Bilateral political relations and sovereign wealth fund investment

We examine the role of bilateral political relations in sovereign wealth fund (SWF) investment decisions. Our empirical results suggest that political relations play a role in SWF decision making. Contrary to predictions based on the FDI and political relations literature, we find that relative to nations in which they do not invest, SWFs prefer to invest in nations with which they have weaker political relations. Using a two-stage Cragg model, we find that political relations are an important factor in where SWFs invest but matter less in determining how much to invest. Inconsistent with the FDI and political relations literature, these results suggest that SWFs behave differently than rational investors who maximize return while minimizing risk. Consistent with the trade and political relations literature, we find that SWF investment has a positive (negative) impact for relatively closed (open) countries. Our results suggest that SWFs use—at least partially—non-financial motives in investment decisions.     

Does deregulation induce competition in the market for corporate control? The special case of banking

Using a sample of 936 acquisitions of commercial banks, we examine the relation between the probability to engage in value-reducing acquisitions and corporate governance structures, as well as the relation between acquirer announcement-period abnormal stock returns and antitakeover indices and measures, and how these relations were affected by the change in the market for corporate control, caused by deregulation due to the implementation of the Interstate Banking and Branching Efficiency Act of 1994 and the Financial Service Modernization Act of 1999. We find that prior to deregulation there is no relation between probability to engage in value destroying acquisitions or acquirer returns and antitakeover indices, whereas after the adoption of the FSMA, probability to engage in value destroying acquisitions and the stock market reaction to bidder M&A announcements are both significantly related to governance indexes and measures. Our findings further confirm the linkage between the market for corporate control, antitakeover indices and firm value.     

CEO turnover and bondholder wealth

We examine the impact of CEO turnover announcements on bondholder wealth, stockholder wealth, and overall firm value. Using publicly traded data for the period from 1973 to 2000, we find evidence consistent with both the wealth transfer and signaling hypotheses. Specifically, we find that CEO turnover events are associated with lower bondholder values, higher stockholder values, and that net changes in firm value are a function of turnover type (forced vs voluntary and outside vs inside firm replacements) and the riskiness of the firm’s debt (investment vs non-investment grade). Overall, the results contribute to the understanding of the effects of corporate governance mechanisms, of which CEO turnover is an extreme form, on bondholders.     

Mutual fund skill and the performance of corporate acquirers

We show that the commonly observed correlation between institutional investor ownership and the success of mergers is partly driven by active stock picking. Several mutual fund stock selection skill measures strongly predict the post-merger performance of corporate acquirers even after controlling for possible shareholder monitoring. These findings are stronger for funds with characteristics more indicative of active stock picking. Moreover, firms held by funds with higher stock selection skills are more likely to subsequently become acquirers, suggesting that the mutual fund skill set includes the ability to identify acquirers with value-enhancing acquisition opportunities.     

The relationship between corporate governance and foreign ownership of the banks in developing countries

The aim of this paper is to determine the effect of corporate governance on foreign ownership of the banks. Within this context, annual data of 65 developing countries for the periods between 2004 and 2013 was analyzed. In addition to this situation, 7 explanatory variables were used in this study in order to achieve this objective. As a result of the analysis, it was identified that there is a strong relationship between operations of foreign banks and governance levels of the countries. In this regard, it was determined that the factors of corruption, political stability, rule of law and flexibility in legal regulations affect foreign bank operations. Moreover, it was also analyzed that foreign bank operations are stronger in the countries that have low poverty, high political stability and efficient legal infrastructure. On the other hand, it was defined that strict legal regulation affects foreign bank operations negatively which shows that foreign banks prefer to enter into the countries that have flexible legal regulations. This study gives essential information to developing countries about the factors that affect the decisions of foreign banks in order to enter into a developing country. Therefore, by considering the results of this study, the authorities of these countries can have a chance to take necessary actions so as to attract foreign banks.     

Firm growth type and capital structure persistence

We find that growth type (identified by a two-way sort on firm initial market-to-book ratio and asset tangibility) can parsimoniously predict significantly dispersed and persistently distinct future leverage ratios. Growth type is persistent; growth-type-sorted cross-sections of corporate fundamental variables (such as tangible versus intangible investment style) are also meaningfully persistent. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. These findings demonstrate that firms rationally invest and seek financing in a manner compatible with their growth types. Consistent with a generalized Myers–Majluf framework, growth type compatibility enables distinct growth types and hence specifications of market imperfection or informational environments to persist. Growth type is apparently a fundamental factor for capital structure persistence.     

