Managerial Ownership and Corporate Hedging

Abstract:  Using information on 443 UK non-financial companies, this work provides evidence supporting the hypothesis that managerial risk aversion is an incentive to deviate from the optimal hedging position. Conflicts of interest between shareholders and managers are at the centre of the decision about the firm's risk profile but are not relevant as determinants of the decision to hedge. This is rather associated with factors enhancing the firm's expected value (underinvestment, scale economies, tax savings).     

The Riskiness of Corporate Bonds

We use an index of riskiness recently proposed by Aumann and Serrano ( 2008 ) to analyze how the riskiness of diversified portfolios of corporate bonds changes across rating classes and through time and how it compares to the riskiness of other financial instruments. We find that differences in riskiness among portfolios of bonds belonging to different rating classes are seldom statistically significant. We instead find significant time variation in riskiness, driven mainly by return volatility, inflation, and average bond yields. In particular, we find that increases in average bond yields have historically tended to reduce the riskiness of portfolios of corporate bonds by increasing their expected return and by lowering the probability of portfolio losses.     

Corporate reputation and hedging activities

This study examines whether corporate reputation affects derivative hedging. We posit that high-reputation firms are more likely to engage in hedging due to greater reputation costs and/or their commitment to lower financial risks. We find that high-reputation firms are more likely to engage in hedging, especially when their hedging efforts or effects are more observable to stakeholders. We also find that high-reputation firms are less likely to disclose the notional values of hedging positions and that interest rate hedging by high-reputation firms is detrimental to firm value. Our results shed light on the impact of reputational concerns on corporate risk management and disclosure policies.     

Disentangling types of liquidity and testing limits-to-arbitrage theories in the CDS–bond basis

We disentangle asset-specific, market, and funding liquidity in the CDS–bond basis outside and during the 2007–9 global financial crisis. Our findings stress the importance of separating different types of liquidity, since all three measures have independently negative impacts on the basis. Funding liquidity emerges as the economically most important liquidity metric. While asset-specific liquidity is cross-correlated in both the cash and derivative markets, funding and market liquidity only matter for the cash market. We exploit the decomposition of the basis to test predictions of limits-to-arbitrage theories. We find strong evidence in favor of margin-based asset pricing and flight-to-quality effects.     

Corporate Fraud and Corporate Bond Costs: Evidence from China

This study investigates the relationship between corporate fraud and four typical components of costs associated with corporate bonds. Based on data from a booming corporate bond market in China, we confirm that fraudulent issuers have higher corporate bond costs. Specifically, they are more likely to push upward price revisions, pay higher issue fees and coupon spreads, and encounter larger underpricing after issuance. Moreover, we demonstrate that severe corporate fraud is also significantly related to the costs of corporate bonds. Furthermore, we find that investors pay more attention to fraud in accounting information and disclosure. These results remain robust to a strand of endogeneity and through the robustness tests. In additional research, we find that bonds issued by fraudulent firms tend to receive lower ratings and show inferior performance after issuance. We also demonstrate that the effects of corporate fraud on bond costs erode as time passes, although the mitigation speed is slow. Finally, we find that hiring reputable financial intermediaries can partially mitigate the negative effects of corporate fraud.     

公司信用债违约风险预警与防范研究

我国债券规模位居世界第二,债券市场已成为企业直接融资的主要渠道;同时我国公司信用债违约频发,违约主体几乎涵盖了全部行业,永煤AAA债券违约事件引发各方关注。在此背景下,本文研究了信用债违约风险预警与防范,搭建了债券违约预警模型:一是深入分析了违约原因,提出了经济下行加剧‘债务-通缩’流动性分层导致再融资困难民企互保引发违约风险串联的观点;二是基于KLR信号分析法,以历史违约主体财报数据为基础构建了上市公司债违约预警模型,抽离出相关指标权重构成预警指标体系,并进行了实证检验;三是基于预警模型,提出加强动态监测、构建债券风险分类管理办法等政策建议。     

