I show that a single ratio requiring only a public company's face value of debt and stock market capitalization is a robust bankruptcy predictor. I develop this ratio from a simple theory of the bankruptcy decision and denote it Ps, since it is the minimum price at which a firm's debt must trade if the firm is solvent. Used alone or in combination with other variables, Ps provides a useful tool for credit analysts, bankers, public accountants and others, and will be of considerable value in academic research on financial distress. I present bankruptcy frequencies for a range of Ps values to facilitate bankruptcy prediction by the reader.
{"title":"Bankruptcy Prediction Using Only the Face Value of Debt and Stock Market Capitalization in a Single Ratio","authors":"J. B. Heaton","doi":"10.2139/ssrn.3773332","DOIUrl":"https://doi.org/10.2139/ssrn.3773332","url":null,"abstract":"I show that a single ratio requiring only a public company's face value of debt and stock market capitalization is a robust bankruptcy predictor. I develop this ratio from a simple theory of the bankruptcy decision and denote it Ps, since it is the minimum price at which a firm's debt must trade if the firm is solvent. Used alone or in combination with other variables, Ps provides a useful tool for credit analysts, bankers, public accountants and others, and will be of considerable value in academic research on financial distress. I present bankruptcy frequencies for a range of Ps values to facilitate bankruptcy prediction by the reader.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"11 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87259986","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Reducing the amount of private information in corporate disclosures does not necessarily reduce the accuracy of analysts’ forecasts. This paper applies model-based earnings forecasts as a benchmark that is immune from disclosure of private information and evaluates the relative performance of analysts’ forecasts of earnings against the benchmark. It finds that the I/B/E/S consensus forecasts in general outperform the benchmark forecasts in the post-Reg FD period, while they underperform the benchmark in the pre-Reg FD period. It seems that Reg FD is a watershed. The difference-in-difference analysis confirms that the accuracy of analysts’ consensus forecasts of earnings has improved significantly following the passage of Reg FD.
{"title":"Financial Analysts’ Forecasts Have Improved Significantly in the Post-Reg FD Period","authors":"Pengguo Wang","doi":"10.2139/ssrn.3767968","DOIUrl":"https://doi.org/10.2139/ssrn.3767968","url":null,"abstract":"Reducing the amount of private information in corporate disclosures does not necessarily reduce the accuracy of analysts’ forecasts. This paper applies model-based earnings forecasts as a benchmark that is immune from disclosure of private information and evaluates the relative performance of analysts’ forecasts of earnings against the benchmark. It finds that the I/B/E/S consensus forecasts in general outperform the benchmark forecasts in the post-Reg FD period, while they underperform the benchmark in the pre-Reg FD period. It seems that Reg FD is a watershed. The difference-in-difference analysis confirms that the accuracy of analysts’ consensus forecasts of earnings has improved significantly following the passage of Reg FD.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"112 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77407834","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
F. Closset, C. Grossmann, C. Kaserer, Daniel Urban
In an attempt to match US bankruptcy law, many European countries have reformed their insolvency laws towards a regime that fosters corporate restructuring. This paper evaluates the implications of these reforms. Based on a staggered difference-in-differences analysis around eight insolvency reforms in 15 European countries, this paper finds a relative increase in the cost of debt by about 50 bps in countries with such a reform. The effect is more pronounced among firms being closer to default. As a result of increased cost of debt financing, firms cut investment and employee pay by about 2 percent. Overall, the results are consistent with the view that creditors may be negatively affected by insolvency law reforms oriented towards restructuring and, thus, demand higher risk premia.
