Share Repurchases and Wealth Transfer:

The Role of Investment Banks’ Bond Ownership

Andriy Bodnaruk* Massimo Massa** Andrei Simonov***

Abstract We study how financial conglomerates that had a previous advisory/underwriting relationship with a firm and hold a stake in it – related conglomerates – condition the firm’s payout policy. We focus on share repurchases. We document a negative correlation between the probability of the share repurchase and the equity ownership by the related conglomerate. We argue that this is due to a deliberate effort by the related conglomerate to push against the repurchase taking place in order to protect its bond stake that built during its prior advisory/underwriting relationship with the firm. This has significant return implications. A higher equity stake of the related conglomerates is associated with lower stock abnormal returns, both around the repurchase and in the long run. In particular, a one standard deviation higher stake (corresponding to 1.84% of shares outstanding) reduces the short term abnormal return by 43 bp and the long run (2 years) return by 238 bp. Stocks of repurchasing firms in which related conglomerates hold an equity stake experience a substantially lower abnormal return over 1, 2 and 3 years following the announcement then stocks of companies with no ownership by related conglomerates. We argue that the related conglomerate’s protection of its bond stake reduces the ability of the firm to enforce a wealth transfer from the bondholders to the equity holders. We provide evidence of this by demonstrating that the related conglomerate’s stake is linked to a lower drop in the bond yields: the higher the stake, the lower the drop in price of the bonds around the repurchase. In particular, a one standard deviation higher equity stake reduces the drop in yield spreads by 1.65 bp. JEL Classification: G34; G23; G32

Keywords: financial conglomerate; share repurchase; wealth transfer; bonds.

* Mendoza College of Business, University of Notre Dame. ** Finance Department, INSEAD. *** Eli Broad Graduate

School of Management, Michigan State University, SITE and CEPR. Please address all correspondence to Massimo

Massa, INSEAD, Boulevard de Constance, 77300 Fontainebleau France, tel: +33160724481 fax: +33160724045 email:

massimo.massa@insead.edu.

Introduction

Recent evidence has shown that financial conglomerates coordinate their acts in the financial markets: the

analysts of the group and market makers prop up the price of the stocks underwritten by the investment

bank (Ellis, Michaely and O’Hara, (2000)), lending banks use private information regarding corporate

clients to trade credit default swaps or equity (Acharya and Johnson (2007), and Ivashina and Sun (2007)),

the mutual funds of the group exploit inside information available to the affiliated banks lending to firms

around the time the loan is granted (Massa and Rehman (2005)) and lead underwriters allocate hot IPOs to

affiliated funds (Ritter and Zhang (2007)). However, scarce attention has been paid to the corporate finance

implications of such a behavior. We focus on one key corporate event: share repurchases.

Share repurchase is one of the corporate events in which the links between the investment bank and the

firm are more tenuous. The firm in general does not need investment bank advice to decide on a share

repurchase nor does it need the bank to implement it.1 This suggests that there should scarcely be a link

between the decision of a firm to implement a share repurchase and/or its impact on the stock price and any

bank-firm relationship. It is therefore an event in which the influence of any prior bank-firm relationship can

be directly ascertained. Moreover, repurchase is an event well suited to assess whether there is some

coordinated action at the financial conglomerate level. Indeed, it generates a trade-off between the part of

the conglomerate holding a bond stake and the part holding an equity stake in the firm. A coordinated action

at the conglomerate level would rely on the prior relationship established between the investment bank of

the conglomerate and the firm.

We focus on the conglomerates whose investment banks have a previous advisory/underwriting role

with the firm and that have an equity stake in the firm – henceforth “related conglomerates”. We test

whether their presence among the equity-holders of the firm is related to the probability of the firm

implementing a share repurchase and to the market reaction to it. We contrast two alternative hypotheses:

the “pressure hypothesis” and the “blockage hypothesis”. The first hypothesis posits that the equity stake

would induce the related conglomerate to pressure the firm to enact a share repurchase. The ensuing

increase in equity value would allow the conglomerate to realize a capital gain. Presumably, the direct

interest in the equity appreciation after the repurchase would induce the conglomerate to act to support and

boost the stock price afterwards using the whole panoply of price support it has available (analysts, market

makers, asset managers belonging to the conglomerate). The market, aware of the related conglomerate’s

interest would react positively to the repurchase of a firm with a sizable equity stake by a conglomerate.

Therefore, the “pressure hypothesis” would predict a positive relation between the probability of the share 1 Accelerated share repurchases are an exception.

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repurchase and the equity stake of the conglomerate and a positive relation between the latter and the stock

price reaction afterwards.

The alternative hypothesis – the “blockage hypothesis” – posits that the prior advisory position in the

bond underwriting market has left the conglomerate with a bond stake that would drop in value in the case

of a share repurchase. The conglomerate, to preserve the value of its bond stake, would try to prevent the

repurchase from happening and, if it takes place, would be watchful to prevent a wealth transfer from

bondholders to equityholders. The market, aware of the conglomerate’s interest will factor in a lower

probability of wealth transfer and would therefore react less positively to the repurchase of a firm with a

sizable equity stake by a related conglomerate. Therefore, the “blockage hypothesis” would predict a

negative relation between the probability of the share repurchase and the equity stake of the conglomerate

and a negative relation between the latter and the stock price reaction afterwards.

Both hypotheses share the feature that the related conglomerate, by the mere fact of having advised the

firm on issuing bonds before and acted as underwriter, has a “close relationship” with the firm. In the case

of the pressure hypothesis, this relationship has led the conglomerate to build an equity stake – presumably

exploiting the information about the firm acquired in its advisory role. In the case of the blockage

hypothesis, the previous relationship has led the conglomerate to build up its bond stake in the firm. In both

cases, the prior relationship, may also confer some influence on the firm. In the case of the pressure

hypothesis, the influence would facilitate a share repurchase, while in the blockage hypothesis, the influence

would oppose it. This influence comes from the previous relationship as well as from the stocks and bonds

of the firm it still holds. If the equity stake is held by some asset managers of the conglomerate and the bond

stake by others, the blockage hypothesis requires a coordinated action at the conglomerate level. The main

difference between the two hypotheses is that while the pressure hypothesis would only require a prior stake

of the financial conglomerate, the blockage hypothesis would only refer to the equity stake of a

conglomerate with a prior underwriting relationship in the bond market (“related”). We test these

hypotheses against the null of no relation between the stake of the conglomerate and the share repurchase.

We focus on the stake of the overall conglomerate. We first identify the position of all the financial

entities (e.g., insurance firms, commercial banks, mutual funds, and pension and hedge funds) that are

affiliated with the same financial conglomerate. Then, we aggregate the equity stake in the firm of the

financial firms that are affiliated with the investment bank that has previously advised the firm for its bond

issuances and/or underwritten its bond issues – either directly or indirectly – or are affiliated with

commercial banks that have previously lent to them.

We focus on the US repurchases over the 1984-2006 period. We start by providing evidence of a

negative correlation between the probability of the share repurchase and the equity ownership of the firm by

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the related conglomerate. A one standard deviation increase in equity ownership by the related

conglomerates (corresponding to 2.07% of shares outstanding) reduces the probability of a share repurchase

by 0.20%. This is a 5.86% drop from the unconditional mean.

These results are consistent with the possibility that the related conglomerate does not want its position

in the bonds of the firm to be reduced in value by the repurchase. That is, the related conglomerate is aware

that the repurchase, by increasing leverage and risk induces a wealth transfer from the bondholders to the

equityholders, and tries to oppose it. At the same time, the findings are also consistent with the firms whose

equity is held by the related conglomerates to be overvalued. Indeed, in general the fact that a bank grants a

loan to a company is perceived by the market as a sign of confidence and this determines a higher price

(e.g., Houston and James, 1996). Therefore, firms whose equity are held by the related conglomerate that

advised the firm before – and therefore that have a better knowledge of the firm – may inspire more

confidence in the market and therefore are more likely to be overvalued. Given that overvalued firms are

less likely to buy back shares, this would induce a spurious negative correlation between the equity stake of

the related conglomerate and the probability of the firm initiating a share repurchase.

To distinguish between these two interpretations, we study whether the firms with an equity stake held

by the related conglomerates are overvalued. We show that they are. At the same time, including

misvaluation among control variables in our regressions does not affect our results in any significant way.

Moreover, we provide evidence of the fact that relatedness increases the bond stake of the

conglomerate. That is, related conglomerates are way more likely to hold bonds of the firm and by a far

bigger amount. This bond stake may be due to the conglomerates having acquired bonds acquired in their

underwriting capacities and never sold because unable to place them in the market or simply because inside

information made the conglomerate more optimistic about the firm. In either case, this bond stake provides

the related conglomerate with an incentive to oppose a share repurchase and, if implemented, to be watchful

that no wealth transfer does take place.

How does the market interpret this equity/bond incentive trade-off of the related conglomerate? To

address this issue, we relate the stock and bond abnormal returns following the share repurchase and the

fraction of equity ownership of the related conglomerate. We use alternative methodologies: cumulative

abnormal returns and calendar-time portfolio regressions (CTPR) using both value- and equal-weighted

portfolios to capture the performance of repurchasing firms. We control for the 3 Fama–French (1993)

factors augmented by the Carhart (1997) momentum factor. The results are consistent across all the

methodologies and robust to the alternative controls. The higher the equity stake of the related

conglomerates, the lower the stock abnormal return, both around the repurchase and in the long run. In

particular, a one standard deviation higher stake reduces the short term abnormal return by 43 bp (or 20.24%

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lower relatively to unconditional mean) and the long run return by 238 bp (or 11.53% lower relatively to

unconditional mean).

Moreover, in calendar portfolios stocks of repurchasing firms in which related investment banks hold a

stake experience significantly lower long run abnormal returns (over the 36 months following the

announcements): insignificant for equally-weighted portfolio and 25 bps per month for value weighted

portfolio. This dramatically contrasts with repurchases in which there is no stake by the related

conglomerates that deliver an average long run abnormal return of 25bp(48bp) over the 36 months for

equally-(value) weighted portfolio. The difference in performance is related to the uncertainty about the

stock in the market. It is higher the higher the dispersion of the forecasts of the analysts tracking the stock.

Overall, share repurchases characterized by a higher stake by related conglomerates do have a very low if

not even negative short term as well as long term abnormal return. These findings are robust to the standard

set of control variables.

We argue that this is due to the inability to enforce a wealth transfer from the bondholders to the

equityholders. In other words, given that the value of the stake is affected in the case the firm implements a

share repurchase, the related conglomerate will exercise their influence on the firm not to implement the

repurchase. If the firm goes ahead with the repurchase, still the conglomerate will be able to protect

themselves, lowering the possibility of wealth transfers from bondholders to equityholders. We provide

evidence of this by focusing on the bond yields. Here, the stake of the related conglomerate is linked to a

lower drop in the bond yields: the higher the fraction of equity held by related conglomerates, the lower the

drop in price of the bonds around the repurchase. In particular, a one standard deviation higher stake reduces

the drop in yield spreads by 1.65 bps.

Moreover, the difference in performance is related to the type of protection the existing bondholders

already enjoy. The role of the related conglomerate is concentrated in the case of bonds not protected by

covenants and in below-investment grade or non-rated bonds and bonds of high leverage firms. This

suggests that the presence of the related conglomerate acts as a sort of deterrent in all those cases in which

the lack of formal protection and the riskiness of the bond more expose the bondholders. Billett et al. (2004)

examine the effect of mergers on bondholder wealth and find that target bonds with credit ratings below that

of the acquirer earn positive returns around mergers.

