Working papers

Jin Xu

Assistant Professor of Finance, Purdue University

Working Papers (you can download all papers from SSRN: http://ssrn.com/author=780124 )

· Taxes and capital structure, with Mara Faccio download from SSRN

Revise and Resubmit, Journal of Financial and Quantitative Analysis

13th Annual Texas Finance Festival Paper, 2012 SFS Finance Cavalcade paper

Abstract: We rely on a quasi-experimental setting to identify over 250 exogenous shifts in statutory corporate and personal tax rates across OECD countries during 1981 to 2009. We exploit those tax changes to assess the effect of corporate and personal taxes on capital structure decisions. Our design avoids many of the empirical difficulties affecting the earlier tests and provides a stronger econometric identification of the relation between taxes and capital structure choices. We find taxes to be a significant determinant of capital structure. In countries where tax laws are enforced, taxes are as important as other traditional variables in explaining capital structure choices. Thus, in those countries, taxes do have a “first order” effect on capital structure choices. Our results are also consistent with the existence of an equilibrium level of optimal leverage at the firm-level.

· Hedge fund activism and bank loan contracting, with Yinghua Li download from SSRN

AFA 2011 Denver Meetings Paper

Abstract: Using a large sample of loans initiated by firms targeted by hedge fund activists during 1994-2008, we show that hedge fund activism has significant impacts on firms’ bank loan contracts. After the targeting announcement, and relative to firms that are not targeted, the targeted firms pay significantly higher spreads, are more likely to be required to secure their loans, face more covenant restrictions on their financial and investment policies, and have shorter loan maturities. These results are consistent with the hypothesis that hedge fund activism increases credit risk by exacerbating shareholder expropriation of bondholder wealth (the “expropriation effect”). Cross-sectional evidence indicates that the increase in the cost of debt after the activism is greater when the activism targets firms’ capital structure. There is also evidence that activism targeting firms’ corporate governance reduces the cost of debt. Our results imply that firms could face higher costs of debt and greater restrictions on financial flexibility when firms are targeted by activist shareholders.

· The five stages of analyst careers: Coverage choices and changing influence, with Yinghua Li and Raghu Rau download from SSRN

Abstract: We examine changes in analysts’ monitoring incentives and effectiveness as they progress along their career paths. We find that analysts are less likely to be elected all-stars in the annual Institutional Investor elections when the firms they covered in the year prior to the election have high absolute abnormal accruals. Consistent with the hypothesis that career concerns play an important role in their coverage decisions, up and coming analysts strategically choose firms to cover. Specifically, they drop firms with high earnings management and replace them with low earnings management firms. Once they are elected all-stars and become established in their careers, they replace low earnings management firms with high earnings management firms. Firms that gain all-star coverage reduce earnings management. In addition, investors value recommendation downgrades by all-stars significantly more than downgrades by incipient stars or ex-stars, suggesting that that analyst visibility/influence, rather than analyst innate ability, is the underlying source of the effective monitoring of star analysts.

· New evidence on the effects of the insider trading sanctions act of 1984 SSRN

Abstract: This paper analyzes the effects of the Insider Trading Sanctions Act of 1984, the first federal level insider trading statute since 1934 which substantially increased the penalties of illegal insider trading. I find that, around the passage of the Act on July 25, 1984, there were positive abnormal returns for stocks heavily traded by insiders in the past. After the passage of the Act, insider trading frequency decreased significantly and insider trading volume also declined once firm characteristics are controlled for. I also explore insider trading behaviors in merger target firms before the merger announcements between 1979 and 1989 and find a significant decline in abnormal pre-announcement insider net purchases. After the enactment the odds ratio of a positive net insider purchase decreased from 0.08 to 0.04. The price run-up before merger announcements also attenuated after the ITSA enactment. The five-day pre-announcement abnormal return accounted for about 48% of the total price increase before the enactment, but only about 27% after the enactment. Overall, the evidence supports the hypothesis that the ITSA effectively reduced informed insider trading.

· An Empirical Examination of the Signing Bonus: An Incentive Mechanism, with Jun Yang (coming soon)

Abstract: Examining 2,301 signing bonus contracts for the top five executives at the ExecuComp (current and past S&P 1500) firms during 1992–2011, we find empirical evidence corroborating the signaling and incentive theory of the signing bonus (Van Wesep 2010). A firm of high quality is more likely to grant the signing bonus when the executive is less certain of how well he will fit in. This occurs when the firm is large and complex, young, R&D intensive, highly-levered, poorly-performing, and volatile in stock returns; and when the executive is young, less experienced, hired as the CEO from a non-CEO position, and coming from outside the firm and from outside the firm’s industry. An executive who receives the signing bonus is more likely to receive a severance contract and to have a lower portfolio delta but higher dollar value of performance-based pay. Moreover, firms that grant signing bonuses tend to outperform subsequently.

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