Financial Research Focus

Published / Preprint: Statistical mechanics of the international trade network. (arXiv:1104.2606v2 [q-fin.GN] UPDATED)

Fri, 25 May 2012 00:32:33 +0000

Analyzing real data on international trade covering the time interval 1950-2000, we show that in each year over the analyzed period the network is a typical representative of the ensemble of maximally random weighted networks, whose directed connections (bilateral trade volumes) are only characterized by the product of the trading countries' GDPs. It means that time evolution of this network may be considered as a continuous sequence of equilibrium states, i.e. quasi-static process. This, in turn, allows one to apply the linear response theory to make (and also verify) simple predictions about the network. In particular, we show that bilateral trade fulfills fluctuation-response theorem, which states that the average relative change in import (export) between two countries is a sum of relative changes in their GDPs. Yearly changes in trade volumes prove that the theorem is valid.

Published / Preprint: Two Models of Stochastic Loss Given Default. (arXiv:1205.5369v1 [q-fin.RM])

Fri, 25 May 2012 00:32:33 +0000

We propose two structural models for stochastic losses given default which allow to model the credit losses of a portfolio of defaultable financial instruments. The credit losses are integrated into a structural model of default events accounting for correlations between the default events and the associated losses. We show how the models can be calibrated and analyze the impact of correlations between the occurrences of defaults and recoveries by testing our models for a representative sample portfolio.

Research Library: Financial Risk Measurement for Financial Risk Management

Thu, 24 May 2012 14:01:08 +0000

Torben G. Andersen
Northwestern University - Kellogg School of Management;

Tim Bollerslev
Duke University - Finance; Duke University - Department of Economics;

Peter Christoffersen
University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus

Francis X. Diebold
University of Pennsylvania - Department of Economics

Abstract

Current practice largely follows restrictive approaches to market risk measurement, such as historical simulation or RiskMetrics. In contrast, we propose flexible methods that exploit recent developments in financial econometrics and are likely to produce more accurate risk assessments, treating both portfolio-level and asset-level analysis. Asset-level analysis is particularly challenging because the demands of real-world risk management in financial institutions - in particular, real-time risk tracking in very high-dimensional situations - impose strict limits on model complexity. Hence we stress powerful yet parsimonious models that are easily estimated. In addition, we emphasize the need for deeper understanding of the links between market risk and macroeconomic fundamentals, focusing primarily on links among equity return volatilities, real growth, and real growth volatilities. Throughout, we strive not only to deepen our scientific understanding of market risk, but also cross-fertilize the academic and practitioner communities, promoting improved market risk measurement technologies that draw on the best of both.

Published / Preprint: Editorial Board

Thu, 24 May 2012 06:08:49 +0000

Published / Preprint: Cover

Thu, 24 May 2012 06:08:49 +0000

Published / Preprint: Forthcoming Articles

Thu, 24 May 2012 06:08:48 +0000

Published / Preprint: Volume 25 Number 6 June 2012 * The Review of Financial Studies - Table of Contents

Thu, 24 May 2012 06:08:47 +0000

Published / Preprint: The Life Cycle of Family Ownership: International Evidence

Thu, 24 May 2012 06:08:46 +0000

We show that in countries with strong investor protection, developed financial markets, and active markets for corporate control, family firms evolve into widely held companies as they age. In countries with weak investor protection, less developed financial markets, and inactive markets for corporate control, family control is very persistent over time. While family control in high investor protection countries is concentrated in industries that have low investment opportunities and low merger and acquisition (M&A) activity, the same is not so in countries that have low investor protection, where the presence of family control in an industry is unrelated to investment opportunities and M&A activity.

Published / Preprint: Creditor Control Rights, Corporate Governance, and Firm Value

Thu, 24 May 2012 06:08:45 +0000

We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the Securities and Exchange Commission's filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10% and 20% of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately by a decline in acquisitions and capital expenditures, a sharp reduction in leverage and shareholder payouts, and an increase in CEO turnover. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making; changes in the management of violating firms suggest that creditors also exert informal influence on corporate governance. Finally, we show that firm operating and stock price performance improve post-violation. We conclude that actions taken by creditors increase the value of the average violating firm.

