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Session I-1 Behavioural & Decision Making (17/12/2009 à 09h30)

F. Moraux

Decision Making In Nonstationary Environments: An Experimental Study Of Human Adaptation

Auteurs : Élise Payzan Le Nestour (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

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Intervenants : Élise Payzan Le Nestour (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

Rapporteurs : Patrick Roger

Evidence from evolutionary neurobiology has been mounting that the development of the modern human brain was shaped by increased nonstationarity in the natural environment, which forced humans to continuously be on the guard for sudden changes (“jumps”) and respond adaptively once such jumps were believed to have occurred. Some of this nonstationarity has been re-emerging in modern social institutions that humans have created, most notably, in financial markets. Indeed, periodically re-emerging instability has long plagued traders and investors, and nonstationarity has been the hallmark of modern econometric analysis of return-generating processes. Here, we conjecture that neurobiological evolution should actually have made humans fit for the instability of modern financial markets. We put this to test in the “Boardgame,” a new high-frequency sampling task wherein we isolated instability in the form of sudden jumps in the return generating processes. From subjects’ choices, we determined to what extent their learning reflected optimal Bayesian inference instead of a simple win-keep lose-switch “Reinforcement Learning” heuristic. In contrast to the latter, the Bayesian updating algorithms accommodate nonstationarity either by directly tracking the probability of a jump (the “Hierarchical Bayesian Model”) or by dynamically adjusting the memory of learning through explicit detection of jumps (the “Forgetting Bayes Model”). The Bayesian models beat the Reinforcement Learning model in terms of the ability to explain actual choices. This result suggests that humans are better adapted to instability in financial markets than previously thought.

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Testing alternative theories of financial decision making: an experimental study with lottery bonds

Auteurs : Patrick ROGER (EM Strasbourg Business School, Strasbourg University, LARGE Research Center)

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Intervenants : Patrick ROGER (EM Strasbourg Business School, Strasbourg University, LARGE Research Center)

Rapporteurs : Carole Bernard

In this paper, we present the results of a simple, easily replicable, survey study based on lottery bonds. It is aimed at testing whether agents make investment decisions according to expected utility, cumulative prospect theory (Tversky-Kahneman, 1992) or optimal expectations theory (Brunnermeier and Parker, 2005, Brunnermeier et al., 2007) when they face skewed distributions of returns. We show that more than 56% of the 245 participants obey optimal expectations theory. They choose a distribution of payoffs which is dominated for second-order stochastic dominance and which would not be chosen according to cumulative prospect theory, for a large range of parameter values.
Our results first cast doubt on the relevance of variance as a measure of risk; they show the importance of skewness in decision making and, more precisely, they emphasize the
attractiveness of the best outcome, an essential feature of optimal expectations theory. The ranking of outcomes, used in cumulative prospect theory, seems insufficient to characterize the way people distort beliefs. As by-products of this study, we illustrate that agents use heuristics when they choose numbers at random and have, in general, a poor opinion about the rationality of others.

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Term structure of psychological interest rate: A behavioural test

Auteurs : Hubert de La Bruslerie (University Paris IX Dauphine)

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Intervenants : Hubert de La Bruslerie (University Paris IX Dauphine)

Rapporteurs : Franck Moraux

The subjective value given to time, also known as the psychological interest rate, or the subjective price of time, is a core concept of the microeconomic choices. Individual decisions using a unique and constant subjective interest rate will refer to an exponential discounting function. However, many empirical and behavioural studies underline the idea of a non-flat term structure of subjective interest rates with a decreasing slope. Using an empirical test this paper aims at identifying in individual behaviours if agents see their psychological value of time decreasing or not. A sample of 243 individuals was questioned with regard to their time preference attitudes. We show that the subjective interest rates follow a negatively sloped term structure. It can be parameterized using two variables, one specifying the instantaneous time preference, the other characterizing the slope of the term structure. A trade-off law called “balancing pressure law” is identified between these two parameters. We show that the term structure of psychological rates depends strongly on gender, but appears not linked with life expectancy. In that sense, individual subjective time preference is not exposed to a tempus fugit effect. We also question the cross relation between risk aversion and time preference. On the theoretical ground, they stand as two different and independent dimensions of choices. However, empirically, both time preference attitude and slope seem directly influenced by the risk attitude.

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Session I-2 IPO & Mergers (17/12/2009 à 09h30)

U. Hege

Auctioned IPOs: The U.S. Evidence

Auteurs : François Degeorge (Swiss Finance Institute, University of Lugano); François Derrien (HEC Paris); Kent L. Womack (Tuck School of Business, Dartmouth College)

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Intervenants : François Derrien (HEC Paris)

Between 1999 and 2007, WR Hambrecht completed 19 IPOs in the U.S. using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is equally prevalent in auctions as in bookbuilt deals – but unlike in bookbuilding, investors in auctions tend to flip their shares more in cold deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher 10-day underpricing. Our results therefore suggest that auctioned IPOs could be an effective alternative to traditional bookbuilding.

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Shell Games: On the Stock Price Performance of Shell Companies

Auteurs : Ioannis V. Floros (College of Business, Iowa State University); Travis R. A. Sapp (College of Business, Iowa State University)

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Intervenants : Ioannis V. Floros

Rapporteurs : François Derrien

In each of the last eight years reverse mergers have outnumbered traditional IPOs as a mechanism for going public, and shell companies are providing fuel for much of this growth. We study 585 trading shell companies over the period 2006-2008. The purpose of most of these shell firms is to find a suitor for a reverse merger agreement. These companies have no systematic risk, operations, or assets, and their share price tends to decline over time. When a takeover agreement is consummated, shell company three-month abnormal returns are 48.1%. We argue that this exceptional return is compensation for shell stock illiquidity and the uncertainty of finding a reverse merger suitor.

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Pre-IPO dividend payments

Auteurs : Jens Martin (Swiss Finance Institute, University of Lugano); Richard Zeckhauser (John F. Kennedy School of Government, Harvard University)

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Intervenants : Jens Martin (Swiss Finance Institute, University of Lugano)

Rapporteurs : Ulrich Hege

We investigate dividend payments of companies prior to their IPOs. Our data sample consists of U.S companies conducting an IPO between 1980 through 2006. These dividend payments are significant both in number and size. We find support for the hypothesis that insiders seeking to exit use dividends as a means to avoid selling a large number of secondary shares in the IPO. Furthermore are managers actively managing their cash holdings prior the IPO. They try to avoid very high cash holdings. We reject the hypothesis that insiders try to strip the company off its hard assets in order to bring the overvalued part to the market.

