Browsing by Author "Lehar, Alfred"
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Item Open Access Essays in Corporate Finance(2021-12-17) Nguyen, Nga; Pandes, J. Ari; Lehar, Alfred; Koskinen, Yrjo; Anderson, Mark; Wilson, Craig; Saunders, ChadThis thesis consists of two essays in corporate finance. In the first essay, which is joint work with Yrjo Koskinen and J. Ari Pandes, we use the enactment of limited liability legislation across Canadian provinces to examine the effect of the change in liability status on firm outcomes for a group of public firms known as income trusts. We show that the switch from unlimited to limited liability increases trusts' institutional ownership, net external financing, investments, profitability, payouts, and riskiness. Our results are stronger for energy trusts, which are more capital-intensive and face potentially greater liability risks. Our event study shows positive cumulative abnormal returns around the legal changes. Overall, we present a novel approach to test the impact of limited liability on firms. In the second essay, which is joint work with Yrjo Koskinen and J. Ari Pandes, we provide an evidence of spillover effects of environmental violations. In particular, we investigate how environmental violations by polluting firms impact their (direct) neighboring peers. Using a difference-in-differences methodology, the paper shows that firms operating in the same industry and having plants located close to the violating firms are negatively impacted by the polluting firms' environmental violations. Peer firms experience lower external financing and lower valuations. However, we also find firms with higher (ex-ante) environmental scores are less negatively affected by the violations.Item Open Access Essays in Corporate Governance and Sustainable Finance(2021-04-19) Yang, Shuai; Pandes, J. Ari; Koskinen, Yrjo; Lehar, Alfred; Palacios, Miguel; Srivastava, Anup; Roth, LukasThis thesis consists of two essays in corporate governance and sustainable finance. In the first essay, we exploit an overlooked aspect of constituency statutes – an emphasis on considering the long-term interests of the firm – and study whether the staggered enactment of the statutes in different U.S. states actually encourages firms to manage for the long-term. We find that for firms in the technology and pharmaceutical industries, where a longer-term orientation matters the most, executive compensation contracts have longer vesting periods, shareholder composition changes towards greater long-term institutional ownership, firms conduct less earnings management, and spend more on R&D after the enactment of constituency statutes. We further show that lengthening the firm horizon increases firm value, but at the expense of decreasing cash flows. Overall, our study shows that lengthening the firm horizon benefits firms in the technology and pharmaceutical industries, but not other firms. In the second essay, we study the resiliency of environmental and social (ES) stocks during the COVID-19 market crash. The COVID-19 pandemic and the subsequent lockdown brought about an exogenous and unparalleled stock market crash. The crisis thus provides a unique opportunity to test theories of ES policies. This paper shows that stocks with higher ES ratings have significantly higher returns, lower return volatility, and higher operating profit margins during the first quarter of 2020. ES firms with higher advertising expenditures experience higher stock returns, and stocks held by more ES-oriented investors experience less return volatility during the crash. This paper highlights the importance of customer and investor loyalty to the resiliency of ES stocks. Collectively, this thesis contributes to the literature by showing that firms’ long-term orientation, including investments in environmental and social initiatives, creates value for them.Item Open Access Essays In Financial Markets(2019-12-13) Stauffer, Ryan; Lehar, Alfred; Mehrotra, Vikas C.; David, Alexander; Koskinen, Yrjö; Choi, Kyoungjin; Moran, Pablo; Patterson, Raymond A.In the first paper of this thesis we model bargaining with a sovereign subject to a moral hazard problem. The country can implement a better economic policy which will increase its future revenues, but doing so comes at a personal cost to the sovereign. The lender can only observe imperfect signals of the country's policy choice and set debt forgiveness and the number of signals required indicating that the country has implemented the good policy. With imperfect signals, welfare reducing bargaining delay may occur. In some cases both lender payoff and total welfare may improve with less precise signals. We offer an explanation why sovereign debt restructuring, such as in the recent case of Greece, can take a long time and why lenders have to collect information on the country's progress during renegotiations. The European debt crisis made clear the negative effects that can arise from the separation of monetary and fiscal policy. A parallel currency could potentially provide some liquidity