Published / Preprint: A Reexamination of Tunneling and Business Groups: New Data and New Methods

Thu, 24 May 2012 06:08:42 +0000

One of the most rigorous methodologies in the corporate governance literature uses firms' reactions to industry shocks to characterize the quality of governance. This methodology can produce the wrong answer unless one considers the ways firms compete. Because macro-level shocks reverberate differently at the firm level depending on whether a firm has a cost structure that requires significant adjustment, the quality of governance can only be elucidated accurately analyzing a firm's business strategy and their corporate governance. These differences can help one determine whether the fruits of a positive macro-level shock have been expropriated by insiders. Using the example of Indian firms, we show that an influential finding is reversed when these differences are considered. We further argue that the conventional wisdom about tunneling and business groups will need to be reformulated in light of the data, methodology, and findings presented here.

Published / Preprint: Dynamic Hedging in Incomplete Markets: A Simple Solution

Thu, 24 May 2012 06:08:41 +0000

We provide fully analytical, optimal dynamic hedges in incomplete markets by employing the traditional minimum-variance criterion. Our hedges are in terms of generalized "Greeks" and naturally extend no-arbitrage–based risk management in complete markets to incomplete markets. Whereas the literature characterizes either minimum-variance static, myopic, or dynamic hedges from which a hedger may deviate unless able to precommit, our hedges are time-consistent. We apply our results to derivatives replication with infrequent trading and determine hedges and replication values, which reduce to generalized Black-Scholes expressions in specific settings. We also investigate dynamic hedging with jumps, stochastic correlation, and portfolio management with benchmarking.

Published / Preprint: Dynamic Debt Runs

Thu, 24 May 2012 06:08:41 +0000

This article analyzes the dynamic coordination problem among creditors of a firm with a time-varying fundamental and a staggered debt structure. In deciding whether to roll over his debt, each maturing creditor is concerned about the rollover decisions of other creditors whose debt matures during his next contract period. We derive a unique threshold equilibrium and characterize the roles of fundamental volatility, credit lines, and debt maturity in driving runs. In particular, we show that when fundamental volatility is sufficiently high, commonly used measures such as temporarily keeping the firm alive under runs and increasing debt maturity can exacerbate rather than mitigate runs.

Published / Preprint: Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases

Thu, 24 May 2012 06:08:40 +0000

Firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout. Subsequent debt reductions are neither rapid, nor the result of proactive attempts to rebalance the firm's capital structure toward a long-run target. Instead, the evolution of the firm's leverage ratio depends primarily on whether or not the firm produces a financial surplus. In fact, firms that generate subsequent deficits tend to cover these deficits predominantly with more debt even though they exhibit leverage ratios that are well above estimated target levels. Our findings are broadly consistent with a capital structure theory in which financial flexibility, in the form of unused debt capacity, plays an important role in capital structure choices.

Published / Preprint: Fiduciary Duties and Equity-debtholder Conflicts

Thu, 24 May 2012 06:08:39 +0000

We use an important legal event to examine the effect of managerial fiduciary duties on equity-debt conflicts. A 1991 legal ruling changed corporate directors' fiduciary duties in Delaware firms, limiting managers' incentives to take actions that favor equity over debt for distressed firms. After this, affected firms responded by increasing equity issues and investment and by reducing risk. The ruling was also followed by an increase in leverage, reduced reliance on covenants, and higher values. Fiduciary duties appear to affect equity-bondholder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.

Published / Preprint: Executive Compensation and the Role for Corporate Governance Regulation

Thu, 24 May 2012 06:08:37 +0000

This article establishes a role for corporate governance regulation. An externality operating through executive compensation motivates regulation. Governance lowers agency costs, allowing firms to grant less incentive pay. When a firm increases governance and lowers incentive pay, other firms can also lower executive compensation. Because firms do not internalize the full benefit of governance, regulation can improve investor welfare. When regulation is enforced, large firms increase in value, small firms decrease in value, and all firms lower incentive pay. Distinct cross-sectional and cross-country predictions for the number of voluntary governance firms are provided.

