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Working Paper
Debt maturity and the use of interest rate derivatives by non-financial firms
We develop and test a simple model of a firm's optimal debt maturity and its demand for interest rate swaps using 1994 data of over 4000 nonfinancial corporations. As in other models of derivative use, ours predicts a systematic relationship between a firm's swap position and the interest-sensitivity of its cash flow. We test this by estimating the cross-sectional relationship between a firm's swap position and: (1) the amount of short-term and floating-rate debt in its capital structure; and (2) the interest-sensitivity of its EBITD. We find strong evidence that firms use swaps to hedge ...
Working Paper
What's the Story? A New Perspective on the Value of Economic Forecasts
We apply textual analysis tools to measure the degree of optimism versus pessimism of the text that describes Federal Reserve Board forecasts published in the Greenbook. The resulting measure of Greenbook text sentiment, ?Tonality,? is found to be strongly correlated, in the intuitive direction, with the Greenbook point forecast for key economic variables such as unemployment and inflation. We then examine whether Tonality has incremental power for predicting unemployment, GDP growth, and inflation up to four quarters ahead. We find it to have significant and substantive predictive power for ...
Working Paper
Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?
Data obtained from special questions on the Michigan Survey of Consumer Attitudes over several years are used to analyze stock market beliefs and portfolio choices of household investors. Consistent with other survey results, expected future returns appear to be extrapolated from past realized returns. The data also indicate that expected risk and return are strongly influenced by economic prospects. When investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility, which implies that household Sharpe ratios are procyclical. ...
Discussion Paper
The Corporate Bond Market Crises and the Government Response
The Covid-19 pandemic led to acute stress in the global economy and, as a consequence, many parts of the global financial system. In the U.S., when concerns over the coronavirus escalated in March, many financial markets were hit by extraordinary selling pressure.
Working Paper
Footnotes aren’t enough: the impact of pension accounting on stock values
Some research has suggested that companies with defined benefit (DB) pensions are sometimes significantly misvalued by the market. This is because the measures of pension cost and pension net liabilities embedded in financial statements, taken at face value, can provide a very misleading picture of pension finances. The more pertinent information on pension finances is relegated to footnotes, but this might not receive much attention from portfolio managers. But dramatic swings in the financial conditions of large DB plans around the turn of the decade focused widespread attention on pension ...
Working Paper
Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting
This paper establishes empirically that specialization in private-market corporate lending exists, adding a new dimension to the public vs. private debt distinctions now common in the literature on debt contracting and financial intermediation. Using a large database of individual loans, we compare lending by finance companies to that by banks. The evidence implies that it is intermediaries in general that are special in solving information problems, not banks in particular. But lending by the two types of institutions is not identical. Finance companies tend to serve observably riskier ...