taxes and capital structure understanding firms savings abstract the u s non financial corporate sector became a net lender to the rest of the economy in the early 2000s with close to half of all publicly traded firms holding financial assets in excess of their debt liabilities we develop a simple dynamic model of debt and equity financing where firms strive to accumulate financial assets even though debt is fiscally advantageous relative to equity moreover firms find it optimal to fund additional financial asset holdings through equity revenues the calibrated model matches well the distribution of public firms balance sheets during the 2000s and correctly predicts which firms are net savers

callable risky perpetual debt with protection period abstract issuances in the usd 260 bn global market of perpetual risky debt are often motivated by capital requirements for financial institutions we analyze callable risky perpetual debt emphasizing an initial protection grace period before the debt may be called the total market value of debt including the call option is expressed as a portfolio of perpetual debt and barrier options with a time dependent barrier we also analyze how an issuer s optimal bankruptcy decision is affected by the existence of the call option by using closed form approximations the model quantifies the increased coupon and the decreased initial bankruptcy level caused by the embedded option examples indicate that our closed form model produces reasonably precise coupon rates compared to numerical solutions the credit spread produced by our model is in a realistic order of magnitude compared to market data

a theory of corporate financial decisions with liquidity and solvency concerns this paper studies the impact of both liquidity and solvency concerns on corporate finance i present a tractable model of a firm that optimally chooses capital structure cash holdings dividends and default while facing cash flows with long term uncertainty and short term liquidity shocks the model explains how changes in solvency affect liquidity and also how liquidity concerns affect solvency via capital structure choice these interactions result in a dynamic cash policy in which cash reserves increase in profitability and are positively correlated with cash flows the optimal dividend distributions implied by the model are smoothed relative to cash flows i also find that liquidity concerns lead to a decrease of dispersion of credit spreads

costly arbitrage evidence from closed end funds arbitrage costs lead to large deviations of prices from fundamentals using a sample of closed end funds i find that the market value of a fund is more likely to deviate from the value of its assets 1 for funds with portfolios that are difficult to replicate 2 for funds that pay out smaller dividends 3 for funds with lower market values and 4 when interest rates are high these factors are related to the magnitude of the deviation as opposed to the direction i e whether discount or premium and explain a quarter of cross sectional mispricing variation these findings are consistent with noise trader models of asset pricing

strategic price complexity in retail financial markets abstract there is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets there is significant price dispersion even when products are homogeneous also despite the large number of firms in the market prices remain above marginal cost and may even rise as more firms enter in a non cooperative oligopoly pricing model i show that these anomalies arise when firms add complexity to their price structures complexity increases the market power of the firms because it prevents some consumers from becoming knowledgeable about prices in the market in the model as competition increases firms tend to add more complexity to their prices as a best response rather than make their disclosures more transparent because this may substantially decrease consumer surplus in these markets such practices have important welfare implications

a theoretical model for valuing preferred stock this paper develops a model of preferred stock value which includes the possibility of dividends on the preferred stock being omitted the analytical framework used is based on the option hedging methodology of black and scholes precise valuation formulae are obtained for cumulative and noncumulative preferred stock in a variety of contexts the values obtained are quite different from those for either riskless or risky perpetual bonds which have previously been proposed as being similar to preferred stock since 1970 an average of 3 billion dollars worth of capital has been raised annually by corporations in the united states in the form of preferred stock in spite of this impressive figure there has been very little theoretical analysis of preferred stock valuation while previous analysis e g merton 9 and ingersoll 7 has treated preferred stock as a corporate consol bond this view is not taken here for an essential feature of preferred stock is that omission of the dividend is permissible and does not precipitate bankruptcy whereas this would happen if a bond coupon payment were missed corporations can and do fail to pay preferred dividends from time to time particularly in times of severe economic depression herein is developed a theory of preferred stock valuation the return generating process for the firm is assumed to be a continuous time diffusion and the option hedging arguments of black and scholes 2 cox and ross 4 and other authors can be used to derive a functional form of preferred stock value in terms of firm value and dividend arrearage the key to the valuation theory lies in a particular assumption about the conditions under which preferred stock dividends are omitted this assumption is that all dividends are omitted whenever firm value falls below some critical amount all the theory is developed subject to this assumption section i of this paper discusses whether such an assumption is reasonable this section carefully examines conditions under which rational management seeking to maximize common shareholder wealth would pay dividends as suggested in section ii the basic model is described and solved some generalization is obtained in section iii where allowance is made for the possible coexistence of other claims such as bonds illustrative solutions to the model are provided

