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RESEARCH PAPERS | CORPORATE FINANCE

Short Selling

STRATEGIC TRADING AS A RESPONSE TO SHORT SELLERS

Marco Di Maggio, Francesco A. Franzoni, Massimo Massa, and Roberto Tubaldi
2019
We study empirically informed traders’ reaction to the presence of short sellers in the market. We find that investors with positive views on a stock strategically slow down their trades when short sellers are present in the same stock. Moreover, they purchase larger amounts to take advantage of the price decline induced by short sellers. Furthermore, they break up their buy trades across multiple brokers, suggesting that they wish to hide from the short sellers. This behavior may impact price discovery, as we find a sizeable reduction of positive information impounding for stocks more exposed to short selling during information sensitive periods. The evidence is confirmed exploiting exogenous variation in short interest provided by the Reg SHO Pilot Program. The findings have relevance for the regulatory debate on the market impact of short selling. >more


Credit Ratings

DO MULTIPLE CREDIT RATINGS REDUCE MONEY LEFT ON THE TABLE? EVIDENCE FROM U.S. IPOS

Marc Goergen, Dimitrios Gounopoulos, and Panagiotis Koutroumpis
2019
We examine initial public offerings (IPOs) with single, multiple, and no credit ratings. We document a beneficial effect of credit ratings provided by the three main credit rating agencies on IPO underpricing, which is amplified by the existence of multiple credit ratings. Multiple ratings also reduce the extent of filing price revisions. Credit rating levels matter for IPOs with more than one rating but not for those with a single rating. Firms with multiple credit ratings also have higher probabilities of survival than those with a single or no rating. Finally, IPOs awarded a first credit rating on the borderline between investment and non-investment grade are more likely to seek an additional rating. >more


SEOs

WHAT DO INSIDERS KNOW? EVIDENCE FROM INSIDER TRADING AROUND SHARE REPURCHASES AND SEOS

Peter Cziraki, Evgeny Lyandres, and Roni Michaely
2019
We examine the nature of information contained in insider trades prior to corporate events. Insiders’ net buying increases before open market share repurchase announcements and decreases before SEOs. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading predicts announcement returns and, for repurchases, the long-term drift following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment. Information about fundamentals is incorporated slowly into prices, while information about mispricing is incorporated faster. >more


Debt Covenants

WEAK CREDIT COVENANTS

Victoria Ivashina, and Boris Vallee
2019
Using novel data on 1,240 credit agreements for leveraged loans, we investigate sources of contractual complexity and their economic rationale. We show that while restrictions on the use of collateral, issuance of new debt, payments to shareholders, asset sales, and affiliate transactions are widespread, clauses that weaken these negative covenants are as frequent. We propose a simple way to account for contractual weakness. These measures are key to understanding the market-wide price reaction that followed a high-profile court case, where the borrower used such contractual elements to dilute existing creditors. Leveraged buyouts, and especially those backed by sponsors with credit market expertise, have loan agreements with the most weakened negative covenants. At the same time, a larger non-bank funding of a loan, and in particular larger engagement by securitization vehicles, is conducive to weaker contractual terms, which translate into modestly higher issuance spreads. Our findings are consistent with sophisticated borrowers catering to a reaching for yield phenomenon by exploiting contractual complexity. >more


Leasing

LEASING AS A RISK-SHARING MECHANISM

Kai Li, and Chi-Yang Tsou
2019
This paper argues leasing is a risk-sharing mechanism: risk-tolerant lessors (capital owners) provide insurance to financially constrained risk-averse lessees (capital borrowers) against systematic capital price fluctuations. We provide strong empirical evidence to support this novel risk premium channel. Among financially constrained stocks, firms with a high leased capital ratio earn average returns 7.35% lower than firms with a low leased capital ratio, which we call it the negative leased capital premium. We develop a general equilibrium model with heterogeneous firms and financial frictions to quantify this channel. Our study also provides a caveat to the recent leasing accounting change of IFRS 16: lease induced liability and financial debt should not be treated equally on firms' balance sheet, as their implications for firms' equity risks and cost of equity are opposite. >more


Investments

MANAGERIAL SHORT-TERMISM AND INVESTMENT: EVIDENCE FROM ACCELERATED OPTION VESTING

Tomislav Ladika, and Zacharias Sautner
2019
We show that executives cut investment when their incentives become more short-term. We examine a unique event in which hundreds of firms eliminated option vesting periods to avoid a drop in income under accounting rule FAS 123-R. This event allowed executives to exercise options earlier and thus profit from boosting short-term performance. Our identification exploits that FAS 123-R’s adoption was staggered almost randomly by firms’ fiscal year-ends. CEOs cut investment and reported higher short-term earnings after option acceleration, and they subsequently increased equity sales. >more


Leverage Ratio

PEER FINANCIAL DISTRESS AND INDIVIDUAL LEVERAGE

Ankit Kalda
2019
Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. Individual leverage declines by 5.7% and remains deflated for at least five years following peer distress. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more while their income remains unchanged following peer distress. As a result, individuals are less likely to default during the period following peer distress. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism. >more


Syndicated Loan Market

TRANCHING IN THE SYNDICATED LOAN MARKET AROUND THE WORLD

Douglas J. Cumming, Florencio Lopez de Silanes, Joseph A. McCahery, and Armin Schwienbacher
2019
Loan tranching allows banks to manage risk and facilitate firm financing, which may be essential for firms that cannot access investors from stock markets. We analyze the determinants and benefits of loan tranching by pooling the tranches of individual loans to create the largest cross-country sample of syndicated loans, covering more than 150,000 loans from multinational and domestic firms. We find that, in addition to market, deal, and borrower characteristics, legal and institutional differences impact loan tranching. Strong creditor protection and efficient debt collection increase the probability of tranching and reduce tranche spreads, ultimately promoting firms’ access to debt. We also find evidence that tranching facilitates the financing of multinational firms abroad due to the transfer of legal and cultural institutions to foreign subsidiaries. Overall, our results suggest that tranching plays an important role in reducing a country’s financial development gap and promotes firms’ access to debt. >more


German Insolvency Law

THE BALANCE OF POWER BETWEEN CREDITORS AND THE FIRM: EVIDENCE FROM GERMAN INSOLVENCY LAW

Frédéric Closset, and Daniel Urban
2019
In 2011, German legislators passed the latest reform to German Insolvency Law (ESUG). ESUG mandates that creditors of larger firms can exert more influence on the appointment of the insolvency administrator, resulting in a shift of power from shareholders to creditors. Based on difference-in-differences estimation, we find that larger firms reduced financial leverage by about 4 to 7 percentage points relative to control firms. Furthermore, after the enactment of ESUG, larger firms spend less money on investment and pay higher interest rates. Overall, the evidence is consistent with the view that German creditor protection has become too strong. >more


Credit Ratings

DO CREDIT DEFAULT SWAPS MITIGATE THE IMPACT OF CREDIT RATING DOWNGRADES?

