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Conferences

SESSION I-1 : PORTFOLIO MANAGEMENT (20/12/2007 à 08h30)

Ekaterini Panopoulou (University Of Piraeus)

Dynamic Asset-Liability Management for Defined-Benefit Pension Plan

Auteurs : DETEMPLE Jerome (Boston Univ.), RINDISBACHER Marcel (J. Rotman School of Management), ZHOU Jing (Boston Univ)

Intervenants : DETEMPLE Jerome (Boston University School of Management)

Rapporteurs : GOLLIER Christian (Toulouse School of Economics)

A dynamic asset-liability management model for defined-benefit pension plans is developed.
The plan sponsor exhibits features of loss aversion and tolerance for limited shortfalls in assets
under management relative to the liability due. The optimal contribution policy, the optimal
dividend policy and the associated asset allocation rule are derived and analyzed. Sound
Asset-Liability Management is shown to entail future withdrawals from, as well as future
contributions to, the pension fund, even if the current funding shortfall is large. The structure
of the optimal portfolio is discussed. An extension to liabilities with unhedgeable cash flow
components is outlined. A numerical analysis is carried out to examine the behavior of the
optimal policy.

detemple@bu.edu

Assets returns volatility and investment horizon: The French case

Auteurs : BEC Frédérique (University of Cergy-Pontoise) and GOLLIER Christian (Toulouse School of Economics)

Intervenants : GOLLIER Christian (Toulouse School of Economics)

Rapporteurs : SALABER Julie (Paris-Dauphine University)

This paper explores French assets returns predictability within a VAR setup. Using quarterly
data from 1970Q4 to 2006Q4, it turns out that bonds, equities and bills returns are actually
predictable. This feature implies that the investment horizon does indeed matter in the asset
allocation. The VAR parameters estimates are then used to compute real returns conditional
volatility across investment horizons. The results reveal the same kind of horizon effect as the
one found in recent empirical studies using quarterly U.S data. More specifically, the annualized
standard deviation of French stocks returns goes down from 2,8% for a 25 year investment
horizon. They suggest that long-horizon investors overstate the share of bonds in their portfolio
choice when neglecting the horizon effect on risk of asset returns predictability.

Email : gollier@cict.fr

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Learning or Robust Control

Auteurs : BRANGER Nicole (Univ. of Muenster), SCHLAG Christian (Goethe Univ.), WU Lue (Goethe Univ.)

Intervenants : WU Lue (Goethe University)

Rapporteurs : PRIGENT Jean-Luc (University of Cergy-Pontoise)

Model mis-specification can cause substantial utility losses in portfolio planning. In this
paper, we compare two approaches to cope with this problem, robust control and
learning.We derive the optimal portfolio strategies and the utility losses due to model
mis-specification. Surprisingly, neither learning nor robust control is uniformly superior
to the naive approach where the investor simply ignores model risk. Furthermore, a
comparison of the two approaches shows that learning takes some time to have an
impact, so that short-term investors are in some (but not all) cases better off with robust
control than with learning.

Email : wu@finance.uni-frankfurt.de

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Utilitarianism and fairness in portfolio positioning

Auteurs : DE PALMA André and PRIGENT Jean-Luc (University of Cergy-Pontoise)

Intervenants : PRIGENT Jean-Luc (University of Cergy-Pontoise)

Rapporteurs : BERNARD Carole (University of Waterloo)

The paper introduces the theory of optimal positioning of financial products. It is illustrated
in the context of long-term intertemporal portfolio allocation and can be applied for example
to asset allocation funds. We embed this problem in location theory : the portfolio is optimized
within the investors’risk aversion dimension. For the CRRA utility functions, we compute
explicitly the distance functions. For the first (utilitarian criterion), the average utility of the
investors is maximized. For the second one (fairness criterion), the choice of portfolio is
optimized so that the average monetary loss due to the lack of customization is minimized.
Given the distribution of investors’ risk aversion, we provide a solution method and an algorithm
to optimally position standardized portfolio along one of these two criteria.

Email : jean-luc.prigent@u-cergy.fr

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SESSION I-2 : CAPITAL STRUCTURE (20/12/2007 à 08h30)

Frédéric Lobez (Université de Lille 2)

The Choice between Private and Public Capital Markets: The Importance of Disclosure Standards and Auditor Discipline to Countries Divesting State-owned Enterprises

Auteurs : GUEDHAMI Omrane (Univ. South Carolina) and PITTMAN Jeffrey (Hong Kong Univ.) Email : Omrane.guedhami@moore.sc.edu

Intervenants : GUEDHAMI Omrane (University of South Carolina)

Rapporteurs : HOMBERT Johan (Ensae)

For a sample of 1,866 privatizations from 37 countries, we estimate the impact of
disclosure standards and legal institutions that discipline auditors on the method
chosen to divest state-owned enterprises. The agency conflict between minority
and controlling shareholders can impede a government from privatizing by selling
its stake to diffuse investors in the public capital market with a share-issue privatization
(SIP) that typically generates important spillover economic benefits, rather than
an asset sale to a small group of buyers. However, prior research implies that
accounting transparency plays a natural role in preventing controlling shareholders
from siphoning corporate resources by helping minority investors identify any diversionary
practices. After controlling for firm-level and other country-level characteristics, we find
that SIPs become more likely when countries mandate strict disclosure standards,
although this result is sensitive to model specification. In comparison, we provide strong,
robust evidence that SIPs are more likely in jurisdictions that relax the burden of proof in
civil lawsuits and criminal prosecutions against auditors, leading to more credible financial
statements. These core results remain after controlling for other aspects of the auditing
environment and liability standards in securities laws. From a policy perspective, our
cross-country research suggests that investors value reforms that subject auditors to more
severe private and public enforcement over several other legal determinants, including
enhancing disclosure standards.

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Law, Finance, and Venture Capital: The Cost of Capital for High-Tech Firms

Auteurs : HALL Thomas (Christopher Newport University) Email : thomas.hall@cnu.edu

Intervenants : HALL Thomas (Christopher Newport University)

Rapporteurs : VILANOVA Laurent (Université de Lyon 2)

We use data from a professionally-conducted survey of high-technology managers to
examine international variation in private equity contracting and cost of capital. Employing
new variables and analyzing hundreds of financing rounds in the U.S., Europe, and Israel,
we find that the sophistication of investors and the number of nonpecuniary services they
provide are significantly associated with the ownership ratio (amount raised/valuation), but
that funding rounds in the United States do not receive lower ownership ratios than elsewhere.
We also find that useful patents are associated with a lower cost of capital, and that the
institutional environment for entrepreneurial finance is related to exit strategy and valuation.

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The Liquidation Dilemma of Money Losing Investments – The Impact of Investment Experience and Window Dressing of Private Equity and Venture Capital Funds

Auteurs : KROHMER Philipp (Goethe University Frankfurt and CEPRES Center of Private Equity Research) Email : philipp.krohmer@cepres.de

Intervenants : KROHMER Philipp (Goethe University Frankfurt and CEPRES Center of Private Equity Research)

Rapporteurs : SAMET Anis (Hec Montréal)

This study examines the investor’s decision on the exit of loss making projects. The investor
faces a liquidation dilemma: follow-on financing versus terminating a loss making investment,
and thereby giving up the turn-around option. I examine the role of investment experience on
solving this liquidation dilemma. Evidence from a sample of 712 realized Private Equity and
Venture Capital investments confirms that young and inexperienced fund managers (i) hold
loss-making investments longer, (ii) invest a higher share of the fund’s portfolio capital into
these losers, and (iii) provide relatively more financing rounds to these deals before the exit
compared to more experienced funds. The results are robust to controlling for potential
reputational concerns.