Our paper makes several contributions. The first is to the literature on share repurchases. Standard

empirical evidence shows a strong positive abnormal return for the stocks of firms implementing share

repurchases. This has been explained in terms of signaling and undervaluation. Firms implement share

repurchases either because they want to signal to the market they are undervalued or because they time the

market by buying undervalued shares. A third explanation has been brought forward: wealth transfer. By

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repurchasing its shares, the firm changes its leverage and increases its riskiness, effectively transferring

value from the bondholders to the shareholders. However, evidence of wealth transfer has been scarce

(Maxwell and Stephens, (2003)). We argue that the reason why this has not been documented till now is that

this wealth transfer does not take place homogeneously for all the repurchases, but just for the ones in which

related conglomerates do not hold a bond position. We contribute by showing that part of the abnormal

return in the share repurchases is related to the wealth transfer from the bondholders to the shareholders. In

particular, we argue that the scarce evidence of wealth transfer is linked to the role of the related

conglomerates. Once we control for it, we are able identify a sizable wealth transfer in the other – non

related-conglomerate – repurchases. We find that about 26.10% of the repurchases have an equity stake by

related conglomerates and as a result the wealth transfer in such deals is much smaller.

Also, our results shed some light on the factors driving the post-announcement drift of the repurchasing

stocks. Ikenberry, Lakonishok and Vermaelen (1995) show that there is no drift in the case of high market

to book stocks. We show that, even after controlling for market-to-book, there is a set of stocks in which

there is practically no abnormal performance: stocks with a high equity ownership by related conglomerates.

Second, we contribute to the literature investigating the coordinated behavior of different financial firms

in the same financial conglomerate. Acharya and Johnson (2007), and Ivashina and Sun (2007) provide

evidence of insider trading by banks by showing that lending banks use private information regarding

corporate clients to trade credit default swaps or equity. Massa and Rehman (2005) show that mutual funds

use the inside information available to the affiliated banks lending to firms around the time the loan is

granted. Ritter and Zhang (2007) show that lead underwriters allocate hot IPOs to affiliated funds, and Ellis,

Michaely, and O’Hara (2000), show that NASDAQ market makers belonging to a financial group support

the stock price of those firms the IPOs of which have been underwritten by the investment bank belonging

to the same group. We show the implications of the coordinated behavior of the different units of a financial

conglomerate having simultaneously advised and underwritten bond issues for a firm and holding a stake in

it.

The remainder of the paper is structured as follows. Section 1 describes the data and variables used.

Section 2 analyzes the impact of the stake of the related conglomerate on the probability that the firm

initiates a share repurchase. Section 3 studies the link between the equity and the bond stake of the related

conglomerates as well as their link to the firm overvaluation. Section 4 and 5 tests the stock and bond price

reaction to the repurchase in the presence of the related conglomerate stake. A brief conclusion follows.

1. Data and Main Variable Construction

1.1 The Sample

We use data from five sources: the CRSP- Compustat Merged Industrial Database for the accounting

variables and the total payout dollar amounts by year for each firm, the Securities Data Corporation (SDC)

Database for open market repurchase program announcements, Mergent database for bond yields and

Federal Reserve Bank of St. Louis (FRED) website for Treasury yields.2 The time period of our study

ranges from 1984 to 2006. The choice of this period for the purposes of our study is motivated by the fact

that open market stock repurchases increased dramatically in the US after 1982 following the adoption by

the SEC of rule 10b-18 which greatly reduced the ambiguity associated with this activity. For tests of

market reaction to repurchase announcements as well as the analysis of post-announcement performance of

firms, we use repurchase announcements from SDC.3

The CRSP-Compustat Merged Industrial Database is the source for all the accounting variables which

have been used as controls. We provide a detailed description of the variables in the Appendix. Also,

following Ikenberry, Lakonishok and Vermaelen (1995), Grullon and Michaely (2002) and others, we

exclude the year 1987 for firm year observations and the last quarter of 1987 for announcement data, due to

the October ‘87 crash. Also, we exclude financial firms and regulated utilities and focus exclusively on US

listed common stocks (CRSP share codes 10 and 11) thereby excluding ADR’s, closed-end funds, etc.

Finally, we require that, for each firm-year, data be available and non-missing for all the main explanatory

variables. The resulting sample comprises 179814 firm-years. We report descriptive statistics of our sample

in Table 1 and these are comparable to the summary statistics reported in Jagannathan et al (2000).

Summary statistics for the data are reported in Table 1, Panel A.

1.2 The Definition of Related Conglomerate and the Construction of Its Stake

We derive the equity stake of institutional investors from the 13F Spectrum database, which consists of the

quarterly 13F filings of qualified money managers to the SEC. It contains the portfolio holdings (i.e.,

positions of more than 10,000 shares or $200,000) of institutions with more than $100 million under

discretionary management (see Gompers and Metrick 2001).4

2 We focus on open market repurchases (Jagannathan et al. (2000) and Guay and Harford (2000)).

3 Following Guay and Harford (2000), if a firm makes more than one open market repurchase announcement

within any given year, we only consider the first one.

4 The Spectrum Dataset does not report short positions or positions in derivatives. However, unless we assume that

investment banks take large short positions (or buy put options) in M&A targets to hedge their large equity stakes,

the lack of this information should not impede our research. Also, some 13F filings are missing from Spectrum. To

6

Our key variable – the stake in the repurchasing firm of the related conglomerate – is constructed as

follows. First, we identify the financial conglomerates and then we aggregate the holdings of all the

different financial entities of the conglomerate in the firm. Given that different divisions of a financial

conglomerate (banks, insurance firms, mutual fund families, etc.) often appear in 13F filings as separate

entities lacking common identifiers, we had to construct a database of financial conglomerates grouping the

different divisions of individual financial groups under single umbrellas, which we call “conglomerates.”

This database was manually assembled using information from various public sources5 and performing a

name-by-name analysis. We assigned each financial conglomerate a conglomerate name and created a set of

identifiers for firms (“names” from Spectrum and SDC) affiliated with each conglomerate; we then matched

this information with information on deal advisors from SDC. For a more detailed description of

conglomerate construction as well as for the descriptive statistics of the conglomerates characteristics see

description of a “brand” construction in Bodnaruk et al.(2008).

Let us consider, for example, the “AXA” conglomerate. “AXA” corresponds to the AXA Financial

conglomerate, which as of December 31, 2005 had approximately $643.3 billion in assets under

management. AXA Financial includes the investment advisors AXA Advisors and Sanford C. Bernstein, the

insurance firm AXA Equitable Life Insurance, the investment and mutual fund management firm Alliance

Bernstein, and the MONY group of firms (as of July 8, 2004). All these firms are assigned identifiers that

uniquely match them to the “AXA” conglomerate.

We also account for the evolution of conglomerate affiliation. For example, “Morgan Keegan” is

reported as an independent conglomerate until March 30, 2001, when Regions Financial acquired it. Up to

that date, “Morgan Keegan” was the unique conglomerate of Morgan Keegan, but also included T.J. Raney,

Scharff & Jones, Cumberland Securities and J. Lee Peeler, all of which had been acquired by Morgan

Keegan between 1989 and 1994. Effective March 30, 2001, the “Morgan Keegan” conglomerate was retired

and all firms affiliated with it became the “Regions Financial” conglomerate.

The total number of conglomerates varies from 643 in 1984 to 2070 in 2003. The average (median)

number of a conglomerate’s affiliates is 1.35 (1.00), and the average (median) conglomerate has 269 (114)

positions in its overall portfolio and holds $3.04 billion ($0.40 billion). In this paper, we will focus on the

conglomerates with affiliated investment banks. We identify 182 such conglomerates. The average (median)

deal with this, we extrapolate the missing positions as the average of positions in previous and following quarters.

Alternatively, we set them to be equal to the position of the previous quarter. The results are not affected.

5 We used the directory of investment advisers maintained by SEC (www.adviserinfo.sec.gov), Morningstar’s

directory of mutual fund family websites (www.advisor.morningstar.com), and the websites of financial groups and

mutual fund families. The completion dates of M&A transactions come from SDC. All affiliations, transaction dates,

and missing information were then double-checked using extensive web querying.

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conglomerate with an affiliated investment bank has 2.13 (1.00) affiliates according to the SDC Spectrum

database. The average (median) portfolio of such a conglomerate contains 1279 (839) stocks and $22.82

billion ($6.58 billion) in equity.6

Our database of conglomerate affiliations lets us investigate the behavior of financial conglomerates in

terms of several important new dimensions. First, we are able to analyze the aggregate holdings of affiliated

firms. Thus, if several divisions of a conglomerate (i.e., conglomerate) hold positions in a certain firm, we

can observe the conglomerate’s overall exposure to this firm. For example, Bear, Stearns & Co. (13F

manager # 8238) held 172,232 shares of Automatic Data Processing Inc. (CUSIP 053015) as of September

30, 2001. At the same time, its affiliate Doerge & Smith Private Advisory LLC (13F manager # 23310)

reported holdings of 138,958 shares in the same firm. The total exposure of the “Bear Stearns”

conglomerate to Automatic Data Processing Inc is the sum of the holdings of Bear, Stearns & Co. and

Doerge & Smith Private Advisory LLC.

Second, we determine the link between the financial conglomerates’ prior underwriting activity. For

each firm we look at all the prior bond issues and investigate the investment bank that has acted as an

underwriter to the firm in the previous 3 years, as well as the commercial bank that has lent to the firm in

the previous 3 years. We then determine the conglomerate to which both the investment bank and the

commercial bank belong. We define as “related conglomerate” the financial conglomerate whose affiliated

investment or commercial banks have either lent or underwritten bond issues in the prior 3 years.

Then, we aggregate all the equity holdings of the related conglomerate. To ensure that our measure is

effectively constructed out-of-sample, we use data measured at the end of the quarter immediately preceding

the announcement of the repurchase. We consider two alternative proxies for the related conglomerate

stake. The first, Conglomerate Stake 1, is the fraction of the company’s market capitalization held by the

related conglomerate. The second, Conglomerate Stake 2, is the fraction of the company’s market

capitalization held by the related conglomerate relatively to the company overall institutional ownership

(fraction of the stake of conglomerate in total institutional ownership). Among the control variables we also

consider the institutional ownership. This helps to control for the impact of the institutional investors

overall. The literature has argued that this affects the payout and repurchase policy (Grinstein and Michaely,

2005, Grullon and Michaely, 2002).

6 It is worth noting that in most cases Spectrum already aggregates the positions of different subsidiaries that file

jointly; for example, Morgan Stanley filings contain 28 different managers, including mutual funds, asset managers,

and hedge funds while Spectrum reports only 1 institutional manager for Morgan Stanley. However, we failed to

discern any regular rule that determines Spectrum dataset construction along this dimension.

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We derive bond holdings of institutional investors from Lipper’s eMAXX fixed income dataset. This

dataset contains quarterly ownership of more then 40,000 fixed-income issuers by nearly 20,000 U.S. and

European insurance companies, U.S., Canadian and European mutual funds, and leading U.S. public

pension funds for the period between the first quarter of 1998 and second quarter of 2005. We aggregate

bond ownership on the conglomerate level using the manually-constructed data set of conglomerate

affiliations described above.

