This paper develops a dynamic model of capital structure. It uses the model to determine whether shifts in the demand for capital or shifts in the supply of capital is the key driving force behind capital structure variation over time. Simulations of the model show that adjusting capital structure in response to variation in the supply of capital results in persistence of dividend and market leverage that is lower than the observed persistence in the data. When variation in the supply of capital is shut down, the persistence of dividend and market leverage of simulated firms is reasonably close to that in the data. The results suggest that shifts in the demand for capital are likely the key driving force behind capital structure variation over time.
{"title":"Driving Forces of Corporate Capital Structure Variation Over Time","authors":"Pedram Nezafat","doi":"10.2139/ssrn.1786874","DOIUrl":"https://doi.org/10.2139/ssrn.1786874","url":null,"abstract":"This paper develops a dynamic model of capital structure. It uses the model to determine whether shifts in the demand for capital or shifts in the supply of capital is the key driving force behind capital structure variation over time. Simulations of the model show that adjusting capital structure in response to variation in the supply of capital results in persistence of dividend and market leverage that is lower than the observed persistence in the data. When variation in the supply of capital is shut down, the persistence of dividend and market leverage of simulated firms is reasonably close to that in the data. The results suggest that shifts in the demand for capital are likely the key driving force behind capital structure variation over time.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130201786","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 article studies how legal sanctions and enforcement affect brokers’ conflicts of interest emanating from investment banking activities. We exploit the recent adoption of the Market Abuse Directive (MAD) across European countries and use the variation in legal sanctions and enforcement that exists in Europe to identify brokers’ reaction. Overall, the enactment of MAD significantly reduced optimistic investment advice. This reduction is larger in countries equipped with more severe legal sanctions and in countries that strongly enforce the rules. Our analysis underscores the importance of legal sanctions and enforcement power to understand the real consequences of regulatory changes.
{"title":"Regulating Conflicts of Interest: The Effect of Sanctions and Enforcement","authors":"M. Dubois, L. Frésard, Pascal Dumontier","doi":"10.2139/ssrn.1786523","DOIUrl":"https://doi.org/10.2139/ssrn.1786523","url":null,"abstract":"This article studies how legal sanctions and enforcement affect brokers’ conflicts of interest emanating from investment banking activities. We exploit the recent adoption of the Market Abuse Directive (MAD) across European countries and use the variation in legal sanctions and enforcement that exists in Europe to identify brokers’ reaction. Overall, the enactment of MAD significantly reduced optimistic investment advice. This reduction is larger in countries equipped with more severe legal sanctions and in countries that strongly enforce the rules. Our analysis underscores the importance of legal sanctions and enforcement power to understand the real consequences of regulatory changes.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"80 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124848447","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}
Modern electronic markets have been characterized by a relentless drive towards faster decision making. Significant technological investments have led to dramatic improvements in latency, the delay between a trading decision and the resulting trade execution. We describe a theoretical model for the quantitative valuation of latency. Our model measures the trading frictions created by the presence of latency, by considering the optimal execution problem of a representative investor. Via a dynamic programming analysis, our model provides a closed-form expression for the cost of latency in terms of well-known parameters of the underlying asset. We implement our model by estimating the latency cost incurred by trading on a human time scale. Examining NYSE common stocks from 1995 to 2005 shows that median latency cost across our sample roughly tripled during this time period. Furthermore, using the same data set, we compute a measure of implied latency, and conclude that the median implied latency decreased by approximately two orders of magnitude. Empirically calibrated, our model suggests that the reduction in cost achieved by going from trading on a human time scale to a low latency time scale is comparable with other execution costs faced by the most cost efficient institutional investors, and is consistent with the rents that are extracted by ultra low latency agents, such as providers of automated execution services or high frequency traders.
