Knowledge that Transforms

This paper examines whether merger and acquisition (M&A) exits have the same effect on venture capital (VC) reputation than initial public offering (IPO) exits? Using a large sample of U.S. IPOs and M&As for the period 1996–2015, we find that M&A exit strategy has the same importance as IPO exit strategy in explaining the incentives of young venture capital firms to grandstand. There is, however, no evidence that young VC firms exit from their portfolio companies closer to the next follow-on fund than older VCs. In addition, our results show that to build their reputation, young VC firms are willing to accept a lower premium in the case of M&A exits and to bear the cost of higher underpricing in the case of IPO exits. We also find that the presence of reputed VC affects significantly the probability of an IPO exit over an acquisition exit.

Many studies find a negative relationship between acquirers’ stock returns and their size, past acquisitiveness, and performance. This counter-intuitively suggests that large, well-performing, and acquisitive firms are worse-than-average acquirers. We hypothesize that these findings stem from bias related to an omitted variable: the predictability of acquisitive behavior. We theoretically model the direction of this bias for each variable and test these predictions using Heckman's two-stage procedure with a relevant and plausibly excludable variable related to tax avoidance. By mitigating this bias, our approach generates several new insights about acquisition value that are obscured by OLS regressions of deal announcement returns.

This paper examines the predictive power of the main default-risk measures used by both academics and practitioners, including accounting measures, market-price-based measures and the credit rating. Given that some measures are unavailable for some firm types, pair wise comparisons are made between the various measures, using same-size samples in every case. The results show the superiority of market-based measures, although their accuracy depends on the prediction horizon and the type of default events considered. Furthermore, examination shows that the effect of within-sample firm characteristics varies across measures. The overall finding is of poorer goodness of fit for accurate default prediction in samples characterised by high book-to-market ratios and/or high asset intangibility, both of which suggest pricing difficulty. In the case of large-firm samples, goodness of fit is in general negatively related to size, possibly because of the “too-big-to-fail” effect.

We investigate the simultaneous relationship among bank capital, risk and profitability, but also considering bank ownership and the emergence of Pan-African cross-border banks. We specify a simultaneous equation model and estimate it using hand-collected bank level data from all West African Economic and Monetary Union (WAEMU) countries for 2000–2014. We split the countries into lower middle-income (LMICs) and low-income (LICs) according to the World Bank classification. We uncover evidence that the sensitivity of bank profitability to an increase in capital ratio seems to be somewhat higher in LMICs (+0.10) than in LICs (+0.05). Moreover, we find that bank capital positions tend to comove positively with the business cycle in LICs, mimicking a key postulate of Basel III. After differentiating between cross-border Pan-African banks and foreign banks from outside the continent, we find that the overall effect of bank ownership on risk depends on the origin of banks (French versus Pan-African). These findings are robust to alternative estimation techniques and the use of competing measures of risk and profitability.

We investigate whether suppliers value customer firms’ socially responsible activities by examining the relation between corporate social responsibility (CSR) and firms’ access to trade credit. We posit that firms with better social performance are more likely to receive trade credit because suppliers view customers’ CSR activities as a signal of trustworthiness and of the capacity to meet financial obligations. In addition to this direct channel, we describe other channels: a) trade credit opens the possibility for suppliers to secure a share of their customers’ future business opportunities, which are expected to be higher for socially responsible firms, and b) the risk associated with the diffusion of negative shocks through the supply chain due to trade credit is lower for socially responsible firms, making them more attractive partners for suppliers. Consistent with our predictions, we find that socially responsible customers receive more trade credit from suppliers. This relation is more pronounced in situations where the aforementioned channels are more relevant: namely, when the financial health of a customer is of greater importance to its suppliers; when there are greater information asymmetries between suppliers and customers due to a lack of close transactional relationships; when socially responsible activities are more likely to generate growth; and when suppliers are exposed to higher risk in the customer-supplier relationship. We also document that during the global financial crisis, socially responsible customers offered backward liquidity provision to suppliers by reducing their use of trade credit, which represents an extra benefit of having socially responsible customers in production networks.

We provide new evidence on the determinants of corporate derivatives use by studying how markets respond to announcements of changes in derivatives positions by gold-mining firms. Announcements of increases or decreases in derivatives positions are associated with, respectively, negative or positive reactions in equity prices for both the announcing firm and other gold-mining firms, and, respectively, negative or positive reactions in the gold market. The reactions in the gold market and stock market (both firm and industry) are significantly more positive or negative, respectively, when firms explicitly state that they are decreasing or increasing derivatives positions due to changes in their market views of future gold prices. We help bridge an important gap in the literature by providing evidence consistent with some firms possessing credible private information that underlies changes in their derivatives positions, despite the absence of documented shareholder benefits created by firms that engage in selective hedging. Our findings also provide support for distress-cost minimization as a rationale for corporate derivatives use.

This paper analyzes hedge fund performance, risk, and fund flows before and after the implementation of the Dodd–Frank Act. The data indicates that, relative to non-US hedge funds, US hedge funds that are regulated under Dodd–Frank have lower fund alphas in the post-Dodd–Frank implementation period, both statistically and economically significant, while the evidence on its effect on risk (standard deviations and idiosyncratic risk) is mixed. We find evidence that there is more fund outflow (or less fund inflow) for certain US hedge fund strategies after the implementation of Dodd–Frank. We show some differences in these findings dependent on fund size and strategy. The findings are robust to difference-in-differences analyses comparing US to non-US funds.

This study investigates if market risk-based capital requirements (MRR) implemented in 1998 mitigated bank risk associated with trading activities. Recognizing that only banks with sufficiently high trading activities are subject to the MRR (regulated), we implement a difference-in-difference (DID) approach to show that in the post-MRR period, unregulated banks experienced an increase in risk associated with trading activity, while their regulated counterparts enjoyed no appreciable change in trading-related risk. We interpret the resulting negative DID coefficient as the evidence of a risk-mitigating effect of the MRR. This effect disappears at already well-capitalized banks. We also show that upon the implementation of the MRR, unregulated banks exhibit a significantly larger increase in contribution of opaque trading activity to bid-ask spreads, compared to regulated banks, for which the association between trading activity and bid-ask spreads actually declines. Our results are consistent with the view that the MRR significantly reduced moral hazard and adverse selection problems associated with opaque trading activities.

This paper studies equity mutual funds’ portfolio choices in emerging markets with different degrees of financial market integration. By examining the monthly holdings of 385 mutual funds from 1999 to 2017, we find that these funds generally engage in portfolio rebalancing strategies in response to equity return changes. Moreover, we show that the propensity to rebalance is greater in stock markets that are more financially integrated into the world market. High market liquidity and low regulatory barriers, which characterize financial integration, are found to be important drivers of active rebalancing in emerging markets.

In the run-up to the ECB’s public sector purchase programme in March 2015, German government bond yields declined significantly. Using an affine term structure model, we provide evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of a portfolio re-balancing channel being at work rather than a (policy rate) signalling channel. The result proves robust against changing the number of factors in the model, the estimation sample and the estimation approach.