Sudheer Chava, Rohan Ganduri, and Chayawat Ornthanalai
2018
We find that a firm's stock price reaction to its credit rating downgrade announcement is muted by 44--52% when credit default swaps (CDSs) trade on its debt. We explore the role of the CDS markets in providing information ex ante and relieving financing frictions ex post for downgraded firms. We find that the impact of CDS trading is more pronounced for firms whose debt financing is more dependent on credit ratings (e.g., those rated around the speculative-grade boundary, those with a higher number of rating-based covenants). Reductions in debt and investment, and the increase in financing costs are less severe for CDS firms than non-CDS firms following an identical credit rating downgrade. Our results suggest that CDSs mute the stock market reaction to a credit rating downgrade by alleviating the financing frictions faced by downgraded firms. >more


Institutional Ownership

INSTITUTIONAL SHAREHOLDERS AND CORPORATE SOCIAL RESPONSIBILITY: EVIDENCE FROM TWO QUASI-NATURAL EXPERIMENTS

Tao Chen, Hui Dong, and Chen Lin
2019
Whether the sustainable investments are offered just in name, or institutional shareholders are making real efforts to generate social impact outcomes? Our paper investigates this question using two distinct quasi-natural experiments: 1) exogenous changes in institutional holdings in Russell Index reconstitutions; 2) exogenous shocks to shareholder attention. We find consistent evidence that both higher institutional ownership and more concentrated shareholder attention induce corporate managers to invest more in CSR activities. The effects are more pronounced in consumer oriented industries, in financially constrained firms, and in firms with inferior corporate governance. Further, we show that institutional shareholders influence CSR investments through shareholder activism, as evidenced by the increased amount and likelihood of CSR-related shareholder proposals. >more


Capital Gains Tax

CAPITAL GAINS TAX, VENTURE CAPITAL, AND INNOVATION IN START-UPS

Lora Dimitrova and Sapnoti Eswar
2019
We examine the effect of staggered changes in state-level capital gains tax rates on Venture Capital (VC)-backed start-ups and show that an increase in tax rates reduces patent quantity and quality. The results are consistent with a reduction in VC incentives to provide effort: VC-level tax increases lead to incrementally lower patent production by start-ups located out-of-state, and not linked by a direct flight to the VC investor. We also find evidence of a change in entrepreneurs' incentives: after a tax increase, entrepreneurs decrease innovation risk, and stay invested for longer (the lock-in effect). >more


Rating Quality

RATINGS QUALITY AND BORROWING CHOICE

Dominique C. Badoer, Cem Demiroglu, and Christopher M. James
2018
Past studies document that incentive conflicts may lead issuer-paid credit rating agencies to provide optimistically-biased ratings. In this paper, we present evidence that investors question the quality of issuer-paid ratings and raise corporate bond yields where the issuer-paid rating is more positive than benchmark investor-paid ratings. We also find that some firms with favorable issuer-paid ratings substitute public bonds with borrowings from informed intermediaries to mitigate the “lemons discount” associated with poor quality ratings. Overall, our results suggest that the quality of issuer-paid ratings has significant effects on borrowing costs and choice of debt. >more


Covenant Violations

CREDITOR CONTROL OF CORPORATE ACQUISITIONS

David Becher, Thomas P. Griffin, and Greg Nini
2018
We examine the impact of creditor control rights on corporate acquisitions. Nearly 75% of private credit agreements restrict borrower acquisition decisions. Following a covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn negative announcement returns. Firms that do announce an acquisition while in violation of a covenant earn 1.8% higher stock returns, on average, with the effect concentrated among firms with weak external governance. We conclude that creditors provide valuable corporate governance that benefits shareholders by reducing managerial agency costs. >more


IPOs

TECHNOLOGICAL DISRUPTIVENESS AND THE EVOLUTION OF IPOS AND SELL-OUTS

Donald E. Bowen III, Laurent Frésard, and Gerard Hoberg
2019
We show that the recent decline in IPOs on U.S. markets is related to changes in the technological disruptiveness of startups, which we measure using textual analysis of patents from 1930 to 2010. We focus on VC-backed startups and show that those with ex-ante disruptive technologies are more likely to exit via IPO and less likely to exit via sell-out. This is consistent with IPOs being favored by firms with the potential to carve out independent market positions with strong defenses against rivals. We document an economy-wide trend of declining technological disruptiveness since World War II that accelerated since the late 1990s. This trend predicts fewer IPOs and more sell-outs, and we find that roughly 20% of the recent dearth of IPOs, and 49% of the surge in sell-outs, can be attributed to changes in firms' technological characteristics. >more


Credit Ratings

WHAT'S IN A DEBT? RATING AGENCY METHODOLOGIES AND FIRMS’ FINANCING AND INVESTMENT DECISIONS

Cesare Fracassi, and Gregory Weitzner
2019
In July 2013, Moody's unexpectedly increased the amount of equity credit that speculative-grade firms receive for preferred stock from 50% to 100%. Firms affected by the rule change were suddenly considered less levered by Moody's even though their balance sheets did not change. These firms responded by issuing debt, targeting an leverage ratio as defined by Moody's, and growing their assets. The rule change transferred value from bond to equity holders, and led to an increase in preferred stock issuance. How rating agencies assess risk thus has a significant causal impact on firms' financing, investment, and security design decisions. >more