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Why privatize? A competition for ownership approach

Auteurs : ROSA Jean-Jacques & PERARD Edouard (IEP Paris) Email : jjr@jjrosa.com

Intervenants : PERARD Edouard (IEP Paris)

Rapporteurs : KOLE Erik (Erasmus School of Economics - Erasmus University Rotterdam)

Theories of privatization or nationalization typically compare the economic or political
efficiency of private and state ownership, either in general, or for a list of specific goods
and services. They aim at defining, once and for all, what a normative allocation of
ownership should be, i.e. the desirable scope of government. Such attempts however can
hardly account for the “big reversal” of post WWII nationalization policies, which gave
way to the current privatization wave, initiated in the 1980s. Since what is to be explained
is the fluctuating allocation of property rights over firms between private investors and the
state, we model a competitive bidding for these rights in which the private investors value
shareholders wealth, and the state values political survival, obtained through the transfer
of the firm cash flow to various political clienteles. The investors who value the firm most
get the rights of control, a privatization or a nationalization, according to which type of
investor has the lowest cost of funds. Recent data on privatization amounts in eight countries
lend support to our theory.

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SESSION II-1 : IPOs (20/12/2007 à 11h00)

Laurent Vilanova (Université de Lyon 2)

The Survival and Success of Penny Stock IPOs: Canadian Evidence

Auteurs : CARPENTIER Cécile and SURET Jean-Marc (Laval University) Email : Cecile.Carpentier@fsa.ulaval.ca

Intervenants : CARPENTIER Cécile (Laval University)

Rapporteurs : ANDRE Paul (ESSEC)

In Canada, listing requirements and financing practices have created an atypical
situation: IPOs mainly consist of micro- and penny stocks offered by non-venture-
backed companies in the developing stage. The proportion of issuers without revenues
(positive earnings) is 45% (71%) and the median issue price is CAN$0.75, less than
Euro0.50. Consequently, Canada offers a very rich context to study the effect of less
restrictive requirements on the survival and success of these issues. This situation,
where a stock market plays a role usually assumed by specialized intermediaries such
as venture capitalists, is also of interest for public policy makers. We analyze the survival
and success of Canadian IPOs based on an original sample of 2,373 issues, free of
selection or survival bias, from 1986 to 2003. Following the TSX Venture Exchange, we
consider that a newly listed company succeeds if it graduates to a senior exchange.
Using Survival functions and Cox Proportional Hazards models, we test whether the
differences between the survival and success rates are linked to the class of minimum
listing requirements in which the company is situated at the IPO. To link the listing
requirement level with the fate of newly listed companies, we divide issuers into four
categories, from the lowest level (no sales, earnings or history) to the highest (major
exchange listing requirements). Lastly, we estimate the costs and benefits in terms of
failure and success associated with easing the new listing requirements. Our research
attempts to contribute to the debate surrounding IPO regulation, listing requirements,
and the balance between investor protection and issuer financing.

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Going Public to Acquire: The Acquisition Motive for IPOs

Auteurs : CELIKYURT Ugur, SEVILIR Merih and SHIVDASANI Anil (Unc Kenan Flagler Business School) Email : merih_sevilir@unc.edu

Intervenants : SEVILIR Merih (Unc Kenan Flagler Business School)

Rapporteurs : HEGE Ulrich (HEC Paris)

This paper demonstrates that the desire for making acquisitions is a primary consideration
underlying the decision of companies to go public. Using a sample of IPOs from 1994-2004,
we show that newly public firms make acquisitions at a torrid pace. This acquisition activity
is fueled both through the initial proceeds from the IPO but also through the use of an acquisition
currency that is used to raise capital for both cash and stock financed acquisitions. Acquisitions
play a more significant role in the growth of newly public firms than internal investment through
R&D and CAPEX.

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Venture Capital and Timing of IPO

Auteurs : TRABELSI Donia (University of Paris 1 Panthéon-Sorbonne) Email : Donia.Trabelsi@univ-paris1.fr

Intervenants : TRABELSI Donia (University of Paris 1 Panthéon-Sorbonne)

Rapporteurs : SENTIS Patrick (Cr2m - Gscm Montpellier Business School)

Our purpose is to find the optimal exit time of a venture capitalist (VC) under profit flow
uncertainty. We consider that the VC sells his holding in two steps: at the offer price at
the date of the initial public offering (IPO) taking into account the underpricing, then at
the expiration of the lock-up period. We use a real options approach when the profit
flow of the venture capital backed company follows an arithmetic Brownian motion. We
find a closed- form solution of the threshold at which it is optimal for the VC to exit and
also determine the expected first hitting time.

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SESSION II-2 : MARKET MICROSTRUCTURE (20/12/2007 à 11h00)

Terrence Henderschott (University of California, Berkeley)

Evaluating Spread Decomposition Models with a Basket Security

Auteurs : CHELLEY-STEELEY Patricia and PARK Keebong (Aston University) Email : parkk@aston.ac.uk

Intervenants : PARK Keebong (Aston University)

Rapporteurs : CELLIER Alexis (Université Paris 12 Val-de-Marne)

In this paper we evaluate the most widely used spread decomposition models. We argue
that Exchange-Traded Funds (ETFs) should have lower adverse selection costs than
appropriate control securities. We make this assertion because ETFs have the
characteristics of a basket security described by Subrahmanyam (1991). As such, an
ETF will diversify away the private information held by informed traders. Diversification
of this information causes ETFs to have lower adverse selection costs than individual
securities providing a criteria for evaluating spread decomposition models. Comparisons
of adverse selection costs for ETF’s and control securities obtained from spread decomposition
models show that only the Glosten-Harris and the Madhavan-Richardson-Roomans models
provide estimates of the spread that are consistent with the diversification of private information
in a basket security. Our results are robust even after controlling for the stock exchange.

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The Early News Catches the Attention: On the Relative Price Impact of Similar Economic Indicators

Auteurs : NIESSEN Alexandra & HESS Dieter (University of Cologne) Email : niessen@wiso.uni-koeln.de

Intervenants : NIESSEN Alexandra (University of Cologne)

Rapporteurs : VAN ACHTER Mark (University of Bonn)

There is strong evidence that macroeconomic news influence prices in financial markets.
However, why do markets react to some indicators while they ignore others with a similar
content? Based on a Bayesian learning model, we show that market impact is mainly
determined by information quality and early availability of an indicator. To test the model’s
implications, we analyze the successive introduction of the two largest German business
surveys: the well-known IFO index and the recently introduced ZEW economic indicator.
In line with the model’s prediction, we find a diminishing market impact of the IFO index
after the ZEW indicator was introduced.

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A Dynamic Limit Order Market with Diversity in Trading Horizons

Auteurs : VAN ACHTER Mark (University of Bonn) Email : Mark.VanAchter@uni-bonn.de

Intervenants : VAN ACHTER Mark (University of Bonn)

Rapporteurs : GRESSE Carole (University Paris-Dauphine)

This paper considers a trading game in which sequentially arriving liquidity traders either
opt for a market order or for a limit order. One class of traders is considered to have an
extended trading horizon, implying their impatience is linked to their trading orientation.
More specifically, sellers are considered to have a trading horizon of two periods, whereas
buyers only have a single-period trading scope (the extended buyer-horizon case is
completely symmetric). Clearly, as the life span of their submitted limit orders is longer, this
setting implies sellers are granted a natural advantage in supplying liquidity. This benefit is
hampered, however, by the direct competition arising between consecutively arriving sellers.
Closed-form characterizations for the order submission strategies are obtained when solving
for the equilibrium of this dynamic game. These allow to examine how these forces affect
traders’ order placement decisions. Further, the analysis yields insight into the dynamic
process of price formation and into the market clearing process of a non-intermediated,
order driven market.