Published / Preprint: Time-Consistent Mean-Variance Portfolio Selection in Discrete and Continuous Time. (arXiv:1205.4748v1 [q-fin.PM])

Wed, 23 May 2012 00:34:38 +0000

It is well known that mean-variance portfolio selection is a time-inconsistent optimal control problem in the sense that it does not satisfy Bellman's optimality principle and therefore the usual dynamic programming approach fails. We develop a time- consistent formulation of this problem, which is based on a local notion of optimality called local mean-variance efficiency, in a general semimartingale setting. We start in discrete time, where the formulation is straightforward, and then find the natural extension to continuous time. This complements and generalises the formulation by Basak and Chabakauri (2010) and the corresponding example in Bj\"ork and Murgoci (2010), where the treatment and the notion of optimality rely on an underlying Markovian framework. We justify the continuous-time formulation by showing that it coincides with the continuous-time limit of the discrete-time formulation. The proof of this convergence is based on a global description of the locally optimal strategy in terms of the structure condition and the F\"ollmer-Schweizer decomposition of the mean-variance tradeoff. As a byproduct, this also gives new convergence results for the F\"ollmer-Schweizer decomposition, i.e. for locally risk minimising strategies.

Published / Preprint: Dynamic Conic Finance: Pricing and Hedging in Market Models with Transaction Costs via Dynamic Coherent Acceptability Indices. (arXiv:1205.4790v1 [q-fin.RM])

Wed, 23 May 2012 00:34:37 +0000

In this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of Asset Pricing using the dynamic coherent risk measures. We introduce the dynamic ask and bid prices of a derivative contract in markets with transaction costs. Based on these results, we derive a representation theorem for the dynamic bid and ask prices in terms of dynamically consistent sequence of sets of probability measures and risk-neutral measures. To illustrate our results, we compute the ask and bid prices of some path-dependent options using the dynamic Gain-Loss Ratio.

Published / Preprint: Time-Consistent and Market-Consistent Evaluations. (arXiv:1109.1749v3 [q-fin.PR] UPDATED)

Wed, 23 May 2012 00:34:36 +0000

We consider evaluation methods for payoffs with an inherent financial risk as encountered for instance for portfolios held by pension funds and insurance companies. Pricing such payoffs in a way consistent to market prices typically involves combining actuarial techniques with methods from mathematical finance. We propose to extend standard actuarial principles by a new market-consistent evaluation procedure which we call `two step market evaluation.' This procedure preserves the structure of standard evaluation techniques and has many other appealing properties. We give a complete axiomatic characterization for two step market evaluations. We show further that in a dynamic setting with a continuous stock prices process every evaluation which is time-consistent and market-consistent is a two step market evaluation. We also give characterization results and examples in terms of g-expectations in a Brownian-Poisson setting.

Research Library: Why Rumors Spread Fast in Social Networks (pdf)

Tue, 22 May 2012 20:37:14 +0000

Benjamin Doerr, Mahmoud Fouz, and Tobias Friedrich

Abstract

Understanding structural and algorithmic properties of complex networks is an important task, not least because of the huge impact of the internet. Our focus is to analyze how news spreads in social networks. We simulate a simple information spreading process in different network topologies and demonstrate that news spreads much faster in existing social network topologies. We support this finding by analyzing information spreading in the mathematically defined preferential attachment network topology, which is a common model for real-world networks. We prove that here a sublogarithmic time suffices to spread
a news to all nodes of the network. All previously studied network topologies need at least a logarithmic time. Surprisingly, we observe that nodes with few neighbors are crucial for the fast dissemination.

