convertible debt corporate call policy and voluntary conversion this paper examines why in contrast to the predictions of finance theory firms do not call convertible debt when the conversion price exceeds the call price the empirical results suggest that the principal reason is because some firms enjoy an advantage of paying less in after tax interest than they would pay in dividends were the bond converted this cash flow incentive is the inverse of an investor s incentive to convert voluntarily if the converted dividends are greater than the bond s coupon because of taxation however the decisions by investors and firms are not symmetric and there exist bonds which the firm may not call and an investor will not convert the results also find that voluntary conversion is significantly related to both the conversion price and the differential between the coupon and the dividends on the converted stock

does the bond market predict bankruptcy settlements this study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded i e usually junior claimants bondholders the data indicate that on average bondholders benefit albeit slightly from absolute priority rule apr violations this paper also examines the degree to which the bond market in the bankruptcy filing month anticipates departures from the apr and other influences on the payoff to bondholders in other words we investigate the informational efficiency of the market for bankrupt bonds overall despite the complex and lengthy nature of bankruptcy proceedings the results support efficiency the finance literature has traditionally assumed that when a firm enters bankruptcy the creditors become the owners and the value of the firm is distributed according to the absolute priority rule apr the apr states that senior creditors should be fully compensated before junior creditors receive any portion of the bankrupt firm s value and junior creditors should receive full payment before shareholders receive any compensation in practice formal bankruptcy proceedings are complex processes that often violate the apr brown 1989 captures some of the intricacies of this process in a game theoretic model showing that the solution to the bargaining process in bankruptcy can involve deviations from the apr although the solution

credit risk measurement developments over the last 20 years abstract this paper traces developments in the credit risk measurement literature over the last 20 years the paper is essentially divided into two parts in the first part the evolution of the literature on the credit risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the journal of banking and finance and other publications in the second part a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented this model is shown to offer some promise in analyzing the risk return structures of portfolios of credit risk exposed debt instruments

drexel burnham lambert s bankruptcy and the subsequent decline in underwriter fees abstract in the 1980s drexel burnham lambert dominated the underwriting of junk bonds with close to a 50 market share in 1990 drexel went bankrupt and was liquidated and the percentage underwriting fees for junk bonds subsequently dropped dramatically we present strong evidence that the exit of drexel burnham lambert and the resulting increase in competition for market share were major contributing factors to the decline in junk bond underwriter fees

early and late calls of convertible bonds theory and evidence many convertible bonds are called too early or too late relative to the perfect markets decision rule of ingersoll 1977a and ingersoll 1977b we re examine the convertible call decision under corporate taxation and possible default prior to maturity our model predicts that early calls will be associated with high coupon and low call premium dividend income volatility tax rate and interest rate and late calls will be associated with high call premium dividend income tax rate and interest rate and low coupon and volatility these implications are supported by empirical tests carried out with five years of convertible call data

the valuation of floating rate instruments abstract a framework for valuing floating rate notes is developed to examine the effects of 1 lags in the coupon formula 2 special contractual features and 3 default risk evidence from a sample of floaters indicates they sold at significant discounts while lags in the coupon formulas and other contractual features make these notes more variable they do not account for the magnitude of the discounts we conclude that the fixed default premium in the coupon formula of a typical note is inadequate to compensate for time varying default premiums demanded by investors who treat other corporate short term paper as close substitutes

pricing credit derivatives with rating transitions we present a model for pricing risky debt and valuing credit derivatives that is easily calibrated to existing variables our approach expands a classical term structure model to allow for multiple rating classes of debt the framework has two salient features 1 it uses a rating transition matrix as the driver for the default process and 2 the entire set of rating categories is calibrated jointly which allows arbitrage free restrictions across rating classes as a bond migrates among them we illustrate the approach by applying it to price credit sensitive notes that have coupon payments linked to the rating of the underlying credit