We report descriptive statistics in Table 1, Panel B. It appears that the unconditional average equity

stake of the related conglomerates is 0.54%. This increases to 0.60% in the case of firms initiating share

repurchase programs. This compares to 39.81% and 48.10% respectively in the case of the equity stake of

all institutional investors. The cross-correlation matrix for the other variables (not reported) indicates that

the related conglomerate stake is higher in larger firms, firms with higher growth of sales and higher

experience in financial markets and lower book-to-market value.

Average (median) bond to equity ownership by institutional investors, defined as logarithm of 1 plus the

ratio of the value of bond stake in the company to the value of equity stake in the company, is 0.066 (0).

However, it increases to 1.308 (0.819) if we consider only the investors with a positive bond stake in the

company.

2. Conglomerate Stake and Probability of Repurchase

We start by testing the relationship between the related conglomerate equity stake in the firm and the

probability that the firm will initiate a share repurchase. We estimate a probit model where the dependent

variable is a dummy taking the value of 1 if the firm initiates a share repurchase program in the subsequent

year and zero if not. The explanatory variables are our alternative measures of related conglomerate’s equity

stake and a series of control variables. In particular, we use as control variables: institutional ownership,

market capitalization, book-to-market, price-to-earnings and debt-to-equity ratios, profitability and growth

(ROE and growth of sales), industry concentration. We also include a variable that proxies for the degree of

financial sophistication of the firm. This is constructed as the logarithm of the number of debt and equity

issues and M&A transaction that the company undertook over the previous 3 years. To control for past stock

momentum, we include the stock return and its volatility in the previous 36 months as well as a measure of

credit spread. This is defined as the difference in yields to maturity on BBB and AAA rated bonds with 5

years to maturity. We consider two specifications, based on the two alternative measures of related

conglomerate stake. We also consider specifications in which we interact the conglomerate’s stake with the

dispersion of the forecasts of analysts following the stock.

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The results are displayed in Table 2. Across all the specifications, we see a strong negative relationship

between the stake of the related conglomerate and the probability of initiation of a share repurchase. The

results are not only statistically significant, but also economically relevant. For example, in the case of the

base specification (column 1), a one standard deviation increase in equity stake of the related conglomerates

lowers the likelihood of a repurchase by around 0.20%.7 This suggests that overall, firms in which related

conglomerates have a stake are less likely to repurchase. The results of specifications 3 and 4 suggest that

this effect is mostly concentrated in firms with high (above median) dispersion of analyst forecasts. These

findings support the “blockage hypothesis”.

If we focus on the other variables, we see that they are consistent with the literature (Fenn and Liang

(2001), Kahle (2002) and Jagannathan et al. (2000)). In particular, repurchases are more likely to be

initiated by relatively larger (market cap), more undervalued firms with lower growth (growth of sales).

Institutional ownership by itself is a powerful determinant of the incentive to start repurchases, though it

goes in the opposite direction to our measure of the stake by related conglomerates. Scarcity of external

financing – i.e., higher credit spread – is also negatively related to the likelihood of share buybacks.

These results are consistent with two alternative interpretations. The first is that the related

conglomerate does not want the repurchase to take place and therefore actively lobbies the firm not to

repurchase. The alternative explanation is that the presence of related conglomerates among the investors in

the firm is spuriously related to some relevant firm characteristics. The most likely one is firm’s

overvaluation. Even if we control for book-to-market and P/E, it may still be the case that the mere presence

of the related conglomerate provides a positive signal to the market and this keeps the price of the stock

artificially overvalued. Alternatively, superior information – e.g., accruing from the previous

underwriting/advisory or lending position – has allowed the conglomerate to invest in a stock that is now

overvalued. Even if the stake of the related conglomerate is not the cause of overvaluation, still it may be

spuriously related to the stock being overvalued. In either case, overvaluation lowers the incentives to buy

back shares and this creates a negative correlation between repurchase and the related conglomerate’s stake.

The first explanation requires the conglomerate to have a conflicting interest, presumably a bond stake

in the firm. However, this is necessary but not sufficient as the very bond stake may actually send a positive

signal to the market. Indeed, the fact that a bank grants a loan to a company is perceived by the market as a

sign of confidence and this determines a higher price (e.g., Houston and James, 1996). Therefore, firms 7 This calculation has been made as follows. The coefficient of marginal impact for the stake of the related

conglomerate in Table 3, column (3) is -9.692/100 while the standard deviation of stake by related conglomerate is

2.11%. The mean value of the dependent variable from this column is 3.48%. Hence, the impact of one standard

deviation increase in the stake of the related conglomerate changes the dependent variable by -9.692/100*2.11=-

0.20% which corresponds to 0.20%/3.48%=5.86% drop relatively to unconditional mean.

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whose bonds are held by related conglomerates – that advised the firm before and therefore that have a

better knowledge of the firm – may inspire more confidence in the market and therefore be overvalued.

The main difference between the two explanation is related to the degree of over(under)valuation of the

firm’s stock. The second explanation would require the firm’s stock to be overvalued. We will now proceed

to test these two both the relation between equity and bond stake and the relation between stake and

overvaluation.

3. Equity Stakes, Stock Value and Bond Stake

We now study if there is a relation between the equity stake of the related conglomerate and its bond

position and then we test whether the related conglomerate’s stake is related to the firm being overvalued.

3.1 Bond and Equity Stakes

We start by focusing on the relation between its equity and bond stake. We do it at the level of each

institutional investor. In particular, we regress the bond ownership in the firm on a dummy for whether the

institutional investor is a part of a related conglomerate and zero otherwise and a set of control variables.

We include firm’s specific characteristics as control variables. They are the fraction of institutional

ownership, market capitalization and value (log(B/M) and P/E), profitability (ROE and growth of sale),

leverage (D/E). We also include investor specific characteristics such as the amount of assets it manages

(log(TNA)) and a dummy taking the value of one if the investor belongs to a conglomerate that also has an

affiliated (but not related to the firm) investment bank and zero otherwise. We estimate both a probit model

where the dependent variable is a dummy which takes value 1 if the investor holds company bonds and 0

otherwise, and a tobit model in which the dependent variable is the logarithm of 1 plus the ratio of the value

of bond stake in the company to the value of equity stake in the company. We consider the overall sample

including all the institutional investors as well as only the institutional investors that have a non negative

bond stake at some company.

The results are displayed in Table 4. The results show a strong positive relation between relatedness and

bond ownership. In general while it is not always the case that big institutional investors, part of wider

conglomerates with affiliated investment banks, tend to invest in corporate bonds, there is a strong positive

relationship between bond ownership and investors being a part of a related conglomerate. These results

hold across the different specifications and robustness checks. The results are not only statistically

significant, but also economically relevant. In the case of probit, a likelihood of being a company

11

bondholder is about 9.03% larger (or 138.27% relatively to the unconditional mean) for related

conglomerates than for institutional investors without affiliated investment banks. This compares to mere

1.11% increase in the likelihood for unrelated conglomerates. In terms of bond stake, relatedness translates

into a 112.34% higher bond to equity ratio (10.24% lower for unrelated conglomerates).

Overall, these results suggest that having had a prior advisory/underwriting relationship increases the

bond ownership of the investor. Presumably, this may be due to better information about the firm the

investment bank of the conglomerate helped to issue, as well as to a stake accumulated to meet underwriting

commitments. For example, it may be the case that the related conglomerates end up holding the bonds

because they have been unable to place them in the market when they underwrote them. In either case, this

provides evidence in favor of a conflicting interest of the related conglomerate. It holds an equity stake that

would make the conglomerate appreciate the repurchase and a bond stake that would make it dislike it.

Anecdotal evidence and previous findings (Xu, 2008, Manconi and Massa, 2008) show that institutions with

both equity and bond stake tend to privilege the bond position and use the equity as instrument to protect the

bond one.

3.2 Conglomerate’s Stake and Overvaluation

We now test whether the presence of related conglomerates is linked to stock overvaluation. We argued that

the stake of the related conglomerate may be spuriously associated to the stock being overvalued, creating

an artificial negative correlation between repurchase and the related conglomerate’s stake. We therefore

construct a measure of stock overvaluation following Rhodes-Kropf, Robinson, and Viswanathan (RRV)

(2005) and relate it to our alternative measures of related conglomerate’s stake and the series of control

variables as defined above. We consider two specifications, based on the two alternative measures of related

conglomerate stake. We also consider a specification in which we interact the related conglomerate’s stake

with the dispersion of the analysts following the stock.

The results are reported in Table 4, Panel A for the univariate analysis and in Panel B for multivariate

regressions that include interaction of conglomerate stakes with the dispersion of the analysts. The results

show a positive correlation between stock overvaluation and the related conglomerate’s stake. The

relationship seems to be also stronger for companies with higher dispersion of analyst forecasts. We,

therefore, include misvaluation as a control variable in all our regressions. The results are not qualitatively

affected. Also, correlation between misvaluation and conglomerate stake is about 3%, which implies that

multicollinearity is not an issue.

Overall these findings suggest that related conglomerates are negatively related to the share repurchases

and that seems to be due to the desire to protect their bond stake against an ensuing drop in bond value as

12

opposed to spurious correlation due to related conglomerates holding stakes in overvalued firms. We now

turn to see how the market interprets this conflict of interest within the conglomerate and how it reacts to it.

4. The Equity Market Reaction

The market observes the fact that the related conglomerate holds both an equity and a bond stake and has to

infer which side the conglomerate will privilege. In particular, the market may read through the related

conglomerate’s hostility to the repurchase the defense of its bond stake and therefore discount any future

possibility of wealth transfer from bondholders to equityholders. This would determine a lower stock price

reaction, both in the short-run and in the long run. The market may also completely ignore it and just

interpret the equity stake as a signal that the related conglomerate will use its “weapons” (affiliated analysts,

mutual funds and asset managers, market makers) to spur an even higher stock price reaction to benefit from

it. This would determine a higher stock price reaction, both in the short-run and in the long run. We will

consider both in turn.

4.1 Short-run Abnormal Return

We start with the short-run abnormal return. We expect the market reaction to the repurchase announcement

to be larger for firms with a higher stake by related conglomerates. We test this prediction by conducting

univariate and multivariate tests on announcement abnormal returns for repurchasing firms with different

degrees of related conglomerate stake. We calculate the abnormal return as the difference between the stock

return and the return predicted by a four factor model.8

The results are reported in Table 5. In Panel A, we display the results for the univariate tests. We report

both the mean and the median CARs over 3 and 7 days around the repurchase announcement for firms with

a stake of related conglomerates and firms not having such a stake. Additionally we split the firms with

positive related conglomerate ownership into a low and high ownership stake groups. The findings show a

clear statistical and economic difference in market’s reaction across conglomerate ownership groups. The

presence and the size of the related conglomerate’s stake are related to a substantially lower return.

These results are confirmed by the multivariate analysis (Panel B). We regress abnormal returns around

the event on our alternative measures of related conglomerate’s stake and the series of control variables we

defined above. Across all the specifications, there is a strong negative relationship between the stake of the

related conglomerate and the abnormal return. This holds across the different specifications and robustness

checks. The results are not only statistically significant, but also economically relevant. A one standard 8 The estimation period ends 90 days prior to the announcement with a maximum of 255 days and minimum of

100 days required.

