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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
Cash Windfalls and Acquisitions
von Beschwitz, Bastian (2016-03-02)
This article studies the effect of cash windfalls on the acquisition policy of companies. As identification I use a German tax reform that permitted firms to sell their equity stakes tax-free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 19 percent. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are ...
International Finance Discussion Papers , Paper 1159

Working Paper
Reputation and Investor Activism: A Structural Approach
Swem, Nathan; Johnson, Travis L. (2020-10-15)
We measure the impact of reputation for proxy fighting on investor activism by estimating a dynamic model in which activists engage a sequence of target firms. Our estimation produces an evolving reputation measure for each activist and quantifies its impact on campaign frequency and outcomes. We find that high reputation activists initiate 3.5 times as many campaigns and extract 85% more settlements from targets, and that reputation-building incentives explain 20% of campaign initiations and 19% of proxy fights. Our estimates indicate these reputation effects combine to nearly double the ...
Finance and Economics Discussion Series , Paper 2017-036r1

Journal Article
Risk management, governance, culture, and risk taking in banks
Stulz, Rene M. (2016-08)
This article examines how governance, culture, and risk management affect risk taking in banks. It distinguishes between good risks, which are risks that have an ex ante private reward for the bank on a standalone basis, and bad risks, which do not have such a reward. A well-governed bank takes the amount of risk that maximizes shareholder wealth, subject to constraints imposed by laws and regulators. In general, this involves eliminating or mitigating all bad risks to the extent that it is cost effective to do so. The role of risk management in such a bank is not to reduce the bank?s total ...
Economic Policy Review , Issue Aug , Pages 43-60

Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World
Eyigungor, Burcu; Chatterjee, Satyajit (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

Journal Article
Deferred cash compensation: enhancing stability in the financial services industry
Mehran, Hamid; Tracy, Joseph (2016-08)
Employees in financial firms are compensated for creating value for the firm, but firms themselves also serve a public interest. This tension can lead to issues that could impose a significant risk to the firm and the public. The authors describe three channels through which deferred cash compensation can mitigate such risk: by promoting a conservative approach to risk, by inducing internal monitoring, and by creating a liquidity buffer. Ultimately, the net contribution of deferred cash pay to financial stability is the sum of the effects of the three channels. The authors argue that a ...
Economic Policy Review , Issue Aug , Pages 61-75

Journal Article
Trends in home purchase lending: consolidation and the Community Reinvestment Act
Canner, Glenn B.; Calem, Paul S.; Bostic, Raphael W.; Avery, Robert B. (1999-02)
Consolidation among banking institutions has substantially changed the structure of the banking industry. Between 1975 and 1997, the number of commercial banks and savings associations declined more than 40 percent. Over the same broad period, the market for home mortgage lending has also changed substantially. Notably, home mortgage lending is no longer primarily the province of banking institutions operating in the communities in which they have banking offices. In recent decades, mortgage and finance companies and banking organizations operating outside their local communities have gained ...
Federal Reserve Bulletin , Volume 85 , Issue Feb

Working Paper
Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry
Gerardi, Kristopher S.; Dennis, Patrick; Schenone, Carola (2019-07-01)
Institutional investors often own significant equity in firms that compete in the same product market. These "common owners" may have an incentive to coordinate the actions of firms that would otherwise be competing rivals, leading to anti-competitive pricing. This paper uses data on airline ticket prices to test whether common owners induce anti-competitive pricing behavior. We find little evidence to support such a hypothesis, and show that the positive relationship between average ticket prices and a commonly used measure of common ownership previously documented in the literature is ...
FRB Atlanta Working Paper , Paper 2019-15

Working Paper
Risk Choices and Compensation Design
Sun, Bo; Carey, Mark S. (2015-01-26)
We analyze the impact of bad-tail risks on managerial pay functions, especially the decision to pay managers in stock or in options. In contrast to conventional wisdom, we find that options are often a superior vehicle for limiting managerial incentives to take bad-tail risks while providing incentives to exert effort. Arrangements similar to collar options are able to incent the desired project choice in wider range of circumstances than call options or stock. However, information requirements appear high. We briefly explore alternatives with features similar to maluses and clawbacks, which ...
International Finance Discussion Papers , Paper 1130

Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration
Eyigungor, Burcu; Chatterjee, Satyajit (2020-07-30)
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 flow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have a 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 ...
Working Papers , Paper 20-29

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