convertible bond underpricing renegotiable covenants seasoning and convergence we investigate the long standing puzzle on the underpricings of convertible bonds we hypothesize that the observed underpricing is induced by the possibility that a convertible bond might renegotiate on some of its covenants e g an imbedded put option in financial difficulties consistent with our hypothesis we find that the initial underpricing is larger for lower rated bonds the underpricing worsens if the issuer experiences subsequent financial difficulties however conditional on no rating downgrades our main empirical result shows that convertible bond prices do converge to their theoretical prices within two years this seasoning period is shorter for higher rated convertible bonds

corporate call policy for nonconvertible bonds we examine corporate call policy for 1 642 nonconvertible bonds that were called during the period 1975 94 the vast majority of firms delay calls and call when the bond price exceeds the call price we find that larger less liquidity constrained firms with a larger opportunity cost of delaying a call have shorter call delays there is no evidence that refunding transaction costs wealth redistribution effects call notice periods or a desire to eliminate restrictive covenants influences the timing of calls an examination of call motives suggests that there is no one underlying motive that fits the average call copyright 2000 by university of chicago press

perceptions and the politics of finance junk bonds and the regulatory seizure of first capital life in may 1991 one month after seizing executive life california regulators seized first capital life fclic both insurers were drexel clients with large junk bond holdings and both had experienced bank runs fclic s run followed regulators televised comments that its poor condition necessitated a substantial cash infusion yet fclic s statutory capital with junk bonds real estate and mortgages marked to market was far from lowest among major insurers with california policyholders it becomes lowest if junk bonds alone are marked to market at year end 1990 ignoring larger market declines in real estate mortgages and the junk bond market s 21 return in early 1991 our findings suggest a regulatory bias against junk bonds in the political backlash against the 1980s

an empirical investigation of u s firms in reorganization the purpose of this paper is to understand the institutional features of chapter 11 from an empirical examination of thirty firms that have emerged from reorganization we find the recontracting framework of chapter 11 to be complex lengthy and costly violations of absolute priority in favor of stockholders are frequently encountered these deviations may result from the bargaining process of chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder oriented management to preserve firm value an example of such recontracting addresses myers underinvestment problem an investigation of the effects of chapter 11 on the pricing of risky debt is also provided the purpose of this paper is to understand the institutional features of chapter

the sensitivity of american options to suboptimal exercise strategies the value of american options depends on the exercise policy followed by option holders market frictions risk aversion or a misspecified model for example can result in suboptimal behavior we study the sensitivity of american options to suboptimal exercise strategies we show that this measure is given by the gamma of the american option at the optimal exercise boundary more precisely if b is the optimal exercise price but exercise is either brought forward when or delayed until a price b has been reached the cost of suboptimal exercise is given by b b b 2 where b denotes the american option gamma therefore the cost of suboptimal exercise is second order in the bias of the exercise policy and depends on gamma this result provides new insights on american options

the intraday liquidity management game abstract we use a game theoretical framework to analyze the intraday behavior of banks with respect to settlement of interbank claims in a real time gross settlement setting the game played by banks depends upon the intraday credit policy of the central bank and it encompasses two well known game theoretical paradigms the prisoner s dilemma and the stag hunt the former arises in a collateralized credit regime where banks have an incentive to postpone payments when daylight liquidity is costly an outcome that is socially inefficient the latter arises in a priced credit regime where the postponement of payments can be socially efficient banks are risk neutral but we show that most of the results are unaffected by risk aversion

convertible bonds are not called late starting with ingersoll 1977b the academic literature has repeatedly sought to explain why convertible bonds are called late the findings here demonstrate there is no call delay to explain this paper finds that most convertible bonds given their call protection are called as soon as possible for those that are not there are significant cash flow advantages to delaying the median call delay for all convertible bonds is less than four months if a safety premium is desired to assure the conversion value will exceed the call price at the end of call notice period the median call period is less than a month the question of what is the optimal call policy for convertible bonds has attracted considerable attention since brennan and schwartz 1977 and ingersoll s 1977a seminal work that work suggests that the optimal call policy is to call the bond when the conversion value first exceeds the call price since forcing conversion eliminates the bondholders premium or option value however empirical studies e g ingersoll 1977b and constantinides and grundy 1987 claim that firms consistently deviate from this call policy and delay calls this claim is based on ingersoll s finding that firms wait on average until the conversion value exceeds the call price by 43 9 a result confirmed in mikkelson 1985 trying to explain this call delay phenomenon has generated an impressive literature to date however no one has actually documented whether there is a delay or measured how long the delay is in addition the existing empirical work has focused either on a subsample of called bonds or on a subsample of bonds remaining uncalled at a given point in time these partial samples are not adequate to empirically determine average call delays for convertible bonds or to distinguish between the various hypotheses proposed for call

