristics of Corporate Innovation
–Large Payoff–High Probability of Failure
Our Intuition is….Corporations • Not detached from local
environment• Take risk on innovation if
local residents are prone to gambling
Are Catholics more risk-taking than Protestants?
“The Higher the Catholics-to-Protestants (CP) Ratio, the Higher Gambling Attitude”
1. Kumar, Page, and Spalt (2011, JFE)• Stocks with lottery features• IPO underpricing • Employee stock option plans
2. Shu, Sulaeman, and Yeung (2012, MS)• MFs: Higher return volatilities & Higher Turnover
CP Ratio Across the United States
Source: Kumar, Page, and Spalt (JFE, 2011)
Religion and R&D
0
0.05
0.1
0.15
0.2
0.25
0.3
Catholic ratio Protestant ratio CP ratio
Religion and Patents
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
Catholic ratio Protestant ratio CP ratio
Religion and Citations
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Catholic ratio Protestant ratio CP ratio
Major Findings Firms in high CP ratio region spend more on innovation and attain higher innovative output
Social gambling and/or Religion: More important drivers of innovative activities than CEO overconfidence
Hirshleifer, Low, and Teoh (JOF, 2012)
Overconfident CEOs achieve greater innovative success•What will happen if we
admit religion?
How to Frame Your Research Ideas
Stock Liquidity and the Value of Cash Holdings
US Corporate Cash Holdings(excl. Financials and Utilities)
Source: Sanchez and Yurdagal (2013)
US Firms with Largest Cash Holdings
1. Apple Inc.2. Microsoft Corp3. Google4. Cisco Systems Inc.5. Pfizer Inc.
Top 5 companies hold more than ¼ of corporate cash holdings. Mostly IT (1/3) and Phamaceutical (1/10) industries
US Industries with Largest (Smallest) Cash
HoldingsLargest1. Pharmaceutical Products 0.672. Electronic Equipment 0.513. Computers 0.494. Precious Metals 0.465. Business Services 0.42Smallest1. Candy and Soda 0.012. Printing and Publishing 0.026. Business Supplies 0.024. Shipping Containers 0.025. Restaurants, Hotels, Motels 0.03
Source: Dittmar and Mahrt-Smith (JFE, 2008)
Relation between Stock Liquidity and Value of
Cash Holdings
Stock Liquidity
Value of Cash
Holding
Governance Hypothesis: Positive Relation (I)
+ +
+
Stock Liquidity
Corporate Governance
Value of Cash
Holdings
Governance Hypothesis: Positive Relation (II)
1st Strand: Stock Liquidity supports Corporate Governance through Blockholders’ activities
• Threat of Intervention: Maug (1998); Norli, Ostergaard, and Schindele (2010)•Threat of Exit: Edmans (2009); Bharath, Jayaraman, and Nagar (2013); Dou, Hope, Thomas, and Zou (2014)
2nd Strand: Good Governance has positive effect on the value of cash holdings [Pinkowitz, Stulz, and Williamson 2006; Dittmar and Mahrt-Smith 2008; Fresard and Salva (2010)]
$1 Worth How Much?: Impact of Corporate Governance
Good
Governance Group
Poor Governance
Group Remarks
Pinkowitz, Stulz, and Williamson (2006, JOF)
$0.91 $0.33
32 countries Investor Protection (La Porta, Lopez-de-Selinas, Shleifer, and Vishny Index)
Dittmar and Mahrt-Smith (2007, JFE)
$0.88 $0.42
US Market
Anti-Takeover
(Gompers Ishii, and Metrick Index)
Fresard and Salvo (2010,
JFE) $1.61 $0.58
Non-US firms listed in US from
40 countries
Financial Constraints Hypothesis: Negative Relation (I)
- +
-
Stock Liquidity
FinancialConstraint
Value of Cash
Holdings
Financial Constraints Hypothesis: Negative Relation (II)
1st Strand: Stock liquidity relaxes financial constraintsthrough IPOs, SEOs, lower COC) [Baker and Stein 2004; Butler, Grullon, and Weston 2005]
2nd Strand: Value of cash is higher for financially constrained firms than unconstrained firms[Almeida, Campello and Weisbach 2004; Faulkender and Wang 2006; and Denis and Sibilkov 2010]
Corporate Governance Hypothesis is
supported, then what?
