Brown Bag Seminar Archives
Abstract:This paper studies the strategic role of debt structure in improving the bargaining position of a firm's management relative to its non-financial stakeholders. Debt structure is essential for strategic bargaining since it affects the ease of debt contract renegotiation and thus the credibility of bankruptcy threat. We first document that the degree of wage concessions is indeed strongly related to a firm's debt structure ex post in the airline industry and the effect is reduced when bankruptcy threat is less credible for employees. Debt structure is further shown to be adjusted ex ante as a response to an increase in non-financial stakeholders' negotiation power. Utilizing NLRB labor union election as a laboratory setting and employing a regression discontinuity design, we find that passing a union election leads to an increase in the ratio of public debt to total asset and a decrease in the ratio of bank debt to total asset in the following three years after elections, while there is no significant change in the level of debt. Syndication size of newly issued bank loans increases while creditor ownership concentration decreases once vote share for unions passes the winning threshold. Various tests confirm that the debt structure adjustment after new unionization is more likely driven by strategic concerns of management rather than more constrained access to bank loans.
TITLE: Asset Pricing and Risk Sharing with Limited Enforcement and heterogeneous Preferences
Title: Why do banks ignore the warnings?
Abstract:Although the recent financial crisis came as a surprise to many, there were some employees who had warned against these risks. These warnings were ignored by the CEOs of the banks and the employees were fired. In my paper, I provide a theory of when will a CEO fire the employees and go ahead with risky strategies. Under the condition that one may get fired, the decision of the employees to disclose his concerns leads to a coordination problem among the employees. In a global games setting I show that, banks are more likely go ahead with the risky strategies when they seem to be more profitable.
Title: Uninsurable Tail Risks, Operating Leverage and the Value Premium
Can the usual tests of the Catering Theory of corporate investment distinguish between behavioral and rational perspectives? Using USA data from 1970 to 2015 we find test result which have been used in support of behavioral Catering Theory. We present a simple rational model of corporate investment and equity issuance. Data generated by the calibrated model produces the same patterns of coefficients as real data. According to behavioral, periods of high market sentiment and booms, are times of overvaluation. Using these periods we find that the patterns of coefficients are consistent with the rational model and not consistent with the behavioral predictions.
Brown Bags take place from 12:00pm-1:00pm in room 1-142 unless otherwise specified.
|Andy Winton||Cheating in China: Corporate Fraud and the Role of Financial Markets|
|9/16/15||Kaushalendra Kishore||Correlated Debt, Information Acquisition and Financial Crisis|
|9/23/15||Mark Egan||Recycling Bad Apples|
|9/30/15||Junyan Shen||Capital Misallocation and Financial Market Friction: Some Evidence by User Cost of Capital|
|10/7/15||John Pokorny||Nominal Frictions, Investment, and Leverage|
|10/14/15||Jincheng Tong||Government Investment and Asset Prices|
|10/21/15||Yue Qiu||Labor Adjustment Cost and Corporate Hedging|
|3/18/2015||Spring Break, No Brown Bag|
|2/26/14||Ashraf Al Zaman|
Cash holdings and technological development: Evidence from IT mediated improvement in inventory management
Since 1980s US manufacturing firms are holding more cash relative to their assets. In this paper, we investigate whether improvements in information technology (IT) and its use have contributed to this increase. We establish that IT contributed to the improvement through inventory channel. IT has enabled firms redeploy their current assets: substituting cash for inventory, engendering an era of sustained higher level of cash holdings. In addition, we also establish that some observed heterogeneity in cash holdings can be explained by the industries firms operate in, the type of inventories they hold, and the financial constraints they face.
|3/5/14||Jianfeng Yu||Short- and Long-Run Business Conditions and Expected Returns |
(joint with Qi Liu, Libin Tao, and Weixing Wu)Numerous studies argue that the market risk premium is associated with economic conditions and show that proxies for business conditions indeed predict aggregate market returns. By directly estimating short- and long-run expected economic growth,we show that short-run expected economic growth is negatively related to future returns, whereas long-run expected economic growth is positively related to aggregate market returns. At an annual horizon, short- and long-run expected growth can jointly predict aggregate excess returns with an R2 of 17-19%. Our ndings indicate that the risk premium has both high- and low-frequency fluctuations and highlight the importance of distinguishing short- and long-run economic growth in macro asset pricing models.
