Does corporate governance influence convertible bond issuance?

We examine the influence of corporate governance quality on firms' choice between convertible debt, straight debt, and equity using a Western European sample of security offerings made between 2000 and 2010. We find that weaker firm-specific and country-specific corporate governance quality increases firms' likelihood of issuing convertible debt instead of straight debt and common equity. We also find that stockholder reactions to convertible debt announcements are more favorable for firms with weaker corporate governance. Our results suggest that corporate governance quality is a significant security choice determinant, with firms using convertible debt as a substitute for high quality governance mechanisms.     

What drives the cost of US dollar bond funding for banks?

This paper decomposes issue spreads on US dollar-denominated bonds issued by LIBOR panel banks into credit risk and liquidity premium components. We attribute the recent increase in issue spreads to the investor perception that banks are less creditworthy than in the past. Although the behaviour of the credit risk component is well-explained by a structural model of default, this mechanism is nullified by the introduction of government guarantees. The behaviour of the liquidity premium component is partially explained by the bid/ask spread in the secondary market and issue size. Government guarantees also reduce the liquidity component of the issue spread.     

Idiosyncratic volatility vs. liquidity? Evidence from the US corporate bond market

Our objective in this paper is to determine empirically the extent to which fixed-income investors are concerned about the relative effects of equity volatility and bond liquidity in the cross-section of corporate bond spreads. Our tests reveal that while both volatility and liquidity effects are significant, volatility, representing ex-ante credit shock, has the first-order impact, and liquidity represented by bond characteristics and price impact measure has the secondary impact on bond spreads. Conditional analysis further reveals that distressed bonds and distress regimes are both associated with significantly higher impact of volatility and liquidity shocks. However, the relative impact of these effects varies conditional on the underlying bond attributes and overall market conditions.     

The US financial crisis and corporate dividend reactions: for better or for worse?

Review of Quantitative Finance and Accounting - We examine how changes in dividend policy in 2008 as the financial crisis was unfolding influenced firm risk-adjusted returns in the following years....     

Are corporate bond market returns predictable?

This paper examines the predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to December 31, 2010. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Both investment-grade and high-yield bond returns can be predicted by past stock market returns in-sample and out-of-sample, and the predictive relation is much stronger between stocks and high-yield bonds. By contrast, there is little evidence that stock returns can be predicted by past bond returns. These findings are robust to various model specifications and test methods, and provide important implications for modeling the term structure of defaultable bonds.     

What slice of the pie? The corporate bond market boom in emerging economies

This paper studies the determinants of shifts in debt composition among emerging market non-financial corporates. We show that the determinants of bond market access in EMs vary with global cyclical conditions and across local and foreign currency markets. We find that the role for institutions and macro fundamentals in creating an enabling environment for markets increased during the post-crisis period for local currency markets. Foreign bank linkages additionally explain why local currency bond markets increasingly substituted for banks in channeling liquidity to EMs. In the case of foreign currency markets, in turn, global cyclical factors accounted for most of the variation. Furthermore, a country’s relative sensitivity to global factors appears to vary with the size of its foreign currency bond market rather than local fundamentals. Our results highlight the risk of capital flow reversal in those EMs that benefited from the upturn in the global financial cycle mostly due to the relative size of their bond markets rather than strong fundamentals.     

Who issues Sukuk and when?: An analysis of the determinants of Islamic bond issuance

Using security issuer data from Malaysia, Indonesia, Saudi Arabia, and the United Arab Emirates from the 2001–2013 period, this study investigates how Islamic bond (Sukuk) issuers differ from conventional debt and equity issuers. An international comparative analysis of these three types of security issuers yields three key insights. First, accessibility to the Sukuk market is essential in choosing Sukuk issuance; other determinants will not promote the use of Sukuk, unless this requirement is first satisfied. Second, the low degree of financial constraints on a firm promotes Sukuk issuance, once the required condition of issuer accessibility to the Sukuk market is satisfied. Third, undervaluation of a firm in the pre-issuance period also encourages Sukuk issuance, once the issuer's Sukuk market accessibility condition is satisfied. Taken together, we conclude that Sukuk issuance is preferred along with market timing, once the pecking-order conditions of market accessibility are satisfied.     

What role for social scientists in risk expertise?

