Publications
Publications
Abstract:
Bond portfolio managers constantly worry about the liquidity of their portfolio. Consider a bond portfolio manager that holds bonds of a particular firm that has numerous maturities outstanding. Assume that some bonds of the issuing firm mature. Do the firm’s remaining bonds become more liquid or less liquid? We analyze the impact of the maturity of a firm’s bonds upon the liquidity of the firm’s remaining bonds where a reduction in the number of bonds outstanding suggests a potential reduction in liquidity. Alternatively, the leverage reduction due to the reduction in number of bonds outstanding may improve the credit quality of the firm and result in greater liquidity. Our results strongly suggest the former where the strength of reduction depends on the ratio of the dollar amount matured to total debt. The results have important implications for how to hedge the portfolio against interest changes.
Impact Factor: 6.36
Abstract:
We construct a balance sheet network model to study the interconnectedness of a banking system. A simulation analysis of the buffer effect of contingent convertible (CoCo) debt in controlling contagion in a theoretical banking network model is followed by calibrating the model using 13F filings. We find that CoCo debt conversion significantly mitigates systemic risk, with a dual-trigger CoCo debt design being more effective in protecting the surviving banks. A two-tranche CoCo debt design combines the benefits of single and dual-trigger CoCo debt. The trade-offs in different designs of CoCo triggers can be evaluated in a network simulation model, as developed in this work.
Abstract:
Using a sample of 814 transcripts from 2011 to 2018, we examine information within merger and acquisition conference calls. Textual analysis reveals significant differences between the content of M&A call transcripts and both contemporaneous corporate press releases and prior earnings conference calls. We find participation of target executive types in M&A calls occurs more frequently in diversifying acquisitions and is related to payment choice consistent with promoting managerial sector-specific skills and incentive alignment, respectively. Retention of participating target executives is associated with a negative market reaction. We also identify a negative relation between textual sentiment and market reaction consistent with a response to higher levels of information asymmetry. Greater quantitative information, however, is positively related to the market reaction of M&A calls. We develop targeted M&A motive dictionaries to identify financial and strategic content within call transcripts. Consistent with prior literature on merger motivation, deals with more finance (strategy)-oriented words have a higher (lower) market reaction. Overall, our results show that deal-related textual analysis explains a highly significant and economically important component of gains/losses to acquirers.
Abstract:
Using novel hand-collected data of managerial annual incentive plans (AIP) goals, we characterize the presence of sustainability compensation targets. We show that sustainability targets are often quantified with corresponding overall weight in the incentive plan instead of rarely observed sustainability modifiers. Examining Fortune 250 firms, we find that such sustainability goals are uncommon and available in less than 8% of the sample. Moreover, most such firms are in the oil & gas industry. Turning exclusively to the latter, we show that sustainability goals are only effective in reducing CO2 emissions, environmental penalties, and toxicity emissions for past polluters. A similar effect is present in green innovation. Our results suggest that sustainability compensation goals are valuable if implemented in firms with high past pollution levels, exclusively, consistent with optimal contracting. Since sustainability goals are associated with slower sales growth and lower profitability, therefore boards need judiciously apply such contracts. Using firm inclusion in the Board Accountability Project and state adoption of director duties statutes as well as industry sustainability compensation practices as instruments for adopting sustainability targets, we confirm that our results are causal.
Abstract:
I provide a new angle on the optimal call policy for corporate callable bonds by evaluating the proportion called in call exercises. My data suggests that firms on average call only 66% of the amount initially offered when they call their bonds with fixed-price call provisions, and 69% when they call their bonds with make-whole call provisions. I examine how the proportion called in a call exercise is correlated with bond and firm characteristics. I find that the proportion called in a call exercise is positively correlated with the call premium for fixed-price call exercises and the cash holdings of the issuing firm for both fixed-price and make-whole call exercises. When a bond is called to be refinanced, it is called in a higher proportion, regardless of the type of the call provision. In addition, the proportion called increases with the number of bondholder protective covenants for make-whole call provisions, but not fixed-price call provisions. Last, I show that for make-whole call provisions, the impact of refinancing the bond on proportion called in a call exercise is higher for speculative-grade bonds as compared to investment-grade bonds.