|3/19/14||Spring Break||No seminar|
|4/9/14||Kee Seon Nam||TBD|
A Mechanism Design Model of Firm Dynamics: The Case of Limited CommitmentWe present a general equilibrium-mechanism design model with two-sided limitedcommitment that accounts for the observed heterogeneity in firms' ;investment, payout and CEO-compensation policies. In the model, shareholders cannot commit to holding ;negative net present value projects, and managers cannot commit to ;compensation plans that yield life-time utility lower than their outside ;options. Firms operate identical constant return to scale technologieswith i.i.d.\ productivity growth. Consistent with the data, the model endogenouslygenerates a power law in firm size and a power law in CEO compensation. ;We also show that the model is able to quantitatively explain the observed negative ;relationship between firms' investment rates andsize, the positive relationship between firms' size and their dividend and CEO payout, as well as ;variation of firms' investment and payout policies across both size and age.
Crash Risk in Currency Returns
We quantify crash risk in currency returns. To accomplish this task, we develop and estimate an empirical model of exchange rate dynamics using daily data for four currencies relative to the US dollar: the Australian dollar, the British pound, the Swiss franc, and the Japanese yen. The model includes (i) normal shocks with stochastic variance, (ii) jumps up and down in the exchange rate, and (iii) jumps in the variance. We identify these components using data on exchange rates and at-the-money implied variances. We find that crash risk is time-varying. The probability of an upward (downward) jump in the exchange rate, associated with depreciation (appreciation) of the US dollar, is increasing in the domestic (foreign) interest rate. The probability of jumps in variance is increasing in the variance but is not related to interest rates. Many of the jumps in exchange rates are associated with macroeconomic and political news, but jumps in variance are not. On average, jumps account for 25% (and can be as high as 40%) of total currency risk, as measured by the entropy of exchange rate changes, over horizons of one to three months. Preliminary analysis suggests that these properties of currency returns correspond to observed option smiles and that jump risk is priced.
CEO Investment Cycles
This paper documents the existence of a CEO Investment Cycle, in which firms disinvest early in a CEO's tenure and increase investment subsequently, leading to cyclical firm growth in assets as well as in employment over CEO tenure. The CEO investment cycle occurs for both firings and non-performance related CEO turnovers, and for CEOs with different relationships with the firm prior to becoming CEO. The magnitude of the CEO cycle is substantial: The estimated difference in investment rate between the first three years of a CEO's tenure and subsequent years is approximately 6 to 8 percentage points, which is of the same order of magnitude as the differences caused by other factors known to affect investment, such as business cycles or financial constraints. We present a variety of tests suggesting that this investment cycle is best explained by a combination of agency-based theories: Early in his tenure the CEO disinvests poorly performing assets that his predecessor established and was unwilling to give up on. Subsequently, the CEO overinvests when he gains more control over his board. There is no evidence that the investment cycles occur because of shifting CEO skill or productivity shocks. Overall, the results imply that public corporations' investments deviate substantially from the first-best, and that governance-related factors internal to the firm are as important as economy-wide factors in explaining firms' investments.
|9/25/13||John Pokorny||Commodity returns and carry portfolios|
|10/2/13||Amanda Heitz||Efficient Contracting, Information Sharing, and Corporate Finance: An International Perspective|
CEO Compensation and Maturity of Debt Issues: Evidence From IRC 162(M)
This essay shows that CEO incentives provided by option compensation have significant impacts on maturity of newly issued debt. To identity such impacts, we exploit IRC 162(M) as an exogenous shock to new option grant decisions. IRC 162(M), effective since January 1st, 1994, limits corporate tax deductibility of CEO compensation and also has impacts on new option grant decisions in US firms. Our main findings are: First, after introduction of IRC 162(M), number, volatility sensitivity and price sensitivity of newly granted options in affected firm increase more than those in unaffected firms. Second, maturity of newly issued debt decreases (increases) when volatility (price) sensitivity of new option compensation increases. Overall, results in this essay show that CEO option compensation has large impacts on maturity of newly issued debt.
