Showing papers in "Review of Financial Studies in 2012"
TL;DR: This article found that borrowers who appear more trustworthy have higher probabilities of having their loans funded and default less often, while borrowers who appeared more trustworthy had better credit scores and defaulted less often.
Abstract: Although it is well known that appearance-based impressions affect labor market and election outcomes, little is known about the role appearance plays in financial transactions. We address this question using photographs of potential borrowers from a peer-to-peer lending site. Consistent with the trust-intensive nature of lending, we find that borrowers who appear more trustworthy have higher probabilities of having their loans funded. Moreover, borrowers who appear more trustworthy indeed have better credit scores and default less often. Overall, our findings suggest that impressions of trustworthiness matter in financial transactions as they predict investor, as well as borrower, behavior. A man I do not trust could not get money from me on all the bonds in Christendom. --John Pierpont Morgan, 1913 The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
771 citations
TL;DR: In this paper, the authors present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (VPIN toxicity metric), which is updated in volume time, making it applicable to the high-frequency world, and does not require the intermediate estimation of non-observable parameters or the application of numerical methods.
Abstract: Order flow is toxic when it adversely selects market makers, who may be unaware they are providing liquidity at a loss. We present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (the VPIN toxicity metric). VPIN is updated in volume time, making it applicable to the high-frequency world, and it does not require the intermediate estimation of non-observable parameters or the application of numerical methods. It does require trades classified as buys or sells, and we develop a new bulk volume classification procedure that we argue is more useful in high-frequency markets than standard classification procedures. We show that the VPIN metric is a useful indicator of short-term, toxicity-induced volatility. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
434 citations
TL;DR: In this paper, a large sample of covenant violations reported by U.S. public firms is used to show that violations are followed immediately with an increase in CEO turnover, an increased in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a sharp reduction in leverage and shareholder payouts.
Abstract: We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. Using a large sample of covenant violations reported by U.S. public firms, we show that violations are followed immediately with an increase in CEO turnover, an increase in the incidence of corporate restructurings and hiring of turnaround specialists, a decline in acquisitions and capital expenditures, and a sharp reduction in leverage and shareholder payouts. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making. In addition, changes in the management of violating firms suggest that creditors exert considerable behind-the-scenes influence on governance in addition to contractual control. We also show that firm operating and stock price performance improve following a violation, suggesting that actions taken by creditors benefit shareholders.
372 citations
TL;DR: In this paper, the role of firm and manager-specific heterogeneities in executive compensation was investigated and it was shown that compensation fixed effects are significantly correlated with management styles (i.e., manager fixed effects in corporate policies).
Abstract: We study the role of firm- and manager-specific heterogeneities in executive compensation. We decompose the variation in executive compensation and find that time-invariant firm and, especially, manager fixed effects explain a majority of the variation in executive pay. We then show that in many settings, it is important to include fixed effects to mitigate potential omitted variable bias. Furthermore, we find that compensation fixed effects are significantly correlated with management styles (i.e., manager fixed effects in corporate policies). Finally, the method used in the article has a number of potential applications in financial economics. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
368 citations
TL;DR: This paper used a structural econometric model to identify the moral hazard effect of bailout expectations on bank risk, exploiting the fact that regional political factors explain bank bailouts but not bank risk.
Abstract: We use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking. To identify the moral hazard effect of bailout expectations on bank risk, we exploit the fact that regional political factors explain bank bailouts but not bank risk. The sample includes all observed capital preservation measures and distressed exits in the German banking industry during 1995-2006. A change of bailout expectations by two standard deviations increases the probability of official distress from 6.6% to 9.4%, which is economically significant.
360 citations
TL;DR: The authors showed that information asymmetry has a substantial effect on prices and demands and affects assets through a liquidity channel, implying that a primary channel that links asymmetry to prices is liquidity.
