Knowledge that Transforms

Abstract We offer several suggestions for researchers using corporate bond return data. First, despite clear instructions from older papers (e.g., Bessembinder et al., The Review of Financial Studies 22:4219–4258, 2009) about ways to compute credit excess returns, a lot of recent research simply subtracts a Treasury Bill return. We show that this imprecision is likely to contaminate inferences, as the rate component of returns is negatively correlated to the spread component. This is a problem for all research looking at corporate bond returns, especially time series analysis and safer corporate bonds (e.g., investment grade). We provide a simple approach using Wharton Research Data Services (WRDS) data to remove the interest rate component of corporate bond returns. Second, we note significant differences in the coverage of corporate bonds across the Trade Reporting and Compliance Engine (TRACE) platform and typical corporate bond indices. We provide some simple rules for researchers who are using TRACE to select a subset of bonds closest to those contained inside corporate bond indices used by institutional investors. Third, we note differential quality in the prices and hence returns between TRACE and typical corporate bond indices. Corporate bond returns provided by corporate bond indices (i) correctly estimate credit excess returns, (ii) are synchronous for the entire set of bonds, allowing for consistent cross-sectional comparability, and (iii) suffer less from stale pricing issues. Due to these coverage and data quality issues, researchers should try, where possible, to source return data from multiple sources to ensure the robustness of their results.

Abstract We examine bankruptcy within business groups. Groups have incentives to support financially distressed subsidiaries, as the bankruptcy of a subsidiary may impose severe costs on the group as a whole. This is in part because, in several countries, bankruptcy courts often “pierce the corporate veil” and hold groups liable for their distressed subsidiaries’ obligations as if they were their own. Using a large cross-country sample of group-affiliated firms, we show that, by reallocating resources within the corporate structure, business groups actively manage intra-group credit risk to prevent costly within-group insolvencies. Moreover, we document that recent regulatory changes in the approval and disclosure of related party transactions are costly for business groups in that they constrain their ability to shield their subsidiaries from credit-risk shocks. Our study informs the current regulatory debate on related party transactions by highlighting an important cost of anti-self-dealing regulation.

Abstract The international dimension of multinational corporations creates opportunities for pursuing both global as well as local (i.e., unilateral subsidiary country) tax planning strategies. To date, however, researchers have limited insights into both the dynamics and relative importance of one versus another strategy for multinationals. We propose and test a group-level ETR-based measure of profit shifting and validate it by showing it correctly identifies profit shifting reductions when shifting costs increase. We confirm that multinationals can keep group ETRs stable after the introduction of tighter tax compliance and documentation rules and suggest they can do so by relying relatively more on local tax planning. In line with the substitution argument, we document that especially groups identified as ex-ante income shifters as well as those with greater target ETR pressure are responsible for the results.

Abstract This study proposes that naming a firm eponymously is a mechanism that small private firms can use to signal their superior financial performance and commitment to fulfill debt contract obligations. Using 621,614 small private firms in Europe over the period 2008–2018, we find that small private eponymous firms pay significantly lower interest on their debts and have more long-term debt than non-eponymous firms. Our findings are robust to various controls and placebo tests. Additional analyses show that eponymy lowers the cost of debt and facilitates long-term debt via reputation signaling and private information. We also document that the effect of eponymy on debt contracting is most pronounced when there is less financial development and when firms’ dependence on external financing is low, consistent with the idea that high-quality firms opt for eponymy when they consider less external financing.