Which corporate governance channel?
The Threat of Intervention
Larger Stake
at Lower Cost
Lower Freerider Problem in Monitoring
Higher Incentive for Intervention
Balance between Blockholders and
Managers
HigherLiquidity
The effect of stock liquidity on value of cash is stronger for firms with stronger shareholder rights
The Threat of Exit
The effect of liquidity on value of cash is stronger for managers whose compensation is more sensitive to stock price
Strategic Dumping of
Shares
Downward Pressure on Share Price
Penalizing Managers
Which Governance Channel?• The Threat of Intervention
• The Threat of Exit
Shareholder Rights
Impact of Liquidity on Cash Value
Manager Compensation’s
Sensitivity to Stock Price
Impact of Liquidity on Cash Value
Anything Wrong with Breaking a Buck?
An Empirical Evaluation of NASDAQ’s$1-Minimum-Price Maintenance Criterion
34
Minimum Price Rules in US Markets
–NYSEUS$1.00 closing price–NASDAQ
US$1.00 bid-price over a 30-day period; applicable to all its three tier markets:1. Global Select Market2. Global Market (formerly NASDAQ National Market)3. Capital Market (formerly NASDAQ Small Cap Market)
The Minimum Price Rule Elsewhere
• London No• HKEx No• SGX No• ASX No• China No• Bursa Malaysia No• IDX 100 Rupiah Minimum• KRX 20% of Face Value
No for KOSDAQ
Types of NASDAQ Delistings CRSP Delisting
Code Description Number of Delistings %
550 Insufficient number of market makers 48 2.72% 551 Insufficient number of shareholders 33 1.87% 552 Price fell below acceptable level 744 42.11% 560 Insufficient capital, surplus, and/or equity 386 21.84% 561 Insufficient float or asset 543 30.73% 587 Corporate governance violation 13 0.74%
Does the Rule Make Sense?• SEC; Financial Industry Regulatory Authority (FINRA);
NASDAQ– YES• It “serves to increase investor confidence and the
credibility of (the) market” • Law firms or lawyers, issuers, securities industry related
firms– NO• “It is a dubious measure even in the best of times”
• Academic Research:– … (silence)
Major Findings • Is the $1 Rule Necessary?
Stocks traded below $1 overwhelmingly exhibit large extreme price drops than higher-priced stocks
• Does it Work?LHS fat tails of low-priced stocks are significantly thinner after the $1 rule was introduced
• Is $1 a Good Cut-off Point?One-dollar-benchmark performs better than any other price thresholds
Return Reversals, Idiosyncratic Risk, and Expected Returns
Is Idiosyncratic Risk Priced in Asset Returns? (I)
– In CAPM Framework: It shouldn’t mattera. the market is completeb. investors are rationalc. idiosyncratic risk can be diversified away
Empirical Evidence Mixed – Positive Relation: Malkiel and Xu (2002), Goyal and Santa-
Clara (2003), Jiang and Lee (2004), Fu (2005), Spiegel and Wang (2005), Chua et al. (2005)
– Fama and MacBeth (1973): Statistical significance of idiosyncratic risk is negligible
– Bali et al.(2004): Positive relation documented by Goyal and Santa-Clara (2003) is not robust
Is Idiosyncratic Risk Priced in Asset Returns? (II)
Negative Intertemporal Relation: Ang, Hodrick, Xing, and Zhang (2006a and 2006b)i. Portfolios with high idiosyncratic volatility in the current month yield lower returns in the following month.ii. This negative relation is confirmed in international markets (Canada, France, Germany, Italy, Japan, United Kingdom, US)
Major Findings• The negative relation is driven by short term
return reversals• Hence, this negative (intertemporal) relation
does not hold if return reversals are controlled • No ex ante relation is observed between
expected idiosyncratic volatility and expected returns once short-term return reversals are controlled for
Thank You for Your Attention