Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads

In this paper, we empirically examine if sovereign risk matters for corporate bonds in developed economies. Using a unique panel data sample of 897 corporate bonds from eleven countries within the Economic and Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads). In the time period from March 2006 to June 2012, we find sovereign risk to be a significant driver of corporate risk. The effect is stronger for companies with domestic revenue structure, for companies that are (partly) owned by the government, and companies active in the utility and transportation sector. Interestingly, the impact of sovereign risk on corporate risk during the acute European sovereign debt crisis period decreases if ratings are examined, but increases if z-spreads are utilized. Rating agencies seem to take a more differentiated view on individual company risk during the sovereign debt crisis, while institutional investors might want to reduce their exposure to a country in financial distress as a whole, regardless of whether sovereign or corporate bonds are held.     

Agency Problems,Equity Ownership,and Corporate Diversification

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces.     

Art as an investment: risk, return and portfolio diversification in major painting markets

The present paper examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period 1976–2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. The financial markets comprise US Treasury bills, corporate and government bonds and small and large company stocks. In common with the published literature in this area, the present study finds that the returns on paintings are much lower and the risks much higher than conventional investment markets. Moreover, while low correlations of returns suggest that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, the construction of Markowitz mean‐variance efficient portfolios indicates that no diversification gains are provided by art in financial asset portfolios. However, diversification benefits in portfolios comprised solely of art works are possible, with Contemporary Masters, 19th Century European, Old Masters and 20th Century English paintings dominating the efficient frontier during the period in question.     

Does institutional ownership matter for international stock return comovement?

We study the link between international stock return comovements and institutional investment. We test whether the rise of institutional ownership has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the 2001–2010 period, we find that industry and global factors are relatively more important the country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies are more beneficial than country diversification strategies for stocks with high institutional ownership. We show that cross-border portfolio investment is a powerful force of international capital market integration and convergence of asset prices.     

民营企业债务违约是内因驱动吗？——基于短贷长投和多元化经营视角的分析

不同于以往从外部因素的角度关注民营企业债务问题,本文从企业自身行为出发分析了民企债务违约是否由内因驱动。具体地,本文考察了短贷长投和多元化经营对民营企业债务违约的影响。结果发现,总体上短贷长投以及多元化程度提高了民企债务违约的可能性。从传导机制上看,短贷长投和多元化降低了企业的盈利水平、提高了过度负债、增加了代理成本,并通过以上三个渠道提高了企业债务违约的可能性。从异质性结果来看,信贷紧缩会加大短贷长投对债务违约的促进作用。对于政府支持的行业而言,短贷长投和多元化引发的债务违约问题更严重。最后,更多的短贷长投和多元化在决策得当情况下不会引发债务违约风险。本文的结果表明,民营企业债务违约主要是由内因驱动,即由企业在“求大”“上层次”的心理下实施的粗放式发展模式驱动。本文对于追溯民企违约的根源、精准施策进而更好地支持民企发展具有一定的启示。     

全球央行购买公司债的原因、效果及启示

中央银行购买公司债是次贷危机后货币政策理论的一项伟大创新和重要实践探索。通过对迄今为止购买过公司债的日本央行、英国央行和欧洲央行的公司债购买计划进行的系统梳理和总结,以及对中央银行购买公司债的理论依据进行分析,提出中央银行购买公司债的六大传导机制。对中央银行购买公司债的经验进行阐述后认为,鉴于当前实体经济依然存在融资难融资贵问题,中国央行在必要时也可实施公司债购买计划,以降低信用利差并提高货币政策传导效率。     

Hedging bonds subject to credit risk

This paper provides a simple and practical approach to hedging bonds that are subject to credit risk. Three new hedge ratios are derived and tested and the roles of basis risk and diversification is investigated. Empirical tests reveal that basis risk is an important factor in hedging corporate bonds. These tests identify a need for new interest rate derivatives where the underlying asset is subject to credit risk.     

Trading-off Corporate Control and Personal Diversification through Capital Structure and Merger Activity

Abstract:  In this study we use direct estimates of the portfolio diversification of the largest shareholder in a firm to study the impact of shareholder diversification on the firm. For firms where the controlling shareholder is an individual, our tests indicate that the owner-managers use debt, dual class shares and corporate control transactions (merger activity) to strategically trade off corporate control and the drawback of poor portfolio diversification. However, for firms where the controlling shareholder is an institution, our results indicate that control but not diversification is important.     