Divestitures

PRACTICE MAKES PROGRESS: EVIDENCE FROM DIVESTITURES

Mark Humphery-Jenner, Ronan Powell, and Emma Jincheng Zhang
2017
This paper examines the role of firm-level experience in the context of divestitures. We find that divesting firms that have recent divestiture experience (hereafter, experienced divestors) are more likely to sell peripheral or underperforming units, and to divest during industry merger waves. Experienced divestors earn higher returns on divestiture announcement, have stronger operating performance post-divestiture, and tend to reinvest sale proceeds in expansion programs using acquisitions. Importantly, we show that divestiture experience at the firm level dominates other measures of experience, including divestiture experience of CEOs or boards, and experience in acquisitions. We take steps to mitigate concerns about econometric and sampling issues. These findings suggest that a strategy of restructuring through divestitures can improve firm value. >more


Capital Structure

WHAT IS THE ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE CAPITAL STRUCTURE DECISIONS? A SURVEY ANALYSIS

Stephen Brown, Marie Dutordoir, Chris Veld, and Yulia V. Veld-Merkoulova
2018
We survey institutional investors about their role in capital structure decisions and views on capital structure theories. Over 82% of investors believe they influence corporate capital structure decisions, especially for smaller, younger, and more financially constrained firms. Unlike corporate managers, investors consider agency costs of free cash flow important drivers of capital structure. Investors’ responses also support pecking order and market timing theory. Most investors find financial constraints important, with components of the Kaplan–Zingales and Whited–Wu indexes dominating other proxies. Our findings suggest a first-order impact of investor preferences on securities issuance and design choices. >more


Discrimination in Financing

GENDER, RACE, AND ENTREPRENEURSHIP: A RANDOMIZED FIELD EXPERIMENT ON VENTURE CAPITALISTS AND ANGELS

Will Gornall, and Ilya A. Strebulaev
2018
We study gender and race in high-impact entrepreneurship within a tightly controlled random field experiment. We sent out 80,000 pitch emails introducing promising but fictitious start-ups to 28,000 venture capitalists and business angels. Each email was sent by a fictitious entrepreneur with a randomly selected gender (male or female) and race (Asian or White). Female entrepreneurs received an 8% higher rate of interested replies than male entrepreneurs pitching identical projects. Asian entrepreneurs received a 6% higher rate than White entrepreneurs. Our results are not consistent with discrimination against females or Asians at the initial contact stage of the investment process. >more


Debt Maturity

CLIENTELE EFFECTS EXPLAIN THE DECLINE IN CORPORATE BOND MATURITIES

Alexander W. Butler, Xiang Gao, and Cihan Uzmanoglu
2019
The average maturity of newly issued corporate bonds has declined substantially over the past 40 years, and traditional determinants of debt maturity fail to explain the trend. We show that the changing composition of the investors in the corporate bond market resolves this puzzle. The results of a Granger causality test, an instrumental variable approach, a natural experiment, and a regulatory study suggest that a decline in insurance company ownership in bonds leads to shorter bond maturities. These findings illustrate how developments in financial institutions can have real effects on corporations. >more


Trade Credit

THE VALUE OF COLLATERAL IN TRADE FINANCE

Anna M. Costello
2018
Suppliers are subject to the credit risk of their customers when they sell products on credit. However, rights to the collateral value of the products they sell may mitigate some of this risk. This paper demonstrates the important role of laws that support suppliers' rights to reclaim and liquidate collateral. Using a change in the U.S. bankruptcy code that altered the rights of a subset of suppliers, I use a difference-in-differences setting to show that an improvement in suppliers' rights to the liquidation value of collateral results in an increase in the amount and duration of trade credit offered. The increase in collateral protection also reduced suppliers' lending standards, resulting in more dispersed trade credit lending and riskier customer portfolios. Finally, I find that the increase in collateral rights decreased suppliers' incentives to monitor their customers, consistent with collateral and monitoring being substitutes. Overall, the paper shows that with strong legal protections in place, trade credit has an important collateral component. >more


Guaranteed Bonds

WHY DO FIRMS ISSUE GUARANTEED BONDS?

Fang Chen, Jing-Zhi Huang, Zhenzhen Sun, and Tong Yu
2018
Corporations often use affiliated firms as guarantors when issuing guaranteed bonds, thus combining external financing with internal credit enhancements. In this study, we empirically examine the potential determinants of corporate guaranteed debt issuance. We find evidence that issuers with fewer tangible assets, lower credit ratings, more pronounced debt overhang and/or greater managerial agency problems are more likely to issue guaranteed bonds. Moreover, we find that while firms generally issue guaranteed bonds with different motives, alternative incentives for guaranteed bond uses are largely captured by bond prices at issuance. >more


Financial Distress

THE ECONOMIC COSTS OF FINANCIAL DISTRESS

Claudia Custodio, Miguel A. Ferreira, and Emilia Garcia-Appendini
2019
We estimate the economic costs of financial distress using local real estate shocks. We identify these effects by exploiting variation in real estate assets and financial leverage across suppliers. We find that clients reduce their reliance on suppliers that are highly levered and own more real estate assets in response to declines in real estate prices. More affected suppliers suffer a 10% larger decline in sales for the same client and year than less affected suppliers. The effect is more pronounced in more competitive industries, for durable and less specific goods, and when switching costs are low. Our results suggest that indirect costs of financial distress are economically important. >more


Small Firm Financing

CULTURAL PREFERENCES AND FIRM FINANCING CHOICES

Mascia Bedendo, Emilia Garcia-Appendini, and Linus Siming
2018
We document significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To isolate the effect of culture, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant cultural differences in the preference towards debt funding and in the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industries, trading partners, and headquarters location. >more


Cash Conversion Cycle

THE CASH CONVERSION CYCLE SPREAD

Baolian Wang
2018
The cash conversion cycle (CCC) refers to the time span between the outlay of cash for purchases to the receipt of cash from sales. It is a widely used metric to gauge the effectiveness of a firm’s management and intrinsic need for external financing. This paper shows that a zero-investment portfolio that buys stocks in the lowest CCC decile and shorts stocks in the highest CCC decile earns 5 to 7% alphas per year. The CCC effect is prevalent across industries and remains even for large capitalization stocks. The CCC effect is distinct from the known return predictors. The returns of high-CCC stocks are more sensitive to the health of the financial intermediaries than low-CCC stocks. This suggests that the CCC-based strategy cannot be explained by the financial intermediary leverage risk. >more


