Systemic Risk,Financial Crisis,and Credit Risk Insurance

Differing from conventional insurance firms whose underwriting business does not contribute to systemic risk, credit risk insurance companies providing credit protections for debt obligations are exposed to systemic risk. We show that credit risk insurers (CRIs) underperformed conventional insurance companies during the 2007–2009 financial crisis, and such underperformance is attributed to the greater systemic risk of CRIs. We also find that the credit spreads of insured bonds increase significantly after their insurers are downgraded or put in the negative watch list. We control for alternative factors affecting bond credit spreads and the result is robust.     

Investor behaviour and reaching for yield: Evidence from the sterling corporate bond market

We provide evidence on how corporate bond investors react to a change in yields, and how this behaviour differs in times of market‐wide stress. We also investigate ‘reaching for yield’ across investor types, as well as providing insights into the structure of the corporate bond market. Using proprietary sterling corporate bond transaction data, we show that insurance companies, hedge funds and asset managers are typically net buyers when corporate bond yields rise. Dealer banks clear the market by being net sellers. However, we find evidence for this behaviour reversing in times of stress for some investors. During the 2013 ‘taper tantrum’, asset managers were net sellers of corporate bonds in response to a sharp rise in yields, potentially amplifying price changes. At the same time, dealer banks were net buyers. Finally, we provide evidence that insurers, hedge funds and asset managers tilt their portfolios towards higher risk bonds, consistent with ‘reaching for yield’ behaviour.     

The role of institutional investors in propagating the crisis of 2007–2008

Using novel data on investors' bond portfolios, we study the contagion of the crisis from securitized bonds to corporate bonds. When securitized bonds became “toxic” in August 2007, mutual funds retained the now illiquid securitized bonds and sold corporate bonds. Funds with negative flows or high liquidity needs liquidated more than others. Yield spreads increased more for corporate bonds whose pre-crisis bondholders were more heavily exposed to securitized bonds, compared to same-issuer bonds held by unexposed investors. The findings suggest that liquidity-constrained investors with exposure to securitized bonds played a role in propagating the crisis from securitized to corporate bonds.     

Regulation fair disclosure and the market’s reaction to analyst investment recommendation changes

Previous research has shown that affiliated analysts (those who are working for investment banks that underwrite securities for companies) have an incentive to provide optimistically biased recommendations from selective information they are given by the firm. In an effort to halt such activities, as of October 2000, Regulation Fair Disclosure (RegFD) prohibits selective disclosure of material non-public information by public companies to privileged individuals (such as favored research analysts) and requires broad, non-exclusionary disclosure of such information. We examine firms’ stock price reactions to investment recommendation changes from affiliated analysts versus unaffiliated analysts from October 1998 to November 2002, around the passage of RegFD. Similar to previous research, we find that investors reacted more significantly to recommendation downgrades by affiliated analysts than to those by unaffiliated analysts prior to the passage of RegFD. However, we find that the difference in the reactions to recommendation changes is not present after the passage of RegFD. We also find that stock price reactions to analysts’ (both affiliated and unaffiliated) recommendation changes decreased significantly after the passage of RegFD. Thus, RegFD appears to have curbed the selective disclosure of information (particularly negative information) by firms to affiliated analysts. Further, the smaller reactions to recommendation changes by all analysts after RegFD may reflect a change in analysts’ behavior (irrespective of information that is available) or a response by corporate managers to withhold information rather than risking a violation of fair disclosure rules.     

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.     

