2016

Abstract: Recent evidence of excessive comovement among stocks following index additions (Barberis, Shleifer, and Wurgler, 2005) and stock splits (Green and Hwang, 2009) challenges traditional finance theory. Based on a simple model, we show that the bivariate regressions relied upon in the literature often provide little or no information about the economic magnitude of the phenomenon of interest, and the coefficients in these regressions are very sensitive to time-variation in the characteristics of the return processes that are unrelated to excess comovement. Instead, univariate regressions of the stock return on the returns of the group it is leaving (e.g., non-S&P stocks) and the group it is joining (e.g., S&P stocks) reveal the relevant information. When we reexamine the empirical evidence using control samples matched on past returns and compute Dimson betas, almost all evidence of excess comovement disappears. The results in the literature are consistent with changes in the fundamental factor loadings of the stocks. One key element to understanding these striking results is that, in both the examples we study, the stocks exhibit strong returns prior to the event in question. We document the heretofore unknown empirical regularity that winner stocks exhibit increases in betas. Thus, much of the apparent excess comovement is just a manifestation of momentum.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2619736

2015

Abstract: We examine signing bonuses awarded to executives hired for or promoted to Named Executive Officer (NEO) positions at S&P 1500 companies during the period of 1992–2011. Executive signing bonuses are sizeable and increasing in use, and are labeled by the media as “golden hellos.” We find that executive signing bonuses are mainly awarded at firms with greater information asymmetry and higher innate risks, especially to younger executives, to mitigate the executives’ concerns about termination risk. When termination concerns are strong, signing bonus awards are associated with better performance and retention outcomes.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2319204

Abstract: This study examines the performance impact of the relative quality of a CEO’s compensation peers (peers selected to determine a CEO’s overall compensation) and bonus peers (peers selected to determine a CEO’s relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO’s relative peer quality (RPQ). We find that firms with higher RPQ tend to earn superior risk-adjusted stock returns and experience higher profitability growth compared with firms that have lower RPQ. These results cannot be fully explained by a CEO’s power, compensation level, intrinsic talent, nor by a board’s possible motivation to use peers to signal a firm’s prospect. Learning among peers and the increased incentive to work harder induced by the peer-based tournament, however, might contribute to RPQ’s positive performance effect. Preliminary evidence also shows that high RPQ is not associated with increased earnings management or increased risk-taking

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2739407

Abstract: This Article analyzes recent business realities and regulatory trends shaping the proactive cybersecurity industry. To provide a framework for our discussion, we begin by describing the historical development of the industry and how it has been shaped by the applicable law in the United States and other G8 nations. We then catalogue the proactive cybersecurity practices of more than twenty companies, focusing on four case studies that we consider in the context of polycentric “global security assemblages.” Finally, we assess the emergence of proactive cybersecurity norms, both within industry and international law, and consider the implications of this movement on contemporary Internet governance debates about the role of the public and private sectors in regulating cyberspace. Ultimately, we maintain that proactive cybersecurity, especially if pursued with improved legal clarity and global cooperation, demonstrates an opportunity for polycentric partnerships to result in better protected IT assets.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573787

Abstract: The Patient Protection and Affordable Care Act (“Affordable Care Act” or ACA), health information technology (HIT) adoption, and increasing implementation of electronic medical records, are all propelling health care into the world of big data. Big data, analytics, and predictive algoithms are poised to play a large part in the transformation of health-care delivery in the United States, determining who will benefit and, unfortunately, who may suffer from its insights. Health-care reform depends on cost savings derived from the application of sophisticated data analytics to the ever-expanding mass of data collected from and about individual patients. Health data analytics can lead to improved care, new scientific discoveries, and better medical treatment. Encouraging healthy behaviors, eliminating health disparities, and addressing the underlying determinants of health in society are important national goals. It is unclear, however, whether massive data collection about personal health and individual social status, both within the health-care system and outside of it, will serve the goal of addressing historical discrimination in health care, or whether data analytics will lead to the loss of individual privacy, unequal treatment of individuals, and the perpetuation of health inequality. Data amassed from electronic health records (EHRs), private sector health website visits, personal health devices, mobile health applications, and social networks, are being linked together in a big data environment. Secondary use of health data by employers, insurers, marketers, and others heightens concerns. The collection and use of massive amounts of data about individuals, fed into a fragmented health analytics framework, may impose personal and societal costs if not carefully constructed. Furthermore, a predictive analytics environment in health care may affect some groups differently than others, not decreasing health dis-parities but segmenting populations and resulting in differential care. Health-care providers and policy makers should ask hard questions about how harms to personal privacy can be avoided, stigmas prevented, and threats of unbridled commercialization ameliorated.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2735137

Abstract: We compare the stock return forecasting performance of alternative payout yields. The net payout yield produces more accurate forecasts relative to alternatives, including the traditional dividend yield. This remains true even after excluding several years during the Great Depression when issuance was unusually high. The measure of cash flow used to form the yield matters economically. Long-term investors' hedging demand for stock is considerably reduced when net payout, rather than dividends, serves as the cash flow measure. An agent relying on an incorrect payout measure is willing to pay an economically significant "management fee" to switch to the optimal policy.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2348250