Private Firm Financing)

MUTUAL FUND INVESTMENTS IN PRIVATE FIRMS

Sungjoung Kwon, Michelle Lowry, and Yiming Qian
2018
Historically a key advantage of being a public firm was broader access to capital, from a disperse group of shareholders. In recent years, such capital has increasingly become available to private firms as well. We document a dramatic increase over the past twenty years in the number of mutual funds participating in private markets and in the dollar value of these private firm investments. We evaluate several factors that potentially contribute to this trend: firms seeking extra capital to postpone public listing; mutual funds seeking higher risk-adjusted returns and IPO allocations; and, VCs seeking new investors to substantiate higher valuations. Results provide the strongest support for the first two factors. >more


Payout Policy

THE INFORMATION CONTENT OF DIVIDENDS: SAFER PROFITS, NOT HIGHER PROFITS

Roni Michaely, Stefano Rossi, and Michael Weber
2018
Contrary to signaling models’ central predictions, changes in profits do not empirically follow changes in dividends, and firms with the least need to signal pay the bulk of dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits. Using the Campbell (1991) decomposition we find that cash-flow-volatility changes follow dividend and repurchase changes (in opposite direction), and that larger volatility changes come with larger announcement returns consistent with our model's predictions. The data support the prediction that the signaling cost is foregone investment opportunities. We conclude payout policy conveys information about future cash-flow volatility. >more


IPOs and SEOs

DO FIRMS ISSUE MORE EQUITY WHEN MARKETS BECOME MORE LIQUID?

Rogier Hanselaar, René M. Stulz, and Mathijs A. Van Dijk
2017
Using quarterly data on IPOs and SEOs in 38 countries over the period 1995-2014, we show that changes in equity issuance are significantly and positively related to lagged changes in aggregate local market liquidity. This relation is at least as economically significant as the well-known relation between equity issuance and lagged stock returns. It survives the inclusion of proxies for market timing, capital market conditions, growth prospects, asymmetric information, and investor sentiment, as well as the exclusion of the financial crisis. Changes in liquidity are less relevant for firms that face greater financial pressures, firms in less financially developed countries, and during the financial crisis. >more


Firm valuation

WHY ARE FIRMS WITH MORE MANAGERIAL OWNERSHIP WORTH LESS?

Kornelia Fabisik, Rüdiger Fahlenbrach, René M. Stulz, and Jérôme Taillard
2018
Using more than 50,000 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, our findings are consistent with the literature, showing that there is an increasing and concave relation between q and managerial ownership. We show that these seemingly contradictory results are explained by cumulative past performance and liquidity. Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q. >more


Credit Ratings

CREDIT RATINGS AND ACQUISITIONS

Nihat Aktas, Nikolaos Karampatsas, Dimitris Petmezas, and Henri Servaes
2018
There is a curvilinear relation between credit ratings and acquisitions. Non-investment grade firms make more acquisitions as their ratings improve, consistent with the relaxation of financial constraints. However, this pattern reverses for investment grade firms, supporting the view that such firms want to preserve their rating and are concerned about acquisition-related downgrades. Abnormal returns first decrease and then increase as ratings improve. In support of these findings, acquisitions have a negative impact on future ratings only for highly-rated firms. These results indicate that the level of a firm’s credit rating has a significant impact on the acquisition process. >more


Green Bonds

DO SHAREHOLDERS BENEFIT FROM GREEN BONDS?

Dragon Yongjun Tang, and Yupu Zhang
2018
The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007-2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a significant premium for green bonds, suggesting that the positive stock returns are not driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm’s issuance of green bonds is beneficial to its existing shareholders. >more


Bank Credit and Innovation

FUEL THE ENGINE: BANK CREDIT AND FIRM INNOVATION

Shusen Qi, and Steven Ongena
2018
Whether bank credit is suitable to finance business innovation is a key financing question. Using a representative sample of 6,422 small firms across 22 emerging economies, we find that lack of access to credit stifles innovation, especially of the technologically “hard” type. Especially access to credit with longer duration and denominated in foreign currency spurs hard innovation. This detrimental impact of credit constraints on innovation activities is stronger in localities or sectors that are more dependent on external financing, and only holds for firms that are more limited in alternative sources of external financing, including small, private, or unaudited firms, receiving no government subsidy. We further found that institutional contexts can mitigate the negative impact of credit constraints, possibly via providing firms with more alternative financing means. Foreign or transactional banks, or banks in more diversified banking market are found to be better at promoting firm innovation. Lastly, bank credit enabling hard innovation is expected to foster future firm growth. >more


Dividend Policy

DO DIVIDENDS CONVEY INFORMATION ABOUT FUTURE EARNINGS?

Charles (Chad) Ham, Zachary Kaplan, and Mark T. Leary
2018
In contrast to the literature’s current consensus, we show that dividends contain highly persistent information about future earnings levels. Using an “event window” approach that compares earnings after dividend changes to those before, we find dividend changes predict unexpected future earnings for horizons up to three years. The attenuation in earnings information noted by prior studies disappears after controlling for (i) endogenous investment and asset write-downs accompanying dividend changes and (ii) the non-linear relation between dividend changes and market reactions. Our results suggest the market reaction to dividend change announcements reflects, at least in part, new information about future earnings. >more


Investment Policy

CREDIT DEFAULT SWAPS AROUND THE WORLD: INVESTMENT AND FINANCING EFFECTS

Söhnke M. Bartram, Jennifer S. Conrad, Jongsub Lee, and Marti G. Subrahmanyam
2018
We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm, taking into consideration differences in firms’ local economic and legal environments. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty whether the actions taken by the reference entity will trigger credit events for the CDS obligations. We test the predictions of the model in a sample of more than 56,000 firms across 50 countries over the period 2001–2015 and find substantial evidence that the introduction of CDS affects real decisions within the firm, including those regarding leverage, investment, and the riskiness of the firm’s investments. Importantly, we find that the legal and market environments in which the reference entity operates have an influence on the impact of CDS. The effect of CDS is larger in environments where uncertainty regarding CDS obligations is reduced and where CDS mitigate weak property rights. Our results shed light on the incomplete nature of CDS contracts in international capital markets, related to significant legal uncertainty surrounding the interpretation of underlying credit events. >more


