Renegotiation of financial contracts: Evidence from private credit agreements

Using a large sample of private credit agreements between U.S. publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. The accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. The terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the structure of the contract in a state contingent manner, renegotiation is partially controlled by the contractual assignment of bargaining power.     

Incorporating location,routing and inventory decisions in supply chain network design

This paper for the first time presents a novel model to simultaneously optimize location, allocation, capacity, inventory, and routing decisions in a stochastic supply chain system. Each customer’s demand is uncertain and follows a normal distribution, and each distribution center maintains a certain amount of safety stock. To solve the model, first we present an exact solution method by casting the problem as a mixed integer convex program, and then we establish a heuristic method based on a hybridization of Tabu Search and Simulated Annealing. The results show that the proposed heuristic is considerably efficient and effective for a broad range of problem sizes.     

Information Structure and the Tragedy of the Commons in Resource Extraction

Synopsis This paper considers the well-known Levhari-Mirman discrete-time model of resource extraction, and investigates the effects of the information structure of the dynamic game – open-loop, Markovian or history-dependent – on the equilibrium consumption path and the overall utility of the agents. Due to the special structure of the model, the open-loop regime yields a Pareto-optimal outcome. The Markovian regime leads to the most pronounced version of the tragedy of the commons. History-dependent behavior yields an outcome set that is intermediate between the other two cases, and that may include the Pareto-optimal outcome in some cases. The level of efficiency of equilibrium behaviour is thus U-shaped as a function of the level of information the agents’ extraction strategies are based on. The analysis suggests that in environments characterized by a dynamic (and no market) externality, forcing agents to commit to open-loop behavior would constitute welfare-improving regulation.     

Institutional ownership,volatility and dividends

We find that the sign of the correlation between institutional ownership and volatility depends on the firm’s dividend policy: institutional ownership is negatively (positively) related to volatility among non-dividend (dividend) paying stocks. The empirical results are consistent with an interaction between institutional preference for low volatility and the tendency of higher levels of institutional ownership to increase volatility through their trading behavior. This result is robust to many control variables and possible endogeneity concerns. Supporting our conjecture that institutions herd on dividend signals we find that the correlation between turnover and institutional ownership is higher for dividend paying stocks, and that the positive correlation between turnover and institutional ownership is higher on dividend declaration days. Finally, we also find that the level of institutional ownership drops following an increase in volatility for both dividend payers and non-payers, and that volatility rises following increased institutional ownership for dividend paying stocks.     

Dividend Changes and Future Profitability

We investigate the relation between dividend changes and future profitability, measured in terms of either future earnings or future abnormal earnings. Supporting "the information content of dividends hypothesis," we find that dividend changes provide information about the level of profitability in subsequent years, incremental to market and accounting data. We also document that dividend changes are positively related to earnings changes in each of the two years after the dividend change.     

An empirical study of an interactive,session-oriented computerized Negotiation Support System (NSS)

Negotiating is one of the four major decisional roles played by managers. In fact, resolving conflict is said to occupy 20% of a manager's working hours. This growing frequency of negotiation scenarios coupled with the increasing complexity of the issues which need to be resolved in a negotiation make the possibility of computer enhancement for negotiation very appealing. Implementations of computerized Negotiation Support Systems (NSS) in the business world, international affairs, labor law, and environmental and safety disputes have demonstrated their potential for making negotiation problems more manageable and comprehensible for negotiators. Still, pioneers in NSS research have expressed their dismay at the lack of rigorous empirical research and evaluation of NSS. In particular, research is needed which will determine how and under what circumstances negotiation processes can be enhanced by NSS support.This article describes empirical research on the effects of a highly structured, interactive NSS on the outcome of face-to-face issues resolution and the attitudes of negotiators in both low- and high-conflict situations. In a laboratory experiment, bargaining dyads played the roles of manufacturers negotiating a four-issue, three-year purchase agreement for an engine subcomponent in conditions of high and low conflict of interest. The results of the study showed that NSS support did help bargainers achieve higher joint outcomes and more balanced contracts, but that the NSS support increased negotiation time. Satisfaction was greater for NSS dyads in both conflict levels, and perceived negative climate was reduced in low conflict.One primary implication of the results of this study is that NSS developers should keep in mind the importance of providing users with a system with interactive qualities which not only enhance the decision-making process but also provide them with a sense of participation in reaching the solution, as was done in this study.     

The association between individual audit partners’ risk preferences and the composition of their client portfolios

We explore whether audit partners’ attitude towards risk, as measured by their personal criminal convictions, are reflected in the composition of their client portfolios. Analyzing a unique dataset of Swedish audit partners’ criminal convictions, we find that the clients of audit partners with criminal convictions are characterized by greater financial, governance, and reporting risk than those of audit partners without criminal convictions. Also, clients of audit partners with criminal convictions pay larger audit fees, on average, than those of auditors without criminal convictions.     

Comparing different explanations of the volatility trend

We analyze the puzzling behavior of the volatility of individual stock returns over the past few decades. The literature has provided many different explanations to the trend in volatility and this paper tests the viability of the different explanations. Virtually all current theoretical arguments that are provided for the trend in the average level of volatility over time lend themselves to explanations about the difference in volatility levels between firms in the cross-section. We therefore focus separately on the cross-sectional and time-series explanatory power of the different proxies. We fail to find a proxy that is able to explain both dimensions well. In particular, we find that Cao et al. [Cao, C., Simin, T.T., Zhao, J., 2008. Can growth options explain the trend in idiosyncratic risk? Review of Financial Studies 21, 2599-2633] market-to-book ratio tracks average volatility levels well, but has no cross-sectional explanatory power. On the other hand, the low-price proxy suggested by Brandt et al. [Brandt, M.W., Brav, A., Graham, J.R., Kumar, A., 2010. The idiosyncratic volatility puzzle: time trend or speculative episodes. Review of Financial Studies 23, 863-899] has much cross-sectional explanatory power, but has virtually no time-series explanatory power. We also find that the different proxies do not explain the trend in volatility in the period prior to 1995 (R-squared of virtually zero), but explain rather well the trend in volatility at the turn of the Millennium (1995-2005).     

Asymmetric responses of house prices to changes in the mortgage interest rate: evidence from the Australian capital cities

We examine the dynamic and asymmetric responses of house prices to changes in mortgage interest rates in Australia from January 1995 to November 2017. We propose a threshold intervention model to distinguish between the effects of positive versus negative changes in the standard variable interest rate. The results indicate that rising interest rates decrease house prices more than falling interest rates increase them. For example, a 1% decrease in interest rates increases Sydney’s house prices by 0.7%, whereas a 1% increase leads to a 1.5% fall. The findings also support the view that when interest rates are on the rise, house prices in larger capital cities such as Sydney and Melbourne fall faster than in their smaller counterparts. Our findings imply that a rise in interest rates may thus lead to sharp, fast and significant falls in house prices, a phenomenon which will not simply be a symmetric unwinding of earlier price increases.