Cahiers de recherche

  • Titre
  • Auteur(s)

  • FIN-2014-1033
  • Debt Structure Dispersion, Creditor Conflicts, and Covenants in Corporate Loans
  • Y. LOU, C. OTTO

Départements : Comptabilité et Contrôle de Gestion, GREGHEC (CNRS), Finance

How do conflicts between creditors affect debt contract terms? We study this question by examining the effect of dispersion in firms' existing debt structures on the use of covenants in new corporate loans. We find that loans include more covenants when firms' existing debt is more dispersed. This effect is strongest for firms with high default risk and opaque accounting. Our findings suggest that covenants are used to address not only creditor-shareholder conflicts but also conflicts between different creditors. Further, our results indicate a dynamic component missing from static debt structure models: Dispersion today entails constraints when issuing future debt

Mots clés : Debt Structure Dispersion, Creditor Conflicts, Loan Covenants

Départements : Economie et Sciences de la décision, GREGHEC (CNRS), Finance

Using inter-state banking deregulation in the U.S. as an exogenous experiment, we find that a 1% increase in banking integration between U.S. states caused a 0.164-0.184% increase in the foreign exports/domestic shipments ratio for U.S. state level exports in the years 1992-1996. We can ascribe these effects to the integration by banks with foreign assets: a 1% increase in banking integration through such banks caused the exports/domestic shipments ratio to increase by 0.22-0.41% while the expansion of banks with purely domestic assets appears to have no impact. Given our empirical specification, this increase in openness can be attributed to an increase in capital to cover variable and fixed export costs relative to domestic shipping costs and a higher provision of trade finance services. Serving new destinations (the extensive margin defined at the state-country level) accounts for 22% to 28% of the banking integration effect that we observe.

Mots clés : Exports, financial depth, inter-state banking deregulation

Départements : Economie et Sciences de la décision, GREGHEC (CNRS), Finance

We provide the first evidence that changes in risk-based capital requirements for banks affect the real economy through international trade. Using a natural experiment – mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012 – we investigate the impact of new risk-weights applied to commercial letters of credit (CLC) on that country’s exports to 174 countries. We estimate the resulting payment-term-cost elasticity of CLC-financed trade to be between -0.5 and -1 while the overall trade elasticity to be between -0.032 and -0.179. Calculations suggest that both CLC-related bank pricing and rationing channels are involved.

Mots clés : commercial letters of credit; international trade finance; exports; risk-weights; Basel II

Départements : Finance

Using securities lawsuits related to M&A as an industry shock, we examine whether litigation risk acts as an external governance mechanism by disciplining managers' investment decisions. In the two years following an M&A lawsuit (a lawsuit where plaintiffs allege that the firm hid poor performance related to a prior acquisition), we find that industry peers experience higher bidder announcement returns, choose more adequate methods of payment, and engage in fewer diversifying and smaller takeovers. Collectively, this evidence is consistent with post lawsuit deals being of higher quality. Furthermore, we find that peer firms respond to the increased litigation risk by reducing abnormally high investment expenditures. Finally, the reactions are stronger among firms with fewer anti-takeover provisions. Overall, our results show that M&A lawsuits can have an industry-wide deterrence effect on firms' suboptimal investment behavior.

Mots clés : Litigation Risk, Mergers, Investment Decisions, Corporate Governance

Départements : Finance, GREGHEC (CNRS)

Aggregate art price patterns mask a lot of underlying variation — both in the time series and in the cross-section. We argue that, to increase our understanding of the market for aesthetics, it is helpful to take a micro perspective on the formation of art prices, and acknowledge that each artwork gives rise to a market for trading in its private-value benefits. We discuss relevant recent literature, and illustrate the potential of this approach through a historical study of art price records between 1701 and 2014. Our newly constructed series also points to the importance of developments in the industrial organization of the art market for long-term price trends.

Mots clés : art market, auctions, art prices, records, private values

Départements : Finance, GREGHEC (CNRS)

Political activism positively affects firm innovation. Firms that support more politicians, politicians on Congressional committees with jurisdictional authority over the firms’ industries and politicians who join those committees innovate more. We employ instrumental variables estimation and a natural experiment to show a causal effect of political activism on innovation. The results are consistent with the hypothesis that political activism is valuable because it helps reduce policy uncertainty, which, in turn, fosters firm innovation. Also consistent with this hypothesis, we show that politically active firms successfully time future legislation and set their innovation strategies in expectation of future legislative changes.

Mots clés : political contributions, innovation, investment policy, policy uncertainty

Départements : Finance, GREGHEC (CNRS)

We study a dynamical model of interconnected firms which allows for certain market imperfections and frictions, restricted here to be myopic price forecasts and slow adjustment of production. Whereas the standard rational equilibrium is still formally a stationary solution of the dynamics, we show that this equilibrium becomes linearly unstable in a whole region of parameter space. When agents attempt to reach the optimal production target too quickly, coordination breaks down and the dynamics becomes chaotic. In the unstable, "turbulent", phase the aggregate volatility of the total output remains substantial even when the amplitude of idiosyncratic shocks goes to zero or when the size of the economy becomes large. In other words, crises become endogenous. This suggests an interesting resolution of the "small shocks, large business cycles" puzzle.

Mots clés : volatility of aggregate output, network theory, rational expectations, general equilibrium

Départements : Finance, GREGHEC (CNRS)

As most Exchange-Traded Funds (ETFs) engage in securities lending or are based on total return swaps, they expose their investors to counterparty risk. To mitigate the funds' exposure, their counterparties must pledge collateral. In this paper, we present a framework to study collateral risk and provide empirical estimates for the $40.9 billion collateral portfolios of 164 funds managed by a leading ETF issuer. Overall, our findings contradict the allegations made by international agencies about the high collateral risk of ETFs. Finally, we theoretically show how to construct an optimal collateral portfolio for an ETF

Mots clés : Asset management, passive investment, derivatives, optimal collateral portfolio, systemic risk

Départements : Finance, GREGHEC (CNRS)

This paper proposes an indirect inference (Gourieroux, Monfort and Renault, 1993; Smith, 1993) estimation method for a large class of dynamic equilibrium models. Our approach is based on the observation that the econometric structure of these systems naturally generates auxiliary equilibria that can serve as building blocks for estimation. We use this insight to develop an accurate estimator for the long-run risk model of Bansal and Yaron (2004). We demonstrate the accuracy of our method by Monte Carlo simulation and estimate the long-run risk model on U.S. data. We also illustrate the good performance of the methodology on an asset pricing model with investor learning

Mots clés : Hidden Markov model, long-run risk, learning, value at risk, indirect inference, particle filters

Départements : Finance

This paper uses reductions of import tariffs to examine how incumbents modify their investment decisions when the threat of entry by foreign rivals suddenly intensifies. We find that incumbents significantly reduce investment by 8.6% in response to higher entry threat following tariff reductions. Various tests indicate that this finding is robust and likely causal. Moreover, and in consistency with strategic investment models, we provide evidence suggesting that the reduction of investment is related to strategic motives to influence the competitive behavior of foreign rivals. Overall, the paper provides novel evidence on how strategic interactions in the product market influence firms' investment decisions

Mots clés : Corporate investment, Entry Threat, Tariff Reduction, Strategic Interactions