In Securities
Corporate bond default risk: A 150-year perspective
Kay Giesecke et al.
Journal of Financial Economics, forthcoming
Abstract:
We study corporate bond default rates using an extensive new data set spanning the 1866-2008 period. We find that the corporate bond market has repeatedly suffered clustered default events much worse than those experienced during the Great Depression. For example, during the railroad crisis of 1873-1875, total defaults amounted to 36% of the par value of the entire corporate bond market. Using a regime-switching model, we examine the extent to which default rates can be forecast by financial and macroeconomic variables. We find that stock returns, stock return volatility, and changes in GDP are strong predictors of default rates. Surprisingly, however, credit spreads are not. Over the long term, credit spreads are roughly twice as large as default losses, resulting in an average credit risk premium of about 80 basis points. We also find that credit spreads do not adjust in response to realized default rates.
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Recourse and Residential Mortgage Default: Evidence from US States
Andra Ghent & Marianna Kudlyak
Review of Financial Studies, forthcoming
Abstract:
We quantify the effect of recourse on default and find that recourse affects default by lowering the borrower's sensitivity to negative equity. At the mean value of the default option for defaulted loans, borrowers are 30% more likely to default in non-recourse states. Furthermore, for homes appraised at $500,000 to $750,000, borrowers are twice as likely to default in non-recourse states. We also find that defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu, in states that allow deficiency judgments. We find no evidence that mortgage interest rates are lower in recourse states.
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Measuring Economic Rents in the Mutual Fund Industry
Jonathan Berk & Jules van Binsbergen
Stanford Working Paper, May 2011
Abstract:
We demonstrate that the skill to pick stocks or time the market exists amongst mutual fund managers and that this skill is persistent. Using this skill, the average mutual fund manager adds between $1/2 million and $1 million per month. The top 10% of managers add about $5 million per month. About 1/3 of managers add value while 2/3 destroy value. There is also evidence of persistence amongst managers that destroy value, suggesting that these managers do not know their own ability.
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Corporate Social Responsibility and Access to Finance
Beiting Cheng, Ioannis Ioannou & George Serafeim
Harvard Working Paper, June 2011
Abstract:
In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to reduced agency costs, due to enhanced stakeholder engagement through CSR and reduced informational asymmetries, due to increased transparency through non-financial reporting. Using a large cross-section of firms, we show that firms with better CSR performance face significantly lower capital constraints. The results are confirmed using an instrumental variables and a simultaneous equations approach. Finally, we find that the relation is primarily driven by social and environmental performance, rather than corporate governance.
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Xinshen Diao, Yumei Zhang & Kevin Chen
China Economic Review, forthcoming
Abstract:
A dynamic computable general equilibrium model is developed to assess the impact of the recent global recession and the Chinese government's stimulus package on China's economic growth. By designing two scenarios - one with and one without the stimulus package - the model results show that GDP growth rate in 2009 could have fallen to 2.9 percent without the stimulus package, mainly as a result of the sharp decline in exports of manufactured goods. Under the stimulus scenario, with the generated additional demand on investment goods, the Chinese economy grows 8¬10 percent in 2009 and the succeeding years. The model also measures the overall gains of the stimulus package, and the cumulative GDP growth difference between the two scenarios for 2009-15 is about RMB76 trillion.
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Credit Ratings and the Evolution of the Mortgage-Backed Securities Market
Jie He, Jun Qian & Philip Strahan
American Economic Review, May 2011, Pages 131-135
Abstract:
We compare the structure and performance of private (non-GSE) mortgage-backed securities sold by large issuers vs. those sold by small issuers over the period 2000-2006. Securities sold by large issuers have less subordination - a greater fraction of the deal receiving AAA rating - than those sold by small issuers. Prices for AAA-rated and non-AAA rated tranches sold by large issuers fell more when the market turned down than those sold by small issuers, and this difference was concentrated among tranches issued between 2004 and 2006. These results suggest that rating agencies grant favorable ratings to large issuers, especially during market booms.
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Global Crises and Equity Market Contagion
Geert Bekaert et al.
NBER Working Paper, June 2011
Abstract:
Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries' economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old "wake-up call" hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.