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Session II-1 Corporate Finance 1 (17/12/2009 à 11h30)

F. Derrien

Leverage in Pyramids: When Debt Leads To Higher Dividends

Auteurs : Abe de Jong (Rotterdam School of Management, Erasmus University); Douglas V. de Jong (Tippie College of Business, University of Iowa); Ulrich Hege (Department of Finance, HEC Paris); Gerard Mertens (Rotterdam School of Management, Erasmus University)

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Intervenants : Ulrich Hege (Department of Finance, HEC Paris)

Rapporteurs : Gilles Sanfilippo

Analyzing pyramids in France, this paper explores the use of leverage in the pyramidal control chain as a control-enhancing mechanism and its relationship to payout policy. In contrast to previous work, we consider not only the control-enhancing effect of equity but explicitly include debt contracted along the control chain. We document that debt in holding companies constitutes a dominant part of the overall discrepancy between control rights and cash flow rights (the control wedge). We closely scrutinize the interaction between leveraged pyramids and payout policy. We find that the dividend payout decreases in the equity portion of the control wedge. At the same time, our evidence shows that the debt portion of the control wedge leads to larger dividend payouts. We suggest that the use of leverage in holding companies commits the dominant owner to more generous payouts since the dividends are needed to service debt in the pyramidal structure. We argue that this debt service hypothesis helps resolve contradictory results among earlier empirical studies. Only a fraction of the cash made available to controlling owners is actually paid out to them, consistent with the view that in leveraged pyramids, servicing debt along the control chain is a primary motive for dividend payouts.

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Dividend Signaling and Pecking Order When “Style” Is All That Matters

Auteurs : Alberto Manconi (Insead Finance Department)

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Intervenants : Alberto Manconi (Insead Finance Department)

Rapporteurs : Jens Martin

Two classic adverse selection theories, dividend signaling and the pecking order of capital structure, face significant empirical difficulties: the market underreacts to dividend increases, and firms issue large amounts of equity, contradicting the pecking order theory. This paper argues that “style investing” can explain these apparent anomalies. When investors allocate their portfolios purely on the basis of broad “styles” (e.g. value/growth), they make the stock price less sensitive to information about the individual firm. Thus the firm gains less from signaling, and bears a smaller dilution cost when issuing equity — and signaling and the pecking order break down. Using mutual fund flows to proxy for style investing and identify “hot” styles, this paper provides evidence supporting this argument. In a “hot” style, the firm is less likely to increase dividends, and the market reaction to the dividend increase is smaller. When in the long run style investing fades, the stock price gradually incorporates the full information contained in the dividend increase announcement: dividend–increasing stocks that at the announcement date belong to a “hot” style earn a significantly positive long–run abnormal return. On the other hand, in a “hot” investment style the firm issues more equity and less debt, and as style investing induces “good” firms to pool with the “bad” ones and issue equity, issuers driven by style investing are more profitable. A number of robustness checks distinguish these results from alternative explanations based on market timing or growth opportunities.

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Agency Risk and Firm Valuation: An Empirical Analysis of Venture Capitalists’ Private Expectations

Auteurs : Thomas Hartmann-Wendels (Department of Banking, University of Cologne); Georg Keienburg (Department of Banking & Graduate School of Risk Management, University of Cologne); Soenke Sievers (Kenan-Flagler Business School, University of North Carolina)

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Intervenants : Thomas Hartmann-Wendels (Department of Banking, University of Cologne)

Rapporteurs : Aurélie Sannajust

This study empirically evaluates the price impact of agency risk in firm valuation. Using a unique data set comprised of internal valuation documents, we find that venture capitalists use risk discounts to cope with expected agency risks. These effects are economically large: e.g., whenever investors deem the management team inexperienced or recent performance inadequate, a firm’s equity value drops by 17-25%. This effect is robust to i) controlling for private business risk expectations, ii) controlling for financial statement data, firm and market characteristics, and iii) examining the effect of financial contracting mechanisms to reduce agency risks.

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Session II-2 Asymetric Information (17/12/2009 à 11h30)

S. Jimenez

Rational Disposition Effects

Auteurs : Daniel Dorn (LeBow College of Business, Drexel University); Günter Strobl (Kenan-Flagler Business School, University of North Carolina)

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Intervenants : Daniel Dorn (LeBow College of Business, Drexel University)

Rapporteurs : Sonia Jimenez

The paper examines the tendency to sell winners and hold on to losers in a dynamic noisy rational expectations equilibrium with informed and uninformed investors. The key feature of the model is that the information asymmetry between investors varies over time. Besides demonstrating that the disposition effect is not intrinsically at odds with rational behavior, the model makes two novel predictions. First, disposition effects among uninformed investors should weaken after events that reduce information asymmetry. Second, disposition effects among uninformed investors should be weaker in persistent winners and persistent losers. The data, transactions of 30,000 clients at a German broker between 1995 and 2000, are consistent with these predictions.

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Uninformed Momentum Traders

Auteurs : A. Emre Konukoglu (Rotman School of Management, University of Toronto)

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Intervenants : A. Emre Konukoglu (Rotman School of Management, University of Toronto)

Rapporteurs : Carol Osler

This paper studies the relation between momentum trading and information. We present a variety of evidence supporting the hypothesis that momentum trading is linked to a lack of information. Firstly, using foreign portfolio flows in individual stocks we document significant momentum trading concentrated in stocks on which foreign investors potentially have more informational disadvantages. Small stocks, stocks with high volatility and low liquidity, and stocks that are internationally less visible are subject to greater momentum trading. In addition, stocks on which foreign trades indicate lower future profitability are subject to higher momentum trading. Secondly, we show that momentum trades exert contemporaneous price pressure and have no valuable longer-run information content. In two quarters following the momentum trades, stocks experience significant return reversal. Using the return reversal after momentum trades we also develop an implementable trading strategy that brings up to 8% per year. Thirdly, there is strong evidence that foreign investors neither possess local market specific information. We show that momentum trading is a sub-optimal investment strategy by showing the negative profitability of a strategy that buys past winners and sells past losers on the cross-section of stocks.

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Hedge Funds and the Origins of Private Information in Currency Markets

Auteurs : Carol Osler (Brandeis International Business School); Vitaliy Vandrovych (State Street Global Advisors, Boston)

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Intervenants : Carol Osler (Brandeis International Business School)

Rapporteurs : Daniel Dorn

This paper provides evidence that hedge funds are a critical source of private fundamental information in currency markets. We analyze the most disaggregated database of currency transactions to date, with ten different categories of market participants including six categories of end users. Our analysis of the information content of individual trades indicates that only one category of end user has information, specifically hedge funds. Orders placed by
Institutional investors, broker-dealers, central banks and government agencies, large corporations, and middle-market corporations provide little information about upcoming returns. Orders of banks in every size category carry information, consistent with now-standard theory that banks gather information from observing customer trades. Theory does not indicate whether banks should be better informed than their customers. Our results suggest that banks are better informed than their individual customers, possibly because they aggregate information from many customers.

