Orange County Bankruptcy: Financial Contagion in the Municipal Bond and Bank Equity Markets

We examine the spillover wealth effects of the Orange County, California bankruptcy announcement in December 1994 on municipal bonds, municipal bond funds, and bank stocks. This bankruptcy is prominent because of unprecedented losses and because it was caused by a highly leveraged derivatives strategy rather than a shortage of tax revenues and excess spending. We find contagion in the bond market with significantly negative abnormal returns for municipal bond funds without direct exposure to Orange County and for non‐Orange County municipal bonds. In addition, our findings suggest the contagion spills over to the common stocks of investment and commercial banks that deal in or use derivatives; however, the equities of banks unexposed to derivatives are not affected.     

The Impact of Futures Trading on the Spot Market for Treasury Bonds

Critics of futures markets contend that futures trading destabilizes spot prices and raises price levels of the underlying treasury bonds, while the proponents claim that futures trading improves the information content and stability of spot prices. To investigate these conflicting viewpoints, this paper examines the price behavior of treasury bonds at three critical time points: a) as they enter, retain, and exit the cheapest-to-deliver status; b) as they approach the futures delivery date; and, c) as they cease to be deliverable. An empirical analysis based on a rich data set of daily bond prices over thirty-four delivery quarters reveals little support for the critics’ view of futures trading.     

Pension Contributions and Firm Performance: Evidence from Frozen Defined Benefit Plans

We study the impact of freezing defined benefit (DB) pension plans and replacing them with defined contribution (DC) plans on liquidity, financial leverage, investment, and market value of a sample of firms over 2001‐2008. We find evidence that the pension freeze tends to attenuate the drain on corporate liquidity and relieve the pressure to borrow to pay for mandatory contributions (MCs) associated with underfunded DB plans. Although investors seem to favor the pension freeze as evidenced by positive announcement abnormal stock returns, there is little reliable evidence that the freeze increases investment efficiency and long‐term stock performance.     

Corporate Governance Ratings and Firm Performance

We examine the corporate governance ratings provided by three premier US rating agencies and find that summary scores are generally poor predictors of primary and secondary measures of future firm performance. However, some component sub-ratings that focus on the eight key dimensions of dynamic governance structures provide more positive and reliable evidence of their information content in predicting the multiple dimensions of firm performance. These results reflect the recent observations by academic researchers and money managers that it is extremely difficult to distill all of the complex governance mechanisms into a single integrated, yet informative overall score.     

Firm Characteristics as Cross‐sectional Determinants of Adverse Selection

Abstract:   We analyze the role of firm characteristics in determining the extent of adverse selection, and therefore liquidity, in securities markets. After controlling for the effects of the well‐established determinants of adverse selection, we find evidence that a firm's ratio of plant, property, and equipment to total book assets and its status as a public utility have additional explanatory power. To the extent that these variables are reasonable proxies for the firm's transparency of assets and regulatory environment, we assert these factors contribute to the adverse selection cost of transacting for our sample of NYSE listed S&P 500 firms.