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Bubbles and Information: An Experiment
Matthias Sutter, Jürgen Huber & Michael Kirchler
Management Science, forthcoming
Abstract:
Asymmetric distribution of information, although omnipresent in real markets, is rarely considered in experimental economics. We study whether information about imminent future dividends can abate bubbles in experimental asset markets. We find that markets with asymmetrically informed traders have significantly smaller bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices - implying higher market efficiency - when some traders know more than others about future dividends. This suggests that bubbles are abated when traders know that a subset of them have an edge (in information) over others.
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K.J. Martijn Cremers & Roberta Romano
American Law and Economics Review, Spring 2011, Pages 220-268
Abstract:
This article examines the impact on shareholder voting of the Securities and Exchange Commission (SEC)'s mutual fund voting disclosure rule, using a paired sample of management proposals on executive equity incentive compensation plans submitted before and after the rule change. In enacting the rule, the SEC intended to increase funds' engagement in corporate governance. While voting support for management has decreased over time, we find no evidence that mutual funds' support for management declined after the rule change, as expected by the SEC and advocates of disclosure. In fact, we find evidence of increased support for management by mutual funds after the change.
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Financialisation, income distribution and aggregate demand in the USA
Özlem Onaran, Engelbert Stockhammer & Lucas Grafl
Cambridge Journal of Economics, July 2011, Pages 637-661
Abstract:
This paper investigates the effects of financialisation and functional income distribution on aggregate demand in the USA by estimating the effects of the increase in rentier income (dividends and interest payments) and housing and financial wealth on consumption and investment. The redistribution of income in favour of profits suppresses consumption, whereas the increase in the rentier income and wealth has positive effects. A higher rentier income decreases investment. Without the wealth effects, the overall effect of the changes in distribution on aggregate demand would have been negative. Thus a pro-capital income distribution leads to a slightly negative effect on growth, i.e. the USA economy is moderately wage-led.
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The Role of Expectations in Value and Glamour Stock Returns
Nicholas Magnuson
Journal of Behavioral Finance, Spring 2011, Pages 98-115
Abstract:
What happens when value and glamour stocks miss earnings expectation targets? Although, as expected, prices for glamour stocks have historically fallen, prices for value stocks have gone up - even when business fundamentals deteriorated based on results found in this study of global equities. These results suggest the superior returns delivered by value stocks may not be a result of positive developments relative to expectations but instead are more likely due to a gradual and corrective reversal of earlier overreaction and mispricing. This augments research by select scholars and provides fresh evidence explaining why value investing historically has been a successful long-term strategy.
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US biopharmaceutical finance and the sustainability of the biotech business model
William Lazonick & Öner Tulum
Research Policy, forthcoming
Abstract:
In the decade before the 2008 economic crisis, the US biotechnology industry was booming. In a 2006 book, Science Business: The Promise, the Reality, and the Future of Biotech, Gary Pisano implies that, given the 10-20 year time-frame for developing biotech products and the lack of profitability of the industry as a whole, the US biotech boom should not have happened. Yet the biotech industry has received substantial funding from venture-capital firms as well as from established companies through R&D alliances. Why would money from venture capitalists and big pharma flow into an industry in which profits are so hard to come by? The purpose of this article is to work toward a solution of what might be called the "Pisano puzzle", and in the process to provide a basis for analyzing the industrial and institutional conditions under which the growth of the US biopharmaceutical (BP) industry is sustainable. One part of the answer has been the willingness of stock-market investors to absorb the initial public offerings (IPOs) of a BP venture that has not yet generated a commercial product, and indeed may never do so. The other part of the answer is that the knowledge base that BP companies can tap to develop products comes much more from government investments and spending than from business finance. Indeed, we show that, through stock buybacks and dividends, established corporations in the BP industry have been distributing substantial sums of cash to shareholders that may be at the expense of R&D. We use the framework that we have developed for analyzing the sustainability of the US BP business model to pose a number of key areas for future research and policy, with an emphasis on the implications of the financialization of this business model for the generation of safe and affordable BP drugs as well as the need for a theory of innovative enterprise.
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The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?
Prachi Deuskar et al.
Review of Financial Studies, forthcoming
Abstract:
Does the mutual fund industry lose its best managers to hedge funds? We find that mutual funds are able to retain managers with good performance in the face of competition from a growing hedge fund industry. On the other hand, poor performers are more likely to leave the mutual fund industry. A small fraction of these poor performers find jobs with smaller and younger hedge fund companies, especially when the hedge fund industry is growing rapidly. Analogously, a small fraction of the better-performing mutual fund managers are retained by allowing them to manage a hedge fund side-by-side.