Published / Preprint: Involving copula functions in Conditional Tail Expectation. (arXiv:1205.4345v1 [math.ST])

Tue, 22 May 2012 00:34:29 +0000

We discuss a new notion of risk measures that preserve the property of coherence called Copula Conditional Tail Expectation (CCTE). This measure describes the expected amount of risk that can be experienced given that a potential bivariate risk exceeds a bivariate threshold value, and provides an important measure for right-tail risk. Our goal is to propose an alternative risk measure which takes into account the fluctuations of losses and possible correlations between random variables.

Published / Preprint: Point process bridges and weak convergence of insider trading models. (arXiv:1205.4358v1 [math.PR])

Tue, 22 May 2012 00:34:26 +0000

We construct explicitly a bridge process whose distribution, in its own filtration, is the same as the difference of two independent Poisson processes with the same intensity and its time 1 value satisfies a specific constraint. This construction allows us to show the existence of Glosten-Milgrom equilibrium and its associated optimal trading strategy for the insider. In the equilibrium the insider employs a mixed strategy to randomly submit two types of orders: one type trades in the same direction as noise trades while the other cancels some of the noise trades by submitting opposite orders when noise trades arrive. The construction also allows us to prove that Glosten-Milgrom equilibria converge weakly to Kyle-Back equilibrium, without the additional assumptions imposed in \textit{K. Back and S. Baruch, Econometrica, 72 (2004), pp. 433-465}, when the common intensity of the Poisson processes tends to infinity.

Published / Preprint: Portfolio Selection with Small Transaction Costs and Binding Portfolio Constraints. (arXiv:1205.4588v1 [q-fin.PM])

Tue, 22 May 2012 00:34:25 +0000

An investor with constant relative risk aversion and an infinite planning horizon trades a risky and a safe asset with constant investment opportunities, in the presence of small transaction costs and a binding exogenous portfolio constraint. We explicitly derive the optimal trading policy, its welfare, and implied trading volume. As an application, we study the problem of selecting a prime broker among alternatives with different lending rates and margin requirements. Moreover, we discuss how changing regulatory constraints affect the deposit rates offered for illiquid loans.

Research Library: The Devil in HML's Details

Mon, 21 May 2012 11:16:30 +0000

Clifford S. Asness
AQR Capital Management, LLC

Andrea Frazzini
AQR Capital Management, LLC

Abstract

This paper challenges the standard method for measuring “value” used in academic work on factor pricing and behavioral finance. The standard method calculates book-to-price (B/P) at portfolio formation using lagged book data, aligns price data using the same lag (ignoring recent price movements), and hold these values constant until the next rebalance. We propose two simple alternatives that use timely price data while retaining the necessary lag for measuring book. We construct portfolios based on the different measures for a US sample (1950-2011) and an International sample (1983-2011). We show that B/P ratios based on timely prices better forecast true (unobservable) B/P ratios at fiscal yearend. Value portfolios based on the most timely measures earn statistically significant alphas ranging between 305 and 378 basis point per year against a 5-factor model itself containing the standard measure of value, as well as market, size, momentum and a short term reversal factor.

Research Library: Replumbing Our Financial System: Uneven Progress (pdf)

Mon, 21 May 2012 11:09:10 +0000

Darrell Duffie
Stanford University

April 23, 2012

Abstract

The financial crisis of 2007-2009 has spurred significant ongoing changes in the "pipes and valves" through which cash and risk flow in the center of our financial system. These include adjustments to the forms of lender-of-last-resort financing from the central bank and changes the infrastructure for the wholesale overnight financing of major dealer banks. Significant changes in the regulation of money market funds are under consideration. The Dodd-Frank Act mandates the central clearing of standardized over-the-counter derivatives, although a pending exemption of foreign-exchange derivatives remains to be decided. The vulnerability of major dealers to runs by prime brokerage clients is also an issue to be addressed. I focus on U.S. financial plumbing and on areas where financial stability remains a concern.

Research Library: Methods for Studying Coincidences (pdf, 1989)

Mon, 21 May 2012 10:57:55 +0000

You can read some interesting commentary on this paper over at Wired.

