Behavioral Finance Assingment Pavel Ponomaryov, Akshay Dua, Arindam Parai, Sathish Mokkapati

Part (b): Table 1 Equity Issues Net equity issuer* Coef p-val Coef p-val Coef p-val Coef -0.64 (0.00) 0.17 (0.3) 0.02 (0.00) 0.04 -0.15 (0.00) -0.01 -0.4 (0.00) -0.02 0.05 (0.00) 0.01 0.02 0.03 0.01

Dependent variable: Qt-1 Profitabilityt-1 Log(assetst-1+1) Leveraget-1 R2

p-val (0.00) (0.00) (0.00) (0.00) 0.05

Dependent variable: Rett-1 Rett-2 Rett-3 Rett-4 Rett-5 Profitabilityt-1 Log(assetst-1+1) Leveraget-1 R2 Coef -0.96 -0.45 -0.36 0.006 -0.13

Table 2 Equity Issues p-val Coef p-val (0.00) -0.63 (0.04) (0.15) 0.07 (0.8) (0.22) -0.01 (0.95) (0.98) 0.28 (0.35) (0.65) 0.03 (0.9) -0.14 (0.00) -0.4 (0.00) 0.05 (0.00) 0.013 0.03

Coef 0.005 0.014 0.009 0.004 0.025

Net equity issuer* p-val Coef (0.58) 0.01 (0.12) 0.02 (0.31) 0.02 (0.66) 0.01 (0.01) 0.02 -0.002 -0.02 0.002 0.008

p-val (0.31) (0.02) (0.09) (0.35) (0.00) (0.00) (0.00) (0.00) 0.03

* Net equity issuer = 1, if Equity issues > 5% and 0 otherwise

In this part, we regress EquityIssues and NetEquityIssuer (definitions similar to those in article) on last years Q (Table 1), past years stock returns (Table 2) and control variables. We expect to find positive relationship between recent stock performance (proxied with Qt-1 in first regression and historical returns in the second) and equity issues probability and size. As it follows from data in Table 1 recent stock performance (Qt-1) doesnt seem to have significant effects on size of equity issued: coefficient is negative, when control variables are added, coefficient of Qt-1 becomes insignificant and very close to zero. Results are similar when we use historical returns: negative coefficients of Rett-i become insignificant when we add control variables.

Part (c): Table 3 Dependent variable: Qi,t-1 Qi, CEO Qi, CEO Q0 Q0 Profitabilityt-1 Log(assetst-1+1) Leveraget-1 C(2) = C(3) test R2 (0.21) 0.01 Coef 0.43 0.21 0.32 Equity Issues Net equity issuer p-val Coef p-val Coef p-val Coef (0.07) 1.68 (0.00) 0.003 (0.7) 0.02 (0.25) 1.56 (0.00) 0.01 (0.1) 0.03 (0.07) 1.69 (0.00) 0.02 (0.00) 0.04 -0.3 (0.00) -0.69 (0.00) 0.05 (0.00) (0.49) 0.05 (0.01) 0.01 -0.004 -0.02 0.002

p-val (0.01) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) 0.04

In this part, we try to investigate wheither equity issues are more sensitive to stock performance under current CEOs rule than to older performance. Baker and Xuan suggest that this is the case and conclude that the Q that company had when current CEO was appointed is a sort of reference point with respect to which CEO subjectively assesses the companys performance. So we expect a coefficient of (Qi,t-1 Qi, CEO), performance of stock under CEOs rule significantly higher than that of (Qi, CEO Q0), stock performance before current CEO. For each firm we exclude observations preceding first new CEOs appointment that is recorded in our data, as we cannot identify Qi, CEO for the CEO who was in office when we started to observe particular firm. As we can see, in this subsample each of components of Q has a strong effect on EquityIssues, however there is no significant difference in effects of (Qi,t-1 Qi, CEO) and (Qi, CEO Q0) (p-value for the test of their equality is reported in table 3) . Results of regression of NetEquityIssuer suggests that effect on probability of equity issuance of (Qi, CEO Q0) is actualy larger. However, effects of both variables on probability are very small: around 2-4% increase in probability for unit increase in a component of Q.