The Impact of Corporate Governance on the Financial Outcomes of Global Diversification

The tenets of agency theory suggest that: 1) managers may pursue investment strategies that are at odds with shareholder value, and 2) effective governance mechanisms can improve the quality of managerial decision-making and enhance the outcomes of corporate investment. Accordingly, using an agency theory lens, we hypothesize that the financial outcomes of global diversification are contingent on the quality of the multinational firm’s corporate governance: high (poor) quality corporate governance is associated with positive (negative) financial consequences attributable to global diversification. Using a sample of 5985 firm-year observations over the period 2002 through 2006, we find support for our hypothesis. The results are robust to using three different measures of global diversification, three different measures of financial outcomes (one accounting-based and two market-based measures), and two econometric methods to control for the endogeneity of the diversification decision.     

Is Country Diversification better than Industry Diversification?

In this paper, we develop a framework in which one can examine the source of industry and country diversification by examining their underlying return components. We find that the global cash flow factor explains on average 39% of the variation of country cash flows and global discount rates explain 55% of the variation of country discount rates. These are much less than the explanatory power of the two factors over industry cash flow and discount rate variations, which are 72% and 78% respectively. This suggests that global factors are much less important for return components at country level than at the industry level. As a result, both better diversification of expected returns and cash flows across countries determine the larger benefits of country diversification versus industry diversification. Moreover, emerging markets tend to have much smaller co‐movements of both dividends and expected returns with those of the world, suggesting a lower degree of integration with the world goods and financial markets. Our results cast doubt on the prevailing wisdom that country diversification should be replaced by industry diversification.     

Value, Survival, and the Evolution of Firm Organizational Structure

We examine corporate product diversification as a dynamic process. Consistent with prior research, we find that the average diversification discount is about 8% when using the standard value-multiple approach. However, we find that a significant portion of the diversification discount arises from benchmark comparisons of value ratios of mature firms with those of very young firms that are more likely to have high value multiples. The magnitude of the diversification discount falls by 15% to 30% when we control for firm age. We also show that diversification reduces the mortality rate of firms, and we provide evidence that mature firms pursue diversification strategies partly as a means to exit stagnant business segments for industries that are more highly valued.     

Firm diversification and earnings management strategies: European evidence

This paper investigates whether corporate diversification, both international and industrial, provides a favourable environment for earnings management. We find that international diversification is associated with greater manipulation of accruals and sales but with lower manipulation of production costs. Industrial diversification is associated with lower levels of all three earnings management strategies. We find strong evidence that the combination of industrial and international diversification increases real activity manipulation but has no effect on accrual manipulation. Moreover, we find that in the presence of firm complexity linked to higher levels of earnings management, the recommendations of financial analysts are more likely to be on the sell side and vice versa. Our results provide useful insights to investors by highlighting the impact of corporate diversification on earnings management and, thus, the accurate estimation of firm value.     

On the importance of systematic risk factors in explaining the cross-section of corporate bond yield spreads

In this paper we examine the importance of systematic equity market factors in explaining the cross-sectional variation in yield spreads on corporate debt. Based on a sample of 1771 corporate bonds over the period from January 1985 to March 1998, we find that once the default-related variables are controlled for, bond betas or sensitivities to aggregate equity market risks have very limited explanatory power. This is in contrast to [Elton, E.J., Gruber, M.J., 2001. Explaining the rate spread on corporate bonds. Journal of Finance 56, 247–277] who find that market factors tied to expected returns are predominantly important, but who do not control for these variables (i.e. the relevant variables from structural models), possibly biasing their estimates. On the other hand, our finding that the systematic factors exhibit some limited explanatory power suggests that the standard contingent claims approach may not fully apply. This finding is consistent with previous research that bond betas are not completely irrelevant once market frictions are introduced. Overall, the evidence provides empirical support for the proposition that structural models capture important elements of corporate bond yield spread determination and equity market systematic factors are by no means predominant.     