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Session III-1 Banking & Insurance (17/12/2009 à 14h30)

C. Refait-Alexandre

Financial Crisis: Estimating the Risk of Assets in Balance

Auteurs : Giovanni Barone-Adesi (Swiss Finance Insitute, University of Lugano); Giuseppe Corvasce (Swiss Finance Insitute, University of Lugano)

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Intervenants : Giovanni Barone-Adesi (Swiss Finance Insitute, University of Lugano)

Rapporteurs : Markus Fischer

We propose a model able to estimate the risk of assets in balance from aggregate data by introducing a prudential measure called Filtered Historical Spectral Asset Measure (FH - SAM). Our measure combines a model based method to simulate the evolution of volatility with model free method of distribution. It provides a robust methodology to simulate the evolution of risk. The paper extends the debate in the literature about the tools for estimating the risk of assets for a financial institution in case of distress and systemic risk (Stiglitz et al. 2002; Lucas and McDonald 2006).

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Bank Capital Ratios, Competition and Loan Spreads

Auteurs : Markus Fischer (Goethe University Frankfurt) - Fischer@finance.uni-frankfurt.deMarkus Fischer (Goethe University Frankfurt); Julian Mattes (Goethe University Frankfurt); Sascha Steffen (University of Mannheim)

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Intervenants : Markus Fischer (Goethe University Frankfurt)

Rapporteurs : Carole Gresse

Bank Capital Ratios, Competition and Loan Spreads
This paper uses a dataset of all syndicated loans issued by U.S. borrowers during the 1993 to 2007 period and empirically investigates whether or not bank banks charge higher loan spreads for maintaining high capital ratios. We find convincing evidence that this is indeed the case. We further investigate whether this result can be explained by banks holding-up their borrowers. using various proxies for information asymmetry and competition, we cannot reject the hypotheses that all borrowers pay for banks having high capital ratios. In other words, this premium is not competed away even for the most transparent firms. Our findings have implications why borrowing costs are higher in the U.S. than in Europe.

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Risk Model Validation with Contaminated Data

Auteurs : Laurent FRÉSARD (HEC Paris); Christophe PÉRIGNON (HEC Paris); Anders Wilhelmsson (Lund University, Sweden)

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Intervenants : Christophe PÉRIGNON (HEC Paris)

Rapporteurs : Giovanni Barone-Adesi

A great challenge for both banks and regulators is to validate risk models. We show that a large fraction of US and international banks uses contaminated data when testing their risk models. In particular, most banks validate their market risk model using profit-and-loss data that include fees and commissions and/or intraday trading revenues. This practice is inconsistent with the definition of the employed market risk measure. Using both simulations and bank data, we find that data contamination has dramatic implications for backtesting and can lead to the acceptance of misspecified risk models. Interestingly, we show that the pernicious effect of data contamination has strengthened during the financial crisis.

Session III-2 International Finance (17/12/2009 à 14h30)

D. Isakov

The Political Economy of State Residual Ownership in Privatized Firms: Evidence from Emerging Markets

Auteurs : Narjess Boubakri (American University of Sharjah, UAE); Jean-Claude Cosset (HEC Montreal); Omrane Guedhami (University of South Carolina); Walid Saffar (American University of Beyruth)

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Intervenants : Omrane Guedhami (University of South Carolina)

Rapporteurs : Dusan Isakov

To investigate the control structure of newly privatized firms, we use a unique database of 221 privatized firms operating in 27 emerging countries over the 1980-2001 period. Specifically, we examine the determinants of residual state ownership after privatization over a window of up to six years after divestiture. We find that the residual state ownership is largely influenced by the size of the firm, the level of investor protection and the extent of corruption in the country. Controlling for the political institutions in place shows that government tenure (stability), the political system and political cohesion are important determinants of the residual state ownership in newly privatized firms. This result confirms that privatization is politically shaped and constrained by a dynamic that will differ between countries.

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Can Corporate Issuers Earn From Conformity among Institutional Investors? Evidence from International Bonds

Auteurs : Massimo Massa (Finance department, INSEAD); Alminas Zaldokas (Finance department, INSEAD)

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Intervenants : Alminas Zaldokas (Finance department, INSEAD)

We study whether bondownership by peers affects international institutional investor demand of bonds and what implications this relationship has for the prices of new bond issues and the decisions of firms to issue abroad. We use detailed US corporate bond ownership data and show that the demand of US bonds by international institutions is positively affected by bondownership of other investors from the same country. International ownership is related to higher yield spreads for the domestic issues and to lower offering yield spreads for the international issues. Firms would gain by issuing in countries where its bondholders are located as their peers provide additional demand. Indeed, we observe that firm issuance decisions are affected by the previous composition of its bondownership. The results are strongest for the firms that have higher deviation of analyst forecasts and lower ratings.

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Foreign bank entry and credit allocation in emerging markets

Auteurs : Hans Degryse (CentER,Tilburg University, and CESif); Olena Havrylchyk (CEPII); Emilia Jurzyk (International Monetary Fund); Sylwester Kozak (National Bank of Poland)

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Intervenants : Olena Havrylchyk (CEPII)

Rapporteurs : Alminas Zaldokas

We employ a unique data set containing bank-specific information to explore how foreign bank entry determines credit allocation in emerging markets. We investigate the impact of the mode of foreign entry – greenfield and takeover – on banks’ portfolio allocation to borrowers with different degrees of informational transparency, as well as by maturities and currencies. The impact of foreign entry on credit allocation may stem from the superior performance of foreign entrants (“performance hypothesis”), or reflect borrower informational capture (“portfolio composition hypothesis”). Our results are broadly in line with the theoretical models underpinning the portfolio composition hypothesis, showing that borrower informational capture determines bank credit allocation. In particular, we find that foreign banks that enter via greenfield investment devote a higher share of their portfolios to transparent borrowers, lend more at shorter maturity and in foreign currency. We find few differences between the portfolio composition of takeover and domestic private banks. We also document that there is a significant convergence over time between foreign and domestic banks in terms of groups of borrowers they lend to, while there is no convergence in terms of maturity and currency. Finally, we do not find any impact of bank ownership and mode of entry on lending rates.

