A Model of Financial Market Liquidity Based on Intermediary Capital


Journal of the European Economic Association

avril-mai 2010, vol. 8, n°2-3, pp.456-466

Départements : Finance, GREGHEC (CNRS)

Acquisition Values and Optimal Financial (In)Flexibility

U. HEGE, C. Hennessy

Review of Financial Studies

juillet 2010, vol. 23, n°7, pp.2865-2899

Départements : Finance

This article analyzes optimal financial contracts for an incumbent and potential entrant accounting for prospective asset mergers. Exercising a first-mover advantage, the incumbent increases his share of surplus by issuing public debt that appreciates in the event of merger. Incumbent debt reduces the equilibrium value of entrant assets and thus reduces the return to (likelihood of) entry through two channels: venture capitalists recover less in default and ownership rights provide weaker managerial incentives. High incumbent leverage has a countervailing cost, since the resulting debt overhang prevents ex post efficient mergers if merger surplus is low. Event risk covenants limiting counterparty debt are optimal for the incumbent, further limiting the entrant's share of merger surplus. A poison-put covenant is also optimal for the incumbent, allowing him to extract the same surplus with lower debt face value.

Auctioned IPOs: The U.S. Evidence

F. Degeorge, F. DERRIEN, K. Womack

Journal of Financial Economics

novembre 2010, vol. 98, n°2, pp.177-194

Départements : Finance, GREGHEC (CNRS)

Mots clés : Initial public offerings, Investment banking, Auctions

accepté le 29 juillet 2009Between 1999 and 2007, WR Hambrecht completed 19 initial public offerings (IPOs) in the US using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is at most as prevalent in auctions as in bookbuilt deals. But, unlike in bookbuilding, investors in auctions do not flip their shares more in 'hot' deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher ten-day underpricing. Our results therefore suggest that auctioned IPOs can be an effective alternative to traditional bookbuilding.Keywords: Initial public offerings; Investment banking; Auctions

Capital Structure Decisions: Evidence From Deregulated Industries


Journal of Financial Economics

février 2010, vol. 95, pp.249-274

Départements : Finance, GREGHEC (CNRS)

Corporate Political Contributions and Stock Returns

M. Cooper, H. Gulen, A. V. OVTCHINNIKOV

The Journal of Finance

avril 2010, vol. 65, pp.687-724

Départements : Finance, GREGHEC (CNRS)

pas sous affiliation HEC

Diversification and Value-at-Risk


Journal of Banking and Finance

janvier 2010, vol. 34, n°1, pp.55-66

Départements : Finance, GREGHEC (CNRS)

Mots clés : Value-at-Risk; Diversification, Dynamic conditional correlation, Copulas

A pervasive and puzzling feature of banks’ Value-at-Risk (VaR) is its abnormally high level, which leads to excessive regulatory capital. A possible explanation for the tendency of commercial banks to overstate their VaR is that they incompletely account for the diversification effect among broad risk categories (e.g., equity, interest rate, commodity, credit spread, and foreign exchange). By underestimating the diversification effect, bank’s proprietary VaR models produce overly prudent market risk assessments. In this paper, we examine empirically the validity of this hypothesis using actual VaR data from major US commercial banks. In contrast to the VaR diversification hypothesis, we find that US banks show no sign of systematic underestimation of the diversification effect. In particular, diversification effects used by banks is very close to (and quite often larger than) our empirical diversification estimates. A direct implication of this finding is that individual VaRs for each broad risk category, just like aggregate VaRs, are biased risk assessments

Equilibrium Asset Pricing and Portfolio Choice Under Asymmetric Information


Review of Financial Studies

avril 2010, vol. 23, n°4, pp.1503-1543

Départements : Finance

Mots clés : Asset Pricing; Trading volume; Bond Interest Rates - Portfolio Choice; Investment Decisions - Financial Markets - Information and Market Efficiency; Event Studies; Insider Trading

We analyze theoretically and empirically the implications of information asymmetry for equilibrium asset pricing and portfolio choice. In our partially revealing dynamic rational expectations equilibrium, portfolio separation fails, and indexing is not optimal. We show how uninformed investors should structure their portfolios, using the information contained in prices to cope with winner’s curse problems. We implement empirically this pricecontingentportfolio strategy. Consistent with our theory, the strategy outperforms economically and statistically the index. While momentum can arise in the model, in the data, the momentum strategy does not outperform the price-contingent strategy, as predicted by the theory

Imperfect Competition in Financial Markets: ISLAND versus NASDAQ


Management Science

décembre 2010, vol. 56, n°12, pp.2237-2250

Départements : Finance

Mots clés : competition in financial markets; liquidity supply; trading mechanisms; different tick sizes

The competition between Island and Nasdaq at the beginning of the century offers a natural laboratory to study competition between and within trading platforms and its consequences for liquidity supply. Our empirical strategy takes advantage of the difference between the pricing grids used on Island and Nasdaq, as well as of the decline in the Nasdaq tick. Using the finer grid prevailing on their market, Island limit order traders undercut Nasdaq quotes, much more than they undercut one another. The drop in the Nasdaq tick sizetriggered a drop in Island spreads, despite the Island tick already being very thin before Nasdaq decimalization. We also estimate a structural model of liquidity supply and find that Island limit order traders earned rents before Nasdaq decimalization. Our results suggest that perfect competition cannot be taken for granted, even on transparent open limit order books with a very thin pricing grid

Large Risks, Limited Liability and Dynamic Moral Hazard



janvier 2010, vol. 78, n°1, pp.73-118

Départements : Finance

Mots clés : Principal–agent model, limited liability, continuous time, Poisson risk, downsizing, investment, firm size dynamics

We study a continuous-time principal–agent model in which a risk-neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses. Firm size can be decreased at no cost or increased subject to adjustment costs. In the optimal contract, investment takes place only if a long enough period of time elapses with no losses occurring. Then, if good performance continues, the agent is paid. As soon as a loss occurs, payments to the agent are suspended, and so is investment if further losses occur. Accumulated bad performance leads to downsizing. We derive explicit formulae for the dynamics of firm size and its asymptotic growth rate, and we provide conditions under which firm size eventually goes to zero or grows without bounds

Leverage choice and credit spread when managers risk shift

A. LAZRAK, M. Carlson

The Journal of Finance

décembre 2010, vol. 65, n°6, pp.2323-2362

Départements : Finance

We model the debt and asset risk choice of a manager with performance-insensitive pay (cash) and performance-sensitive pay (stock) to theoretically link compensation structure, leverage, and credit spreads. The model predicts that optimal leverage trades off the tax benefit of debt against the utility cost of ex-post asset substitution and that credit spreads are increasing in the ratio of cash-to-stock. Using a large cross-section of U.S.-based corporate credit default swaps (CDS) covering 2001 to 2006, we find a positive association between cash-to-stock and CDS rates, and between cash-to-stock and leverage ratios.