Costs of Leverage

DOES CORPORATE SOCIAL RESPONSIBILITY REDUCE THE COSTS OF HIGH LEVERAGE? EVIDENCE FROM CAPITAL STRUCTURE AND PRODUCT MARKETS INTERACTIONS

Kee-Hong Bae, Sadok El Ghoul, Omrane Guedhami, Chuck C.Y. Kwok, and Ying Zheng
2018
Research on capital structure and product markets interactions shows that high leverage is associated with substantial losses in market share due to unfavorable actions by customers and competitors. We examine whether corporate social responsibility (CSR) affects firms’ interactions with customers and competitors and reduces the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. By reducing adverse behavior by customers and competitors, CSR helps highly leveraged firms keep customers and guard against rival predation. Our results support the stakeholder value maximization view of CSR. >more


Financial Distress

FORGIVE BUT NOT FORGET: THE BEHAVIOR OF RELATIONSHIP BANKS WHEN FIRMS ARE IN DISTRESS

Larissa Schäfer
2018
Do relationship banks help firms in distress? Combining a survey-based measure of relationship lending with unique credit registry data, I examine the effect of relationship lending on loan performance. I find that the same firm in the same time period is more likely to become delinquent on a relationship-based loan relative to a transaction-based loan. Higher delinquencies do not, however, result in more defaults or less loan recoveries for relationship banks when loans mature relative to transactional banks. Conditional on past delinquencies, relationship banks are more likely to offer follow-up financing and extract rents. Consistent with theory, relationship banks tolerate temporarily bad results, yet extract rents and secure future business in return. The paper provides new empirical evidence for rent extraction by relationship banks that have been lenient to distressed firms in the past. >more


External Financing Costs

DOES POLITICAL UNCERTAINTY INCREASE EXTERNAL FINANCING COSTS? MEASURING THE ELECTORAL PREMIUM IN SYNDICATED LENDING

Olivia Kim
2018
This paper examines a contractual lending channel through which political uncertainty matters in a large sample of syndicated loans involving 63 borrower and 35 lender countries between 1990 and 2008. To address the endogenous nature of political uncertainty and simultaneity of credit demand and supply, I use a within-firm estimation approach that exploits differences in lenders’ exposure to national elections around the world as a source of plausibly exogenous time-series variation in political uncertainty. I document that firms pay on average 7 basis points more on loans originated when their lenders are undergoing a national election relative to when their lenders are not undergoing a national election. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Lenders from less financially developed countries are more likely to pass-through political uncertainty costs to borrowers, especially to those from weak creditor rights countries. Overall, political uncertainty leads to a tangible increase in firms’ financing costs. >more


Covenants

BANK INTERVENTIONS AND TRADE CREDIT: EVIDENCE FROM DEBT COVENANT VIOLATIONS

Zilong Zhang
2018
This study examines the consequences of conflicts between creditors. Using the setting of debt covenant violations, I employ a regression discontinuity design to identify the effect of bank interventions on their borrowers' trade credit. The results show that trade credit experiences a substantial decline when banks intervene in the borrowing firm following covenant violations. The decline is mitigated by the presence of dependent suppliers and exacerbated by banks' incentives to exercise control rights. Such externalities are reflected in the loan contract design. Borrowing firms sign less restrictive loan contracts when they rely more on trade credit or trade creditors. >more


Cost of Capital

BIG DATA IN FINANCE AND THE GROWTH OF LARGE FIRMS

Juliane Begenau, Maryam Farboodi, and Laura Veldkamp
2018
One of the most important trends in modern macroeconomics is the shift from small firms to large firms. At the same time, financial markets have been transformed by advances in information technology. We explore the hypothesis that the use of big data in financial markets has lowered the cost of capital for large firms, relative to small ones, enabling large firms to grow larger. Large firms, with more economic activity and a longer firm history offer more data to process. As faster processors crunch ever more data – macro announcements, earnings statements, competitors' performance metrics, export demand, etc. – large firms become more valuable targets for this data analysis. Once processed, that data can better forecast firm value, reduce the risk of equity investment, and thus reduce the firm's cost of capital. As big data technology improves, large firms attract a more than proportional share of the data processing, enabling large firms to invest cheaply and grow larger. >more


Fintech Lending

FINTECH, REGULATORY ARBITRAGE, AND THE RISE OF SHADOW BANKS

Greg Buchak, Gregor Matvos, Tomasz Piskorski, and Amit Seru
2017
Shadow bank market share in residential mortgage origination nearly doubled from 2007-2015, with particularly dramatic growth among online “fintech” lenders. We study how two forces, regulatory differences and technological advantages, contributed to this growth. Difference in difference tests exploiting geographical heterogeneity induced by four specific increases in regulatory burden – capital requirements, mortgage servicing rights, mortgage-related lawsuits, and the movement of supervision to Office of Comptroller and Currency following closure of the Office of Thrift Supervision - all reveal that traditional banks contracted in markets where they faced more regulatory constraints; shadow banks partially filled these gaps. Fintech lenders appear to offer a higher quality product and charge a premium of 14-16 basis points. Relative to other lenders, they seem to use different information to set interest rates. A quantitative model of mortgage lending suggests that regulation accounts for roughly 60% of shadow bank growth, while technology accounts for roughly 30%. >more


Trade Credit

TRADE CREDIT AND SUPPLIER COMPETITION

Jiri Chod, Evgeny Lyandres, and S. Alex Yang
2018
This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailer's purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. >more


Cash Holdings

HOW DO CHIEF FINANCIAL OFFICERS AFFECT CORPORATE CASH POLICIES?