a game options approach to the investment problem with convertible debt financing we consider a firm that operates a single plant and has an expansion option to invest in a new plant with convertible debt financing this conversion feature introduces another complication not only because of the added conversion timing problem by the bond holder but also because the equity holder needs to take future conversion into account when evaluating her expansion financing decision we have two main objectives here we use game options techniques to analyze optimal strategies involved in this convertible debt financed expansion problem the first goal is to provide a comprehensive framework and procedure for solving the problem in a mathematically tractable way secondly we illustrate our solution method through a concrete example with economic analysis this includes a comparison with straight bond financing and comparative statics with respect to price volatility and conversion ratio in this regard we attempt to clarify how the conversion feature affects the equity holder s investment decisions throughout the paper we study expansion options by viewing a firm s existing operation bankruptcy threat conversion decisions and financing decisions all together

liquidation costs and capital structure abstract we investigate the relation between liquidation costs of assets and composition of capital structure for firms that reorganized under chapter 11 of the bankruptcy code firms with high liquidation costs emerge from chapter 11 with relatively low debt ratios the debt of these firms is more likely to be public and unsecured and to have less restrictive covenant terms these firms are also more likely to raise new equity capital assets with high liquidation costs thus lead firms to choose capital structures that make financial distress less likely

the statistical analysis of roll call data modern studies of legislative behavior focus upon the relationship among the policy preferences of legislators institutional arrangements and legislative outcomes in spatial models of legislatures policies are represented geometrically as points in a low dimensional euclidean space each legislator has a most preferred policy or ideal point in this space and his or her utility for a policy declines with the distance of the policy from his or her ideal point see davis hinich and ordeshook 1970 for an early survey the primary use of roll call data the recorded votes of deliberative bodies 1 is the estimation of ideal points the appeal and importance of ideal point estimation arises in two ways first ideal point estimates let us describe legislators and legislatures the distribution of ideal points estimates reveals how cleavages between legislators reflect partisan affiliation or region or become more polarized over time e g mccarty poole and rosenthal 2001 roll call data serve similar purposes for interest groups such as americans for democratic action the national taxpayers union and the sierra club to produce ratings of legislators along different policy dimensions second estimates from roll call analysis can be used to test theories of legislative behavior for instance roll call analysis has been used in studies of the u s congress both contemporary and

debt and the marginal tax rate abstract do taxes affect corporate debt policy this paper tests whether the incremental use of debt is positively related to simulated firm specific marginal tax rates that account for net operating losses investment tax credits and the alternative minimum tax the simulated marginal tax rates exhibit substantial variation due to the dynamics of the tax code tax regime shifts business cycle effects and the progressive nature of the statutory tax schedule using annual data from more than 10 000 firms for the years 1980 1992 i provide evidence which indicates that high tax rate firms issue more debt than their low tax rate counterparts

corporate credit risk dynamics the lack of widely available and comprehensive data of default activity on the corporate level has encouraged the advance of theories of corporate credit risk far beyond related empirical work this article addresses this deficit by examining a unique data set corporate bond defaults and credit ratings compiled by moody s investors service since 1920 the article investigates the time inhomogeneity of company default risk that is the pattern in which the risk of default for a company changes over time the empirical analysis addresses company default risk within a regression framework of competing risks or hazards the analysis identifies and quantifies variations in default risk with macroeconomic conditions with industries and through time an important characterization for many approaches to measuring and managing credit risk

