J. Coles, Naveen D. Daniel, Farooq Durrani, L. Naveen
We introduce an easy-to-compute measure of board advising: Director Connections. This is the number of unique directors that a firm’s outside directors are connected to through common board service. We find that as firm complexity increases: Director Connections increases, firm value increases with Director Connections, and announcement returns to director appointments increases. The idea that connected directors are valuable advisors is further supported by the findings that connected directors have higher human capital, are paid more, disproportionately represented on advising committees, and do not improve monitoring effectiveness. Our contribution is to document that director connections are valuable in complex firms.
{"title":"Director Connections and Board Advising","authors":"J. Coles, Naveen D. Daniel, Farooq Durrani, L. Naveen","doi":"10.2139/ssrn.2002250","DOIUrl":"https://doi.org/10.2139/ssrn.2002250","url":null,"abstract":"We introduce an easy-to-compute measure of board advising: Director Connections. This is the number of unique directors that a firm’s outside directors are connected to through common board service. We find that as firm complexity increases: Director Connections increases, firm value increases with Director Connections, and announcement returns to director appointments increases. The idea that connected directors are valuable advisors is further supported by the findings that connected directors have higher human capital, are paid more, disproportionately represented on advising committees, and do not improve monitoring effectiveness. Our contribution is to document that director connections are valuable in complex firms.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"59 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123578552","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 develops a model of CDS demand when investment is subject to economic fluctuations and verification is imperfect. We show that CDS overinsurance (insurance in excess of renegotiation proceeds) is procyclical and allows for greater financing of firms with positive NPV projects. In bad times, CDS overinsurance triggers the early liquidation of firms with low continuation values. Our analysis explains the optimality of CDS contracting and reconciles evidence showing that CDSs are most beneficial for firms that are safer and have higher continuation values. The model generates a number of empirical predictions and provides insights on the regulation of CDS markets.
{"title":"Investment Risk, CDS Insurance, and Firm Financing","authors":"Murillo Campello, R. Matta","doi":"10.2139/ssrn.1770066","DOIUrl":"https://doi.org/10.2139/ssrn.1770066","url":null,"abstract":"This paper develops a model of CDS demand when investment is subject to economic fluctuations and verification is imperfect. We show that CDS overinsurance (insurance in excess of renegotiation proceeds) is procyclical and allows for greater financing of firms with positive NPV projects. In bad times, CDS overinsurance triggers the early liquidation of firms with low continuation values. Our analysis explains the optimality of CDS contracting and reconciles evidence showing that CDSs are most beneficial for firms that are safer and have higher continuation values. The model generates a number of empirical predictions and provides insights on the regulation of CDS markets.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121987889","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 develop a new empirical approach to term structure analysis that allows testing for time-varying risk premiums and arbitrage opportunities in models with both unobservable factors and factors identified as the innovations to observed macroeconomic variables. Factors can play double roles as both covariance-generating common shocks driving yields and determinants of market prices of risk in cross-sectional pricing. The evidence favors time-varying risk prices significantly related to the second Stock–Watson principal component of macroeconomic variables and to changes in the industrial production index. Our preferred specification includes these two observable and two unobservable factors, with the no-arbitrage condition imposed.
{"title":"An Asset Pricing Approach to Testing General Term Structure Models","authors":"B. Christensen, Michel van der Wel","doi":"10.2139/ssrn.1578354","DOIUrl":"https://doi.org/10.2139/ssrn.1578354","url":null,"abstract":"We develop a new empirical approach to term structure analysis that allows testing for time-varying risk premiums and arbitrage opportunities in models with both unobservable factors and factors identified as the innovations to observed macroeconomic variables. Factors can play double roles as both covariance-generating common shocks driving yields and determinants of market prices of risk in cross-sectional pricing. The evidence favors time-varying risk prices significantly related to the second Stock–Watson principal component of macroeconomic variables and to changes in the industrial production index. Our preferred specification includes these two observable and two unobservable factors, with the no-arbitrage condition imposed.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126672784","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}
In pursuit of understanding the mechanism that relates the expansion in credit to the increase in real-estate prices during the real-estate bubble, I explore transaction-level data for 1994-2008. I document a strong correlation between borrowing at high leverage (>95% loan to value) and paying the full listing price or above. Homebuyers in these transactions pay prices that are higher than market prices by 3.4% ($5,700 on average) and they are 22.7% more likely to default on their mortgages, relative to other highly leveraged borrowers. The correlation between leverage and paying high prices is stronger beyond what a mechanical relation predicts: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger for financially constrained and unsophisticated homebuyers, and in areas of high past price growth (indicative of buyer optimism). The study highlights the importance of buyer sophistication, financial constraints, and beliefs in determining prices and leverage.
