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Sergey Chernenko Fisher Hall 818 |
Abstract: We document the consequences of money market fund risk taking during the European sovereign debt crisis. Using a novel data set of security-level holdings of prime money market funds, we show that funds with large exposures to risky Eurozone banks suffered significant outflows between June and August 2011. Due to credit market frictions, these outflows have significant spillover effects on other firms: non-European issuers that typically rely on these funds raise less financing in this period. The results are not driven by issuers' riskiness or exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. We show that relationships are important in short-term credit markets so that these spillover effects cannot be seamlessly offset, even though issuers are large, highly rated firms. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them.
Arbitrage Capital and Real InvestmentAbstract: We study the relationship between the supply of arbitrage capital and real investment. The investment of firms that depend on convertible debt for financing responds positively to flows into convertible arbitrage hedge funds. An extra $1 of fund flows increases capital expenditures of convertible dependent firms by $0.49. At the same time, convertible arbitrage strategy returns are uncorrelated with the stock returns of convertible dependent firms. Moreover, fund flows respond positively to lagged strategy returns but not to lagged returns of dependent firms, suggesting that the supply of capital is not driven by changes in firm investment opportunities. We also examine an isolated market dislocation that occurred in 2005 when funds suffered large withdrawals. Though the macroeconomic outlook was positive and stable, dependent firms sharply cut their investment in response to the withdrawal of capital, with the overall reduction in capital expenditures amounting to 55% of outflows. Our results suggest that firm investment responds to shocks to the supply of arbitrage capital.
Abstract: Standard theories of ownership assume insiders ultimately bear all agency costs and therefore act to minimize conflicts of interest. However, overvalued equity can offset these costs and induce listings associated with higher agency costs. We explore this possibility by examining a sample of public listings of Japanese subsidiaries. Subsidiaries in which the parent sells a larger stake and subsidiaries with greater scope for expropriation by the parent firm are more overpriced at listing, and minority shareholders fare poorly after listing as mispricing corrects. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.
The Real Consequences of Market SegmentationAbstract: We study the real effects of market segmentation due to credit ratings by using a matched sample of firms just above and just below the investment-grade cutoff. These firms have similar observables, including average investment rates. However, flows into high-yield mutual funds have an economically significant effect on the issuance and investment of the speculative-grade firms relative to their matches, especially for firms likely to be financially constrained. The effect is associated with the discrete change in label from investment- to speculative-grade, not with changes in continuous measures of credit quality. We do not find similar effects at other rating boundaries.
The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate SwapsAbstract: Existing cross-sectional findings on nonfinancial firms' use of derivatives that are usually interpreted as the result of hedging may alternatively be due to speculation. Panel data examinations can distinguish between derivatives practices that endure over time and are therefore more likely to result from hedging, and those that are more transient, thus more consistent with speculation. Our decomposition results indicate that hedging of interest rate risk is concentrated among high-investment firms, consistent with costly external finance. Simultaneously, firms appear to use interest rate swaps to manage earnings and to speculate when their executive compensation contracts are more performance sensitive.
Trading Activity and Macroeconomic Announcements in High-Frequency Exchange Rate Data