Abon Mozumdar’s research while affiliated with Virginia Tech and other places

We examine whether internal funds matter for investment when the measurement error in q is addressed. By carefully employing methodologies that tackle the measurement error in q , we show that cash flow is a significant determinant of investment. We also find that an analyst-forecast-based q measure is not superior to a stock-market-based q measure. We further propose an approach that uses two alternative proxies of q as instruments for addressing measurement error. Our evidence indicates that instrumental-variables-type generalized method of moments estimators yield empirically well-specified models.

We examine whether internal funds matter for investment when measurement errors in q are addressed. Through a detailed analysis of the studies that tackle measurement errors in q, we show that cash flow cannot be dismissed as an artifact of these errors. We also find that an analyst forecast based q measure is not superior to a stock market based one. Our findings indicate that while investment-cash flow sensitivities decline through time, they do not disappear during the recent financial crisis. We also propose a methodology that uses two alternative proxies of q as instruments in addressing these measurement errors.

We examine the investment-cash flow sensitivity of US manufacturing firms in relation to five factors associated with capital market imperfections - fund flows, institutional ownership, analyst following, bond ratings, and an index of antitakeover amendments. We find a steady decline in the estimated sensitivity over time. Furthermore, we find that investment-cash flow sensitivity decreases with increasing fund flows, institutional ownership, analyst following, antitakeover amendments and with the existence of a bond rating. The overall evidence suggests that investment-cash flow sensitivity decreases with factors that reduce capital market imperfections.

Recent studies by Erickson and Whited (2000) and Cummins, Hassett, and Oliner (2006) report findings indicating that positive estimates of investment-cash flow sensitivity in earlier papers are mere artifacts of measurement error in Tobin's q. We find that the Cummins, Hassett, and Oliner (2006) findings of the superiority of an analyst forecast-based measure of q and the insignificance of cash flow effects suffer from several implementational drawbacks, an unnecessarily restrictive choice of instruments, and a probable data discrepancy. Erickson and Whited's (2000) approach of using higher order moments suffers from material sensitivity to small changes in variable constructions, specification test failures, and contrary results with sample and estimator extensions. Use of lagged q as instruments yields well-specified models that confirm the explanatory power of cash flow and stock price-based measures of q. Sweeping generalizations about the investment-cash flow effect being a myth therefore appear unwarranted.

We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.

The conflicting nature of the existing evidence on the pecking order theory is due to the difference between financing practices of large and small firms, and the skewness of the firm size distribution. The theory performs poorly for small firms because they have low debt capacities that are quickly exhausted, forcing them to issue equity. The pecking order theory performs satisfactorily for large firms, firms with rated debt, and when the impact of debt capacity is accounted for. The debt-deficit relationship is concave and piecewise linear with slopes close to the predicted values of 1 and 0. Conventional factors predicted by the trade-off theory are useful in determining debt capacity.

We show that firms attach call options to debt issues to manage interest-rate risk and characterize the empirical determinants of this hedging decision. Our results affirm that firms' hedging choices are explained by theories of hedging demand, but more importantly, provide novel evidence that the supply side of hedging is equally important. In contrast to studies based on OTC derivatives, small firms are more likely to hedge in our setting, in which supply-side barriers are absent. We show that there is a secular, robust shift away from callable bonds in the 1990s, when supply-side barriers to hedging declined. This shift is more likely when firms disclose derivatives usage disclosed in their 10-K's

Kaplan and Zingales [Quart. J. Econ. 112 (1997) 169] and Clearly [J. Finance 54 (2) (1999) 673] diverge from the large literature on investment–cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms. We examine if this result can be explained by the fact that when firms are in sufficiently bad shape (incurring cash losses), investment cannot respond to cash flow. We find that while Cleary's results can be explained by such negative cash flow observations, the Kaplan–Zingales results are driven more by a few influential observations in a small sample. We also record a decline in investment–cash flow sensitivity over the 1977–1996 period, particularly for the most constrained firms.

We examine the determinants of debt issuance in 10 major currencies by large U.S. firms. Using the fraction of foreign subsidiaries and tests exploiting the disaggregated nature of our data, we find strong evidence that firms issue foreign currency debt to hedge their exposure both at the aggregate and the individual currency levels. We also find some evidence that firms choose currencies in which information asymmetry between domestic and foreign investors is low. We find no evidence that tax arbitrage, liquidity of underlying debt markets, or legal regimes influence the decision to issue debt in foreign currency.

In a sample of 200 large Nasdaq firms we examine the determinants of stock option grants and study whether options are associated with superior firm performance. We find that firms grant options in the face of financial constraints, to give incentives to increase firm value, and to hire and retain employees. We further find that grant of options to retain key employees and to relax financial constraints increases firm value and results in positive abnormal returns. However, there is little evidence that option grants to align employee incentives in high growth firms results in superior performance. There also exists some evidence that difficulty in the estimation of the true cost of stock options results in over estimation of firm value and abnormal returns, though this effect is confined only to the case when Fama-French size and book-to-market portfolios are used as reference portfolios.