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Discussion Paper
The Private Premium in Public Bonds?
In a 2012 New York Fed study, Chenyang Wei and I find that interest rate spreads on publicly traded bonds issued by companies with privately traded equity are about 31 basis points higher on average than spreads on bonds issued by companies with publicly traded equity, even after controlling for risk and other factors. These differences are economically and statistically significant and they persist in the secondary market. We control for many factors associated with bond pricing, including risk, liquidity, and covenants. Although these controls account for some of the absolute pricing ...
Report
CDS and equity market reactions to stock issuances in the U.S. financial industry: evidence from the 2002-13 period
We study seasoned equity issuances by financial and nonfinancial companies between 2002 and 2013. To assess the risk and valuation implications of these issuances, we conduct an event-study analysis using daily credit default swap (CDS) and stock market pricing data. The major findings of the paper are that equity prices do not react to new issues in the pre-crisis period, but react negatively in the crisis. CDS prices respond to new, default-relevant information. Over the full sample period, cumulative abnormal CDS spreads drop in response to equity issuance announcements. The reactions are ...
Discussion Paper
The Role of Bank Credit Enhancements in Securitization
As Nicola Cetorelli observes in his introductory post, securitization is a key element of the evolution from banking to shadow banking. Recognizing that raises the central question in this series: Does the rise of securitization (and shadow banking) signal the decline of traditional banking? Not necessarily, because banks can play a variety of background (or foreground) roles in the securitization process. In our published contribution to the series, we look at the role of banks in providing credit enhancements. Credit enhancements are protection in the form of financial support against ...
Report
The private premium in public bonds
This paper is the first to document the presence of a private premium in public bonds. We find that spreads are 31 basis points higher for public bonds of private companies than for bonds of public companies, even after controlling for observable differences, including rating, financial performance, industry, bond characteristics and issuance timing. The estimated private premium increases to 40-50 basis points when a propensity matching methodology is used or when we control for fixed issuer effects. Despite the premium pricing, bonds of private companies are no more likely to default or be ...
Journal Article
The Role of bank credit enhancements in securitization
This article looks at enhancements provided by banks in the securitization market. We start with a set of new facts on the evolution of enhancement volume provided by U.S. bank holding companies (BHCs). We highlight the importance of bank-provided enhancements in the securitization market by comparing their market share with that of financial guaranties sold by insurance companies, one of the main sellers of credit protection in the securitization market. Contrary to the notion that banks were being eclipsed by other institutions in the shadow banking system, we find that banks have held ...
Report
Deferred compensation, risk, and company value: investor reactions to CEO incentives
Many commentators have suggested that companies pay top executives with deferred compensation, a type of incentive known as inside debt. Recent SEC disclosure reforms greatly increased the transparency of deferred compensation. We investigate stockholder and bondholder reactions to companies' initial reports of their CEOs' inside debt positions in early 2007, when new disclosure rules took effect. We find that bond prices rise, equity prices fall, and the volatility of both securities drops upon disclosures by firms whose CEOs have sizable defined benefit pensions or deferred compensation. ...
Working Paper
The private premium in public bonds
This paper is the first to document the presence of a private premium in public bonds. We find that spreads are 31 basis points higher for public bonds of private companies than for bonds of public companies, even after controlling for observable differences, including rating, financial performance, industry, bond characteristics and issuance timing. The estimated private premium increases to 40 to 50 basis points when a propensity matching methodology is used or when we control for fixed issuer effects. Despite the premium pricing, bonds of private companies are no more likely to default or ...
Conference Paper
Financial innovation and corporate default rates
Corporate default rates have been unusually low in recent years, both relative to historical rates and to forecasts of economists and ratings agencies. We examine the hypothesis that financial innovation has provided new financing options for distressed firms, which are consequently able to postpone or avoid default. Consistent with this hypothesis, we find that in recent years the incidence of early default has decreased, even after controlling for business cycle effects. Next, we estimate a model for predicting aggregate monthly defaults and find that, if financial innovation is ignored, ...