at least in the short term. The rise in prominence of cryptocurrencies may indicate a future willingness of the public to adopt alternative currencies. The second paper examines price differences in Bitcoin across different markets. Between January 2016 and February 2018, Bitcoin were in Korea on average 4.73% more expensive than in the United States, a fact commonly referred to as the Kimchi premium. We argue that capital controls create frictions as well as amplify existing frictions from the microstructure of the Bitcoin network that limit the ability of arbitrageurs to take advantage of persistent price differences. We find that the Bitcoin premia are positively related to transaction costs, confirmation time in the blockchain, and to Bitcoin price volatility in line with the idea that the delay and the associated price risk during the transaction period make trades less attractive for risk averse arbitrageurs and hence allow prices to diverge. A cross country comparison shows that Bitcoin tend to trade at higher prices in countries with lower financial freedom. Finally unlike the prediction from the stock bubble literature, the Kimchi premium is negatively related to the trading volume, which also suggests that the Bitcoin microstructure is important to understand the Kimchi premium.Item Open Access Essays on Capital Structure and Product Market Competition(2014-05-01) Song, Yang; Lehar, Alfred; Oxoby, Robert; Yuan, LashengThis volume examines the interaction of capital structure and product market competition. The first chapter investigates how upstream firms use trade credit to affect downstream firms behavior in imperfect competition. The second chapter explores the impact of price matching on firms' advertising investments in a price duopoly game and the last chapter focuses on how an incumbent firm adopting a price matching strategy changes its investments to accommodate a new entrant. Chapter 1 explains trade credit financing as a strategic tool for a supplier to influence her retailer behavior in a product market, provides a new rationale for the existence as well as the contract structure of trade credit financing, and shows why financially unconstrained firms occasionally finance their inventory with expensive trade credit. In our model competing supply chains deliver a homogeneous good to a market with imperfect competition where retailers have to make inventory decisions before demand is realized. When demand is weak trade credit financing makes the retailer more aggressive as he avoids having to finance unsold inventory at the high trade credit interest rate. The ex-ante expected cost of having to finance excess inventory at the high trade credit rate when demand is weak reduces retailers' optimal ex-ante inventory levels. When demand is high sales are constrained by inventory and competition is less intense. The modified product market behavior induced by trade credit financing increases the producer surplus at the expense of consumer surplus in oligopoly markets, while we find no benefit for producers in either monopoly or perfect competition. Chapter 2 examines how a price matching strategy affects a firm's advertising decision under price duopoly competition. Price matching serves as a double-edged sword for firms' investments in advertising, profits and social welfare. Specifically, if a firm's advertising benefits to both firms, a price matching strategy increases advertising investments, profits, and consumer surplus relative to the Bertrand equilibrium. This arises as price matching effectively reduces market competition and mitigates the free-riding problem of advertising, giving both firms strong incentives to invest. Conversely, if advertising is predatory, price matching harms both firms and consumers due to over-investment. Price matching moves competition between firms solely into the realm of advertising, thereby exacerbating the externality effects. Chapter 3 studies how price matching affects an incumbent firm's investment to accommodate a new entrant prior to competition. A simple theoretical model is developed to investigate the interaction among price matching, the incumbent firm's investments (R&D and advertising) as well as product market competition. The price matching policy has a significant effect on such investments but the impact works totally oppositely on investments for demand enhancement and cost reduction. Compared to Bertrand competition, price matching facilitates advertising investment but impedes R&D investment.Item Open Access Labour Investment: A Managers’ Decision-Making Perspective(2020-04-22) Yu, Dongning; Anderson, Mark; Warsame, Hussein A.; Herremans, Irene M.; Mashruwala, Raj; Lehar, Alfred; Muslu, VolkanMy dissertation consists of three studies that investigate factors that affect management’s labour investment decisions and how management of labour influences firm performance. In my first study, I examine how firms adjust their labour in response to business downturns and how different labour adjustment practices influence firms’ financial performance. I