In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards.
This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to influence. It relies on a private database consisting of the correspondence between TIAA-CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA-CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements.
This paper studies the impact that capital market imperfections have on the natural selection of the most efficient firms by estimating the effect of the prederegulation level of leverage on the survival of trucking firms after the Carter deregulation. Highly leveraged carriers are less likely to survive the deregulation shock, even after controlling for various measures of efficiency. This effect is stronger in the imperfectly competitive segment of the motor carrier industry. High debt seems to affect survival by curtailing investments and reducing the price per ton-mile that a carrier can afford to charge after deregulation.
We examine the bidding patterns and auction profits in the Japanese Government Bond (JGB) auctions and empirically test the predictions of auction theory. We find that the average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are insignificant in determining auction profits. The winning shares of the U.S. dealers are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese dealers tends to be correlated with the share of winnings of their compatriot dealers but a similar relation is not found for U.S. dealers.
We show how to construct models of the term structure of interest rates in which the expectations hypothesis holds. McCulloch (1993) presents such a model, thereby contradicting an assertion by Cox, Ingersoll, and Ross (1981), but his example is Gaussian and falls outside the class of finite-dimensional Markovian models. We generalize McCulloch's model in three ways: (i) We provide an arbitrage-free characterization of the unbiased expectations hypothesis in terms of forward rates; (ii) we extend this characterization to a whole class of expectations hypotheses; and (iii) we show how to construct finite-dimensional Markovian and non-Gaussian examples.
We use panel data on prices and net asset values to test whether dramatic country-specific news affects the response of closed-end country fund prices to asset value. In a typical week, prices underreact to changes in fundamentals; the (short-run) elasticity of price with respect to asset value is significantly less than one. In weeks with news appearing on the front page of The New York Times, prices react much more; the elasticity of price with respect to asset value is closer to one. These results are consistent with the hypothesis that news events lead some investors to react more quickly.
The paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed. The model compares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration. The paper reexamines the free-rider problem in corporate control in the presence of liquidity trading, derives predictions for the trade and pricing of blocks, and provides criteria for the optimal choice of ownership structure.
The existing empirical literature fails to agree on the nature of the intertemporal relation between risk and return. This paper attempts to resolve the issue by estimating a conditional two-factor model motivated by Merton's intertemporal capital asset pricing model. When long-term government bond returns are included as a second factor, the partial relation between the market risk premium and conditional market variance is found to be positive and significant. The paper also helps explain the convoluted empirical relation between the market risk premium, conditional market variance, and the nominal risk-free rate previously reported in the literature.
Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence.
This paper analyzes the incentives of large shareholders to monitor public corporations. We investigate the hypothesis that a liquid stock market reduces large shareholders' incentives to monitor because it allows them to sell their stocks more easily. Even though this is true, a liquid market also makes it less costly to hold larger stakes and easier to purchase additional shares. We show that this fact is important if monitoring is costly: market liquidity mitigates the problem that small shareholders free ride on the effort of the large shareholder. We find that liquid stock markets are beneficial because they make corporate governance more effective.