The delivery option in credit default swaps

Under standard assumptions the reduced-form credit risk model is not capable of accurately pricing the two fundamental credit risk instruments – bonds and credit default swaps (CDS) – simultaneously. Using a data set of euro-denominated corporate bonds and CDS our paper quantifies this mispricing by calibrating such a model to bond data, and subsequently using it to price CDS, resulting in model CDS spreads up to 50% lower on average than observed in the market. An extended model is presented which includes the delivery option implicit in CDS contracts emerging since a basket of bonds is deliverable in default. By using a constant recovery rate standard models assume equal recoveries for all bonds and hence zero value for the delivery option. Contradicting this common assumption, case studies of Chapter 11 filings presented in the paper show that corporate bonds do not necessarily trade at equal levels following default. Our extension models the implied expected recovery rate of the cheapest-to-deliver bond and, applied to data, largely eliminates the mispricing. Calibrated recovery values lie between 8% and 47% for different obligors, exhibiting strong variation among rating classes and industries. A cross-sectional analysis reveals that the implied recovery parameter depends on proxies for the delivery option, primarily the number of available bonds and bond pricing errors. No evidence is found for a direct influence of the bid-ask spread, notional amount, coupon, or rating used as proxies for bond market liquidity.     

Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads

We study the dynamic impact of idiosyncratic volatility and bond liquidity on corporate bond spreads over time and empirically disentangle both effects. Using an extensive data set, we find that both idiosyncratic volatility and liquidity are critical mainly for the distress portfolios, i.e., low-rated and short-term bonds; for others only volatility matters. The effects of volatility and liquidity shocks on bond spreads were both exacerbated during the recent financial crisis. Liquidity shocks are quickly absorbed into bonds prices; however, volatility shocks are more persistent and have a long-term effect. Our results overall suggest significant differences between how volatility and liquidity dynamically impact bond spreads.     

Institutional herding and its price impact: Evidence from the corporate bond market

We examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior. We find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much stronger and more persistent than buy herding. The price impact of herding is also highly asymmetric. While buy herding facilitates price discovery, sell herding causes transitory yet large price distortions. Such price destabilizing effect of sell herding is particularly pronounced for speculative-grade, small, and illiquid bonds, and during the financial crisis.     

Reaching for Yield in the Bond Market

This paper studies reaching for yield—investors’ propensity to buy riskier assets to achieve higher yields—in the corporate bond market. We show that insurance companies reach for yield in choosing their investments. Consistent with lower rated bonds bearing higher capital requirements, insurance firms prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior is related to the business cycle being most pronounced during economic expansions. It is also characteristic of firms with poor corporate governance and for which the regulatory capital requirement is more binding.     

Stock market reactions to adverse ESG disclosure via media channels

This study examines the value relevance of corporate reputation risks (CRR) from adverse media coverage of environmental, social and governance (ESG) issues on stock performance at the firm level. Empirical results advance signalling theory and resource-based view by providing evidence that corporate reputation is considered a valuable intangible asset by investors and adverse ESG disclosure via media channels have a significant and negative impact on firm valuation. The research is extended using various factors and indicates that heightened CRR have a substantially negative corollary effect on stock price of smaller and less liquid firms that are typically not S&P500 constituents. Further analysis using industry classifications reveals that stock performance of companies in the ‘sin’ triumvirate (i.e., alcohol, tobacco, and gaming) is not significantly affected by negative ESG media coverage. Instead, firms in candy & soda, steel works, banking, and insurance industries are the most susceptible to investors' repercussion from undesirable media spotlight. These findings provide new insights and indicate that beyond the type and delivery method of ESG disclosures, firm characteristics, corporate reputation status and industry explain differences in investors' reaction to ‘bad’ news.     

No contagion,only globalization and flight to quality

In this article, tests for globalization and contagion are separated using an ex ante definition of crises, and contagion tests are neutralized with respect to globalization effects. A large database is constructed to study the stability of correlation matrices for four asset classes: equities, government bonds, investment grade corporate bonds, and high-yield corporate bonds, in four geographical zones. Overall, the results confirm the instability of correlations and point to a combination of globalization and flight to quality, while emphasizing that contagion on the equity markets appears as an artifact due to globalization.     

Corporate Governance in China: a Step Forward

Recently, the presumed benefits of corporate governance have become one of the most contentious issues especially for emerging markets in Asia where institutional settings are quite different from other parts of the world. Using an internationally accepted benchmark (OECD's Principles of Corporate Governance, OECD, 2004 ), this study evaluates the progress of corporate governance practice of Chinese listed companies. A corporate governance index (CGI) is constructed to measure the quality of corporate governance practices of the 100 largest listed firms in China during 2004‐2006. The results show that Chinese companies have been making progress in the corporate governance reform. The findings also show a positive relation between market valuation and overall corporate governance practices, as measured by the CGI, among these Chinese listed companies. Additional investigation reveals that the rights of shareholders are the main driver in the relationship.     

