{"title":"Loan Officer Incentives, Internal Rating Models and Default Rates","authors":"Tobias Berg, M. Puri, Jörg Rocholl","doi":"10.2139/ssrn.2022972","DOIUrl":"https://doi.org/10.2139/ssrn.2022972","url":null,"abstract":"There is increasing reliance on quantitative complex models, such as internal ratings based (IRB) models for bank regulation, with much resources being spent on model validation exercises. We argue that a significant cost of IRB models that is not well understood or monitored is the change in loan officer incentives down the line. Using proprietary data on almost a quarter million loan applications, we show loan officer incentives significantly skew ratings even if the quantitative model is correct and there is no subjectivity in the system. These incentive effects have a first order effect on bank profitability. Incentives influence the hard information reported by loan officers and thus change the link between hard information and default probabilities in a way not captured by regular model validation exercises. Banks and regulators need to take these effects into account when using internal ratings for risk assessment and regulation.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131164195","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Large Wealth Creation in Mergers and Acquisitions","authors":"Eliezer M. Fich, Tu Nguyen, Micah S. Officer","doi":"10.2139/ssrn.2020507","DOIUrl":"https://doi.org/10.2139/ssrn.2020507","url":null,"abstract":"We examine completed MA (ii) transaction-specific events (not firm- nor CEO-specific events); (iii) enhanced by synergies from a strategic fit in the supply chain; and (iv) executed by bidders with high valuation multiples. Our analyses also document a link between financial accounting reporting irregularities and subsequent merger performance. These findings provide important insight into the factors associated with considerable wealth creation for acquirer shareholders in M&A deals.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"212 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121932589","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Large Bets and Stock Market Crashes","authors":"A. Kyle, Anna A. Obizhaeva","doi":"10.2139/ssrn.2023776","DOIUrl":"https://doi.org/10.2139/ssrn.2023776","url":null,"abstract":"\u0000 Some market crashes occur because of significant imbalances in demand and supply. Conventional models fail to explain the large magnitudes of price declines. We propose a unified structural framework for explaining crashes, based on the insights of market microstructure invariance. A proper adjustment for differences in business time across markets leads to predictions which are different from conventional wisdom and consistent with observed price changes during the 1987 market crash and the 2008 sales by Société Générale. Somewhat larger-than-predicted price drops during 1987 and 2010 flash crashes may have been exacerbated by too rapid selling. Somewhat smaller-than-predicted price decline during the 1929 crash may be due to slower selling and perhaps better resiliency of less integrated markets.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"93 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-01-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115339298","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Survey Forecasts and the Time-Varying Second Moments of Stock and Bond Returns","authors":"Pierluigi Balduzzi, Chunhua Lan","doi":"10.2139/ssrn.2022274","DOIUrl":"https://doi.org/10.2139/ssrn.2022274","url":null,"abstract":"What are the economic determinants of the level and volatility of the second moments of stock and bond returns? We address this central question via the Campbell-Shiller (Campbell and Shiller, 1988) decomposition, with news constructed using survey forecasts. Risk premium news explains most of the unconditional second moments of returns and 86% of the pre- to post-1997 change in the stock-bond covariance. Also, the second moments of risk premium news explain most of the variance of the second moments of returns. In turn, the second moments of fundamental news explain large portions of the variance of the second moments of risk premium news.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"37 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-02-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117058684","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"An Empirical Assessment of Models of the Value Premium","authors":"Huijun Wang, Jianfeng Yu","doi":"10.2139/ssrn.1866397","DOIUrl":"https://doi.org/10.2139/ssrn.1866397","url":null,"abstract":"Recent models of the value premium typically endogenously link B/M to firm-specific attributes. The value firms earn higher subsequent returns because these firms command a higher risk premium due to a higher default probability, lower profitability, higher operating leverage, shorter cash flow duration, or higher cash flow risk. In this paper, we first sort the entire sample into several groups of firms based on different levels of limits to arbitrage, across which the value premium varies substantially. We find that among the low limits-to-arbitrage groups in which the value premium is relatively small, there is indeed a significant desired relation between B/M and firm-specific attributes. In sharp contrast, among the high limits-to-arbitrage groups in which the value premium is the most pronounced, there is no significant desired relation between B/M and firm-specific attributes. These results are robust to exclusion of small stocks. Our findings suggest that risk may play a role in the value premium only among the low limits-to-arbitrage group, whereas mispricing plays a significant role among the high limits-to-arbitrage group.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114971631","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Returns Over the Life-Cycles of Open Market Repurchase Programs","authors":"L. Bargeron, A. Bonaimé, Shawn Thomas","doi":"10.2139/ssrn.2023898","DOIUrl":"https://doi.org/10.2139/ssrn.2023898","url":null,"abstract":"We construct a large sample of announcements that firms have authorized, suspended, resumed, or completed open market repurchase (OMR) programs. Starting or continuing repurchases is associated with positive average announcement period abnormal returns. Stopping repurchases, either by suspending uncompleted programs or by not immediately following completed programs with new programs, is associated with negative average announcement period abnormal returns. We find that excess returns are not significantly different from zero over the periods between initial authorizations and program completions, i.e., the life-cycles of the OMRs; however, consistent with prior literature, we find excess returns are positive and significant over standard long-run event windows. We then document that the excess returns over standard long-run windows are substantially attributable to positive and significant announcement returns to repurchase authorizations and takeover attempts that occur after the completions of the OMR programs. We confirm that these results generalize to the entire population of OMR programs. Further analysis suggests that the positive post-OMR abnormal returns documented in prior literature are a product of misspecification of the model for expected returns that, once corrected, no longer yields evidence of excess returns. Thus, we conclude that the positive long-run excess returns in prior literature do not represent evidence of market inefficiency.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-12-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134333216","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Market Expectations in the Cross Section of Present Values","authors":"B. Kelly, Seth Pruitt","doi":"10.2139/ssrn.1752543","DOIUrl":"https://doi.org/10.2139/ssrn.1752543","url":null,"abstract":"Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross section of book- to-market ratios, we find an out-of-sample return forecasting R-squared as high as 13% at the annual frequency (0.9% monthly). We document similar out-of-sample predictability for returns on value, size, momentum and industry-sorted portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a dynamic latent factor system. We find that spreads in growth and value portfolios’ exposures to economic shocks are key to identifying predictability and are consistent with duration-based theories of the value premium. Our findings suggest that discount rates are far less persistent, and their shocks far more volatile, than implied by leading asset pricing models.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"610 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123045965","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Structural Investigation of Acquiring Managers' Incentives in Takeovers","authors":"D. Li","doi":"10.2139/ssrn.2022615","DOIUrl":"https://doi.org/10.2139/ssrn.2022615","url":null,"abstract":"This paper quantifies the degree of agency conflicts in acquiring firms. By estimating managerial valuations using a structural method and calculating shareholder valuations from stock market reactions to takeovers, I find that acquiring managers overvalue targets by 63% of target capitalization. As a result, acquiring managers pick targets that provide no synergy gains in 17% of takeovers and overbid by 13% of target capitalization in the rest. Private benefits sought by acquiring managers amount to $9 million on average and vary substantially across firms. Agency problems are more severe for larger bidders that have greater free cash flows and chase larger targets. However, an independent board can reduce private benefits and mitigate agency problems for acquiring firms.","PeriodicalId":260147,"journal":{"name":"AFA 2013 San Diego Meetings (Archive)","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-05-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133938591","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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