{"title":"High Leverage and Willingness to Pay: Evidence from the Residential Housing Market","authors":"Itzhak Ben-David","doi":"10.2139/ssrn.1927294","DOIUrl":"https://doi.org/10.2139/ssrn.1927294","url":null,"abstract":"In pursuit of understanding the mechanism that relates the expansion in credit to the increase in real-estate prices during the real-estate bubble, I explore transaction-level data for 1994-2008. I document a strong correlation between borrowing at high leverage (>95% loan to value) and paying the full listing price or above. Homebuyers in these transactions pay prices that are higher than market prices by 3.4% ($5,700 on average) and they are 22.7% more likely to default on their mortgages, relative to other highly leveraged borrowers. The correlation between leverage and paying high prices is stronger beyond what a mechanical relation predicts: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger for financially constrained and unsophisticated homebuyers, and in areas of high past price growth (indicative of buyer optimism). The study highlights the importance of buyer sophistication, financial constraints, and beliefs in determining prices and leverage.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125849513","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}
Peter F. Christoffersen, Ruslan Goyenko, Kris Jacobs, M. Karoui
Standard option valuation models leave no room for option illiquidity premia. Yet we find the risk-adjusted return spread for illiquid over liquid equity options is $3.4%$ per day for at-the-money calls and $2.5 %$ for at-the-money puts. These premia are computed using option illiquidity measures constructed from intraday effective spreads for a large panel of U.S. equities, and they are robust to different empirical implementations. Our findings are consistent with evidence that market makers in the equity options market hold large and risky net long positions, and positive illiquidity premia compensate them for the risks and costs of these positions. Received September 25, 2012; editorial decision September 17, 2017 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Illiquidity Premia in the Equity Options Market","authors":"Peter F. Christoffersen, Ruslan Goyenko, Kris Jacobs, M. Karoui","doi":"10.2139/ssrn.1784868","DOIUrl":"https://doi.org/10.2139/ssrn.1784868","url":null,"abstract":"Standard option valuation models leave no room for option illiquidity premia. Yet we find the risk-adjusted return spread for illiquid over liquid equity options is $3.4%$ per day for at-the-money calls and $2.5 %$ for at-the-money puts. These premia are computed using option illiquidity measures constructed from intraday effective spreads for a large panel of U.S. equities, and they are robust to different empirical implementations. Our findings are consistent with evidence that market makers in the equity options market hold large and risky net long positions, and positive illiquidity premia compensate them for the risks and costs of these positions. Received September 25, 2012; editorial decision September 17, 2017 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122808657","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}
Miguel A. Ferreira, Pedro Matos, J. Pereira, P. Pires
We compare the performance of local versus foreign institutional investors using a comprehensive data set of equity holdings in 32 countries during the 2000–2010 period. We find that foreign institutions perform as well as local institutions on average, but only domestic institutions show a trading pattern consistent with an information advantage. Our results suggest a smart-money effect of local institutions in countries subject to higher information asymmetry, non-English speaking countries, countries with less efficient stock markets, with poor investor protection, or high levels of corruption. The local advantage is more pronounced in periods of market turmoil and in illiquid stocks.
{"title":"Do Locals Know Better? A Comparison of the Performance of Local and Foreign Institutional Investors","authors":"Miguel A. Ferreira, Pedro Matos, J. Pereira, P. Pires","doi":"10.2139/ssrn.1361747","DOIUrl":"https://doi.org/10.2139/ssrn.1361747","url":null,"abstract":"We compare the performance of local versus foreign institutional investors using a comprehensive data set of equity holdings in 32 countries during the 2000–2010 period. We find that foreign institutions perform as well as local institutions on average, but only domestic institutions show a trading pattern consistent with an information advantage. Our results suggest a smart-money effect of local institutions in countries subject to higher information asymmetry, non-English speaking countries, countries with less efficient stock markets, with poor investor protection, or high levels of corruption. The local advantage is more pronounced in periods of market turmoil and in illiquid stocks.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-05-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130008910","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}
Huafeng (Jason) Chen, Shaojun Chen, Zhuo Chen, Feng Li
We show that an equity pairs trading strategy generates large and significant abnormal returns. We find that this return is not driven purely by the short-term reversal of returns. The evidence related to the cross-sectional variation, the time-series variation, and the persistence of the pairs trading profits, and the determinants of return correlations is consistent with the delay in information diffusion as the driver for the pairs trading strategy. Evidence from the liquidity factor and the recent financial crisis suggests that the short-term liquidity provision is not the main cause of the pairs trading strategy.