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SESSION III-1 : ASSET PRICING (20/12/2007 à 14h00)

Ako Doffou (Sacred Heart University)

Information Asymmetries, Common Factors, and International Portfolio Choice

Auteurs : COVRIG Vincentiu ( Northridge), FONTAINE Patrice (Eurofidai Grenoble 2), JIMENEZ Sonia (CERAG INPG) SEASHOLES Marck (INSEAD)

Intervenants : JIMENEZ Sonia (Cerag and Grenoble Institute of Technology) sonia.jimenez@wanadoo.fr

Rapporteurs : PANOPOULOU Ekaterini (University Of Piraeus)

We propose a rational expectations equilibrium model in which agents are asymmetrically
informed about both asset-specific components of payoffs and common factors that
affect payoffs. The model produces closed-form solutions for asset prices and investor
holdings (positions). We apply the model to a study of international portfolio choice. Low
levels of asset-specific information, high levels of information about common (cross-border)
factors, and different factor loadings lead to wide dispersion in home bias measures. We
empirically analyze cross-border mutual fund holdings of 5,781 stocks from 21 developed
countries and find broad support for our model’s implications.

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Price Adjustment to News with Uncertain Precision

Auteurs : HAUTSCH Nikolaus (Humboldt-Univ of Berlin), HESS Dieter, MUELLER Christoph (Univ. Cologne) christoph.mueller@wiso.uni-koeln.de

Intervenants : MUELLER Christoph (University of Cologne)

Rapporteurs : BURLACU Radu (Université de Grenoble 2)

Bayesian learning provides a core concept of information processing in financial markets.
Typically, it is assumed that market participants perfectly know the quality of released news.
In practice, information precision is rarely disclosed and needs to be assessed by traders.
We extend the standard Bayesian model by including different precision signals that are
actually available to traders. When these signals indicate a higher precision, the model
predicts a stronger price reaction to news. Empirical tests based on intra-day T-bond
futures price reactions to U.S. employment announcements suggest that these precision
signals have a strong influence on the pricing mechanism of the market.

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Replicating the properties of hedge fund returns

Auteurs : PAPAGEORGIOU Nicolas, REMILLARD Bruno, HOCQUARD Alexandre (Hec Montreal) Email : nicolas.papageorgiou@hec.ca

Intervenants : PAPAGEORGIOU Nicolas (Hec Montreal)

Rapporteurs : HALL Thomas (Christopher Newport University)

In this paper, we implement a multi-variate extension of Dybvig (1988) Payoff Distribution
Model that can be used to replicate not only the marginal distribution of most hedge fund
returns but also their dependence with other asset classes. In addition to proposing ways
to overcome the hedging and compatibility inconsistencies in Kat and Palaro (2005), we
extend the results of Schweizer (1995) and adapt American options pricing techniques to
evaluate the model and also derive an optimal dynamic trading (hedging) strategy. The
proposed methodology can be used as a benchmark for evaluating fund performance, as
well as to replicate hedge funds or generate synthetic funds.

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SESSION III-2 : MERGERS & ACQUISITIONS I (20/12/2007 à 14h00)

Paul André (ESSEC)

Acquisition Values and Optimal Financial (In)Flexibility

Auteurs : HEGE Ulrich (Hec Paris) and HENNESSY Christopher (Uc Berkeley) Email : hege@hec.fr

Intervenants : HEGE Ulrich (Hec Paris)

We analyze optimal financial structure for an incumbent and potential entrant accounting for
feedback effects in secondary asset markets. By issuing sufficient debt, the incumbent creates
overhang and credibly commits against acquiring entrant assets. This depresses asset values
and entrant returns, thus reducing the likelihood of entry. The cost of debt overhang is that
the incumbent fails to make positive NPV acquisitions if entry deterrence fails. The implied
trade-off between ex post efficiency and entry deterrence explains why growth firms eschew debt
while value firms issue public debt. Contrary to the traditional view, if predation is feasible,
the case for shallow pockets is potentially stronger, since an unlevered incumbent prefers to
acquire whereas a levered incumbent responds to entry with predation. Since predation reduces
entrant returns and acquisitions raise them, the entry deterrence benefit from shallow pockets is
magnified if predation is feasible. Optimal entrant contracts depend upon incumbent financial
structure, with higher debt capacity and stronger financier ownership rights if the incumbent has
deep pockets.

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An empirical model of merger and acquisitions timing

Auteurs : KASTRINAKI Zafeira and STONEMAN Paul (The University of Warwick) Email : zafeira.kastrinaki@wbs.ac.uk

Intervenants : KASTRINAKI Zafeira (The University of Warwick)

Rapporteurs : TRABELSI Donia (University of Paris 1 Panthéon-Sorbonne)

An empirical model of merger timing is constructed combining different micro-perspectives
into a single framework that endogenises the merger process and illuminates the dynamics
of merger activity. The model is estimated using survival analysis upon a uniquely constructed
UK panel data set covering merger activity in twelve major industrial sectors over the period
from 1990 to 2004. The findings provide strong empirical evidence for the endogenous
character of mergers, especially as regards herd and preemption effects. The results also
indicate that, mergers are strategic complements in the sense that by reducing competition
in the market, merger activity today can dampen future competitive response and as a
consequence mergers can become more profitable as merger activity proceeds. It is
further shown that firm specific characteristic play an important role in merger timing.
Specifically firms that are low growth but resource-rich, high growth but resource-poor,
pay low dividends, have low investment opportunities or are small, are all considered ‘
attractive’ targets and are more likely to be acquired. The relative importance of these
micro-forces may differ at different stages of a merger wave, causing in this way the
bandwagon rolling at full speed. These results provide answers to the long-standing
question regarding the dynamics of merger activity and its wave like behavior.

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Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria

Auteurs : LOBE Sebastian and SCHENK Nils-Christian (University of Regensburg) Email : sebastian.lobe@wiwi.uni-regensburg.de

Intervenants : LOBE Sebastian (University of Regensburg)

Rapporteurs : CARPENTIER Cécile (Laval University)

In this paper, we provide the first empirical evidence of fairness opinions in Europe.
Legal requirements concerning the use of fairness opinions in mergers and acquisitions
are significantly different in Germany, Switzerland, and Austria. We examine the
determinants of target fairness opinions in these various regulatory settings and, moreover,
investigate the impact of such opinions on abnormal target returns. Whilst in Germany and
Austria market participants do not deem fairness opinions important, they do create value
for shareholders in Switzerland. Because conflicts of interest between target board and
bidder are a main determinant of fairness opinions in Switzerland, we conclude that, when
target management faces such conflict, external expert advice replaces the board’s opinion
on the offer.

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SESSION IV-1 : CORPORATE FINANCE I (20/12/2007 à 16h00)

Ulrich Hege (HEC Paris)

How Do Firms Choose Between Intermediary and Supplier Finance?

Auteurs : ANTOV Dimitar (Cambridge Group) and ATANASOVA Christina (Simon Fraser University) Email: catanaso@sfu.ca

Intervenants : ATANASOVA Christina (Simon Fraser University)

Rapporteurs : KOIVULEHTO Hanna (Vienna University of Economics and Business Administration)

We examine the dynamics of firm’s choice of short-term financing between intermediated
loans and trade credit. We argue that trade credit facilitates the access to and improves
the terms of conventional loans. We model the idea that trade credit is a favorable signal
of the creditworthiness of the borrower. Hence, some firms will use trade credit in addition
to conventional institutional loans despite its higher cost. Our empirical results support the
predictions of the theoretical model we develop. We show that firms with high agency costs
rely heavily on supplier financing. For these firms trade credit has a significant positive
effect on the level of intermediated borrowing.

