Author: Gang LiuPublisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 141
Book Description
Essays on Corporate Default Risk and Equity Return
Author: Gang LiuEssays on Equity Duration and Default Risk
Author: Kothai Priyadharshini AlagarsamyPublisher:
ISBN:
Category :
Languages : en
Pages : 131
Book Description
This dissertation investigates the cross-sectional implications of equity duration, the weighted average time for shareholders to receive cash-flows from a firm in which weights are the ratio of the firm's discounted future cash-flows to the firm's price. The first chapter investigates techniques to more accurately measure equity duration. The second chapter examines the pervasiveness of the default risk puzzle that high default risk (HDR) firms earn lower abnormal returns under existing asset pricing models than low default risk (LDR) firms. The third chapter examines whether firms that differ in default risk also differ in equity duration. In the first chapter, I examine whether cross-sectional variation in firm characteristics affects equity duration of firms. Compared to the existing estimation method, a duration measurement technique that accounts for cross-sectional variation in growth opportunities reduces firm cash-flow forecasting error scaled by the firm market-value throughout the cash-flow projection horizon (ten years). The spread in average scaled forecasting error between the two techniques is 24.16% at the end of the ten years. This less noisy cash-flow prediction translates into a longer duration differential (11.98 years) and a larger return spread (-1.83% per month) between the top and bottom decile of firms differing in equity duration than the previously thought duration differential (8.71 years) and return spread (-1.08% per month). Existing risk factors span only 43% of the new return spread. The new technique also implies a steeper sloped term structure of equity risk premium, a 1.83% decrease as opposed to 1.48% decrease in monthly mean excess returns over the risk-free rate for a one-year increase in equity duration. This chapter suggests that accounting for cross-sectional variation in firm characteristics results in a less noisy measure of equity duration. In the second chapter, I examine whether the default risk puzzle is pervasive across firms. The top 40th percentile of default risk firms can either delist, recover, or possess elevated default risk at the end of the sample. Irrespective of the paths, these firms earn lower abnormal returns under Fama and French (1993) three-factor model than the bottom 40th percentile of default risk firms. Further, firms that recover from elevated default risk levels earn significant positive Fama and French (1993) three-factor alphas. The alphas persist despite allowing six months for the market to assimilate earnings information before rebalancing default risk portfolios, suggesting the possibility of a missed pricing factor. In the third chapter, I investigate whether firms with elevated default risk also have elevated equity duration and earn lower returns than LDR firms due to the downward-sloping term structure of equity risk premium. In expectation, HDR firms take longer than LDR firms to generate cash-flows for shareholders because HDR firms may use most of their short-term cash-flows to ensure their survival. Consequently, equity duration for HDR firms is 4.03 years longer than that for LDR firms. An arbitrage portfolio that buys the top decile and sells the bottom decile of firms differing in equity duration based on the new technique (chapter 1) reduces the default risk puzzle by 57% on the value-weighted arbitrage portfolio that buys the top quintile and sells the bottom quintile of default risk firms. This chapter suggests that equity duration has implications for the cross-section of returns.
Is Systematic Default Risk Priced in Equity Returns? A Cross-Sectional Analysis Using Credit Derivatives Prices
Author: Jorge A. Chan-LauPublisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 22
Book Description
This paper finds that systematic default risk, or the event of widespread defaults in the corporate sector, is an important determinant of equity returns. Moreover, the market price of systematic default risk is one order of magnitude higher than the market price of other risk factors. In contrast to studies by Fama and French (1993, 1996 ) and Vassalou and Xing (2004), this paper uses a market-based measure of systematic default risk. The measure is constructed using price information from credit derivatives prices, namely the spreads of standardized single-tranche collateralized debt obligations on credit derivatives indices.
Three Essays on Credit Risk, Fixed Income and Derivatives
Author: Redouane ElkamhiPublisher:
ISBN:
Category : Credit
Languages : en
Pages : 179
Book Description
Three Essays on Corporate Default Prediction
Author: Ruwani FernandoThree Essays in Credit Risk
Author: Gordon DelianedisPublisher:
ISBN:
Category : Credit
Languages : en
Pages : 326
Book Description
Three Essays on the Basis Risk of Fixed Income Securities
Author: Long ChenPublisher:
ISBN:
Category :
Languages : en
Pages : 0
Book Description
The three essays can be regarded as studies on the basis risk of fixed income securities. They investigate the spreads among different bonds. The first essay, Market Risk and Credit Risk in a General Equilibrium Model, assumes perfect liquidity and focuses on the credit spread. By incorporating credit risk into the standard asset pricing models, it provides one of the first studies on how credit spread relates to market risk, including equity risk, interest risk, and inflation risk. The second essay, Illiquidity and Expected Return of Treasury Securities, focuses on Treasury bonds with zero default risk. The yield spreads among the bonds are solely due to liquidity difference. We derive, quantitatively, how this spread is related to the bid-ask spread, brokerage fee, bond maturity, and investors? expected holding period. It is one of the first theoretical models on the liquidity of treasury securities. The third essay, An Indirect Estimation of the Transaction Costs of Corporate Bonds, is an empirical estimation of the transaction costs of corporate bonds. It is observed that bonds with less liquidity tend to be the ones with lower credit rating quality. Liquidity risk and credit risk are thus intertwined. We are able to separate their effects and obtain estimates for liquidity spreads and credit spreads. In summary, the first essay studies credit risk; the second studies liquidity risk, and the third, as an empirical study, investigates both issues. They jointly contribute to the understanding of the basis risk of fixed income securities.
