Research

Working papers

“Credit rating under ambiguity”

Co-Authored with Christian Hilpert, Jan Pape, and Alexander Szimayer
September 26, 2023 - Available at SSRN

Abstract:
We consider the impact of ambiguity on credit rating with feedback effects. A firm signals its quality by surviving phases of apparent distress. A rating agency, whose analysts hold multiple priors about the firm’s true asset value, for example, due to the difficulties in the valuation of intangible assets, aims for unbiased ratings. Contrasting classical min-max results, the rating agency selects a dynamically adjusted weighted average of multiple beliefs that overweight uninformative beliefs. The ambiguity impact on ratings hinges on whether the disagreement between the analysts has a common direction: When analysts jointly perceive the firm’s value of intangibles as overstated, feedback effects make the firm delay default to benefit from the rating agency’s learning.

“Bankruptcy Prediction with Incomplete Accounting Information”

Co-Authored with Christian Hilpert and Alexander Szimayer
November 22, 2022 - Available at SSRN

Abstract:
How does a creditor’s learning from a firm’s strategic actions affect bankruptcy prediction, debt values, and optimal capital structure? We investigate a Leland (1994) setting augmented by asymmetric information on the firm’s asset value. Observing the firm’s survival of apparently distressed periods, the creditor excludes asset value estimates that are too low to be consistent with the observed survival. We show that the expected bankruptcy threshold decreases as result of the learning. While expected asset and debt values decrease upon reaching new all-time-low asset values, they are persistently higher once the observed asset value recovers to a given level, but the creditor remembers the all-time low. In terms of selecting the capital structure, high quality firms can separate and signal their quality by over-leveraging if the information asymmetry is high enough. Moderate information asymmetry implies a pooling equilibrium.

“No News is Good News! Media Coverage and Corporate Takeover Characteristics”

Co-Authored with Narmin Nahidi
August 24, 2022 - Available at SSRN

Abstract:
The purpose of this study is to empirically examine the relation between a target firm’s media coverage (measured by degree of media coverage, positive and negative media coverage) and various takeover characteristics. We find that media coverage is negatively associated with the takeover premium. This holds for both positive and negative media coverage. Thus, no news is good news in terms of achieving a higher takeover premium. The method of payment shows an ambiguous relation with media coverage. All three measures of media coverage have a positive effect on the time of completion.

“The Information Value of Distress”

Co-Authored with Christian Hilpert and Alexander Szimayer
Management Science, Volume 70, Issue 1, January 2024, Pages 78–97
Available at INFORMS - Available at SSRN

Abstract:
We propose a novel framework for investigating learning dynamics on the debt market. Observing a firm’s survival of apparently distressed periods, the market eliminates asset value estimates that are too low to be consistent with the observed survival. Therefore, the firm’s cost of debt becomes lower for given financials. Relative to a perfect information setting, the firm strategically delays default to benefit from a subsequently lower cost of debt. Default comes as a surprise, as it reveals the currently worst possible asset value as correct. The surprise effect is mitigated for debt with higher performance sensitivity and for lower ex-ante information asymmetry.

“Measuring the value of intangibles”

Co-Authored with Saskia Clausen
Journal of Corporate Finance, Volume 40, October 2016, Pages 110-127
Available at ScienceDirect

Abstract:
We propose a new earnings-based measure for the value of intangibles. To validate this measure, we compare it to commonly used proxies for intangible intensity, such as R&D expenses. While R&D expenses measure the investment in new intangibles, our new measure gauges the productivity of already existing intangibles. We show that our new measure serves as an additional factor to explain firm value, measured either as market capitalization or acquisition prices in M&A transactions. Moreover, it captures the increasing importance of intangibles over time. Finally, we present a specific application of our intangible-intensity measure in the context of capital structure. We find that more intangible-intensive firms have lower leverage.

“Credit Rating Dynamics and Competition”

Journal of Banking and Finance, Volume 49, December 2014, Pages 100-112
Available at ScienceDirect

Abstract:
I analyze the market for credit ratings with competition between more than two rating agencies. How can honest rating behavior be achieved, and under which conditions can a new honest rating agency successfully invade a market with inflating incumbents? My model predicts cyclic dynamics if sophisticated investors have a high impact on agencies’ reputation. In contrast, if trusting investors have the main impact, then the dynamics exhibits a saddle point rather than cycles. In this case, regulatory support for honest rating agencies is only needed for a limited time, but the effect is sustainable in the long run.

“Asset Liquidity, Corporate Investment, and Endogenous Financing Costs”

Co-Authored with Christian Riis Flor
Journal of Banking and Finance, Volume 37, Issue 2, February 2013, Pages 474-489
Available at ScienceDirect

Abstract:
We analyze how the liquidity of real and financial assets affects corporate investment. The trade-off between liquidation costs and underinvestment costs implies that low-liquidity firms exhibit negative investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities. If real assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Our findings demonstrate that asset liquidity is an important determinant of corporate investment.

“Financing Constraints, Cash-Flow Risk, and Corporate Investment”

Co-Authored with Marc Viswanatha
Journal of Corporate Finance, Volume 17, Issue 5, December 2011, Pages 1496-1509
Available at ScienceDirect

Abstract:
Using an analytically tractable two-period model of a financially constrained firm, we derive an investment threshold that is U-shaped in cash holdings. We show analytically the relevant trade-offs leading to the U-shape: the firm balances financing costs for present and future investment, respectively. Our main argument is that financing costs today are more important than the risk of future financing costs. The empirically testable implications are that low-cash firms facing financing costs today are more reluctant to invest if they have less cash, or if their future cash flows are more risky. On the other hand, cash-rich firms facing no financing costs today invest in less favorable projects (i.e., forgo their real option to wait) if they have less cash, or if their future cash flows are more risky. The magnitude of these effects is amplified by the degree of market frictions that the firms are facing.

“Investment Timing When External Financing Is Costly”

Co-Authored with Marliese Uhrig-Homburg
Journal of Business Finance & Accounting, Volume 37, Issue 7-8, September/October 2010, Pages 929-949
Available at Wiley InterScience

Abstract:
This paper analyzes the investment timing of firms facing two dimensions of financing constraints: Liquidity constraints and capital market frictions inducing financing costs. We show that liquidity constraints are not sufficient to explain voluntary investment delay. However, when additionally considering financing costs, we can explain both voluntary delay and acceleration of investment. More precisely, we find that investment thresholds are U-shaped in liquid funds. For high-liquidity firms, investment thresholds are decreasing (i.e. accelerated investment takes place) in either dimension of financing constraint. In contrast, investment thresholds are increasing (i.e. investment is further delayed) in either form of financing constraint for low-liquidity firms. For intermediate levels of liquidity, investment thresholds are U-shaped in market frictions.

“Investment Timing, Liquidity, and Agency Costs of Debt”

Co-Authored with Marliese Uhrig-Homburg
Journal of Corporate Finance, Volume 16, Issue 2, April 2010, Pages 243-258
Available at ScienceDirect

Abstract:
This paper examines the effect of debt and liquidity on corporate investment in a continuous-time framework. We show that stockholder-bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt.

“Liquide Mittel und Investitionsentscheidungen - Ein optionstheoretischer Ansatz”
(“Liquid Funds and Investment Decisions - An Option Theory Approach”)

Beiträge zur betriebswirtschaftlichen Forschung 118, Gabler Verlag, Wiesbaden 2008
Available at Springer Gabler