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Should we Invest in Microcredit? A Financial Analysis of Microcredit from a USD-Investor’s Perspective

Auteurs : KOIVULEHTO Hanna (Vienna University of Economics And Business Administration) Email : hanna.koivulehto@wu-wien.ac.at

Intervenants : KOIVULEHTO Hanna (Vienna University of Economics And Business Administration)

Rapporteurs : FASNACHT Philipp (University of Geneva)

This study makes an innovative approach towards rating the profitability of micro-credit.
While previous research on microfinance has been conducted through the analysis of
individual case studies, this study takes a more widespread look at the financial performance
of micro-lending organizations in less developed financial markets. A sample consisting
of 24 micro-finance institutions (MFIs) operating in different regions worldwide is observed
over a period of up to 9 consecutive years. The influence of both organization-specific and
environmental factors on the profitability of their loan portfolios is examined. Furthermore,
the capacity of those institutions to generate sufficient yields on their credit operations in
order to attract rational foreign investors is rated. For this purpose, the realized credit spreads
on MFI-portfolios are compared with spreads observable for exchange-traded USD-corporate
bonds exhibiting equal levels of risk. The panel design and the investigation of multiple (partly
qualitative) external variables influencing loan portfolio returns contribute to a comprehensive
investigation of MFI-performance. Indeed, MFI-specific factors are found to be much more
decisive for profitability than any environmental conditions.

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Leverage Choice and Credit Spread Dynamics when Managers Risk Shift

Auteurs : LAZRAK Ali and CARLSON Murray (University of British Columbia) Email : ali.lazrak@sauder.ubc.ca

Intervenants : LAZRAK Ali (University of British Columbia)

Rapporteurs : TROEGE Michael (ESCP-EAP Paris)

We provide new insights that link compensation terms to credit spreads and leverage by
structurally modeling the financial and operating decisions of a risk-averse manager paid
with cash and stock. Optimal debt balances tax benefits with the utility cost resulting from
ex-post asset substitution. When cash-stock ratios are low (high), initial leverage is high
and debt is safe (risky), while moderate cash-stock ratios are associated with low initial
leverage. High credit spreads can be generated even when leverage and equity volatility
are low. Using a large cross-section of 646 US based corporate credit default swaps (CDS)
covering 2001-2006, we find strong evidence that the flexibility provided by the compensation
terms is important for explaining CDS rates. With parameters estimated to match moments
based on stock volatility and CDS rates, our model outperforms a similarly calibrated version
of the Merton (1974) model, explaining an additional 10% of the variation in CDS rates and
reducing average bias by over 50%.

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The Determinants of Sin Stock Returns: Evidence on the European Market

Auteurs : SALABER Julie (Paris-Dauphine University) Email : Julie.Salaber@dauphine.fr

Intervenants : SALABER Julie (Paris-Dauphine University)

Rapporteurs : LOBE Sebastian (University of Regensburg)

This article deals with the time-series variation in average sin stock returns – returns on
publicly-traded companies involved in producing tobacco, alcohol, and gaming. Next to
nothing has been written about this class of stocks, especially on the European stock
market. The hypothesis I explore in this paper is that sin stock returns depend on legal
and cultural characteristics such as religious preferences, the level of excise taxation,
and the degree of litigation risk. Using data on 18 European countries over the period
1975-2006, my results show evidence that Protestants are more “sin averse” than
Catholics, and require a significant premium on sin stocks. Moreover, sin stocks have
higher risk-adjusted returns when they are located in a country with high excise taxation;
and sin stocks outperform other stocks when the litigation risk is higher, even after
controlling for well-known risk factors such as market capitalization and book-to-market
ratio. These findings suggest that sin stock returns depend on both legal and religious
environments of each country.

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SESSION IV-2 : RISK MANAGEMENT (20/12/2007 à 16h00)

François Quittard-Pinon (Université de Lyon 1)

Comparison Results for Credit Risk Portfolios

Auteurs : COUSIN Areski and LAURENT Jean-Paul (Isfa - Lyon 1 University) Email : areski.cousin@univ-lyon1.fr

Intervenants : COUSIN Areski (Isfa – Claude Bernard Lyon 1 University)

Rapporteurs : ELKAMHI Redouane (Mcgill University)

This paper is dedicated to the risk analysis of credit portfolios. Assuming that default
indicators form an exchangeable sequence of Bernoulli random variables and as a
consequence of de Finetti’s theorem, default indicators are Binomial mixtures. We can
characterize the supermodular order between two exchangeable Bernoulli random
vectors in terms of the convex ordering of their corresponding mixture distributions.
Thus we can proceed to some comparisons between stoploss premiums, CDO tranche
premiums and convex risk measures on aggregate losses. This methodology provides a
unified analysis of dependence for a number of CDO pricing models based on factor
copulas, multivariate Poisson and structural approaches.

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Time Varying Default Risk Premia in Corporate Bond Markets

Auteurs : ELKAMHI Redouane and ERICSSON Jan (Mcgill University) Email : redouane.elkamhi@mail.mcgill.ca

Intervenants : ELKAMHI Redouane (Mcgill University)

Rapporteurs : JEANNERET Alexandre (Swiss Finance Institute - University of Lausanne)

We develop a methodology to study the linkages between equity and corporate bond risk
premia and apply it to a large panel of corporate bond transaction data. We and that a
significant part of the time variation in bond default risk premia can be explained by
equity implied bond risk premium estimates. We compute these estimates using a recent
structural credit risk model. In addition, we show by means of linear regressions that
augmenting the set of variables predicted by typical structural models with equity-implied
bond default risk premia significantly increases explanatory power. This in turn suggests
that time varying risk premia are a desirable feature for future structural models.

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Admissible Designs of Debt-Equity Swaps for Distressed Firms: Analysis, Limits and Applications

Auteurs : MORAUX Franck & NAVATTE Patrick (University of Rennes 1) Email : franck.moraux@univ-rennes1.fr

Intervenants : MORAUX Franck (University of Rennes 1)

Rapporteurs : COUSIN Areski (Isfa – Claude Bernard Lyon 1 University)

This paper reconsiders the design of debt-equity swaps that are common tools to financially
restructure distressed firms. While an ad hoc approach consists in characterizing a set of
three parameters, we demonstrate that a system of two equations defines admissible designs.
Hence, assuming that creditors do not want to bankrupt the firm nor they want to evict
completely current equity holders, we solve the debt holders’ design problem. We then
undertake an in-depth analysis of corresponding solutions and we show that debt-equity
swaps can significantly increase the probability of being reimbursed of the remaining due
payment in the next future.

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The Level and Quality of Value-at-Risk Disclosure by Commercial Banks

Auteurs : PERIGNON Christophe (Hec Paris) and SMITH Daniel (Simon Fraser University) Email : perignon@hec.fr

Intervenants : PERIGNON Christophe (Hec Paris)

Rapporteurs : DOFFOU Ako (Sacred Heart University)

In this paper we study (1) the level of Value-at-Risk (VaR) disclosure and (2) the accuracy
of the disclosed VaR figures for a sample of US and international commercial banks. To
measure the level of VaR disclosures, we develop a VaR disclosure index that captures
many different facets of market risk disclosure. Using panel data over the period 1996- 2005,
we find large differences in the level of disclosure between US commercial banks and an
overall upward trend in the quantity of information released to the public. Our cross-sectional
analysis of the largest banks in the world indicates that US disclosures are below average.
We also find that Historical Simulation is by far the most popular VaR method. We assess
the accuracy of the disclosed VaR figures by studying whether actual daily VaRs contain
information about the volatility of subsequent trading revenues. We find that VaR computed
using Historical Simulation contains very little information about the future volatility of trading
revenues and that a simple GARCH model often dominates bank proprietary VaR models.
We show that this finding is a natural consequence of the growing popularity of the Historical
Simulation method among banks.

