Forthcoming Articles

Measuring Interconnectedness between Financial Institutions with Bayesian Time-Varying Vector Autoregressions

Marco Valerio Geraci and Jean-Yves Gnabo

We propose a market-based framework that exploits time-varying parameter vector autoregressions to estimate the dynamic network of nancial spillover effects. We apply it to nancials in the Standard & Poor’s 500 index and estimate interconnectedness at the sector and institution level. At the sector level, we uncover two main events in terms of interconnectedness: the Long Term Capital Management crisis and the 2008 crisis. After these crisis events, we nd a gradual decrease in interconnectedness, not observable using the classical rolling window approach. At the institution level, our framework delivers more stable interconnectedness rankings over time than other market-based measures.

The Term Structure of Expected Recovery Rates

Hitesh Doshi, Redouane Elkamhi, and Chayawat Ornthanalai

There is widespread agreement that corporate debts’ recovery rates are time-varying, but empirical work in this area is limited. We show that the joint information from the term structure of senior and subordinate credit default swaps can identify the level and the dynamics of recovery rates. We estimate a reduced form no-arbitrage model on 46 firms across different industries. We find that the term structure of expected recovery rates is, on average, downward sloping. However, an inversion occurs during the 2008 crisis, suggesting the market expects higher recoveries conditional on short-term survival. The inversion is more pronounced for firms in distressed industries.

Do IPOs Affect the Market Price? Evidence from China

Song Shi, Qian Sun, and Xin Zhang

We examine whether sizable initial public offerings (IPOs) affect the whole market. Using a Chinese IPO sample, we find robust evidence that sizable IPOs do depress the market price on not only the listing day but also the offering (subscription) day. The impact on the market is negatively correlated with the IPO size on the listing day. However, the IPO impact is largely transitory. The China Securities Regulatory Commission (CSRC) often places a moratorium on IPOs to support the market, which seems ineffective as the negative IPO effect is transitory and moratoriums are not perceived as good news.

Organizational Form and Corporate Payout Policy

Bradford D. Jordan, Mark H. Liu, and Qun Wu

We examine how organizational form affects corporate payouts. Conglomerates pay out more than pure plays in both cash dividends and total payouts (cash dividends plus share repurchases). Further, their payouts are more sensitive to cash flows compared to pure-play firms. The sensitivity of payouts to cash flow increases as the cross segment correlation in a conglomerate decreases. Corporate payouts increase after mergers and acquisitions (M&As), especially among M&As in which acquirers and targets are less correlated. These results suggest that the coinsurance among different divisions of a conglomerate allows them to pay out more cash flow to their shareholders than pure-play firms.

Credit Default Swaps and Firm Value

Rajesh Narayanan and Cihan Uzmanoglu

This paper provides evidence that firm value declines when credit default swaps (CDS) are initiated, and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm’s credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

Tournament-Based Incentives, Corporate Cash Holdings, and the Value of Cash

Hieu V. Phan, Thuy Simpson, and Hang T. Nguyen

This research examines the relationships between tournament-based incentives and corporate cash holdings and the value of cash. We find robust evidence that tournament-based incentives are positively related to cash holdings and the value of cash. Moreover, the effect of tournament-based incentives on the value of cash is stronger for financially constrained firms. Our evidence indicates that, as tournament-based incentives motivate riskier corporate policy choices that lead to not only larger expected shareholder value but also greater cash flow uncertainty, firms increase cash holdings to cushion potential liquidity shortfalls that may cause underinvestment.

The Effect of Credit Competition on Banks’ Loan Loss Provisions

Yiwei Dou, Stephen G. Ryan, and Youli Zou

Exploiting differential interstate branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan underwriting quality appear better, deterring entry, while local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, and that the other incentive dominates in counties with both few heterogeneous loans and highly volatile economic conditions.

Managerial Risk-Taking Incentives and Merger Decisions

Chen Lin, Micah S. Officer, and Beibei Shen

We provide evidence concerning the effect of managerial risk-taking incentives on merger and acquisition (M&A) decisions and outcomes for different types of mergers: vertical, horizontal, and diversifying. Using chief executive officer (CEO) relative inside leverage to proxy for the incentives of risk-averse managers, we find that CEOs with higher inside leverage are more likely to engage in vertical mergers, and those mergers generate lower announcement returns for shareholders. This effect of CEO relative inside leverage on returns for shareholders in vertical acquisitions is more pronounced when the acquirer has a higher degree of informational opacity, weak governance, and excess cash.

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