classify firms into two groups: those with more stable labour adjustment strategies (most sticky in labour) and those with more flexible labour adjustment strategies (least sticky in labour). I find that companies with more flexible labour adjustment strategies outperform relative to companies with more stable labour adjustment strategies in terms of return on assets. Using DuPont analysis, I find that underperformance of stable companies is due to lower efficiency (asset turnover) and the superior performance of flexible firms is due to higher efficiency. However, stable firms achieve higher profit margin than flexible firms, consistent with the resource-based view of human capital. In my second study, I investigate whether higher ability managers achieve better performance outcomes through labour investment. I document that deviations from expected net hiring are, on average, smaller for higher ability managers. In this regard, I find that higher ability managers avoid both over-investment and under-investment in labour. I also find that managerial ability mitigates the negative effects of deviations from expected hiring on future firm performance. This latter result holds whether deviations from expected hiring are positive or negative. In my third study, I investigate how companies adjust their employment in recessions with a focus on credit constraints. Controlling for firm productivity, I find an inverted U-shaped relationship between leverage and labour growth rate. This suggests that debt accommodates labour growth up to a certain point, but adding additional debt after that point imposes financial constraints on firms’ ability to effectively manage labour growth – these firms may be forced to grow labour less or reduce labour more than the optimal amount. In addition, recession enlarges the negative impact of financial constraints on labour growth rate. Findings of my thesis studies contribute to management decision-making regarding labour adjustment in response to business cycles.Item Open Access Macroprudential capital requirements and systemic risk(2010) Lehar, Alfred; Gauthier, Celine; Souissi, MoezIn the aftermath of the financial crisis, there is interest in reforming bank regulation such that capital requirements are more closely linked to a bank’s contribution to the overall risk of the financial system. In our paper we compare alternative mechanisms for allocating the overall risk of a banking system to its member banks. Overall risk is estimated using a model that explicitly incorporates contagion externalities present in the financial system. We have access to a unique data set of the Canadian banking system, which includes individual banks’ risk exposures as well as detailed information on interbank linkages including OTC derivatives. We find that macroprudential capital allocations can differ by as much as 50% from observed capital levels and are not trivially related to bank size or individual bank default probability. Macroprudential capital allocation mechanisms reduce default probabilities of individual banks as well as the probability of a systemic crisis by about 25%. Our results suggest that financial stability can be enhanced substantially by implementing a systemic perspective on bank regulation.Item Open Access Three Essays in Financial Economics(2016) Isakin, Maksim; Serletis, Apostolos; David, Alexander; Roberts, Joanne; Lehar, Alfred; McKenzie, Kenneth; Swofford, JamesThis dissertation consists of three essays on financial economics. In the first essay, I build a theoretical model for pricing collateralized debt obligations (CDO) based on varying precision of credit ratings. A credit rating agency (CRA) produces noisy ratings to maximize the proportion of firms with high ratings but still ensures that firms choose lower risk projects. Increased fundamental volatility in bad times makes high-risk choices more appealing to firms, which the CRA responds to by increasing the precision of ratings. Only firms that can call existing bonds and issue new ones will choose low risk projects at such times. Therefore, the resulting high risk strategy for constrained firms in such periods implies that junior tranches get seriously impacted. In contrast, senior tranches are more exposed to growth shocks, which increase the risk of all firms' projects. I structurally estimate the parameters of the model and show that the model is able to explain the levels and a significant fraction of the volatilities of CDO tranche spreads. In the second essay, I take the user cost approach to modelling a banking firm and analyze banks' optimal response to monetary and regulatory changes. The bank maximizes its profit choosing the quantities of financial goods such as deposits, loans, and investments based on their user costs. I estimate the system of demand and supply of financial goods using data on U.S. banks over the 1992-2013 period. The policy tools change the user costs of the financial goods and, therefore, bank's demand and supply of financial goods. I report the effects of an increase in interest paid