scholarly journals Cheap Talk and Strategic Rounding in LIBOR Submissions

2019 ◽  
Vol 33 (6) ◽  
pp. 2585-2621 ◽  
Author(s):  
Ángel Hernando-Veciana ◽  
Michael Tröge
Keyword(s):  
Opportunity Cost ◽  
Web Site ◽  
Financial Stress ◽  
Cheap Talk ◽  
Short Term ◽  
Market Conditions ◽  
Borrowing Costs ◽  
Oxford University ◽  
Borrowing Cost ◽  
Published Paper

Abstract Interbanking rates were, until recently, based on judgmental estimates of borrowing costs. We interpret this as a cheap-talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties. Under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost, but, in times of financial stress, only “coarse” equilibria survive. We take this prediction to the data and show that banks round more frequently if the risk of the bank increases. Rounding is also more frequent for the more liquid short-term rates and certain benchmark maturities. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Aggregation, Capital Heterogeneity, and the Investment CAPM

2019 ◽  
Vol 33 (6) ◽  
pp. 2728-2771 ◽  
Author(s):  
Andrei S Gonçalves ◽  
Chen Xue ◽  
Lu Zhang
Keyword(s):  
Stock Returns ◽  
Web Site ◽  
Physical Capital ◽  
Working Capital ◽  
Short Term ◽  
Firm Level ◽  
Oxford University ◽  
Detailed Treatment ◽  
Published Paper

Abstract A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model simultaneously fits the value, momentum, investment, and profitability premiums and partially explains positive stock-fundamental return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, and the countercyclical and long-term dynamics of the value and investment premiums. However, the model falls short in explaining momentum crashes. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online..

Dividend Payouts and Rollover Crises

2019 ◽  
Vol 33 (9) ◽  
pp. 4139-4185 ◽  
Author(s):  
Ragnar E Juelsrud ◽  
Plamen T Nenov
Keyword(s):  
Web Site ◽  
Financial Stability ◽  
Unique Equilibrium ◽  
Short Term ◽  
Oxford University ◽  
Optimal Dividend ◽  
Informational Externality ◽  
Published Paper ◽  
Oxford University Press

Abstract We study dividend payouts when banks face coordination-based rollover crises. Banks in the model can use dividends to both risk shift and signal their available liquidity to short-term lenders, thus, influencing the lenders’ actions. In the unique equilibrium both channels induce banks to pay higher dividends than in the absence of a rollover crisis. In our model banks exert an informational externality on other banks via the inferences and actions of lenders. Optimal dividend regulation that corrects this externality and promote financial stability includes a binding cap on dividends. We also discuss testable implications of our theory. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

scholarly journals Impediments to Financial Trade: Theory and Applications

2019 ◽  
Vol 33 (6) ◽  
pp. 2697-2727 ◽  
Author(s):  
Nicolae Gârleanu ◽  
Stavros Panageas ◽  
Jianfeng Yu
Keyword(s):  
Performance Evaluation ◽  
Web Site ◽  
Theoretical Basis ◽  
Style Analysis ◽  
Trade Theory ◽  
Noise Traders ◽  
Oxford University ◽  
Asset Class ◽  
General Preferences ◽  
Published Paper

Abstract We propose a tractable model of an informationally inefficient market featuring nonrevealing prices, general preferences and payoff distributions, but not noise traders. We show the equivalence between our model and a substantially simpler one in which investors face distortionary investment taxes depending on both their identity and the asset class. This equivalence allows us to account for such phenomena as underdiversification. We further employ the model to assess approaches to performance evaluation and find that it provides a theoretical basis for some intuitive practices, such as style analysis, that have been adopted by finance professionals. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Destructive Creation at Work: How Financial Distress Spurs Entrepreneurship

2019 ◽  
Vol 33 (9) ◽  
pp. 4061-4101 ◽  
Author(s):  
Tania Babina
Keyword(s):  
Economic Activity ◽  
Financial Distress ◽  
Web Site ◽  
High Tech ◽  
High Wage ◽  
New Firms ◽  
Oxford University ◽  
Service Sectors ◽  
The Impact ◽  
Published Paper

Abstract Using U.S. Census firm-worker data, I document that firms’ financial distress has an economically important effect on employee departures to entrepreneurship. The impact is amplified in the high-tech and service sectors, where employees are key assets. In states with enforceable noncompete contracts, the effect is mitigated. Compared to typical entrepreneurs, distress-driven entrepreneurs are high-wage workers who found better firms, as measured by jobs, pay, and survival. Startup jobs compensate for 33% of job losses at the constrained incumbents. Overall, the financial inability of incumbent firms to pursue productive opportunities increases the reallocation of economic activity into new firms. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel

2019 ◽  
Vol 32 (10) ◽  
pp. 3884-3919 ◽  
Author(s):  
Gianpaolo Parise ◽  
Kim Peijnenburg
Keyword(s):  
Financial Distress ◽  
Web Site ◽  
Income Shocks ◽  
Oxford University ◽  
Editorial Decision ◽  
Differential Exposure ◽  
Published Paper ◽  
Oxford University Press ◽  
Low Ability

