DEFAULT AND SYSTEMIC RISK IN EQUILIBRIUM

We develop a finite horizon continuous time market model, where risk‐averse investors maximize utility from terminal wealth by dynamically investing in a risk‐free money market account, a stock, and a defaultable bond, whose prices are determined via equilibrium. We analyze the endogenous interaction arising between the stock and the defaultable bond via the interplay between equilibrium behavior of investors, risk preferences and cyclicality properties of the default intensity. We find that the equilibrium price of the stock experiences a jump at default, despite that the default event has no causal impact on the underlying economic fundamentals. We characterize the direction of the jump in terms of a relation between investor preferences and the cyclicality properties of the default intensity. We conduct a similar analysis for the market price of risk and for the investor wealth process, and determine how heterogeneity of preferences affects the exposure to default carried by different investors.     

On the simultaneity of real and financial policies

This study investigates the interdependencies between a firm's real and financial decisions. One cause of this interdependence is, as with several previous studies, the real costs associated with bankruptcy. A classical multiperiod model is developed which allows for the endogeneity of debt issues, interest rates, the probability of firm default, and dividends. The modeling suggests an explanation for dividend determination which differs from traditional views. The resulting explanation is that funds are always channelled into the most profitable use. Thus, the model generates an optimal quantity of dividends which cannot be altered without decreasing the expected return to equity.     

Assessing credit quality from the equity market: can a structural approach forecast credit ratings?

We investigate the empirical performance of default probability prediction based on Merton's (1974) structural credit risk model. More specifically, we study if distance‐to‐default is a sufficient statistic for the equity market information concerning the credit quality of the debt‐issuing firm. We show that a simple reduced form model outperforms the Merton (1974) model for both in‐sample fitting and out‐of‐sample predictability for credit ratings, and that both can be greatly improved by including the firm's equity value as an additional variable. Moreover, the empirical performance of this hybrid model is very similar to that of the simple reduced form model. As a result, we conclude that distant‐to‐default alone does not adequately capture the firm's credit quality information from the equity market. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.     

The effect of ownership concentration and composition on dividends: Evidence from Latin America

We analyze a unique data set of publicly traded firms based in six Latin American countries to study the joint effect of ownership concentration and composition on dividend policy. We find that when ownership concentration is high and the largest investor is identified as an individual, firms tend to pay fewer dividends consistent with individual investors extracting benefits from minority shareholders. However, if the largest shareholder is based in a common law country, the dividend paid is significantly higher. Finally, greater ownership by the second largest shareholder decreases firm dividends suggesting the monitoring role of a large shareholder.     

ON SURRENDER AND DEFAULT RISKS

This paper examines certain types of saving institutions or insurance companies that are subject to surrender and default risks, in a stochastic interest rate context. In the setting under study, investors are endowed with an option to surrender. The goal of the paper is to study how this option impacts the default risk of the issuing company and the value of the contracts it issues. Surrender risk has been extensively studied in arbitrated markets, using trees or least‐squares Monte Carlo methods for valuations, although practitioners often rely on econometric methods. We deal with surrender risk in a third way, assuming policyholders have sets of information and preferences that differ from those of financial market agents, but without relying on econometric methods. In particular, policyholders are supposed to be only partially rational (at least in the financial sense). This is done by modeling surrender risk through a Cox process correlated to the assets and interest rate dynamics. The paper provides formulas for the dynamics of the assets of the issuing firm (these dynamics drive the default time of the company), and for the valuation of liabilities and equity. A numerical illustration is provided.     

股利政策的股东财富效应:来自中国股市的经验证据

Based on the special separated equity management structure of the listed companies in China and using a sample of the listed companies with distributed dividend in 2003 and 2004, this paper tests the shareholder wealth effects of dividend policy in Chinese separated equity market. Results show that shareholders of non-circulating stock get a high return rate by cash dividends, and circulating shareholders obtain a high short-term return rate by stock dividends. Translated from Nankai Guanli Pinglun 南开管理评论 (Nankai Business Review), 2006, 9(2): 4–10     

Bank affiliations and corporate dividend policy in pre-World War I Belgium

We investigate the impact of universal banks on the dividend policy of affiliated companies, in an environment characterised by poor investor protection, booming stock markets and strong banks. Our results, based on a unique sample of 428 listed companies in pre-World War I Belgium, are consistent with the hypothesis that companies with good investment opportunities and a bank director on their board paid higher dividends to establish a good reputation with investors. However, our results also indicate that companies with several bank directors and companies in which the bank had an equity stake paid lower dividends.     

CEO's Total Wealth Characteristics and Implications on Firm Risk

We study the connections between firm risk and the CEO's personal wealth characteristics, using a unique dataset on CEO wealth and its components. Consistent with decreasing absolute risk aversion, we find that wealthier CEOs are associated with higher risk firms. Riskier firms tend to have CEOs whose wealth is more independent of the firm. We also find that CEOs with high personal portfolio betas run firms with higher betas. CEO's tenure is negatively associated with firm risk measured either as beta, idiosynchratic risk, or volatility of accounting profitability. A possible interpretation is that risk‐averse managers are better able to imprint their risk preferences on the firm over time. Stronger corporate governance weakens the connection between CEO wealth characteristics and firm risk.     