Control/ownership structure,creditor rights protection,and the cost of debt financing: International evidence

We explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms. We find strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yield-spreads, and a negative and significant effect on bond ratings. Control in the hands of widely held financial firms has a positive effect on bond ratings only, while State control has no effect on either bond yield-spreads or ratings. We also find that a higher protection of debtholders’ rights generally reduces bond yield-spreads and increases bond ratings. Our results additionally show that, for both bondholders and rating agencies, the enforcement of debt laws is crucially important. Finally, we document a negative effect of debt covenants on debt costs when there is a high expropriation risk and poor creditor rights protection.     

Going private transactions,bondholder returns,and wealth transfer effects

We examine how buyout activity and deal characteristics drive bondholder returns and the wealth transfer effects between bondholders and stockholders in going private transactions from 1981 to 2006. We find that various deal characteristics are major determinants of the cross-sectional variation in bondholder returns. In particular, a single private equity acquirer mitigates bondholder losses. On the other hand, bondholders have larger losses when a reputable buyout firm is involved in the deal. Bondholders experience losses in the 1980s and 2000s, but enjoy gains in the 1990s. Our findings remain robust to consideration of deal financing, relative cost of credit, and level of market overheating. We find a negative and significant relationship between stockholder and bondholder wealth effects, which supports the wealth transfer hypothesis.     

Can an Asia Pacific Community,similar to the European Community,emerge?

The purpose of this paper is to analyse whether the Asia Pacific region could form a union similar to the one now established in Europe. To this end, it analyses some of the major challenge faced by the US prior to its union in the 19th century and the way countries such as France and Germany contributed to the formation of the EU, despite their past animosity. The paper proposed a two tier system for the emergence of a union in the Asia Pacific region in which all countries could become part of a regional framework for regional security and free trade and some of the more advanced countries in the region could start the process of financial integration and invite other member countries to join them over time. The paper argues that in the 2st century, unlike the claim of the “currency optimum theory,” there is no need for labour mobility amongst Asian countries for the formation of a union in this region and hence Australia should not expect millions of workers from China to migrate there. The paper argues that the role of Japan and China in the process of regional integration has been underestimated, due to the claim that the former is a monoculture and the latter is too nationalistic. The paper highlights how diversity in the region could be seen as a strength in the Asia Pacific region. It also shows how the process of globalisation has already overcome differences in culture, religion and race which used to be stumbling blocks for more regional or global integration. The paper argues that a union in the Asia Pacific region would reduce “home bias” for international capital flows and hence there would be significant financial transformation of countries in this region.     

Bank/sovereign risk spillovers in the European debt crisis

This paper investigates contagion between bank and sovereign default risk in Europe over the period 2007–2012. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. Using the EBA’s disclosure of sovereign exposures of banks, we provide empirical evidence that three contagion channels are at work: a guarantee channel, an asset holdings channel and a collateral channel. We find that banks with a weak capital buffer, a weak funding structure and less traditional banking activities are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion. Furthermore, the impact of government interventions on contagion depends on the type of intervention, with outright capital injections being the most effective measure in reducing spillover intensity.     

The impact of distressed economies on the EU sovereign market

Financially distressed economies inside the European Union (EU) are being blamed for producing a general increase in borrowing costs. This article analyzes the channels of default risk transmission within the EU countries using the information content in the sovereign Credit Default Swap (CDS) market. We proceed in two directions. First, we test the existence of cross-border volatility effects between the central and the peripheral EU countries. Second, we explore the effect of distressed economies on the default and risk premium constituents of sovereign default swaps. We show a significant volatility spillover from distressed to central European Economic and Monetary Union (EMU) economies. This causality pattern leads to a significant impact on the default swap risk premia. On average, the risk premium accounts for approximately 42% of central EMU spreads and 56% of the spreads for those countries outside of the EMU. The peripheral risk also affects the default component of central economies, although its impact is lower.     

Minority shareholders’ wealth effects and stock market development: Evidence from increase-in-ownership M&As

This paper examines, using a global M&A data set, the relationship between the target firm’s minority shareholders’ returns and a country’s stock market development in deals in which large shareholders increase their ownership stakes. For the purpose of this study, we use two measures of stock market development: (1) turnover over GDP, and (2) turnover over market capitalization. We provide evidence supporting the view that minority shareholders in target firms gain significantly more in countries with high stock market development than their counterparts in less-developed markets. Our results are robust to several firm and deal characteristics and provide evidence to policy makers that the degree of stock market development is a key determinant in improving minority shareholders’ welfare.     

