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1 – 10 of over 6000Mehdi Mili and Sami Abid
The purpose of this paper is to examine the relationship between corporate governance (CG) and firms’ bond recovery rates (RRs). The authors hypothesize that governance features…
Abstract
Purpose
The purpose of this paper is to examine the relationship between corporate governance (CG) and firms’ bond recovery rates (RRs). The authors hypothesize that governance features impact RRs by controlling agency costs that result from conflicts between bondholders and shareholders. The authors also test the relationship between CG and RRs during the last crisis.
Design/methodology/approach
The authors use a generalized method of moments regression model to test the relationship between CG and firms’ bond RRs. The authors employ a direct measure of recoveries rates from Moody’s ultimate recovery database covering the period from 2003 to 2012. Both firm-level CG and country-level variables are used to examine the determinants of corporate bonds RRs.
Findings
The results support a significant impact of CG mechanisms on bond RRs mainly during crisis period. The authors find that firms operating with CEO-Duality decrease their bond RRs during financial crisis. This implies wealth transfers from bondholders to shareholders and provides one explanation why some firms operate with weak governance.
Originality/value
This paper provides the first direct evidence that corporate bond RRs are directly related to CG mechanisms. The authors combine firm-level CG and country-level variables to examine the determinants of corporate bonds RRs. Earlier studies focussed on financial firm-level data and macro-economic variables. The authors also test the impact of board composition and ownership structure on bond recoveries.
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In fraudulent conveyance cases, plaintiffs allege that by entering into a complex leverage transaction, such as an LBO, a firm’s former owners ensured its subsequent collapse…
Abstract
Purpose
In fraudulent conveyance cases, plaintiffs allege that by entering into a complex leverage transaction, such as an LBO, a firm’s former owners ensured its subsequent collapse. Proving that the transaction rendered the firm insolvent may allow debtors (or their proxies) to claw back transfers made to former shareholders and others as part of the transaction.
Courts have recently questioned the robustness of the solvency evidence traditionally provided in such cases, claiming that traditional expert analyses (e.g., a discounted flow analysis) may suffer from hindsight (and other forms of) bias, and thus not reflect an accurate view of the firm’s insolvency prospects at the time of the challenged transfers. To address the issue, courts have recently suggested that experts should consider market evidence, such as the firm’s stock, bond, or credit default swap prices at the time of the challenged transaction. We review market-evidence-based approaches for determination of solvency in fraudulent conveyance cases.
Methodology/approach
We compare different methods of solvency determination that rely on market data. We discuss the pros and cons of these methods and illustrate the use of credit default swap spreads with a numerical example. Finally, we highlight the limitations of these methods.
Findings
If securities trade in efficient markets in which security prices quickly impound all available information, then such security prices provide an objective assessment of investors’ views of the firm’s future insolvency prospects at the time of challenged transfer, given contemporaneously available information. As we explain, using market data to analyze fraudulent conveyance claims or assess a firm’s solvency prospects is not as straightforward as some courts argue. To do so, an expert must first pick a particular credit risk model from a host of choices which links the market evidence (or security price) to the likelihood of future default. Then, to implement his chosen model, the expert must estimate various parameter input values at the time of the alleged fraudulent transfer. In this connection, it is important to note that each credit risk model rests on particular assumptions, and there are typically several ways in which a model’s key parameters may be empirically estimated. Such choices critically affect any conclusion about a firm’s future default prospects as of the date of an alleged fraudulent conveyance.
Practical implications
Simply using market evidence does not necessarily eliminate the question of bias in any analysis. The reliability of a plaintiff’s claims regarding fraudulent conveyance will depend on the reasonableness of the analysis used to tie the observed market evidence at the time of the alleged fraudulent transfer to default prospects of the firm.
Originality/value
There is a large body of literature in financial economics that examines the relationship between market data and the prospects of a firm’s future default. However, there is surprisingly little research tying that literature to the analysis of fraudulent conveyance claims. Our paper, in part, attempts to do so. We show that while market-based methods use the information contained in market prices, this information must be supplemented with assumptions and the conclusions of these methods critically depend on the assumption made.
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I build an equilibrium model trying to reconcile investor preferences with several features of the cat bond market. The driving force behind the model is a habit process, in that…
Abstract
I build an equilibrium model trying to reconcile investor preferences with several features of the cat bond market. The driving force behind the model is a habit process, in that catastrophes are rare economic shocks that could bring investors closer to their subsistence level. The calibration requires shocks with an impact between −1% and −3% to explain a reasonable level of cat bond spreads. Such investor preferences are not only able to generate realistic cat bond returns and price comovement among different perils, but may also able to explain why cat bonds offer higher rewards compared to equally rated corporate bonds.
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Chuang-Chang Chang and Yu Jih-Chieh
We set out, in this paper, to extend the Das and Sundaram (2000) model as a means of simultaneously considering correlated default risk structure and counter-party risk. The…
Abstract
We set out, in this paper, to extend the Das and Sundaram (2000) model as a means of simultaneously considering correlated default risk structure and counter-party risk. The multinomial model established by Kamrad and Ritchken (1991) is subsequently modified in order to facilitate the development of a computational algorithm for valuing two types of active credit derivatives, credit-spread options and default baskets. From our numerical examples, we find that along with the correlated default risk, the existence of counter-party risk results in a substantially lower valuation of credit derivatives. In addition, we find that different settings of the term structure of interest rate volatility also have a significant impact on the value of credit derivatives.