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SESSION V-1 : CORPORATE FINANCE II (21/12/2007 à 09h00)

Edith Ginglinger (Université Paris-Dauphine)

Financial Strength and Product Market Performance: The Real Effects of Corporate Cash Holdings

Auteurs : FRESARD Laurent (University of Neuchâtel) Email : laurent.fresard@unine.ch

Intervenants : FRESARD Laurent (University of Neuchâtel)

Rapporteurs : MICHENAUD Sébastien (HEC Paris)

In this paper I empirically investigate whether a cash-rich firm can capture market
shares to its cashpoor rivals, and examine the determinants of such strategic gains.
Using U.S. intra-industry data from 1971 to 2005, I find that firms with larger cash
reserves than their industry-year average expand their sales markedly more than rivals
in future years. This “cash effect” turns out be magnified when industry rivals face
tighter financing constraints, when investment opportunities are more interdependent
between product market participants as well as in response to negative (unexpected)
shocks to aggregate demand. Noteworthy, my tests show that the impact of cash on
market share gains has increased over-time and that the importance of this evolution
varies along with industry characteristics and the financial structure of rivals. Overall,
my results provide strong evidence that by enhancing competitive performance, firm’s
cash policy encompasses an important strategic dimension.

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Corporate Investment and Analyst Pressure

Auteurs : MICHENAUD Sébastien (Hec Paris) Email : sebastien.michenaud@mailhec.net

Intervenants : MICHENAUD Sébastien (Hec Paris)

Rapporteurs : BESSIERE Véronique (Université Montpellier 2)

This paper empirically investigates whether executives alter capital budgeting decisions
to meet or exceed analysts’ earnings per share (EPS) consensus forecasts. I find that
(i) firms reduce investment when analyst pressure to increase EPS is high and that (ii)
firms increase their likelihood to meet or beat analyst EPS consensus forecasts by
reducing investment. Investment has a direct impact on EPS through depreciation
expenses and collateral costs. The observed reduction in investment to meet forecast
targets occurs primarily within firms with better investment opportunities. This pattern is
consistent with the passing up of valuable investment opportunities in response to analyst
pressure.

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Assigning Market Power to Price Cap Regulation by the Analysis of Investment Decisions

Auteurs : NAGEL Thomas & RAMMERSTORFER Margarethe (Vienna Univ. of Economics and Business Administration) thomas.nagel@wu-wien.ac.at

Intervenants : NAGEL Thomas (Vienna University of Economics and Business Administration)

This paper examines the effects and dependence of price regulation, quality aspects or
benchmark scaling and market power. By considering a model without regulation, we
first show how quality parameters, included via benchmark scaling factors, influence
investment behavior and how the additional existence of market power affects these
results. This existence of market power allows further conclusions for certain stages of
market liberalization. Hence, it becomes possible to analyze investment behavior over
time which corresponds to different levels of regulatory development, starting from a
natural monopoly and ending up at a market with workable competition. We can then
enhance the previous model by creating a general framework with regulation and derive
further optimal investment decisions. Therefore, we use a real option approach which
enables us to compare the two frameworks and the adherent investment triggers. Our
model allows the regulatory authority to test their regulatory setup ex ante as well as ex
post in order to quantify the consequences of their activities.

SESSION V-2 : DERIVATIVES (21/12/2007 à 09h00)

Jerôme Detemple (Boston University School of Management)

Optimal Design of Structured Products and the Role of Capital Protection

Auteurs : BERNARD Carole and TIAN Weidong (University of Waterloo), BOYLE Phelim (Wilfrid Laurier University) Email :c3bernar@uwaterloo.ca

Intervenants : BERNARD Carole (University of Waterloo)

Rapporteurs : WU Lue (Goethe University)

Index linked products (ILP) and other structured products as a new asset class are
currently becoming very popular. In this paper we develop a simple model to address
the optimal design issue from the seller’s perspective of a class of structured products.
The model derives some common features of these ILPs in particular the need for
capital protection, (even though issuers might have different preferences of risk), in an
incomplete market setting. On the other hand, the optimal design of ILPs can depend on
the issuer’s preference of risk and thus provides some explanations to the heterogeneity
of the index-linked products currently traded on the financial market. Through an empirical
analysis of the structured products currently traded on the American stock exchange,
we find out that this theoretical optimal design model partly supports current designs of
index linked products.

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American Index Put Options Early Exercise Premium Estimation

Auteurs : DOFFOU Ako (Sacred Heart University) Email : adoff21@yahoo.com

Intervenants : DOFFOU Ako (Sacred Heart University)

This paper examines empirically the value of early exercise by testing the ability of two
American put valuation models to predict the early exercise premium for the S&P 100
American put options. An accuracy test and a quality test are performed on (1) the
MacMillan (1986) & Barone-Adesi and Whaley (1987) model, and (2) the Carr, Jarrow
and Myneni(1992) model. The test results show that early exercise premium is significant
regardless of moneyness. Moreover, consistent with the theory, the value of early exercise
is significantly negatively related to moneyness and interest rates and significantly positively
related to time to maturity and to the volatility of the underlying index. Both American put
valuation models examined do not fully capture the value of early exercise embedded in
American put prices.

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Get an implied correlation to price equity-interest rates hybrids

Auteurs : HAMEL Mathieu (Inria) Email : mathieu.c.hamel@gmail.com

Intervenants : HAMEL Mathieu (Inria)

Rapporteurs : Aboura Sofiane (Université de Paris-Dauphine)

To price vanilla options, the market does not rely on empirical parameters. Why should
it be the case when pricing hybrids? When pricing long dated equity or indexes linked
derivatives, one cannot assume the interest rates to be constant. As a consequence the
market, consciously or not, does not only make bets on the volatility but also on the
potential drift of the underlying. Therefore long dated vanilla options incorporate information
on the dynamic of the interest rates. Using market prices from variance swaps, caps/floors
and long dated vanilla options, one proposes a simple way to extract implied correlation
between indexes and interest rates through a stochastic interest rates-stochastic volatility model.

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SESSION VI-1 : INTERNATIONAL FINANCE (21/12/2007 à 11h00)

Patrick Navatte (Université de Rennes 1)

The Choice of ADRs

Auteurs : BOUBAKRI Narjess, COSSET Jean-Claude and SAMET Anis (Hec Montréal) Email: anis.samet@hec.ca

Intervenants : SAMET Anis (Hec Montréal)

Rapporteurs : FRESARD Laurent (University of Neuchâtel)

We study the determinants of a firm’s decision to issue one of the four available ADR
programs (Level I, Level II, Level III, and Rule 144A). We find that the firm's attributes
(size, income, asset growth, leverage, privatization, ownership structure, and country-
of-origin) and the firm's home-country institutional variables (accounting rating and
legal protection of minority shareholders) condition this choice. We also examine the
issuing activity and the determinants of the ADR choice before and after the enactment
of the Sarbanes-Oxley (SOX) Act. Following this structural change, we provide evidence
of a reallocation between ADR programs. Compared to the pre-SOX period, we find that,
after SOX, firms from emerging markets and those from countries with weak legal protection
of minority shareholders show an increased probability of choosing Rule 144A and Level
III, respectively.