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Session IV-1 Corporate Governance (17/12/2009 à 16h30)

C. Casamatta

Family Ownership, Multiple Blockholders and Firm Performance

Auteurs : Dušan Isakov (University of Fribourg); Jean-Philippe Weisskopf (University of Fribourg)

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Intervenants : Dušan Isakov

Rapporteurs : Gaël Imad’Eddine

Recent research has documented that family-controlled firms are very common around the world. This paper provides new evidence on the accounting and market performance of this type of companies. The empirical investigation is conducted on a market in which family firms are well-established and represent the most widespread form of ownership, namely Switzerland. Using panel data for the period 2003 to 2007 on companies listed on the Swiss exchange, we find evidence that family firms have a 1.19 higher Tobin’s Q and a 3% higher return on assets than non-family firms. A finer analysis reveals that the outperformance depends on the characteristics of the family business. First, we find evidence that family firms in which a second blockholder is present are even more profitable with a 5% higher return on assets and a 1.27 higher Tobin’s Q than non-family firms. In this case not only agency costs between management and shareholders are reduced but also between majority and minority shareholders by limiting private benefit extraction. Second, family firms in which a family is only an investor do not perform better than non-family firms. Only if family members are actively involved in management, as either CEO, Chairman or both do they add value and thus perform significantly better than outsiders. This indicates that family members have superior knowledge on their companies that is lost when they solely hold a financial participation in the firm. Finally, our results also show that these skills are not confined to the founder but are also present in heir-managed family firms. In particular we find that firms with descendant-CEO or founders acting as Chairman have better accounting and market performances.

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The Value of Independent Directors: Evidence from Sudden Deaths

Auteurs : Bang Dang Nguyen (Chinese University of Hong Kong); Kasper Meisner Nielsen (Chinese University of Hong Kong and CEBR)

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Intervenants : Kasper Meisner Nielsen (Chinese University of Hong Kong and CEBR)

Rapporteurs : Moqi Xu

We investigate the contributions of independent directors to shareholder value by examining the stock price reaction to sudden deaths in the United States from 1994 to 2007. We have four key findings. First, following the death of an independent director, the firm’s stock price drops by almost 1 percent on average. Second, the degree of independence and the power structure of the board determine the marginal value of independent directors. Third, independence is more valuable in crucial board functions, such as the audit committee. Finally, controlling for director-invariant heterogeneity using a fixed-effects approach, we identify the value of independence over and above the value of individual skills and competences. Overall, our results suggest that independent directors provide a valuable service to shareholders.

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CEO Employment Contract Horizon and Myopic Behaviour

Auteurs : Moqi Xu (INSEAD)

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Intervenants : Moqi Xu (INSEAD)

Rapporteurs : Catherine Casamatta

This paper studies the effects of horizon in CEO employment contracts on CEO performance. It uses the terms of 1,018 employment contracts to determine the employment time horizon of U.S. CEOs. Firms with shorter CEO contracts trade at a discount to firms with longer contracts. An investment strategy that bought firms with the longest remaining contract horizon and sold firms with the shortest CEO contracts would have earned 9.9% annual abnormal returns during the sample period. CEOs with short-term contracts invest less but exhibit higher profitability than their peers. This is consistent with the argument that short-term oriented CEOs sacrifice long-term investments for short-term value maximization. Short employment contracts also have a positive disciplining effect. When CEOs with longer term contracts are up for contract renewal and the probability of termination is high, they overinvest in unproductive or excessively risky projects and thereby destroy firm value by 34% more than CEOs with shortest term contracts in the cross-section.

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Session IV-2 Portfolio Management (17/12/2009 à 16h30)

C. Pérignon

Quantitative Forecast Model for the Application of the Black-Litterman Approach

Auteurs : Franziska Becker (Institute of Finance, Technical University Carolo-Wilhelmina) ;Marc Gürtler (Institute of Finance, Technical University Carolo-Wilhelmina)

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Intervenants : Franziska Becker (Institute of Finance, Technical University Carolo-Wilhelmina) ;Marc Gürtler (Institute of Finance, Technical University Carolo-Wilhelmina)

Rapporteurs : Luis Goncalves-Pinto

The estimation of expected security returns is one of the major tasks for the practical implementation of the Markowitz optimization. Against this background, in 1992 Black and Litterman developed an approach based on (theoretical established) expected equilibrium returns which also accounts for subjective investors’ views. In contrast to historical estimated returns, which lead to extreme asset weights within the Markowitz optimization, the Black-Litterman model generally results in balanced portfolio weights. However, the existence of investors’ views is crucial for the Black-Litterman model and with absent views no active portfoliomanagement is possible. Moreover problems with the implementation of the model arise, as analysts’ forecasts are typically not available in the way they are needed for the Black-Litterman-approach. In this context we present how (publicly available) analysts’ dividend forecasts can be used to determine an a-priori-estimation of the expected returns and how they can be integrated into the Black-Litterman model. For this purpose confidences of the investors’ views are determined from the number of analysts’ forecasts as well as from a Monte-Carlo simulation. After introducing our two methods of view generation, we examine the effects of the Black-Litterman approach on portfolio weights in an empirical study. Finally, the performance of the Black-Litterman model is compared to alternative portfolio allocation strategies in an out-of-sample study that has not been presented in literature before to the best of our knowledge.

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How Does Illiquidity Affect Delegated Portfolio Choice?

Auteurs : Luis Goncalves-Pinto (Marshall School of Business, University of Southern California)

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Intervenants : Luis Goncalves-Pinto (Marshall School of Business, University of Southern California)

Rapporteurs : Denitsa Stefanova

In a continuous-time dynamic portfolio choice framework, I study the problem of an investor who exogenously decides to delegate the administration of his or her savings to a risk-averse money manager who trades multiple risky assets in a thin market. I consider a manager who is rewarded for increasing the value of assets under management, which is the product of both the manager’s portfolio allocation decisions, taken over the investment period, and the money flows into and out of the fund, as a result of the portfolio performance relative to an exogenous benchmark. The model proposed here shows that, whenever the manager can substitute between more illiquid and less illiquid risky assets, he or she is likely to choose to hold an initial portfolio that is skewed toward more illiquid assets, and to gradually shift toward less illiquid assets over the investment period. The model further shows that several misalignments of objectives between the investor and the manager can lead to large utility costs on the part of the investor, and that these costs decrease with asset illiquidity. Solving for the shadow costs of illiquidity, the model indicates that delegated rather than direct investing is likely to lead to larger price discounts.

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Dynamic Correlation Hedging in Copula Models for Portfolio Selection

Auteurs : Denitsa Stefanova (University of Amsterdam); Redouane Elkamhi (University of Iowa, Henry B. Tippie College of Business)

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Intervenants : Denitsa Stefanova (University of Amsterdam)

Rapporteurs : Olivier Lecourtois

In this paper we address the issue of modeling extreme asset co-movements and their implications for the hedging demands of a dynamic portfolio. We propose a model that is able to accommodate an extremal dependence structure through the stationary distribution of the state variables underlying the asset price process, as well as through a dynamic conditional correlation specification, driven by latent and observable factors. With this we aim at replicating the stylized fact of increased dependence during extreme market downturns, rising market-wide volatility, or worsening macroeconomic conditions. The model we propose accounts for stylized properties of asset returns in terms of univariate tail behavior as well as varying forms of dependence in the extremes , while keeping a continuous time complete market setup for a tractable portfolio solution. The paper further concentrates on the portfolio implications of those stylized facts. We isolate the intertemporal hedging demands, including those for correlation risk due to stochastic changes in the factors. Thus, we are able to analyze separately the impact of tail dependence through the unconditional distribution of the underlying state variables and that of conditional correlation on the portfolio holdings. We find that both correlation hedging demands and intertemporal hedges due to increased tail dependence have distinct portfolio implications and cannot act as substitutes to each other. As well, there are substantial economic costs for disregarding both the dynamics of conditional correlation and the dependence in the extremes.