competition risk and managerial incentives this paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers a central assumption is that there is free entry and exit in the industry which implies that changes in the nature of competition lead to changes in the equilibrium market structure the main result is that as the intensity of product market competition increases as a result of greater product substitutability or greater market size principals unambiguously provide stronger incentives to their agents to reduce costs at the same time more intense competition also leads to more volatile firm level profits consequently managers incentives are positively correlated with firm level risk consistent with empirical evidence a decrease in the cost of entering the market has the opposite effect on incentives but still induces a positive correlation between risk and incentives

temporary versus permanent shocks explaining corporate financial policies we investigate corporate financial policies in the presence of both temporary and permanent shocks to firms cash flows in our framework cash flows can be negative and are imperfectly correlated with firm value and earnings volatility differs from asset volatility these results are consistent with empirical stylized facts they are also contrary to the implications of existing dynamic capital structure models that allow only for permanent shocks to cash flows temporary shocks increase the importance of financial flexibility and may provide an intuitively simple and realistic explanation of empirically observed financial conservatism and low leverage phenomena the theoretical framework developed in this article general enough to be used in various corporate finance applications jel g12 g32 g33

index investment and financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become incr

creative destruction and firm specific performance heterogeneity traditional u s industries with higher firm specific stock return and fundamentals performance heterogeneity use information technology it more intensively and post faster productivity growth in the late 20 th century we argue that this mechanically reflects a wave of schumpeter s 1912 creative destruction disrupting a wide swath of industries with successful it adopters unpredictably undermining established firms this validates endogenous growth theory models of creative destruction e g aghion and howitt 1992 and suggests intensified creative destruction as explaining findings associating greater firm specific performance variation with higher per capita gdps economy growth rates accounting standards financial system development and property right protection

product market competition and analyst forecasting activity international evidence abstract in this study we investigate how product market competition affects the extent of analyst following and the properties of analyst forecasts using a broad sample of firms from 37 countries over the 1990 2008 period we find that firms that operate in more concentrated industries and with stronger pricing power are associated with greater analyst following higher forecast accuracy and lower forecast dispersion moreover the effect of product market power on analyst following and forecast properties is more pronounced in countries with less effective competition laws and higher entry costs these findings suggest that high industry concentration and a dominant market position enhance the earnings predictability of firms and lower their information uncertainty and that country level institutions that promote competition effectively constrain the power in product markets

index investment and the financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become increasingly correlated with oil prices this trend has been significantly more pronounced for commodities in two popular commodity indices this finding reflects the financialization of the commodity markets and helps explain the large increase in the price volatility of non energy commodities around 2008

primary commodity prices co movements common factors and fundamentals the behavior of commodities is critical for developing and developed countries alike this paper contributes to the empirical evidence on the co movement and determinants of commodity prices using nonstationary panel methods we document a statistically significant degree of co movement due to a common factor within a factor augmented var approach real interest rate and uncertainty as postulated by a simple asset pricing model are both found to be negatively related to this common factor this evidence is robust to the inclusion of demand and supply shocks which both positively impact on the co movement of commodity prices

does economic policy uncertainty matter for commodity market in china evidence from quantile regression this paper investigates the effect of economic policy uncertainty epu on china s agricultural and metal commodity futures returns across quantiles we address this issue using the panel quantile