{"title":"Corporate Restructuring and Creditor Power: Evidence from European Insolvency Law Reforms","authors":"F. Closset, C. Grossmann, C. Kaserer, Daniel Urban","doi":"10.2139/ssrn.3768436","DOIUrl":"https://doi.org/10.2139/ssrn.3768436","url":null,"abstract":"In an attempt to match US bankruptcy law, many European countries have reformed their insolvency laws towards a regime that fosters corporate restructuring. This paper evaluates the implications of these reforms. Based on a staggered difference-in-differences analysis around eight insolvency reforms in 15 European countries, this paper finds a relative increase in the cost of debt by about 50 bps in countries with such a reform. The effect is more pronounced among firms being closer to default. As a result of increased cost of debt financing, firms cut investment and employee pay by about 2 percent. Overall, the results are consistent with the view that creditors may be negatively affected by insolvency law reforms oriented towards restructuring and, thus, demand higher risk premia.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"44 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77629223","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Digital payments are essential to the functioning of a modern economy, yet pose challenges to the prudential supervision of the financial system. At the same time, the use of physical cash persists in most countries due to its ease of use and the perceived or actual advantages of anonymity. A digital currency is seen as a possible solution to the oversight problem and a suitable instrument for modernising trade and exchange through the elimination of physical cash and its attendant production, storage and transport costs as well as its unsuitability for online payments. In this paper, we provide a non-technical overview of the advantages a central bank issued digital currency (CBDC), mechanisms through which such a currency can be implemented and how it might interact with the conventional banking system. The discussion includes but is not limited to distributed ledgers and we briefly consider the examples of three pilot CBDC projects.
{"title":"Central Bank Issued Digital Currencies","authors":"Bronwyn E. Howell, P. Potgieter","doi":"10.2139/ssrn.3782968","DOIUrl":"https://doi.org/10.2139/ssrn.3782968","url":null,"abstract":"Digital payments are essential to the functioning of a modern economy, yet pose challenges to the prudential supervision of the financial system. At the same time, the use of physical cash persists in most countries due to its ease of use and the perceived or actual advantages of anonymity. A digital currency is seen as a possible solution to the oversight problem and a suitable instrument for modernising trade and exchange through the elimination of physical cash and its attendant production, storage and transport costs as well as its unsuitability for online payments. In this paper, we provide a non-technical overview of the advantages a central bank issued digital currency (CBDC), mechanisms through which such a currency can be implemented and how it might interact with the conventional banking system. The discussion includes but is not limited to distributed ledgers and we briefly consider the examples of three pilot CBDC projects.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"23 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87426758","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.
{"title":"The Effect of Tax Avoidance Crackdown on Corporate Innovation","authors":"Qin Li, Mark (Shuai) Ma, T. Shevlin","doi":"10.2139/ssrn.3734660","DOIUrl":"https://doi.org/10.2139/ssrn.3734660","url":null,"abstract":"Abstract To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"53 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84524448","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Guillaume Arnould, B. Guin, S. Ongena, P. Siciliani
We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.
{"title":"(When) Do Banks React to Anticipated Capital Reliefs?","authors":"Guillaume Arnould, B. Guin, S. Ongena, P. Siciliani","doi":"10.2139/ssrn.3733513","DOIUrl":"https://doi.org/10.2139/ssrn.3733513","url":null,"abstract":"We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79331422","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Office of Financial Research (“OFR”) was created to address the gaps in data availability and analysis that hampered governmental authorities in their response to the financial crisis of 2008. It was hoped that the OFR would serve as a type of “early warning system” that would detect emerging systemic risks through data collection and analysis, but the OFR never had the opportunity to live up to its promise. During the Obama administration, it suffered from an unsupportive Treasury Secretary and pushback from other federal financial regulatory agencies; under the Trump administration, the staff and resources of the OFR have been decimated. The next administration should seize the opportunity to rebuild the OFR – not only to fulfil the OFR’s initial data collection and analysis functions, but also to address new sources of systemic risk that have emerged since 2010. In particular, the OFR should be rebuilt with the new types of expertise needed to address the growing systemic threats that may arise from climate change and fintech innovation. At present, climate, complexity, computer and data science expertise are largely unrepresented in the financial regulatory agencies, but financial regulation – particularly financial stability regulation – can no longer be fully effective without them. A resurrected OFR could serve as a hub of these types of expertise, drawing upon them to monitor new types of systemic risks, research innovative solutions to those risks, and also to assist the other US financial federal regulatory agencies with technical expertise as the need arises.