2014

Abstract: This paper examines whether one of the most important participants in the takeover market, the institutional investors of target companies, suffers from the disposition effect; and if so, how this selling bias influences the takeover outcomes. I report robust evidence that target institutional investors are reluctant to realize losses. This bias further allows their sunk cost to affect both the takeover price and the deal success. My results are explained by neither the undervalued targets, nor the 52-week high price effect. They are most pronounced among targets whose investors have a strong propensity to hold on to loser stocks.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166022

We examine the relation between the management of cash holdings and corporate governance. We find that firms with weaker corporate governance have smaller cash reserves. Further tests suggest that these firms dissipate their cash reserves more quickly than do managers of firms with stronger governance, and that rather than investing internally, they spend the cash primarily on acquisitions. The investment of cash by weakly governed managers reduces future profitability, an effect that is priced into those firms' stocks. We conclude that self-interested managers choose to spend cash quickly rather than gain flexibility through stockpiling it. This suggests that the expected discipline costs of visibly accumulating excess cash reserves are high. Our results, which contrast with recent research on the cross-country relation between shareholder rights and cash holdings, help explain how country level shareholder rights interact with firm-level agency problems and shareholder power.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=595150

2013

Abstract: This paper examines the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. We use the deaths of directors and CEOs as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The sudden loss of such key co-employees is an ‘attention shock’ because it increases the board committee workload for some independent directors at the interlocked firm – the ‘treatment group’, but not others – the ‘control group’. In a hand-collected sample of 2,551 (592) firms that share a non-deceased independent director with 633 (189) firms subject to director (CEO) deaths, difference-in-differences estimates reveal that investors react negatively to these attention shocks. There is a significant negative stock market reaction of -0.79% (-0.95%) for director-interlocked firms in the treatment group, but no reaction for those in the control group. The treatment effect is significantly magnified by interlocking directors’ busyness (e.g., board size and number of outside directorships), the importance of their roles in the firm (e.g., type of committee membership), and their degree of actual independence (e.g., board classification). Overall, these results provide endogeneity-free evidence that independent directors’ busyness is detrimental to board monitoring quality and shareholder value.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272478

Abstract: We investigate the impact of political institutions on corporate risk-taking. We posit that the extent of political constraints on the government affect corporate risk-taking along both direct and indirect mechanisms. Using a large sample of non-financial firms from 77 countries covering the period from 1988 to 2008, we find that sound political institutions are positively associated with corporate risk-taking and that this relation is stronger when government extraction is higher. In a sub-sample of 45 countries, we also find that politically-connected firms engage in more risk-taking suggesting that close ties to the government lead to less conservative investment choices. Our results are economically significant and are robust to alternative risk-taking measures, various political institutions proxies, cross-sectional and country-level regressions, and endogeneity concerns of political institutions. Our results have important implications for governments and corporate managers by pointing to the direct relevance of political institutions to the corporate decision-making process. To encourage investment at the firm-level, and hence innovation and overall growth, governments need to undertake the necessary reforms to better control corruption and enforce contracts, and thus decrease government predation and extraction.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2629486

Abstract: We use nearly 500 shifts in statutory corporate and personal income tax rates as natural experiments to assess the effect of corporate and personal taxes on capital structure. We find both corporate and personal income taxes to be significant determinants of capital structure. Based on ex-post observed summary statistics, across OECD countries, taxes appear to be as important as other traditional variables in explaining capital structure choices. The results are stronger among corporate tax payers, dividend payers, and companies that are more likely to have an individual as the marginal investor.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1781158

Abstract: We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 2.4% and 2.6% of total assets, respectively. These results are significantly stronger for firms that are smaller, have less analyst coverage, have a bigger increase in information asymmetry, and are more financially constrained.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1725539

2012

Abstract: The use of equity incentives is significantly greater in countries with stronger insider trading restrictions, and these higher incentives are associated with higher total pay. These findings are robust to alternative definitions of insider trading restrictions and enforcement, and to panel regressions with country fixed effects. We also find significant increases in top executive pay and the use of equity-based incentives in the period immediately following the initial enforcement of insider trading laws. We conclude that insider trading laws are one channel through which cross-country differences in pay practices can be explained.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1909065

Abstract: We analyze a sample of over 3,600 ex ante explicit severance pay agreements in place at 808 firms and show that firms set ex ante explicit severance pay agreements as one component in managing the optimal level of equity incentives. Younger executives are more likely to receive explicit contracts and better terms. Firms with high distress risk, high takeover probability and high return volatility are significantly more likely to enter into new or revised severance contracts. Finally, ex post payouts to managers are largely determined by the ex ante contract terms.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571971

Abstract: This study uses the method of Cremers and Petajisto (2009) to separate active institutional investors from passive ones and shows that only active institutional investors are able to alleviate the anomalous comovement of stock returns. Focusing on two events directly linked to the excess comovement anomaly: S&P 500 Index additions and stock splits, I find that if an event stock has more active institutional investors trading in the post-event period, the anomalous comovement effect disappears. In contrast, if an event stock experiences a massive exit of active institutional investors, this market anomaly persists. Furthermore, the exit of active institutional investors also results in a strong price synchronicity effect. Overall, my findings support the notion that active investing is socially valuable in mitigating the influences of uninformed investors and enhancing stock market’s information efficiency in the long run.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1831406

Abstract: We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC’s Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2081657