The purpose of this paper is to quantify the monetary amount of relationship investment in an investment banking context, investigate the drivers behind these relationship…
Abstract
Purpose
The purpose of this paper is to quantify the monetary amount of relationship investment in an investment banking context, investigate the drivers behind these relationship investments and look for evidence indicating reciprocity from the clients who receive these relationship investments. Relationship marketing has been one of the dominant mantras in marketing strategy circles, yet there is a lack of empirical evidence to prove significant relationship investment and reciprocity between exchange partners.
Design/methodology/approach
Relationship investment as the monetary amount by which the fair value of a loan at issuance is below its par value is measured. Regression analysis is used to study the drivers of relationship investment, including relationship depth, relationship breadth and relationship potential. Finally, reciprocity is studied as the extent to which bank’s expectations are realized through future revenues.
Findings
Based on 164 loans issued by a multinational investment bank, it was found that the bank provides significant monetary benefit to its corporate clients. The amount of monetary benefit provided to each client depends on the breadth and potential of the bank-borrower relationship. The author also finds evidence suggesting that the clients reciprocated these relationship investments and the bank anticipated the reciprocity by clients.
Originality/value
This paper is the first to empirically show a significant monetary investment in a relationship-marketing context, with the intention of building stronger relationship with clients and earning future revenues through reciprocity.
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Chengli Zheng, Jiayu Jin and Liyan Han
This paper originally proposed the fuzzy option pricing method for green bonds. Based on the requirements of arbitrage equilibrium, this paper draws on Merton's corporate bond…
Abstract
Purpose
This paper originally proposed the fuzzy option pricing method for green bonds. Based on the requirements of arbitrage equilibrium, this paper draws on Merton's corporate bond option pricing model.
Design/methodology/approach
Describing the asset value behavior of green bond issuing enterprises through diffusion-jump processes to reflect the uncertainty brought by carbon emission reduction policies and technologies, using approximation methods to get the analytical pricing formula and then, using a fuzzification technique of Choquet expectation under λ-additive fuzzy measures after considering fuzzy factors, the paper provides fuzzy intervals for the parity coupon rates of green bonds with different subjective levels for investors.
Findings
The paper proposes and argues the classical and fuzzy option pricing methods in turn for both corporate ordinary bonds and green bonds, considering carbon risk or climate risk. It implements the scenario analysis varying with industry emission standards and discusses the sensitiveness of the related key parameters of the option.
Practical implications
The fuzzy option pricing for the green bonds provides the scope of the variable equilibrium values, operational theoretical supports and some policy implications of carbon reduction and promoting green funding.
Originality/value
The logic of introducing the fuzziness of the option pricing for the green bonds lies with considering the existence of fuzzy information about the project supported by the green bond and the subjectivity of investors and it also responds to changes in technological uncertainty and policy uncertainty in the process of “carbon peaking and carbon neutrality.”
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Feng Jui Hsu and Yu-Cheng Chen
The purpose of this paper is to examine whether socially responsible firms behave differently from other firms in terms of financial risk using US-based firms from 1991 to 2012…
Abstract
Purpose
The purpose of this paper is to examine whether socially responsible firms behave differently from other firms in terms of financial risk using US-based firms from 1991 to 2012.
Design/methodology/approach
The authors used the KLD social performance rating scores as the measure of corporate social responsibility (CSR) performance and obtained an initial sample of 38,158 firm-year observations from 1991 to 2012. The authors obtained the monthly consensus earnings forecast for fiscal year one and the monthly dispersions for these earnings forecasts from I/B/E/S, and the bond spread from DataStream database. Specifically, the authors question whether firms that exhibit CSR obtain market approval to reduce financial risk, thereby providing investors and regulators with more reliable and transparent financial information, as opposed to firms that do not meet the same criteria.
Findings
The authors find that social responsible firms usually perform better in terms of their credit ratings and have lower credit risk, in terms of loan spreads when compared to corporate bond spreads, and in terms of distance to default. The results control for various measurements for CSR and time periods, consider various CSR dimensions and components, and use alternative proxies to improve the quality of financial risk estimates.
Originality/value
The findings demonstrate the importance of considering both positive and negative CSR performance. Positive CSR ratings are associated with reduced financial risk while negative CSR performance scores lead to increased financial distress. Investors respond to positive CSR ratings.
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This paper aims to investigate the informational content of earnings surprises and accounting information in credit default swap (CDS) markets.
Abstract
Purpose
This paper aims to investigate the informational content of earnings surprises and accounting information in credit default swap (CDS) markets.
Design/methodology/approach
This paper analyzes a sample of 444 US firms and 6,907 earnings announcements. By means of parametric and non-parametric event study analysis, the paper assesses the informational value and the timeliness in the assimilation of earnings surprises by CDS rates.
Findings
This paper shows that earnings surprises contain material information and that CDS rates are affected by the disclosure of obligors’ financial statements. There is also supporting evidence that positive and negative surprises induce asymmetric reactions on CDS rates, especially after accounting for the credit risk of the obligor and the liquidity of the CDS contract. Finally, and perhaps the most interesting conclusion of the study, there is evidence that earnings disclosed during unstable periods lack informational value, in opposition to normal periods.
Originality/value
As compared with similar studies, this paper presents three novel contributions. The first concerns the use of non-parametric analysis in parallel with parametric tests to achieve robust conclusions. The second novel contribution resides in assessing whether the liquidity of the CDS contracts affects the information value of earnings surprises or the timeliness at which the information is assimilated into CDS rates. Finally, this paper also contributes to improve our understanding on the relationship between the business cycle and the informativeness of accounting information.
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