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Rare Disasters and Exchange Rates: A Theory of the Forward Premium Puzzle

Auteurs : FARHI Emmanuel (Harvard University) and GABAIX Xavier (New York University) Email : xgabaix@stern.nyu.edu

Intervenants : FARHI Emmanuel (Harvard University)

Rapporteurs : SCHROEDER David (Bonn Graduate School of Economics)

We propose a new theory of the forward premium puzzle for exchange rates. Our
explanation combines two ingredients: the possibility of rare economic disasters, and
an asset view of the exchange rate. Our model is frictionless and has complete markets.
In the model, rare worldwide disasters can occur and affect each country’s productivity.
Each country’s exposure to disaster risk varies over time according to a mean-reverting
process. Risky countries command high risk premia: they feature a low exchange rate
and a high interest rate. As their risk premium reverts to the mean, their exchange rate
appreciates. Therefore, the currencies of high interest rate countries appreciate on average.
This provides an explanation for the forward premium puzzle (a.k.a. uncovered interest rate
parity puzzle). We then extend the framework to incorporate two factors: a slow moving
productivity factor, and a fast mean-reverting disaster risk factor. We calibrate the model
and obtain quantitatively realistic values for the volatility of the exchange rate, the forward
premium puzzle regression coefficients, and near-random 1 walk exchange rate dynamics.
Finally, we work out a model of the stock market, which allows us to make a series of
predictions about the joint behaviour of exchange rates, bonds, options and stocks across
countries.

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International stock market correlations: A sectoral approach

Auteurs : FASNACHT Philipp and LOUBERGÉ Henri (University of Geneva) Email : philipp.fasnacht@ecopo.unige.ch

Intervenants : FASNACHT Philipp (University of Geneva)

Rapporteurs : FARHI Emmanuel (Harvard University)

A lot of studies dealing with international correlations look only at correlations at the market
level and often use its time-varying nature as motivation for their work. However, why and
how market correlations change is a point that is still not very well understood. As the market
is composed of different sectors, we propose to look into this question by studying the behavior
of equity correlations at the sectoral level. We show how sectoral correlation coefficients
determine the market correlation coefficient and decompose the latter into two parts ; one
that represents country factors and one that represents industry factors. This decomposition
allows us to get a clear idea on how and why market correlations change over time. We also
get some interesting insights such as market level correlations are higher on average than
sectoral correlations as well as that sectoral correlations between countries tend to do be
more stable over time than market level correlations and sectoral correlations within countries.
Finally, we present evidence that a few sector correlations related to Financial, Industrial and
Consumer Services segments drive the evolution of the market level correlation.

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SESSION VI-2 : MARKET EFFICIENCY (21/12/2007 à 11h00)

Roland Gillet (Université de Paris 1 – Panthéon Sorbonne)

Corporate disclosure, information uncertainty and investors’ behavior: A test of the overconfidence effect on market reaction to goodwill write-offs

Auteurs : BESSIÈRE Véronique (CR2M - University Montpellier 2), SENTIS Patrick (CR2M - Gscm Montpellier Business School)

Intervenants : BESSIÈRE Véronique (CR2M – University of Montpellier 2) veronique.bessiere@wanadoo.fr

Rapporteurs : MUELLER Christoph (University of Cologne)

This article examines the link between uncertainty and investors’ reaction to goodwill
write-offs (GWWOs) for a sample of French firms during the period 2001- 2004. Our
theoretical setting is derived from Daniel, Hirshleifer and Subrahmanyam (1998,
hereafter DHS98) who posit that overconfidence leads to an overreaction to private
information, followed by too little adjustments when the information becomes public and
then a long adjustment which reduce slowly the mispricing in the long run. We consider
three proxies for uncertainty – stock return volatility, analyst coverage and dispersion in
analyst forecasts – and sort two samples of GWWOs according to the level of uncertainty.
Our results confirm DHS98 model and, indirectly, that overconfidence is boosted by
uncertainty. We identify a particular corporate event – here a bad signal: goodwill write-
offs – and a particular context – high uncertainty – that fit DHS98 model, allowing private
information prospecting, overconfidence in this information and arbitrage obstacles. Our
tests confirm the overconfidence effect on investors’ reaction: the high-uncertainty sample
is characterized by strongly negative abnormal returns during the period preceding GWWOs
announcement, associated with high volatility. At the announcement date, negative abnormal
returns are observed in line with the selfattribution bias effect (the overreaction is strengthened
by a confirming signal). The overreaction to private information is corrected in the long run,
where we observe positive abnormal returns, creating a reversal. No abnormal returns are
observed for the low-uncertainty sample. This study offers interesting insights in two ways:
(i) in the area of financial markets and efficiency, it provides a test of a major over- and
under-reaction model, (ii) in the area of corporate finance and accounting, it helps to
explain investors’ reaction to corporate financial disclosure
according to a theoretical approach of information process and inference.

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Implied Cost of Capital Based Investment Strategies - Evidence from International Stock Markets

Auteurs : ESTERER Florian (Swisscanto Asset Management Ag), SCHROEDER David (Bonn School of Economics) Email : david.schroeder@uni-bonn.de

Intervenants : SCHROEDER David (Bonn Graduate School of Economics)

Rapporteurs : ATANASOVA Christina (Simon Fraser University)

This paper demonstrates that investors can generate excess returns by implementing
trading strategies that are based on publicly available analysts’ forecasts. To capture
expectations of equity analysts, we employ the so-called implied cost of capital (ICOC).
Calculated as the internal rate of return that equates share price with discounted forecasted
cash-flows, the ICOC allows condensing a variety of analysts’ expectations about the
future of any company into one single figure. Our analysis across the world’s largest
stock markets shows that a simple portfolio strategy yields significant excess returns
with respect to several common asset pricing models.

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Riding Bubbles

Auteurs : KOLE Erik (Erasmus University Rotterdam), GUENSTER Nadja (Maastricht University), JACOBSEN Ben (Massey University)

Intervenants : KOLE Erik (Erasmus University Rotterdam) email : kole@few.eur.nl

Rapporteurs : LE SAOUT Erwan (Université Paris 1 Panthéon-Sorbonne & ESCEM)

Theoretical studies have yet to reach consensus on a rational investor's optimal response
to asset price bubbles. Their predictions vary between going short, sidelining, and riding
bubbles. We document patterns in U.S. industry returns that support riding bubbles as an
optimal response, consistent with the theory of Abreu and Brunnermeier (2003). An investor
who rides bubbles can earn abnormal returns in the order of 0.41% to 0.64% per month.
However, these high returns come at the expense of a high crash risk: upon the detection
of a bubble, the risk of a crash more than doubles. We evaluate the asset allocation
implications of this tradeoff in a mean-downside risk framework. The additional return an
investor can earn by riding a bubble more than offsets the higher risk of a crash.

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SESSION VII-1 : INTEREST RATES (21/12/2007 à 14h00)

Patrice Poncet (Université de Paris 1 – Panthéon Sorbonne)

An Analysis of the True Notional Bond System Applied to the CBOT T-Bonds Futures

Auteurs : BEN-ABDALLAH Ramzi, BEN-AMEUR Hatem and BRETON Michèle (Hec Montréal) Email: ramzi.ben-abdallah@hec.ca

Intervenants : BEN-ABDALLAH Ramzi (Hec Montréal)

Rapporteurs : MORAUX Franck (University of Rennes 1)

The main purpose of this paper is to apply the True Notional Bond System (TNBS) proposed
by Oviedo (2006) for the theoretical pricing of the Chicago Board of Trade Treasury-bond
futures, one of the most traded derivatives in the world. This system is proposed as an
alternative to the current conversion factor system (CFS), whose poor performance is
well known. In this paper, we price the CBOT T-bond futures as well as all its embedded
delivery options and compare the corresponding results under the CFS in a stochastic
interest rate framework. Our pricing procedure is an adaptation of the Dynamic Programming
(DP) algorithm described in Ben-Abdallah et al. (2006), giving the value of the futures
contract under the TNBS as a function of time and current short-term interest rate.
Numerical illustrations, provided under the Vacisek and CIR models, show that the TNBS
reduces dramatically the value of all the delivery options embedded in the CBOT T-bond
futures.

