Structured Finance Deals: A Review of the Rating Process and Recent Evidence Thereof, 2012, Journal of Investment Management
The pooling and tranching of assets into prioritized cash-flow claims has become a substantial source of revenue for issuers as well as rating agencies in the last decade. With the recent demise of vehicles used to operationalize these structured deals, a natural question arises as to the quality of standards applied in structuring, managing, and ultimately rating these products. The purpose of this paper is to review rating practices in the area of structured finance, and to summarize the research and empirical evidence pertaining to these questions.
It Pays to Have Friends, with Byoung-Hyoun Hwang, 2009, Journal of Financial Economics
Currently, a director is classified as independent if he/she has neither financial nor familial ties to the CEO or to the firm. We add another dimension: social ties. Using a unique data set, we find that 87% of boards are conventionally independent, but that only 62% are conventionally and socially independent. Furthermore, firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay performance sensitivity, and exhibit stronger turnover-performance sensitivity than firms whose boards are only conventionally independent. Our results suggest that social ties do matter, and that consequently, a considerable percentage of the conventionally independent boards are substantively not.
Return Performance Surrounding Reverse Stock Splits, with April Klein and James Rosenfeld, 2008, Financial Management
We examine the long-run return performance of over 1,600 firms with reverse stock splits. These stocks record statistically significant negative abnormal returns over the three-year period following the month of the reverse split. The sample firms experience poor operating performances over the four years that include and follow the year of the reverse split, which suggests informational inefficiencies. Because these stocks have unique financial characteristics, we also show that they would be very difficult to sell short. Thus, arbitrageurs would be restricted in their ability to earn abnormal profits, even if they correctly anticipated a price decline.
Working Papers / Works in Progress
Going for Broke: Optimizing Investments in Distressed Debt, with Sanjiv Das, 2013
How should nancial intermediaries restructure and optimize portfolios of distressed debt?
What are the gains from doing so, and where do the gains come from? We employ a parsimo-
nious model for the pricing and optimal restructuring of distressed debt, i.e., loans that are
under-collateralized and are at risk of borrower default, where willingness to pay and ability
to pay are at issue. Distressed-debt investing requires optimization over all moments, not
just mean and variance, and with debt restructuring, the investor can endogenously alter the
return distribution of the candidate securities before subjecting them to portfolio optimiza-
tion. We show that post-restructuring return distributions of distressed debt portfolios are
attractive to xed-income investors, with risk-adjusted certainty equivalent yield pick-ups in
the hundreds of basis points.
Credit Spreads with Dynamic Debt, with Sanjiv Das, 2013
We provide a framework to analyze debt where there is a latent option to alter the underlying
principal. Specically, we extend the Merton (1974) model for static debt guarantees
in a setting with dynamic debt, where leverage can be ratcheted up as well as written down
through pre-specied policies. We show that for many dynamic debt covenants, ex-ante
credit spread term structures may be derived in closed-form using modied barrier option
mathematics, a class of exotic derivatives that are activated or de-activated upon accessing a
pre-determined barrier. We observe that principal write-down covenants decrease the magnitude
of credit spreads but increase the slope of the credit curve, transforming downward
sloping curves into upward sloping ones. On the other hand, ratchet covenants increase the
magnitude of ex-ante spreads without dramatically altering the slope of the credit curve.
Overall, explicitly modeling this latent option to alter debt leads to term structures of credit
spreads that are more consistent with observed empirics.
Directors' Decision-Making Involvement on Corporate Boards, 2013
Using the full set of committee memberships for the directors of Fortune 100 firms (which I collect from annual proxy statements), I introduce a measure to capture the extent of a director's involvement in making decisions that affect corporate policy, and I provide evidence of substantial variation in directors' decision-making power both within and across boards. I also show that considering the entire range of decision-making involvement can alter the implications of tests examining the link between board composition and corporate performance. Specifically, I find that the extent of affiliated directors' committee involvement is substantially and negatively associated with firm value and subsequent operating performance, and I argue that incorporating these differences in decision-making power has important implications for studies in corporate governance.
Social Ties and Earnings Management, with Byoung-Hyoun Hwang, 2012
We detect a significant presence of social ties between the CEO and audit committee members and our results suggest that these informal ties play a material role in audit-committee oversight. In particular, we find a substantially stronger, positive relation between abnormal (i.e., discretionary) accruals and the extent of an audit committee's connection to the CEO when we consider social ties in addition to the conventional ties. Moreover, we find that an audit committee's social affiliation is associated with an increased discontinuity in the earnings distribution surrounding earnings targets. Together, our findings suggest that informal ties play a material role in facilitating creative accounting practices.
Measuring Luck in CEO Outperformance, 2012
Firm performance is a crucial factor in how CEOs are evaluated. However, a CEO can be repeatedly lucky or unlucky, adding noise to performance outcomes as a measure of managerial ability. In this study, I examine how much of the observed cross-sectional dispersion in outcomes can be attributed to differences in luck as opposed to differences in skill. Using bootstrap simulations, I show that, even if all CEOs were equally skilled, we can expect substantial differences in performance outcomes. When comparing the simulated distribution of outcomes to the actual empirical distribution, I find that the best performing CEOs perform too well relative to the median to be completely explained by luck alone. However, the true underlying differences in skill are substantially smaller than suggested by simply looking at the raw performance differential.
Behavioral Portfolio Theory and Liability Directed Investing, with Sanjiv Das and Meir Statman
Link to: Faculty Page
Link to: Curriculum Vitae
Link to: SSRN page
Back to Main Page
Electronic versions of published papers/working papers are provided as a professional courtesy to ensure timely dissemination of the research for individual non-commercial purposes. Copyright, and all other rights therein, reside with the respective copyright holders, as stated within each paper. These files may not be reposted without permission.