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Session V-2 Insurance (18/12/2009 à 08h30)

D. Gabay

Impact of Stochastic Interest Rates and Stochastic Volatility on Variable Annuities

Auteurs : Eric Benhamou (Pricing Partners); Pierre Gauthier (Pricing Partners)

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Intervenants : Pierre Gauthier (Pricing Partners)

Rapporteurs : Daniel Gabay

With the success of variable annuities, insurance companies are piling up large risks in terms of both equity and fixed income assets. These risks should be properly modeled as the resulting dynamic hedging strategy is very sensitive to the modeling assumptions. The current literature has been largely focusing on simple variations around Black-Scholes model with basic interest rates term structure models. However, in a more realistic world, one should account for both Stochastic Volatility and Stochastic Interest rates. In this paper, we examine the combine effect of a Heston-type model for the underlying asset with a HJM affine stochastic interest rates model and apply it to the pricing of GMxB (GMIB, GMDB, GMAB and GMWB). We see that stochastic volatility and stochastic interest rates have an impact on the resulting fair value of the contract and the resulting fair fee as well as mainly on the vega hedge. Interestingly, using a stochastic volatility model leads to scenarios with high level of volatility for long maturities resulting in a higher contract value and a resulting fair fee. We also see that the impact of stochastic interet rates and volatility is more pronounced on the vega hedge than on the delta hedge.

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Calculating capital requirements for longevity risk in life insurance products using an internal model in line with Solvency II

Auteurs : Ralph Stevens (CentER and Netspar, Tilburg University); Anja De Waegenaere (Department of Econometrics & OR and Netspar, Tilburg University); Bertrand Melenberg (Department of Econometrics & OR and Netspar, Tilburg University)

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Intervenants : Ralph Stevens (CentER and Netspar, Tilburg University)

Rapporteurs : Rivo Randriarivony

Over the last decades, significant improvements in life expectancy have been observed in most Western countries. More importantly, there is considerable uncertainty regarding the future development of life expectancy. This uncertainty imposes significant risk on pension providers and life insurance companies, and is referred to as longevity risk. The new Solvency II regulation requires that insurers and pension funds hold a reserve capital in order to limit the probability of underfunding in a one year horizon to 0.5%, taking into account the impact of longevity risk on funding ratio volatility. In this paper we develop a methodology to determine reserve requirements for longevity risk in life insurance products. We consider the case where, as suggested in Solvency II, the risk premium for longevity risk is determined by the Cost of Capital approach. Because longevity risk arises from uncertainty in future
survivor probabilities, the capital reserve depends on the probability distribution of future mortality rates. The literature has devoted considerable attention to the development of statistical models to forecast future mortality improvements. However, using such statistical models to determine solvency requirements can be highly time-consuming. The goal of the paper is twofold. First, we propose a computationally tractable approach that yields an accurate approximation for the required solvency capital for di®erent portfolios of life insurance products, in case mortality rates are forecasted by means of the Lee and Carter (1992) model. Second, we quantify the effects of a number of simplified approaches, as suggested in the Solvency II proposal, on the level of the required solvency capital.

Valuation of Equity-Linked Life Insurance Contracts with Flexible Guarantees in a Non Gaussian Economy

Auteurs : François Quittard-Pinon (Université de Lyon and EMLyon Business School); Rivo Randrianarivony (EMLyon Business School)

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Intervenants : Rivo Randrianarivony (EMLyon Business School)

Rapporteurs : Ralph Stevens

In this paper, we focus on the pricing of a particular life insurance contract where the conditional payoff to the policyholder is the maximum of two risky assets. The first one has larger expected returns but is riskier while the second one is less risky but still can earn more
than an investment in a risk-free asset. Of course this payoff can be seen as the result of an investment in the first asset and a long position in an exchange option. The latter was priced under Gaussian assumptions by Margrabe (1978). To take kurtosis into account the underlying dynamics have to be changed. In this paper, we suggest modelling the underlying dynamics of the second asset by a simple diffusion, i.e. a geometric Brownian motion with a low volatility while the riskier asset follows a jump diffusion. More precisely, this process has a Brownian component and a compound Poisson one, where jump size is driven by a double exponential distribution. This stochastic process introduced by Kou (2002) is easy to manage and proves to be a versatile tool. To price our life insurance contract, we use a generalized Fourier transform and obtain the solution numerically. As far as we know, this is the first paper to use this approach. This methodology proves to be very efficient both with respect to accuracy and to computational time. We also consider a contrat with a fixed guarantee and price it while taking into account stochastic volatility and jumps. We incorporate mortality using a classical Makeham law.

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Hedging (Co)Variance Risk with Variance Swaps

Auteurs : José Da Fonseca (Ecole Supérieure d'Ingénieurs Léonard de Vinci); Florian Ielpo (Pictet & Cie Asset Management); Martino Grasselli (University of Padua & Ecole Superieure d'Ingenieurs Leonard de Vinci)

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Intervenants : Martino Grasselli (University of Padua & Ecole Superieure d'Ingenieurs Leonard de Vinci)

Rapporteurs : Pierre Gauthier

In this paper we measure the impact of variance and covariance risks in financial markets. In an asset allocation framework with stochastic (co)variances, we consider the possibility to invest not only in the risky assets but also in the variance swaps associated that are non redundant derivatives which span the volatility as well as the co-volatility risks. We provide explicit solutions for the portfolio optimization problem in both the incomplete and completed market cases. We use the ratio between the initial wealths leading to the same expected utility in the two market cases as a criterion in order to measure the impact of (co)variance risk. Using real data on major indexes and this criterion, we find that the impact of (co)variance risk on the optimal strategy is huge. We especially discuss the sensitivity of the criterion proposed to measure (co)variance risk with respect to the volatility of volatility parameter and it is found to be huge. This is consistent with the single asset empirical literature and the fast development of variance and covariance-based derivative products.

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Session V-1 Corporate Finance 2 (18/12/2009 à 09h00)

E. Ginglinger

Stock market liquidity and the rights offer paradox

Auteurs : Edith Ginglinger (Université Paris-Dauphine, DRM); Laure Koenig (Université Paris-Dauphine, DRM); Fabrice Riva (Université Paris-Dauphine, DRM)

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Intervenants : Fabrice Riva (Université Paris-Dauphine, DRM)

Rapporteurs : Baran Siyahhan

This paper contributes to the resolution of the rights offer paradox, using a database of French SEOs. We first document higher direct flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. We find that blockholder renouncements to subscribe to new shares and stock market liquidity are important determinants of flotation method choice. After controlling for endogeneity in the choice of flotation method, we find that public offerings are cost effective and more liquidity improving than standby rights whereas an uninsured rights offering is the best choice for low liquidity, closely held firms. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.