Does Risk Management Add Value? A Survey of the Evidence

The fact that 92% of the world's 500 largest companies recently reported using derivatives suggests that corporate managers believe financial risk management can increase shareholder value. Surveys of finance academics indicate that they too believe that corporate risk management is, on the whole, a valueadding activity. This article provides an overview of almost 30 years of broadbased, stock‐market‐oriented academic studies that address one or more of the following questions:

• ? Are interest rate, exchange rate, and commodity price risks reflected in stock price movements?
• ? Is volatility in corporate earnings and cash flows related in a systematic way to corporate market values?
• ? Is the corporate use of derivatives associated with reduced risk and higher market values?

The answer to the first question, at least in the case of financial institutions and interest rate risk, is a definite yes; all studies with this focus find that the stock returns of financial firms are clearly sensitive to interest rate changes. The stock returns of industrial companies exhibit no pronounced interest rate exposure (at least as a group), but industrial firms with significant cross‐border revenues and costs show considerable sensitivity to exchange rates (although such sensitivity actually appears to be reduced by the size and geographical diversity of the largest multinationals). What's more, the corporate use of derivatives to hedge interest rate and currency exposures appears to be associated with lower sensitivity of stock returns to interest rate and FX changes. But does the resulting reduction in price sensitivity affect value—and, if so, how? Consistent with a widely cited theory that risk management increases value by limiting the corporate “underinvestment problem,” a number of studies show a correlation between lower cash flow volatility and higher corporate investment and market values. The article also cites a small but growing group of studies that show a strong positive association between derivatives use and stock price performance (typically measured using price‐to‐book ratios). But perhaps the nearest the research comes to establishing causality are two studies—one of companies that hedge FX exposures and another of airlines' hedging of fuel costs—that show that, in industries where hedging with derivatives is common, companies that hedge outperform companies that don't.     

Opacity of young businesses: Evidence from rating disagreements

A conventional wisdom in the contemporary corporate finance literature argues that small and medium-sized enterprises (SMEs) are informationally opaque. We use data from two credit information companies and in particular their disagreements over the creditworthiness of SMEs to study the empirical relevance of this often invoked assumption. Our panel data analysis shows that once unobserved firm-effects are controlled for, the disagreements (i.e., rating splits) are inversely related to the age of firms. We are not able to document such a robust relationship between the disagreements and the size of firms. This finding holds a lesson for empirical corporate finance researchers who need firm-level proxies for informational imperfections and asymmetries: of the two often-used proxies, firm size is not as closely related to informational opacity as firm age is.     

Liquidity risk of corporate bond returns: conditional approach

We study the exposure of the US corporate bond returns to liquidity shocks of stocks and Treasury bonds over the period 1973–2007 in a regime-switching model. In one regime, liquidity shocks have mostly insignificant effects on bond prices, whereas in another regime, a rise in illiquidity produces significant but conflicting effects: Prices of investment-grade bonds rise while prices of speculative-grade (junk) bonds fall substantially (relative to the market). Relating the probability of these regimes to macroeconomic conditions we find that the second regime can be predicted by economic conditions that are characterized as “stress.” These effects, which are robust to controlling for other systematic risks (term and default), suggest the existence of time-varying liquidity risk of corporate bond returns conditional on episodes of flight to liquidity. Our model can predict the out-of-sample bond returns for the stress years 2008–2009. We find a similar pattern for stocks classified by high or low book-to-market ratio, where again, liquidity shocks play a special role in periods characterized by adverse economic conditions.     