{"title":"The Cost of Latency in High-Frequency Trading","authors":"C. Moallemi, Mehmet Saglam","doi":"10.2139/ssrn.1571935","DOIUrl":"https://doi.org/10.2139/ssrn.1571935","url":null,"abstract":"Modern electronic markets have been characterized by a relentless drive towards faster decision making. Significant technological investments have led to dramatic improvements in latency, the delay between a trading decision and the resulting trade execution. We describe a theoretical model for the quantitative valuation of latency. Our model measures the trading frictions created by the presence of latency, by considering the optimal execution problem of a representative investor. Via a dynamic programming analysis, our model provides a closed-form expression for the cost of latency in terms of well-known parameters of the underlying asset. We implement our model by estimating the latency cost incurred by trading on a human time scale. Examining NYSE common stocks from 1995 to 2005 shows that median latency cost across our sample roughly tripled during this time period. Furthermore, using the same data set, we compute a measure of implied latency, and conclude that the median implied latency decreased by approximately two orders of magnitude. Empirically calibrated, our model suggests that the reduction in cost achieved by going from trading on a human time scale to a low latency time scale is comparable with other execution costs faced by the most cost efficient institutional investors, and is consistent with the rents that are extracted by ultra low latency agents, such as providers of automated execution services or high frequency traders.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121094110","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}
Michaël Dewally, Louis H. Ederington, Chitru S. Fernando
Using a unique proprietary data set of positions held by all large traders in the crude oil, gasoline, and heating oil futures markets, we use actual trader profits to test the predictions of various commodity futures pricing models. We find statistically and economically significant evidence that: (a) mean hedger profits are negative while speculator profits are positive, which is consistent with the risk premium hypothesis, (b) traders (whether speculators or hedgers) who hold long (short) positions when likely hedgers in aggregate are net short (long) have higher profits than traders whose net positions are aligned with likely hedgers, which is consistent with the hedging pressure hypothesis, and (c) profits on long positions vary inversely with inventories and directly with price volatility, which is consistent with the modern theory of storage. We establish these associations while controlling for macroeconomic risk factors that potentially affect futures returns and for trader characteristics. Our results indicate also that the momentum in commodity futures markets may be due largely to hedging pressure.
{"title":"Determinants of Trader Profits in Futures Markets","authors":"Michaël Dewally, Louis H. Ederington, Chitru S. Fernando","doi":"10.2139/ssrn.1781975","DOIUrl":"https://doi.org/10.2139/ssrn.1781975","url":null,"abstract":"Using a unique proprietary data set of positions held by all large traders in the crude oil, gasoline, and heating oil futures markets, we use actual trader profits to test the predictions of various commodity futures pricing models. We find statistically and economically significant evidence that: (a) mean hedger profits are negative while speculator profits are positive, which is consistent with the risk premium hypothesis, (b) traders (whether speculators or hedgers) who hold long (short) positions when likely hedgers in aggregate are net short (long) have higher profits than traders whose net positions are aligned with likely hedgers, which is consistent with the hedging pressure hypothesis, and (c) profits on long positions vary inversely with inventories and directly with price volatility, which is consistent with the modern theory of storage. We establish these associations while controlling for macroeconomic risk factors that potentially affect futures returns and for trader characteristics. Our results indicate also that the momentum in commodity futures markets may be due largely to hedging pressure.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-01-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121367091","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}
Prior research has addressed the question of whether certain events cause a transfer of wealth between stockholders and bondholders but does not control for the events’ impacts on firms’ credit risk. This may explain why many studies fail to identify wealth transfers. By employing announcements of reductions in credit quality, we find that two types of events cause wealth transfers from bondholders to stockholders. These are unexpected increases in firm leverage, and the firms’ contemporaneous involvement in M&A. Both cases reveal positive excess stock returns and CDS premiums, which exhibit a significantly positive correlation.