Abstract: We provide evidence for the importance of information asymmetry in asset pricing by using three natural experiments. Consistent with rational expectations models with multiple assets and multiple signals, we find that prices and uninformed demand fall as asymmetry increases. These falls are larger when more investors are uninformed, turnover is larger and more variable, payoffs are more uncertain, and the lost signal is more precise. Prices fall partly because expected returns become more sensitive to liquidity risk. Our results confirm that information asymmetry is priced and imply that a primary channel that links asymmetry to prices is liquidity. (JEL G12, G14, G17, G24) Theoretical asset pricing models routinely assume that investors have heterogeneous information. The goal of this article is to establish the empirical relevance of this assumption for equilibrium asset prices and investor demands. To do so, we exploit a novel identification strategy that allows us to infer changes in the distribution of information among investors and hence to quantify the effect of information asymmetry on prices and demands. Our results suggest that information asymmetry has a substantial effect on prices and demands and affects assets through a liquidity channel. Asymmetric-information asset pricing models typically rely on a noisy rational expectations equilibrium (REE) in which prices, due to randomness in the risky asset’s supply, only partially reveal the better-informed investors’ information. Random supply might reflect the presence of “noise traders” whose demands are independent of information. Prominent examples of such models include Grossman and Stiglitz (1980), Hellwig (1980), Admati (1985), Wang (1993), and Easley and O’Hara (2004).
347 citations
TL;DR: In this article, the authors model how corporate bond prices are affected by search frictions and occasional selling pressures, and test their predictions empirically, and identify two liquidity crises (i.e. high estimated numbers of forced sellers), namely the downgrade of GM and Ford in 2005 and the current crisis.
Abstract: I model how corporate bond prices are affected by search frictions and occasional selling pressures, and test my predictions empirically. A key prediction in my model is that in a distressed market with more sellers than buyers, the midprice (i.e. the average of bid and ask price) paid by institutional investors is lower than that of retail investors. Using a structural estimation, the model is able to identify liquidity crises based on the relative prices of institutional and retail investors. I identify two liquidity crises (i.e. high estimated numbers of forced sellers), namely the downgrade of GM and Ford in 2005 and the current crisis. I also estimate that search costs for institutional investors increase strongly during the subprime crisis, while search costs for retail investors appear stable. Finally, search costs have the highest impact on yields for bonds with short maturities according to the estimation.
338 citations
TL;DR: This article showed that hedge fund investors withdraw capital three times as intensely as do mutual fund investors in response to poor returns and identified important roles for share liquidity restrictions and institutional ownership in hedge funds.
Abstract: Hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008Q3-Q4, hedge funds sold 29% of their aggregate portfolio. Consistent with a fire sale explanation, hedge funds sold high-volatility and liquid stocks. We find that investor redemptions and pressure from lenders were the primary drivers of selloffs. To broaden the perspective, we compare to mutual funds, for which redemptions and stock sales were not nearly as severe. In a pooled analysis of flow-performance sensitivity, we show that hedge fund investors withdraw capital three times as intensely as do mutual fund investors in response to poor returns. When studying the sources of this difference in behavior, we identify important roles for share liquidity restrictions and institutional ownership in hedge funds.
337 citations
TL;DR: In this article, a new dynamic asymmetric copula model is proposed to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections.
Abstract: International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower in EMs than in DMs. Tail dependence has also increased, but its level is still relatively low in EMs. We propose new measures of dynamic diversification benefits that take into account higher-order moments and nonlinear dependence. The benefits from international diversification have reduced over time, drastically so for DMs. EMs still offer significant diversification benefits, especially during large market downturns. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
315 citations
TL;DR: The authors used exogenous scheduling of Wall Street Journal columnists to identify a causal relation between financial reporting and stock market performance, and added columnist fixed effects to a daily regression of excess Dow Jones Industrial Average returns.
Abstract: We use exogenous scheduling of Wall Street Journal columnists to identify a causal relation between financial reporting and stock market performance. To measure the media's unconditional effect, we add columnist fixed effects to a daily regression of excess Dow Jones Industrial Average returns. Relative to standard control variables, these fixed effects increase the R-super-2 by about 35%, indicating each columnist's average persistent "bullishness" or "bearishness." To measure the media's conditional effect, we interact columnist fixed effects with lagged returns. This increases explanatory power by yet another one-third, and identifies amplification or attenuation of prevailing sentiment as a tool used by financial journalists. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
292 citations
TL;DR: The authors compare the dividend policies of publicly and privately held firms in order to identify the forces shaping corporate dividends and shed light on the behavior of privately held companies, showing that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time.
Abstract: We compare the dividend policies of publicly and privately held firms in order to help identify the forces shaping corporate dividends, and shed light on the behavior of privately held companies. We show that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time. Public firms pay relatively higher dividends that tend to be more sensitive to changes in investment opportunities than otherwise similar private firms. Ultimately, ownership structure and incentives play key roles in shaping dividend policies. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this paper, an investment-ow based explanation for three empirical ndings on return predictability was proposed and tested, i.e., the persistence of mutual fund performance, the smart money, and the smart index.
