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Merger options and risk arbitrage
Van Tassel, Peter (2016-01-01)
Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio ...
Staff Reports , Paper 761

Report
The impact of CEO turnover on equity volatility
Clayton, Matthew J.; Hartzell, Jay C.; Rosenberg, Joshua V. (2003-05-01)
A change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock price volatility, and test these hypotheses using a sample of 872 CEO turnovers over the 1979-95 period. We find that volatility increases following a CEO turnover, even when the CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers - a finding consistent with the ...
Staff Reports , Paper 166

Report
Buyout activity: the impact of aggregate discount rates
Haddad, Valentin; Loualiche, Erik; Plosser, Matthew (2013)
Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the ...
Staff Reports , Paper 606

Working Paper
Interlocked Executives and Insider Board Members: An Empirical Analysis
Gayle, George-Levi; Golan, Limor; Miller, Robert A. (2015-11-27)
This paper asked the question of whether the behavior and compensation of interlocked executives and non-independent board of directors are consistent with the hypothesis of governance problem or whether this problem is mitigated by implicit and market incentives. It then analyzes the role of independent board of directors. Empirically, we cannot reject the hypothesis that executives in companies with a large number of non-independent directors on the board receive the same expected compensation as other executives. In our model, every executive has an incentive to work. Placing more of ...
Working Papers , Paper 2015-40

Working Paper
Bank Size and Household Financial Sentiment: Surprising Evidence from the University of Michigan Surveys of Consumers
Berger, Allen N.; Irresberger, Felix; Roman, Raluca (2019-01-14)
We analyze comparative advantages/disadvantages of small and large banks in improving household sentiment regarding financial conditions. We match sentiment data from the University Of Michigan Surveys Of Consumers with local banking market data from 2000 to 2014. Surprisingly, the evidence suggests that large rather than small banks have significant comparative advantages in boosting household sentiment. Findings are robust to instrumental variables and other econometric methods. Additional analyses are consistent with both scale economies and the superior safety of large banks as channels ...
Working Papers , Paper 19-4

Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World
Chatterjee, Satyajit; Eyigungor, Burcu (2019-03-14)
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of ...
Working Papers , Paper 19-18

Working Paper
The Community Reinvestment Act (CRA) and Bank Branching Patterns
Ding, Lei; Reid, Carolina (2019-10-01)
This paper examines the relationship between the Community Reinvestment Act (CRA) and bank branching patterns, measured by the risk of branch closure and the net loss of branches at the neighborhood level, in the aftermath of Great Recession. Between 2009 and 2017, there was a larger decline in the number of bank branches in lower-income neighborhoods than in more affluent ones, raising concerns about access to mainstream financial services. However, once we control for supply and demand factors that influence bank branching decisions, we find generally consistent evidence that the CRA is ...
Working Papers , Paper 19-36

Working Paper
How Important Are Local Community Banks to Small Business Lending? Evidence from Mergers and Acquisitions [REVISED]
Maingi, Ramain Quinn; Jagtiani, Julapa (2018-06-29)
[REVISED AUG 2019]We investigate the shrinking community banking sector and the impact on local small business lending (SBL) in the context of mergers and acquisitions. From all mergers that involved community banks, we examine the varying impact on SBL depending on the local presence of the acquirers? and the targets? operations prior to acquisitions. Our results indicate that, relative to counties where the acquirer had operations before the merger, local SBL declined significantly more in counties where only the target had operations before the merger. This result holds even after ...
Working Papers , Paper 18-18

Working Paper
The Impact of Reserves Practices on Bank Opacity
Kwan, Simon H.; Iannotta, Giuliano (2013)
Using a banking firm?s unexpected loan loss provision to proxy for earnings management, it is found to have a significantly positive effect on bank opacity. The explanatory power of earnings management on bank opacity is stronger during the pre-crisis period than during the 2007-2009 financial crisis. When we examine the effects of delays in loan loss recognition on bank opacity, we found strong statistical relations during the financial crisis period, while the results for the pre-crisis period are mixed. We conclude that bank opacity is related to unexpected loan loss provision as well as ...
Working Paper Series , Paper 2013-35

Working Paper
Are Euro-Area Corporate Bond Markets Irrelevant? The Effect of Bond Market Access on Investment
von Beschwitz, Bastian; Howells, Conor T. (2016-06-30)
We compare how bond market access affects firms? investment decisions in the United States and the euro area. Having a bond rating enables US corporations to invest more and undertake more acquisitions. In contrast, in the euro area, bond ratings have no effect on investment decisions. Similarly, firms with bond ratings have higher leverage in the United States, but not in the euro area. This difference may be due to euro-area firms getting sufficient financing from banks. Consistent with this explanation, euro-area bond ratings became more relevant for investment after the banking crisis of ...
International Finance Discussion Papers , Paper 1176

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