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A Structural Model for Sovereign Credit Risk

Auteurs : JEANNERET Alexandre (Swiss Finance Institute – University of Lausanne) Email : alexandre.jeanneret@unil.ch

Intervenants : JEANNERET Alexandre (Swiss Finance Institute – University of Lausanne)

Rapporteurs : RAIMBOURG Philippe (University of Paris 1)

This study examines the risk inherent to sovereign default on external debts denominated
in foreign currency. I develop a contingent claims theory of a sovereign, which optimally
chooses its level of foreign debt and default policy. In the model, renegotiation upon default
plays an important role in determining country creditworthiness. In crises episodes, the
sovereign initiates a process of debt restructuring with the lender. Both parties bargain
over a reduction of the debt service, which determines the level of economic sanctions.
With a recovery rate being endogenous to the model, I show that the generated credit
spreads are higher than when renegotiation is not accounted for and thus more consistent
to the data. This prediction stands in stark contrast to the existing theoretical literature.
On the empirical side, the analysis explores the relation between economic fundamentals
and offers predictions that are consistent with the empirical literature. Finally, I compare
credit spreads generated by the structural model with the observed EMBI+ spreads for a
sample of emerging economies. The model is able to replicate most of the daily credit spread
changes over the 1998-2006 period.

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Joint Modelling of International Yield Curves

Auteurs : KOIVU Matti, NYHOLM Ken and STROMBERG Jacob (European Central Bank) Email : ken.nyholm@ecb.int

Intervenants : NYHOLM Ken (European Central Bank)

Rapporteurs : BEN-ABDALLAH Ramzy (Hec Montréal)

In this paper we propose a new approach to modelling and estimating yield curves across
multiple currency areas. The idea is that one area acts as the ‘cardinal’ economy by
affecting the yield curve evolution in the other markets. To some extent, the yield curve
factors of the ‘cardinal economy’ serve the role as global yield curve factors. The adopted
methodology is inspired by the 3-factor Nelson-Siegel yield curve model where a particular
loading structure is identified for the ‘non-cardinal’ currency areas. Using US, German and
Japanese data the model is shown to fit well both the cross-sectional and time-series dynamics
of yields.

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Testing for Instability in Factor Structure of Yield Curves

Auteurs : PHILIP Dennis & URGA Giovanni (Cass Business School), KAO Chihwa (Syracuse University) Email : D.Philip-1@city.ac.uk

Intervenants : PHILIP Dennis (Cass Business School - Faculty Of Finance)

Rapporteurs : VILLA Christophe (ENSAE)

A widely relied upon but a formally untested consideration is the issue of stability in factors
underlying the term structure of interest rates. In testing for stability, practitioners as well
as academics have employed ad-hoc techniques such as splitting the sample into a few
sub-periods and determining whether the factor loadings have appeared to be similar over
all sub-periods. Various authors have found mixed evidence on stability in the factors. In
this paper we develop formal tests in order to evaluate the factor structure stability of the
US zero coupon yield term structure. We find the factor structure of level to be unstable
over the sample period considered. The slope and curvature factor structures are however
found to be stable. We corroborate the literature that variances (volatility) explained by the
level, slope, and curvature factors are unstable over time. We find evidence of the presence
of common economic shocks affecting the level and slope factors, unlike slope and curvature
factors that responded differently to economic shocks and were unaffected by any common
instabilities.

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SESSION VII-2 : CORPORATE GOVERNANCE (21/12/2007 à 14h00)

Omrane Guedhami (University of South California)

Ownership structure and Debt leverage: Empirical Test on French Firms

Auteurs : DE LA BRUSLERIE Hubert (University Paris 1 Sorbonne) and LATROUS Imen (University of Quebec) Email : ilatrous@uqac.ca

Intervenants : LATROUS Imen (University of Quebec at Chicoutimi)

Rapporteurs : DERRIEN François (HEC Paris)

The appropriation of private benefits by controlling shareholders introduces a conflict
with outside shareholders. Debt is traditionally analyzed as disciplinary in the shareholders-
manager conflict. It is less commonly analyzed in relation to controlling and outside shareholders.
This paper shows that the joint problematics of ownership, private benefits and debt leverage
are linked in a framework of financial governance. At the same time, debt helps to manage
the conflict because it may be easier for the controlling shareholders to modify the leverage
ratio than to modify his share of capital. A model shows that debt appears as a key governance
variable as it can moderate private benefits or, conversely, may help diversion. The entrenchment
effect and the fear for failure may explain the impact of debt. The existence of self-limited
appropriation logics is highlighted as well as the importance of the information policy
adopted by the controlling shareholders. In this paper, we test a possible non-linear relation
between shareholders ownership and leverage. Using a sample of 118 French listed firms over
the period 1998-2002, our results show that controlling shareholders ownership is linked with debt
at different stage. At low levels of ownership, controlling shareholders use more debt in order to
inflate their voting power and resist to unfriendly takeovers attempts. When ownership reaches a
certain point, controlling shareholders’ objectives converge further to those of outside shareholders.
Thus, controlling shareholders have little incentives to use more debt. Moreover, the fear of financial
distress will prompt controlling shareholders to reduce the firm’s leverage ratio.

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Ownership, Control and Market Liquidity

Auteurs : GINGLINGER Edith and HAMON Jacques (University Paris Dauphine) Email : edith.ginglinger@dauphine.fr

Intervenants : GINGLINGER Edith (University Paris Dauphine)

Rapporteurs : PERIGNON Christophe (HEC Paris)

We examine how ownership concentration and the separation of ownership and control
affect market liquidity in France. We find that firms with a large insider blockholder
exhibit significantly lower liquidity. Different methods of concentrating control affect
liquidity in different ways. Pyramid structures negatively affect liquidity for all pyramiding
firms. Double voting right shares, a French specific means of control enhancement
rewarding long-term shareholders, lead to increased liquidity for outside investors of
small, familyfirms, by reducing the probability of informed trading.

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The Market for Corporate Directors

Auteurs : LEE Changmin (Indiana University, Bloomington) Email : cl3@indiana.edu

Intervenants : LEE Changmin (Indiana University, Bloomington)

Rapporteurs : QUERE Bertrand (Université de Grenoble 2)

This paper develops a matching model in the market for directors to explain
equilibrium board quality. In my model, (1) the boards of directors have the role of
monitoring and advising, (2) the impact of a CEO’s quality increases with the size of
a firm under his control, (3) the CEO and the boards could be either complements
or substitutes, in the production function, and (4) the boards enjoy money value
and reputation value. When the reputation depends on market value of firms, po-
tential directors like to work at firms with talented CEOs if they can enjoy enough
reputational gain on boards owing to talented CEOs. In contrast, when potential
directors want value-added for reputation, they would be at firms with low-ability
CEOs if the CEO and the boards are substitute. My empirical estimates suggest
that talented ongoing CEOs and former CEOs work as outside directors of firms
with high market capitalization and with high sales, though not with high assets.
The quality of boards is higher where CEO pay is higher, but whether they like to
work at firms with talented CEOs or not is ambiguous due to the endogeneity. The
firms with talented boards would be likely to pay more to CEO. I also find that the
firms with high sales pay more to outside directors. A 1% increase in sales makes
board compensation increase by 0.66%. Finally, board pay is 0.13% higher where
CEO pay is 1% higher. We can infer that the CEO and the boards are complements
in the production function.