the role of debt and perferred stock as a solution to adverse investment incentives we analyze the optimal mix of debt common equity and preferred equity in a model with an investment opportunity and asymmetric information about its quality and show that an all equity financed firm will overinvest issuing the appropriate amount of debt before the project becomes available resolves this overinvestment problem introducing a second motive for debt such as taxes leads to a role for preferred stock as a means of enhancing the firm s debt capacity by creating additional incentives to invest we derive an opti mal capital structure involving debt preferred stock and common stock this paper examines the ifnpact of a firm s capital structure on its subsequent investment decisions we assume that a firm s equityholders receive private information about the quality of a project that must be funded externally before the project becomes available and before the information asymmetry exists however the equityholders can choose a capital structure from among debt preferred stock and common stock we show that a subsequent informational asymmetry about project quality induces fully equity financed firms to overin vest that is to accept some negative net present value investments this overin vestment will be reflected in security values prior to the investment we then demonstrate that an appropriate initial debt issue eliminates this suboptimal in vestment behavior and results in an optimal initial debt equity ratio not based upon taxes bankruptcy costs or other exogenous factors we then allow for a corporate tax advantage to debt that leads the firm to issue additional debt however the additional debt creates an underinvestment problem we demonstrate that preferred stock has features that generate incen tives for equityholders to invest and so preferred stock enhances the firm s debt capacity i e the firm can issue more debt in conjunction with preferred stock without creating an underinvestment problem

involuntary corporate finance the dominance of history in decisions lagged values of corporate finance decisions are known to be economically important but most analyses ignore them this article examines the influence on five key financial decisions of previous decisions using a data set that includes industry census data it finds that lagged values explain between 25 and 36 of decisions on leverage payout and investment which gives them strong predictive ability in regression of these decisions on firm and industry traits omission of lagged values leads to a change of around one third in parameter estimates and so significantly overstates their impact the influence of lagged values persists and for most decisions is significant for several years given the stickiness in financial decisions there are potentially significant analytical problems from ignoring their lagged values

religious beliefs gambling attitudes and financial market outcomes this study investigates whether geographic variation in religion induced gambling norms affects aggregate market outcomes we conjecture that gambling propensity would be stronger in regions with higher concentrations of catholics relative to protestants consistent with our conjecture we show that in regions with higher catholic protestant ratios investors exhibit a stronger propensity to hold lottery type stocks broad based employee stock option plans are more popular the initial day return following an initial public offering is higher and the magnitude of the negative lottery stock premium is larger collectively these results indicate that religion induced gambling attitudes impact investors portfolio choices corporate decisions and stock returns

losses from failure of stakeholder sensitive processes financial consequences for large us companies from breakdowns in product environmental and accounting standards this article makes first use of a set of databases that are authoritative independent and consistent to examine an old research question do firms hurt their financial performance by damaging stakeholder interests the databases are us government on line listings of fines for environmental breaches unsafe workplaces fraudulent accounting standards and product recalls these measures are assumed to proxy for signals to stakeholders of the environmental social and governance esg risks in transacting with the firm and appear to have fewer biases than conventional measures of stakeholder standards using a sample of all non financial sp and shareholder return was significantly reduced by an epa or sec prosecution this study links the risk of transaction uncertainty information signaling theory and the resource based view of the firm to company financial performance results support the normative assumption that a firm s sales margin will be damaged by unethical treatment of stakeholders as evidenced by esg breaches presumably because risk averse customers and suppliers are alert to signals of counterparty risk

common dynamics of nonenergy commodity prices and their relation to uncertainty the purpose of this article is to improve the empirical evidence on commodity prices in various dimensions first we attempt to identify the extent of comovements in 44 monthly nonenergy commodity price series in order to ascertain whether the increase in comovement is a recent term phenomenon second we attempt to determine the role of uncertainty in determining comovements among nonenergy prices in the short run we diagnose the overall comovement using a dynamic factor model estimated by principal components a factor augmented vector autoregressive approach is used to assess the relationship of fundamentals financial and uncertainty variables with the comovement in commodity prices we find a greater synchronization among raw materials since december 2003 since that date uncertainty has played an important role in determining short run fluctuations in nonenergy raw material prices