{"title":"Empirical Investigation of an Equity Pairs Trading Strategy","authors":"Huafeng (Jason) Chen, Shaojun Chen, Zhuo Chen, Feng Li","doi":"10.2139/ssrn.1361293","DOIUrl":"https://doi.org/10.2139/ssrn.1361293","url":null,"abstract":"We show that an equity pairs trading strategy generates large and significant abnormal returns. We find that this return is not driven purely by the short-term reversal of returns. The evidence related to the cross-sectional variation, the time-series variation, and the persistence of the pairs trading profits, and the determinants of return correlations is consistent with the delay in information diffusion as the driver for the pairs trading strategy. Evidence from the liquidity factor and the recent financial crisis suggests that the short-term liquidity provision is not the main cause of the pairs trading strategy.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-04-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130970409","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}
Dynamic Monitoring of Financial Intermediaries with Subordinated Debt by Gloria Gonzalez-Rivera University of California, Riverside Department of Economics Riverside, CA 92521 e-mail: gloria.gonzalez@ucr.edu phone: (951) 827 1470 fax: (951) 827 5685 David Nickerson Colorado State University Departments of Economics and Finance Fort Collins, CO 80523-1771 e-mail: david.nickerson@colostate.edu phone: (970) 491 5249
{"title":"Monitoring Financial Intermediaries with Subordinated Debt: A Dynamic Signal Model for Bank Risk","authors":"Gloria González-Rivera, David Nickerson","doi":"10.2139/ssrn.354390","DOIUrl":"https://doi.org/10.2139/ssrn.354390","url":null,"abstract":"Dynamic Monitoring of Financial Intermediaries with Subordinated Debt by Gloria Gonzalez-Rivera University of California, Riverside Department of Economics Riverside, CA 92521 e-mail: gloria.gonzalez@ucr.edu phone: (951) 827 1470 fax: (951) 827 5685 David Nickerson Colorado State University Departments of Economics and Finance Fort Collins, CO 80523-1771 e-mail: david.nickerson@colostate.edu phone: (970) 491 5249","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114139835","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}
Separation between CEO and Chairman of the Board is typically viewed as evidence of good corporate governance. Surprisingly, the literature has failed so far to uncover any significant relation between CEO/Chairman duality and firm performance. By distinguishing between periods with and without CEO turnover, we empirically identify two o setting effects: the correlation between duality and performance is positive around CEO turnover and negative otherwise. This suggests that the competition for managerial talent forces firms to combine CEO and Chairman in order to attract more skilled CEOs at the cost of reducing governance standards.
{"title":"Competition for Managers and Corporate Governance","authors":"V. Acharya, Marc Gabarro, P. Volpin","doi":"10.2139/ssrn.1572994","DOIUrl":"https://doi.org/10.2139/ssrn.1572994","url":null,"abstract":"Separation between CEO and Chairman of the Board is typically viewed as evidence of good corporate governance. Surprisingly, the literature has failed so far to uncover any significant relation between CEO/Chairman duality and firm performance. By distinguishing between periods with and without CEO turnover, we empirically identify two o setting effects: the correlation between duality and performance is positive around CEO turnover and negative otherwise. This suggests that the competition for managerial talent forces firms to combine CEO and Chairman in order to attract more skilled CEOs at the cost of reducing governance standards.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127258863","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}
Economic theory suggests that pervasive factors should be priced in the cross-section of stock returns. However, our evidence shows that portfolios with higher risk exposure do not earn higher returns. More importantly, our evidence shows a striking two-regime pattern for all 10 macro-related factors: high-risk portfolios earn significantly higher returns than low-risk portfolios following low-sentiment periods, whereas the exact opposite occurs following high-sentiment periods. These findings are consistent with a setting in which market-wide sentiment is combined with short-sale impediments and sentiment-driven investors undermine the traditional risk-return tradeoff, especially during high-sentiment periods.
{"title":"Investor Sentiment and Economic Forces","authors":"Junyan Shen, Jianfeng Yu, Shen Zhao","doi":"10.2139/ssrn.1991244","DOIUrl":"https://doi.org/10.2139/ssrn.1991244","url":null,"abstract":"Economic theory suggests that pervasive factors should be priced in the cross-section of stock returns. However, our evidence shows that portfolios with higher risk exposure do not earn higher returns. More importantly, our evidence shows a striking two-regime pattern for all 10 macro-related factors: high-risk portfolios earn significantly higher returns than low-risk portfolios following low-sentiment periods, whereas the exact opposite occurs following high-sentiment periods. These findings are consistent with a setting in which market-wide sentiment is combined with short-sale impediments and sentiment-driven investors undermine the traditional risk-return tradeoff, especially during high-sentiment periods.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"84 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114218730","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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