13

deviation increase in stake of the related conglomerates reduces the abnormal return by 43bp, which is about

20% relatively to the unconditional mean.

These results suggest that the market reacts negatively to the presence of the related conglomerates.

This is in line with the “blockage hypothesis” and rejects the “pressure hypothesis”. That is, either the

market does not consider the repurchase as initiated to generate a capital gain for the related conglomerate

or the conglomerate does not help by boosting the price. Quite the contrary, the presence of the

conglomerate seems to depress the price reaction. We now consider the long-run.

4.2 The Long-Run Abnormal Return

We now explore the long-run performance of the repurchasing firms conditioning on the equity stake of the

related conglomerate. The blockage hypothesis posits that since the related conglomerate is likely to protect

its bond stake and therefore hardly any wealth transfer will take place in the presence of the related

conglomerate. Therefore, we should observe a significant difference between the post-announcement

performance of repurchasing firms with a related conglomerate’s stake and that of the other firms.

We start by relating to previous findings on long-run performance of repurchasing firms. We plot a

figure similar to Figure 1 of Ikenberry, Lakonishok and Vermaelen, (1995) for repurchasing firms with and

without a related conglomerate’s stake. We split repurchasing companies based on related conglomerate

ownership and consider equally and value weighted portfolios of daily cumulative abnormal returns

(relatively to a four-factor model). The graphs show that long-run over-performance of share repurchasing

firms is substantially lower in the case in which the related conglomerate has a stake in the firm.

We then consider the long run over-performance in more detail. We proceed as follows. First, we

implement a univariate analysis, then multivariate analysis and finally construct calendar portfolios based

on related conglomerate ownership. In the univariate analysis we split the repurchasing companies into two

groups: those with related conglomerate ownership and those without. We then compare the average

cumulative abnormal returns for these groups over 1, 2 and 3 year periods. The results, presented in Panel A

of Table 6 demonstrate that abnormal return for the repurchases with positive stake by related

conglomerates is less than half of the abnormal return on the repurchases without ownership by related

conglomerates. This hold across both mean and median returns and across all time horizons considered.

In the multivariate analysis, for each firm, we relate its long-run abnormal return on our alternative

measures of related conglomerate’s stake and the series of control variables we defined above. We consider

two specifications, based on the two alternative measures of related conglomerate stake. We also consider

specifications in which we interact the role of the conglomerate’s stake with the dispersion of forecasts of

14

the analysts following the stock. The abnormal return is the outcome of a 4-factor model estimated over

previous 36 months period. We consider windows of 1 year, 2 year and 3 years after the announcement.

The results are displayed in Table 6, Panel B for the conglomerate stakes and in Panel C for the

interaction with dispersion of analyst forecasts. The results show a strong negative relationship between the

stake of the related conglomerate and long run abnormal return. This holds across the different

specifications and robustness checks. The results are not only statistically significant, but also economically

relevant. For example, in the case of the base specification for 2 year holding period (Table 6, Panel B,

column 5), a one standard deviation increase in stake of the related conglomerates reduces the abnormal

return by 238bp. The results in Panel C, suggest that this effect is mostly concentrated in firms with high

dispersion of analyst forecasts.

As an alternative methodology, we use the calendar-time portfolio regression (CTPR) approach of

Ikenberry, Lakonishok and Vermaelen (2000). In particular, each month we form two portfolios of the

companies which have undertaken a repurchase over the previous 35 months: those with a related

conglomerate stake and those without. These portfolios are rebalanced every month to include in the

portfolio stocks that have announced a repurchase program in the previous month and to drop stocks which

have reached the end of their holding period of 36 months. We then calculate the abnormal returns with

respect to a 4 factor model (i.e., the 3 Fama-French (1993) factors augmented by Carhart (1997) momentum

factor. The intercept of the time-series regression is used as a proxy for the abnormal return. Given that in

the literature there is a debate on whether the more proper measure is based on value-weighted or equally-

weighted returns (Fama (1998), Mitchell and Stafford (2000), Loughran and Ritter (2000)), we consider

both value- and equal-weighted portfolios. Additionally we consider portfolios constructed based on the

interaction of conglomerate stake and dispersion of analyst forecasts.

We report the results for equally-(value) weighted portfolios in Table 7, Panel A (B). The results

confirm the previous ones. Using equal (value) weighted portfolios, stocks of repurchasing firms with a

conglomerate stake underperform the repurchasing firms without a conglomerate stake by 18 (23) bps per

month, which is significant at the 10 percent level over 36 months. As before, the inferior performance of

repurchases with related conglomerate stake is particularly pronounced for the firms with higher dispersion

of analyst forecasts. Overall, these findings support the “blockage hypothesis”.

5. The Bond Market Reaction

15

Overall, these findings point in the direction of a lower equity return due to the lack of wealth transfer. If

this is correct, we should find that the equity stake of the related conglomerate is associated with a lower

drop in value of the bonds of the firm at the announcement of the repurchase. To address this issue, we

regress the firm’s change in bond yield spreads around the event on our alternative measures of related

conglomerate’s stake and the series of control variables we defined above. We augment them by adding

credit rating dummies, a dummy taking a value of 1 if the firm is rated and zero otherwise, Altman’s Z-

score, the firm’s (book) leverage the liquidity of the stock, the firm’s KZ index of financial constraints, a

measure of asset tangibility, the effective duration of the bond, a dummy taking the value of one if the bond

can be redeemed by the firm and zero otherwise, the coupon of the bond, the existence of covenants.

We focus on yield spreads as opposed to just bond prices and yields to better control for market

conditions. The bond yield spread is constructed as the difference between the bond yield and the yield of an

equivalent maturity Treasury bond.9 The data on bond yield, time-to-maturity and coupon rate are obtained

from Bloomberg. The data on Treasury constant maturity interest rates are obtained from the FRED

database (Federal Reserve Bank of St. Louis). The other variables are defined as in the previous

specifications. The regressions are estimated at the bond level and at a monthly frequency. They are

clustered at both firm and industry level.

The results are reported in Table 8. They show a strong negative correlation between the increase in

yield spreads ensuing the repurchase and the related conglomerate’s equity stake. A one standard deviation

higher stake is related to a 1.65bp lower increase in bond yield spread (or 35.02% relatively to the

unconditional mean). The use of interaction dummies shows that the impact is stronger the lower the rating

of the firm and for the firms with higher leverage. Moreover, the results are mostly concentrated in bonds

with no covenants and redeemable bonds. Overall, these findings support the blockage hypothesis and show

that the presence of the related conglomerate plays a reassuring role for the bondholders. This role is more

appreciated in the case the firm is more risky (higher leverage, low investment grade, non-rated) and in the

case the bond is less protected (no covenant). It is also interesting to note that it seems the impact to be

stronger for redeemable bond.

Up to now we have assumed that related conglomerates are indeed able to protect their bond stake in the

wake of a repurchase. Are they able? First, it has to be stressed that for the purpose of our analysis it is not 9 We adjust bond yield in the following way: for bond i at month t, we first calculate the time to

maturity and subtract the corresponding treasury constant maturity rate from its bond yield. In detail,

the adjustment is the 90-day T-bill rate if the time to maturity is less than one year, the 2-year T-bill

rate if the time to maturity is between 1 and 5 years, and the 10-year treasury constant maturity rate if

the time to maturity is larger than 5 years.

16

important the fact that they are able to protect their stake, as the fact that the market believes it. “Moral

suasion” by the side of the conglomerate which the firm will presumably use again to issue, the possibility

of using the equity stake to influence key votes and coordinate with other institutional investors and the

direct threat of “Walking the Wall Street way” dumping equity (Kahn and Winton (1998), Maug (1998)) are

some potential ways the related conglomerate can make itself heard. Recent evidence (Manconi and Massa

(2008), Souza (2008)) shows that institutional investors holding common equity and bond stake are able to

enforce a less risk-taking behavior of the managers by tying their compensation to the probability of distress

of the company.

6. Conclusion

We study how financial conglomerates that have a previous advisory/underwriting relationship with a firm

and hold a stake in it – related conglomerates – condition the firm’s payout policy. We focus on share

repurchases. We contrast two alternative hypotheses: the “pressure hypothesis” and the “blockage

hypothesis”. The first hypothesis posits that the equity stake induces the related conglomerate to pressures

the firm to enact a share repurchase. The ensuing increase in equity value allows the conglomerate to realize

a capital gain. This would predict a positive relation between the probability of the share repurchase and the

equity stake of the conglomerate and a positive relation between the latter and the stock price reaction

afterwards. The alternative hypothesis posits that the prior advisory position in the bond underwriting

market leaves the conglomerate with a bond stake that would drop in value in the case of a share repurchase.

The conglomerate, to preserve the value of its bond stake, would try to prevent the repurchase from

happening and, if it takes place, would be watchful to prevent a wealth transfer from bondholders to

equityholders. This predicts a negative relation between the probability of the share repurchase and the

equity stake of the conglomerate and a negative relation between the latter and the stock price reaction

afterwards.

We find support for the blockage hypothesis. We document a negative correlation between the

probability of the share repurchase and the fraction of bonds of the firm held by the related conglomerate.

This seems to be related to a deliberate effort by the related conglomerate to push against the repurchase

taking place. This is supported by the positive relation between relatedness and bond ownership.

This has significant return implications. A higher equity stake of the related conglomerates is associated

with lower stock abnormal returns, both around the repurchase and in the long run. In particular, a standard

deviation higher stake reduces the short term abnormal return by 43 bps and the long run (2 years) return by

238 bp. Stocks of repurchasing firms in which related investment banks hold a stake experience a

17

substantially lower abnormal returns over 36 months following the announcement then repurchases in which

there is no stake by the related conglomerates.

We argue that this is due to the inability to enforce a wealth transfer from the bondholders to the

equityholders. We provide evidence of this by focusing on the bond yields. We show that the stake of the

investment bank is linked to a lower drop in the bond yields: the higher the fraction of bonds held by related

conglomerates, the lower the drop in price of the bonds around the repurchase. In particular, a one standard

deviation higher stake reduces the drop in yield spreads by 1.65 bps.

Our results have important implications for the literature of share repurchases, as they provide evidence

of the signaling role played by the main shareholders. They also shed a new light on the role of

conglomerates in financial markets. By using their equity stake to protect their bond stake, they effectively

prevent a wealth transfer, reduce the yields for the corporations potentially reducing their cost of funding.

18

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Appendix: variables description Variable Description of Variable and Source of Data

Conglomerate Stake 1 fraction of the company’s market capitalization held by the related conglomerate. Calculated from Spectrum 13f using hand-collected data on conglomerate affiliations.

Conglomerate Stake 2 fraction of the company’s market capitalization held by the related conglomerate relatively to the company overall institutional ownership; Conglomerate Stake 1/ Institutional Ownership: Spectrum 13f and hand-collected data on conglomerate affiliations

Company Sophistication the logarithm of the number of debt and equity issues and M&A transaction that the company undertook over the previous 3 years: SDC/Thompson Financial

Institutional Ownership end of the year fraction of shares outstanding owned by institutional managers: Spectrum 13f.

ROE ratio of earnings to average equity for the prior fiscal year: CCM data 20/ (data 60 + data 60(t-1))/2).