2011

Abstract: This study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management. For certain expenditures fund managers have alternative means of payment which differ greatly in their opacity: payments can be expensed (relatively transparent); or bundled with brokerage commissions (relatively opaque). We find that the return impact of opaque payments is significantly more negative than that of transparent payments. Moreover, we find a differential flow reaction that confirms the opacity of commission bundling. Collectively, our results demonstrate the importance of transparency in addressing agency costs of delegated investment management.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108768

Abstract: Institutional trading arrangements often involve the portfolio manager delegating the task of trade execution to a separate division within the firm. We model the agency conflict that arises in this setting and show that optimal performance benchmarks often create an incentive to execute orders contrary to concurrent information flow. We hypothesize that aggregate contrarian trading resulting from widespread application of such benchmarks leads to delays in the assimilation of information in security prices. Using institutional trading data, we document the hypothesized contrarian trading pattern and relate the pattern to price-adjustment delays in the response of individual stocks to index futures returns. The evidence supports the assertion that delegated institutional trading contributes to these delays.

Journal Link: http://su8bj7jh4j.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info%3Asid%2Fsummon.serialssolutions.com&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.atitle=Delegated+trading+and+the+speed+of+adjustment+in+security+prices&rft.jtitle=Journal+of+Financial+Economics&rft.au=Edelen%2C+Roger+M&rft.au=Kadlec%2C+Gregory+B&rft.date=2012-02-01&rft.pub=Elsevier+B.V&rft.issn=0304-405X&rft.eissn=1879-2774&rft.volume=103&rft.issue=2&rft.spage=294&rft_id=info:doi/10.1016%2Fj.jfineco.2010.11.008&rft.externalDBID=BSHEE&rft.externalDocID=275179751&paramdict=en-US

Abstract: I find that firms experiencing increases in import competition significantly reduce their leverage ratios by issuing equity and selling assets to repay debt. Using import tariffs and foreign exchange rates as instrumental variables for import penetration, I show that these results are not manifestations of endogenous relations between import competition and leverage. The results are consistent with traditional tradeoff models of capital structure that predict a positive relation between book leverage and future expected profitability. Further evidence suggests that import competition affects leverage through changes in the tradeoff between the tax benefits of debt and the costs of financial distress.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=972816

Abstract: This paper examines the use of derivatives and its relation with risk-taking in the hedge fund industry. From a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks, such as market risk, downside risk, and event risk; such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=972816

Abstract: We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC’s Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2081657

2010

We provide new evidence linking board characteristics and performance. We employ a sample of index funds to isolate the operational component of performance, thereby minimizing investment policy effects in our performance measures. Using manually collected governance data from the mutual fund industry covering the period from 1998 to 2007, we find an inverse relation between board size and fund performance. We also find evidence supporting our hypotheses that organizational form (whether the fund sponsor is publicly or privately held) as an internal governance mechanism plays an important role in determining operational performance. Specifically, we find that board size, the presence of fund sponsor officers, and boards comprised of all independent directors are related to operational performance when the sponsor is publicly held. For privately held firms, board structure is insignificantly related to performance. Overall, the results are consistent with the notion that there may not be a single optimal board structure that is applicable to all funds, attempts to regulate board attributes should be considered with caution, and sponsor level factors are important board structure considerations.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356364

2009

This paper evaluates the ability of bond funds to "market time" nine common factors related to bond markets. Timing ability generates nonlinearity in fund returns as a function of common factors, but there are several non-timing-related sources of nonlinearity. Controlling for the non-timing-related nonlinearity is important. Funds' returns are more concave than benchmark returns, and this would appear as poor timing ability in naive models. With controls, the timing coefficients appear neutral to weakly positive. Adjusting for nonlinearity the performance of many bond funds is significantly negative on an after-cost basis, but significantly positive on a before-cost basis.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1486431

2007

This paper examines whether self-described market timing hedge funds have the ability to time the U.S. equity market. We propose a new measure for timing return and volatility jointly that relates fund returns to the squared Sharpe ratio of the market portfolio. Using a sample of 221 market timing funds during 1994-2005, we find evidence of timing ability at both the aggregate and fund levels. Timing ability appears relatively strong in bear and volatile market conditions. Our findings are robust to other explanations, including public information-based strategies, options trading, and illiquid holdings. Bootstrap analysis shows that the evidence is unlikely to be attributed to luck.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=676110

2006

2005

2004

We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990 through 2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with strongest management rights (strongest antitakeover provisions) and firms with strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about thirty-four basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=527663

2003

According to Chen and Singal (2003), the weekend effect arose from the action of speculative short sellers closing their risky positions on Fridays and reopening them on Mondays. Furthermore, they argue that when less risky put options became available the weekend effect disappeared for the optioned securities because the bearish investors were no longer compelled to close their short positions over the weekend. In this study we challenge both the assertion that short selling initially caused the weekend effect and the assertion that the introduction of put options dramatically altered the behavior of bearish investors. We find evidence against Chen and Singal's hypothesis in an examination of the financial press and in a survey of bearish investors. In addition, we support our position with an empirical examination of the return behavior of option securities before and after the introduction of put options and through an empirical examination of weekday volume and return before and after the introduction of put options.