Chris Florackis, and Sushil Sainani
2017
This paper examines the extent to which Chief Financial Officers (CFOs) affect corporate cash holding policies. We construct an index (CFO index) that enables us to distinguish between "strong'' and "weak'' CFOs based on their ability to influence firm outcomes. We find that firms with strong CFOs hold substantially less cash than firms with weak CFOs, ceteris paribus. Importantly, the CFO effect documented in our study goes beyond the effect caused by the Chief Executive Officer (CEO) on cash holdings. Our findings provide the first direct empirical evidence that firms with strong CFOs are well positioned to hold less cash due to their relatively weak precautionary motive and superior ability to raise external financing during periods of financial stress. >more


Unicorns

THE RACE OF UNICORNS: STARTUP ACQUISITIONS BEFORE IPO TO SIGNAL COMPANY QUALITY

Xuelin Li
2018
The merger and acquisition activity of startups prior to IPO is a neglected but important phenomenon. On one hand, more startups end up being acquired than going public. On the other hand, successful startups engage in frequent M&As. This paper argues that good startups could signal their quality to IPO investors by taking over their inferior competitors. However, bad startups may resist selling because there is a chance to pool with good types in IPO when investors have confusions of firm qualities. By formalizing a race of unicorns with dynamics adverse selection, I characterize the equilibrium outcomes into three regions: IPO wave, M&A and waiting zone. >more


IPO Underpricing

PUBLIC MARKET PLAYERS IN THE PRIVATE WORLD: IMPLICATIONS FOR THE GOING-PUBLIC PROCESS

Shiyang Huang, Yifei Mao, Cong (Roman) Wang, and Dexin Zhou
2018
Recent years have seen a dramatic increase in investment by public market institutional investors in the private market. We study the consequences of these investments for the initial public offerings of startups. We argue that because institutions are able to substitute for all-star analysts in the secondary market, startups rely less on underwriters with all-star analysts, leading to less IPO underpricing. We find that: (1) institutional participation in startups reduces IPO underpricing; (2) there is a substitution between institutions and all-star analysts in IPO underpricing. We use the 2003 mutual fund scandal as an exogenous shock to establish the causality. >more


Liquidity Provision for Bonds

THE COST OF IMMEDIACY FOR CORPORATE BONDS

Jens Dick-Nielsen, and Marco Rossi
2018
Liquidity provision for corporate bonds has become significantly more expensive after the 2008 crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the cost of immediacy has more than doubled. In addition, the supply of immediacy has become more elastic with respect to its price. Consistent with a stringent regulatory environment incentivizing smaller dealer inventories, we also find that dealers revert deviations from their target inventory more quickly after the crisis. Finally, we investigate the pricing impact of information, changes in ownership structure, and differences between bank and non-bank dealers. >more


Debt Maturities

CORPORATE DEBT MATURITY PROFILES

Jaewon Choi, Dirk Hackbarth, and Josef Zechner
2017
We study a novel aspect of a firm's capital structure, namely the profile of its debt maturity dates. In a simple theoretical framework we show that the dispersion of debt maturities constitutes an important dimension of capital structure choice, driven by firm characteristics and debt rollover risk. Guided by these predictions we establish two main empirical results. First, using an exogenous shock to rollover risk, we document a significant increase in maturity dispersion for firms that need to roll over maturing debt. Second, we find strong support that maturities of newly issued debt are influenced by pre-existing maturity profiles. >more


Internal Capital Markets

THE ORIGINS AND REAL EFFECTS OF THE GENDER GAP: EVIDENCE FROM CEOS' FORMATIVE YEARS

Ran Duchin, Mikhail Simutin, and Denis Sosyura
2018
CEOs allocate more investment capital to male managers than to female managers in the same divisions. Using data from individual Census records, we find that this gender gap is driven by CEOs who grew up in male-dominated families — those where the father was the only income earner and had more education than the mother. The gender gap also increases for CEOs who attended all-male high schools and grew up in neighborhoods with greater gender inequality. The effect of gender on capital budgeting introduces frictions and erodes investment efficiency. Overall, the gender gap originates in CEO preferences developed during formative years and produces significant real effects. >more


Bankruptcy

BUSY BANKRUPTCY COURTS AND THE COST OF CREDIT

Karsten Müller
2018
How large are the welfare losses from inefficient legal enforcement? This paper studies the effect of judicial efficiency in the context of credit contracts in the United States. Using the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as an exogenous shock to the caseload of bankruptcy courts, I show that debt enforcement is a quantitatively important factor for credit spreads and contract maturities. Consistent with higher expected recovery values for creditors, the effect is driven by firms with higher bankruptcy risk and lower expected liquidation values. The estimates imply a lower bound for the US-wide costs of bankruptcy court backlog of around $670 million per year and fiscal multipliers for new bankruptcy judges of above 100. This approach also uncovers the bankruptcy districts with the highest social returns on new judgeships. >more


Investor Horizons

CORPORATE ESG PROFILES AND INVESTOR HORIZONS

Laura T. Starks, Parth Venkat, and Qifei Zhu
2017
Questions and debate surround institutional investor preferences regarding the Environmental, Social and Governance (ESG) profiles of their portfolio firms. To address these issues, we examine changes in their portfolios and find that preferences for corporate ESG depend critically on investor horizons: Investors with longer horizons tend to prefer higher-ESG firms, while short-term investors prefer the opposite. Consistent with the importance of horizon, we find that investors behave more patiently toward high ESG firms, selling less after negative earnings surprises or poor stock returns. We further support these findings using changes in the FTSE4Good Index as shocks to firms' ESG reputations. >more


Underwriter Bargaining Power

UNDERWRITER COMPETITION AND BARGAINING POWER IN THE CORPORATE BOND MARKET

Alberto Manconi, Ekaterina Neretina, and Luc Renneboog
2018
We develop a new measure of underwriter bargaining power and a novel empirical approach, based on underwriters’ comparative ability to place bonds. When an issuer has few “outside options” to take her bond to the market, the underwriter enjoys a stronger bargaining power over her. The key feature of our approach is that bargaining power varies for a given underwriter at a given point in time across different issuers, allowing us to separate the effects of bargaining power from those of reputation and certification with a fixed effects strategy. Using our measure, we document that powerful underwriters are able to extract rents at the expense of bond issuers. For issues with the highest underwriter bargaining power, fees and bond offering yields increase by a combined cost of USD 1.5 million, or about 7% of the average costs for the issuer. We rule out alternative mechanisms based on issuer-underwriter “loyalty”. Our findings suggest that lack of competition increases underwriter bargaining power, resulting in material costs for corporate bond issuers. >more