Abstract: This paper proposes and tests an investment-ow based explanation for three empirical ndings on return predictability { the persistence of mutual fund performance, the \smart
TL;DR: In this article, the authors proposed that fund performance can be predicted by its R 2, obtained by regressing its return on the multi-factor benchmark model, and they found that lagged R 2 has significant negative predictive coefficient in predicting alpha or information ratio.
Abstract: We propose that fund performance can be predicted by its R 2 , obtained by regressing its return on the multi-factor benchmark model. Lower R 2 measures selectivity or active management. We find that lagged R 2 has significant negative predictive coefficient in predicting alpha or Information Ratio. Funds ranked into lowest-quintile lagged R 2 and highest-quintile alpha produce significant alpha of 2.5%. Across funds, R 2 is positively related to the fund’s size and negatively related to its manager’s tenure and its past performance, as well as being negatively related to its expenses. We also find that for funds that hold corporate bonds, R 2 from a benchmark model that includes bond factors predicts fund performance in the same way that it does for stock funds.
TL;DR: The average cash holdings of Chinese-listed firms decreased significantly after the split share structure reform in China, which specified a process that allowed previously nontradable shares held by controlling shareholders to be freely tradable on the exchanges as discussed by the authors.
Abstract: The average cash holdings of Chinese-listed firms decreased significantly after the split share structure reform in China, which specified a process that allowed previously nontradable shares held by controlling shareholders to be freely tradable on the exchanges. The reduction in cash holdings is greater for firms with weaker governance and firms facing more financial constraints prior to the reform. The reform also significantly reduced the average corporate savings rate, as measured by cash-to-cash-flow sensitivity. These findings are consistent with the premise that the reform removed a significant market friction, which led to better incentive alignment between controlling shareholders and minority shareholders and relaxed financial constraints. Additional analyses show that the reform affects firms' cash management policies, investment decisions, dividend payout policies, and financing choices differently in private firms than in state-owned enterprises. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this article, the authors examined the link between mortgage securitization and lender screening during the boom and bust of the U.S. housing market and found that the change in decision-making by subprime lenders occurs on dimensions that are unreported to investors.
Abstract: This article examines the link between mortgage securitization and lender screening during the boom and bust of the U.S. housing market. Using comprehensive data on both prime and subprime securitized and bank-held loans, we provide evidence that securitization affected lenders' screening decisions in the subprime market for low-documentation loans through two channels: the securitization rate and the time it takes to securitize a loan. The change in decision-making by subprime lenders occurs on dimensions that are unreported to investors. Examining the time-series evolution of the securitization market further reinforces these findings. We exploit heterogeneity across subprime and prime markets to illustrate that the potential for moral hazard may be reduced with greater collection of hard information and increased monitoring of lenders. Our results suggest that the policy debate regarding securitization and lenders' underwriting standards should separately evaluate the agency and non-agency markets, with special attention toward the extent of soft information in assets being securitized. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
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TL;DR: In this paper, the authors develop a dynamic model of debt runs on a medium-sized bank, which invests in an illiquid asset by rolling over staggered short-term debt contracts.
Abstract: We develop a dynamic model of debt runs on a …rm, which invests in an illiquid asset by rolling over staggered short-term debt contracts (i.e., dierent contracts mature at dierent times.) We derive a unique threshold equilibrium, in which creditors coordinate their asynchronous rollover decisions based on the …rm's publicly observable and time-varying fundamental. The coordination problem ampli…es the creditors'concerns about the …rm's future rollover risk created by its time-varying fundamental, and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability. Our model provides a set of implications on the roles played by volatility, illiquidity and debt maturity in driving debt runs, as well as on …rms'capital adequacy standards and credit risk.
TL;DR: The authors decompose aggregate market variance into an average correlation component and an average variance component and find that the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility.
Abstract: We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to the Fama-French (1993) model have positive (negative) exposures to innovations in average stock variance and therefore lower (higher) expected returns. These two findings explain the idiosyncratic volatility puzzle of Ang et al. (2006, 2009). The factor related to innovations in average variance also reduces the pricing errors of book-to-market and momentum portfolios relative to the Fama-French (1993) model. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.
TL;DR: In this paper, the authors show that the correlation between cash and spreads is robustly positive and higher for lower credit ratings, which can be explained by the precautionary motive for saving cash.