Journal Link: https://search-proquest-com.ezproxy.lib.vt.edu/docview/1034734670?pq-origsite=summon

We investigate the impact of founding-family ownership structure on the agency cost of debt. We find that founding-family ownership is common in large, publicly traded firms and is related, both statistically and economically, to a lower cost of debt financing. The evidence also indicates that the relation between founding-family holdings and debt costs is non-monotonic; debt costs first decrease as family ownership increases but then increase with increasing family ownership. However, irrespective of the level of family holdings, we find that family firms enjoy a lower cost of debt than non-family firms. These results are consistent with the hypothesis that continued founding-family ownership in publicly traded firms reduces the agency costs of debt. Additional analysis reveals that when a family member serves as the firm's CEO, the cost of debt financing is higher than if an outsider is CEO, but still lower than in non-family firms. Overall, the results are consistent with the idea that founding-family firms have incentive structures that result in fewer agency conflicts between equity and debt claimants, suggesting that bond investors view founding-family ownership as an organizational structure that better protects their interests.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=303864

2002

2001

This paper examines whether corporate insiders use private information to time the exercises of their executive stock options. Prior to May 1991, insiders had to hold the stock they acquired through option exercise for six months. We find that exercises from this regulatory regime precede significantly positive abnormal stock returns. This suggests that insiders timed exercises so that the subsequent forced investment in the stock coincidedwith favorable price performance. By contrast, we find little evidence of the use of inside information totime exercises since the removal of the holding restriction in May 1991. When insiders can sell the acquired shares immediately, the use of private information should manifest itself as negative abnormal stock price performance following option exercise. However, only in the subsample of exercises by top managers at small firms, a tiny fraction of the full sample, do we find significantly negative post-exercise stock price performance after May 1991. Weconclude that, in most cases, insiders' pote

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1296410

We consider the patterns in the predictability of interest rates expectations hypothesis (EH), and attempt to account for them with affine models. We make the following points: (i) Discrepancies in the data from the EH take a particularly simple form with forward rates: as theory suggests, the largest discrepancies are at short maturities. (ii) Reasonable estimates of one-factor Cox-Ingersoll-Ross models imply regressions on the opposite side of the EH than we see in the data: regression slopes are greater than one (iii) Multifactore affine models can nevertheless approximate both departures from the EH and other properties of interest rates.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=226127

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Abstract: We study the effect of investor horizons on a comprehensive set of corporate decisions. We argue that monitoring by long-term investors generates decision making that maximizes shareholder value. We find that long-term investors strengthen governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Innovation increases, in quantity and quality. Shareholders benefit through higher profitability that the stock market does not fully anticipate, and lower risk.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2505261

Abstract: We examine the effect of aggregate cash flow news and discount rate news on momentum returns. We find that momentum profits are higher following aggregate positive cash flow news, even in down markets or low sentiment periods. This finding expands on the evidence in Cooper et al. (2004) that momentum is significant only when past market returns are non-negative and in Antoniou et al. (2013) that momentum is weaker when sentiment is pessimistic. We find that the higher momentum profits during aggregate positive cash flow news periods are primarily driven by the losers continuing to underperform in subsequent periods. Our findings are consistent with the Hong and Stein (1999) model in the sense that gradual diffusion of contradictory news is accentuated when change in wealth is positive and relatively more permanent.

Journal Link: http://su8bj7jh4j.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info%3Asid%2Fsummon.serialssolutions.com&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.atitle=Cash+flow+news%2C+discount+rate+news%2C+and+momentum&rft.jtitle=Journal+of+Banking+%26+Finance&rft.au=Celiker%2C+Umut&rft.au=Kayacetin%2C+Nuri+Volkan&rft.au=Kumar%2C+Raman&rft.au=Sonaer%2C+Gokhan&rft.date=2016-11-01&rft.pub=Elsevier+B.V&rft.issn=0378-4266&rft.eissn=1872-6372&rft.volume=72&rft.spage=240&rft_id=info:doi/10.1016%2Fj.jbankfin.2016.07.016&rft.externalDBID=BKMMT&rft.externalDocID=470212735&paramdict=en-US

Abstract: Using bank level measures of competition and co-dependence, we show a robust negative relationship between bank competition and systemic risk. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, in this paper we examine the correlation in the risk taking behavior of banks. We find that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on bank systemic risk shows that banking systems are more fragile in countries with weak supervision and private monitoring, greater government ownership of banks, and with public policies that restrict competition. We also find that the negative effect of lack of competition can be mitigated by a strong institutional environment that allows for efficient public and private monitoring of financial institutions.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020584

Abstract: Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other creditors. If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699612

Abstract: Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks which lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. Our findings suggest that the “moral hazard effect” of deposit insurance dominates in good times while the “stabilization effect” of deposit insurance dominates in turbulent times. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2168168

Abstract: The standard measures of distress risk ignore the fact that firm defaults are correlated and that some defaults are more likely to occur in bad times. We use risk premium computed from corporate credit spreads to measure a firm’s exposure to systematic variation in default risk. Unlike previously used measures, the credit risk premium explicitly accounts for the non-diversifiable component of distress risk. In contrast to prior findings in the literature, we find that stocks with higher systematic default risk exposures, have higher expected equity returns which are largely explained by the Fama-French risk factors. We confirm the robustness of these results by using an alternative systematic default risk factor for firms that do not have bonds outstanding.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344745