Market cap end of the year equity market capitalization: (price x shares outstanding), CCM data 24 x data 25.

Book-to-Market, B/M ratio of long-term debt to the total equity of the firm: CCM data 9/ data 60.

Growth of Sales proportional change in sales over the prior fiscal year (ln(CCM data 12/12(t-1))).

Accounting Liquidity ratio of net liquid assets to total assets (CCM data (4-5/6)).

Price-to-Earnings, P/E ratio of the year-end stock price to earnings per share for the prior fiscal year: CCM data 24/data 58.

Debt-to-Equity, D/E ratio of long-term debt to the total equity of the firm: CCM data 9/ data 60.

Past Year Return compounded monthly return for the previous year: CRSP Monthly Stocks.

Volatility stock return volatility, computed as the standard deviation of daily stock returns for the previous year: CRSP Daily Stocks

Industry Concentration sum of the squared market share of each firm in the same industry during a year. Market share is defined as the total sales of the firm in a given year divided by the total sales of the industry in the year. The industry is defined at the three-digit SIC code level, where the SIC codes have been obtained from CRSP Monthly Stocks (SICCD). The sales data comes from CCM: data 12.

Misvaluation (RRV) sector-adjusted firm-specific valuation errors corresponding to the residuals of Model 3 in Rhodes-Kropf, Robinson and Viswanathan (RRV) (2005) that regresses market value on leverage, book value of assets and net income for each of twelve Fama-French sectors of the economy. Estimated from COMPUSTAT

TNA Total net assets of the institutional investor: estimated from Spectrum 13f using hand-collected data on conglomerate affiliations

Capital Expenditure, Capex ratio of capital expenditure to total assets of the firm: CCM data 128/ data 6.

β Company market β: estimated using CRSP Daily Stocks over the 3 year window ending 42 days prior to the repurchase announcement

Yield spread Difference between yields to maturity on corporate bond and Treasury with similar maturity: estimated from Lehman Brothers Bond Database data and FRED

Profitability Operating income before depreciation to total assets: CCM data 13 / data 6

Tangibility Net PPE to assets: CCM data 8 / data 6

Liquidity (l2) l2 measure of liquidity: obtained from Joel Hasbrouck’s website

KZ-index Kaplan-Zingales index of financial constraints

Z-score Altman’s index of bankruptcy likelihood

Rating dummies Dummy variables for each credit rating category (AAA, AA, A, BBB, BB, B, CCC, CC, C, NR (not rated): estimated using senior long-term debt rating CCM data 280

Repurchase A dummy variable which takes a value of 1 if a company’s common shares outstanding have decreased by more then 1 % over the following calendar year; CCM

22

Table 1: Descriptive statistics of data Panel A presents descriptive statistics of our control variables. Panel B presents descriptive statistics of our measures of equity and debt/equity ownership. All variables are described in Appendix. Panel A

n mean median std market cap 210637 2971.790 237.930 41390.660 B/M 210637 0.610 0.500 1.778 experience*102 210637 3.612 0.000 21.620 Growth sales 210637 0.149 0.105 0.376 ROE 210637 0.060 0.057 3.061 P/E 210637 19.680 14.604 24.479 D/E 210637 0.894 0.268 3.107 past year return 210637 0.279 0.213 0.530 stock volatility*103 210637 0.122 0.079 0.182 accounting liquidity 210637 0.284 0.269 0.232 ind. Concentration 210637 0.096 0.069 0.100 Stock Turnover 210637 1.398 0.801 4.491 credit spread*102 210637 0.913 0.827 0.272 Beta 6085 0.829 0.763 0.477 CAR3d 6085 0.022 0.016 0.074 CAR7d 6085 0.021 0.018 0.095 CAR1y 6085 0.069 0.058 0.387 CAR2y 6048 0.137 0.117 0.581 CAR3y 6047 0.207 0.174 0.722 TNA*10-9 4379426 26.090 2.228 78.743 change in bond spreads 2512 0.047 0.034 0.243 redeemable 2512 0.450 0.000 0.498 coupon 2512 7.295 7.150 1.334 effective duration 2512 6.166 5.535 3.270 covenant 2512 0.924 1.000 0.266 profitability 2512 0.150 0.149 0.053 book leverage 2512 0.313 0.319 0.114 tangibility 2512 0.374 0.378 0.196 z-score 2512 1.791 1.768 0.846 KZ-index 2512 -0.864 -0.842 0.616 liquidity (l2) 2512 82.561 69.580 60.665 Panel B Conglomerate Stake 1*102 210637 0.457 0.000 1.900 -- cond. on doing a repurchase 6048 0.525 0.000 2.034 Conglomerate Stake 2*102 210637 0.967 0.000 4.125 -- cond. on doing a repurchase 6048 1.038 0.000 3.464 Institutional Ownership*102 210637 38.265 35.790 25.886 -- cond. on doing a repurchase 6048 48.043 48.309 22.895 bond holding dummy 4379426 0.066 0.000 0.025 log(1+bond stake/ equity stake) 4379426 0.061 0.000 0.336 -- cond. on positive bond stake 284661 1.308 0.819 1.407

Table 2: Likelihood of undertaking a repurchase We report the results of the relationship between stock ownership by related conglomerates and the likelihood of doing a repurchase. The dependent variable is a dummy variable which takes a value of 1 if the company undertakes a repurchase over a subsequent year, 0 if not. Conglomerate stake 1 (Conglomerate stake 2) is a fraction of company shares outstanding (fraction of shares outstanding divided by company institutional ownership) which is held by financial conglomerates which affiliated investment banks underwrote company’s bond issues or commercial banks provided a loan within the previous 3 years. All variables are described in Appendix.

est. t-stat ME est. t-stat ME est. t-stat ME est. t-stat ME Conglomerate stake 1 -1.740 (-4.10) -9.692 ---* high dispersion of analyst forecasts -3.016 (-4.99) -19.812 ---* low dispersion of analyst forecasts -1.123 (-2.29) -7.379 Conglomerate stake 2 -1.044 (-3.95) -5.811 ---* high dispersion of analyst forecasts -1.703 (-3.73) -11.173 ---* low dispersion of analyst forecasts -0.736 (-2.31) -4.825

Company Sophistication -0.057 (-1.54) -0.316 -0.057 (-1.57) -0.318 -0.071 (-1.75) -0.467 -0.071 (-1.73) -0.465 Institutional Ownership 0.506 (8.41) 2.817 0.489 (8.50) 2.719 0.469 (5.85) 3.084 0.445 (5.75) 2.922 ROE 0.001 (0.37) 0.004 0.001 (0.35) 0.004 0.010 (2.46) 0.065 0.010 (2.44) 0.064 Log(B/M) 0.016 (0.92) 0.091 0.016 (0.90) 0.090 0.005 (0.25) 0.032 0.004 (0.22) 0.028 Log(Size) 0.080 (12.77) 0.446 0.081 (12.92) 0.449 0.089 (14.08) 0.586 0.090 (14.02) 0.587 Growth of Sales -0.096 (-5.68) -0.536 -0.095 (-5.73) -0.529 -0.109 (-3.62) -0.716 -0.107 (-3.62) -0.704 Accounting Liquidity 0.229 (3.15) 1.278 0.230 (3.16) 1.279 0.247 (2.84) 1.626 0.247 (2.83) 1.620 P/E 0.000 (0.40) 0.000 0.000 (0.37) 0.000 0.000 (0.23) 0.000 0.000 (0.21) 0.000 D/E 0.000 (5.91) 0.002 0.000 (6.01) 0.002 0.000 (3.78) 0.002 0.000 (3.84) 0.002 Volatility -88.581 (-7.86) -493.393 -88.622 (-7.79) -493.150 -119.842 (-7.50) -787.286 -120.110 (-7.56) -787.823 Returns -0.006 (-0.32) -0.035 -0.007 (-0.34) -0.037 -0.032 (-1.58) -0.208 -0.031 (-1.58) -0.207 Industry Herfindahl Index 0.048 (0.52) 0.267 0.046 (0.50) 0.258 0.043 (0.43) 0.282 0.042 (0.42) 0.273 Turnover -0.001 (-0.34) -0.008 -0.001 (-0.28) -0.007 0.002 (0.42) 0.011 0.002 (0.48) 0.013 Credit Spread -54.570 (-8.87) -303.955 -54.609 (-8.84) -303.879 -55.736 (-7.23) -366.154 -55.746 (-7.21) -365.651 Misvaluation -0.096 (-3.67) -0.535 -0.096 (-3.66) -0.535 -0.097 (-2.85) -0.637 -0.097 (-2.86) -0.638 Time Fixed Effects Yes Yes Yes Yes Industry fixed effects Yes Yes Yes Yes Clustering SIC2 SIC2 SIC2 SIC2

Pseudo R2 0.062 0.062 0.056 0.057

N 179814 179814 119559 119559

23

Table 3: Likelihood of being a company bondholder We estimate the relationship between the type of a company’s institutional shareholder and the likelihood of being a company bondholder and the relative ownership of company’s debt and equity. We distinguish between three types of institutional shareholders: financial conglomerates without prior relationship with the company (over the previous 3 years), financial conglomerates with prior relationship (i.e. those which have underwritten company bond issue or provided a loan), i.e. “related conglomerates”, and others. We restrict our analysis to the firms with at least 100 mln dollars in market capitalization. Panel A presents the univariate results between the type of institutional shareholder and the likelihood of being a company bondholder. We present the results both for full sample of institutional shareholders and for institutional shareholders with a positive bond ownership in any company. Wilcoxon test presented for the difference against the group of IBs with prior relationship. Panel B presents the results of multivariate regressions. The main explanatory variable of interest is the dummy variable Related Conglomerate, which takes a value of 1, if an institutional shareholder is a related conglomerate, 0 if not. For probit analysis the dependent variable is the dummy variable which takes a value of 1 an institutional shareholder holds company bonds, 0 if not. For tobit analysis the dependent variable is the relative ownership of company’s debt to equity by institutional shareholder defined as log(1+ debt stake/equity stake). Marginal effects are multiplied by 100. All other variables are defined in Appendix. Panel A: univariate analysis

likelihood of being a company bondholder

full sample only shareholders with any bond holdings

N mean Wilcoxon prob N mean Wilcoxon prob Others 4995308 0.048 405.90 0.01 1560691 0.153 174.02 0.01 unrelated conglomerates 1043057 0.125 187.04 0.01 863412 0.151 169.59 0.01 related conglomerates 94678 0.348 86906 0.379