{"title":"Wealth Transfer Effects between Stockholders and Bondholders","authors":"Björn Imbierowicz, Mark Wahrenburg","doi":"10.2139/ssrn.1786605","DOIUrl":"https://doi.org/10.2139/ssrn.1786605","url":null,"abstract":"Prior research has addressed the question of whether certain events cause a transfer of wealth between stockholders and bondholders but does not control for the events’ impacts on firms’ credit risk. This may explain why many studies fail to identify wealth transfers. By employing announcements of reductions in credit quality, we find that two types of events cause wealth transfers from bondholders to stockholders. These are unexpected increases in firm leverage, and the firms’ contemporaneous involvement in M&A. Both cases reveal positive excess stock returns and CDS premiums, which exhibit a significantly positive correlation.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"102 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-01-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114315058","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 a general equilibrium economy with uninsurable aggregate liquidity shocks, we show that public information may trigger allocative inefficiency and liquidity crises. Entrepreneurs do not internalize the negative impact of their investment decisions on the equilibrium risk of liquidity shortage. A more informative public signal decreases the risk of a liquidity shock, but increases the risk of capital rationing conditional on a liquidity shock. In equilibrium, information quality has a non-monotonic effect on expected returns on investment and social welfare. An increase in the quality of public information has redistributive effects on welfare as entrepreneurs gain and financiers lose. Investment restrictions and targeted disclosure of information achieve constrained efficiency as competitive market equilibrium.
{"title":"Public Information and Inefficient Investment","authors":"V. Gala, P. Volpin","doi":"10.2139/ssrn.1572376","DOIUrl":"https://doi.org/10.2139/ssrn.1572376","url":null,"abstract":"In a general equilibrium economy with uninsurable aggregate liquidity shocks, we show that public information may trigger allocative inefficiency and liquidity crises. Entrepreneurs do not internalize the negative impact of their investment decisions on the equilibrium risk of liquidity shortage. A more informative public signal decreases the risk of a liquidity shock, but increases the risk of capital rationing conditional on a liquidity shock. In equilibrium, information quality has a non-monotonic effect on expected returns on investment and social welfare. An increase in the quality of public information has redistributive effects on welfare as entrepreneurs gain and financiers lose. Investment restrictions and targeted disclosure of information achieve constrained efficiency as competitive market equilibrium.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125982571","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}
A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.
{"title":"The Investment Manifesto","authors":"Xiaoji Lin, Lu Zhang","doi":"10.2139/ssrn.2011221","DOIUrl":"https://doi.org/10.2139/ssrn.2011221","url":null,"abstract":"A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"49 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125919285","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 empirical associations between online information acquisition and several aspects of investors’ trading activities. We find that trading volume and buy-sell imbalance between small and large traders are positively associated with abnormal ticker search on Google. These positive trading-search associations are more pronounced for firms with large accruals, during earnings announcement periods, and in more recent years. Our evidence is consistent with information acquisition triggers investor disagreement.
{"title":"Online Information Acquisition and Investor Trading","authors":"Lei Gao, Oliver Zhen Li, P. Yeung","doi":"10.2139/ssrn.1929402","DOIUrl":"https://doi.org/10.2139/ssrn.1929402","url":null,"abstract":"We examine the empirical associations between online information acquisition and several aspects of investors’ trading activities. We find that trading volume and buy-sell imbalance between small and large traders are positively associated with abnormal ticker search on Google. These positive trading-search associations are more pronounced for firms with large accruals, during earnings announcement periods, and in more recent years. Our evidence is consistent with information acquisition triggers investor disagreement.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125972388","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 integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay-to-performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay-toperformance sensitivity depends positively on a firm’s idiosyncratic risk, and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.
{"title":"Optimal CEO Compensation with Search: Theory and Empirical Evidence","authors":"Melanie Cao, Rong Wang","doi":"10.2139/ssrn.1355502","DOIUrl":"https://doi.org/10.2139/ssrn.1355502","url":null,"abstract":"We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay-to-performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay-toperformance sensitivity depends positively on a firm’s idiosyncratic risk, and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"72 12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130169753","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}
Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.
{"title":"Acquisitions Driven by Stock Overvaluation: Are They Good Deals?","authors":"Fangjian Fu, Leming Lin, Micah S. Officer","doi":"10.2139/ssrn.1328115","DOIUrl":"https://doi.org/10.2139/ssrn.1328115","url":null,"abstract":"Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"179 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124482287","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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