Does home bias affect firm value? Evidence from holdings of mutual funds worldwide

This study finds strong evidence that home bias affects firm valuation at both country and firm levels. At the country level, increasing the bias of domestic investors toward home equity lowers the market valuation of home equity. At the firm level, firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms' global market capitalization weights, but decreases as their weights deviate from global weights. Overall, the evidence is consistent with the optimal global risk-sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation.     

Conditional pricing of currency risk in Africa's equity markets

In this paper, we sought to establish whether Africa's volatile currencies drive equity risk premia. We use the SDF framework to estimate various conditional specifications of the International Capital Asset Pricing Model through generalized method of moments technique. Our results show strong evidence of conditional, time-varying currency risk premia in equity returns. Currency risk is also perceived by international investors as important in informing the equities pricing kernel. Interestingly, we find evidence that international investors are concerned about Africa's small size equity markets and build the impact of anticipated low trading into their pricing calculus.     

Influence of dividend tax policy tied to investment horizon on stock price stability: Evidence from the 2015 dividend tax reform in China

We examine how the dividend tax cut policy tied to the investment horizon enforced on September 8, 2015, influences stock price stability in China's A-share market. As the new dividend tax policy waives the tax on cash dividends for investors holding a stock for more than a year, it encourages long-term investment behavior. From 2013 to 2017, we find that stock turnover, return volatility, and turnover volatility decrease after the policy enforcement, especially for stocks with high dividend yields. This result shows that dividend tax reforms increase investors' stock investment horizons and help stabilize the market. However, our findings demonstrate that stock crash risk increases after policy enforcement. Further analysis shows that earnings management through real activities manipulation for stocks with a higher dividend yield contributes to an increase in stock crash risk. Therefore, one externality of the dividend tax cut policy tied to the investment horizon is that top managers of firms with a higher dividend yield may take advantage of investors' passive longer-term investment behavior and engage in more earnings management. This result suggests that regulatory agencies should pay attention to top managers' earnings management behavior after enacting policies that encourage long-term investment.     

Ownership,financial strategy and performance: the Lancashire cotton textile industry, 1918–1938

This article assesses the validity of John Maynard Keynes' claim that the Lancashire cotton industry failed to restructure because the banks as debt holders prevented firms exiting the industry, creating persistent over-capacity. Using case studies from a substantial sample of Lancashire firms, the article explores archival evidence to establish their financial characteristics, to examine their equity and debt finance and the governance roles of directors and outside ownerhip groups. On the basis of this review the article develops hypotheses to suggest alternatives to the view that bank debt was the dominant explantion of firm level behaviour and industry failure. Applying these to a statistical dataset, results show that syndicates of local shareholders, not banks, were an important impediment to the exit of firms. Moreover, syndicates milked firms of any profits through dividends, thereby limiting reinvestment and re-equipment possibilities. Our results show that where laissez-faire fails in response to a crisis, incumbent investors, particularly block-holders, can be an important impediment to corporate restructuring.     

Wealth effects on cross-border acquisition firms from emerging economies

Cross-border acquisitions (CBAs), as a corporate expansion strategy, are being espoused by emerging market firms (EMFs) to overcome their competitive disadvantage at the global level. The objective of this paper is to analyse the wealth effects of cross-border acquisition announcement on the acquiring firms from emerging economies during the period of 2001–17. Wealth effects have been measured in terms of short-term change in equity prices (investors' reaction) around the public announcement of 553 and 125 overseas acquisitions by Indian and Chinese listed firms respectively. The investors' reaction to the acquisition of a foreign target has been captured using the event study methodology. Further, a disaggregated analysis has been conducted to gauge the impact of various deal-specific factors, the legal structure of the target firm and the development status of the target country on the wealth creation potential of a cross-border acquisition.Both Indian and Chinese investors have responded favourably to the announcement of international acquisitions as exhibited in significant and positive average abnormal returns of 0.71% and 0.23% respectively on the event day. Further, it is revealing to note that investors in these economies differ widely with regard to their perception pertaining to the method of payment and acquisition strategy. At the same time, the extent of wealth creation is higher when acquired firms are based in developed economies possessing high quality resources and advanced technology along with better institutional and regulatory milieu; Indian as well as Chinese markets have experienced larger abnormal returns on acquiring advanced vis-à-vis developing market firms.     

The value of family control during political uncertainty: Evidence from Thailand's constitutional change in 2014

We examine the effect of family control on firm value and corporate decision during Thailand's constitutional change arising from the 2014 coup d'état. We find that Thai family firms perform poorly when compared to non-family firms during the period of political uncertainty. The effect is more pronounced when firms have high expected agency costs from outside investors. Further, we find that family firms delay their investments, hold less cash, pay smaller dividends and have poorer access to debt financing sources relative to non-family firms. The reductions in investment and financing activities may at least partially account for their underperformance. Our evidence is consistent with the view that family control enhances firms' survivorship by establishing political connections in times of political uncertainty at the expense of minority shareholders.     