Essays on Corporate Governance of Financial and Non-Financial Firms
Author: Ling ZhangPublisher:
ISBN:
Category :
Languages : en
Pages : 141
Book Description
Corporate governance of financial and non-financial firms is critical in modern corporations with diffuse stock ownership, which deals with the agency conflicts between managers and shareholders. Corporate governance has a profound impact on various corporate policy, and firm value in the end. This study examines the importance of corporate governance and its influences on various corporate policy and firm value and risks for both financial and non-financial firms. Chapter 1 investigates the association between the firm's liquidity level and liquidity mix on the one hand and CEO entrenchment on the other. CEO entrenchment may distort the firms' liquidity policy because managers and shareholders may have conflicting preferences between cash and lines of credit. Using lines of credit data from 1996 to 2008, we find five main results. First, entrenched CEOs hold more liquidity as measured by the sum of cash and lines of credit. Second, entrenched managers have a preference for cash over lines of credit because while cash gives them flexibility, lines of credit are accompanied with bank restrictions and monitoring. Third, entrenched CEOs also use more lines of credit because of the extra liquidity it provides, despite the associated bank monitoring. Fourth, entrenched CEOs in smaller and opaque firms tend to hold more liquidity. Five, entrenched CEO's preference for cash versus lines of credit is stronger for large and transparent firms, compared to small and opaque firms. These findings imply that firms should better align the interests of the entrenched managers with those of the shareholders in order to limit the excessive liquidity holding of firms when CEOs are entrenched and to thereby increase firms' profitability. Chapter 2 examines the relationship between bank holding company (BHC) performance, risk and "busy" board of directors, an overlooked dimension of corporate governance in the banking literature. Busy directors are defined as directors with three or more directorships. The sample covers the 2001-2010 period. We employ a simultaneous equation framework and estimate the models employing the three stage least square (3SLS) technique in order to account for endogeneity. Several interesting results are obtained. First, BHC performance, as measured by return on assets (ROA), Tobin's Q and earnings before interest and taxes (EBIT) over total assets is positively associated with busy directors. Second, BHC total risk (standard deviation of stock returns), market risk (market beta), idiosyncratic risk (standard errors of the CAPM model) credit risk (percentage of non-performing assets over total assets) and default risk (HigherZ-Score) are inversely related to it. Third, busy directors are not more likely to become problem directors, in the sense of failing the meeting-attendance-criterion (75% attendance). Fourth, the benefits of having busy directors in terms of performance improvement strengthened but the benefits of risk reduction declined during the recent financial crisis These findings partially alleviate concerns that when directors become too busy with multiple directorships, they shirk their responsibilities. Major implications for investors, regulators, and firm managers are drawn. Chapter 3 investigates the effect of CEO entrenchment on the loan syndication structure. Over the past decade, syndicated loans have played an increasingly important role in corporate financing. Unlike a traditional bank loan with only a single creditor, a syndicated loan involves a group of lenders: a lead arranger and a number of participant lenders. The syndication process, therefore, generates an additional dimension of agency problem between the lead arranger and the participant lenders, besides the traditional agency cost of debt between the borrowing firm and the lender (Diamond, 1984; Holmstrom and Tirole, 1997). Several results are obtained about syndicated loans made to firms with more entrenched CEOs. First, in these loans the number of participant lenders and their share in the loan are smaller; the lead arranger retains a larger loan share. Second, these loans are more closely held resulting in a higher Herfindahl index of loan concentration. Third, foreign lenders are less involved in these loans. Specifically, the number of foreign lenders and the percentage of loans held by foreign lenders are both smaller. Our findings shed light on the two types of agency problems associated with the syndicated loans, and have great implication for the firms' shareholders, creditors and regulators.
Two Essays on Corporate Governance
Author: Yong LeeEssays in Financial Economics
Author: Rita BiswasPublisher: Emerald Group Publishing
ISBN: 1789733898
Category : Business & Economics
Languages : en
Pages : 168
Book Description
This volume, dedicated to John W. Kensinger, explores a variety of topics in financial economics, including firm growth, investment risks, and the profitability of the banking industry. With its global perspective, Essays in Financial Economics is a valuable addition to the bookshelf of any researcher in finance.