AbstractThis paper provides evidence of how noncognitive abilities affect financial distress. In a representative panel of households, we find that people in the bottom quintile of noncognitive abilities are 10 times more likely to experience financial distress than those in the top quintile. We provide evidence that this relation largely arises from worse financial choices and lack of financial insight by low-ability individuals and reflects differential exposure to income shocks only to a lesser degree. We mitigate endogeneity concerns using an IV approach and an extensive set of controls. Implications for policy and finance research are discussed.Received September 24, 2017; editorial decision September 26, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Contingent Capital Trigger Effects: Evidence from Liability Management Exercises

2019 ◽  
Vol 8 (2) ◽  
pp. 235-259 ◽  
Author(s):  
Boris Vallée
Keyword(s):  
Time Series ◽  
Cross Section ◽  
Web Site ◽  
Regulatory Capital ◽  
Oxford University ◽  
Contingent Capital ◽  
Liability Management ◽  
Editorial Decision ◽  
Debt Holders ◽  
Published Paper

AbstractThis paper studies liability management exercises (LME) by banks, which have comparable regulatory capital effects than contingent capital triggers. LMEs are concentrated on low capitalization situations, both in the cross-section and in the time series and are frequently associated with equity issuances. These exercises prove effective at improving bank capitalization levels. The market reaction to LMEs is positive and mostly accrues to debt holders. These findings strengthen the case for innovative liabilities securities as a tool to improve bank resilience.Received February 8, 2019; editorial decision May 16, 2019 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Auto Credit and the 2005 Bankruptcy Reform: The Impact of Eliminating Cramdowns

2019 ◽  
Vol 32 (12) ◽  
pp. 4734-4766 ◽  
Author(s):  
Rajashri Chakrabarti ◽  
Nathaniel Pattison
Keyword(s):  
Interest Rates ◽  
Strong Evidence ◽  
Web Site ◽  
Causal Effect ◽  
Oxford University ◽  
Editorial Decision ◽  
Historical Variation ◽  
The Impact ◽  
Published Paper ◽  
Rule Out

Abstract Auto lenders were perhaps the biggest winners of the 2005 Bankruptcy Reform, as Chapter 13 bankruptcy filers can no longer “cramdown” the amount owed on recent auto loans. We estimate the causal effect of this anticramdown provision on the price and quantity of auto credit. Exploiting historical variation in states’ usage of Chapter 13 bankruptcy, we find strong evidence that eliminating cramdowns decreased interest rates and some evidence that loan sizes increased among subprime borrowers. The decline in interest rates is persistent and is robust to a battery of sensitivity checks. We rule out other reform changes as possible causes. Received September 29, 2016; editorial decision January 15, 2019 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Countercyclical Bank Equity Issuance

2020 ◽  
Vol 33 (9) ◽  
pp. 4186-4230 ◽  
Author(s):  
Matthew Baron
Keyword(s):  
Financial Distress ◽  
Commercial Banks ◽  
Web Site ◽  
Market Discipline ◽  
Equity Issuance ◽  
Oxford University ◽  
Bank Equity ◽  
Published Paper ◽  
Oxford University Press

Abstract Over the period 1980–2012, large U.S. commercial banks raise and retain less equity during credit expansions, which amplifies their leverage. The decrease in equity issuance is large relative to subsequent banking losses. I consider a variety of explanations for why banks resist raising equity and find evidence consistent with the diminishment of creditor market discipline due to government guarantees. I test this explanation by analyzing the removal of government guarantees to German Landesbank creditors and find that creditor market discipline and equity issuance increase. These findings help explain why banks resist raising equity, making financial distress more likely. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Resiliency and Stock Returns

2019 ◽  
Vol 33 (2) ◽  
pp. 747-782
Author(s):  
Jian Hua ◽  
Lin Peng ◽  
Robert A Schwartz ◽  
Nazli Sila Alan
Keyword(s):  
Stock Returns ◽  
Web Site ◽  
Trading Volume ◽  
Expected Returns ◽  
Control Variables ◽  
Oxford University ◽  
And Control ◽  
Published Paper ◽  
Extensive List ◽  
Oxford University Press

Abstract We present resiliency as a measure of liquidity and assess its relationship to expected returns. We establish a covariance-based measure, RES, that captures opening period resiliency, and use it to find a significant nonresiliency premium that ranges from 33 to 57 basis points per month. The premium persists after accounting for an extensive list of other liquidity-related measures and control variables. The results are significant for both value-weighted and equal-weighted returns, when micro-cap stocks are excluded, and for a sample of large cap stocks. The premium is particularly pronounced when trading volume is high. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Peer Financial Distress and Individual Leverage

2019 ◽  
Vol 33 (7) ◽  
pp. 3348-3390 ◽  
Author(s):  
Ankit Kalda
Keyword(s):  
Financial Distress ◽  
Web Site ◽  
Underlying Mechanism ◽  
Health Shocks ◽  
Intensive Margin ◽  
Oxford University ◽  
Published Paper ◽  
Average Individual ◽  
Oxford University Press

Abstract Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. Individual leverage declines by 5.7% and remains deflated for at least five years following peer distress. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more while their income remains unchanged. As a result, individuals are less likely to default during the period following peer distress. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism. (JEL D10, D12, D14, D84, H31, R20) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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