Abstract: This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine the evolution of the correlation structure of default risk for more than 1,800 banks in more than 60 countries. They find that there has been a significant increase in default risk co-dependence over the three-year period leading to the financial crisis. They also find that countries that are more integrated, and that have liberalized financial systems and weak banking supervision, have higher co-dependence in their banking sector. The results support an increase in scope for international supervisory co-operation, as well as capital charges for "too-connected-to-fail" institutions that can impose significant externalities.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1947192

Abstract: The global financial crisis brought government guarantees to the forefront of the debate. Based on a review of frictions that hinder financial contracting, this paper concludes that the common justifications for government guarantees — i.e., principal-agent frictions or un-internalized externalities in an environment of risk neutrality — are flawed. Even where risk is purely idiosyncratic — and thus diversifiable in principle — government guarantees (typically granted via development banks/agencies) can be justified if private lenders are risk averse and because of the state’s comparative advantage over markets in resolving the collective action frictions that hinder risk spreading. To exploit this advantage while keeping moral hazard in check, however, development banks/agencies have to price their guarantees fairly, crowd in the private sector, and reduce their excessive risk aversion. The latter requires overcoming agency frictions between managers and owner (the state), which would likely entail a significant reshaping of development banks’ mandates, governance, and risk management systems.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2531967

Abstract: Using bank level measures of competition and co-dependence, the authors show a robust positive relationship between bank competition and systemic stability. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, they examine the correlation in the risk taking behavior of banks, hence systemic risk. They find that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, with generous deposit insurance and greater government ownership of banks, and public policies that restrict competition. Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with low levels of foreign ownership, weak investor protections, generous safety nets, and where the authorities provide limited guidance for bank asset diversification.

Journal Link: https://openknowledge.worldbank.org/handle/10986/3267

Abstract: We analyze a sample of over 3,600 ex ante explicit severance pay agreements in place at 808 firms and show that firms set ex ante explicit severance pay agreements as one component in managing the optimal level of equity incentives. Younger executives are more likely to receive explicit contracts and better terms. Firms with high distress risk, high takeover probability and high return volatility are significantly more likely to enter into new or revised severance contracts. Finally, ex post payouts to managers are largely determined by the ex ante contract terms.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571971

Abstract: This paper examines how corporate governance and executive compensation affect bank capitalization strategies for an international sample of banks over the 2003-2011 period. ‘Good’ corporate governance, which favors shareholder interests, is found to give rise to lower bank capitalization. Boards of intermediate size, separation of the CEO and chairman roles, and an absence of anti-takeover provisions, in particular, lead to low bank capitalization. However, executive options and stock wealth invested in the bank is associated with better capitalization except just before the crisis in 2006. In that year stock options wealth was associated with lower capitalization which suggests that potential gains from taking on more bank risk outweighed the prospect of additional loss. Banks’ tendency to continue payouts to shareholders after experiencing negative income shocks are shown to reflect executive risk-taking incentives.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2336949

Abstract: The use of equity incentives is significantly greater in countries with stronger insider trading restrictions, and these higher incentives are associated with higher total pay. These findings are robust to alternative definitions of insider trading restrictions and enforcement, and to panel regressions with country fixed effects. We also find significant increases in top executive pay and the use of equity-based incentives in the period immediately following the initial enforcement of insider trading laws. We conclude that insider trading laws are one channel through which cross-country differences in pay practices can be explained.

Journal Link: http://su8bj7jh4j.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info%3Asid%2Fsummon.serialssolutions.com&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.atitle=Insider+trading+restrictions+and+top+executive+compensation&rft.jtitle=The+Journal+of+Accounting+and+Economics&rft.au=Denis%2C+David+J&rft.au=Xu%2C+Jin&rft.date=2013-07-01&rft.pub=Elsevier+B.V&rft.issn=0165-4101&rft.eissn=1879-1980&rft.volume=56&rft.issue=1&rft.spage=91&rft_id=info:doi/10.1016%2Fj.jacceco.2013.04.003&rft.externalDBID=BSHEE&rft.externalDocID=336577912&paramdict=en-US

Abstract: We investigate the impact of political institutions on corporate risk-taking. We posit that the extent of political constraints on the government affect corporate risk-taking along both direct and indirect mechanisms. Using a large sample of non-financial firms from 77 countries covering the period from 1988 to 2008, we find that sound political institutions are positively associated with corporate risk-taking and that this relation is stronger when government extraction is higher. In a sub-sample of 45 countries, we also find that politically-connected firms engage in more risk-taking suggesting that close ties to the government lead to less conservative investment choices. Our results are economically significant and are robust to alternative risk-taking measures, various political institutions proxies, cross-sectional and country-level regressions, and endogeneity concerns of political institutions. Our results have important implications for governments and corporate managers by pointing to the direct relevance of political institutions to the corporate decision-making process. To encourage investment at the firm-level, and hence innovation and overall growth, governments need to undertake the necessary reforms to better control corruption and enforce contracts, and thus decrease government predation and extraction.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2629486

