{"title":"Valuing the Treasury’s Capital Assistance Program","authors":"P. Glasserman, Zhenyu Wang","doi":"10.2139/ssrn.1525640","DOIUrl":"https://doi.org/10.2139/ssrn.1525640","url":null,"abstract":"The Capital Assistance Program (CAP) was created by the U.S. government in February 2009 to provide backup capital to large financial institutions unable to raise sufficient capital from private investors. Under the terms of the CAP, a participating bank receives contingent capital by issuing preferred shares to the Treasury combined with embedded options for both parties: The bank gets the option to redeem the shares or convert them to common equity, with conversion mandatory after seven years; the Treasury earns dividends on the preferred shares and gets warrants on the bank’s common equity. We develop a contingent claims framework in which to estimate market values of these CAP securities. The interaction between the competing options held by the buyer and issuer of these securities creates a game between the two parties, and our approach captures this strategic element of the joint valuation problem and clarifies the incentives it creates. We apply our method to the eighteen publicly held bank holding companies that participated in the Supervisory Capital Assessment Program (the stress test) launched together with the CAP. On average, we estimate that, compared to a market transaction, the CAP securities carry a net value of approximately 30 percent of the capital invested for a bank participating to the maximum extent allowed under the terms of the program. We also find that the net value varies widely across banks. We compare our estimates with abnormal stock price returns for the stress test banks at the time the terms of the CAP announced; we find correlations between 0.78 and 0.85, depending on the precise choice of period and set of banks included. These results suggest that our valuation aligns with shareholders’ perception of the value of the program, prompting questions about industry reactions and the overall impact of the program.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"103 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116881472","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":"Intertemporal Substitution and Equity Premium: A Perspective with Habit in Epstein-Zin Preferences","authors":"Wei Yang","doi":"10.2139/ssrn.1107298","DOIUrl":"https://doi.org/10.2139/ssrn.1107298","url":null,"abstract":"This paper presents a consumption based model that reveals intertemporal substitution as a distinctive and important channel, separate from risk aversion, in generating equity premium, return volatility, and their cyclical variations. Two main ingredients, Epstein-Zin preferences and external habit, allow the model to distinguish the separate effects of intertemporal substitution and risk aversion. The results indicate an effective elasticity of intertemporal substitution that is much lower than the parameter value and varies procyclically. On the other hand, the effective risk aversion is counter-cyclical and much higher than the parameter value. To match the empirical statistics of the post-war U.S. stock market, the model critically requires a small elasticity parameter below 1. This points to an interesting contrast between the habit formation and the long-run consumption risk models.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-06-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128653007","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":"Earnings Management and Initial Public Offerings: The Case of the Depository Industry","authors":"Brian J. Adams, Kenneth A. Carow, Tod Perry","doi":"10.2139/ssrn.1397390","DOIUrl":"https://doi.org/10.2139/ssrn.1397390","url":null,"abstract":"In a typical IPO, insiders are “net sellers” of IPO shares; however, in a demutualizing thrift, insiders are “net buyers” of IPO shares. Using a sample of mutual depository IPOs, we find evidence consistent with earnings management prior to the conversion of mutual thrifts. We find on average that mutuals report lower ROA and increased loan loss provisions and loan loss reserves in the period prior to the demutualization. Using a two-stage approach, we also find that the level of discretionary loan loss provisions and discretionary reserves are positively related to both the level of insider participation in the IPO and the first-day returns to investors. Our results are consistent with management of mutual thrifts benefiting at the conversion from reduced pre-IPO earnings and book equity resulting from earnings management.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127051223","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":"Financial Restructuring in Fresh Start Chapter 11 Reorganizations","authors":"Randall A. Heron, E. Lie, K. Cornaggia","doi":"10.2139/ssrn.890693","DOIUrl":"https://doi.org/10.2139/ssrn.890693","url":null,"abstract":"We find that firms substantially reduce their debt burden in “fresh-start” Chapter 11 reorganizations, yet they emerge with higher debt ratios than what is typical in their respective industries. While cross-sectional regressions reveal that post-reorganization debt ratios are more in line with the predictions of the static-tradeoff theory, they also reveal that pre-reorganization debt ratios affect post-reorganization debt ratios. Collectively, these results suggest that impediments in Chapter 11 prevent firms from completely resetting their capital structures. We also find that firms that reported positive operating income leading up to Chapter 11 emerge faster, suggesting that it is quicker to remedy strictly financial distress than economic distress.