Abstract: Intuition suggests that rms with higher cash holdings are safer and should have lower credit spreads. Yet empirically the correlation between cash and spreads is robustly positive, and higher for lower credit ratings. This puzzling nding can be explained by the precautionary motive for saving cash. In our model endogenously determined optimal cash reserves are positively related to credit risk, resulting in a spurious positive correlation between cash and spreads. By contrast, spreads are negatively related to the \exogenous" component of cash holdings independent of credit risk factors. Similarly, although rms with higher cash reserves are less likely to default over short horizons, longer term endogenously determined liquidity may be positively related to the probability of default. Our empirical analysis conrms these predictions, suggesting that endogenous precautionary savings are central to understanding the eects of cash on credit risk.
TL;DR: In this article, the authors examined the performance of liquidity proxies in commodities and found that the Amihud measure has the largest correlation with liquidity benchmarks and the Effective Tick measure also performed well, while Splitting trades over one hour can reduce trading costs by two-thirds compared to an immediate execution.
Abstract: We examine the performance of liquidity proxies in commodities. The Amihud measure has the largest correlation with liquidity benchmarks. Amivest and Effective Tick measures also perform well. These proxies are useful for studies of commodity liquidity over a long time period and those that lack access to high-frequency data. We use various aspects of transaction costs, such as spread, depth, immediacy, and resiliency, to give insight into the costs of different execution approaches. Transaction costs increase with volatility and exhibit mean reversion. Splitting trades over one hour can reduce trading costs by two-thirds compared to an immediate execution. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: The authors found that 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, and that subsequent debt reductions are neither rapid nor the result of pro-active attempts to rebalance the firm's capital structure towards a long run target.
Abstract: 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 pro-active attempts to rebalance the firms capital structure towards a long-run target. Instead, the evolution of the firms 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. While many of our findings are difficult to reconcile with traditional capital structure models, they 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.
TL;DR: In this article, the authors show that investors who most need the financial advice are least likely to obtain it and that the investors who do obtain the advice hardly follow the advice and do not improve their portfolio efficiency by much.
Abstract: Working with one of the largest brokerages in Germany, we record what happens when unbiased investment advice is offered to a random set of approximately 8,000 active retail customers out of the brokerage's several hundred thousand retail customers. We find that investors who most need the financial advice are least likely to obtain it. The investors who do obtain the advice (about 5%), however, hardly follow the advice and do not improve their portfolio efficiency by much. Overall, our results imply that the mere availability of unbiased financial advice is a necessary but not sufficient condition for benefiting retail investors. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this paper, the authors derive a measure of aggregate systemic risk, designated CATFIN, that complements bank-specific systemic risk measures by forecasting macroeconomic downturns six months into the future using out-of-sample tests conducted with U.S., European, and Asian bank data.
Abstract: We derive a measure of aggregate systemic risk, designated CATFIN, that complements bank-specific systemic risk measures by forecasting macroeconomic downturns six months into the future using out-of-sample tests conducted with U.S., European, and Asian bank data. Consistent with bank "specialness," the CATFIN of both large and small banks forecasts macroeconomic declines, whereas a similarly defined measure for both nonfinancial firms and simulated "fake banks" has no marginal predictive ability. High levels of systemic risk in the banking sector impact the macroeconomy through aggregate lending activity. A conditional asset pricing model shows that CATFIN is priced for financial and nonfinancial firms. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this paper, the authors show that indirect pay for performance from future fund-raising is of the same order of magnitude as direct pay for portfolio performance from carried interest, and that indirect compensation for performance is stronger when managerial abilities are more scalable and weaker when current performance is less informative about ability.
Abstract: Lifetime incomes of private equity general partners (GPs) are affected by their current funds’ performance not only directly, through carried interest profit-sharing provisions, but also indirectly by the effect of the current fund’s performance on GPs’ abilities to raise capital for future funds. In the context of a rational learning model, which we show better matches the empirical relations between future fund-raising and current performance than behavioral alternatives, we estimate that indirect pay for performance from future fund-raising is of the same order of magnitude as direct pay for performance from carried interest. Consistent with the learning framework, indirect pay for performance is stronger when managerial abilities are more scalable and weaker when current performance is less informative about ability. Specifically, it is stronger for buyout funds than for venture capital funds, and declines in the sequence of a partnership’s funds. Total pay for performance in private equity is both considerably larger and much more heterogeneous than implied by the carried interest alone. Our framework can be adapted to estimate indirect pay for performance in other asset management settings. (JEL G11, G23, J33)
TL;DR: The authors examined how investor preferences and beliefs affect trading in relation to past gains and losses and found that the probability of selling as a function of profit is V-shaped; at short holding periods, investors are more likely to sell big losers than small ones.