monetary policy shocks and the dynamics of agricultural commodity prices evidence from structural and factor augmented var analyses fluctuation in commodity prices is a significant and timely issue to be studied this study is to examine the impact of monetary policy and other macroeconomic shocks on the dynamics of agricultural commodity prices the major contributions of this study are twofold first unlike other studies that use indexes this study analyzes the commodities individually affording the inclusion of commodity specific fundamentals such as the level of inventory an important determinant of commodity price in a structural var framework second it exploits a rich data set of agricultural commodity prices which includes commodities that are usually overlooked in the literature and extracts a common factor using the dynamic factor model to understand the extent of comovement of the prices and to gauge the extent to which macroeconomic shocks drive the comovement in a factor augmented var favar framework the findings show that monetary policy global economic conditions and the u s dollar exchange rates play an important role in the dynamics of agricultural commodity prices

an empirical equilibrium model of a decentralized asset market i estimate a search and bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations and asset prices and to quantify the effects of intermediaries that facilitate trade using business aircraft data i find that relative to the walrasian benchmark 12 4 percent of the assets are misallocated and prices are approximately 27 3 percent lower dealers play an important role in reducing frictions in a market with no dealers 15 7 percent of the assets would be misallocated perhaps surprisingly in a market with no dealers prices would increase by 2 8 percent because sellers outside options improve relative to buyers thus counteracting the effects of higher search costs and slower trade on asset prices

evidence that the zero earnings discontinuity has disappeared abstract discontinuities in earnings distributions at zero have been widely cited as evidence of earnings management but not without controversy recent research suggests discontinuities may be mere artifacts of certain research design choices we find that the well known zero earnings discontinuity disappears soon after passage of the sarbanes oxley act sox and has not returned we also find that neither the discontinuity nor its disappearance require the effects of widely cited alternative non earnings management explanations for the zero earnings discontinuity

explaining crude oil prices using fundamental measures abstract oil is the world s most important commodity and improving the understanding of drivers of its price is a longstanding research objective this article analyses real oil prices during 1984 2007 using a monthly dataset of fundamental and market parameters that cover financial markets global economic growth demand and supply of oil and geopolitical measures the innovation is to incorporate proxies for speculative and terrorist activity and dummies for major industry events and quantify price impacts of each new findings are positive links between oil prices and speculative activity bond yields an interaction term incorporating opec market share and oecd import dependence and the number of us troops and frequency of terrorist attacks in the middle east shocks also prove significant with a 6 18 per barrel impact on price for several months

corporate cash hoarding the role of just in time adoption i explore the role of the just in time jit inventory system in the increase in cash holdings by u s manufacturing firms i develop a model to illustrate the mechanism through which jit affects cash and quantify its impact in the model both cash and inventory can serve as working capital as firms switch from the traditional system to jit they shift resources from inventory to cash to facilitate transactions with suppliers on average this switchover accounts for a 4 1 percentage point increase in the cash to assets ratio which is approximately 28 of the change observed in the data data are available at https doi org 10 1287 mnsc 2017 2775 this paper was accepted by neng wang finance

why company specific risk changes over time company specific risk climbed steadily between 1962 and 1999 in the u s market but fell sharply between 2000 and 2003 this article explores the hypothesis that three factors are primarily responsible for observed changes in company specific risk changes in the market weights of riskier industries changes in the relative role of small capitalization stocks in the market and measurement error associated with changes in within industry concentration empirical tests reveal that each factor contributes to changes in company specific risk over time and that combined these three factors largely explain changes in company specific risk over the past 40 years

