Liquidity provision for corporate bonds has become significantly more expensive after the 2008 crisis. Using index exclusions as a natural experiment during which uninformed index trackers request ...immediacy, we find that the cost of immediacy has more than doubled. In addition, the supply of immediacy has become more elastic with respect to its price. Consistent with a stringent regulatory environment incentivizing smaller dealer inventories, we also find that dealers revert deviations from their target inventory more quickly after the crisis. Finally, we investigate the pricing impact of information, changes in ownership structure, and differences between bank and nonbank dealers.
Does private equity (PE) contribute to financial fragility during economic crises? The proliferation of poorly structured transactions during booms may increase the vulnerability of the economy to ...downturns. During the 2008 crisis, PE-backed companies decreased investments less than did their peers and experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects are especially strong among financially constrained companies and those whose PE investors had more resources at the crisis onset. In a survey, PE firms report being active investors during the crisis and spending more time working with their portfolio companies.
This study proposes that CEO–CFO "language style matching"-a form of unconscious verbal mimicry based on function words-can provide insights into social interaction processes between CEOs and CFOs. ...We argue and empirically verify that high CEO–CFO language style matching reflects CFOs' strong attempts to ingratiate themselves with CEOs. Because ingratiation with superiors can lead to the superiors' positive evaluations of subordinates, CFOs who exhibit higher language style matching with CEOs will receive higher compensation and are more likely to become board members of the associated firms. In addition, the proposed relationships will be stronger when CEOs are more powerful. Yet, in the presence of high CEO–CFO language style matching, CFOs are less likely to voice different viewpoints and challenge CEOs in strategic decision processes. As a result, firms tend to undertake more mergers and acquisitions, and such mergers and acquisitions will be paid with a low percentage of cash (vs. stock) and realize lower announcement returns. Using a sample of over 2,000 U.S. firms from the period 2002–2013, we find empirical support for these predictions.
This paper examines the macroeconomic implications of sovereign risk in a model in which banks hold domestic government debt. News of a future sovereign default hampers financial intermediation. ...First, it tightens the funding constraints of banks, reducing their resources to finance firms (liquidity channel). Second, it generates a precautionary motive to deleverage (risk channel). I estimate the model using Italian data, finding that sovereign risk was recessionary and that the risk channel was sizable. I also use the model to measure the effects of subsidized long-term loans to banks. Precautionary motives at the height of the crisis imply that bank lending to firms responds little to these interventions.
The Strategic Underreporting of Bank Risk Begley, Taylor A.; Purnanandam, Amiyatosh; Zheng, Kuncheng
The Review of financial studies,
10/2017, Letnik:
30, Številka:
10
Journal Article
Recenzirano
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We show that banks significantly underreport the risk in their trading book when they have lower equity capital. Specifically, a decrease in a bank’s equity capital results in substantially more ...violations of its self-reported risk levels in the following quarter. Underreporting is especially frequent during the critical periods of high systemic risk and for banks with larger trading operations. We exploit a discontinuity in the expected benefit of underreporting present in Basel regulations to provide further support for a causal link between capitalsaving incentives and underreporting. Overall, we show that banks’ self-reported risk measures become least informative precisely when they matter the most.
Illiquidity in short-term credit markets during the financial crisis might have severely curtailed the supply of nonbank consumer credit. Using a new data set linking every car sold in the United ...States to the credit supplier involved in each transaction, we find that the collapse of the asset-backed commercial paper market reduced the financing capacity of such nonbank lenders as captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on nonbank lenders declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market. These results also imply that interventions aimed at arresting illiquidity in short-term credit markets might have helped contain the real effects of the crisis.
We use an asset pricing approach to compare the effects of the liquidity level and liquidity risk on expected U.S. corporate bond returns. Using signed transaction data, we estimate effective ...transaction costs for bond portfolios by a repeat-sales method. We find that the liquidity level and exposure to equity market liquidity risk affect expected bond returns. In contrast, exposure to corporate bond liquidity shocks carries an economically negligible risk premium. A simulation study shows that it is unlikely that our results are driven by measurement error in betas or multicollinearity. We present a simple theoretical model that explains these findings.
We study the effect of a bond’s place in its issuer’s maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers’ maturity ...structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices.
Abstract
We study how small and medium enterprise (SME) lenders react to information about their competitors’ contracting decisions. To isolate this learning from lenders’ common reactions to ...unobserved shocks to fundamentals, we exploit the staggered entry of lenders into an information-sharing platform. Upon entering, lenders adjust their contract terms toward what others offer. This reaction is mediated by the distribution of market shares: lenders with higher shares or that operate in concentrated markets react less. Thus, contract terms are shaped not only by borrower or lender fundamentals but also by the interaction between information availability and competition.
Abstract
We analyze a multiyear, multicountry entrepreneurship survey with more than one million observations to identify startups with low and high growth potential. We confirm the validity of these ...ex ante measures with ex post firm-level information on employment growth. We find that negative aggregate financial shocks reduce all startup types, but their effect is significantly stronger for startups with high growth potential, especially when GDP growth is low. Our results uncover a new composition of entry channel that significantly reduces employment growth and is potentially important for explaining slow recoveries after financial crises.
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