Abstract: This paper presents a data point relevant to significant issues of policy concerning areas of law where small firms have either been granted exemption from regulations or not investigated for violations of laws that, on their face, apply to them. Whether small firms should be exempted is an empirical question the answer to which depends on the likelihood of such firms violating regulations. Researchers, however, face a problem when obtaining data on violations because violations are typically observed only when they are investigated. The selection of firms for investigation is under the discretion of enforcement officials who may select larger firms for investigation, passing over smaller firms, to either promote societal welfare or to further various career aspirations. The stock options backdating scandal provides a unique opportunity to examine the likelihood that a firm is engaging in illicit activity by observing stock price behavior regardless of whether the firm is ever investigated. Our data set thus enables us to compare the size of the firms likely to have engaged in illegal backdating of executive stock options with those firms that have been investigated or prosecuted for these frauds. Our results show that smaller firms are overly represented in the sample of firms that have engaged in illegal activity, but spared the bulk of law enforcement efforts. Thus, these firms have essentially been given a free pass to engage in illicit behavior – raising significant issues for public policy.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1806267

Abstract: We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC’s Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2081657

Abstract: This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers’ self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm’s internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm’s motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers’ self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=460987

Abstract: This paper examines the impact of the strength of governance on firms’ use of currency derivatives. Using a sample of firms from 30 countries over the period 1990 to 1999, we find that strongly governed firms tend to use derivatives to hedge currency exposure and overcome costly external financing. On the other hand, weakly governed firms appear to use derivatives mostly for managerial reasons. These results are robust to alternative measures of corporate governance, various subsamples, the use of foreign denominated debt as an alternative strategy to hedge currency exposure, and a potential selection bias. Overall, the results serve as the first comprehensive evidence of the impact of firm- and country-level corporate governance on firms’ use of derivatives.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=391883

Abstract: There is a long running debate over whether competition in the mutual fund industry limits the ability of investment advisors to charge fees that are disproportionate to the services they provide. We posit that disproportionately high fees are prevalent in funds with multiple share classes and those with weak governance structures. Using a comprehensive sample of index mutual funds for the from 1998 to 2007, we find that internal governance mechanisms matter primarily for funds with relatively small share classes where investors often face increased search costs and/or restricted access to competitive mutual funds. Additionally, we find that funds managed by publicly held sponsors are associated with disproportionately higher fee spreads (about 28 basis points). The results are robust to the inclusion of board characteristics, share class structure, and investment objectives. Overall, our findings suggest that competition and agency considerations are important determinants in the pricing of mutual funds.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1433517

Abstract: We examine the relation between organizational structure (public vs private) and managerial turnover in a large sample of U.S. offered mutual funds. Consistent with the hypothesis that publicly traded firms focus more on shorter term performance, we find that public sponsors are more sensitive to prior fund performance when making replacement decisions and experience smaller post turnover performance improvements. Additional testing suggests a higher likelihood of fund manager replacement when mutual funds are team managed and when fund boards more independent. Overall, our results indicate that organizational form plays a pivotal role in the managerial labor market for mutual funds.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1492846

Abstract: Research suggests that firms can use either debt or dividends as a commitment device to mitigate the free cash flow problem. We hypothesize that firms which face limitations on debt may use increased dividend payments as a second-best bonding device. Limitations on debt are implicit in state laws that restrict the firm from making payouts when the asset-to-liability ratio is low. Consistent with our hypothesis, we find that (i) firms incorporated in states with stricter payout restrictions pay more dividends, (ii) the probability of paying dividends or repurchasing shares decreases as firms approach their binding payout constraint, and (iii) bonding with dividends is less prevalent with increased managerial equity holdings. Further tests examining the relation between firm payout policy and payout restriction laws while controlling for antitakeover and director liability laws confirm our findings.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1404177

Abstract: This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers' self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm's internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm's motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers' self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.

Journal Link: http://su8bj7jh4j.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info%3Asid%2Fsummon.serialssolutions.com&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.atitle=The+use+of+foreign+currency+derivatives%2C+corporate+governance%2C+and+firm+value+around+the+world&rft.jtitle=Journal+of+International+Economics&rft.au=Allayannis%2C+George&rft.au=Lel%2C+Ugur&rft.au=Miller%2C+Darius+P&rft.date=2012-05-01&rft.pub=Elsevier+Science+Publishers&rft.issn=0022-1996&rft.eissn=1873-0353&rft.volume=87&rft.issue=1&rft.spage=65&rft_id=info:doi/10.1016%2Fj.jinteco.2011.12.003&rft.externalDBID=XI7&rft.externalDocID=A288037569&paramdict=en-US

Abstract: We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (i.e., those with high idiosyncratic risk). Our results are robust to controls for the amount of private information in equity prices and the level of corporate disclosures. Overall, our the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=699702

Abstract: We develop a new methodology that controls for both the timing of annual earnings news (Asquith et al., 1989) and the performance prior to split announcements (Barber and Lyon, 1996) to evaluate the information content of stock splits. In contrast to existing evidence, we find that stock splits in aggregate are followed by positive abnormal future earnings growth, suggesting that stock splits contain information about future, rather than past, operating performance. When we use changes in breadth of institutional ownership as a new metric of information content to corroborate our findings, we find that splits with the greatest increase in breadth experience positive post-split abnormal returns and positive abnormal earnings growth. Together, our results suggest that some splits contain positive information about future performance, and that sophisticated market participants such as institutional investors are able to select these splits.