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115756733","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":"Industrial Diversification and Underpricing of Initial Public Offerings","authors":"T. Boulton, Scott B. Smart, C. Zutter","doi":"10.2139/ssrn.1018995","DOIUrl":"https://doi.org/10.2139/ssrn.1018995","url":null,"abstract":"Diversified IPOs, firms reporting more than one business segment at the time of going public, experience less underpricing than do IPOs by focused issuers. We explore two explanations for this phenomenon. Diversification may benefit IPO firms by reducing information asymmetries and hence, lowering underpricing costs. Alternatively, higher quality focused firms may underprice their shares more to signal their quality to the market. Though we find at least some evidence consistent with each explanation, a majority of the evidence favors a signaling story.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116176290","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":"On the Use of Poison Pills and Defensive Payouts by Takeover Targets","authors":"Randall A. Heron, E. Lie","doi":"10.1086/503648","DOIUrl":"https://doi.org/10.1086/503648","url":null,"abstract":"Using a large sample of unsolicited takeover attempts, we examine the determinants and effects of targets' choice to adopt poison pills either before or after unsolicited offers and to initiate defensive payouts. The probability of poison pill adoptions decreases with insider ownership, whereas the probability of defensive repurchases increases at a decreasing rate with insider ownership. Poison pills contribute to bid increases and higher bids, yet do not alter the likelihood of takeover. Defensive share repurchases slightly reduce the takeover likelihood but do not appear to harm shareholders, perhaps because they tend to fend off lowball bids or increase the firm's leverage.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131471809","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":"Pegged Limit Orders","authors":"David P. Brown, C. Holden","doi":"10.2139/ssrn.744667","DOIUrl":"https://doi.org/10.2139/ssrn.744667","url":null,"abstract":"Limit orders face mispricing risk - the risk of executing at a stale limit price after an innovation in public valuation, because limit-order traders generally do not continuously monitor market conditions. We analyze the impact of pegged limit orders that automatically adjust the limit price in a hybrid market. We find the direct effect is to increase limit-order profits, reduce dealer profits, and increase market-order losses. However, the indirect effect is to increase the quantity of limit orders submitted. A numerical calibration finds that when dealers supply relatively little liquidity, there is a net benefit to market orders as well.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"824 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132009175","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 International Welfare Analysis of Inflation-Indexed Government Bonds","authors":"Michael T. Gapen, C. Holden","doi":"10.2139/ssrn.744684","DOIUrl":"https://doi.org/10.2139/ssrn.744684","url":null,"abstract":"We analyze the introduction of an inflation-indexed government bond in a Markowitz framework of individual agent portfolio optimization. Our theoretical metric for the welfare gain is the percent increase in wealth required to make the investor indifferent between holding the benchmark set of risky assets only vs. the expanded set of assets, which includes the inflation-indexed government bond. This metric is estimated using data on real monthly rates of return on domestic and international assets from 1993-2003. Optimal portfolios are calculated for hypothetical investors in four developed countries (Canada, France, Sweden, and the United States) and two developing countries (Brazil and Mexico) before and after introduction of an inflation-indexed government bond. We find that risk averse investors based in Brazil and Mexico benefit more than risk tolerant investors from the introduction of inflation-indexed government bonds due to the high variability of real returns on existing nominal return assets. High inflation and exchange rate risk leads to less favorable investment opportunities when indexed debt is not present. In contrast, we find that gains in the four developed economies are largest when risk tolerance is highest, but these gains are dependent on the ability to engage in short-selling which may not be allowable or feasible if inflation-indexed debt is not sufficiently liquid. Otherwise, the developed country examples indicate that demand for indexed bonds will likely be low when inflation and exchange rate risk is low, and may explain why the main holders of such debt are insurance companies and pension plans.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124029297","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":"Relationship Lending and Lines of Credit in Small Firm Finance","authors":"Allen N. Berger, Gregory F. Udell","doi":"10.1086/296668","DOIUrl":"https://doi.org/10.1086/296668","url":null,"abstract":"This paper examines the role of relationship lending in small firm finance. We examine price and nonprice terms of bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us toe examine a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.","PeriodicalId":303799,"journal":{"name":"Kelley: Finance (Topic)","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132071680","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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