24

Panel B: multivariate regressions full sample institutional shareholders with a positive bond ownership

probit tobit probit tobit

est. t-stat ME est. t-stat ME est. t-stat est. t-stat est. t-stat ME est. t-stat ME est. t-stat est. t-stat Any conglomerate 0.241 (25.01) 1.897 0.142 (2.31) -0.0842 (-8.27) -1.846 -0.203 (31.27) Unrelated conglom. 0.130 (12.83) 1.107 -0.108 (-2.06) -0.109 (-10.42) -2.372 -0.234 (-9.36)Related conglom. 0.661 (23.61) 9.029 0.753 (6.54) 0.412 (13.79) 11.101 0.352 (8.41) log(TNA) 0.255 (68.81) 2.011 0.258 (71.04) 2.040 0.504 (25.89) 0.509 (25.88) 0.149 (41.23) 3.332 0.149 (41.23) 3.297 0.150 (13.67) 0.149 (13.62)Inst. Ownership 0.411 (3.83) 3.238 0.403 (3.84) 3.181 0.685 (2.89) 0.668 (2.85) 0.501 (3.74) 11.111 0.488 (3.75) 10.792 0.634 (3.34) 0.617 (3.30) log(market cap) 0.220 (9.30) 1.735 0.217 (9.23) 1.712 0.253 (4.08) 0.246 (4.01) 0.278 (9.28) 6.157 0.272 (9.19) 6.012 0.321 (7.29) 0.312 (7.23) log(B/M) 0.305 (10.27) 2.403 0.302 (10.20) 2.384 0.978 (11.01) 0.972 (10.95) 0.374 (10.90) 8.304 0.368 (10.77) 8.135 0.609 (11.02) 0.600 (11.00)Growth of Sales -0.047 (-0.87) -0.368 -0.049 (-0.92) -0.386 -0146 (-0.78) -0.150 (-0.80) -0.041 (-0.67) -0.918 -0.046 (-0.77) -1.029 -0.053 (-0.44) -0.058 (-0.53)ROE 0.013 (2.01) 0.104 0.013 (2.04) 0.105 0.049 (4.39) 0.049 (4.44) 0.133 (1.87) 0.030 0.133 (1.90) 0.029 0.023 (2.75) 0.023 (2.71) Capex 0.688 (1.87) 5.417 0.673 (1.85) 5.318 2.700 (1.98) 2.668 (1.96) 0.862 (2.01) 19.109 0.830 (1.97) 18.378 1.628 (1.96) 1.594 (1.85) P/E -0.001 (-1.42) -0.003 -0.000 (-1.40) -0.003 -0.001 (-1.64) -0.001 (-1.62) -0.001 (-1.42) -0.012 -0.001 (-1.39) -0.011 -0.001 (-1.72) -0.001 (-1.77)D/E 0.175 (8.87) 1.381 0.173 (8.76) 1.136 0.517 (6.67) 0.511 (6.62) 0.228 (9.27) 5.047 0.222 (9.07) 4.922 0.354 (6.81) 0.347 (6.86) Ind. concentration 0.849 (2.37) 6.689 0.844 (2.39) 6.669 2.540 (2.12) 2.525 (2.12) 1.140 (2.67) 25.276 1.126 (2.69) 24.930 1.725 (2.43) 1.707 (2.38) Bond league table Yes Yes Yes Yes Yes Yes Yes Yes Industry dummies Yes Yes Yes Yes Yes Yes Yes Yes Time dummies Yes Yes Yes Yes Yes Yes Yes Yes Clustering Cusip Cusip Cusip Cusip Cusip Cusip Cusip Cusip

R2 0.195 0.196 0.080 0.080 0.110 0.114 0.059 0.060

Nobs 4379394 4379394 4379394 4379394 1779166 1779166 1779166 1779166

25

26

Table 4: Misvaluation We report the results of the relationship between the stock ownership by related conglomerates and company misvaluation. Misvaluation is estimated according to Rhodes-Kropf et al. (2005) Model 3. Panel A presents results of univariate analysis. We split companies into three groups based on related conglomerate ownership (related conglomerate ownership interacted with dispersion of analyst forecasts): none, low and high (relative to the median of positive ownership subsample). Panel B reports the results of multivariate regressions. We report the results both for ownership by related conglomerates and for ownership interacted with high/low dispersion of analyst forecasts dummies. Conglomerate stake 1 (Conglomerate stake 2) is a fraction of company shares outstanding (fraction of shares outstanding divided by company institutional ownership) which is held by financial conglomerates which affiliated investment banks underwrote company’s bond issues or commercial banks provided a loan within the previous 3 years. All variables are described in Appendix. Panel A: univariate results

Conglomerate stake 1

Conglomerate stake 1 * disp. of analyst forecasts

Conglomerate stake 2

Conglomerate stake 2 * disp. of analyst forecasts

mean median mean median mean median Mean Median none -0.063 -0.066 -0.063 -0.066 -0.063 -0.066 -0.063 -0.066 low 0.084 0.061 0.087 0.062 0.071 0.060 0.085 0.061 high 0.105 0.083 0.096 0.082 0.108 0.083 0.099 0.082

t-stat Wilcoxon t-stat Wilcoxon t-stat Wilcoxon t-stat Wilcoxon low-none 11.17 11.75 12.37 12.74 8.80 9.50 12.27 12.65

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) high-none 14.11 13.97 13.47 13.52 15.54 15.46 13.55 13.62

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) high-low 1.29 1.70 0.57 1.30 2.16 2.45 0.91 1.56

(0.20) (0.05) (0.58) (0.10) (0.04) (0.01) (0.37) (0.06) Panel B: multivariate results

est. t-stat est. t-stat est. t-stat est. t-stat Conglomerate stake 1 0.254 (2.17) ---* high dispersion of analyst forecasts 0.333 (2.88) ---* low dispersion of analyst forecasts 0.019 (0.14) Conglomerate stake 2 0.051 (1.05) ---* high dispersion of analyst forecasts 0.122 (2.29) ---* low dispersion of analyst forecasts 0.006 (0.09)

Company Sophistication 0.010 (3.01) 0.011 (3.45) 0.004 (1.52) 0.004 (1.68) Institutional Ownership 0.006 (0.39) 0.009 (0.61) 0.013 (0.93) 0.016 (1.17) ROE 0.001 (0.66) 0.001 (0.66) 0.003 (0.71) 0.003 (0.71) Log(B/M) -0.311 (-24.99) -0.311 (-24.97) -0.295 (-22.97) -0.295 (-22.93)Log(Size) 0.014 (3.40) 0.015 (3.45) 0.026 (5.99) 0.026 (6.05) Growth of Sales 0.053 (3.35) 0.053 (3.35) 0.064 (2.82) 0.064 (2.82) Accounting Liquidity -0.209 (-6.07) -0.209 (-6.08) -0.138 (-4.43) -0.138 (-4.42) P/E 0.000 (-0.17) 0.000 (-0.17) 0.000 (0.41) 0.000 (0.41) D/E -0.001 (-4.70) -0.001 (-4.72) -0.001 (-4.76) -0.001 (-4.76) Volatility 12.597 (4.58) 12.685 (4.57) 14.242 (3.36) 14.399 (3.40) Returns 0.018 (2.33) 0.018 (2.31) 0.027 (2.48) 0.027 (2.47) Industry Herfindahl Index 0.092 (1.28) 0.092 (1.27) 0.117 (1.89) 0.117 (1.89) Turnover 0.007 (4.64) 0.007 (4.62) 0.007 (5.51) 0.007 (5.48) Credit Spread -0.233 (-0.34) -0.246 (-0.36) 0.040 (0.05) 0.040 (0.05) Time Fixed Effects Yes Yes Yes Yes Industry fixed effects Yes Yes Yes Yes Clustering SIC2 SIC2 SIC2 SIC2

R2 0.412 0.412 0.394 0.394

N 181110 181110 121661 121661

27

Table 5: Short-run stock market reaction We report the results of the relationship between the stock ownership by related conglomerates and stock price reaction to repurchase announcement. The dependent variable is a four-factor adjusted abnormal return on a company stock over the (-1;+1) or (-3;+3) days event window, where day 0 is the repurchase announcement day. Factor loadings are estimated with over (-252;-62) trading days event window. Conglomerate stake 1 (Conglomerate stake 2) is a fraction of company shares outstanding (fraction of shares outstanding divided by company institutional ownership) which is held by financial conglomerates which affiliated investment banks underwrote company’s bond issues or commercial banks provided a loan within the previous 3 years. All variables are described in Appendix. Panel A presents the results of univariate analysis. We split companies into three groups: no relate conglomerate ownership, low and high (relatively to median of positive ownership subsample) conglomerate ownership. Panel B reports results of multivariate regressions. Panel A: univariate results

Conglomerate stake 1 Conglomerate stake 2

(-1;+1) (-3;+3) (-1;+1) (-3;+3)

n mean median mean median n mean median mean Median none 4473 0.022 0.016 0.023 0.020 none 4473 0.022 0.016 0.023 0.020 low 806 0.016 0.012 0.014 0.012 low 806 0.019 0.014 0.015 0.013 high 806 0.011 0.011 0.006 0.009 high 806 0.010 0.010 0.007 0.009

t-stat (prob)

Wilcoxon (prob)

t-stat (prob)

Wilcoxon(prob)

t-stat (prob)

Wilcoxon (prob)

t-stat (prob)

Wilcoxon(prob)

low-none -2.75 -2.87 -3.11 -3.68 low-none -1.35 -1.30 -2.47 -2.91 (0.01) (0.01) (0.01) (0.01) (0.18) (0.10) (0.02) (0.01)

high-none -5.40 -5.20 -5.92 -5.49 high-none -6.12 -6.08 -6.04 -5.86 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

high-low -2.00 -1.82 -2.13 -1.39 high-low -2.93 -3.03 -1.94 -1.43 (0.05) (0.04) (0.04) (0.09) (0.01) (0.01) (0.06) (0.08)

Panel B: multivariate analysis

(-1;+1) (-1;+1) (-3;+3) (-3;+3)

est. t-stat est. t-stat est. t-stat est. t-stat Conglomerate stake 1 -0.089 (-2.02) -0.209 (-3.08) Conglomerate stake 2 -0.070 (-2.85) -0.109 (-3.30)

Company Sophistication -0.003 (-1.15) -0.003 (-1.07) -0.007 (-2.25) -0.007 (-2.33) Institutional Ownership -0.011 (-1.92) -0.012 (-2.08) -0.010 (-1.38) -0.012 (-1.62) ROE 0.004 (1.79) 0.004 (1.77) 0.002 (0.76) 0.002 (0.72) Log(B/M) 0.004 (1.73) 0.004 (1.71) 0.010 (3.23) 0.010 (3.21) Log(Size) -0.003 (-4.59) -0.003 (-4.51) -0.002 (-1.82) -0.002 (-1.91) Growth of Sales 0.002 (0.59) 0.002 (0.64) -0.003 (-0.59) -0.003 (-0.57) Accounting Liquidity -0.005 (-0.69) -0.005 (-0.71) -0.015 (-1.71) -0.015 (-1.69) P/E 0.000 (-1.49) 0.000 (-1.50) 0.000 (-1.67) 0.000 (-1.69) D/E 0.000 (-0.50) 0.000 (-0.51) 0.000 (0.52) 0.000 (0.55) Volatility 7.225 (4.24) 7.214 (4.25) 10.378 (6.44) 10.330 (6.46) Returns -0.004 (-1.13) -0.004 (-1.14) -0.009 (-1.86) -0.009 (-1.86) Industry Herfindahl Index 0.001 (0.07) 0.001 (0.08) -0.001 (-0.03) -0.001 (-0.03) Turnover -0.002 (-0.80) -0.001 (-0.79) -0.002 (-1.25) -0.002 (-1.24) β 0.004 (0.90) 0.004 (0.91) 0.000 (0.11) 0.001 (0.17) Misvaluation -0.007 (-1.95) -0.007 (-1.96) -0.014 (-2.20) -0.014 (-2.20) Heckman's lambda -0.034 (-1.17) -0.021 (-1.14) -0.051 (-1.85) -0.041 (-1.64) Time Fixed Effects Yes Yes Yes Yes Industry fixed effects Yes Yes Yes Yes Clustering SIC2 SIC2 SIC2 SIC2

