We investigate the extent to which the scheduled release of macroeconomic indicators affects the acquirer's value in Mergers and Acquisitions (M&As). We find that M&As announced on days of the release of key macroeconomic indicators (i.e. indicator days) realize higher announcement period risk-adjusted returns compared to counterparts announced on non-indicator days. The positive wealth effect is due to the higher market attention on indicator days, which is particularly relevant for smaller M&As that are not usually exposed to significant investor scrutiny. The results hold after addressing self-selection bias concerns. We also find that firms announcing M&As on indicator days are more likely to “listen” to the market's feedback.

This paper is an empirical exploration of the determinants of the required credit spreads on highly leveraged transaction (HLT) loans. The analysis uses a multi-factor spread model to estimate the movement of loan spreads relative to spreads required in the (competing) corporate bond market as well as the significance of loan-specific characteristics in determining loan spreads. The empirical estimates are based on the Loan Pricing Corporation's database which consists of over 4000 loan transactions between 1987 and 1994. We find a positive HLT loan spread sensitivity to changes in spreads in the corporate bond market, but this sensitivity is significantly less than unity; indicating that the HLT loan market and high yield public debt market are not fully integrated. Furthermore, there is evidence that lenders augment, rather than substitute, loan yield spreads with additional fees for syndication, commitment and cancellation risks. In general syndicated loans have lower yield spreads than other HLT loan types.

Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposure in the subprime crisis. Evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms after we match them on firm size and insolvency risk. When the short ban was in effect, the market quality of financial stocks without subprime assets exposure had deteriorated to a larger degree than that of financial companies with subprime assets exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also be seen as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.

In this paper, we have revised and updated our earlier study in order to analyze the most recent (second) draft of the BIS's proposed reforms of bank capital requirements. We conduct Monte-Carlo experiments using data on defaults and severity rates on publicly-traded US corporate bonds over the 1981–1999 period. Analyzing the whole period and various sub-periods, it is clear that the most recent draft of the BIS proposed reforms seriously overestimates the relative riskiness of high-quality debt relative to low quality debt in the so-called standardized model. As a result, the most recent proposal still contains inherent risk-shifting (taking) incentives for banks.

Considerable debate surrounds how the US government's TARP bailout intervention has affected the risk-taking and moral hazard behavior of U.S. banks around the global financial crisis. We examine this issue with a focus on lottery behavior introducing MAX/MIN as a new measure of lotteryness in banking to capture the loss protection from bank bailout guarantees. We find that the TARP bailout increased the likelihood of bank lotteryness and risk shifting. Lottery-like bank equities are riskier after TARP and exhibit fatter right to left tails. A consistent pattern of risk taking and lottery behavior extends both before and after the 2008–2009 crisis, engulfing the largest systemic banks (SIFIs). While confirming that lottery-like bank equities have lower short-term return, we find they exhibit better cumulative long-term return performance. Our findings have important policy implications regarding government intervention in banking crises.

This paper investigates trading patterns in target and acquirer firms prior to public announcement of M&A deals, a corporate event in which group based co-offence has been anecdotally documented. Our analysis differentiates whether such trading is primarily conducted by hedge funds with short-term investment horizons as opposed to other short horizon investors or hedge funds and institutional investors with long-term horizons, in both the equity and derivatives markets. Our results are consistent with exploitation of M&A deal related information prior to the deal's public announcement. In particular we find that the greater the likelihood of insider information leakage, the greater the short-term hedge fund holdings. We consider several alternative explanations, such as those related to the short-term hedge fund's skill in identifying profitable trades' ex-ante; our results seem inconsistent with such alternative explanations.

More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total‐cost‐of‐borrowing measure that includes various fees charged by lenders.

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‐period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.