企业债“信用价差之谜”的最新研究与未来展望

企业债的信用价差和预期违约损失之间的巨大差异，正在引起人们对“信用价差之谜”的日益关注。对“信用价差之谜”的代表性解释之一为信用价差分解理论，该理论的最新研究已经触及到了税收、风险溢价和流动性溢价等方面；代表性解释之二为信用风险分散困境理论，包括系统风险的不可分散性和可分散风险的难以分散性。此外，对“信用价差之谜”的探讨已经从发达债券市场过渡到新兴债券市场，并仍有待于进一步的研究。     

Pricing of Defaultable Bonds with Log-Normal Spread: Development of the Model and an Application to Argentinean and Brazilian Bonds During the Argentine Crisis

In this paper we describe a two-factor model for a defaultable discount bond, assuming log-normal dynamics with bounded volatility for the instantaneous short rate spread. Under some simplified hypothesis, we obtain an explicit barrier-type solution for zero recovery and constant recovery. We also present a numerical application for Argentinean and Brazilian Sovereign Bonds during the default crisis of Argentina.JEL Classification: G 13     

企业发债和贷款期限的差异化:基于增量法的实证研究

已有文献主要从资产负债表法来实证研究企业负债期限结构的影响因素,本文以我国企业在1998～2008年企业发行的各类债券和银行贷款为研究对象,运用增量法从企业财务特征和债务契约属性等方面对企业增量债务期限的影响因素进行实证研究,采用了GMM计量方法,并通过对比分析筛选出了影响企业发债和贷款期限差异化的关键因素。研究表明:企业规模越大,利润率越高,具备担保,信用评级和授信比率越高,其债务期限越长。企业若选择发债,债务期限会延长,而选择银行贷款则企业债务期限会缩短。     

Hedging Housing Risk*

An unusually rich source of data on housing prices in Stockholm is used to analyze the investment implications of housing choices. This empirical analysis derives market-wide price and return series for housing investment during a 13-year period, and it also provides estimates of the individual-specific, idiosyncratic, variation in housing returns. Because the idiosyncratic component follows an autocorrelated process, the analysis of portfolio choice is dependent upon the holding period. We analyze the composition of household investment portfolios containing housing, common stocks, stocks in real estate holding companies, bonds, and t-bills. For short holding periods, the efficient portfolio contains essentially no housing. For longer periods, low-risk portfolios contain 15 to 50 percent housing. These results suggest that there are large potential gains from policies or institutions that would permit households to hedge their lumpy investments in housing. We estimate the potential value of hedges in reducing risk to households, yet yielding the same investment returns. The value is surprisingly large, especially to poorer homeowners.     

Corporate Risk Management under Information Asymmetry

This paper examines the financial and operational hedging activities of US pharmaceutical and biotech firms that are subject to a high level of information asymmetry stemming from R&D investments during 2001–2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under‐investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry‐specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity‐based industries without addressing information asymmetry.     

Methods of Partial Hedging

In this article we survey methods of dealing with the following problem: A financial agent is trying to hedge a claim C, without having enough initial capital to perform a perfect (super) replication. In particular, we describe results for minimizing the expected loss of hedging the claim C both in complete and incomplete continuous-time financial market models, and for maximizing the probability of perfect hedge in complete markets and markets with partial information. In these cases, the optimal strategy is in the form of a binary option on C, depending on the Radon-Nikodym derivative of the equivalent martingale measure which is optimal for a corresponding dual problem. We also present results on dynamic measures for the risk associated with the liability C, defined as the supremum over different scenarios of the minimal expected loss of hedging C. This revised version was published online in August 2006 with corrections to the Cover Date.     

Hedging Housing Risk in London

This paper investigates the benefits of allowing households to compensate the portfolio distortion due to their housing consumption through investments in housing price derivatives. Focusing on the London market, we show that a major loss from over-investment in housing is that households are forced to hold a very risky portfolio. However, the strong performance of the London housing market means that little is lost in terms of expected returns. Even households with limited wealth are better off owning their home rather than renting and investing in financial assets, as long as they are willing to face the financial risk involved. In this context, access to housing price derivatives would benefit most poor homeowners looking to limit their risk exposure. It would also benefit wealthier investors looking for the high returns provided by housing investments without the costs of direct ownership of properties. Comparisons with French, Swedish and U.S. data provide a broader perspective on our findings.     

