Michael McDonald, PhD

This article investigates whether firms vary the debt side of their capital structure based on changes in investor demand for bonds. Examining asset flows into various asset classes over the last 30 years reveals that companies respond to recent increases in demand for bonds from investors by altering their capital structure toward greater use of debt. Firms are more likely to issue debt when demand for bonds rises, and their use of debt increases (decreases) in periods when demand for bonds is… Show more

This article investigates whether firms vary the debt side of their capital structure based on changes in investor demand for bonds. Examining asset flows into various asset classes over the last 30 years reveals that companies respond to recent increases in demand for bonds from investors by altering their capital structure toward greater use of debt. Firms are more likely to issue debt when demand for bonds rises, and their use of debt increases (decreases) in periods when demand for bonds is high (low) compared with periods when demand is not significantly changed. Firms use more (less) debt when spreads between corporate yields and Treasury rates are low (high), consistent with efforts by managers to adjust their debt issuances based on relative debt costs. These results hold after controlling for seasonality, firm effects, and macroeconomic conditions. These findings suggest that investor demand for debt needs to be taken into account when examining the capital structure puzzle. Show less

Research on angel investors is sparse because data are sparse. Most comprehensive studies of angel investors have focused on the US and UK. In these studies, definitions of angel investors and estimates of returns on angel investments vary dramatically. What can we make of this wide range of reported returns? We find that the calculations of reported return results for angel investments are vague. Most researchers do not explicitly report if their estimates are equal-weighted or value-weighted,… Show more

Research on angel investors is sparse because data are sparse. Most comprehensive studies of angel investors have focused on the US and UK. In these studies, definitions of angel investors and estimates of returns on angel investments vary dramatically. What can we make of this wide range of reported returns? We find that the calculations of reported return results for angel investments are vague. Most researchers do not explicitly report if their estimates are equal-weighted or value-weighted, nor do they say whether the results are weighted by the duration of the investment. We show that the unit of analysis – investment, project, or angel – affects interpretations. These limitations leave the current literature incomplete. Show less

This study investigates positive and negative price shocks in individual securities and the degree to which they affect related firms in the same industry. This price contagion effect is meaningful. Initial price shocks lead to substantial long-term abnormal returns across firms in the same industry over time. Price shocks also have predictive value regarding future earnings and revenues for the firm in question and its industry overall. Positive (negative) price shocks that are continued over… Show more

This study investigates positive and negative price shocks in individual securities and the degree to which they affect related firms in the same industry. This price contagion effect is meaningful. Initial price shocks lead to substantial long-term abnormal returns across firms in the same industry over time. Price shocks also have predictive value regarding future earnings and revenues for the firm in question and its industry overall. Positive (negative) price shocks that are continued over time are associated with higher (lower) Sharpe Ratios suggesting that abnormal returns are not simply a form of compensation for greater expected future volatility. Show less

We argue that research on small firms is less informative than most scholars believe, which suggests that researchers and practitioners know less than they think. Research in small firm finance is hindered by a lack of good data, vague descriptions of methodology in the extant literature, and the potential for severe biases in results. We discuss hurdles to our understanding of small firm finance, and the status of government intervention in markets. We close by discussing potential dangers… Show more

We argue that research on small firms is less informative than most scholars believe, which suggests that researchers and practitioners know less than they think. Research in small firm finance is hindered by a lack of good data, vague descriptions of methodology in the extant literature, and the potential for severe biases in results. We discuss hurdles to our understanding of small firm finance, and the status of government intervention in markets. We close by discussing potential dangers posed to businesses, especially small firms, by economic and political Institutions. Show less

We examine social characteristics (individualism and risk aversion) and their interaction with firm governance and capital structure across the G20 countries from 1995 to 2009 using roughly 13,000 firms. We show that higher levels of individualism are associated with increased firm use of debt and lower cost of capital, whereas higher risk aversion has the opposite effects. Better firm-level governance substantially reduces these cultural effects, as does larger firm size, and less… Show more

We examine social characteristics (individualism and risk aversion) and their interaction with firm governance and capital structure across the G20 countries from 1995 to 2009 using roughly 13,000 firms. We show that higher levels of individualism are associated with increased firm use of debt and lower cost of capital, whereas higher risk aversion has the opposite effects. Better firm-level governance substantially reduces these cultural effects, as does larger firm size, and less research-intensity at the firm. The results show that capital structure in emerging markets is considerably less affected by national culture relative to developed countries. To address endogeneity concerns, we show our results hold after using a propensity score matching procedure. Show less

Recent research has studied the impact of asymmetry on cost of capital estimation, performance evaluation, and optimal portfolio composition. This study examines the impact of skewness preference on the risk premium of a gamble. The three-moment analogue of the Pratt-Arrow risk premium is derived for asymmetric gambles that are not necessarily actuarially neutral. It is seen that the standard Pratt-Arrow risk premium is biased down (up) for an actuarially neutral gamble that has positive… Show more

Recent research has studied the impact of asymmetry on cost of capital estimation, performance evaluation, and optimal portfolio composition. This study examines the impact of skewness preference on the risk premium of a gamble. The three-moment analogue of the Pratt-Arrow risk premium is derived for asymmetric gambles that are not necessarily actuarially neutral. It is seen that the standard Pratt-Arrow risk premium is biased down (up) for an actuarially neutral gamble that has positive (negative) skew. Show less

We examine the impact of differences in time varying social views towards sin stocks across G20 nations on firm valuation and excess returns. Sin stocks have an 8% lower equity valuation in countries where society is strongly against such industries. After controlling for other factors, sin stocks have excess returns of about 1–2% annually. However, these returns are largely arbitraged away in nations without capital and investment controls, but persist in countries with capital restrictions… Show more

We examine the impact of differences in time varying social views towards sin stocks across G20 nations on firm valuation and excess returns. Sin stocks have an 8% lower equity valuation in countries where society is strongly against such industries. After controlling for other factors, sin stocks have excess returns of about 1–2% annually. However, these returns are largely arbitraged away in nations without capital and investment controls, but persist in countries with capital restrictions. These results are robust to proxies for litigation risk, transparency, growth opportunities, sin measures, and alternative measures of firm valuation. Show less