Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Decomposing and Testing Long‐term Returns: an Application on Danish IPOs

An improved method for measuring and testing long‐run returns is proposed. The method adjusts for the right‐skewed distribution of long‐run buy‐and‐hold by decomposing average cross‐sectional buy‐and‐hold returns into mean components and volatility components. The method is applied to initial public offerings in Denmark. The mean‐component under performance of initial public offering stocks compared to the market is 30% and significant after 5 years. Compared to matching firms the under performance of IPO stocks is 13% after 5 years but insignificant.     

“Too‐Small‐To‐Survive” versus “Too‐Big‐To‐Fail” banks: The two sides of the same coin

In the recent crisis, the U.S. authorities bailed out numerous banks through TARP, whilst let many others to fail as going concern entities. Even though both interventions fully protect depositors, a bail out represents an implied subsidy to shareholders, which is not yet the case with closures where creditors are not subsidised. We investigate this non‐uniform policy, demonstrating that size and not performance is the decision variable that endogenously determines one threshold below which banks are treated as TSTS by regulators and another one above which are considered to be TBTF. We, hence, provide a pair of economic rather than regulatory cut‐offs for TBTF and TSTS banks. The shareholders and the other uninsured creditors of a distressed bank are not bailed out if the bank is considered to be TSTS. We further document that the less complex a bank is, the less likely is to be bailed out and, hence, to have all of its creditors protected.     

Distressed Debt Restructuring in the Presence of Credit Default Swaps

The availability of credit insurance via credit default swaps has been closely associated with the emergence of empty creditors. We empirically investigate this issue by looking at the debt restructurings (distressed exchanges and bankruptcy filings) of rated, nonfinancial U.S. companies over the period January 2007–June 2011. Using different proxies for the existence of insured creditors, we do not find evidence that the access to credit insurance favors bankruptcy over a debt workout. However, we document higher recovery prices following a distressed exchange in firms where empty creditors are more likely to emerge.     

The effect of unfunded pension liabilities on corporate bond ratings,default risk,and recovery rate

Unfunded pension liabilities lower ratings of non-senior secured bonds but do not affect ratings of senior secured bonds due to their higher seniority. Pension funding improvement (deterioration) is associated with bond rating upgrade (downgrade). Moreover, large unfunded liabilities increase bond default risk and reduce the recovery rate of bondholders after controlling for credit ratings, suggesting that bond ratings do not fully capture pension underfunding risk. Overall, our results highlight the important effects of unfunded pension obligations on bond ratings, default risk, and creditors’ payoff, and suggest that investors should look beyond bond ratings in making investment decisions.     

Trade credit,creditor protection and banking crisis

This paper analyzes the effect of banking crises on the trade credit provided to customers and whether this effect depends on the strength of a country's legal protection of creditors. The results indicate that trade credit extensions increase in times of crisis, although this increase is smaller in countries where creditors are well protected; however, no differences are observed in trade credit extensions between countries with weak and strong creditor protection in non-crisis periods.     

Hedge Funds and Chapter 11

This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter's loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of key employee retention plan, while their effect on secured creditors manifests in higher probabilities of emergence and payoffs to junior claims.     

Tournament incentives and firm credit risk: Evidence from credit default swap referenced firms

In this paper, we evaluate the impact of managerial tournament incentives on firm credit risk in credit default swap (CDS) referenced firms. We find that intra‐firm tournament incentives are negatively related to credit risk. Our results suggest that tournament incentives reduce credit risk by alleviating the potential for underinvestment when managers are concerned about exacting empty creditors. Further, we find that tournament incentives decrease credit risk when internal governance is strong or product market competition is intense. Taken together, our results suggest that creditors perceive senior manager tournament incentives (SMTI) as a critical determinant of a firm's credit risk, particularly in settings where managerial risk aversion is high.     

Dutch corporate insolvency law: On the brink of a revolution?

The Dutch Bankruptcy Code (DBC) has not changed fundamentally over the more than 110 years of its existence, at least as far as corporate insolvency proceedings are concerned. On 1 November 2007, however, a committee of insolvency experts presented a draft for an entirely new code to the Ministry of Justice. Whether this new code will gain the force of law and whether this will happen within the near future remains uncertain but the proposals will in any event dominate discussions on insolvency law in the Netherlands for the foreseeable future. The main goal behind many of the proposals is improving the ability to successfully restructure companies that experience financial difficulties. To this end the proposals include various measures that would weaken the position of (secured) creditors. The proposals include widening the scope of the cooling-off period during which secured creditors are unable to enforce their security by granting the administrator a right of use of assets subject to security interests. The ability to rely on early termination clauses in contracts is also reduced during the cooling-off period. The position of secured creditors is further weakened by a proposal to grant the right to sell assets that are subject to security interests to the administrator if he continues the business. Under the current bankruptcy code, secured creditors can largely ignore insolvency proceedings, there is no general stay on enforcement and, early termination clauses in contracts are generally thought to be valid and enforceable during insolvency proceedings. Although banks have already argued that weakening the position of secured creditors will limit the ability to restructure companies, it seems safe to assume that the relatively comfortable position that secured creditors currently enjoy during insolvency proceedings in the Netherlands will be under fire due to the proposals for a new bankruptcy code. Copyright © 2008 John Wiley & Sons, Ltd.     