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CEO Manipulation of Stock-Option Grants : Evidence from Canadian Public Firms

Auteurs : Lamia Chourou (Faculty Queen’s School of Business, Quenn’s University); Samir Saadi (Queen's School of Business, Quenn's University)

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Intervenants : Lamia Chourou (Faculty Queen’s School of Business, Quenn’s University)

Rapporteurs : Christophe Pérignon

Using a sample of unscheduled stock options granted to CEOs of large Canadian firms, we find reliable evidence of option grants manipulation. Our results show that the introduction of the two-day filing requirement following the Sarbanes-Oxley Act (SOX) has eliminated backdating practice by Canadian firms cross-listed in the U.S. stock market. Further, we find that SOX has altered the way Canadian domestic firms manipulate stock option grants. Most importantly, we find that cross-listed firms are likely to set stock option grants in harmony with the day-of-the-week effect. Our study suggests that Canadian regulators should at least adopt the SEC-initiated change and should also introduce new regulations that enhance the monitoring role of board of directors.

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Information Revelation and Strategic Use of Capital Structure in Duopoly with Asymmetric Information

Auteurs : Baran Siyahhan (Vienna Graduate School of Finance)

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Intervenants : Baran Siyahhan (Vienna Graduate School of Finance)

This paper studies strategic behavior in product markets with asymmetric information. A real options model is developed to investigate information revelation and signaling role capital structure. Information revelation is ensured through a learning mechanism that stems from the real options framework: firms learn from the strategic exercise of options. In cases where option exercise fails to yield information, firms issue securities in order to change the strategic behavior of their competitors. Such a policy, in turn, is shown to impose constraints on the ex ante capital structure decision of the firm. The outcome of competition depends on industry and firm characteristics. The model has important implications for firms operating in mature industries with low growth and/or high operating expenses.

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Session VI-1 Bubbles / Portfolio Holding (18/12/2009 à 11h00)

C. Villa

Bubbles and Investment Horizons

Auteurs : Nadja Guenster (Finance Department, Maastricht University); Erik Kole (Econometric Institute, Erasmus School of Economics, Erasmus University)

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Intervenants : Erik Kole (Econometric Institute, Erasmus School of Economics, Erasmus University)

Rapporteurs : Yuri Biondi

The current theoretical literature makes contradicting predictions regarding the impact of an investor’s horizon on his optimal trading strategy in the presence of bubbles. We analyze this relation empirically using a Regime Switching Model to identify bubbles and crashes. We base our analysis on industry returns and find high positive returns after bubbles at the one-month horizon. At intermediate horizons of 2-4 months our findings are mixed, but thereafter, for horizons up to five years, returns following a bubble are again more positive than returns in the absence of a bubble. We compare a mean-variance as well as a downside-risk averse investor’s portfolio allocation in the presence and absence of a bubble. The weight allocated to the bubbly asset is higher for horizons up to 5 years. These findings suggest that even for a rather unsophisticated trader who does not follow daily market news, riding bubbles is a more profitable strategy than refraining from investing in the bubbly asset. Given the broad range of horizons during which riding bubbles is the optimal strategy, our results question the idea that bubbles are zero-sum games.

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Resilience and contagion in a connected economy

Auteurs : Camille Cornandy (CNRS - BETA); Gwenaël Moysan (ENS-LSH)

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Intervenants : Gwenaël Moysan (ENS-LSH)

Rapporteurs : Christophe Villa

This paper argues that financial links between agents may lead to the resilience or to the contagion of financial distress. Our model details the real effects of agents’ beliefs on the resilience of the economy. When the economy is connected enough, it is subject to an unstable equilibrium. Our model therefore delivers various implications for crisis workouts.

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The Evolution of Aggregate Stock Ownership - A Unified Explanation

Auteurs : Kristian Rydqvist (Binghamton University and CEPR); Joshua Spizman (Binghamton University); Ilya Strebulaev (Stanford University)

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Intervenants : Kristian Rydqvist (Binghamton University and CEPR)

Rapporteurs : Erik Kole

Since World War II, direct stock ownership by households has largely been replaced by indirect stock ownership by financial institutions which manage pensions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside a pension plan. This finding is important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices.

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Session VI-2 Financial Information & Accounting (18/12/2009 à 11h00)

E. de Bodt

Accounting lighthouse in share market dynamics: a theoretical model of share price formation with dual informational structure

Auteurs : Yuri Biondi (CNRS - Preg CRG, Ecole Polytechnique, Paris); Pierpaolo Giannoccolo (University of Bologna, Dept. of Economics)

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Intervenants : Yuri Biondi (CNRS - Preg CRG, Ecole Polytechnique, Paris)

Rapporteurs : Buhiu Qiu

The discovery and processing of firm-specific information is expected to play a role in the making of individual expectations and related financial decisions. The information set available to share market investors is then jointly composed by market and firm-specific (non-market) information. From one side, the accounting system provides collective signals of firm-specific information. From another side, the price system provides collective signals of market information. Both institutional devices are significant for the formation of aggregate share market prices over time. In particular, the accounting system complements the price system by constituting a lighthouse in the amazing dynamics of the share market through hazard, learning and interaction. This theoretical framework applies here to provide an heuristic model of share price formation with such dual informational (and institutional) structure. Implications and recommendations are derived for the concept and occurrence of speculative bubbles, and the cyclical effects of accounting information on share market evolution.

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The Strategic Interaction between Committing and Detecting Fraudulent Misreporting

Auteurs : Buhui Qiu (Rotterdam School of Management, Erasmus University); Steve L. Slezak (College of Business, University of Cincinnati)

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Intervenants : Buhui Qiu (Rotterdam School of Management, Erasmus University)

Rapporteurs : Catherine Refait-Alexandre

The paper considers an agency model of fraudulent misreporting which implies a rich set of relationships between the commission of fraud, the observation or detection of fraud, economic performance, and the compensation policy of the firm. The paper develops a number of testable empirical implications and highlights several interesting phenomena, including implications on exogenous variables that can cause an increase in the amount of fraud committed but a decrease in the amount of fraud being observed (and visa versa). Thus, empirical studies that seek to identify the firm or managerial characteristics associated with the commission of fraud cannot infer a relationship by simply examining how the amount of observed fraud varies with these characteristics. In addition, the paper also shows that an increase in an industry’s growth potential can cause that industry to fall from a high-productivity pooling equilibrium (with high levels of incentive compensation and effort and, as a result, many high-productivity firms) to the lower-productivity mixed-strategy equilibrium (with lower levels of incentive compensation and effort and, as a result, fewer high-productivity firms), resulting in a drop in economic performance.