When it comes to risks – health and environmental risks, like those linked to the use of nanotechnologies, pesticides, etc. – three main groups of actors are easily identified, brought together through boundary organisations such as environmental and sanitary risk agencies: the natural and technical scientists, who provide their expertise to assess risks (especially toxicologists, epidemiologists and microbiologists); the policy makers, who take decisions regarding risk management and risk regulation; the lay public, who are more and more involved in participatory frameworks. Sometimes three other groups of actors are added: the ‘economists’ who can for instance conduct cost–benefit assessments or multi-criteria analyses (especially ecological economists, public economists, political economists and social economists); the ‘philosophers’/‘ethicists’ who can use ethics to highlight moral choices and responsibilities in face of risks; and the ‘jurists’/‘legal experts’ who can justify authorisation or interdiction according to law. Inversely, there is a group of actors which is not clearly identified, that of social scientists, even though a considerable quantity of social science knowledge on risk has been produced. Why is there such a discrepancy? This article, based on a critical review of the literature, aims to make sense of the fuzziness surrounding the involvement of social scientists when it comes to risk expertise. The article shows that one reason for this puzzling situation is to be found in the gap between what social scientists often want to do when they are called in as risk experts and what natural scientists and public policy makers actually expect from them.     

Did quantitative easing reduce the borrowing costs of firms? The risk-taking channel

This paper examines the effect of the Federal Reserve's quantitative easing (QE) on the cost of bank loans and documents large heterogeneous effects across different firms. In QE1, the average loan spread is 22.7 percent lower compared to the non-QE period. This effect falls in QE2 and OT and then rises in QE3 and the tapering period. The rates of riskier loans are restrained more than less risky loans during QEs as banks take more risks by offering lower rates to attract risky borrowers. The Fed mortgage-backed securities purchases have a larger impact in narrowing the borrowing cost difference between riskier and safer loans than the Fed Treasury purchases. Our results are robust to borrower, year-quarter and bank fixed effects. Overall, our findings support that the risk-taking channel of QE plays a significant role in the corporate bank loan market.     

Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?

We assess the degree of market fragmentation in the euro-area corporate bond market by disentangling the determinants of the risk premium paid on bonds at origination. By looking at over 2400 bonds we are able to isolate the country-specific effects which are a suitable indicator of the market fragmentation. We find that, after peaking during the sovereign debt crisis, fragmentation shrank in 2013 and receded to pre-crisis levels only in 2014. However, the low level of estimated market fragmentation is coupled with a still high heterogeneity in actual bond yields, challenging the consistency of the new equilibrium.     

What determines corporate pension fund risk-taking strategy?

Corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk, consistent with the risk management hypothesis. However, for financially distressed sponsors and sponsors that freeze, terminate, or convert defined benefit to defined contribution plans, the risk-shifting incentive (moral hazard) dominates. Pension fund risk-taking is also affected by labor unionization and sponsor incentives to maximize tax benefits, restore financial slack, and justify the accounting choices of pension assumptions. Sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding, bankruptcy risk is reduced, or marginal tax rate decreases. Overall, we show that corporate sponsors adopt a dynamic risk-taking strategy in their pension fund investments.     

What explains corporate sukuk primary market spreads?

This study investigates the determining factors of international corporate sukuk pricing in the primary market for the period of 2004–2015. We present novel evidence for a unique data set covering all 63 international corporate sukuk issuances consisting of both a fixed margin rating as well a credit rating score. Our cross-sectional analysis indicates that both credit rating and maturity are significant factors which reduce issue spreads, whereas sukuk margin rating increases issue spreads. More prominently, Shari’ah scholar reputation and the type of sukuk are not statistically significant factors in the explanation of the issue spread. Our results are comparable with determinants of conventional bond pricing, and our findings further confirm existing sukuk market practices.     

Turn-of-the-month and intramonth effects in government bond markets: Is there a role for macroeconomic news?

This paper focuses on the turn-of-the-month (TOM) and intramonth anomalies in government bond returns. In particular, we examine whether the TOM and intramonth effects exist in government bond markets, and moreover, whether these anomalies are related to the release of macroeconomic news as suggested in recent stock market studies. Using data on the 2-year and 10-year US Treasury Notes and German government bonds, we document a modest TOM effect in government bond returns. This effect does not disappear after controlling for the release of macroeconomic announcements, thereby suggesting that the origin of the TOM effect is not necessarily the same across asset classes.     

Exit as governance: do blockholders affect corporate innovation in large US firms?