Market structure and the efficiency of European insurance companies: A stochastic frontier analysis

This paper is motivated by the progressive liberalisation of the European insurance market in recent years. It uses stochastic frontier analysis to estimate Flexible Fourier cost functions for European insurance companies. Separate frontiers are estimated for life, non-life and composite companies. We adopt a maximum likelihood approach to estimation in which the variance of both one-sided and two-sided error terms is modelled jointly with the frontiers. This approach allows us to simultaneously control for the impact of heteroskedasticity on the estimation of scale economies as well as estimating the effect of firm size and market structure on X-inefficiency. The study draws on Standard & Poor’s Eurothesys data set of financial reports for the period 1995 to 2001. This provides technical and non-technical accounts at year-end for life, non-life and composite insurance businesses in 14 major European countries. Our estimates suggest that over this period most European insurers were operating under conditions of decreasing costs (increasing returns to scale), and that company size and domestic market share were significant factors determining X-inefficiency. Larger firms, and those with high market shares, tend to have higher levels of cost inefficiency.     

What Does the Corporate Bond Market Know?

Do related markets reflect new information simultaneously? For high‐yield bonds, a large abnormal price decline in a corporation's most liquid bond over a month is followed by an average abnormal stock price decline of ?1.42%. This effect is larger for stocks that have increased in value and for volatile stocks. It is also larger for bonds with high coupons and shorter maturities. These results support the view that high‐yield corporate bonds have an informational edge when news is negative and stock returns are noisy, and add to the growing literature on the substantial lags in price discovery between related markets.     

Determinants of bond tender premiums and the percentage tendered

We analyze a large sample of US corporate bond tender offers to understand what affects tender premiums as well as the percentage of bonds tendered. For the average (median) tender offer, the tender price is 5.55% (3.24%) greater than the pre-tender market price while the percentage of bonds tendered is 82.3% (94.6%). Premiums offered by firms are greater when the firm is simultaneously soliciting consents to amend restrictive covenants and when the bond has a greater number of restrictive covenants. Premiums are also greater when long-term risk-free yields are low and the yield curve is flatter – conditions where a firm might want to lock in favorable long-term rates by issuing new debt and retiring old debt. Bondholders respond to higher tender premiums by tendering a greater percentage of their bonds – a 1% increase in tender premium increases the tendering rate by approximately 9%. Bondholders also tender a greater percentage of bonds possessing less desirable characteristics such as a short remaining maturity or bonds that are simultaneously undergoing consent solicitations. Finally, we find that tender offers are easier to complete when bond ownership concentration is greater.     

On the Relative Performance of Investment‐Grade Corporate Bonds with Differing Maturities

We find that short‐maturity investment‐grade corporate bonds perform better, controlling for risk differences, than similar bonds with longer maturities. Our results are at least partially attributable to insurance companies’ trading behavior and align with the preferred‐habitat theory of the term structure. We find that insurance‐company purchases create a strong demand for long‐term bonds and that their rebalancing activity results in sales of short‐term bonds. As documented by extant literature, such demand‐supply imbalance is not easily resolved by arbitrageurs or firms seeking to time the market with bond issuance.     

保险治理与公司违规——董事高管责任保险的治理效应研究

公司治理机制被认为是影响公司违规的重要因素,然而董事高管责任保险作为一种重要的外部治理机制,是否会影响公司违规尚未得到充分研究。本文研究发现董事高管责任保险显著降低公司违规概率,符合监督效应假说。经工具变量法、Heckman两阶段模型和倾向得分匹配法稳健性检验,上述结论依然成立。影响机制分析表明,董事高管责任保险显著降低了公司违规倾向,显著增加了违规后被稽查的概率,并降低了上市公司的第一类代理成本。对董事高管责任保险的监督职能做进一步分析发现:(1)董事高管责任保险对上市公司经营违规和领导人违规的监督效应更为显著,但对信息披露违规的治理作用并不显著;(2)董事高管责任保险发挥的监督职能与股权属性和保险机构股东治理存在替代效应,与外部审计师治理和董事长CEO二职分离存在互补效应;(3)分组检验结果表明,董事高管责任保险对公司违规的监督效应在外部监管环境较差或者公司内部信息透明度较高的情况下更加显著。本文既提供了保险合约通过公司治理渠道影响公司违规的证据,同时也表明保险机构通过董事高管责任保险为中国资本市场提供了一种较为有效的公司外部治理机制。