{"title":"Resurrecting the OFR","authors":"Hilary J. Allen","doi":"10.2139/SSRN.3727585","DOIUrl":"https://doi.org/10.2139/SSRN.3727585","url":null,"abstract":"The Office of Financial Research (“OFR”) was created to address the gaps in data availability and analysis that hampered governmental authorities in their response to the financial crisis of 2008. It was hoped that the OFR would serve as a type of “early warning system” that would detect emerging systemic risks through data collection and analysis, but the OFR never had the opportunity to live up to its promise. During the Obama administration, it suffered from an unsupportive Treasury Secretary and pushback from other federal financial regulatory agencies; under the Trump administration, the staff and resources of the OFR have been decimated. The next administration should seize the opportunity to rebuild the OFR – not only to fulfil the OFR’s initial data collection and analysis functions, but also to address new sources of systemic risk that have emerged since 2010. In particular, the OFR should be rebuilt with the new types of expertise needed to address the growing systemic threats that may arise from climate change and fintech innovation. At present, climate, complexity, computer and data science expertise are largely unrepresented in the financial regulatory agencies, but financial regulation – particularly financial stability regulation – can no longer be fully effective without them. A resurrected OFR could serve as a hub of these types of expertise, drawing upon them to monitor new types of systemic risks, research innovative solutions to those risks, and also to assist the other US financial federal regulatory agencies with technical expertise as the need arises.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"14 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88187547","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the hold-up problem with the government, namely that the government may be provided an opportunity to expropriate firm investment in an incomplete contract. We employ the enactment of the 2007 Property Law in China as a natural experiment to empirically test the effect of the hold-up problem. We document that firm investments increase 12% on average after the Law enactment, and this effect tends to be stronger for private enterprises. We then provide evidence from four perspectives suggesting that mitigating the risks of being held up by the government may encourage firm investment. We show that in the post-enactment period firms become less likely to withhold their investments during local government official rotations. We also find a larger post-enactment increase in investments for firms headquartered in regions with more local government fiscal pressure, more corruption, and worse government-business relations which may indicate a higher prevalence of the hold-up problem. Our findings hold for a group of robustness checks and are valid after taking account of alternative explanations.
{"title":"Hold-up Problem with the Government: Evidence from China","authors":"Jiaoliang Jiang, Xi Sun, Changyun Wang","doi":"10.2139/ssrn.3423523","DOIUrl":"https://doi.org/10.2139/ssrn.3423523","url":null,"abstract":"This paper studies the hold-up problem with the government, namely that the government may be provided an opportunity to expropriate firm investment in an incomplete contract. We employ the enactment of the 2007 Property Law in China as a natural experiment to empirically test the effect of the hold-up problem. We document that firm investments increase 12% on average after the Law enactment, and this effect tends to be stronger for private enterprises. We then provide evidence from four perspectives suggesting that mitigating the risks of being held up by the government may encourage firm investment. We show that in the post-enactment period firms become less likely to withhold their investments during local government official rotations. We also find a larger post-enactment increase in investments for firms headquartered in regions with more local government fiscal pressure, more corruption, and worse government-business relations which may indicate a higher prevalence of the hold-up problem. Our findings hold for a group of robustness checks and are valid after taking account of alternative explanations.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"21 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73949812","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the causal effect of managerial litigation risk on managers’ disclosure of earnings warnings in the face of large earnings shortfalls. Exploring the staggered adoption of universal demand (UD) laws as an exogenous decrease in litigation risk, we find that the adoption leads to a decrease in managers’ issuance of earnings warnings, especially among firms facing a higher litigation risk prior to the adoption. In contrast, we find no change in managers’ tendency to alert investors of impending large positive earnings surprises. Collectively, our results provide causal evidence that higher litigation risk incentivizes managers to issue more earnings warnings. Our results differ from Bourveau et al.’s finding of an increase in the frequency of management earnings forecasts after the adoption of UD laws. We reconcile our findings with theirs by demonstrating that the effect of adopting UD laws on management earnings forecasts depends critically on forecast horizon: The adoption increases long‐horizon forecasts, but decreases short‐horizon forecasts.
