Behavioral Corporate Finance
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Geoffrey Tate, University of North Carolina
What Causes Passive Hedge Funds to Become Activists?
AbstractAbout 20% of the total activist hedge funds’ positions are initiated as passive holdings, that is without the intention of changing or influencing the control of the target firms. At some point, however, the hedge funds change their filing status and switch to activism. My paper investigates what triggers this switch. I hypothesize and find that hedge funds see the purchase price of their passive positions as a reference point. When hedge funds are suffering losses on these positions, they are more likely to switch to become activists, even after controlling for the firms’ underperformance. This study presents new evidence about what causes hedge fund activism.
CAPM-Based Company (Mis)valuations
AbstractThere is a discrepancy between CAPM-implied and realized returns. As a result, using the CAPM in capital budgeting decisions -- as is recommended in finance textbooks -- should have valuation effects. For instance, low beta projects are expected to be valued more by CAPM-using managers than by the market. This paper empirically tests this hypothesis using publicly announced M&A decisions. We show that takeovers of lower beta targets are accompanied by lower CARs for the bidder. Consistent with our hypothesis, the effect is more pronounced for larger acquisitions, higher growth targets, and private targets. Furthermore, low beta bidders are more likely to use their own stock to finance the deal. More generally, low beta firms are less likely to issue equity, and more likely to repurchase shares. These effects are not reversed in the long-run, suggesting that CAPM-using managers may be irrational, though this last test lacks power.
The Effect of Superstar Firms on College Major Choice
AbstractWe study the effect of superstar firms on college students’ major choice. The occurrence of superstar performers in an industry is followed by a significant rise in the number of college students choosing to major in related fields, after controlling for lagged industry returns and wages. The tendency to follow superstars, however, results in a temporary over-supply of human capital, as evidenced by the lower real wage earned by entry-level employees when students enter the job market. Further evidence from the National Survey of College Graduates shows that this adverse impact on career outcomes can last for decades.
- G3 - Corporate Finance and Governance