dividend distributions and closed end fund discounts abstract empirical support for the hypothesis that closed end fund discounts are related to overhanging tax liabilities has been mixed we introduce a new approach to testing this hypothesis by examining changes in discount levels following distributions of dividends and capital gains since distributions reduce future shareholder tax liabilities the tax liability hypothesis implies that closed end fund discounts should decline following distributions focusing on changes in discounts isolates this tax effect by eliminating the impact of other fund specific factors on discount levels our results support the tax liability hypothesis showing that short run fluctuations in discounts are directly affected by taxable distributions

opaque financial reports r2 and crash risk abstract we investigate the relation between the transparency of financial statements and the distribution of stock returns using earnings management as a measure of opacity we find that opacity is associated with higher r2s indicating less revelation of firm specific information moreover opaque firms are more prone to stock price crashes consistent with the prediction of the jin and myers 2006 r2 around the world new theory and new tests journal of financial economics 79 257 292 model however these relations seem to have dissipated since the passage of the sarbanes oxley act suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment

can equity volatility explain the global loan pricing puzzle we examine whether equity volatility can explain the difference in syndicated corporate loan spreads paid by u s and european borrowers first documented by carey and nini 2007 we argue that ols estimates of the association between equity volatility and loan spreads are biased and inconsistent we suggest instrumental variables that potentially identify consistent estimates our instrumental variable results indicate that there is no statistically significant difference in loan spreads paid by u s and european borrowers and that ols estimates of the association between idiosyncratic equity volatility and corporate loan spreads are biased downward by about a factor of 5

product market pricing power industry concentration and analysts earnings forecasts this is the first study to establish a link between product market power and analysts earnings forecast accuracy and bias relating two different dimensions of market power to earnings forecastability we document that a a firm s relative pricing power and b its industry concentration are strong positive determinants of analysts earnings forecast accuracy we find that forecasting earnings of higher market power firms is less complex due to their ability to withstand cost shocks as well as greater informational efficiency enjoyed by such firms further forecast optimism increases with weakening product market pricing power and with lower industry concentration the knowledge derived from this study will hopefully improve the accuracy of equity valuation and thereby engender better buy side stock selections and sell side recommendations by analysts our analysis also suggests that brokerage firms compensating analysts based on forecast accuracy need to adjust for the differential in the information complexity of different industries

the idiosyncratic volatility puzzle time trend or speculative episodes campbell lettau malkiel and xu 2001 document a positive trend in idiosyncratic volatility during the 1962 1997 period we show that by 2003 volatility falls back to pre 1990s levels furthermore we show that the increase and subsequent reversal is concentrated among firms with low stock prices and high retail ownership this evidence suggests that the increase in idiosyncratic volatility through the 1990s was not a time trend but rather an episodic phenomenon at least partially associated with retail investors results from cross sectional regressions conditional trend estimation stock split events and attention grabbing events are consistent with a retail trading effect the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

r d investment and financing choices a comprehensive perspective abstract we posit that the effects of r d investment on financing choices depend on the degree of intervention barriers and appropriation discrepancy between capital providers and the firm based on these two contingencies we categorize financing instruments into four types common equity common stock convertible securities preferred stock and convertible debt transactional debt corporate bonds and relational debt bank and commercial loans from the experiences of 39 petroleum firms during the period 1976 2005 we found r d investment has a positive effect on the use of common equity a u shaped effect on the use of convertible securities and an inverted u shaped effect on the use of relational debt to raise capital these effects are sustained over several years

how important is financial risk we explore the determinants of equity price risk of nonfinancial corporations operating and asset characteristics are by far the most important determinants of risk for the median firm financial risk accounts for only 15 of observed stock price volatility furthermore financial risk has declined over the last 3 decades indicating that any upward trend in equity volatility was driven entirely by economic risk factors this explains why financial distress as opposed to economic distress was surprisingly uncommon in the nonfinancial sector during the 2007 2009 crisis even as measures of equity volatility reached unprecedented highs