high yield bond default and call risks this paper empirically investigates high yield bond default and call behavior using a competing risks hazard model that simultaneously estimates the impact of bond age issue specific characteristics and business conditions on both events results reveal nonmonotonic aging effects default rates increase and then drop while call rates first increase and then level off rating and coupon size affect default risk while maturity and issue size impact only call rates defaults are more likely when economic conditions have worsened and no improvement is anticipated calls are more likely when interest rates have decreased but are expected to rise

original issue high yield bonds aging analyses of defaults exchanges and calls this paper presents an aging analysis of 741 high yield bonds and finds default exchange and call percentages substantially higher than reported in earlier studies by december 31 1988 cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979 1983 and from 3 to 9 percent for issue years 1984 1986 exchanges are also a significant factor although they often are followed by default moreover a significant percentage of high yield debt 26 47 percent for 1977 1982 has been called by december 31 1988 approximately one third of the bonds issued in 1977 1982 has defaulted or been exchanged and an additional one third had been called on average only 28 percent of these issues are still outstanding there is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982

determinants of the decreasing term structure of relative yield spreads for taxable and tax exempt bonds the empirical finding that the relative yield spread for taxable and tax exempt bonds decreases across the term structure is usually attributed to tax differentials and or arbitrage opportunities using monthly data it is found that the decresing term structure of relative yield spreads is determined by the decreasing forward marginal tax rate increasing default risk premium increasing tax timing option premium and expected rate of inflation

the design of bank loan contracts the unique characteristics of bank loans emerge endogenously to enhance efficiency in a model of renegotiation between a borrower and a lender in which there is the potential for moral hazard on each side of the relationship firm risk is endogenous and renegotiated interest rates on the debt need not be monotone in firm risk the initial terms of the debt are not set to price default risk but rather are set to efficiently balance bargaining power in later renegotiation loan pricing may be nonlinear involving initial transfers either from the borrower to the bank or front the bank to the borrower article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

forecasting losses on a liquidating long term loan portfolio abstract assessing the condition of financial institutions and valuation of loan portfolios in secondary markets require the estimation of exposure to losses on existing portfolios of long term loans data from a major u s financial institution were used to construct a forecasting model with markovian structure and nonstationary transition probabilities the model proved to be effective in representing changes in probability of default that occur as individual loans mature and accurate in forecasting aggregate defaults and losses on a nationwide portfolio of long term loans

term structure effects on default risk premia and the relationship of default risky tax exempt yields to risk free taxable yields a note abstract the behavior of the default risk premium on bonds has caught the attention of many researchers some researchers have analyzed how default risk premia may vary with maturity it has been suggested that default risk premia are independent of maturity however recent research by rodriguez 1988 shows this to not hold for nonpar taxable bonds this research shows that the shape of the underlying term structure affects default risk premia for even par bonds in a systematic way furthermore the maturity dependent variation in equilibrium tax rates has a strong impact upon default risk premia behavior where equilibrium tax rates are derived from comparisons of taxable and tax exempt bonds the inclusion of the shape of the underlying term structure also has very important implications for the relation between taxexempt yields and taxable yields the slope and intercept terms of the relation between taxexempt and taxable yields are clearly dependent upon maturity a fact which has not been recognized before

the anatomy of the high yield bond market 1987 the anatomy of the high yield bond market financial analysts journal vol 43 no 4 pp 12 25

corporate compliance with debt covenants in this paper i present and test a model of corporate compliance with the debt covenant requiring payment of a current obligation this study adds to the empirical literature on forecasting financial distress by showing conditions under which debt default may be a rational economic decision by the firm s shareholders this analysis departs from empirical financial distress studies which are often not linked to an underlying economic theory the focus on covenant default also extends the literature which has modeled bankruptcy bulow and shoven 1978 and liquidation decisions titman 1984 but which has not considered a common first symptom of financial distress covenant default briefly the model examines the costs that influence shareholders decision to comply with or violate a particular debt covenant payment of a current obligation these costs include those associated with bondholders reaction to possible default the model predicts that shareholders will default when holding other factors constant i interest rates have declined relative to coupon rates stated in the debt issue ii the probability of paying future obligations is high and iii the cost of obtaining funds to pay the obligation is high the model also predicts when stockholders and bondholders will renegotiate the debt contract and the amount of wealth transferred in the renegotiation finally the