Using probabilistic analysis, the paper explores everything from why we see newly learned words almost immediately after first learning them, to why double lottery winners exist, to even the frequency of meeting people with the same birthday. They even explore whether or not we can statistically state that Shakespeare used alliteration, or if the frequency of words with similar-sounding beginnings could simply be explained by chance alone.

By Persi Diaconis and Frederick Mosteller

Abstract

This article illustrates basic statistical techniques for studying coincidences. These include data-gathering methods (informal anecdotes, case studies, observational studies, and experiments) and methods of analysis (exploratory and confirmatory data analysis, special analytic techniques, and probabilistic modeling, both general and special purpose). We develop a version of the birthday problem general enough to include dependence, inhomogeneity, and almost and multiple matches. We review Fisher's techniques for giving partial credit for close matches. We develop a model for studying coincidences involving newly learned words. Once we set aside coincidences having apparent causes, four principles account for large numbers of remaining coincidences: hidden cause; psychology, including memory and perception; multiplicity of endpoints, including the counting of "close" or nearly alike events as if they were identical; and the law of truly large numbers, which says that when enormous numbers of events and people and their interactions cumulate over time, almost any outrageous event is bound to occur. These sources account for much of the force of synchronicity.

KEY WORDS:

Research Library: Optimal portfolio design to reduce climate-related conservation uncertainty in the Prairie Pothole Region

Wed, 16 May 2012 14:48:00 +0000

Amy W. Ando and Mindy L. Mallory

Abstract

Climate change is likely to alter the spatial distributions of species and habitat types but the nature of such change is uncertain. Thus, climate change makes it difficult to implement standard conservation planning paradigms. Previous work has suggested some approaches to cope with such uncertainty but has not harnessed all of the benefits of risk diversification. We adapt Modern Portfolio Theory (MPT) to optimal spatial targeting of conservation activity, using wetland habitat conservation in the Prairie Pothole Region (PPR) as an example. This approach finds the allocations of conservation activity among subregions of the planning area that maximize the expected conservation returns for a given level of uncertainty or minimize uncertainty for a given expected level of returns. We find that using MPT instead of simple diversification in the PPR can achieve a value of the conservation objective per dollar spent that is 15% higher for the same level of risk. MPT-based portfolios can also have 21% less uncertainty over benefits or 6% greater expected benefits than the current portfolio of PPR conservation. Total benefits from conservation investment are higher if returns are defined in terms of benefit–cost ratios rather than benefits alone. MPT-guided diversification can work to reduce the climate-change–induced uncertainty of future ecosystem-service benefits from many land policy and investment initiatives, especially when outcomes are negatively correlated between subregions of a planning area.

Research Library: Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation (pdf)

Tue, 15 May 2012 08:27:10 +0000

Thomas Philippon

Abstract

I provide a quantitative interpretation of financial intermediation in the U.S. over 140 years. I measure the cost of intermediation on the one hand, and the production of financial services on the other. I find the following results: (i) intermediation is produced under constant returns to scale; (ii) “quality” adjustment for changes in borrowers’ characteristics are important; (iii) the unit cost of intermediation in the U.S. economy has historically been around 2% (i.e., creating and maintaining one dollar of intermediation costs about 2 cents); (iv) surprisingly, however, the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.

Research Library: Why Do UK Banks Securitize?

Tue, 15 May 2012 05:50:20 +0000

Mario Cerrato
London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

Moorad Choudhry
University of Reading; London Metropolitan University; Birkbeck, University of London

John Crosby
University of Glasgow

John L. Olukuru

Abstract

The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre-financial crisis credit-boom, the peak of the financial crisis and its aftermath. In the wake of the financial crisis, many governments, regulators and political commentators have pointed an accusing finger at the securitization market - even in the absence of a detailed statistical and economic analysis. We contribute to the extant literature by performing such an analysis on UK banks, focussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk transfer that has led to UK banks securitizing their assets.

