Acquirers facing strong union power tend to acquire target firms with cash rather than equity or a mix of cash and equity. A one standard deviation increase in the union power faced by the acquirer increases the odds of choosing cash payment by a factor ranging from 1.26 to 1.57. The effect is stronger when: the acquiring firm is located in states without the right-to-work laws; the interests of managers are more aligned with shareholders in acquiring firms; and acquiring firms’ asset specificity is high. When union power is strong, acquirers making cash payment are associated with a significantly positive announcement return. In addition, they are less likely to experience labor strikes or declines in operating performance, and more likely to obtain wage concessions in collective bargaining in the post-acquisition period than acquirers using other methods of payment. These findings suggest that cash payment allows acquirers to reduce excess liquidity and strengthen their bargaining power with unions.

This paper investigates the time-varying corporate bond index returns in a multi-factor smooth transition regression model. We find that expected index returns vary between weak and strong economic regimes, where the transition from one regime to the other is governed by the 3-quartered growth of industrial production. Weak economic regimes are characterized by low growth of industrial production, vice versa for strong economic regimes. Further, risk factor sensitivities are generally more negative in strong economic regimes than in weak regimes, implying that index returns are low when economic conditions are good and high when economic conditions are poor.

If prices of individual stocks are unbiased but noisy approximations to fundamental values, there will be a gap in returns between the standard cap-weighted market portfolio and the one based on fundamentals. The discrepancy occurs because, relative to fundamentals, cap-weights are too large (small) for stocks with positive (negative) deviations from fundamental values. It follows that the usual cap-weighted portfolio will underperform relative to the fundamental-based portfolio as long as prices revert to fundamental values. This has led Arnott et al. to propose new market indices based on a firm’s fundamental size as measured by its revenues, number of employees, and so on. In this paper we follow the same principle but propose to estimate fundamental weights using a smoothed average of standard cap-weights. Since the putative excess returns of a fundamentals-weighted portfolio requires reversion to fundamental values, and because fundamental values are likely to change slowly, we can estimate current fundamentals by smoothing the time series of a stock’s noisy prices. The determination of fundamental size in terms of accounting data is thereby replaced by a simple estimate based on price history. We derive expressions for expected returns of the market capitalization-based and fundamentals-based portfolios under various assumptions about (i) the random deviations from fundamental values and (ii) the change in fundamentals over time. We present empirical comparisons between portfolios and find the returns of the fundamentals-based portfolios exceed the standard indices by an amount comparable to the prior estimates that used accounting data to determine size.

The risk-neutral credit migration process captures quantitative information which is relevant to the pricing theory and risk management of credit derivatives. In this article, we derive implied migration rates by means of a recently introduced credit barrier model which is calibrated on the basis of aggregate information such as credit migration rates and credit spread curves. The model is characterized by an underlying stochastic process that represents credit quality, and default events are associated to barrier crossings. The stochastic process has state dependent volatility and jumps which are estimated by using empirical migration and default rates. A risk-neutralizing drift and forward liquidity spreads are estimated to consistently match the average spread curves corresponding to all the various ratings. The implied migration rates obtained with our credit barrier model are then compared with those obtained via the Kijima–Komoribayashi model.

We examine how various aspects of corporate governance structures affect the capital allocation inefficiency that drives the value discounts of diversified firms. Diversified firms with more effective internal or external governance mechanisms experience more efficient investment allocations at both the firm and segment levels and show less of a diversification discount. The efficiency of the investment allocation process is better for diversified firms with high board independence, low board busyness, high institutional ownership, high outside director ownership, high CEO equity-based pay, high audit quality, and strong shareholder rights. The results hold after controlling for other potential influences. Our evidence suggests that corporate governance considerations are important in assessing the relation between investment efficiency and firm value for diversified firms.

We investigate whether the U.S. stock market disciplines asset-backed commercial paper (ABCP) liquidity guarantors who exploit a regulatory loophole that exempts at least 90% of the risk capital charge. We find that the market reduces liquidity guarantors’ franchise value when a short ABCP maturity causes the conduit credit losses to remain with guarantors rather than being transferred to investors. Banks with franchise value more sensitive to the ABCP guarantee cost maintain a higher risk capital buffer. We interpret our findings as evidence that market discipline–complexity of the shadow banking system notwithstanding–alleviates the consequence of regulatory arbitrage.

This study analyzes the role of corporate governance in the relationship among credit, interest rate, and liquidity risks encountered by banks. In particular, the study investigates how banks make the trade-offs among these risks under the maturity transformation business model. The sample consists of banks in 43 countries over the period of 2002–2010. Results show that credit, interest rate, and liquidity risks are related to one another, and that the interactions among them can be reduced by corporate governance and regulations. During the regular yield curve spread (YCS) period, management-controlled banks take less credit risk and even less liquidity risk whereas shareholder-controlled banks encounter more liquidity risk as they pursue more interest rate risk. During the inverted YCS period, management-controlled banks still opt for less credit risk-taking, but shareholder-controlled banks are greatly exposed to risks and should thus be monitored by concerned authorities.