the evolution of buyout pricing and financial structure in the 1980s we examine changes in the pricing and financial structure of large management buyouts in the 1980s over time 1 buyout price to cash flow ratios rose in absolute terms particularly in deals financed using public junk bonds 2 required bank principal repayments accelerated leading to sharply lower ratios of cash flow to total debt obligations 3 private subordinated and bank debt were replaced by public junk debt and 4 management teams and dealmakers took more money out of transactions up front these patterns are consistent with an overheating phenomenon in the buyout market preliminary post buyout evidence lends some support to this interpretation

a discounted cash flow model of convertibles subject to multiple calls in a world of refunding costs and stochastic interest rates fixed income securities which can be converted into other assets such as common stock represent a sizable portion of the capital market 33 and have therefore received frequent attention in the financial literature 20 21 23 35 39 however due to their complexity attempts to develop mathematical models of convertibles have encountered severe computational and theoretical difficulties 36 one of the primary complications results from convertible securities generally having contractual call features which permit the issuing organization to redeem the securities at stipulated dates for specific prices in addition although a majority of convertibles listed in moody s bond guide have sinking funds the issue of analyzing convertible sinking fund calls represents a specific problem that has never been adequately addressed early studies of convertibles such as brigham 10 focused on the discounted cash flow approach to valuing the securities the general procedure was to estimate a terminal price for the convertible on an arbitrarily specified date in the future and then take the present value of the price together with all intervening fixed income payments these models lacked precision insofar as no theoretical framework was developed for specifying the relevant terminal date terminal price or discount rate and the individual effect of each call feature on convertible values was largely ignored other research such as walter and que 38 has employed regression analysis to pro

how can we estimate the ideology of citizens and political elites on the same scale estimating the ideological positions of political elites on the same scale as those of ordinary citizens has great potential to increase our understanding of voting behavior representation and other political phenomena there has been limited attention however to the fundamental issues both practical and conceptual involved in conducting these joint scalings or to the sensitivity of these estimates to modeling assumptions and data choices i show that the standard strategy of estimating ideal point models using preference data on citizens and elites can suffer from potentially problematic pathologies this article explores these issues and presents a technique that can be used to investigate the effects of modeling assumptions on resulting estimates and also to impose restrictions on the ideological dimension being estimated in a straightforward way abstract from author

the long term default performance of bank underwritten security issues abstract the glass steagall act of 1933 barred commercial banks and their affiliates from underwriting and dealing in securities activities amidst concerns that banks abused the trust of their depositors and clientele by systematically underwriting poor quality security issues this paper examines if these concerns were justified by studying the long term default performance of bank underwritten issues as compared to non bank underwritten issues the evidence shows that contrary to conventional wisdom bank underwritten issues defaulted less than non bank underwritten issues over a seven year period from the issue date and had a significantly lower mortality rate

the default rate experience on high yield corporate debt recent 1978 83 net returns on high yield low rated debt have been impressive averaging 490 to 580 basis points above the long term government bond index but low rated junk bonds pose a risk of default not present in the higher rated segment of the bond market the authors divided the par value of defaulting debt by total low rated straight debt outstanding to arrive at an estimate of the default rate for high yield bonds excluding johns manville which had the only defaulting debt rated investment grade just prior to the default date for the 1974 84 period this averaged 1 52 per cent or 152 basis points annually year to year variations in the rate were substantial furthermore default experience differed across various industry segments railroads and reits were particularly vulnerable to default in the past although they are unlikely to represent a large portion of future defaults retailer electronic computer airline and oil and gas defaults have become more common in recent years losses from default are actually lower than the default rate alone implies defaulted bonds traded on average at 41 per cent of par shortly after default after accounting for the bonds retained value and the loss of interest the average reduction in return to the investor who had purchased the bonds at par would have been in the range of 96 to 100 basis points annually

liquidity saving mechanisms abstract this paper studies the incentives of participants in a real time gross settlement system with and without the addition of a liquidity saving mechanism lsm participants in the model face a liquidity shock and different costs for delaying payments they trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank the main contribution of the paper is to show that the design of an lsm has important implications for welfare in particular parameters determine whether the addition of an lsm increases or decreases welfare

