Ming Dong

We revisit the survey questions on convertible bond issue motives from the influential study of Graham and Harvey (2001). Our question-conditional analysis connecting survey answers with firm characteristics reveals that the conclusions on two of the four convertible debt theories from the original study need to be revised. More particularly, the delayed equity rationale and the sequential financing rationale on convertible bond issuance do not receive support from the question-conditional tests. Our results indicate that adding a question-conditional analysis is essential in obtaining correct inferences from survey data.

We study market timing and pecking order in a sample of debt and equity issues and share repurchases of Canadian firms from 1998 to 2007. We find that only when firms are not financially constrained is there evidence that firms issue (repurchase) equity when their shares are overvalued (undervalued) and evidence that overvalued issuers earn lower postannouncement long‐run returns. Similarly, we find that only when firms are not overvalued do they prefer debt to equity financing. These findings highlight an interaction between market timing and pecking order effects.

We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation, but only among overvalued stocks, and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment-scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.

We investigate the effects of five weather conditions (sunshine, wind, rain, snow depth, and temperature) on daily index returns of 49 countries from 1973 to 2012. We hypothesize that the effects of the weather on investor behavior depend on climate and season, and examine the relation between weather and daily returns separately for each temperature region (cold, hot, and mild) and each month. We find that the effects of weather on returns are contingent on climate and season and more pervasive than previously documented. A hedge strategy that exploits the daily return predictability of the weather generates up to 25% annualized out-of-sample gross profits during 1993-2012. The patterns of weather effects across climates and seasons suggest that weather influences investor psychology.

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is very strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as well as R&D and innovative output (patent and citation counts). Misvaluation affects R&D more via a non-equity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation is increasing with share turnover and overvaluation. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and by encouraging firms to engage in highly inventive innovation.

We hypothesize that employee flexibility enhances firm value by helping firms respond to exogenous shocks. We estimate employee flexibility scores through textual analysis of online job reviews, and find a high flexibility score leads to superior stock returns for firms exposed to external risk. During 2011-2017, the value-weighted hedge portfolio formed on employee flexibility earned a five-factor annualized alpha of 9.5% during periods of high policy uncertainty. Earnings announcement returns also suggest that investors do not fully value workforce flexibility. These results indicate that employee flexibility is a valuable corporate intangible that helps firms to manage risk during uncertain times.