Research

Published Work

"The exclamation mark of Cain: Risk salience and mutual fund flows"

"Dividends from Unrealized Earnings and Default Risk"

Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the International Financial Reporting Standards (IFRS), we investigate whether and how dividend payouts based on unrealized revaluation earnings affect a firm’s default risk. Our results indicate that in the era of fair value accounting, whether the dividend payment originates from unrealized or realized earnings has a significant effect on a firm’s default risk above and beyond the effect of the extent of the payment. Specifically, controlling for various determinants of financial risk, including the amount of the dividends paid, we find that firms are four times more likely to subsequently require debt restructuring if they distribute dividends based on unrealized earnings. However, this enhanced risk seems to be mispriced by the market: cost of debt proxies are generally insignificantly different for these firms following payouts originating from unrealized earnings than for firms that never make such risky payouts.

"Chasing Their Tails: Inflow Momentum and Yield Chasing among Provident Fund Investors in Israel"

This paper examines the short-run relationship between provident fund yields and investment in provident funds. Using Panel VAR regressions, we find that there is short-term momentum in provident fund yields and flows and investors engage in short-term yield chasing. We also find positive effect of flows on short term yields. We reinforce these conclusions by dividing our sample to pre-crisis, crisis and post-crisis estimation and confirming our main results in the sub-periods. Additional evidence seems to suggest that investor yield chasing is affected by fund risk and management fees.

Working Papers

"Market Timing in Open Market Bond Repurchases"

Bond repurchases are widespread in the US and other markets but data limitations have thus far prevented market-timing analysis. Using unique Israeli daily data we show that firms time the market in their actual open market bond repurchases. Bond repurchases typically follow price decline and result in significantly positive abnormal returns in the following days. The market reaction is quicker within a pre-announced repurchase program, and it is stronger when the firm repurchases high-yield bonds or when the repurchase is preceded by positive net insider share purchases. The results lend support to the information motive for bond repurchases.

"Conditional Control: The Consequences of Expanding Creditors’ Right to Initiate Bankruptcy"

We study the effects of a court ruling granting creditors the ability to impose bankruptcy on borrowing companies whose liabilities exceed their assets even if they are current on their payments. We find that bond (stock) prices responded positively (negatively) to the court ruling. We also find that affected firms did not reduce their risk, but managed to increase their net worth through equity injections and aggressive accounting. As a result, the informativeness of the affected firms’ financial reports decreased. We conclude that the benefits from creditor empowerment may be mitigated by the borrowers’ incentives to present overly-optimistic financial reports.