Short Arbitrage and Abnormal Return Asymmetry
This paper studies how constraints on short arbitrage are associated with abnormal return asymmetry of a broad set of anomalies. Using institutional holdings as a proxy for ease of short selling and idiosyncratic volatility for arbitrage risk, We find that the return asymmetry is stronger when short arbitrage is more constrained (low institutional holdings and high idiosyncratic volatility).
|10/30/13||Sangiago Bazdresch||Out of Sample Prediction tests for a Structural Model of Investment and Financing|
Liabilities ceded by life insurers to shadow reinsurers (i.e., less regulated off-balance-sheet entities) grew from $11 billion in 2002 to $363 billion in 2012. Companies that are involved in shadow insurance, which capture 50 percent of the market share, ceded 28 cents of every dollar insured to shadow reinsurers in 2012, up from 2 cents in 2002. Our adjustment for shadow insurance reduces risk-based capital by 49 percentage points (or 3 rating notches) and raises expected loss by at least $15.7 billion for the industry. We develop a structural model to estimate the impact of shadow insurance on the equilibrium supply in the retail market. In the absence of shadow insurance, marginal cost would rise by 1.8 percent, and annual insurance underwritten would fall by $1.4 billion at unit demand elasticity.
|11/13/13||Kee Seon Nam||Uncertainty about Management and Information Asymmetry|
Equilibrium Corporate Capital Structure (work-in-progress with Hong Chen, SAIF)
The trade-off theory of corporate capital structure has been studied in partial equilibrium settings, and in dynamic models that require numerical solutions. Separately, as a result of the financial crisis of 2007-2009, there are studies of financial frictions at the bank. These models are used to study "unconventional Fed policy" along the lines of the policies actually adopted during the crisis. We bring a simple financing friction model closer to the trade-off theory, by permitting equity finance. Cases with and without corporate tax, and the financing friction (bank default) are compared. Results similar to Modigliani-Miller (1958 and 1963) emerge naturally as special cases. Allowing for an equity market tends to undermine the policy justifications of "unconventional Fed policy" because investment tends to avoid distorted markets when an undistorted alternative is available. In contrast to the usual trade-off theory models, the corporate tax rate may affect the volume of household savings and hence the scale of firm production, but not the equilibrium leverage ratio in some equilibria.
|12/2/13 - Monday||Junyan Shen||Capital Misallocation and Financial Intermediary|
|12/11/13||Hongda Zhong||Thoughts on Optimal Debt Maturity, Number of Creditors and Seniority Structure under Rollover Risk|
|4/10/13||Kai Li (UBC)|
|9/5/12||Huijun Wang||The Role of Exploration and Exploitation in Diseconomies of Scale in the Mutual Fund Industry|
|9/19/12||John Pokorny||Do Agents Equate Marginal Utility Growth Over the Assets They Can Trade?|
|9/26/12||Tao Shen||Credit Spreads and Investment Opportunities|
|10/10/12||Hongda Zhong||Dynamic Trade with Asymmetric Information and Market Timing|
|10/17/12||Junyan Shen||Efficiency or Sentiment, discussion on the role of mutual fund flow|
|10/24/12||Hengjie Ai||Corporate Finance Frictions and Expected Return on Equity: An Irrelevance Result|
|10/31/12||Jianfeng Yu||Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle|
|11/7/12||Kee Seon Nam||National Culture and Innovation: A Cross-Country Empirical Investigation|
|11/14/12||Sergiy Dubynskiy||Technological Diversification and Asset Prices|
|11/28/12||Frederico Belo||Labor heterogeneity and asset prices: the importance of skilled labor|
|1/18/12||Philip Bond||The Effect of Government Guarantees without Risk-Shifting|
|1/25/12||Murray Frank||Investment and the Weighted Average Cost of Capital. How Good is the Standard Model?|
|2/1/12||Stephen Parente||Micro Simulation of Early Health Savings Account Adoption and Policy Proposals|
|2/8/12||Raj Aggarwal||Internal Capital Markets and Unrelated Acquisitions|
|2/15/12||Tracy Wang||First Year in Office: How Do New CEOs Create Value?|
|2/22/12||Jianfeng Yu||Extrapolative Expectation and Asset Pricing Puzzles|
|2/29/12||Huijun Wang||Does Effort Matter? A Study on Persistence in Mutual Fund Performance|