Shareholder democracy in play: Career consequences of proxy contests

This paper shows that proxy contests have a significant adverse effect on careers of incumbent directors. Following a proxy contest, directors experience a significant decline in the number of directorships not only in the targeted company, but also in other nontargeted companies. The results are established using the universe of all proxy contests during 1996–2010. To isolate the effect of the proxy contest, our empirical strategy uses within-firm variation in directors? exposure to the possibility of being voted out and exploits the predetermined schedule of staggered boards that allows only a fraction of directors to be nominated for election every year. We find that nominated directors relative to non-nominated ones lose 58% more seats on other boards. The evidence suggests the proxy-contest mechanism imposes a significant career cost on incumbent directors.     

Understanding merger incentives and outcomes in the US mutual fund industry

This paper examines the incentives of acquirers and targets in the merger market. Using data on acquisitions among mutual fund management companies from 1991 to 2004, I estimate a two-sided matching model of the merger market jointly with equations representing merger outcomes. According to the empirical investigation, although the desire to achieve a sufficient scale to attract investors is a key driver for mergers, some mergers seem to be driven by objectives other than shareholder value maximization. I find that companies that are potentially prone to misaligned incentives between owners and managers are more acquisitive than others, yet have significantly worse post-merger operating performance. I also find that these acquirers, despite their higher willingness to pay for targets, are not any more likely to match with high-quality targets, potentially due to targets’ incentive to avoid bad organizations.     

Analyst forecasts and European mutual fund trading

This paper addresses the questions whether European mutual fund managers rely on sell-side analyst information and whether this behavior impacts fund performance. Results show that mutual funds significantly increase (decrease) their holdings in stocks when any of the consensus forecast measures increases (decreases) within the quarter prior to the observation period. Furthermore, mutual fund managers primarily attribute high information value to consensus forecast revisions that contain positive information, that are based on a sufficiently high number of inputs, and with more unanimous inputs to the consensus. Finally, following sell-side research seems to be beneficial for mutual fund managers since our results show that stock trades that are in line with analyst forecast revisions significantly outperform trades that are contrary to analyst research.     

A note on Chui,Gai and Haldane’s “Sovereign liquidity crisis: Analytics and implications for public policy”

This note corrects the welfare calculations in Chui, Gai and Haldane’s paper on sovereign liquidity crisis [Chui, M., Gai, P., Haldane, A.G., 2002. Sovereign liquidity crisis: Analytics and implications for public policy. Journal of Banking and Finance 26, 519–544]. We show that the exact formula not only dramatically reduces the computed welfare consequences from 66% of ex-ante expected output to roughly 13%, but also changes the direction of some reported comparative static results. In addition, we clarify the difference between fundamentals-driven and belief-driven welfare costs and extend some of the sensitivity calculations.     

Domestic liquidity and cross-listing in the United States

This study examines changes in domestic liquidity after cross-listing in the United States. Our liquidity measures are based on intraday data from domestic markets for a large sample of firms that cross-list in the United States and for a matched sample of firms that do not cross-list. We find that unadjusted liquidity significantly improves after cross-listing. However, after controlling for contemporaneous changes in liquidity for a matched sample of firms that do not cross-list, there is no evidence of improvements in domestic liquidity due to cross-listing. Our results offer no support for the bonding hypothesis, or for the hypothesis that cross-listing improves domestic liquidity because of increased intermarket competition and additional order flow.     

Corporate governance and firm value: International evidence

In this paper, we investigate the relation between firm-level corporate governance and firm value based on a large and previously unused dataset from Governance Metrics International (GMI) comprising 6663 firm-year observations from 22 developed countries over the period from 2003 to 2007. Based on a set of 64 individual governance attributes we construct two alternative additive corporate governance indices with equal weights attributed to the governance attributes and one index derived from a principal component analysis. For all three indices we find a strong and positive relation between firm-level corporate governance and firm valuation. In addition, we investigate the value relevance of governance attributes that document the companies' social behavior. Regardless of whether these attributes are considered individually or aggregated into indices, and even when “standard” corporate governance attributes are controlled for, they exhibit a positive and significant effect on firm value. Our findings are robust to alternative calculation procedures for the corporate governance indices and to alternative estimation techniques.     

An analysis of the implications of uncertainty and agency problems on the wealth effects to acquirers of private firms

Extensive empirical work shows that bidders do not gain from the acquisition of publicly traded targets but experience positive excess returns in the acquisition of privately held firms. This study investigates how two important differences between private and public firms, namely, informational uncertainty and ownership characteristics, impact the returns to acquirers. A sample of targets that were acquired shortly after filing for an IPO was collected to circumvent the lack of information on private firms. In spite of the special characteristics of these targets, the listing effect is still prevalent in this sample. The results of the analysis are consistent with the hypothesis that acquirers gain in the acquisition of private firms because these targets have a relatively weaker bargaining position due to informational and agency problems and costly access to external capital markets to finance growth opportunities.