Access to Informal Financing

CORPORATE RESILIENCE TO BANKING CRISES: THE ROLES OF TRUST AND TRADE CREDIT

Ross Levine, Chen Lin, and Wensi Xie
2017
Are firms more resilient to systemic banking crises in economies with higher levels of social trust? Using firm-level data in 34 countries from 1990 through 2011, we find that liquidity-dependent firms in high-trust countries obtain more trade credit and suffer smaller drops in profits and employment during banking crises than similar firms in low-trust economies. The results are consistent with the view that when banking crises block the normal banking-lending channel, greater social trust facilitates access to informal finance, cushioning the effects of these crises on corporate profits and employment. >more


Cash Savings

CASH SAVINGS AND CAPITAL MARKETS

R. David McLean, and Mengxin Zhao
2018
Previous studies find that U.S. firms make large equity issues when stock prices are high for the purpose of building precautionary cash savings. We find these effects internationally, but only in countries where it is less costly to issue equity. In countries where external finance is costlier, high precautionary motive firms do not build cash with equity issues, suggesting the benefits of building cash via external finance are outweighed by issuance costs. These effects are economically important; the previously documented relation between precautionary motives and cash savings is no longer significant if the proceeds from net equity issues are removed from cash. Our findings show that capital market development has a first order impact on cash policy. >more


Default Prediction Models

FEATURES OF A LIFETIME PD MODEL: EVIDENCE FROM PUBLIC, PRIVATE, AND RATED FIRMS

Sajjad Beygiharchegani, Uliana Makarov, Janet Zhao, and Douglas Dwyer
2018
With the new CECL and IFRS 9 requirements, we see an increased need for lifetime probability of default models. In this document, we formally investigate and summarize the term structure properties consistently seen across public, private, and rated ?rms. We observe that the default rate for “good” ?rms tends to increase over time, while the default rate for “bad” ?rms decreases over time, an indication of the mean-reversion effect seen with ?rms' default risk. >more


Impact of Cyberattacks

WHAT IS THE IMPACT OF SUCCESSFUL CYBERATTACKS ON TARGET FIRMS?

Shinichi Kamiya, Jun-Koo Kang, Jungmin Kim, Andreas Milidonis, and René M. Stulz
2018
We examine which firms are targets of successful cyberattacks and how they are affected. We find that cyberattacks are more likely to occur at larger and more visible firms, more highly valued firms, firms with more intangible assets, and firms with less board attention to risk management. These attacks affect firms adversely when consumer financial information is appropriated, but seem to have little impact otherwise. Attacks where consumer financial information is appropriated are associated with a significant negative stock market reaction, an increase in leverage following greater debt issuance, a deterioration in credit ratings, and an increase in cash flow volatility. These attacks also affect sales growth adversely for large firms and firms in retail industries, and there is evidence that they decrease investment in the short run. Affected firms respond to such attacks by cutting the CEO’s bonus as a fraction of total compensation, by reducing the risk-taking incentives of management, and by taking actions to strengthen their risk management. The evidence is consistent with cyberattacks increasing boards’ assessment of target firm risk exposures and decreasing their risk appetite. >more


Crowdfunding

BEYOND FINANCING: CROWDFUNDING AS AN INFORMATIONAL MECHANISM

Jordana Viotto da Cruz
2016
Besides providing financial support for new ventures, crowdfunding can bring additional advantages for entrepreneurs. In this paper, we test the hypothesis that crowdfunding also serves as an informational mechanism. Using a unique dataset built with publicly available data from Internet-based sources, and after controlling for alternative explanations, we empirically show that even when not successful on crowdfunding, thus not accessing capital, project owners may still decide to release the product in the market if contributions suggest positive valuation of the “crowd”. >more


Bank Capital Structure

THE AGENCY OF COCO: WHY DO BANKS ISSUE CONTINGENT CONVERTIBLE BONDS?

Roman Goncharenko, Steven Ongena, and Asad Rauf
2017
Why do banks issue contingent convertible debt? To answer this question we study comprehensive data covering all issues by publicly traded banks in Europe of contingent convertible bonds (CoCos) that count as additional tier 1 capital (AT1). We find that banks with lower asset volatility are more likely to issue AT1 CoCos than their riskier counterparts, but that CDS spreads do not react following issue announcements. Our estimates therefore suggest that agency costs play a crucial role in banks' ability to successfully issue CoCos. The agency costs may be higher for CoCos than for equity explaining why we observe riskier or lowly capitalized banks to issue equity rather than CoCos. >more


Credit Supply

BANK RESPONSE TO HIGHER CAPITAL REQUIREMENTS: EVIDENCE FROM A QUASI-NATURAL EXPERIMENT

Reint Gropp, Thomas C. Mosk, Steven Ongena, and Carlo Wix
2018
We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets and - consistent with debt overhang - not by raising their levels of equity. Banks reduce lending to corporate and retail customers, resulting in lower asset-, investment- and sales growth for firms obtaining a larger share of their bank credit from the treated banks. >more


Credit Cycle

LENDING STANDARDS OVER THE CREDIT CYCLE

Giacomo Rodano, Nicolas Andre Benigno Serrano-Velarde, and Emanuele Tarantino
2018
We empirically identify the lending standards applied by banks to small and medium firms over the cycle. We exploit an institutional feature of the Italian credit market that generates a sharp discontinuity in the allocation of comparable firms into credit risk categories. Using loan-level data, we show that during the expansionary phase of the cycle, banks relax lending standards by narrowing the interest rate spreads between substandard and performing firms. During the contractionary phase of the cycle, the abrupt tightening of lending standards leads to the exclusion of substandard firms from credit. These firms then report significantly lower production, investment, and employment. Finally, we find that the drying up of the interbank market is an important factor determining the change in bank lending standards. >more


Bond Default Spreads

THE MYTH OF THE CREDIT SPREAD PUZZLE

Peter Feldhütter, and Stephen M. Schaefer
2018
We ask whether a standard structural model (Black and Cox (1976)) is able to explain credit spreads on corporate bonds and, in contrast to much of the literature, we find that the model matches the level of investment grade spreads well. Model spreads for speculative grade debt are too low and we find that bond illiquidity contributes to this underpricing. Our analysis makes use of a new approach for calibrating the model to historical default rates that leads to much more precise estimates of investment grade default probabilities. >more


Cash Holdings

WHY HAS THE VALUE OF CASH INCREASED OVER TIME?