on reserves, federal funds rate and others. In the third essay, I develop a framework for estimating demand systems with autoregressive conditional heteroscedasticity (ARCH). In this setup, the conditional variance is a random variable depending on current and past information. Since most economic and financial time series are nonlinear, using parametric nonlinear demand systems with an ARCH-component can significantly improve the quality of a model. I prove the invariance of the maximum likelihood estimator with respect to the choice of an estimated demand subsystem.Item Open Access Three Essays on the Impact of Analysts on Financial Markets(2019-06-25) Farhat, Amel; David, Alexander; Sezer, Deniz; Lehar, Alfred; Hollifield, Burton; Koskinen, YrjöThis thesis studies three different topics on the impact of analysts on financial markets. The first chapter documents that the price of analysts’ dispersion risk in the cross-section of stock returns changes over time, in particular, turns positive in periods of high analyst dispersion. Our result holds using 100 test portfolios that are double-sorted on their betas and their coefficients on aggregate dispersion, as well as numerous test portfolios. We construct a general equilibrium model in the spirit of Merton’s ICAPM, in which analysts of different types have heterogeneous beliefs and provide different forecasts of a macroeconomic factor. The consumer does not trust either analyst fully, and dynamically adjusts the weight given to each analyst, given the history of their past forecast performance. In equilibrium, each asset’s risk premium depends on its exposure to three factors: the market portfolio, the macroeconomic factor, and, a ”flight-to-safety” factor. The first term increases with dispersion, while the third term declines. The latter decline occurs because consumers shift into assets with lower cash flow betas during periods of high dispersion. The model provides a testable implication that the changing sign of the price of risk is due to the flight-to-safety during periods of high dispersion. We find strong support for such a flight to safety in the data. The second chapter questions the view that all analysts are equal and develop the idea that analysts may have different strategic behaviour to influence the market. The main contribution is to provide evidence that the market assigns different weights to different analysts and to show that more experienced analysts have more significant impact on asset prices and trading activity. The third chapter studies the relation between dispersion, short sale constraints, and stock returns. The main contribution is to analyze the high returns of a portfolio formed by unconstrained and low opinion divergence stocks. Such portfolio contains stocks with low total and idiosyncratic risks and low leverage. Three and four factors models, as well as liquidity factors models, cannot account for these high abnormal returns.Item Open Access Using Price Information as an Instrument of Market Discipline in Regulating Bank Risk(2011-01-26T20:47:39Z) Lehar, Alfred; Seppi, Duane; Strobl, GunterAn important trend in bank regulation is greater reliance on market discipline. In particular, information impounded in securities prices is increasingly used to complement supervisory activities of regulators with limited resources. The goal of this paper is to analyze the theoretical foundations of market-based bank regulation. We nd that price information only improves the e ciency of the regulator's monitoring function if the banks' risk-shifting incentives are not too large. Further, if the regulator cannot commit to an ex ante suboptimal auditing policy, market-based bank regulation can lead to more risk taking in equilibrium, increasing the expected payments by the deposit insurance agency. Finally, we show that the regulatory use of market information can decrease the investors' incentives to acquire costly information, thereby reducing the informativeness of stock prices.Item Open Access Variance and Volatility Swaps and Futures Pricing Under Geometric Markov Renewal Processes and Stochastic Volatility Models(2017) Wang, Zijia; Swishchuk, Anatoliy; Badescu, Alexandru; Lehar, AlfredIn this thesis, we consider volatility swap, variance swap and VIX future pricing under different asset models. Specifically, we obtain the new results of swaps and futures pricing for the geometric Markov renewal processes (GMRP) models under different schemes and approximation approaches. We also consider four different stochastic volatility models and jump diffusion models which are commonly used in financial market, and use convexity correction approximation technique and Laplace transform method to evaluate the variance and volatility strikes and estimate the VIX future prices. In empirical study, we use Markov chain Monte Carlo algorithm for model calibration based on S&P 500 market data, evaluate the effect of adding jumps into the asset price processes on volatility derivatives pricing, and compare the performance of different pricing approaches.