[We analyze determinants of secondary debt market liquidity, identifying conditions under which a large investor can profitably buy stakes from small bondholders and offer unilateral debt relief to a distressed firm. We show that endogenous trading by small bondholders may result in multiple equilibria. Some equilibria entail vanishing liquidity and sharp increases in yields absent changing fundamentals. In turn, anticipation of illiquid equilibria induces firms to eschew public debt financing, since such equilibria create higher bankruptcy costs and debt illiquidity discounts. The model thus offers a rational micro-foundation for stylized facts commonly attributed to investor sentiment and CFO market timing. Finally, we show that the vulnerability of debt markets to multiple equilibria is highest during downturns, when small bondholders face severe adverse selection.]

We examine the dynamics of assets under management (AUM) and management fees at the portfolio manager level in the closed-end fund industry. We find that managers capitalize on good past performance and favorable investor perceptions about future performance, as reflected in fund premiums, through AUM expansions and fee increases. However, the penalties for poor performance or unfavorable investor perceptions are either insignificant, or substantially mitigated by manager tenure. Long tenure is generally associated with poor performance and high discounts. Our findings suggest substantial managerial power in capturing CEF rents. We also document significant diseconomies of scale at the manager level.

[We develop a continuous-time model in which a portfolio manager is hired by a management company. On the basis of observed portfolio returns, all agents update their beliefs about the manager's skills. In response, investors can move capital into or out of the mutual fund, and the management company can fire the manager. Introducing firing rationalizes several empirically documented findings, such as the positive relation between manager tenure and fund size or the increase of portfolio risk before a manager replacement and the following risk decrease. The analysis predicts that the critical performance threshold that triggers firing increases signifi-cantly over a manager's tenure and that management replacements are accompanied by capital inflows when a young manager is replaced but may be accompanied by capital outflows when a manager with a long tenure is fired. Our model yields much lower valuation levels for management companies than simple applications of discounted cash flow (DCF) methods and is thus more consistent with empirical observations.]

[We analyze the location of stock trading for firms with a US cross-listing. The fraction of trading that occurs in the United States tends to be larger for companies from countries that are geographically close to the United States and feature low financial development and poor insider trading protection. For companies based in developed countries, trading volume in the United States is larger if the company is small, volatile, and technology-oriented, while this does not apply to emerging country firms. The domestic turnover rate increases in the cross-listing year and remains higher for firms based in developed markets, but not for emerging market firms. Domestic trading volume actually declines for companies from countries with poor enforcement of insider trading regulation]

This paper shows that short debt maturities commit equityholders to leverage reductions when refinancing expiring debt in low-profitability states. However, shorter maturities lead to higher transaction costs since larger amounts of expiring debt need to be refinanced. We show that this trade-off between higher expected transaction costs against the commitment to reduce leverage in low-profitability states motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress and risky cash flows benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt. Evidence supports the model’s predictions.

We analyze determinants of secondary debt market liquidity, identifying conditions under which a large investor can profitably buy stakes from small bondholders and offer unilateral debt relief to a distressed firm. We show that endogenous trading by small bondholders may result in multiple equilibria. Some equilibria entail vanishing liquidity and sharp increases in yields absent changing fundamentals. In turn, anticipation of illiquid equilibria induces firms to eschew public debt financing, since such equilibria create higher bankruptcy costs and debt illiquidity discounts. The model thus offers a rational micro-foundation for stylized facts commonly attributed to investor sentiment and CFO market timing. Finally, we show that the vulnerability of debt markets to multiple equilibria is highest during downturns, when small bondholders face severe adverse selection. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

We examine the dynamics of assets under management (AUM) and management fees at the portfolio manager level in the closed-end fund industry. We find that managers capitalize on good past performance and favorable investor perceptions about future performance, as reflected in fund premiums, through AUM expansions and fee increases. However, the penalties for poor performance or unfavorable investor perceptions are either insignificant, or substantially mitigated by manager tenure. Long tenure is generally associated with poor performance and high discounts. Our findings suggest substantial managerial power in capturing CEF rents. We also document significant diseconomies of scale at the manager level.

We develop a continuous-time model in which a portfolio manager is hired by a management company. On the basis of observed portfolio returns, all agents update their beliefs about the manager’s skills. In response, investors can move capital into or out of the mutual fund, and the management company can fire the manager. Introducing firing rationalizes several empirically documented findings, such as the positive relation between manager tenure and fund size or the increase of portfolio risk before a manager replacement and the following risk decrease. The analysis predicts that the critical performance threshold that triggers firing increases significantly over a manager’s tenure and that management replacements are accompanied by capital inflows when a young manager is replaced but may be accompanied by capital outflows when a manager with a long tenure is fired. Our model yields much lower valuation levels for management companies than simple applications of discounted cash flow (DCF) methods and is thus more consistent with empirical observations.

We analyze the location of stock trading for firms with a US cross-listing. The fraction of trading that occurs in the United States tends to be larger for companies from countries that are geographically close to the United States and feature low financial development and poor insider trading protection. For companies based in developed countries, trading volume in the United States is larger if the company is small, volatile, and technology-oriented, while this does not apply to emerging country firms. The domestic turnover rate increases in the cross-listing year and remains higher for firms based in developed markets, but not for emerging market firms. Domestic trading volume actually declines for companies from countries with poor enforcement of insider trading regulation.