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

the resiliency of the high yield bond market the ltv default this paper investigates the resiliency of the new issue high yield bond market by examining the changes in implied default rates of such bonds before and after the largest high yield bond default i e the ltv bankruptcy specifically the paper compares implied default probabilities of high yield bonds during the post ltv period calculated from actual new issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred a comparison of these probabilities reveals that the market s perception of default on the hjgh risk segment of the bond market increased significantly after the ltv bankruptcy however the effect was transitory lasting only six months thus the market was resilient to a major default in recent years high yield debt has become a significant segment of the corporate bond market the main source of the growth has come from new issues of high yield corporate bonds rather than an increase in fallen angels 1 the driving force behind this new breed of high yield debt growth has been its use as a means to tap the capital markets to finance increasingly common leveraged buyouts hostile takeovers and major corporate restructurings the market acceptance of high yield bonds was further enhanced by empirical evidence that net returns on a diversified portfolio of low grade bonds exceeded those on highgrade bonds while the volatility of their monthly returns was no greater 2 the frenzied pace of growth in the high yield debt market however has been accompanied by increasing concerns from various quarters 3 critics have char

securityholder taxes and corporate restructurings previous studies have found that positive abnormal stock returns are associated with corporate spin offs and divestitures using a simplified model of the process of investor tax trading we show that an improvement in the value of the tax timing option component of securities prices is a likely contributing factor to those abnormal returns the analysis indicates that the same phenomenon also may be part of the explanation for the generally higher returns observed for spin offs than for divestitures both when leverage is and is not present in the restructuring transactions

a non gaussian panel time series model for estimating and decomposing default risk we model 1981 2005 quarterly default frequencies for a panel of u s firms in different rating and age classes from the standard and poor database the data are decomposed into systematic and firm specific risk components where the systematic component reflects the general economic conditions and the default climate we need to cope with the shared exposure of each age cohort industry and rating class to the same systematic risk factor strongly non gaussian features of the individual time series possible dynamics of an unobserved common risk factor changing default probabilities over the age of the rating and missing observations we propose a non gaussian multivariate state space model that deals with all of these issues simultaneously the model is estimated using importance sampling techniques that have been modified to a multivariate setting we show in a simulation study that such a multivariate approach improves the performance of the importance sampler in our empirical work we find that s

lower grade bonds their risks and returns to reflect as realistically as possible the risks and returns of lower grade bonds the authors constructed an index from actual average returns used in the compilation of the salomon brothers and drexel burnham lambert lower grade indexes supplementing these with month end prices prior to 1982 from the sp thus a diversified portfolio may contain both the debt and equity of the issuing companies

security pricing and deviations from the absolute priority rule in bankruptcy proceedings claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 bankruptcy reform act we measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents on average 7 6 of the total awarded to all claimants evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority suggesting that deviations from the rule were expected by the equity markets the absolute priority rule hereafter apr states that a bankrupt firm s value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors and junior creditors are paid in full before common shareholders bankruptcy reorganization proceedings however are leaving shareholders and junior creditors with valuable assets even when senior claimants receive only partial settlements as barrett and sullivan 1988 noted traditionally shareholders have been last in line their claims on a troubled company s assets have had the lowest priority and their impact on the course of bankruptcy code proceedings generally has been next to nil but lately the balance of power has been shifting warner 1977 provided one of the early discussions of the implications of deviations from the apr baldwin and mason 1983 pp 510 511 examined the resolution of claims in the massey ferguson reorganization and provided no support for the hypothesis that the market believes absolute priority rules will be enforced if the firm defaults on its financial obligations franks and torous 1989 analyzed a sample of bankruptcies that occurred during the period 1970 through 1984 and found that 21 of 27 sample cases exhibited departures from the apr more recently weiss 1990 examined 37 firms that filed for bankruptcy between 1980 and 1986 and reported that 27 of the cases involved apr violations

