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Published / Preprint: Creditor Control Rights, Corporate Governance, and Firm Value

May 24, 2012 by MoneyScience   Comments (0)

We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the Securities and Exchange Commission's filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10% and 20% of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately by a decline in acquisitions and capital expenditures, a sharp...

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Published / Preprint: A Reexamination of Tunneling and Business Groups: New Data and New Methods

May 24, 2012 by MoneyScience   Comments (0)

One of the most rigorous methodologies in the corporate governance literature uses firms' reactions to industry shocks to characterize the quality of governance. This methodology can produce the wrong answer unless one considers the ways firms compete. Because macro-level shocks reverberate differently at the firm level depending on whether a firm has a cost structure that requires significant adjustment, the quality of governance can only be elucidated accurately analyzing a firm's business...

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Published / Preprint: Dynamic Hedging in Incomplete Markets: A Simple Solution

May 24, 2012 by MoneyScience   Comments (0)

We provide fully analytical, optimal dynamic hedges in incomplete markets by employing the traditional minimum-variance criterion. Our hedges are in terms of generalized "Greeks" and naturally extend no-arbitrage–based risk management in complete markets to incomplete markets. Whereas the literature characterizes either minimum-variance static, myopic, or dynamic hedges from which a hedger may deviate unless able to precommit, our hedges are time-consistent. We apply our results to...

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Published / Preprint: Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases

May 24, 2012 by MoneyScience   Comments (0)

Firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout. Subsequent debt reductions are neither rapid, nor the result of proactive attempts to rebalance the firm's capital structure toward a long-run target. Instead, the evolution of the firm's leverage ratio depends primarily on whether or not the firm produces a financial surplus. In fact, firms that generate subsequent...

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Published / Preprint: Fiduciary Duties and Equity-debtholder Conflicts

May 24, 2012 by MoneyScience   Comments (0)

We use an important legal event to examine the effect of managerial fiduciary duties on equity-debt conflicts. A 1991 legal ruling changed corporate directors' fiduciary duties in Delaware firms, limiting managers' incentives to take actions that favor equity over debt for distressed firms. After this, affected firms responded by increasing equity issues and investment and by reducing risk. The ruling was also followed by an increase in leverage, reduced reliance on covenants, and higher...

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Published / Preprint: Executive Compensation and the Role for Corporate Governance Regulation

May 24, 2012 by MoneyScience   Comments (0)

This article establishes a role for corporate governance regulation. An externality operating through executive compensation motivates regulation. Governance lowers agency costs, allowing firms to grant less incentive pay. When a firm increases governance and lowers incentive pay, other firms can also lower executive compensation. Because firms do not internalize the full benefit of governance, regulation can improve investor welfare. When regulation is enforced, large firms increase in value,...

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Blog Post: TheAlephBlog: 23,401 Auctions

May 24, 2012 by MoneyScience   Comments (0)

I’m fascinated at the degree of hatred for high frequency trading [HFT] among my fellow portfolio managers, particularly those that live in the Baltimore area.  I have my own techniques for dealing with them: discretionary reserve orders, and not trading much.  If you are a longer-term investor, the games that exist in buying and selling in the short-run don’t matter much.  In my opinion, HFT milks short-term traders the most.read more...

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Blog Post: Falkenblog: Early Low Vol Literature Now Everywhere

May 24, 2012 by MoneyScience   Comments (0)

It sure would have helped if sites like lowvolatilitystocks.com were up back in 2007. It's Bob Haugen and Nardin Baker's new website and has lots of neat references on low volatility. Then there's a wikipedia page on the Low_volatility_anomaly, where I get to discover first hand how misleading Wikipedia is when you are well versed in something. Nonetheless, the Wiki page is pretty good and hopefully will get better over time.In my Kafkaesque litigation I scrambled to find...

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