Essays on Financial Markets

<p><b>This thesis consists of five chapters. Chapter 1 is the preliminaries. Chapter 2 to chapter 4 are the three main chapters of this thesis, which covers the U.S. market, international market, and the Chinese market, respectively. Chapter 5 is the discussion.</b></p> <p>Chapter 1 is the preliminaries. It introduces the setting and motivations for the three topics covered in this thesis.</p> <p>Chapter 2 investigates how equity exchange-traded fund (ETF) ownership affects the cost of debt. I find that, by facilitating short-selling activities to execute disciplinary effects, equity ETF ownership decreases a firm's cost of debt. This negative association between equity ETF ownership and the cost of debt is more pronounced for firms with weaker information environments and lower bond ratings. The disciplinary effect works through a more active short-selling market provided by equity ETF ownership. However, I fail to establish the corporate governance channel, which is consistent with Schmidt and Fahlenbrach (2017) and Heath, Macciocchi, Michaely, and Ringgenberg (2021).. Those results are also robust to endogeneity.</p> <p>Chapter 3 studies the predictive power of the trend strategy in the international stock market. Using data from 49 markets, I find that a trend signal exploiting the short-,intermediate-, and long-term price information can predict stock returns cross-sectionally in the international market. The significance of the trend strategy is associated with market-level characteristics such as macroeconomic conditions, culture, and the information environment. The trend premium is more pronounced in markets with a more advanced macroeconomic status, a higher level of information uncertainty and individualism, and better accessibility to foreign investors. Nevertheless, the trend strategy only outperforms the momentum strategy in a relatively short horizon.</p> <p>Chapter 4 investigates whether margin-trading in the Chinese stock market reflects information or sentiment. At the aggregate level, I find no evidence of information-driven or sentiment-driven margin-trading behavior. At the individual stock level, both information-driven and sentiment-driven margin-trading exists, which are relevant to firm characteristics. I also find the likelihood of sentiment-driven margin-trading significantly declined after the regulator enforced tighter rules for margin-trading in 2015.</p> <p>Chapter 5 summarizes the main findings of the three topics, discusses the implications of the findings, and points out the future direction for research.</p>

Risk transfer in project finance loans for toll road using credit default swaps

Purpose The purpose of this paper is to demonstrate the applicability of the Credit Default Swaps (CDS), as a financial instrument, for transferring of risk in project finance loans. Also, an equation has been derived for pricing of CDS spreads. Design/methodology/approach The debt service cover ratio (DSCR) is modeled as a Brownian Motion (BM) with a power-law model fitted to the mean and half-variance of the existing data set of DSCRs. The survival probability of DSCR is calculated during the operational phase of the project finance deal, using a closed-form analytical method, and the results are verified by Monte Carlo simulation (MCS). Findings It is found that using the power-law model yields higher CDS premiums. This in turn confirms the necessity of conducting rigorous statistical analysis in fitting the best performing model as uninformed reliance on constant time-invariant drift and diffusion model can erroneously result in smaller CDS spreads. A sensitivity analysis also shows that the results are very sensitive to the recovery rate and cost of debt values. Originality/value Insufficiency of free cash flow is a major risk in the toll road project finance and hence there is a need to develop innovative financial instruments for risk management. In this paper, a novel valuation method of CDS is proposed assuming that DSCR follows the BM stochastic process.

Changes in the effect of corporate tax avoidance on the cost of debt over the past 25 years

Purpose This study aims to examine how the effect of corporate tax avoidance on the cost of debt has changed in the period 1993–2017. Although it is known that tax avoidance has significantly increased during this period (Dyreng et al., 2017), little evidence exists on how this change alters the effect of tax avoidance on the cost of debt. This study investigates how changes in tax avoidance modify the association between tax avoidance and the cost of debt. Design/methodology/approach By using a comprehensive sample of 15,825 loan facilities issued to US public firms in the period 1993–2017, this study tests the time-series changes in the association between tax avoidance and the cost of debt. Findings This study finds that a positive association between tax avoidance and the cost of debt has been declined over the past 25 years. Accordingly, tax avoidance in general no longer increases the loan spread after the enactment of domestic production activities deduction. However, the risker end of tax avoidance does still increase the loan spread. Originality/value This study spotlights the time-series changes in the effect of corporate tax avoidance on the cost of debt, showing how lenders perception on corporate tax avoidance has altered in accordance with changes in corporate tax practice.

Do audited firms have a lower cost of debt?

The purpose of this study is to investigate if audited financial statements add value for firms in the private debt market. Using an instrumental variable method, we find that firms with audited financial statements, on average, save 0.47 percentage points on the cost of debt compared to firms with unaudited financial statements. We also find that using the big, well-known auditing firms does not yield any additional cost of debt benefits. Lastly, we investigate if there are industries where alternative sources of information make auditing less valuable in reducing the cost of debt. Here, we find that auditing is less important in lowering cost in one industry, agriculture, where one lender has a 74% market share and a 100-year history of lending to firms within that industry. As such, it seems that lenders having high exposure to a certain industry might act as an alternative to auditing in reducing the information asymmetry between the firm and the lender.

