Using data from a major mortgage bank, we examine the predictive power of mortgage delinquency models as an aggregate measure of the quality of information recorded at loan origination. We measure model predictive power using an out-of-sample prediction criterion and compare predictive power of delinquency models over time and across loans of different documentation levels and origination channels.
In one laboratory study and one field study conducted with a large, representative sample of respondents, we show that seemingly innocuous questions that precede a conjoint task, such as demographic and usage-related screening questions can alter the price sensitivities recovered from the main conjoint task. The findings demonstrate that whether these prior questions use broad response categories (i.e., few scale points) or narrow response categories (i.e., many scale points) systematically influences consumers' price sensitivity in a CBC (Choice Based Conjoint) study.
The 2008 financial crisis exemplifies significant uncertainties in corporate financing conditions. We develop a unified dynamic q- theoretic framework where firms have both a precautionary-savings motive and a market-timing motive for external financing and payout decisions, induced by stochastic financing conditions. The model predicts (1) cuts in investment and payouts in bad times and equity issues in good times even without immediate financing needs; (2) a positive correlation between equity issuance and stock repurchase waves.
This paper examines listed companies in the US and Europe with market capitalizations less than the book value of equity in the years immediately before and after the global financial crisis of 2008. The paper documents a higher percentage of companies in the (European) STOXX 600 with market capitalization less than book value than in the (US) S&P 500. Further, the negative difference between market and book value is larger for European companies and more persistent over time. The paper seeks explanations for the differences.
This paper considers a model of (irreversible) investment under uncertainty for a firm facing external financing costs. Such a firm prefers to fund its investment through internal funds, so that thefirm's optimal investment policy and value now depend on the size of its retained earnings. We show that the standard real options results are significantly modified when there are external financing costs.
The SEC is currently considering a rulemaking petition requesting that the Commission shorten the ten-day window, established by Section 13(d) of the Williams Act, within which investors must publicly disclose purchases of a 5% or greater stake in public companies. In this Article, we provide the first systematic empirical evidence on these disclosures and find that several of the petition's factual premises are not consistent with the evidence.
The financial crisis that erupted in late 2007 has resurfaced debates about the role of accounting and external financial reporting by financial institutions in helping detect or mask systemic risks and in exacerbating or mitigating such risks. The debate has largely focused on the role of fair value accounting, securitization and special purpose entities, off-balance sheet reporting and pro-cyclicality. We consider these and other issues using a single company's published accounts.
This paper reviews recent research at the intersection of industrial organization and corporate finance on credit default swap (CDS) markets. These markets have been at the center of the financial crisis of 2007-2009 and many aspects of their operation are not well understood. The paper covers topics such as counterparty risk in CDS markets, the "empty creditor problem," "naked" CDS positions, the super-senior status of credit (and other) derivatives in Chapter 11 bankruptcy, and strategic behavior in CDS settlement auctions.
We study a dynamic-contracting problem involving risk sharing between two parties — the Proposer and the Responder — who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share the underlying investment and termination risk. When the project ends they consume their final accumulated wealth. The Proposer and the Responder have constant relative risk aversion R and r respectively, with R > r > 0.