idiosyncratic return volatility cash flows and product market competition over the past 40 years the volatility of the average stock return has drastically outpaced total market volatility thus idiosyncratic return volatility has dramatically increased we estimate this increase to be 6 per year consistent with an efficient market this result is mirrored by an increase in the idiosyncratic volatility of fundamental cash flows we argue that these findings are attributable to the more intense economy wide competition various cross sectional and time series tests support this idea economic competitiveness facilitates reinterpretation of the results from the cross country r2 literature as well as the us idiosyncratic risk literature jel g12 g14

qualitative similarity and stock price comovement abstract i introduce a method for gauging the qualitative similarity of firm specific information based on linguistic commonality in newswire text i show that this new qualitative similarity measure predicts future cross firm return correlation even after accounting for the pair s contemporaneous price comovement common exposures to systematic risk firm liquidity price index membership text volume headquarters location product similarity shared mutual fund or institutional ownership common analyst following and newswire co mentions i also demonstrate that content produced solely by journalists cannot predict an economically meaningful portion of future comovement out of sample tests confirm that knowledge of qualitative similarity can also reduce portfolio risk

market madness the case of mad money we use the popular television show mad money hosted by jim cramer to test theories of attention and limits to arbitrage stock recommendations on mad money constitute attention shocks to a large audience of individual traders we find that stock recommendations lead to large overnight returns that subsequently reverse over the next few months the spike reversal pattern is strongest among small illiquid stocks that are hard to arbitrage using daily nielsen ratings as a direct measure of attention we find that the overnight return is strongest when high income viewership is high we also find weak price effects among sell recommendations taken together the evidence supports the retail attention hypothesis of barber and odean barber b t odean 2008 all that glitters the effect of attention and news on the buying behavior of individual and institutional investors rev financial stud 21 2 785 818 and illustrates the potential role of media in generating mispricing this paper was accepted by brad barber teck ho and terrance odean special issue editors

choosing the precision of performance metrics there is a standard trade off in compensation contracts between the provision of incentives and insurance we hypothesize that this trade off influences the precision with which firm performance is measured we find that firm outcomes are measured less precisely when chance plays a large role in these outcomes further this precision is determined through the choice of shares outstanding this has several novel implications nominal stock prices can remain constant over time and firms with unpredictable cash flows should have more shares and lower stock price levels all else equal we find evidence consistent with these implications

why have measures of earnings quality changed over time the properties of earnings have changed dramatically over the past 40 years prior studies interpret this trend as a decline in earnings quality but disagree on whether it results from changes in the real economy or changes in accounting standards i find that each new cohort of listed firms exhibits lower earnings quality than its predecessors mainly because of higher intangible intensity i conclude that the trend of decline in earnings quality is due more to changes in the sample of firms than to changes in generally accepted accounting principles gaap or in the earnings quality of previously listed firms

comovement information production and the business cycle abstract recent theoretical research suggests that information production is a positive externality of aggregate economic activity veldkamp 2005 both the quantity and quality of information increase during periods of economic expansion and decrease during periods of contraction based on this insight we hypothesize and confirm that time varying information production drives the comovement patterns observed in stock returns we examine stock return comovement in 36 countries from 1980 to 2007 and show that consistent with the theory comovement patterns are countercyclical that is when information production is high low comovement is low high we also find that the relation between comovement and the business cycle is stronger in countries that experience large intertemporal swings in information production finally we show that the relation between business cycle and comovement is stronger in poor countries countries with less developed financial markets and countries with weaker accounting and transparency standards these results suggest that financial development and transparency are conducive to a steady flow of financial information over the business cycle

