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Bankruptcy and the Collateral Channel Do bankrupt firms impose negative externalities on their non-bankrupt competitors? We propose and analyze a collateral channel in which a firm's bankruptcy reduces collateral values of other industry participants, thereby increasing the cost of external debt finance industry wide. More >> |
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Credit Traps (Forthcoming) This paper studies the limitations of monetary policy in stimulating credit and investment. We show that, under certain circumstances, unconventional monetary policies fail in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. More >> |
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Vintage Capital and Creditor Protection We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraft-level data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology as well as firms with larger aircraft fleets. More >> |
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Generalized Transform Analysis of Affine Processes and Applications in Finance Non-linearity is an important consideration in many problems of finance and economics, such as pricing securities and solving equilibrium models. This paper provides analytical treatment of a general class of nonlinear transforms for processes with tractable conditional characteristic functions, which extends existing results on characteristic function based transforms to a substantially wider class of nonlinear functions while maintaining low dimensionality by avoiding the need to compute the density function. More >> |
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Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure I build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. More >> |
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Market Timing, Investment, and Risk Management Firms face uncertain financing conditions, which can be quite severe as exemplified by the recent financial crisis. We capture the firm's precautionary cash hoarding and market timing motives in a tractable model of dynamic corporate financial management when external financing conditions are stochastic. Firms value financial slack and build cash reserves to mitigate financial constraints. The finitely-lived favorable financing condition induces them to rationally time the equity market. More >> |
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Rare Disasters and Risk Sharing with Heterogeneous Beliefs (Forthcoming) Risks of rare economic disasters can have large impact on asset prices. At the same time, difficulty in inference regarding both the likelihood and severity of disasters as well as agency problems can effectively lead to signiffcant disagreements among investors about disaster risk. More >> |
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A Unified Theory of Tobin's Q, Corporate Investment, Financing, and Risk Management We propose a model of dynamic corporate investment, financing, and risk management for a financially constrained firm. The model highlights the central importance of the endogenous marginal value of liquidity (cash and credit line) for corporate decisions. More >> |
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Entrepreneurial Finance and Nondiversifiable Risk We develop a dynamic incomplete-markets model of entrepreneurial firms, and demonstrate the implications of non-diversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. More >> |
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Snow and Leverage Based on a sample of highly leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance. More >> |
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Displacement Risk and Asset Returns (Forthcoming) We study asset-pricing implications of innovation in a general-equilibrium overlapping- generations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. More >> |
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Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs (Forthcoming) We use price pressure resulting from purchases by mutual funds with large capital inflows to identify overvalued equity. This is a relatively exogenous overvaluation indicator as it is associated with who is buying -- buyers with excess liquidity -- rather than what is being purchased. More >> |
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Economic Activity of Firms and Asset Prices (Forthcoming) In this paper we survey the recent research on the fundamental determinants of stock returns. These studies explore how firms' systematic risk and their investment and production decisions are jointly determined in equilibrium More >> |
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Securities Trading of Concepts Market prices are well known to efficiently collect and aggregate diverse information regarding the economic value of goods, services, and firms, particularly when trading financial securities. We propose a novel application of the price discovery mechanism in the context of marketing research: to use pseudo-securities markets to measure consumer preferences for new product concepts. More >> |
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What Happened to the Quants in August 2007 During the week of August 6, 2007, a number of quantitative long/short equity hedge funds experienced unprecedented losses. Based on TASS hedge-fund data and simulations of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid "unwind" of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a forced liquidation by a multi-strategy fund or proprietary-trading desk, possibly due to a margin call or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses by triggering stop/loss and de-leveraging policies. More >> |
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Real Options Signaling Games with Applications to Corporate Finance We study games in which the decision to exercise an option is a signal of private information to outsiders, whose beliefs affect the utility of the decision-maker. More >> |
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Competition among Sellers in Securities Auctions We study simultaneous security-bid second-price auctions with competition among sellers for potential bidders. The sellers compete by designing ordered sets of securities that the bidders can offer as payment for the assets. More >> |
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A Bayesian Approach to Real Options: The Case of Distinguishing between Temporary and Permanent Shocks Traditional real options models demonstrate the importance of the "option to wait" due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. More >> |
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The Hazards of Debt: Rollover Freezes, Incentives, and Bailouts (Forthcoming) We investigate the trade-off between incentive provision and inefficient rollover freezes for a firm financed with staggered short-term debt. More >> |
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Financial Puzzles Financial Puzzles written by Stewart Myers of MIT will be published over the next several issues of JAF. These are offered to stimulate discussion and thought around several topics in finance. The proposed solutions to the puzzles will be published in the following issue of JAF, as well as in the FMA on-line journal. We trust that you will find these puzzles both enjoyable and thought provoking. More >> |
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How Sovereign is Sovereign Credit Risk? We study the nature of sovereign credit risk using an extensive set of sovereign CDS data. We find that the majority of sovereign credit risk can be linked to global factors. More >> |
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Volatility Information Trading in the Option Market This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. More >> |
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The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis (Forthcoming) This paper documents the role of angel funding for the growth, survival, and access to follow-on funding of high-growth start-up firms. We use a regression discontinuity approach to control for unobserved heterogeneity between firms that obtain funding and those that do not. More >> |
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Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis (Forthcoming) We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: in the two days after Lehman Brothers' bankruptcy, loan terms become more sensitive to borrower characteristics. More >> |
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