The aftermarket performance of small firm initial public offerings

The dream of many entrepreneurs is to some day take his or her growing small firm public and, to thereby become the CEO of a publicly-traded corporation. Currently, entrepreneurs are continuing to utilize initial public offerings (IPOs), as a viable source of venture financing. IPOs also represent a viable mechanism for harvesting venture capital and entrepreneurial investments. The touted entrepreneurial benefits of taking a company public include the abilities to borrow additional funds; return to the public equity market; negotiate mergers without depleting cash; the potential for enhanced personal wealth and so forth. Investors in small firm public equity issues are often motivated by the potential for discovering another Apple Computer, or perhaps an IBM at the “ground floor.”This study empirically examines the aftermarket returns of small publicly-held firms that have issued initial public offerings. Aftermarket returns refers to stock returns immediately after a stock begins trading. The study specifically examines two questions. First, “Is there a positive risk-return relationship for small firm aftermarket returns, where higher firm risk will generate higher aftermarket return?” Second, “Will aftermarket returns show on industry effect, where certain industries will automatically generate higher returns?” Answers to these questions will affect the strategic financial alternatives available to entrepreneurs both before and after going public and, will also affect the decisions of investors interested in financing small public corporations.The research findings indicate that entrepreneurs planning to take younger firms public will probably not have available to them numerous subsequent financial alternatives, utilizing corporate stock, if the true aftermarket performance of their stock is taken into consideration. Likewise, investors in small firm public issues may also be disappointed in the aftermarket performance of younger firms. A positive risk-return relationship, where age was a proxy measure of risk, did not exist. This was true even though the initially quoted returns of these same younger firms may have been substantial. On the other hand, the aftermarket performance of older firms is typically favorable.Finally, the study suggests that neither entrepreneurs nor investors should bet solely on a particular industry categorization to “carry” their aftermarket stock performance. While certain industries indicated significant positive initial returns, aftermarket returns based on industry classification were generally not statistically significant. Investors should therefore always exercise firmspecific due diligence and research before investing in small firm public equity issues, since the variance of their aftermarket market returns tends to be large.     

Put Your Money Where Your Mouth Is: A Model of Certification with Informed Finance

We consider how funding from informed investors such as banks certifies the quality of the recipient firms to investors uninformed of it. We show that informed finance leads to full separation of firms’ quality types, with a larger quantity of it certifying a better quality. Moreover, the increase in the market value of the recipient firm is a convex, increasing function of the quantity of informed finance that it obtains. Lastly, firms with attribute X derive a greater value from the certification service of informed finance than those without it if the distribution of firms’ quality conditional on X is second‐order stochastically dominated by that conditional on its absence. The informed finance could be commercial bank loans or the purchase of a firm's equity preceding its IPO by renowned investment banks.     

SHAREHOLDER RISK MEASURES

The aim of this paper is to put forward a new family of risk measures that could guide investment decisions of private companies. But at the difference of the classical approach of Artzner, Delbaen, Eber, and Heath and the subsequent extensions of this model, our risk measures are built to reflect the risk perception of shareholders rather than regulators. Instead of an axiomatic approach, we derive risk measures from the optimal policies of a shareholder value‐maximizing company. We study these optimal policies and the related risk measures that we call shareholder risk measures. We emphasize the fact that due to the specific corporate environment, in particular the limited shareholders' liability and the possibility to pay out dividends from cash reserves, these risk measures are not convex. Also, they depend on the specific economic situation of the firm, in particular its current cash level, and thus they are not translation invariant. This paper bridges the gap between two important branches of mathematical finance: risk measures and optimal dividends.     

强制分红对企业创新的负面影响

近年来出现的分红与再融资挂钩政策,不仅没有给股民带来多少即时收益,反而损害了企业与股民的长期利益：一方面分红给股民带来收入幻觉,其实真正的受益者是大股东与管理层;另一方面强制分红政策产生监管悖论,也不符合国际趋势。股民与企业的利益结合点在于企业的创新,强制分红损害了创新的可持续,从而损害彼此利益。停止强制分红、放权于市场才是正确选择。     

Optimal Financing of a Corporation Subject To Random Returns

We consider the problem of finding an optimal financing mix of retained earnings and external equity for maximizing the value of a corporation in a stochastic environment. We formulate the problem as a singular stochastic control for a diffusion process. We show that the value function satisfies a free-boundary problem. We characterize the value function and show that the optimal policy can be characterized in terms of two threshold parameters. With asset level below the lower threshold, optimal policy is to finance the firm's growth by retaining all earnings and raising the required external equity financing. With asset level above the higher threshold, optimal policy is to pay all retained earnings as dividends and to bring in no new equity. Between the two thresholds, the optimal policy is to retain all earnings but not raise any external equity. We obtain an explicit solution for the value function when there is no brokerage commission in floating external equity. We provide economic interpretations of the results obtained in the paper.