We show that securitization has been significantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks' credit risk. We interpret these latter findings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the financial crisis suffered more defaults after the financial crisis.

Research Library: The Economic Organisation of a P.O.W. camp (pdf, 1945)

Mon, 14 May 2012 10:51:14 +0000

This paper by R.A. Radford came via Tim Harford who comments.

Introduction

After allowance has been made for abnormal circumstances, the social institutions, ideas and habits of groups in the outside world are to be found reflected in a Prison of War Camp. It is an unusual but vital society. Camp organisation and politics are matters of real concern to the inmates, as affecting their present and perhaps their future existances. Nor does this indicate any loss of proportion. No one pretends that camp matters are of any but local importance or of more than transient interest, but their importance there is great. They bulk large in a world of narrow horizons and it is suggested that any distortion of calues likes rather in the minimisation rather than in the exageration of their importance. Human affairs are essentially practical matters and the measure of immediate effect on the lives of those directly concerned in them is to a large extrent the criterion of their importance at that time and place. A prisoner can hold strong views on such subjects as whether or not all tinned meats shall be issued to individuals cold or be centrally cooked, without losing sight of the significance of the Atlantic Charter.

One aspect of social organisation is to be found in economic activity and this, along with other manifestations of a group existence, is to be found in any P.O.W. camp. True, a prisoner is not dependent on his exertions for the provisions of the necessaries, or even the luxuries of life, but through his economic activity, the exchange of goods and services, his standar of material comfort is considerably enhanced. And this is a serious matter to the prisoner: he is not simply "playing at shops" even though the small scale of the transactions and the simple expression of comfort and wants in terms of cigarettes and jam, razor bladeds and wrting paper, makes the urgency of those needs difficult to appreciate, even by an ex-prisoner of some three months' standing...

Research Library: Research Blogs and the Discussion of Scholarly Information

Sat, 12 May 2012 22:24:47 +0000

Hadas Shema, Judit Bar-Ilan, Mike Thelwall

Abstract

The research blog has become a popular mechanism for the quick discussion of scholarly information. However, unlike peer-reviewed journals, the characteristics of this form of scientific discourse are not well understood, for example in terms of the spread of blogger levels of education, gender and institutional affiliations. In this paper we fill this gap by analyzing a sample of blog posts discussing science via an aggregator called ResearchBlogging.org (RB). ResearchBlogging.org aggregates posts based on peer-reviewed research and allows bloggers to cite their sources in a scholarly manner. We studied the bloggers, blog posts and referenced journals of bloggers who posted at least 20 items. We found that RB bloggers show a preference for papers from high-impact journals and blog mostly about research in the life and behavioral sciences. The most frequently referenced journal sources in the sample were: Science, Nature, PNAS and PLoS One. Most of the bloggers in our sample had active Twitter accounts connected with their blogs, and at least 90% of these accounts connect to at least one other RB-related Twitter account. The average RB blogger in our sample is male, either a graduate student or has been awarded a PhD and blogs under his own name.

Research Library: Risk Premia Harvesting Through Momentum

Fri, 11 May 2012 11:52:38 +0000

This paper won the NAAIM 2012 Wagner Award for Advances in Active Investment Management

Gary Antonacci
Portfolio Management Associates

Abstract

Momentum is the premier market anomaly. It is nearly universal in its applicability. Rather than focus on momentum applied to particular assets or asset classes, this paper explores momentum with respect to what makes it most effective. We do this first by introducing a hurdle rate filter before we can initiate long positions. This ensures that momentum exists on both an absolute and relative basis and allows momentum to function as a tactical overlay. We then explore the factor most rewarded by momentum - extreme past returns, i.e., price volatility. We identify high volatility through the paired risk premiums in foreign/U.S. equities, high yield/credit bonds, equity/mortgage REITs, and gold/Treasury bonds. Using modules of asset pairs as building blocks lets us isolate volatility related risk factors and use momentum to effectively harvest risk premium profits.