{"title":"The Effect of Managerial Litigation Risk on Earnings Warnings: Evidence from a Natural Experiment","authors":"Ying Huang, Ningzhong Li, Yong Yu, Xiaolu Zhou","doi":"10.2139/ssrn.3698391","DOIUrl":"https://doi.org/10.2139/ssrn.3698391","url":null,"abstract":"We examine the causal effect of managerial litigation risk on managers’ disclosure of earnings warnings in the face of large earnings shortfalls. Exploring the staggered adoption of universal demand (UD) laws as an exogenous decrease in litigation risk, we find that the adoption leads to a decrease in managers’ issuance of earnings warnings, especially among firms facing a higher litigation risk prior to the adoption. In contrast, we find no change in managers’ tendency to alert investors of impending large positive earnings surprises. Collectively, our results provide causal evidence that higher litigation risk incentivizes managers to issue more earnings warnings. Our results differ from Bourveau et al.’s finding of an increase in the frequency of management earnings forecasts after the adoption of UD laws. We reconcile our findings with theirs by demonstrating that the effect of adopting UD laws on management earnings forecasts depends critically on forecast horizon: The adoption increases long‐horizon forecasts, but decreases short‐horizon forecasts.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"35 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88157199","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mary E. Barth, Travis Dyer, W. Landsman, Daniel J. Taylor
We comment on the Securities and Exchange Commission’s proposed Reporting Threshold for Institutional Investment Managers (“Proposal”). We estimate the cost savings from the Proposal are economically small, and amount to 0.004% (0.008%) of assets under management for the average (median) affected filer, and 0.02% of assets for the smallest filer. This small cost savings needs to be weighed against the potentially large costs to investors and others created by eliminating a public disclosure that they heavily use. We believe the analysis in Section II of the Proposal is incomplete for two reasons. First, the Proposal does not contain any formal economic analysis. Second, it does not attempt to quantify either the extent of use of Form 13F or the benefits that it provides to investors and other stakeholders. To help fill this void, we analyze the usage patterns of the EDGAR system, and specifically the frequency of Form 13F downloads from EDGAR. Our analysis suggests the investing public and other stakeholders are strongly interested in the information in Form 13F filings, particularly those of affected filers, and that exempting such institutions from filing Form 13F would deprive the market of this information.
{"title":"Commentary on the SEC's Proposed Reporting Threshold for Institutional Investment Managers","authors":"Mary E. Barth, Travis Dyer, W. Landsman, Daniel J. Taylor","doi":"10.2139/ssrn.3714221","DOIUrl":"https://doi.org/10.2139/ssrn.3714221","url":null,"abstract":"We comment on the Securities and Exchange Commission’s proposed Reporting Threshold for Institutional Investment Managers (“Proposal”). We estimate the cost savings from the Proposal are economically small, and amount to 0.004% (0.008%) of assets under management for the average (median) affected filer, and 0.02% of assets for the smallest filer. This small cost savings needs to be weighed against the potentially large costs to investors and others created by eliminating a public disclosure that they heavily use. We believe the analysis in Section II of the Proposal is incomplete for two reasons. First, the Proposal does not contain any formal economic analysis. Second, it does not attempt to quantify either the extent of use of Form 13F or the benefits that it provides to investors and other stakeholders. To help fill this void, we analyze the usage patterns of the EDGAR system, and specifically the frequency of Form 13F downloads from EDGAR. Our analysis suggests the investing public and other stakeholders are strongly interested in the information in Form 13F filings, particularly those of affected filers, and that exempting such institutions from filing Form 13F would deprive the market of this information.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88188068","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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