proxies for the corporate marginal tax rate abstract this paper focuses on how best to measure the corporate marginal tax rate which is an important input into financial analysis of the cost of capital financing policy corporate hedging and corporate reorganizations the results indicate that the simulated tax rate used by shevlin 1990 and graham 1996 although difficult to calculate is the best available proxy for the true marginal tax rate if the simulated rate is unavailable an easy to calculate trichotomous variable or the statutory marginal tax rate which captures the progressivity in the tax schedule are reasonable alternatives better than most commonly used tax variables

the value of private sector business credit information sharing the us case this paper investigates the value added by private information exchanges that share information on business payment performance we discuss how this information is collected and disseminated by the worlds largest private information broker dun bradstreet we provide the first empirical examination of the importance of this information at the lending decision level our findings indicate that exchange generated information provides significant explanatory power in failure prediction models controlling for other credit information that is easily available to lenders our study complements the work of jappelli and pagano information sharing lending and defaults cross country evidence centre for economic policy research discussion paper 2184 1999 who find in cross country macro level tests that information exchanges add value 2003 elsevier science b v all rights reserved

settlement risk under gross and net settlement previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements and on the incentives for participants to alter the risk of their portfolios under net settlement by modeling the trading economy that generates the demand for payment services we are able to show some largely unexplored advantages of net settlement we find that net settlement can prevent certain gridlock situations which may arise in gross settlement in the absence of delivery versus payment requirements in addition we show that net settlement can economize on collateral requirements and avoid trading delays

spatial voting in the 2004 presidential election the theory of spatial voting has played a large role in the development of important results across many areas of political science directly testing the foundational assumptions of spatial voting theory however has not been possible with existing data using a novel survey design this article obtains estimates of voter ideology on the same scale as candidate positions the results of this scaling demonstrate that voters possess meaningful ideologies and furthermore that these beliefs are strongly related to the sorts of policy proposals considered in congress these ideology estimates are then used to uncover the actual relationships between ideology and vote choice for citizens of various types in the 2004 presidential election although the choices of independent voters are shown to be largely consistent with the assumptions of spatial voting theory the decision rules used by partisans differ strongly from what unbiased spatial voting would imply although partisans do converge toward the behavior of independents and hence toward the assumptions of spatial voting theory as information levels increase we see that even highly informed partisans show significant differences from what would be implied by unbiased spatial voting theory

the role of time value in convertible bond call policy abstract since the seminal work of ingersoll 1977b the optimal time in which a firm should redeem its outstanding convertible bonds has received large attention by the financial literature several studies have put forward a number of possible costs and benefits for a firm if it interrupts the life of its convertible bonds prior to their contractual maturity however in this paper we argue that the managerial decision to call back a convertible bond is mainly driven by a fundamental variable almost neglected up until now the time value extraction from bondholders conversion option accordingly we propose a measure for the effective convenience of calling which we define as net time value advantage and we show using a survival analysis that it is more effective than previously proposed measures in explaining the firms observed call policy

defaults of original issue high yield convertible bonds recent studies using aging analysis have found high rates of default for rated nonconvertible high yield bonds this paper examines the remainder of the market and concludes that rated and nonrated convertible high yield bonds had significantly lower default rates it also provides some evidence that nonrated nonconvertible securities may have lower default rates even after controlling for issue size and coupon rates in a logit model these differences remain statistically significant the success in marketing original issue high yield bonds has generated significant interest in their default experience studies comparing defaults to the par value of outstanding issues such as altman 1987 altman and nammacher 1985 and weinstein 1987 have found relatively low default rates however these studies understate default rates because of the rapid increase in the par value of outstanding issues and because cumulative default rates increase with years from issuance two recent studies by altman 1989 and asquith mullins and wolff 1989 have corrected these problems by using aging analysis to follow rated nonconvertible high yield bonds over time they find cumulative default rates for such bonds 10 years after issuance exceeding 30 percent this study extends the literature on high yield default rates to convertible and nonrated securities not examined in previous studies the high yield market can be partitioned into rated nonconvertible rated convertible nonrated nonconvertible and nonrated convertible securities other things equal one would expect higher default risk to be associated with higher yields however other things are not equal for example securities may have high yields because of differences in liquidity or differences in conversion options therefore yields reflect more than just expected default risk they also incorporate premiums for other characteristics of individual securities when the securities are partitioned by rating and convertibility the results of this paper show that the cumulative default rates are lower for rated convertible securities than for rated nonconvertible securities because in