Abstract: We examine how investor preferences and beliefs affect trading in relation to past gains and losses. The probability of selling as a function of profit is V-shaped; at short holding periods, investors are more likely to sell big losers than small ones. There is little evidence of an upward jump in selling at zero profits. These findings provide no clear indication that realization preference explains trading. Furthermore, the disposition effect is not driven by a simple direct preference for selling a stock by virtue of having a gain versus a loss. Trading based on belief revisions can potentially explain these findings. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this paper, the authors proposed a pricing model of limits to arbitrage for the U.S. Treasurys in the repurchase market, which shares a common component with risk premia in other markets.
Abstract: Recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries. In the US, the repo market is the key funding market. Then, the premium of on-the-run U.S. Treasury bonds should share a common component with risk premia in other markets.
TL;DR: This paper showed that familiarity affects the portfolio decisions of mutual fund managers and showed that home-state bias is stronger if the manager is inexperienced, is resource-constrained, or spent more time in his home state.
Abstract: We show that familiarity affects the portfolio decisions of mutual fund managers. Controlling for fund location, funds overweight stocks from their managers' home states by 12% compared with their peers. In team-managed funds, home-state overweighting is 37% larger than the fund location effect. The home-state bias is stronger if the manager is inexperienced, is resource-constrained, or spent more time in his home state. Home-state stocks do not outperform other holdings, confirming that home-state investments are not informed. The overweighting also leads to excessively risky portfolios. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this paper, the authors study the interaction between financing and investment decisions in a dynamic model, where the firm has multiple debt issues and equityholders choose the timing of investment, and develop several predictions about how firms adjust their priority structure in response to changes in leverage, credit conditions, and firm fundamentals.
Abstract: We study the interaction between financing and investment decisions in a dynamic model, where the firm has multiple debt issues and equityholders choose the timing of investment. Jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract. Examining the relative efficiency of priority rules observed in practice, we develop several predictions about how firms adjust their priority structure in response to changes in leverage, credit conditions, and firm fundamentals. Notably, financially unconstrained firms with few growth opportunities prefer senior debt, while financially constrained firms, with or without growth opportunities, prefer junior debt. Moreover, lower-rated firms are predicted to spread priority across debt classes. Finally, our analysis has a number of important implications for empirical capital structure research, including the relations between market leverage, book leverage, and credit spreads and Tobin's Q, the influence of firm fundamentals on the agency cost of debt, and the conservative debt policy puzzle. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
TL;DR: In this article, the authors 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.
Abstract: 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.
TL;DR: The authors investigate the effects of bank control over borrower firms whether by representation on boards of directors or by the holding of shares through bank asset management divisions, and find that banks are more likely to act as lead arranger in loans when they exert some control over the borrower firm.
Abstract: We investigate the effects of bank control over borrowerfirms whether by representation on boards of directors or by the holding of shares through bank asset management divisions. Using a large sample of syndicated loans, we find that banks are more likely to act as lead arrangers in loans when they exert some control over the borrower firm. Bank-firm governance links are associated with higher loan spreads during the 2003‐2006 credit boom but lower spreads during the 2007‐2008 financial crisis. Additionally, these links mitigate credit rationing effects during the crisis. The results are robust to several methods to correct for the endogeneity of the bank-firm governance link. Our evidence, consistent with intertemporal smoothing of loan rates, suggests that there are costs and benefits from banks’involvement in firm governance. (JEL G21, G32)
TL;DR: In this article, the authors theoretically and empirically address the endogeneity of corporate ownership structure and the cost of debt, with a novel emphasis on the role of control concentration in post-default firm restructuring.
Abstract: We theoretically and empirically address the endogeneity of corporate ownership structure and the cost of debt, with a novel emphasis on the role of control concentration in postdefault firm restructuring. Control concentration raises agency costs of debt, and dominant shareholders trade off private benefits of control against higher borrowing costs in choosing their ownership stakes. Based on our theoretical predictions, and using an international sample of syndicated loans and unique dynamic ownership structure data, we present new evidence on the firm- and macro-level determinants of corporate control concentration and the cost of debt. (JEL G21, G32)