level dependent annuities defaults of multiple degrees abstractmotivated by the risk of stopped debt coupon payments from aleveraged company in nancial distress we value a level dependentannuity contract where the annuity rate depends on the value of anunderlying asset process the range of possible values of the asset isdivided into a nite number of regions the annuity rate is constantwithin each region but may di er between the regions we considerboth in nite and nite annuities with or without bankruptcy risk i e bankruptcy occurs if the asset value process hits an absorbing bound ary such annuities are common in models of debt with credit risk in nancial economics suspension of debt service under the us chap ter 11 provisions is one well known real world example we presentclosed form formulas for the market value of such multi level annuitiescontracts when the market value of the underlying asset is assumedto follow a geometric brownian motion the authors thank zheng huang and bernt ksendal for comments and discusssions an earlier version of this paper has been presented at fibe 2008 nhh keywords multi level annuity credit risk nancial distress jel classi cations g33 g13 g32

arbitrage risk and post earnings announcement drift this study examines whether the magnitude of post earnings announcement drift is related to the risk faced by arbitrageurs who may view the anomaly as a trading opportunity consistent with this hypothesis the magnitude of the drift is strongly related to the arbitrage risk measure developed by wurgler and zhuravskaya 2002 the effect of arbitrage risk is statistically and economically significant in a range of specifications the results support the view of post earnings announcement drift as an underreaction to earnings information

optimal debt and equity values in the presence of chapter 7 and chapter 11 explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders in the first best outcome reorganization adds value to both parties via higher debt capacity lower credit spreads and improved overall firm value if control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers most of the benefits are appropriated by borrowers ex post lenders can restore the first best outcome by seizing this control or by the ex post transfer of control rights reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only the u s bankruptcy code which includes a liquidation process chapter 7 and a reorganization process chapter 11 aims to resolve a number of important issues associated with a distressed firm these issues can be classified into information asymmetry problems e g quality of the firm heinkel and zechner 1993 agency problems e g risk shifting jensen and meckling 1976 or coordination problems e g debt of various maturities berglof and von thadden 1994 in this paper we investigate whether there is a place for a reorganization process in the presence of costly financial distress and liquidation these costs capture in reduced form the aforementioned frictions we wish to characterize the states of a borrowing firm relative to its outstanding contractual debt obligations at different stages of financial distress assuming full information and a single issue of debt we also seek to determine the role played by the bankruptcy code in improving the welfare of borrowers and lenders and how its influence depends on the rights given to borrowers and lenders at various stages of financial distress more precisely we build on structural models of debt merton 1974 black and cox 1976 which allows us to determine overall firm value along with the values of equity and debt in line with this literature we assume that liquidation destroys part of the firm s value we then ask the basic and yet important

a transaction level analysis of spatial arbitrage the role of habit attention and electronic trading despite the central role of arbitrage in finance and economic theory there is limited evidence of the factors that create and eliminate arbitrage opportunities how often arbitrage occurs and how profitable it is we address these gaps via a transaction level analysis of spatial arbitrage in the wholesale automotive market we investigate why arbitrage opportunities are created by analyzing how sellers choose where to sell vehicles we find that the attention sellers pay to the distribution of a vehicle is negatively related to the probability that it is arbitraged arbitrage occurs in approximately 1 of transactions although electronic trading is making arbitrage less prevalent by improving buyer seller matching across locations arbitrage yields a 5 6 return on average although arbitrageurs take a loss 14 of the time our results contribute to the literature on arbitrage the effect of attention allocation on market outcomes and the effect of information technology on market efficiency this paper was accepted by brad barber teck ho and terrance odean special issue editors

financial asset demand is elastic evidence from new issues of federal home loan bank debt abstract we estimate the slope of the demand curve for newly auctioned fhlb discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity our unique dataset of roughly 2900 observations of two price quantity pairs the first from a pre auction dealer survey the second from actual auction results provides the quantity shift necessary to identify demand in contrast to previous findings of downward sloping demand curves for equities we show that demand for newly issued fhlb notes is nearly perfectly elastic during normal market conditions we find however that frictions like arbitrage risk and to a lesser extent heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50 drop in elasticity observed during the recent financial crisis