evaluating corporate bonds and analyzing claim holders decisions with complex debt structure abstract although many different aspects of debt structures such as bond covenants and repayment schedules are empirically found to significantly influence values of bonds and equity many theoretical structural models still oversimplify debt structures and fail to capture phenomena found in financial markets this paper proposes a carefully designed structural model that faithfully models typical complex debt structures containing multiple bonds with various covenants for example the ability for an issuing firm to meet an obligation is modeled to rely on its ability to meet previous repayments and the default trigger is shaped according to the characteristics of its debt structure such as the amount and schedule of bond repayments thus our framework reliably provides theoretical insight and concrete quantitative measurements consistent with extant empirical research such as the shapes of yield spread curves under various firm s financial statuses and the impact of payment blockage covenants on newly issued and other outstanding bonds we also develop the forest a novel quantitative method to handle contingent changes in the debt structure due to premature bond redemptions a forest consists of several trees that capture different debt structures for instance those before or after a bond redemption this method can be used to analyze how poison put covenants in the target firm s bonds influence the bidder s costs of debt financing for a leveraged buyout or investigate how the presence of wealth transfer among the remaining claim holders due to a bond redemption influences the firm s call policy or further reconcile conflicts among previous empirical studies on call delay phenomena

sources of gains to shareholders from bankruptcy resolution abstract using a logistic regression model we identify the characteristics of firms whose shareholders are likely to benefit from bankruptcy resolution that is winners losers are firms whose shareholders experience positive negative excess returns after bankruptcy filing we find that winners are relatively smaller firms with higher proportions of convertible debt tend to file for bankruptcy for strategic reasons have low share ownership concentration and suffer comparatively larger pre filing stock price declines among winners shareholder returns are greater for firms that have higher levels of private debt and research and development r d expenditures and operate in more concentrated industries in addition our analysis indicates that an ex ante trading strategy of purchasing bankrupt stocks with a greater than 50 probability of being a winner on the day after bankruptcy filing and holding the stocks for a year on an average can generate average compounded and excess compounded holding period returns of 71 and 42 respectively

representation in municipal government municipal governments play a vital role in american democracy as well as in governments around the world despite this little is known about the degree to which cities are responsive to the views of their citizens in the past the unavailability of data on the policy preferences of citizens at the municipal level has limited scholars ability to study the responsiveness of municipal government we overcome this problem by using recent advances in opinion estimation to measure the mean policy conservatism in every u s city and town with a population above 20 000 people despite the supposition in the literature that municipal politics are non ideological we find that the policies enacted by cities across a range of policy areas correspond with the liberal conservative positions of their citizens on national policy issues in addition we consider the influence of institutions such as the presence of an elected mayor the popular initiative partisan elections term limits and at large elections our results show that these institutions have little consistent impact on policy responsiveness in municipal government these results demonstrate a robust role for citizen policy preferences in determining municipal policy outcomes but cast doubt on the hypothesis that simple institutional reforms enhance responsiveness in municipal governments

information asymmetries and spillover risk in settlement systems abstract i show how information asymmetries between agents in different settlement systems can increase the risk that a problem in one may spill over to another i focus on the strategic behavior of participants who operate in multiple systems as they choose how best to manage their liquidity across the systems in the event of an operational shock in one system these participants may continue to make payments in order to avoid delay costs thereby risking a liquidity sink if they believe they can recycle liquidity from the other unaffected system they are more likely to risk a liquidity sink if they believe banks in the unaffected system will continue making payments early unaware of the operational problem i show that a liquidity saving mechanism lsm in one system may reduce the probability of spillover into the other in this sense i identify a positive externality from the introduction of an lsm