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The value-relevance of foreign currency disclosures

Auteurs : MULLER Aline (Hec Management School Liège Univ.) and VERSCHOOR Willem (Radboud University Nijmegen) Email : aline.muller@ulg.ac

Intervenants : MULLER Aline (Hec Management School of the University of Liège)

Rapporteurs : DUMONTIER Pascal (University Grenoble 2)

This paper studies the value-relevance of FCD disclosures on an unique and extensive
ample of European companies. Our findings show that these firms use FCDs to hedge
and not to speculate but that the impact of hedging strategies’ disclosures is statistically
and economically weak revealing that either (i) managers hedge only a small proportion
of the currency risk they are facing, or that (ii) investors make systematic errors when
assessing the link between disclosed FCD usage and firms’ risk exposures. We find strong
evidence in favor of the existence of economies of scale in hedging and that European
firms engage in hedging programs in response to tax convexity. Our results tend to support
financial distress motives to hedge, but no evidence is found in favor of agency costs related
motives. Whereas the degree of international involvement strongly determines the magnitude
and significance of a firm’s exchange rate exposure, it appears that large firms benefit from
the diversification of their foreign operations and are to a greater extent capable of
implementing operational hedging strategies.

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SESSION VIII-1 : MERGERS & ACQUISITIONS II (21/12/2007 à 16h30)

François Derrien (HEC Paris)

Fire Sales: Revisiting the Market Equilibrium Approach

Auteurs : HOMBERT Johan (Ensae) Email : hombert@ensae.fr

Intervenants : HOMBERT Johan (Ensae)

Rapporteurs : PLAKSEN Evgeny (Swiss Finance Institute)

I explore the impact of fire sales on welfare. Because they allocate assets according to
financial muscle rather than real efficiency, they are usually seen as socially costly.
Though I show the following irrelevance result : When firms are cashless and use industry-
specific assets, the competitive equilibrium exhibits fire sales and though is socially
optimal. By contrast, when cash-rich outsiders can acquire assets in the industry, firms
hoard less liquidity and the asset resale price is lower than in the social optimum. Although
too many assets are reallocated from efficient cash-poor firms towards inefficient cash-
rich firms, restricting such asset transactions (for example with anti-takeover laws) makes
a bad situation worse.

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Value of your Advisor’s Advice

Auteurs : PLAKSEN Evgeny (Swiss Finance Institute) E-mail : plaksen@isb.uzh.ch

Intervenants : PLAKSEN Evgeny (Swiss Finance Institute)

Rapporteurs : SURET Jean-Marc (Université de Laval)

This empirical paper addresses the issue of the quality of financial advice given by
investment banks regarding firms’ acquisition activities. Motivated by anecdotal and
documented evidence on the cases of ”fee generating” motives in advisory business,
the hypothesis of the paper is whether the better established contacts of investment
bankers with firm’s executives can boost the phenomenon of ”chasing deals” and lead
to a larger number of value destroying acquisitions. We investigate whether closer
contacts between investment bankers and corporate management encourage the firm
to perform acquisitions characterized with lower abnormal returns. In this paper, the
event establishing close ties between advisors and executives is taking the firm public,
i.e. the conjecture is that those banks, who have underwritten company’s IPO issue,
have preferential access to its corporate executives, in that the bankers can easily
identify and pitch potential takeover targets deliberately and insistently. If the ”fee
generating” hypothesis is true, we expect the abnormal returns at acquisitions to be
lower for firms that went public with banks actively advising on M&A. In contrast,
whenever a firm goes public with an IPO-specialized bank, which does not seek fees
from extra M&A advisory, we expect this firm to have higher announcement returns at
acquisitions. The results suggest that there is indeed a negative relation between the
engagement of the underwriter in advisory business and stock performance at acquisitions.
The results stay robust when controlling for possible endogeneity of strategic choice of the
investment banker for IPO.

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Cosmetic Mergers: The Effect of Style Investing on the Market for Corporate Control

Auteurs : ZHANG Lei & MASSA Massimo(Insead) Email : massimo.massa@insead.edu

Intervenants : ZHANG Lei (Insead)

Rapporteurs : THESMAR David (HEC Paris)

We study the impact of style investing on the market for corporate control. We argue that
a firm may choose to boost its market value by merging with a firm that belongs to a style
that is more favored by the market. By using data on the flows in mutual funds, we construct
a measure of neglectedness, which relies directly on the identification of sentiment-induced
investor demand, rather than being a direct transformation of stock market data. We show
that bidders tend to pair with targets that are relatively less neglected. The merger with a less
neglected target generates a halo effect from the target to the bidder that induces the market
to evaluate the assets of the more neglected bidder at the (inflated) market value of the less
neglected target. Both bidder and target premia are positively related to the difference in
neglectedness between bidder and target. However, the target’s ability to appropriate the gain
is reduced by the fact that its bargaining position is weaker when the bidder’s potential for asset
appreciation is higher. We document a better medium-term performance of more neglected firms
taking over less neglected firms. The bidder managers engaging in these cosmetic mergers take
advantage of the window of opportunity created by the higher stock price induced by the M&A
deal to reduce their stake in the firm under convenient conditions.

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SESSION VIII-2 : EMPIRICAL METHODS (21/12/2007 à 16h30)

Christophe Pérignon (HEC Paris)

Testing For Jumps In A Discretely Observed Process

Auteurs : AIT-SAHALIA Yacine (Princeton University) and JACOD Jean (University of Paris 6) Email : yacine@princeton.edu

Intervenants : AIT-SAHALIA Yacine (Princeton University)

Rapporteurs : LE COURTOIS Olivier (EM Lyon)

We propose a new test to determine whether jumps are present in asset returns
or other discretelly sampled processses. As the sampling interval tends to 0, our test
statistic converges to 1 if there are jumps, and to another deterministic and known
value (such as 2) if there are no jumps. The test is valid for all Itô semimartingales,
depends neither on the law of the process nor on the coefficients of the equation which
it solves, does not require a preliminary estimation of these coefficients, and when there
are jumps the test is applicable whether jumps have finite or infinite activity and for an
arbitrary Blumenthal-Getoor index. We finally implement the test on simulations and
asset returns data.

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Assessing the power and the size of the event study method through the decades

Auteurs : AKTAS Nihat (Univ.Catholique Louvain Core & IAG), COUSIN Jean-Gabriel and DE BODT E.(Univ. Lille2 and Groupe Esc Lille)

Intervenants : COUSIN Jean-Gabriel (University of Lille2 and Groupe Esc Lille) jgcousin@univ-lille2.fr

Rapporteurs : WANG Zaizhi (Cerna, Ecole des Mines de Paris)

The idiosyncratic risk is a key input of the standard event study method. The recent
literature has suggested that the idiosyncratic risk is not stable through time, and it has
increased significantly in the nineties. This paper investigates to what extent the event
study method is affected by this economic phenomenon. Using both simulation and real
dataset analyses, we show that the classical event study methods suffer from a significant
loss of power due to increasing idiosyncratic risk, as the intuition suggests it.
A (and maybe the only) solution to alleviate the impact of increasing idiosyncratic risk
consists in increasing the sample size by a factor corresponding to the ratio of average
idiosyncratic variances between the analyzed periods.

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”Effective” parameters for stochastic volatility models

Auteurs : WANG Zaizhi (Cerna, Ecole des Mines de Paris) Email : Zaizhi.wang@ensmp.fr

Intervenants : WANG Zaizhi (Cerna, Ecole des Mines de Paris)

Rapporteurs : Pierre CLAUSS (ENSAI Rennes)

This paper tackles the issue of approximated formula for stochastic model with time dependent
model parameters, using an averaging principle. The idea lies in finding a similar model but
with constant parameters that is the closest to our initial process, along the same lines as
results proven by Gyöngy (1986) for general stochastic processes. We extend previous
results found by Piterbarg (2005) for the particular case of SABR model (Hagan (2002)).
The resulting formula can be evaluated very quickly solving the implied Riccati equations.
We compare the approximation with exact solution of the corresponding partial differential
equation using an ADI method. Numerical results show that the approximation works well
for short term maturities.

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