Journal Link: http://su8bj7jh4j.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info%3Asid%2Fsummon.serialssolutions.com&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.atitle=The+information+content+of+stock+splits&rft.jtitle=Journal+of+Banking+and+Finance&rft.au=Chen%2C+Honghui&rft.au=Nguyen%2C+Hoang+Huy&rft.au=Singal%2C+Vijay&rft.date=2011&rft.pub=Elsevier+B.V&rft.issn=0378-4266&rft.eissn=1872-6372&rft.volume=35&rft.issue=9&rft.spage=2454&rft.epage=2467&rft_id=info:doi/10.1016%2Fj.jbankfin.2011.02.005&rft.externalDocID=doi_10_1016_j_jbankfin_2011_02_005&paramdict=en-US

Abstract: This paper investigates the possible formation of informational cascades by traders in a random sample of 8,000 NYSE stock-days experiencing extreme price changes during 1998-2001. Our cascade measure is designed to detect informational cascades in high-frequency stock market prices. First, we find evidence of cascades on approximately 12% of the days when the NYSE experiences, on average, large price increases. This percentage increases to about 20% on days experiencing large price decreases, on average. Second, we find evidence that the interarrival times of trades in those stocks exhibiting significant informational cascades are generated by a nonlinear stochastic process. Third, the evidence supporting cascades is largely confined to smaller stocks and to stocks followed by fewer security analysts. Last, the occurrence of cascades appears to correlate with the incorporation of fundamental information into security prices. 

Journal Link: https://search-proquest-com.ezproxy.lib.vt.edu/docview/314092863?pq-origsite=summon

Abstract: This paper examines whether customer satisfaction is associated with key metrics from corporate bond markets - credit ratings and cost of debt financing. We draw on theory in marketing and finance to predict how customer satisfaction should be associated with both measures. To test our hypotheses, we employ the American Customer Satisfaction Index (ACSI) database of more than 150 publicly traded firms during the period from 1994 to 2004. We control for factors known to influence the bond market, such as firm profitability and risk, as well as potential unobservable factors. We find firms with lower customer satisfaction exhibit lower credit ratings and higher debt costs - financial benefits of customer satisfaction not previously observed. We also find both effects are attenuated by the inherent level of risk faced by the firm.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1138912

Abstract: Daily financial returns (and daily stock returns, in particular) are commonly modeled as GARCH(1, 1) processes. Here we test this specification using new model evaluation technology developed by Ashley and Patterson that examines the ability of the estimated model to reproduce features of particular interest: various aspects of nonlinear serial dependence, in the present instance. Using daily returns to the CRSP equally weighted stock index, we find that the GARCH(1, 1) specification cannot be rejected; thus, this model appears to be reasonably adequate in terms of reproducing the kinds of nonlinear serial dependence addressed by the battery of nonlinearity tests used here.

Journal Link: https://search-proquest-com.ezproxy.lib.vt.edu/docview/314015405?pq-origsite=summon

Abstract: We investigated the informational content of corporate insider buying activity and concluded that the market impact of insider transactions varies with the length of interval between insider buy transactions and the disclosure of information to the public. Analysis of a sample obtained from the Washington Services Insider Trade database indicates that (1) the informational content of insider transactions leaks out prior to the U.S. SEC announcement, (2) information leakage is positively associated with the length of the interval between the insider buying activity and the SEC announcement, (3) information leakage for CEOs and other officers differs only marginally, and (4) those insiders with the longest delay in reporting have the greatest total impact on stock prices. Our findings suggest that insiders are able to use their disclosure timing to manipulate the stock-price impact of their buying activity.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=415680

Abstract: Theoretical models suggest that firms may pursue riskier strategies in times of financial distress. For example, financially weak firms may compromise safety and quality to maximize current period profits. If the riskier strategy fails, then the stockholders are content to hand over the bankrupt firm to the debt holders. Despite much interest, there is little, if any, empirical evidence that relates financial health to the risk-taking behavior of firms. We explore this relationship for the airline industry. Using bond ratings to proxy for financial health and airline mishaps to measure safety, we find a significant correlation: airlines with higher quality bond ratings are less likely to experience mishaps than airlines with lower quality ratings. On average, an airline with an investment grade bond rating has a 25% lower probability of a mishap than an airline with a below investment grade bond rating. The findings imply that the Federal Aviation Administration (FAA) should shift part of its inspection and surveillance resources from financially strong airlines to financially weak airlines. Further, reliance on readily available bond ratings makes it easy to implement these

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=47266

Abstract: Five methods of estimating the term structure from on-the-run Treasuries are compared with respect to error in spot rate estimation, forward rate estimation and coupon bond pricing. The methods can all be considered variants of the bootstrapping technique. The two discrete-time bootstrapping methods are based on linear and cubic interpolation of the yield curve. Two continuous-time bootstrapping methods are based on exponential functional forms for the yield curve and a third is based on a bilinear transformation of a power function. Simulated bond samples with and without random error are employed to study the relative importance of interpolation error and random pricing error. CRSP bond data are used in assessing the accuracy of the methods in pricing liquid and illiquid bonds. Two methods stand out in terms of good interpolation properties and robustness in the face of pricing errors. These are the Nelson and Siegel and the Mansi and Phillips methods. Both are based on exponential functions.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=288600