The Effect of Managerial Share Pledges on the Cost of Debt

We examines whether share pledges by controlling shareholders influence a firm’s cost of debt. We also investigate whether the relationship between share pledges and the cost of debt stems from the managerial risk-taking incentives or pursuing the private benefits of controlling shareholders. We make three major findings. First, we find the cost of debt is higher in firms with share pledges than in firms without share pledges. Furthermore, we identify a positive relationship between the cost of debt and the level of share pledges. Second, we find that there is no increased corporate financial leverage or investment activities in firms with share pledges. Finally, our empirical evidence demonstrates that the positive relationship between share pledges and cost of debt is more pronounced for lower foreign institutional investor stakes or higher controlling shareholders ownership. Overall, the results indicate that share pledges by controlling shareholders negatively affect the cost of debt. However, the effect of share pledges on the cost of debt is differently influenced by a firm’s ownership structure. Our findings suggest that share pledges induce stockholder-bondholder conflict, and the bondholder requires more risk premium due to the decrease of firm value.

FOREIGN FINANCING, EXCHANGE RATE EXPOSURES AND CORPORATE INVESTMENT IN SINGAPORE

We study the effect of exchange rate fluctuations on foreign corporate investment flows to Singaporean firms using a linear reduced-form empirical specification on data from the past decade. Overall, we find that the cost of debt capital falls on average when the Singapore dollar depreciates. Isolating the effect of exchange rates on US-denominated debt vis-a-vis interest rates and yield curve variables shows that an increase in the cost of foreign debt capital through exchange rate changes leads to lower investment, albeit only slightly and an order of magnitude less important than short-term government bond yields.

Komisaris Independen sebagai Pemoderasi Pengaruh Intensitas Modal dan Biaya Utang terhadap Agresivitas Pajak

ABSTRACT This reseacrh to determine the direct and indirect effects of Capital Intensity and Cost of Debt mediated by Tax Aggressiveness on Independent Commissioners. The type of research used is descriptive quantitative research. Collecting data through literature study and documentation study through reports downloaded through the website on the Indonesia Stock Exchange using proposive sampling technique. The sample in this study amounted to 13 companies. The data analysis method used is data analysis through E-views 9 software. The results of this study indicate that capital intensity has a positive and significant effect on tax aggressiveness, the cost of debt does not significantly affect tax aggressiveness, independent commissioners cannot moderate or weaken the relationship between capital intensity and aggressiveness. tax. Meanwhile, independent commissioners can moderate or strengthen the relationship between the cost of debt and tax aggressiveness. ABSTRAK Penelitian ini bertujuan untuk mengetahui pengaruh langsung dan tidak langsung dari Intensitas Modal dan Biaya Utang yang dimediasi oleh tindakan Agresivitas Pajak terhadap Komisaris Independen. Jenis penelitian yang digunakan adalah penelitian kuantitatif deskriptif. Pengumpulan data melalui studi pustaka dan studi dokumentasi melalui laporan yang diunduh melalui website di Bursa Efek Indonesia dengan menggunakan teknik proposive sampling. Sampel dalam penelitian ini berjumlah 13 perusahaan. Metode analisis data yang digunakan analisis data melalui software E-views 9. Hasil dari penelitian ini menunjukkan Intensitas modal berpengaruh positif dan signifikan terhadap agresivitas pajak, biaya utang tidak berpengaruh signifikan terhadap agresivitas pajak, komisaris independen tidak dapat memoderasi atau memperlemah hubungan intensitas modal terhadap agresivitas pajak. Sedangkan komisarisi independen dapat memoderasi atau memperkuat hubungan biaya utang terhadap agresivitas pajak.

Will the Reduction of CO2 Emissions Lower the Cost of Debt Financing? The Case of EU Countries

The main objective of this article is to test the relationship between the intensity of CO2 emissions and company’s cost of debt capital. This study fills a gap in the financial literature on this compound by examining a sample of 225 large nonfinancial enterprises operating in 15 EU countries in the years 2018–2021. The fractional logit regression controlling for company’s characteristics (assets, profitability, liquidity and leverage) was used. The results show that by reducing the intensity of CO2 emissions, a company can reduce the cost of debt. This relationship was confirmed for three measures of intensity, i.e., CO2 emissions in relation to revenues, assets and number of employees. Markets and financial institutions impose an additional risk premium in relation to companies operating in an industry considered to be comprised of strong CO2 emitters. The use of the latest data for a wide sample of European enterprises provides an up-to-date assessment of the analyzed issues and the results can be used by enterprises and public authorities when analyzing the benefits of implementing a technology that reduces CO2 emissions.

Does Real Earnings Management Explain Cost of Debt? Evidence from an Emerging Economy

This study tested the relationship between real earnings management and debt cost in Vietnam, a developing market. We used the Generalized Method of Moments (GMM) Technique on a sample of 241 listed firms in Vietnam for 7 years from 2010 to 2016, with a total of 1687 observations collected. The regression result showed a positive association between real earnings management and cost of debt. The results of the study revealed that real earnings management is shown through the rising transactions and directly affected financial reports, thereby affecting creditors by affecting their cost of debt. This can be seen as the driving force for listed companies to increase the quality of their financial information. Our study only focussed on earnings manipulation through real earnings management (REM) to affect transaction costs in Vietnam. The research explains the relationship between managerial behavior (real earnings management) and direct influence on creditors' behavior (cost of debt capital). The result would give outside stakeholders an overall view about the usage of REM in Vietnamese listed firms, the reasonable action of investors, financial institutions, banks, etc on the debt market to reduce risk and the signal of warning for regulators and policy-makers. Keywords: real activities earnings management, cost of debt capital