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Is corporate disclosure necessarily desirable? A survey

Auteurs : Etienne Farvaque (Université de Lille 1, Faculté des Sciences Économiques et Sociales); Céline Gainet (IAE Paris); Catherine Refait-Alexandre (CRESE, Université de Franche-Comté); Dhafer Saïdane (Lille School of Management Research Center)

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Intervenants : Catherine Refait-Alexandre (CRESE, Université de Franche-Comté)

This article reviews the recent literature on the consequences of disclosure for listed firms. Though some studies show that disclosure is desirable for shareholders because it reduces the cost of capital, and increases the value created, others provide more mixed results. The conclusion on the collective advantages is even less convincing; it is not at all certain that disclosure can improve the stability of financial markets. To explain these results, it is necessary to invoke the costs and pernicious effects of disclosure. Disclosing information is expensive: because of the communication and audit costs, strategic information given to competitors and because disclosure can increase managers’ suboptimal behavior. But corporate disclosure also generates informational costs, because it is not certain that it improves the information held by third parties. Indeed, a firm can disclose information that is false, manipulated, too complex or too extensive. In this case, disclosure can increase information asymmetry between agents. Finally, disclosure can reduce actors’ incentives to look for information about the firm; it can reduce the knowledge that the market has at its disposal. Disclosure can therefore lead to an illusion of knowledge, increasing the instability of the financial markets instead of reducing it.

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Session VII-1 Exchange Rates (18/12/2009 à 13h30)

B. Dumas

International Competition and Exchange Rate Shocks in Small Export-Oriented Economies: A Cross-Country Industry Analysis of Stock Returns in Finland and Sweden

Auteurs : Anand Bir Singh Gulati (Hanken School of Economics); Johan Knif (Hanken School of Economics); James W. Kolari (Texas A&M University)

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Intervenants : Anand Bir Singh Gulati (Hanken School of Economics)

Rapporteurs : Mara Madaleno

This study empirically examines the impact of exchange rate shocks and industrial competitiveness on equity returns for sectors and industries in Finland. The test of the competitive hypothesis is based on cross-country sector and industry analysis of Finland and Sweden. The results show a statistically significant exchange rate exposure in the post-euro period for almost all the Finnish sector and industry portfolios. On the other hand, in the pre-euro period there is little empirical evidence of excess exchange rate risk exposure associated with Finnish Markka (FIM)/Swedish krona (SEK) exchange rate shocks. This indicates that the Finnish equity market was to a high degree homogeneous with respect to exchange rate shocks in the pre-euro period. For the post-euro period the exposure is more sector and industry dependant. The results clearly indicate a positive correlation between excess industry returns across border, and even more so in the post-euro period. Hence, the competitive hypothesis finds no support. This is interpreted as a sign of market integration, rather than competitiveness, among the sectors and industries of these two countries. Finally, asymmetric and time-varying excess exposure is to a high degree sector and industry dependant.

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Asset Prices and Real Exchange Rates with Deep Habits

Auteurs : Christian Heyerdahl-Larsen (SIFR – Institute for Financial Research)

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Intervenants : Christian Heyerdahl-Larsen (SIFR – Institute for Financial Research)

Rapporteurs : Bernard Dumas

I study a two country - two good pure exchange economy with deep habits that jointly explains the volatility of the real exchange rate, equity premiums, levels of risk free rates and that reproduces the uncovered interest rate (UIP) puzzle. While both the volatility of the real exchange rate and the equity premium depend on the habit formation, the magnitudes are governed by different parameters. The equity premium depends mainly on the risk aversion while the real exchange rate depends on the elasticity of substitution between the home good and the foreign good. In an extension of the model I allow for preference heterogeneity of the home and the foreign representative agents. I solve for optimal portfolios and show that consumption home bias leads to portfolio home bias.

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Time frequency effects on market indices: world commovements

Auteurs : Carlos Pinho (Economics, Management and Industrial Engineering department, University of Aveiro); Mara Madaleno (Economics, Management and Industrial Engineering department, University of Aveiro)

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Intervenants : Mara Madaleno (Economics, Management and Industrial Engineering department, University of Aveiro)

Rapporteurs : Anand Bir Singh Gulati

The international comovement of stock market indices is reviewed. The most powerful argument for cross-border investing is the risk reduction due to low correlation of world's stock markets. Diversifying risk has become even more important as financial markets globalize, helped by advanced information technology which lowers the transaction costs. Systematic risk is lowered through international diversification in markets with low correlation with domestic markets. Investors must be willing to take advantage of these correlations to reduce volatility in their portfolios. As such, we show the usefulness of wavelet analysis for financial relations. The current work tries to analyze the relationship among eleven stock indices using wavelet theory, applying the MODWT, cross-Wavelets techniques, and regression analysis for different time scales. The findings suggest that there is strong to moderate cointegration among many stock markets, and as such there is evidence of intra-continental relationships. We were thus able to disentangle different short, medium and long-run relations. The importance of historical transmissions is low for the period under analysis.

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Session VII-2 Credit & Interest Rates (18/12/2009 à 13h30)

F. Quittard-Pinon

Credit Spread Changes Within Switching Regimes

Auteurs : Olfa Maalaoui (KAIST Graduate School of Finance); Georges Dionne (HEC Montreal); Pascal François (HEC Montreal)

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Intervenants : Olfa Maalaoui (Olfa Maalaoui (KAIST Graduate School of Finance)

Rapporteurs : Grégoire Leblon

Many empirical studies on credit spread determinants consider a single-regime model over the entire sample period and find limited explanatory power. We model the credit cycle independently from macroeconomic fundamentals using a Markov regime switching model. We show that accounting for endogenous credit cycles enhances the explanatory power of credit spread determinants. The single regime model cannot be improved when conditioning on the states of the NBER economic cycle. Furthermore, the regime-based model highlights a positive relation between credit spreads and the risk-free rate in the high regime. Inverted relations are also obtained for some other determinants.

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From Group Lending to Lending by a Group

Auteurs : Christophe Villa (Audencia Nantes School of Management and CREST-CSM); Nurmukhammad Yusupov (Audencia Nantes School of Management)

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Intervenants : Christophe Villa (Audencia Nantes School of Management and CREST-CSM)

Theoretical models of microcredit have focused on single lender settings with monopolistic MFIs. In practice however, multiple banking relationships are ubiquitous. In this paper we develop a theoretical model with multiple players on the supply side of microcredit to explain the workings of modern microcredit industry.