Part (d): Table 4 Dependent variable Coeff Retl1 Retl2 Retl3 Retl4 Retl5 Current_ceo1 Current_ceo2 Current_ceo3 Current_ceo4 Current_ceo5 Retl1 Current_ceo1 Retl2 Current_ceo2 Retl3 Current_ceo3 Retl4 Current_ceo4 Retl5 Current_ceo5 1.24 (0.05) 1.32 (0.04) 0.019 (0.31) 0.024 (0.19) -0.46 (0.44) -0.47 (0.43) 0.019 (0.28) 0.021 (0.22) -0.01 (0.97) 0.14 (0.8) -0.002 (0.88) 0.007 (0.68) -1.39 (0.02) -1.16 (0.05) 0.00 (0.97) 0.01 (0.47) 2.96 (0.00) 3.19 (0.00) 0.01 (0.64) 0.02 (0.4) -3.62 0.03 -0.66 0.13 -0.34 0.25 0.2 -0.05 -0.86 0.11 Equity Issuance p-value (0.00) (0.93) (0.08) (0.7) (0.33) (0.57) (0.66) (0.9) (0.13) (0.82) Coeff -3.46 0.44 -0.38 0.44 -0.19 0.21 0.26 0.00 -0.9 0.17 p-value (0.00) (0.32) (0.32) (0.22) (0.57) (0.63) (0.58) (0.98) (0.11) (0.72) Coeff -0.007 0.007 0.006 -0.006 0.02 -0.007 -0.001 0.005 -0.03 0.01 Net Equity Issuer p-value (0.7) (0.56) (0.56) (0.53) (0.03) (0.57) (0.94) (0.72) (0.03) (0.5) Coeff -0.01 0.008 0.007 -0.002 0.022 -0.007 -0.002 0.01 -0.03 0.01 p-value (0.59) (0.53) (0.51) (0.78) (0.03) (0.58) (0.87) (0.55) (0.03) (0.3)

Profitabilityt-1 Log(assetst-1+1) Leveraget-1 R2

-0.14 -0.38 0.05

(0.00) (0.00) (0.00)

-0.002 -0.02 0.002

(0.00) (0.00) (0.00)

0.01

0.03

0.003

0.03

* Note: we consider whole sample in running regressions in this part. In this part we try to test the hypothesis of CEOs inherited stock price being a reference point in equity issues: we will try to see if the historical returns effect on equity issues is different if those returns have happened under the rule of current CEO or not. We introduce five dummy variables current_ceoi indicating if each of the historical returns is atributable to current CEO. Then coeffient of Returni Current_ceoi would measure the assitional impact of return i years before if this return is attributable to current CEO. Baker and Xuan suggest that performance under the current CEOs rule is of larger importance on equity issues, so the coefficients of Returni Current_ceoi should be positive and significant. Results in Table 4 suggest that last years returns have significant negative effect on equity issue in case they can be attributed to another CEO (coefficient of rett-1 is -3.62), whereas it has almost no effect on equity issues (coefficient of Retl1 Current_ceo1 is almost as large as coefficient of rett-1 and positive). The fact that retuns two years ago can be attributed to current CEO seems to aggravate negative effect of this return on equity issue (coefficient of Retl2 Current_ceo2 is negative). Whether returns older than 2 years seem to have similar effect on equity issue regardsless of whether they can be attributed to current CEO (coefficients of Retli Current_ceoi are insignificant for i = 3, 4, 5). Part (e):
40

30

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0 -4 -3 -2 -1 -10 0 1 2 3

-20

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Picture 1

250 200 150 100 50 0 -15 -10 -5 -50 -100 -150 -200 0 5 10

Picture 2 Here we plot Qi, t-1 Qi, CEO on X-axis and EquityIssuance on Y-axis (Picture 1). From Table 3 we know that these variables have positive relationship after controlling for other relevant variables. Therefore, we expect positive regression line. Assuming that Qi, CEO serves as a reference point for subjective evaluation of companys performance, we expect to observe bunching of data points with positive values of EquityIssues to the right of Y-axis, that is equity issues happen when Qi, t-1 Qi, CEO > 0 i.e. reference point is achieved. We do not observe positive relationship in our graph. Possible reason for it is that the variations due to other variables for which we have controlled in Table 3 are very large compared to variations due to Qi, t-1 Qi, CEO. When we plot Qi, t-1 Qi, CEO against residuals of regresssing EquityIssues on control variables and q0(Picture 2), we obtain positive relationship. Picture 1 doesnt suggest any obvious realtionship between Qi, t-1 Qi, CEO and equity issues with the exception that data changes tend to concetrate around 0, what is when Qi, t1 = Qi, CEO. This might suggest that inherited stock price is indeed sort of reference point for equity issues. Part (f): To sum up, we have not been able to exactly replicate any results of Baker and Xuan. Our regressions show no apparent relationships that are established in the article. Suprisingly, we have even not been able to find evidence of positive relationship between equity issues and recent stock performance. However, we find convincing evidence for this

result with both proxies for stock performance (Q and returns) when we exclude from our sample observations prior to CEO turnover for each firm. Possible explanation might be is that the general relationship does not hold in special circumstances that lead to CEO turnover. Also we find that results are (slightly) sensitive to data preparation. In particular, results somewhat differ depending on wheither equityissues is calculated from winsorized external equity ratios. Also inclusion of firm / year fixed effects changes (thought not much) results.