Using a sample of large US firms, this study shows that blockholders in combination with liquidity can contribute positively to innovation (R&D investments). We contribute to the literature on managerial myopia that has focused mainly on large owners and their type (short-term/long-term). Our results are in line with recent theoretical studies arguing that blockholders in combination with market liquidity can mitigate managerial myopia, as suggested by the exit model of governance. The results indicate that blockholders can be efficient in resolving agency problems and that they can enhance long-term prosperity, even when the individual blockholder investment horizon may not be long.     

What moves international stock and bond markets?

We study the relation between international mutual fund flows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows.     

What drives corporate minority acquisitions around the world? The case for financial constraints

In this paper, I examine minority block acquisitions from 1990 to 2009, as well as possible theories for the presence of equity stake purchases. I find that target firms are financially constrained. Acquisitions significantly increase their stock prices at announcement, along with their investment expenditures afterwards. In the two years following the acquisition, 27% (9%) issue new equity (debt) and raise 27% (24%) of their market capitalization. These findings support the theory that equity stakes certify the investment opportunities of target firms. I also find some support for the contracting motive, mostly in countries with good investor protection and a well-performing banking sector.     

Asian financial integration: Global or regional? Evidence from money and bond markets

This paper investigates the degree of global versus regional financial integration in Southeast Asia during the period 2004–2012. We examine integration in the money and bond markets in Asia by employing a covered-interest-parity-based measure of financial integration. The impact of the 2008 financial crisis as well as the recent regional bond initiatives on the integration process of Asian money and bond markets respectively are specifically investigated. Empirically, we adopt the Phillips and Sul (2007) convergence methodology that has not been previously employed to examine the integration process in Asian money and bond markets. We find evidence of both global and regional integration in the money market pre 2008 but once the crisis hit, the process of global integration comes to an abrupt halt. However, regional integration, albeit at a slower pace, is still clearly evident in the post-crisis period. As for the Asian bond market, evidence of both global and regional integration is found but, in comparison, the latter is more convergent post 2008. Regional integration is stronger when interest rates with longer maturity are considered. In addition, we identify some convergent subgroups of countries and this suggests that a multi-tiered style of convergence is present.     

Missing the marks? Dispersion in corporate bond valuations across mutual funds

We study the dispersion of month-end valuations placed on identical corporate bonds by different mutual funds. Such dispersion is related to bond-specific characteristics associated with liquidity and market volatility. The Trade Reporting and Compliance Engine (TRACE) could have contributed to the general decline in dispersion over our sample period, though other factors most likely played roles. Further tests reveal marking patterns to be consistent with returns smoothing behavior by managers. Funds with ambiguous marking policies and those holding “hard-to-mark” bonds appear more prone to smooth reported returns. From a regulatory perspective, we see little downside to requiring funds to explicitly state their marking standards.     

How does the corporate bond market value capital investments and accruals?

This paper examines whether the mispricing of accruals documented in equity markets extends to bond markets. The paper finds that corporate bonds of firms with high operating accruals underperform corporate bonds of firms with low operating accruals. In the first year after portfolio formation, the underperformance is 115 basis points using an accrual measure that includes capital investments and 93 basis points using an accrual measure that is based only on working capital investments. The Sharpe ratios of the zero-investment bond accrual portfolios are comparable to those of the corresponding zero-investment stock accrual portfolios. The results are also robust to risk adjustments based on both a factor model consisting of the Fama and French (J. Financial Econ 33 (1993) 3) stock and bond market factors and a characteristics model based on bond ratings and duration. Cross-sectional Fama–MacBeth regressions that use individual bond data and control for stock and bond issuances in addition to ratings and duration also confirm the time-series portfolio findings. Overall, our results reveal an accrual anomaly among bonds similar to that observed among stocks.

Does easing access to foreign financing matter for firm performance?

The literature shows that rigid capital control policies adversely influence international trade, leading to external financial reforms in terms of greater cross-border access to financing, which, in turn, can stimulate aggregate productivity. However, the literature overlooks the relationships among access to external financing, firm-level productivity, and exporting performance. We fill this research gap by using a rich dataset of 11,612 Indian firms over the period 1988–2014 and study how a unique financial policy intervention affects firm performance. We establish a significant effect of capital-account liberalization through an export-oriented policy initiative on firms' productivity and, consequently, on their exporting activity. Finally, we find that the benefits of the policy reform are more pronounced for financially vulnerable firms characterized by either high debt or low liquidity.