The information content of credit ratings: evidence from European convertible bond markets

Prior research has investigated the information content of credit ratings for standard financing instruments such as stocks and corporate bonds, while this question has been neglected for convertible bonds (CBs) so far. CBs are simultaneously determined by the bond floor and the conversion value, which makes it more difficult to assess price effects following rating announcements. In this context, we compare price effects of CBs with those of stocks and corporate bonds of the same issuer using robust event study methods. Our findings indicate that rating changes convey new information for investors in European CBs. In terms of the direction of the expected price reaction, we find CBs to react in a more debt-like manner to the announcement of a rating change. Moreover, our results provide evidence that the magnitude of price reactions differs among different types of securities.     

Corporate bond liquidity and yield spreads: A review

Secondary market illiquidity is an important non-default factor affecting yield spreads. Yet, a review of the literature suggests the findings are mixed, both regarding the relative size of the default versus non-default components as well as the relative importance of liquidity premium for investment-grade and high-yield bonds. While in theory country and currency risk might affect international bonds' yield spreads, empirical findings show that international corporate bonds pricing and liquidity are generally affected by the same factors as the U.S. market. We identify several other areas of disagreement and challenges in the literature that warrant further research.     

The effect of the Euro on country versus industry portfolio diversification

We examine the relative benefits of industrial versus geographical diversification in the Euro zone before and after the introduction of the common currency. A priori, one may expect that increased stock market correlation would precipitate a move from geographical towards industrial diversification. We employ the empirical model of Heston and Rouwenhorst but show that adopting a panel data approach is a more efficient estimation method. We find evidence of a shift in factor importance; from country to industry. However, this is not exclusive to the Euro zone but is also present for non-EMU European countries. Therefore, fund managers should pursue industrial rather than geographical diversification strategies.     

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap (CDS) spreads instead of bond yield or revalued book values to test the risk‐reduction hypothesis. The analysis relies upon a sample of STOXX^® EUROPE 600 index members and covers the years 2010–2014. After controlling for various CDS‐ and firm‐specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk‐reducing effects resulting from corporate diversification.     

Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability

In this paper, we empirically examine whether superior performance in corporate social responsibility (CSR) results in lower credit risk, measured by credit ratings and zero-volatility spreads (z-spreads). We are especially interested in how the environmental, social, and governance (ESG) related performance of the corresponding countries moderates this relationship. We find only weak evidence that superior corporate social performance (CSP) results in systematically reduced credit risk. However, we do find strong support for our hypothesis that a country’s ESG performance moderates the CSP–credit risk relationship. Superior CSP is regarded as risk-reducing and rewarded with better ratings and lower z-spreads only if it is recognized by the environment. In addition, we find a reduction of corporate bonds’ z-spreads by approx. 9.64 basis points if the CSP of a company mirrors the ESG performance of the country it is located in.     

Corporate focus versus diversification: the role of growth opportunities and cashflow

We examine the valuation impact of corporate diversification strategies through an analysis of a set of international joint ventures which contain both focus-decreasing and focus-increasing investments. Consistent with previous findings reported for US firms, we find that focus-increasing joint ventures create value for shareholders. However, we do not find that corporate diversification uniformly reduces shareholder value, either at the announcement of the project or in the long-run. Diversifying joint ventures negatively impact shareholder wealth only when the investing firms have poor growth opportunities and a weak cashflow position. After controlling for the q and cashflow effects, we find no significant difference in the market reaction to focus-increasing and -decreasing joint ventures. Such a result implies that the impact of diversification on shareholder wealth is not absolute, but rather is conditional upon the financial resources and growth opportunities available to the firm.     

Evidence on the international evolution and convergence of corporate governance regulations

The issue of appropriate corporate governance framework has been a focal point of recent reforms in many countries. This study provides a comprehensive comparative analysis of corporate governance regulatory systems and their evolution since 1990 in 30 European countries and the US. It proposes a methodology to create detailed corporate governance indices which capture the major features of capital market laws in the analyzed countries. The indices indicate how the law in each country addresses various potential agency conflicts between corporate constituencies: namely, between shareholder and managers, between majority and minority shareholders, and between shareholders and bondholders. The analysis of regulatory provisions within the suggested framework enables us to understand better how corporate law works in a particular country and which strategies regulators adopt to achieve their goals. The 15-year time series of constructed indices and large country-coverage also allows us to draw conclusions about the convergence of corporate governance regimes across the countries.