Corporate Finance

Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis — leading to the double counting of risks.

We document how a positive shock to investment opportunities at one plant ("treated plant") spills over to other plants within the same firm, but only if the firm is financially constrained. To provide the treated plant with resources, the firm's headquarters withdraws capital and labor from other plants, especially plants that are relatively less productive, not part of the firm's core industries, and located far away from headquarters. As a result of the resource reallocation, aggregate firm-wide productivity increases.

This paper provides a comprehensive and detailed analysis of Central and Eastern European (CEE) equity markets from the mid-1990s until now. Using firm-level data and custom-made indices and indicators, we show that (1) there is considerable heterogeneity in the degree, dynamics, and determinants of market development across the different markets, (2) that especially the smaller markets still offer diversification benefits to global investors, and (3) that there are substantial premiums associated with investing in small, value, low volatility and illiquid CEE stocks.

What is the next step for institutional investors who have already embraced investing in established large hedge fund managers? What are the benefits of embracing smaller emerging hedge fund managers?

We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedge funds have a detrimental effect on the long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data.

This paper identifies cash-flow news and expected-return news in financial statements and shows that stock returns are increasing with positive cash-flow news in the statements and decreasing in the news about increasing expected returns. The identified news measures differ significantly from those identified from decomposing returns based on the Vuoltennaho (2002) framework.

A long stream of papers documents robust correlations between firm characteristics and future stock returns. Most of these characteristics involve accounting numbers. Usually, characteristics have been identified from data analysis, resulting in a proliferation of characteristics. A 2013 survey of published papers and working papers found 186 predictors — a number that the authors said likely under represents the total.

We model an electronic limit order book as a multi-class queueing system under fluid dynamics, and formulate and solve a problem of limit and market order placement to optimally buy a block of shares over a short, predetermined time horizon. Using the structure of the optimal execution policy, we identify microstructure variables that affect trading costs over short time horizons and propose a resulting microstructure-based model of market impact costs.

We propose an extension of standard asymmetric volatility models in the generalized autoregressive conditional heteroskedasticity (GARCH) class that admits conditional non-Gaussianities in a tractable fashion. Our "bad environment-good environment" (BEGE) model utilizes two gamma-distributed shocks and generates a conditional shock distribution with time-varying heteroskedasticity, skewness, and kurtosis. The BEGE model features nontrivial news impact curves and closed-form solutions for higher-order moments.