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Quadratic Term Structure Models: Analysis and Performance

Auteurs : Grégoire Leblon (Université de Rennes 1 and CNRS); Franck Moraux (Université de Rennes 1 and CNRS)

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Intervenants : Grégoire Leblon (Université de Rennes 1 and CNRS)

Rapporteurs : Olfa Maalaoui

The family of the Affine Term Structure of interest rate has been a lot
developed in the literature since the first work of Vasicek (1977) and Cox, Ingersoll and Ross (1985b). Although their performances increase, they are still facing several difficulties in their capacity to fully explain the behaviour of the Term Structure of interest rate. Some of these issues are explain by the omission of non linear relation in the affine model (Dai and Singleton, 1999). This paper is in the continuity of this reflexion. It presents, develops, applies and discuses the quadratic model both in discrete and continuous time.

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Session VIII-1 Asset Pricing (18/12/2009 à 15h30)

J.P. Laurent

Analyzing the Spectrum of Asset Returns: Jump and Volatility Components in High Frequency Data

Auteurs : Yacine Aït-Sahalia (Bendheim Center for Finance, Princeton University and NBER); Jean Jacod (Institut de Mathématiques de Jussieu, Université P. et M. Curie)

!!Email!! : yacine@Princeton.EDU

Intervenants : Yacine Aït-Sahalia (Bendheim Center for Finance, Princeton University and NBER)

Rapporteurs : Semyon Malamud (EPF Lausanne and Swiss Finance Institute)

This paper describes a simple yet powerful methodology to decompose asset returns sampled at high frequency into their base components (continuous, small jumps, large jumps), determine the relative magnitude of the components, and analyze the finer characteristics of these components such as the degree of activity of the jumps.

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Equilibrium Asset Pricing and Portfolio Choice with Heterogeneous Preferences

Auteurs : Jaksa Cvitanic (Caltech, Division of Humanities and Social Sciences); Semyon Malamud (EPF Lausanne and Swiss Finance Institute)

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Intervenants : Semyon Malamud (EPF Lausanne and Swiss Finance Institute)

Rapporteurs : Christian Heyerdahl-Larsen

We study the market price of risk, the stock volatility and the hedging behavior in equilibrium of heterogeneous agents with arbitrary utility functions, consuming only at the end of the time horizon, and with the state variable following an arbitrary homogeneous diffusion process. We introduce a new notion that we call the "rate of macroeconomic fluctuations", and show hat, in equilibrium, all the quantities and strategies can be characterized in terms of the dividend volatility and the interest rate volatility discounted at this rate. We also show that both the optimal portfolio strategies and the stock price volatility can be decomposed into a myopic and a non-myopic component. The market price of risk, the myopic volatility and the myopic portfolio are determined by the present market value of future discounted volatilities of the dividend and of the interest rate. By contrast, the non-myopic volatility and non-myopic portfolio are given in terms of covariances of equilibrium quantities with the discounted dividend volatility. These representations enable us to show that, under natural cyclicality conditions, the non-myopic volatility is always positive, and the non-myopic portfolio is positive for an agent if and only if the product of his prudence and risk tolerance is less than the same product corresponding to the log agent.

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The Price of Asymmetric Dependence

Auteurs : Jamie Alcock (Department of Land Economy, Cambridge University and UQ Business School, University of Queensland); Anthony Hatherley (UQ Business School, University of Queensland)

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Intervenants : Anthony Hatherley (UQ Business School, University of Queensland)

Rapporteurs : Jean-Paul Laurent

We investigate whether asymmetric dependence (AD) is priced in US equities. Using a ß and idiosyncratic risk invariant measure of AD, we find that AD is as important as linear dependence in explaining the variation in returns. In particular, we find a significant positive (negative) relationship between lower (upper) tail dependence and returns. This result holds after controlling for size, robust ß, downside ß, coskewness and cokurtosis. We also find past AD is a significant variable in predicting future returns for small firms. However neither AD nor linear dependence predict the future returns of large firms. Our results suggest that there are multiple dimensions to systematic risk.

Session VIII-2 Corporate Finance & Information (18/12/2009 à 15h30)

H. de la Bruslerie

Corporate serial acquisitions: An empirical test of the learning hypothesis

Auteurs : Nihat Aktas (EMLYON Business School); Eric de Bodt (Université Lille Nord de France); Richard Roll (The Anderson School UCLA)

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Intervenants : Nihat Aktas (EMLYON Business School)

Rapporteurs : Hubert de la Bruslerie

Aktas, de Bodt and Roll (forthcoming, Journal of Corporate Finance) develop a theoretical model of CEO learning in merger and acquisition deal making. This study offers a test of the learning hypothesis using a sample of 235 U.S. CEOs. Consistent with the theory, CEOs take investors’ reactions to their previous deal announcements into account to adjust their bidding behaviors in subsequent transactions.

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Real option Financing under asymmetric information

Auteurs : Matthieu Bouvard (Toulouse University and McGill University)

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Intervenants : Matthieu Bouvard (Toulouse University and McGill University)

Rapporteurs : Laurent Frésard

We extend a standard model of financing under asymmetric information to the case where the investment opportunity is a real option. An initial investment gives access to a public signal that takes the form of a poisson process of unknown parameter. Observing the realization of this process through time generates information on the value of implementing a project, but is costly because it delays cash-flows. The project is owned by a cash-constrained entrepreneur who needs an outside investor to finance the initial investment, as well as a potential future development. An adverse selection problem arises, as the entrepreneur receives some private information about the profitability of the project and enjoys private benefits from the moment where it is fully implemented. This gives him an incentive to hurry implementation by overstating the project prospects. In line with common practices in venture capital, we show that it is optimal to include investment timing in the financial contract (“ex-ante staging”) as an instrument to induce information revelation. This creates however a distortion towards late investment. Furthermore the adverse selection problem may lead to a complete market breakdown where the initial investment cannot be financed. We show that cash holdings of the entrepreneur accelerate investment and increase risk-taking. We derive empirical predictions about the relationships between pay, performance, investment timing and corporate governance.

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Corporate savings and price informativeness

Auteurs : Laurent Frésard (HEC School of Management)

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Intervenants : Laurent Frésard (HEC School of Management)

Rapporteurs : Issam Hallak

This paper examines the process whereby firms accumulate their cash reserves, i.e. their savings decisions. The investigation illustrates that stock prices, and more importantly, the private information they contain, play a crucial role in explaining firms’ savings choices. I start by documenting that a firm’ savings are highly sensitive to its stock price. This positive association indicates that firms tend to transfer more resources into their cash balances when the market foresees valuable future prospects. Strikingly, such a precautionary mechanism turns out to be amplified when the market price contains a larger content of private investors’ information. Hence, the findings are consistent with the view that managers learn from observing the level of their stock price. Moreover, further test show that this defensive learning is not due to the uncaptured effect of market mispricing or financing constraints. Overall, the analysis importantly highlights that the nature and precision of the available information about firms’ future prospects are crucial ingredients of their saving choices.

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