islamic corporate governance risk sharing and islamic preferred shares the recent financial crises including the asian and subprime crises indicated the need to reinforce corporate governance mechanisms in emerging and developing market economies corporate governance refers to all the factors that affect firm processes including among others financing strategies firms must avoid debt financing instruments and adopt financing instruments that allow for risk sharing rather than risk shifting because all recent financial crises were in essence debt crises the primary objective of this paper is to examine the principles of risk sharing promoted by islamic finance and study their implications for corporate governance the secondary objective of this paper is to propose a pricing model for a new risk sharing financial instrument islamic preferred shares ips that was recently discussed by zarka and al suhaibani shariah compatible preference shares the sharia basis and economic rationale working paper sabic chair for islamic financial market studies 2012 we study the implications of this new instrument as a powerful tool for corporate governance in the case of islamic markets we explain the possible contribution of ips to agency cost reduction sharia screening costs and ethical corporate governance

does product complexity matter for firms output volatility abstract with this paper we provide the first micro level evidence on the linkage between firm complexity and volatility by defining product complexity a la hausmann and hidalgo 2009 we find that a higher complexity level of a firm s product basket is associated to a reduction of its output fluctuations this evidence is robust to the control for omitted variables sample selection and to the use of alternative volatility and complexity indicators across similar firms active in different sectors and regions both technological factors and product market conditions explain the effect of complexity on volatility however within narrowly defined sectors and locations the complexity volatility nexus fully reflects the role of the human capital content of firms product baskets

varying heterogeneity among u s firms facts and implications abstract u s firms stock return volatility rose fivefold from 1971 through 2000 and then reverted to near 1971 levels by 2006 this was driven mainly by a rise and fall in the firm specific rather than systematic component of volatility firm level total factor productivity growth volatility exhibited a similar pattern we hypothesize that firm heterogeneity reflected in firm specific volatility rises as a new general purpose technology gpt propagates across the economy and then ebbs once the gpt is widespread measuring gpt adoption by information technology capital intensity we find robust cross industry empirical evidence supporting the hypothesis

potential pilot problems treatment spillovers in financial regulatory experiments abstract the total effects of a regulatory change consist of direct effects and indirect effects spillovers but the standard difference in difference approach mostly ignores potential indirect effects during the 2007 full repeal of the uptick rule short sellers become much more aggressive across the board even in control stocks where the uptick rule is already suspended this finding is consistent with positive and significant indirect effects on control stocks likely driven by aggressive broad list based shorting in contract the indirect effect coefficients on shorting aggressiveness are negative for the 2005 partial uptick repeal possibly due to substitutions between control and treatment stocks

the shrinking merger arbitrage spread reasons and implications the merger arbitrage spread has declined by more than 400 bps since 2002 this decline which is both economically and statistically significant corresponds to the decline in aggregate returns of merger arbitrage hedge funds as well as increased inflows into merger arbitrage hedge funds part of the decline in the arbitrage spread may be explained by increased trading in the targets stocks following the merger announcement reduced transaction costs and changes in risk related to merger arbitrage these findings suggest that some of the decline is likely to be permanent therefore investors seeking to invest in merger arbitrage hedge funds should focus on returns since 2002

large market shocks and abnormal closed end fund price behaviour abstract this paper investigates the short term price behaviour of closed end funds following eight large market wide shocks the findings from a sample of 63 funds continuously traded on the london stock exchange indicate that prices overreact relative to equilibrium given by net asset values the speed of reversion in discounts following market wide shocks is slower than that following fund specific shocks of a similar magnitude the post shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity as proxied by fund size or to the speed of recovery in the broader market the discount decays more slowly for those funds that are difficult to arbitrage

self selection and the forecasting abilities of female equity analysts this paper investigates whether there are systematic differences between the forecasting style and abilities of female and male analysts and whether market participants recognize these differences my key conjecture is that only female analysts with superior forecasting abilities enter the profession due to a perception of discrimination in the analyst labor market consistent with this conjecture i find that female analysts issue bolder and more accurate forecasts and their accuracy is higher in market segments in which their concentration is lower further the stock market participants are aware of the male female skill