European Financial Regulation Reforms and Bank Capital Structure
Job Market Paper.
Abstract: I study the relationship between three regulatory measures imposed in Europe after the 2008 crisis and the capital structure decisions of regulated banks. I analyse the increase of the level of coverage of Deposit Insurance Schemes, the introduction of the Asset Transfer resolution tool, and the introduction of the bail-in tool. For that, I develop a continuous time model with asset uncertainty where a bank selects the optimal capital structure while facing a regulator with a real option to impose a resolution measure. This model relies upon a set of parameters that can be estimated with empirical data and can easily accommodate additional extensions. My results show that the introduction of these regulatory measures incentivises banks to decrease the ratio of equity over assets and to increase the ratio of deposits over total debt. Lastly, introducing the bail-in tool generates a recapitalisation option, that is, banks unable to rebalance their capital structure may have an incentive to increase ex-ante the weight of bail-inable debt over total debt if they expect that a potential bail-in will result in a value-enhancing recapitalisation.
Presentations: International Finance and Banking Society Conference 2021, Univ. Adolfo Ibanez Research Seminar 2020, Univ. Minho Workshop 2019, SBS FAME Seminar Nov-2019, International Finance and Banking Society Conference 2018, Univ. Porto MFin Seminar 2018.
The Leicester-Pearson Phenomenon
Slides
Abstract: Managers are more likely to be fired when firms perform poorly. However, real-world examples suggest that some firms may have an incentive to replace the manager when the firm starts performing exceptionally well. I propose an explanation based on the differences of managerial skillsets using a continuous time model where a firm faces cash-flow uncertainty and managerial moral hazard. When the firm performance is bad, the shareholder is less likely to fire the incumbent manager if the incumbent's skillset is predominantly independent from cash-flows. In this case, the incumbent's skillset works as a safe asset that contributes with a constant input to cash-flow growth. However, if the firm performance improves, the shareholder values a skillset that can vary with the levels of cash-flows. In this case, the incumbent is likely to be replaced if the outsider's skillset generates a stronger variable contribution to cash-flow growth. The likelihood of dismissal increases when the agents' discount rate decreases, the incumbent's risk aversion and effort costs increase, the outsider's risk aversion and costs of effort decrease. Cash-flow uncertainty has a non-monotonic effect over the dismissal decision.
Presentations: Portuguese Financial Network 2021.
Investing in Patent Litigations under the Hatch-Waxman Integrity Act
Joint with Paulo Pereira.
Abstract: The Hatch-Waxman Integrity Act is designed to reduce abusive short-selling from investors that petition for an inter partes review over the patents of a firm while shorting its securities. However, this legislation does not distinguish between uninformed speculators and informed arbitrageurs. While the former profits from price swings caused by the revelation of an inter partes review, the latter profits from the revelation of the true quality of a patent. % which promotes market efficiency. Our model studies the effects of introducing this Act over the financial position of an informed arbitrageur that initiates an inter partes review and hedges the litigation process. We show that the arbitrageur has to short a lower number of shares in order to hedge the expected value of requesting the inter partes review. Moreover, for patents in highly uncertain industries, the required short-selling position is even lower because high volatility increases the time value of the patent and the extrinsic value of the litigation option.
Joint with João Soares.
This paper tests the efficiency of macroeconomic forecasts and contributes to the existing literature by using a rolling-event approach. We construct a monthly economic surprises index, aggregating several macroeconomic news surprises for the nine largest economic areas (G9), with which we further analyze the impact on stock, bonds and foreign exchange markets using monthly data. Consistently with the slow adjustment of analysts to news, our results suggest the existence of persistent unexpected economic surprises, presenting a strong autocorrelation for the aggregated G9 economic areas and, individually for USA, Eurozone and Japan. Business cycle decomposition shows that this is more intense in recession phases. Moreover, we provide evidence of a strong relationship between economic news surprises and the returns of bond and stock markets. At last, we provide a comparative study of investment decisions and asset allocation rules, concluding that past economic surprises can be used to predict future returns, providing stronger hit-ratios and higher returns than buy-and-hold and auto-regressive based strategies.
Presentations: Portuguese Financial Network 2012
Finance Research Letters, Volume 14, 150-159, 2015.
Joint with Paulo Pereira.
Abstract: We derive an optimal compensation scheme that aims to eliminate inadequate misaligned managerial actions ensuring optimal investment decisions. With this model, the owners of the option to invest do not need to follow the future evolution of project value drivers in order to guarantee optimal behavior. The optimal contract scheme is a correct balance between effort costs, fixed wages, and a value-sharing bonus. As shown, even small deviations from the optimal compensation scheme may lead to highly sub-optimal decisions. The model is extended to accommodate impatience behavior by the managers or the shareholders.
Presentations: Real Options International Conference 2011