Abstract: examine the impact of state payout restrictions on firm credit ratings and bond yields. Using publicly traded bond data for a sample of large firms, we find that firms incorporated in states with more restrictive payout statutes (e.g., New York and California), have better credit ratings and significantly lower yield spreads (about 8.7%) relative to firms incorporated in less restrictive states (e.g., Delaware). These results suggest that incorporation in a more restrictive state provides a credible commitment mechanism for avoiding some of the moral hazard problems associated with long-term debt. This commitment corresponds to an economically and statistically significant difference in market yields and firm financing costs and is robust to controls for ownership, governance, debt type, Delaware versus non-Delaware incorporation, and covenant usage. Overall, our results are consistent with the notion that Delaware incorporation has hidden costs for some firms.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=892808

Abstract: Creditor reliance on accounting-based debt covenants suggests that debtors are potentially concerned with board of director characteristics that influence the financial accounting process. In a sample of S&P 500 firms, we find that the cost of debt financing is inversely related to board independence and board size. We also examine the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process. We find that fully independent audit committees are associated with a significantly lower cost of debt financing. Similarly, yield spreads are also negatively related to audit committee size and the number of audit committee meetings. Overall, these results provide market-based evidence that boards and audit committees are important elements affecting the reliability of financial reports.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=491883

Abstract: The literature provides conflicting evidence on the relation between corporate international activity and the cost and level of debt financing. Based on this evidence, we explore the impact of firm international activity on debt financing. Using a market-based sample of U.S. firms, we find significant evidence of a non-monotonic relation between firm international activity and both the cost and level of debt financing. Specifically, we find that, contrary to prior research, firm international activity is associated with a 13% reduction in the cost of debt and a 30% increase in the level of debt financing.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=285984

Abstract: This paper examines whether corporate insiders use private information to time the exercises of their executive stock options. Prior to May 1991, insiders had to hold the stock they acquired through option exercise for six months. We find that exercises from this regulatory regime precede significantly positive abnormal stock returns. This suggests that insiders timed exercises so that the subsequent forced investment in the stock coincidedwith favorable price performance. By contrast, we find little evidence of the use of inside information totime exercises since the removal of the holding restriction in May 1991. When insiders can sell the acquired shares immediately, the use of private information should manifest itself as negative abnormal stock price performance following option exercise. However, only in the subsample of exercises by top managers at small firms, a tiny fraction of the full sample, do we find significantly negative post-exercise stock price performance after May 1991. Weconclude that, in most cases, insiders' potential information advantage in timing exercises is not an important issue in valuing executive stock options.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1296410

Abstract: The link between asset valuations and investor sentiment is the subject of considerable debate in the profession. We address this question by examining how survey data on investor sentiment relates to i) long-horizon returns, and ii) asset valuations. If excessive optimism drives prices above intrinsic values, periods of high sentiment should be followed by low returns as market prices revert to fundamental values. We find this to be the case for the overall stock market at horizons of two to three years. The relation is strongest for large-capitalization, low book-to-market (growth) portfolios. We also examine the relation between sentiment levels and deviations from intrinsic value. Using errors from an independent pricing model, we find sentiment is positively related to valuation errors using a variety of tests. All of our results are robust to the inclusion of other factors that have been shown to forecast stock returns, including past returns.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=292139

Abstract: We examine how a sample of publicly traded corporate bond issuers and institutional investors, namely corporate bond funds, assess the four major nationally recognized credit rating agencies and their role in capital markets. The results show that these issuers and institutional investors differ dramatically in their assessments about rating agencies. Specifically, the majority of institutional investors require, as a matter of formal policy, only one rating when they buy rated corporate bonds, but most issuers obtain two or more ratings. Issuers and institutional investors also differ in their assessments about whether ratings accurately reflect creditworthiness and whether agencies maintain timely ratings. In aggregate, the results suggest that differences between bond issuers and institutional investors reflect the different roles that rating agencies provide in the market place.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=288683

Abstract: The literature provides conflicting evidence on the relation between corporate international activity and the cost and level of debt financing. Based on this evidence, we explore the impact of firm international activity on debt financing. Using a market-based sample of U.S. firms, we find significant evidence of a non-monotonic relation between firm international activity and both the cost and level of debt financing. Specifically, we find that, contrary to prior research, firm international activity is associated with a 13% reduction in the cost of debt and a 30% increase in the level of debt financing.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=285984

Abstract: We propose a new model to estimate the term structure of interest rates using observed on-the-run Treasury yields. The new model is an improvement over models that require apriori knowledge of the shape of the yield curve to estimate the term structure. The general form of the model is an exponential function that depends on the estimation of four parameters fit by nonlinear least squares and has straightforward interpretations. In comparing the proposed model with current yield curve smoothing models, we find that, for the data used, the proposed model does best overall in terms of pricing accuracy both in-sample and out-of-sample.

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=291340

Abstract: The on-the-run term structure is generally estimated from yields on securities that sell at or near their par values. These yields can be obtained either from market data or from published estimates of par yields, known as constant maturity Treasury yields. The purpose of this research is to compare and contrast the use of constant maturity yields as an alternative to actual yields observed in the Treasury market. Based on a sample of month-end data covering the period January 1, 1990 to December 31, 1997, we find that constant maturity Treasury yields provide a significantly larger pricing error in term structure estimation than market Treasury yields both in-sample and out-of-sample. The results also suggest that the Department of Treasury can improve its estimation of constant maturity yields by using a continuous bootstrapping methodology based on an assumed functional form (e.g., Nelson and Siegel (1987)).

Journal Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=291689