Pseudo R2 0.042 0.042 0.040 0.040

N 6085 6085 6085 6085

28

Table 6: Long-run performance of repurchases – cumulative abnormal returns We report the results of the relationship between the stock ownership by related conglomerates and the long-run performance of repurchases. The dependent variable is the cumulative abnormal (four-factor adjusted) return on the company stock over 1, 2, or 3 years period following the announcement of repurchase. Factor loadings are estimated with over (-252;-62) trading days event window. Conglomerate stake 1 (Conglomerate stake 2) is a fraction of company shares outstanding (fraction of shares outstanding divided by company institutional ownership) which is held by financial conglomerates which affiliated investment banks underwrote company’s bond issues or commercial banks provided a loan within the previous 3 years. All variables are described in Appendix. Panel A presents the results of univariate analysis. Panel B reports the results of multivariate analysis of the relationship between for ownership by related conglomerates and abnormal returns. Panel B presents the results for the interaction with the dispersion of analyst forecasts. Panel A: univariate analysis Abnormal return

Related Conglomerate Stake 1(2) 1 year 2 year 3 year

n mean median mean median mean median none 4473 0.080 0.067 0.159 0.138 0.237 0.203 positive 1583 0.035 0.027 0.072 0.054 0.116 0.082

t-stat

(prob) Wilcoxon

(prob) t-stat

(prob) Wilcoxon

(prob) t-stat

(prob) Wilcoxon

(prob) -3.98 -4.31 -5.1 -6.19 -5.73 -6.47 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Panel B: Conglomerate stake and long-term cumulative abnormal returns 1 year 2 years 3 years

est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat Conglomerate stake 1 -0.710 (-2.31) -1.173 (-2.29) -0.973 (-1.78) Conglomerate stake 2 -0.358 (-2.20) -0.772 (-2.40) -0.313 (-0.67)

Company Sophistication -0.018 (-1.48) -0.019 (-1.57) -0.044 (-2.06) -0.044 (-1.98) -0.049 (-1.84) -0.054 (-2.17) Institutional Ownership -0.088 (-2.78) -0.094 (-2.90) -0.137 (-2.96) -0.147 (-3.15) -0.192 (-3.16) -0.198 (-3.36) ROE 0.041 (4.06) 0.041 (4.03) 0.022 (1.43) 0.022 (1.41) 0.085 (2.83) 0.085 (2.82) Log(B/M) 0.027 (2.26) 0.027 (2.25) 0.060 (3.47) 0.059 (3.43) 0.095 (4.06) 0.095 (4.06) Log(Size) 0.001 (0.12) 0.001 (0.10) 0.010 (1.41) 0.011 (1.43) 0.017 (1.73) 0.016 (1.73) Growth of Sales -0.033 (-1.55) -0.033 (-1.54) -0.101 (-4.17) -0.100 (-4.15) -0.146 (-3.79) -0.147 (-3.84) Accounting Liquidity -0.038 (-1.08) -0.038 (-1.06) -0.033 (-0.73) -0.034 (-0.75) 0.004 (0.05) 0.006 (0.08) P/E 0.000 (-0.40) 0.000 (-0.42) 0.000 (-0.82) 0.000 (-0.86) 0.000 (-0.48) 0.000 (-0.49) D/E 0.000 (1.93) 0.000 (1.92) 0.000 (2.34) 0.000 (2.36) 0.000 (2.57) 0.000 (2.58) Volatility 11.794 (1.13) 11.632 (1.11) 55.841 (3.00) 55.658 (3.00) 102.028 (4.27) 101.718 (4.28) Returns -0.013 (-0.76) -0.013 (-0.76) -0.098 (-4.75) -0.099 (-4.76) -0.155 (-4.57) -0.155 (-4.56) Industry Herfindahl Index 0.059 (0.97) 0.059 (0.97) 0.040 (0.27) 0.040 (0.27) 0.140 (0.66) 0.139 (0.66) Turnover 0.013 (2.64) 0.013 (2.63) 0.026 (2.66) 0.026 (2.66) 0.038 (2.28) 0.037 (2.29) Beta -0.057 (-3.06) -0.056 (-3.00) -0.133 (-4.01) -0.132 (-4.00) -0.159 (-3.70) -0.158 (-3.67) Misvaluation -0.009 (-0.40) -0.009 (-0.41) 0.005 (0.18) 0.004 (0.16) 0.023 (0.50) 0.023 (0.50) Heckman's lambda -0.136 (-2.35) -0.077 (-1.23) -0.130 (-2.27) -0.075 (-1.20) -0.700 (-3.09) -0.714 (-3.57) Time Fixed Effects Yes Yes Yes Yes Yes Yes Industry fixed effects Yes Yes Yes Yes Yes Yes Clustering SIC2 SIC2 SIC2 SIC2 SIC2 SIC2

Pseudo R2 0.058 0.058 0.089 0.089 0.115 0.115

N 6085 6085 6048 6048 6047 6047

29

Panel C: Interaction of conglomerate stake and dispersion of analyst forecasts and long-term cumulative abnormal returns 1 year 2 years 3 years

est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat Conglomerate stake 1 ---* high disp. of analyst forecasts -1.522 (-3.10) -3.402 (-4.22) -3.962 (-4.21) ---* low disp. of analyst forecasts -0.440 (-1.19) -0.472 (-1.00) -0.403 (-0.63) Conglomerate stake 2 ---* high disp. of analyst forecasts -0.661 (-2.67) -1.723 (-3.65) -2.307 (-4.82) ---* low disp. of analyst forecasts -0.251 (-1.18) -0.225 (-0.74) -0.142 (-0.33)

Company Sophistication -0.012 (-0.96) -0.013 (-1.06) -0.047 (-2.41) -0.050 (-2.53) -0.058 (-2.10) -0.060 (-2.16) Institutional Ownership -0.076 (-1.85) -0.086 (-2.06) -0.100 (-1.74) -0.119 (-2.03) -0.195 (-2.86) -0.216 (-3.16) ROE 0.033 (2.48) 0.033 (2.49) 0.011 (0.76) 0.010 (0.71) 0.097 (3.11) 0.095 (3.07) Log(B/M) 0.035 (2.40) 0.035 (2.40) 0.056 (3.22) 0.055 (3.19) 0.106 (4.76) 0.106 (4.75) Log(Size) 0.004 (0.78) 0.004 (0.76) 0.020 (2.86) 0.019 (2.82) 0.031 (2.79) 0.030 (2.73) Growth of Sales -0.043 (-1.27) -0.043 (-1.28) -0.179 (-4.54) -0.178 (-4.52) -0.259 (-5.24) -0.257 (-5.18) Accounting Liquidity 0.004 (0.09) 0.004 (0.10) 0.021 (0.37) 0.021 (0.37) 0.089 (1.07) 0.088 (1.06) P/E 0.000 (-0.36) 0.000 (-0.38) 0.000 (-0.74) 0.000 (-0.77) 0.000 (-0.46) 0.000 (-0.49) D/E 0.001 (5.51) 0.001 (5.43) 0.000 (4.25) 0.000 (4.29) 0.001 (4.24) 0.001 (4.43) Volatility 5.239 (0.31) 5.228 (0.30) 76.942 (2.87) 76.903 (2.80) 122.609 (3.30) 122.591 (3.24) Returns -0.008 (-0.40) -0.007 (-0.39) -0.087 (-4.31) -0.087 (-4.28) -0.123 (-3.90) -0.123 (-3.91) Industry Herfindahl Index 0.057 (1.19) 0.056 (1.18) 0.161 (1.99) 0.159 (1.98) 0.237 (1.60) 0.236 (1.60) Turnover 0.018 (3.64) 0.017 (3.51) 0.029 (2.69) 0.029 (2.65) 0.048 (2.98) 0.049 (3.00) Beta -0.052 (-2.51) -0.051 (-2.45) -0.121 (-3.33) -0.118 (-3.29) -0.155 (-3.27) -0.153 (-3.23) Misvaluation -0.009 (-0.40) -0.009 (-0.41) 0.005 (0.18) 0.004 (0.16) 0.023 (0.50) 0.023 (0.50) Heckman's lambda -0.397 (-3.05) -0.415 (-3.64) -0.321 (-2.92) -0.321 (-2.89) -0.778 (-4.37) -0.837 (-5.53) Time Fixed Effects Yes Yes Yes Yes Yes Yes Industry fixed effects Yes Yes Yes Yes Yes Yes Clustering SIC2 SIC2 SIC2 SIC2 SIC2 SIC2

Pseudo R2 0.074 0.073 0.113 0.113 0.147 0.149 N 4599 4599 4583 4583 4579 4579

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Table 7: Long-term abnormal performance -- calendar portfolios

We report the abnormal returns to calendar portfolios formed of the stocks which undertook a repurchase. At the end of each month we identify companies which conducted a repurchase within the last 35 months; these constitute the portfolio of all repurchases. We also consider a variety of portfolios based on the degree of related conglomerate ownership. If ownership by the related conglomerates was zero at the end of the last quarter preceding the repurchase announcement than such firm fall into “no conglomerate ownership” portfolio, if there was some ownership then a company goes into “positive conglomerate ownership” portfolio. The latter is subsequently divided into “low conglomerate stake 1 (2) ownership” and “high conglomerate stake 1 (2) ownership” based on the median of positive Conglomerate Stake 1 (2) ownership prior to the announcement. Portfolios, which are based on the interaction between related conglomerate ownership and dispersion of analyst forecasts, are constructed in a similar way. Panel A (B) presents the results for equally- (value) weighted portfolios. Panel A: equally-weighted portfolios N alpha t-stat mktrf t-stat smb t-stat hml t-stat umd t-stat adj R2 all repurchases (1) 276 0.0020 (2.37) 0.9863 (46.07) 0.5650 (21.48) 0.3942 (12.43) -0.1581 (-8.44) 0.921

conglomerate ownership none (2) 276 0.0025 (2.64) 0.9400 (39.10) 0.6010 (20.35) 0.3990 (11.20) -0.1276 (-6.07) 0.896 positive (3) 276 0.0007 (0.77) 1.1148 (50.96) 0.4256 (15.83) 0.3538 (10.92) -0.2149 (-11.23) 0.930 low positive conglomerate stake 1 (4) 276 0.0015 (1.50) 1.1104 (43.81) 0.4940 (15.86) 0.2996 (7.98) -0.2343 (-10.57) 0.914 high positive conglomerate stake 1 (5) 276 -0.0002 (-0.18) 1.1194 (43.86) 0.3571 (11.39) 0.4088 (10.81) -0.1953 (-8.75) 0.902 low positive conglomerate stake 2 (6) 276 0.0012 (1.21) 1.1273 (45.74) 0.4583 (15.14) 0.3497 (9.58) -0.2180 (-10.11) 0.916 high positive conglomerate stake 2 (7) 276 0.0001 (0.13) 1.1022 (41.77) 0.3922 (12.10) 0.3562 (9.11) -0.2115 (-9.16) 0.898

conglomerate ownership*dispersion none (8) 276 0.0026 (2.79) 0.9487 (40.02) 0.6098 (20.94) 0.3921 (11.17) -0.1395 (-6.73) 0.901 positive (9) 276 -0.0003 (-0.30) 1.1261 (53.63) 0.3602 (13.96) 0.3866 (12.43) -0.2094 (-11.40) 0.934 low positive conglomerate stake 1*dispersion (10) 276 0.0021 (2.17) 1.0872 (44.29) 0.3142 (10.42) 0.3428 (9.43) -0.1688 (-7.86) 0.904 high positive conglomerate stake 1*dispersion (11) 276 -0.0026 (-2.54) 1.1649 (45.03) 0.4063 (12.78) 0.4305 (11.23) -0.2501 (-11.05) 0.910 low positive conglomerate stake 2*dispersion (12) 276 0.0015 (1.53) 1.0984 (43.87) 0.2885 (9.38) 0.3658 (9.86) -0.1603 (-7.32) 0.900 high positive conglomerate stake 2*dispersion (13) 276 -0.0020 (-1.92) 1.1537 (43.65) 0.4321 (13.31) 0.4074 (10.40) -0.2586 (-11.19) 0.907

