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Local Gambling Preferences and Corporate Innovative Success

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.

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Local Gambling Preferences and Corporate Innovative Success

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  1. Local Gambling Preferences and Corporate Innovative Success

  2. This paper is about…. St. Peter’s Basilica Steve Jobs Apple Inc.

  3. Factors Affecting Innovations (I)

  4. Factors Affecting Innovations (II)

  5. Characteristics of Corporate Innovations • Large Payoff • High Probability of Failure

  6. Geographical Variation of Corporate R&D

  7. Top and Bottom Five States for R&D Expenditure Top Five New Mexico Massachusetts Maryland Washington Connecticut Bottom Five Wyoming Louisiana Nevada Arkansas Oklahoma

  8. R&D Spending and State Lotteries

  9. 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

  10. Our Intuition is…. Corporations • Not detached from local environment • Take risk on innovation if local residents are prone to gambling

  11. Are Catholics more risk-taking than Protestants? “The Higher the Catholics-to-Protestants (CP) Ratio, the Higher Gambling Attitude” • Kumar, Page, and Spalt (2011, JFE) • Stocks with lottery features • IPO underpricing • Employee stock option plans • Shu, Sulaeman, and Yeung (2012, MS) • MFs: Higher return volatilities & Higher Turnover

  12. CP Ratio Across the United States Source: Kumar, Page, and Spalt (JFE, 2011)

  13. Religion and R&D

  14. Religion and Patents

  15. Religion and Citations

  16. 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

  17. Hirshleifer, Low, and Teoh (JOF, 2012) Overconfident CEOs achieve greater innovative success • What will happen if we admit religion?

  18. How to Frame Your Research Ideas

  19. Stock Liquidity and the Value of Cash Holdings

  20. US Corporate Cash Holdings(excl. Financials and Utilities) Source: Sanchez and Yurdagal (2013)

  21. US Firms with Largest Cash Holdings 1. Apple Inc. 2. Microsoft Corp 3. Google 4. Cisco Systems Inc. Pfizer Inc. Top 5 companies hold more than ¼ of corporate cash holdings. Mostly IT (1/3) and Phamaceutical (1/10) industries

  22. US Industries with Largest (Smallest) Cash Holdings Largest Pharmaceutical Products 0.67 2. Electronic Equipment 0.51 3. Computers 0.49 Precious Metals 0.46 Business Services 0.42 Smallest 1. Candy and Soda 0.01 2. Printing and Publishing 0.02 Business Supplies 0.02 4. Shipping Containers 0.02 Restaurants, Hotels, Motels 0.03 Source: Dittmar and Mahrt-Smith (JFE, 2008)

  23. Relation between Stock Liquidity and Value of Cash Holdings Stock Liquidity Value of Cash Holding

  24. Governance Hypothesis: Positive Relation (I) + + + Corporate Governance Value of Cash Holdings Stock Liquidity

  25. 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)]

  26. $1 Worth How Much?: Impact of Corporate Governance

  27. Financial Constraints Hypothesis: Negative Relation (I) - + - Financial Constraint Value of Cash Holdings Stock Liquidity

  28. Financial Constraints Hypothesis: Negative Relation (II) 1st Strand: Stock liquidity relaxes financial constraints through 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 Weisbach2004; Faulkenderand Wang 2006; and Denis and Sibilkov 2010]

  29. Corporate Governance Hypothesis is supported, then what? Which corporate governance channel?

  30. The Threat of Intervention The effect of stock liquidity on value of cash is stronger for firms with stronger shareholder rights

  31. The Threat of Exit

  32. 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

  33. Anything Wrong with Breaking a Buck?An Empirical Evaluation of NASDAQ’s$1-Minimum-Price Maintenance Criterion

  34. Minimum Price Rules in US Markets • NYSE US$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 Market 2. Global Market (formerly NASDAQ National Market) 3. Capital Market (formerly NASDAQ Small Cap Market)

  35. 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

  36. Types of NASDAQ Delistings

  37. 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)

  38. 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

  39. Return Reversals, Idiosyncratic Risk, and Expected Returns

  40. Is Idiosyncratic Risk Priced in Asset Returns? (I) • In CAPM Framework: It shouldn’t matter a. the market is complete b. investors are rational c. 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

  41. 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)

  42. 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

  43. Thank You for Your Attention

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