盯市风险下的期货套期保值

本文把盯市风险引入传统的期货套期保值框架，论证了在考虑盯市风险的情况下，一个关注每日最大亏损值的套期保值者会显著地减少他的期货头寸。在一个中期的套期保值期内，该套期保值者的期货套期保值头寸约为其现货头寸的80％。盯市风险的影响随着套期保值期的延长而缓慢减弱。如果套期保值者关注的是每日平均亏损值，在一个中期的套期保值期内盯市风险的影响极小。     

Financial Regulation,Exchange Rate Exposure,and Hedging Activities: Evidence from Korean Firms

ABSTRACT

In this article, we attempt to estimate whether firm-specific exchange rate exposures affected by hedging activities can be improved through financial regulation or supervision. To analyze this, we compose three-step estimations by using a sample of KOSPI 200 firms during 1,803 trading days between 2005 and 2012. We first estimate the relationship between exchange rate exposure and hedging activities and see whether financial regulation had any effect on hedging activities. Furthermore, using TSLS analysis, we estimate the effect of hedging activities on exchange rate exposure, which is caused by tightened financial regulation in the form of corporate governance. We report the following findings. First, firms are less likely to be exposed to exchange risk with more hedging activities. Second, corporate governance has a strongly positive effect on the hedging activities. Firms use more hedging tools when they have a strong structure of shareholder’s protection, clear outside ownership, and a better monitoring system; but the relationship becomes weaker in times of crisis.     

The Effect of Corporate Social Responsibility on Cost of Corporate Bond: Evidence from China

This article examines the link between corporate social responsibility(CSR) and cost of bond(COB) in China. We find that there exists a negative relationship between CSR and COB. In particular, when the bond issuer is a state-owned enterprise, or when the credit rating of bond is high, the negative association between CSR and COB is strengthened. The findings indicate that CSR plays a significant role in reducing the risk premium of corporate bonds through an insurance-like effect. Moreover, the effect of CSR on COB also depends on contextual factors such as firm ownership and bond credit rating.     

The Original Maturity of Corporate Bonds: The Influence of Credit Rating,Asset Maturity,Security, and Macroeconomic Conditions

We examine the determinants of the new issue maturity of corporate bonds. As credit rating decreases, new bond issues have longer maturities, but substantial variation in maturity within each rating class remains. We seek to explain the variation of new issue maturity within credit classes. We find that asset maturity, security covenants, and macroeconomic conditions influence the new issue maturity of bonds within rating categories.     

The Effects of Corporate Social Performance on the Cost of Corporate Debt and Credit Ratings

This study investigates the differential impact that various dimensions of corporate social performance have on the pricing of corporate debt as well as the assessment of the credit quality of specific bond issues. The empirical analysis, based on an extensive longitudinal data set, suggests that overall, good performance is rewarded and corporate social transgressions are penalized through lower and higher corporate bond yield spreads, respectively. Similar conclusions can be drawn when focusing on either the bond rating assigned to a specific debt issue or the probability of it being considered to be an asset of speculative grade.     

Benefits from Asia-Pacific Mutual Fund Investments with Currency Hedging

This study presents empirical evidence on the efficiency and effectiveness of hedging U.S.-based international mutual funds with an Asia-Pacific investment objective. The case for active currency risk management is examined for a passive and a selective hedge, which is constructed with currency futures in the major currencies. Both static and dynamic hedging models are used to estimate the risk-minimizing hedge ratio. The results show that currency hedging improves the performance of internationally diversified mutual funds. Such hedging is beneficial even when based on prior optimal hedge ratios. Further, efficiency gains from hedging, as measured by the percent change in the Sharpe Index, are greatest under a selective portfolio strategy that is implemented with an optimal constant hedge ratio.     

Hedging derivatives with model error

The current derivatives pricing technology enables users to hedge derivatives with the underlying asset or any other traded derivative. In theory, there is no reason to prefer one hedging instrument to another. However, given model errors, this is not true. Imposing some simple assumptions on the structure of model errors, this paper shows that to maximize hedging accuracy, there is an ordering to the hedging instruments utilized. Holding constant market illiquidities, one should always hedge first with ‘like’ derivatives, next with derivatives one layer down the hierarchy of derivatives, and lastly using the underlying.