|3/7/12||Amanda Heitz||Blockholder Preference on Governance: Insights from VC-Backed IPOs|
|3/21/12||Tao Shen||Credit Spreads and Investment: Aggregate and Firm Level Evidence|
|3/28/12||Moto Yogo||Insurance Regulation and Policy Firesales|
|4/4/12||Sergiy Dubynskiy||Learning-by-Doing and Asset Prices|
|4/11/12||Raj Singh||Effect of Non-Tradability on Risk Aversion|
|4/25/12||Gordon Alexander||How Informed Are Predictive and Reactive Short Sellers around Earnings Announcements?|
|9/7/11||Bob Goldstein||Dividend Dynamics|
|9/14/11||Tao Shen||A Dynamic Learning Model of Takeovers|
|9/21/11||Andrew Winton||Lender Moral Hazard and Reputation in Originate-to-Distribute Markets|
|9/28/11||Amanda Heitz||The Social Costs and Benefits of Too-Big-To-Fail Banks: A Bounding Exercise|
|10/5/11||John Boyd||What Made US Banks Susceptible to a Systemic Crisis?|
|10/12/11||Daniil Osipov||Does solvency regulation always reduce product market competition? Evidence from the EU life insurance industry|
|10/19/11||Huijun Wang||Precautious Exploration of Mutual Fund Investment|
|10/26/11||Doriana Ruffino||Estimating Return Parameters with Short Historical Data: The Case of U.S. Treasury Inflation-Protected Securities|
|11/2/11||Jun Li||Investment-specific shocks and momentum profits|
|11/9/11||Santiago Bazdresch||Product Differentiations and Stock Returns: Theory andEvidence on Differentiations-Return Dynamics|
|11/16/11||Sergey Dubynskiy||Investment and Stock Returns Correlation Puzzle|
|11/30/11||Hongda Zhong||Higher Incentives Lead to Lower Effort? OptimalÂ Contracting with Heterogeneous Altruistic Agents|
|12/7/11||Jeremy Graveline||Exchange Rate Dynamics and International Risk Sharing|
|12/14/11||Junyan Shen||Investor Sentiment and the Economic Forces|
|1/28/11||Motohiro Yogo, Federal Reserve Bank of Minnesapolis||Health Data|
|3/25/11||Tao Shen and Huijun Wang|
|4/1/11||Jun Li and Sergiy Dubynskiy|
Estimating Bounds on the Present Discounted Value of Economics of Scale in Large Banks
Continuouos Time Agency Problem
|5/11/11||Murray Frank||Bank Loan Search|
|8/4/10||Jianfeng Yu||Investor Sentiment and Anomalies|
|10/8/10||Philip Bond||Bankers and Regulators|
|10/13/10||Tao Shen Huijun Wang|
|10/22/10||Jeremy Graveline||The Cost of Short-Selling Liquid Securities|
|10/27/10||Sergiy Dubynskiy and Jun Li|
|11/10/10||Pedram Nezafat||Corporate Capital Structure Variation over Time: Capital Market Driven or Investment Driven?|
|11/17/10||Xiaoji Lin, London School of Economics||Micro Frictions, Asset Pricing and Aggregate Implications|
|12/15/10||Tracy Wang||Competition and Corporate Fraud Waves|
|3/2/10||Tao Shen and Huijun Wang||Literature Review|
|3/10/10||Murray Frank and Pedram Nezafat||Credit Market Timing|
|3/22/10||Doriana Ruffino||Robust Mean-Variance Portfolio Analysis|
|5/11/10||Xiaoyun Yu||Do Financial intermediaries During IPOs Affect Long-Term Firm Mortality Rates?|
|5/19/10||Pedram Nezafat||High Frequency Capital Structure Decisions: Theory and Empirical Test|
|5/26/10||Fan Yang||A Production-Based Model on teh Cross- Section Predictability of Commodity Futures Returns|
|6/4/10||Yihui Pan||The Determinants and Impact of Executive-Firm Matches|
|6/11/10||Daniil Osipov||Trade-off and pecking Order Theories of Capital Structure: The Case of the UK Insureance Industry|
|6/19/10||Raj Aggarwal||An Empircal Investivgation of Internal Governance|
Predictability of Excess Returns on Foreign Currency Portfolios and Foreign Equity Portfolios
Replication and Extension: Invvestmenta nd Value, A Neoclassical Benchmark
|9/9/09||Yihui Pan||The Determinants and Impact of Executive-Firm Matches|
|9/16/09||Tracy Wang||Tolerance for Failure and Corporate Innovation|
|9/23/09||Xiaoyun Yu||Information From Relationship Lending: Evidence from Loan Defaults in China|
|9/30/09||Frederico Belo||A Labor-Augmented Investment-Based Asset Pricing Model|
|10/28/09||Jianfeng Yu||Psychological Anchors, Underreaction, Overreachtion, and Asset Prices|
Investment-based Asset Pricing
Literature Review on Parial Adjustment Toward Target Capital Structures
Literature Review of Commodity Pricing
Literature Review of Asset Prices and Business Cycles
|12/9/09||Frederico Belo||Is Investment in Public Capital Good News for the Stock Market?|
|12/16/09||Jianfeng Yu||A Sentiment-Based Explanation of Forward Premium Puzzle|