Research Seminars 2015-2016

Venue for seminars: ICMA Centre, Room G03/04
Seminar Time: 1:00pm to 2:00pm

Shantanu Banerjee, Lancaster University

In the path of the storm: Does financial distress cause non-financial firms to risk-shift?

Date: 14 Oct, 15

We use a new proxy capturing manager-initiated changes to firm risk together with a unique identification strategy to study whether financial distress causes non-financial firms to risk-shift. We derive the proxy from an application of modern portfolio theory to operating-segment data and use hurricanes as distress risk instrument. Distress risk shocks lead moderately distressed firms to risk-shift. Risk-shifting is facilitated by closing low-risk segments and raises failure rates. Further evidence suggests that creditor control keeps highly distressed firms from risk-shifting. Despite its importance, we are first to empirically show that agency problems of debt cause non-financial firms to risk-shift.

John Thanassoulis, University of Warwick

Real economy effects of short-term equity ownership

Date: 4 Nov, 15

Investor time horizon varies by company, industry and economic system. In this paper we explore the importance of this variation by studying the impact of shareholder time horizon on the investment decisions of the firms they own, and externalities on the wider market. We demonstrate theoretically that short-term shareholders cause Boards to care about the path of the stock price, rationalising firms’ pursuit of investments for signalling reasons at the expense of long-term value. We demonstrate that short-termism has spillover effects, leading to higher costs of equity capital; bubbles in the price of input assets; and predictable excess returns. We build testable cross-country hypotheses and evaluate these using existing evidence coupled with a new dataset on owner duration of U.S. and Germanic firms.

Hongda Zhong, London School of Economics

A dynamic model of optimal creditor dispersion

Date: 11 Nov, 15
Borrowing from multiple creditors exposes firms to liquidation risks due to coordination problems among creditors, but it also improves the firms’ repayment incentives, thereby increasing pledgeability. Based on this trade-off, I develop a dynamic debt rollover model to analyse the evolution of creditor dispersion. Consistent with empirical findings, firms optimally increase the number of creditors when they perform badly, while in the cross-section, high growth firms can support more dispersed debt. Policies that promote ex-post efficient coordination lower firms’ ex-ante pledgeability and therefore exacerbate rollover risk. Finally, frequent debt rollover diminishes the additional pledgeability from having multiple creditors.

Sohnke Bartram, University of Warwick

Why does idiosyncratic risk have a systematic component?

Date: 18 Nov, 15

From 1962 through 2011, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the strength of the relation, the relation is strong for the most liquid stocks. Firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. Specifically, the relation is weaker for firms with more growth options. This evidence is consistent with the view that growth options provide a hedge against macroeconomic uncertainty.

Sanjay Banerji, Nottingham University Business School

Collusion, Incentives and Reputation: The role of Experts in Corporate Governance

Date: 25 Nov, 15

We demonstrate that CEOs with higher agency costs and experts (audit firms etc.) with imprecise signals have strong tendencies to manipulate information jointly. To deter their collusion, firms must design both incentive contracting and elicit the expert’s reputation for honesty using optimal and probabilistic contract renewals. These two mechanisms work only with abler experts and CEOs with lower agency costs. The expert’s skills to obtain precise information and her reputation are positively correlated. Reputable experts enjoy larger life-time earnings, have longer- term relationships with clients, contribute to corporate governance by facilitating their information disclosures truthfully and transparently at lower costs.

Roman Kozhan, University of Warwick

To be announced

Date: 2 Dec, 15

Ning Gao, University of Manchester

To be announced

Date: 9 Dec, 15