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

Ambiguity, Earnings Surprises, and Asset Prices

Date: 2 Dec, 15

Ambiguity impedes diversification. Hence, cash flow news will affect aggregate returns when ambiguity of cash flow news is high. We provide supporting evidence using data of this. In our sample, we find strong empirical evidence that the firm-level return-earnings relation is monotonically increasing with the degree of firm-level ambiguity. Increase in market-level ambiguity significantly decreases the individual earnings response coefficient of high firm-level ambiguity firms and increases the individual earnings response coefficient of low firm-level ambiguity firms. When we sort stocks based on the firm-level ambiguity and aggregate them into portfolios, we find that the aggregate earnings response coefficient increases with the degree of firm-level ambiguity. The market-wide ambiguity significantly decreases the earnings response coefficient of the portfolio of low ambiguity firms. Once the ambiguity measures are included into the regression, we get negative and statistically significant earnings response coefficient for low ambiguity firms during the period of high market ambiguity.

Ning Gao, University of Manchester

To be announced

Date: 9 Dec, 15

Barbara Casu Lukac, Cass Business School

Bank Fragility and Contagion: Evidence from the bank CDS market

Date: 20 Jan, 16

Understanding how contagion works among financial institutions is a top priority for regulators and policy makers who aim to foster financial stability and to prevent financial crises. Using bank credit default swap (CDS) data, we provide a framework for the evaluation of contagion among banks in different countries and regions during a period of prolonged financial distress. We measure contagion in terms of return spillovers, following a Generalized VAR (GVAR) approach. In addition, we propose an innovative framework to distinguish between two types of contagion: systematic (linked to global factors), and idiosyncratic (linked to bank specific factors). We find evidence of both types of contagion, although the spillover dynamics changed over time. Our measure of systematic contagion is always greater than the idiosyncratic component, thus highlighting the importance of common factors in the propagation of risk spillovers. This indicates that international linkages among banking markets are central to the transmission of shocks.

Aneel Keswani, Cass Business School

Lazy investors, lazy fund managers, lousy performance: national culture and mutual fund management

Date: 27 Jan, 16

In this paper, we use a comprehensive dataset of equity mutual funds covering 30 countries to study the effects of national culture on mutual fund management. Culture contributes to differences in the flow-performance and flow-fee sensitivities of fund investors across countries. The effect of culture on flow-performance sensitivity has an economically significant impact on fund manager risk-taking and fund performance. Where culture raises the sensitivity of flows to fees, the level of fees charged is significantly lower. We also show that if culture boosts the performance of active management then this significantly increases the fraction of assets that are actively managed in the fund industry. Our findings are the first large-scale evidence that culture affects some of the most important aspects of mutual fund management.