Research Library: Hedge Funds and Chapter 11

Fri, 11 May 2012 11:40:13 +0000

Wei Jiang
Columbia Business School - Finance and Economics

Kai Li
University of British Columbia - Sauder School of Business; China Academy of Financial Research (CAFR)

Wei Wang
Queen's School of Business

Abstract

This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter’s loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of KERP, while their effect on secured creditors manifests in higher probabilities of emergence and payoffs to junior claims.

Research Library: Men are from Mars, Women are from Venus: Director Gender and Mergers and Acquisitions

Fri, 11 May 2012 11:32:01 +0000

Winner of the Best Doctoral Student Paper in Behavioral Finance Award at the 2011 Annual Meeting of the Academy of Behavioral Finance & Economics

Maurice D. Levi
University of British Columbia - Sauder School of Business

Kai Li
University of British Columbia - Sauder School of Business; China Academy of Financial Research (CAFR)

Feng Zhang
University of Utah - David Eccles School of Business

Abstract

This paper examines the influence of female directors on corporate boards on mergers and acquisitions (M&As). Using acquisition bids initiated by S&P 1500 firms during 1997-2009, we find that each ten-percent representation of female directors on a corporate board is associated with a reduction in the number of a company’s acquisition bids by 7.5 percent: women are less acquisitive than men. Furthermore, using over 450 acquisition bids for which we have data on bidder and target firm characteristics and their board membership, we find that each ten-percent of female directors on a bidder board is associated with a reduction in the bid premium by 13.3 percent. There is no significant effect of female directors on a target board. We argue that these results are what we would expect if, as other researchers have shown, women are less overconfident than men when facing difficult tasks lacking fast, clear feedback.

Keywords: director gender, overconfidence, bid initiation, bid premium, mergers and acquisitions

Research Library: Predicting the outcome of roulette

Fri, 11 May 2012 09:18:02 +0000

Michael Small, Chi Kong Tse

Abstract

There have been several popular reports of various groups exploiting the deterministic nature of the game of roulette for profit. Moreover, through its history the inherent determinism in the game of roulette has attracted the attention of many luminaries of chaos theory. In this paper we provide a short review of that history and then set out to determine to what extent that determinism can really be exploited for profit. To do this, we provide a very simple model for the motion of a roulette wheel and ball and demonstrate that knowledge of initial position, velocity and acceleration is sufficient to predict the outcome with adequate certainty to achieve a positive expected return. We describe two physically realisable systems to obtain this knowledge both incognito and {\em in situ}. The first system relies only on a mechanical count of rotation of the ball and the wheel to measure the relevant parameters. By applying this techniques to a standard casino-grade European roulette wheel we demonstrate an expected return of at least 18%, well above the -2.7% expected of a random bet. With a more sophisticated, albeit more intrusive, system (mounting a digital camera above the wheel) we demonstrate a range of systematic and statistically significant biases which can be exploited to provide an improved guess of the outcome. Finally, our analysis demonstrates that even a very slight slant in the roulette table leads to a very pronounced bias which could be further exploited to substantially enhance returns.

Research Library: Value Investing: Investing for Grown Ups?

Wed, 09 May 2012 13:34:37 +0000

Value Investing: Investing for Grown Ups?
Aswath Damodaran

New York University - Stern School of Business

April 14, 2012

Abstract

Value investors generally characterize themselves as the grown ups in the investment world, unswayed by perceptions or momentum, and driven by fundamentals. While this may be true, at least in the abstract, there are at least three distinct strands of value investing. The first, passive value investing, is built around screening for stocks that meet specific characteristics – low multiples of earnings or book value, high returns on projects and low risk – and can be traced back to Ben Graham’s books on security analysis. The second, contrarian investing, requires investing in companies that are down on their luck and in the market. The third, activist value investing, involves taking large positions in poorly managed and low valued companies and making money from turning them around. While value investing looks impressive on paper, the performance of value investors, as a whole, is no better than that of less “sensible” investors who chose other investment philosophies and strategies. We examine explanations for why "active" value investing may not provide the promised payoffs.