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Panel B: value-weighted portfolios N alpha t-stat mktrf t-stat smb t-stat hml t-stat umd t-stat adj R2 all repurchases (1) 276 0.0036 (4.67) 1.0032 (52.04) -0.1204 (-5.08) 0.0607 (2.12) -0.1636 (-9.70) 0.930

conglomerate ownership none (2) 276 0.0048 (4.32) 1.0226 (36.13) -0.0152 (-0.44) 0.0630 (1.50) -0.1654 (-6.68) 0.867 positive (3) 276 0.0025 (2.80) 1.0032 (43.76) -0.1694 (-6.01) 0.0734 (2.16) -0.1681 (-8.38) 0.903 low positive conglomerate stake 1 (4) 276 0.0033 (2.67) 0.9763 (31.08) -0.0323 (-0.84) 0.0641 (1.38) -0.1417 (-5.15) 0.826 high positive conglomerate stake 1 (5) 276 0.0023 (1.97) 1.0270 (35.13) -0.2422 (-6.74) 0.0674 (1.56) -0.1850 (-7.24) 0.859 low positive conglomerate stake 2 (6) 276 0.0031 (2.58) 0.9728 (32.52) -0.0465 (-1.27) 0.0790 (1.78) -0.1408 (-5.38) 0.837 high positive conglomerate stake 2 (7) 276 0.0020 (1.64) 1.0333 (33.58) -0.2466 (-6.52) 0.0629 (1.38) -0.1766 (-6.56) 0.847

conglomerate ownership*dispersion None (8) 276 0.0048 (4.57) 1.0075 (37.88) -0.0068 (-0.21) 0.0512 (1.30) -0.1389 (-5.97) 0.877 Positive (9) 276 0.0023 (2.50) 1.0065 (42.82) -0.1821 (-6.30) 0.0841 (2.41) -0.1809 (-8.79) 0.900 low positive conglomerate stake 1*dispersion (10) 276 0.0029 (2.38) 0.9286 (30.29) -0.1808 (-4.80) 0.0255 (0.56) -0.1236 (-4.61) 0.818 high positive conglomerate stake 1*dispersion (11) 276 0.0010 (0.77) 1.1100 (34.85) -0.1668 (-4.26) 0.1851 (3.92) -0.2217 (-7.96) 0.852 low positive conglomerate stake 2*dispersion (12) 276 0.0030 (2.54) 0.9434 (31.97) -0.1695 (-4.67) 0.0422 (0.97) -0.1223 (-4.74) 0.832 high positive conglomerate stake 2*dispersion (13) 276 0.0009 (0.69) 1.0960 (34.16) -0.1727 (-4.38) 0.1751 (3.68) -0.2221 (-7.91) 0.848

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Table 8: Change in bond spreads following the repurchase announcement We report the results of the relationship between stock ownership by related conglomerates and the change in bond spreads following the repurchase announcement. The dependent variable is the change in the bond spreads between months t-1 and t+1 with month t being a month of a repurchase announcement. Every bond with available data is treated as a separate observation. We cluster standard errors at the company level. Conglomerate stake 1 (Conglomerate stake 2) is a fraction of company shares outstanding (fraction of shares outstanding divided by company institutional ownership) which is held by financial conglomerates which affiliated investment banks underwrote company’s bond issues or commercial banks provided a loan within the previous 3 years. All variables are described in Appendix. Panel A(B) presents the results for the conglomerate stake 1 (2). Panel A: Conglomerate stake 1

est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat Conglomerate stake 1 -0.372 (-2.44) -0.372 (-1.13) --- * redeemable bond -0.677 (-2.16) --- * non-redeem. bond -0.070 (-0.14) --- * covenant -0.049 (-0.13) --- * no covenant -1.072 (-3.53) --- * investment grade 0.095 (0.21) --- * non-investm. grade -2.606 (-2.75) --- * non-rated or missing -0.575 (-1.58) --- * high book leverage -0.633 (-1.92) --- * low book leverage 0.494 (0.85) inst. equity ownership 0.123 (2.49) 0.123 (1.30) 0.130 (1.37) 0.129 (1.39) 0.119 (1.27) 0.116 (1.21) log (market cap) -0.020 (-2.82) -0.020 (-1.54) -0.020 (-1.57) -0.020 (-1.55) -0.022 (-1.75) -0.021 (-1.67)log (book-to-market) -0.009 (-0.81) -0.009 (-0.42) -0.011 (-0.52) -0.013 (-0.64) -0.011 (-0.52) -0.008 (-0.40)coupon 0.002 (0.48) 0.002 (0.38) 0.001 (0.21) 0.000 (0.08) 0.002 (0.37) 0.001 (0.18) redeemable bond 0.024 (2.22) 0.024 (1.57) 0.044 (2.16) 0.031 (1.95) 0.024 (1.58) 0.028 (1.78) covenant 0.036 (1.80) 0.036 (1.06) 0.025 (0.71) -0.029 (-0.83) 0.027 (0.83) 0.024 (0.78) effective duration 0.001 (0.61) 0.001 (0.47) 0.001 (0.50) 0.001 (0.30) 0.001 (0.31) 0.001 (0.26) profitability 0.080 (0.56) 0.080 (0.35) 0.071 (0.31) 0.050 (0.22) 0.055 (0.24) 0.121 (0.53) book leverage -0.082 (-1.50) -0.082 (-0.87) -0.081 (-0.85) -0.087 (-0.90) -0.085 (-0.89) -0.023 (-0.22)tangibility -0.083 (-2.64) -0.083 (-1.29) -0.079 (-1.23) -0.083 (-1.28) -0.087 (-1.32) -0.091 (-1.39)Z-score -0.022 (-2.29) -0.022 (-1.16) -0.021 (-1.13) -0.019 (-1.01) -0.020 (-1.04) -0.021 (-1.10)KZ-index -0.030 (-2.36) -0.030 (-1.33) -0.029 (-1.29) -0.029 (-1.31) -0.032 (-1.41) -0.031 (-1.37)Liquidity (l2) 0.001 (2.96) 0.001 (1.73) 0.001 (1.68) 0.001 (1.56) 0.001 (1.84) 0.001 (2.05) Industry dummies SIC1 SIC1 SIC1 SIC1 SIC1 SIC1 Time dummis Yes Yes Yes Yes Yes Yes 10 Rating dummies Yes Yes Yes Yes Yes Yes Clustering Sic1 cusip cusip cusip cusip cusip

Adj R2 0.123 0.123 0.123 0.125 0.125 0.126 Nobs 2512 2512 2512 2512 2512 2512

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Panel B: Conglomerate stake 2 est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat est. t-stat

Conglomerate stake 2 -0.184 (-1.93) -0.184 (-0.88) --- * redeemable bond -0.427 (-2.09) --- * non-redeem. bond -0.001 (-0.01) --- * covenant -0.015 (-0.06) --- * no covenant -0.754 (-3.23) --- * investment grade 0.084 (0.29) --- * non-investm. grade -1.705 (-2.00) --- * non-rated or missing -0.301 (-1.24) --- * high book leverage -0.376 (-1.77) --- * low book leverage 0.241 (0.61) inst. equity ownership 0.100 (1.01) 0.100 (1.11) 0.110 (1.20) 0.121 (1.36) 0.104 (1.15) 0.089 (0.98) log (market cap) -0.021 (-1.52) -0.021 (-1.58) -0.021 (-1.62) -0.020 (-1.56) -0.023 (-1.78) -0.023 (-1.72)log (book-to-market) -0.009 (-0.60) -0.009 (-0.41) -0.011 (-0.51) -0.013 (-0.63) -0.010 (-0.50) -0.008 (-0.37)coupon 0.002 (0.43) 0.002 (0.42) 0.001 (0.23) 0.001 (0.12) 0.002 (0.44) 0.001 (0.24) redeemable bond 0.022 (1.51) 0.022 (1.49) 0.045 (2.25) 0.030 (1.88) 0.022 (1.49) 0.024 (1.55) covenant 0.041 (1.26) 0.041 (1.19) 0.029 (0.83) -0.031 (-0.86) 0.035 (1.07) 0.034 (1.06) effective duration 0.001 (0.34) 0.001 (0.50) 0.001 (0.54) 0.001 (0.33) 0.001 (0.34) 0.001 (0.41) profitability 0.088 (0.34) 0.088 (0.38) 0.082 (0.36) 0.056 (0.24) 0.061 (0.26) 0.125 (0.54) book leverage -0.084 (-0.73) -0.084 (-0.88) -0.082 (-0.86) -0.087 (-0.90) -0.089 (-0.92) -0.041 (-0.38)tangibility -0.082 (-0.79) -0.082 (-1.27) -0.078 (-1.21) -0.084 (-1.29) -0.084 (-1.28) -0.087 (-1.34)Z-score -0.021 (-0.87) -0.021 (-1.15) -0.021 (-1.14) -0.019 (-1.02) -0.020 (-1.05) -0.021 (-1.14)KZ-index -0.030 (-3.18) -0.030 (-1.33) -0.029 (-1.30) -0.029 (-1.32) -0.032 (-1.43) -0.030 (-1.35)Liquidity (l2) 0.001 (2.20) 0.001 (1.79) 0.001 (1.78) 0.001 (1.60) 0.001 (1.86) 0.001 (2.01) Industry dummies SIC1 SIC1 SIC1 SIC1 SIC1 SIC1 Time dummis Yes Yes Yes Yes Yes Yes 10 Rating dummies Yes Yes Yes Yes Yes Yes Clustering Sic1 cusip cusip cusip cusip cusip

Adj R2 0.120 0.120 0.123 0.125 0.124 0.122 Nobs 2512 2512 2512 2512 2512 2512

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Graph 1: Cumulative abnormal returns to repurchasing firms We plot the cumulative abnormal returns (relatively to a four-factor model) for repurchasing firms over 3 years period after the repurchase announcement on a daily basis. We consider equally and value-based portfolios based on whether related conglomerates had an equity stake in a repurchasing company in a quarter preceding the repurchase announcement. Definition of related conglomerate stake is provided in Appendix. Vertical axis depicts abnormal performance. Horizontal axis plots days following the repurchase announcement.

0.00

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0 126 252 378 504 630 756

related conglomerate stake -- EW

no related conglomerate stake -- EW

related conglomerate stake -- VW

no related conglomerate stake -- VW

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