Thomas W. Bates, Chinghung Chang, and J. Daniel Chi
2017
The value of corporate cash holdings has increased significantly in recent decades. On average, one dollar of cash is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. This increase is predominantly driven by the investment opportunity set and cash-flow volatility, as well as secular trends in product market competition, credit market risk, and within-firm diversification. We document a secular decrease in the speed of adjustment in cash holdings, particularly for financially constrained firms with cash deficits, suggesting that capital market frictions can account for the trend in the value of cash holdings. >more


Treasury Market

NOTES ON BONDS: ILLIQUIDITY FEEDBACK DURING THE FINANCIAL CRISIS

David K. Musto, Greg Nini, and Krista Schwarz
2017
We trace the evolution of extreme illiquidity discounts among Treasury securities during the financial crisis, when bond prices fell more than six percent below more-liquid but otherwise identical notes. Using high-resolution data on market quality and trader identities and characteristics, we find that the discounts amplify through feedback loops, where cheaper, less-liquid securities flow to investors with longer horizons, thereby increasing their illiquidity and thus their appeal to these investors. The effect of the widened liquidity gap on transactions costs is further amplified by a surge in the price liquidity providers charge for access to their balance sheets in the crisis. >more


Agency Conflicts

AGENCY CONFLICTS AROUND THE WORLD

Erwan Morellec, Boris Nikolov, and Norman Schürhoff
2017
We use a dynamic model of financing decisions to measure agency conflicts for a large panel of 12,652 firms from 14 countries. Our estimates show that agency conflicts are large and vary significantly across firms and countries. Differences in agency conflicts are largely due to differences in firm-level governance, ownership concentration, and other firm characteristics, including intangibles and cash. The origin of law is more relevant for curtailing governance excesses than for guarding the typical firm. Agency costs split about equally between wealth transfers and value losses from policy distortions, the latter being smaller in civil law countries where ownership is more concentrated.  >more


Reporting Quality

DIRECTOR CONNECTEDNESS: MONITORING EFFICACY AND CAREER PROSPECTS

Vincent Intintoli, Kathleen M. Kahle, and Wanli Zhao
2017
We examine a specific channel through which director connectedness may improve monitoring: financial reporting quality. We find that the connectedness of independent, non-co-opted audit committee members has a positive effect on financial reporting quality and accounting conservatism. The effect is not significant for non-audit committee or co-opted audit committee members. Our results are robust to tests designed to mitigate self-selection. Consistent with connected directors being valuable, the market reacts more negatively to the death of highly connected directors than less connected directors. Better connected directors also have better career prospects, suggesting that they have greater incentives to monitor. >more


Credit Risk Premia

CORPORATE CREDIT RISK PREMIA

Antje Berndt, Rohan Douglas, Darrell Duffie, and Mark Ferguson
2017
We measure credit risk premia---prices for bearing corporate default risk in excess of expected default losses---using Markit CDS and Moody's Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008-09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit risk premia fluctuate over time by more than a factor of ten. Credit risk premia comove with macroeconomic indicators, even after controlling for variation in expected default losses, with higher premia per unit of expected loss during times of market-wide distress. Countercyclical variation of premia-to-expected-loss ratios is more pronounced for investment-grade issuers than for high-yield issuers. >more


Exposure to Sovereign Default

THE COSTS OF SOVEREIGN DEFAULT: EVIDENCE FROM THE STOCK MARKET

Sandro C. Andrade, and Vidhi Chhaochharia
2017
We use stock market data to test cross-sectional implications of theories of sovereign default and provide a market-based estimate of sovereign default costs. We find that the stock prices of firms vulnerable to financial intermediation disruption, or firms more exposed to the government, are particularly sensitive to changes in sovereign credit spreads. This is consistent with theories in which default is costly because it disrupts financial intermediation and damages government reputation. Estimation of a structural valuation model indicates that the market prices stocks as if sovereign default has large effects on vulnerable stocks, translating to a 12% destruction of the value of their productive assets. >more


Financial Distress

DESTRUCTIVE CREATION AT WORK: HOW FINANCIAL DISTRESS SPURS ENTREPRENEURSHIP

Tania Babina
2017
Using US Census employer-employee matched data, I show that employer financial distress accelerates the exit of employees to found start-ups. This effect is particularly evident when distressed firms are less able to enforce contracts restricting employee mobility into competing firms. Entrepreneurs exiting financially distressed employers earn higher wages prior to the exit and after founding start-ups, compared to entrepreneurs exiting non-distressed firms. Consistent with distressed firms losing higher-quality workers, their start-ups have higher average employment and payroll growth. The results suggest that the social costs of distress might be lower than the private costs to financially distressed firms. >more


Yield Volatility

DISAGREEMENT ABOUT INFLATION AND THE YIELD CURVE

Paul Ehling, Michael F. Gallmeyer, Christian Heyerdahl-Larsen, and Philipp K. Illeditsch
2017
We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves. >more


Bond Yields

TOO BIG TO IGNORE? HEDGE FUND FLOWS AND BOND YIELDS

Olga Kolokolova, Ming-Tsung Lin, and Ser-Huang Poon
2017
This paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Using a sample of 9,725 hedge funds from 1994 to 2012, we find that fund flow is negatively related to the changes in 10-year Treasury and Moody's Baa bond yields one month ahead. The relation is still pronounced after controlling for other determinants of yield changes, including the amount of arbitrage capital available in the economy, suggesting a non-trivial effect of flow-induced hedge fund trading on bond yields. Flow impact on corporate bonds is further amplified during periods of decreasing market liquidity, consistent with a fire-sale hypothesis. Hedge fund flow also predicts convergence between constant maturity swap rate and constant maturity Treasury rate, as well as between the TIPS and Treasury bond yields, suggesting that hedge funds exploit arbitrage opportunities in these fixed-income markets. >more