Secured and unsecured debt in creditor-friendly bankruptcy

This article develops a continuous-time asset pricing model for valuing corporate securities in the presence of both secured and unsecured debt. We consider a framework where creditors dominate the negotiation process. This is consistent with the increasing influence of creditors in bankruptcy. We show that the unsecured creditors are incentivized to liquidate the firm prematurely relative to the first-best threshold. However, if the firm’s liquidation value is very low, it should complement its secured debt with unsecured debt as a form of insurance to avoid early liquidations. Our results have important implications for the debt structure and the resolution of financial distress of modern firms with substantial intangible assets.     

Investment Horizon Effects

Abstract:   Boudry and Gray (2003) have documented that the optimal buy‐and‐hold demand for Australian stocks is not necessarily increasing in the investment horizon when returns are predictable. Such finding is in contrast with Barberis (2000) who shows that positive monotonic horizon effects predominate for US stocks. Using a closed‐form approximation to the asset allocation problem, this paper relates the return dynamics to the investor's portfolio choice for different investment horizons. In the special case of a single risky asset, it is shown that return predictability under stationarity may induce both positive and negative horizon effects in the optimal allocation to the risky asset. The paper extends previous empirical results by solving for the optimal portfolio when two risky assets with predictable returns are available for investment.     

Fortune's Best 100 Companies to Work for in America: Do They Work for Shareholders?

In this paper we examine the market reaction to the announcement by Fortune of the 'Best 100 Companies to Work for in America.' Employees rate firms based on several criteria including trust in management, pride in work/company and camaraderie. To examine long‐term performance, we calculate raw and risk‐adjusted returns and then compare them to the returns of a matched sample of firms. In addition, we calculate the return on a buy and hold investment in the sample firm less the return on a buy‐and‐hold investment in a matched sample firm (BHARs). We find a statistically significant positive response to the announcement of the '100 best companies to work for' by Fortune . Also, based on all measures of risk‐adjusted return, we find these firms generally outperform the matched sample of companies. The BHAR results, although not exhibiting the level of statistical significance, are consistent with the raw and risk‐adjusted return results.     

Audit Reports in Australia during the Global Financial Crisis

The Global Financial Crisis reduced economic growth, impacted equity and credit markets, and increased business risk. To the extent that this increased risk translates into greater uncertainty of companies’ ability to continue as going concerns, this should be reflected in audit reports. This paper investigates how the crisis impacted auditor reporting in Australia by examining the period 2005–2009. It finds that the main reason for audit report modification is going concern and that modification rates increased from 12% in 2005–2007 to 18% in 2008 and 22% in 2009. Serious audit report qualification rates remain around 3%.     

The Exploitation of Relationships in Financial Distress: The Case of Trade Credit

This paper develops optimal pricing, lending, and renegotiation strategies for companies in relationships where one firm is highly dependent on the other. Long-term trade–creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors. Anticipating these larger renegotiation concessions, not only do less financially stable firms prefer trade credit, but all firms agree to pay a higher interest rate for trade credit. The model also explains the existence of "teaser" interest rates and convenience classes. Findings are consistent with those of the relationship-lending literature.     

Wholesale bank funding,capital requirements and credit rationing

This paper analyzes how different types of bank funding affect the extent to which banks ration credit to borrowers, and the impact that capital requirements have on that rationing. Using an extension of the standard Stiglitz–Weiss model of credit rationing, unsecured wholesale finance is shown to amplify the credit market impact of capital requirements as compared to funding by retail depositors. Unsecured finance surged in the pre-crisis years, but is increasingly replaced by secured funding. The collateralization of wholesale funding is found to expand the extent of credit rationing.     

Closing the Ledger

Using a unique, hand‐collected final dataset of 57 management buy‐outs in distress, this paper analyses the determinants of bankruptcy costs under the UK's receivership regime. We show that the direct costs of receivership consume a significant percentage of the receivership proceeds, with mean receivership costs equal to 30% of receivership proceeds. Importantly we find that while the average length of receivership was 3.0 years, 95% of repayments are made on average within 1.9 years. Our findings do not support the argument that multiple lenders create inefficiencies resulting in significantly lower secured creditor recovery rates. However, when there are multiple secured lenders, the senior secured lender gains at the expense of other secured creditors. We find that receivership costs are positively related to the proportion of secured debt repaid and that, consistent with the presence of a scale effect, the relative significance of receivership costs declines as firm size grows. Receiverships last longer the larger the amount of debt owed to the secured lenders.     

The number and the closeness of bank relationships

We analyze a firm's optimal choice over the number of creditors and the extent of information disclosed to them. By dealing with many creditors and disclosing essential confidential information, a firm can keep its cost of credit low. This, however, is associated with a relatively high probability that valuable information leaks to competitors, leading to lower expected net returns from product market operations. The importance of these two countervailing effects varies with size, time, industry, and the form of the financial sector, which yields a number of empirically testable hypotheses.     

The Decline of Secured Debt

The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high-quality borrowers will respect their claims even if creditors do not obtain security upfront. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently—when a firm approaches distress. This also explains why, superimposed on the secular decline, the share of secured debt issued is countercyclical.     

The Determinants of Credit Ratings in the United Kingdom Insurance Industry

This paper examines the determinants of external credit ratings attained by insurance firms in the United Kingdom (UK) and of the likelihood that insurers will have such an assessment. Using panel data relating to A.M. Best‐rated and Standard and Poor's (S&P)‐rated insurers over the period 1993–1997, a trichotomous logit model and an ordered probit model with sample selection are employed to show that the factors which influence the likelihood of having external credit assessments not only vary between the two agencies but also differ from those which determine the ratings themselves. Our results are shown to be of potential interest to participants in the insurance industry and policy‐makers alike.