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Abstract:
Using a set of structural models, we evaluate bond yield spreads and the price of default protection for a sample of US corporations. Theory predicts that if credit risk alone explains these two quantities, their magnitudes should be similar. Our findings concur with previous results that bond yield spreads are underestimated. However, this is not systematically the case for CDS premia, which in our dataset are much lower than bond spreads. Furthermore, our results highlight the strong relationship between bond residuals and nondefault proxies, in particular illiquidity. CDS residuals exhibit no such relations. This suggests that the bond spread underestimation by our structural models may not stem from their inability to properly account for default risk, but rather from the importance of the omitted risk factors.

Credit risk, credit derivatives, corporate bonds, structural models

Abstract:
I develop a contingent claims model to examine the impacts of managerial entrenchment on firm policies and security valuation. The model emphasizes the role that managerial agency issues play in determining both dividend payout and capital structure. Evidence shows that self-interested managers' leverage choices deviate from the optimal leverages that maximize firm values. Both the extent and sensitivity of the deviations are affected by default solutions and the relative bargaining strength between firm and debtholders in debt renegotiations. I find that shareholder-manager conflicts over risk choice and cash payout level vary dynamically with a firm's financial health. The model predicts that dividend yields are negatively and nonlinearly influenced by leverage ratios and managerial entrenchment.

Managerial Entrenchment, Capital Structure, Dividend Payout policy, Security Valuation

Abstract:
Corporate bond prices are known to be influenced by default and term structure risk in addition to non-default risks such as illiquidity. Putable corporate bonds allow investors to sell their holdings back to the issuer and may thus provide insurance against all of these risks. We first document empirically that embedded put option values are related to proxies for all three. In a second step, we develop a valuation model that simultaneously captures default and interest rate risk. We use this model to disentangle the reduction in yield spread enjoyed by putable bonds that can be attributed to each risk. Perhaps surprisingly, the most important reduction is due to mitigated default or spread risk, followed by term structure risk. The reduction in the non-default component is present but rather small.

Putable Bonds, Credit Risk, Liquidity Premium, Bivariate Lattice

Abstract:
We examine the information based price discovery around the lockup expirations in the recent split-share structure reform in China. We find an average abnormal return of -14% associated with the lockup expirations of the restricted shares. A large portion of this abnormal return was realized 40 days before expiration dates. There is evidence that the stock returns (trading volumes) are positively (negatively) correlated with firm information transparency and improvements in firm fundamentals. Stock prices reflect the inter-temporal and cross-sectional variations in firm fundamentals. These findings offer support to effective price discovery and medium to long term market efficiency in the Chinese stock market.

Price discovery, Information Revelation, Market Efficiency, Lockup Expiration, Split-share Structure Reform

Abstract:
We examine shareholder activism in the recent split-share structure reform in China. This unique event allows us to avoid the deficiencies in determining activism proxies and in measuring their effectiveness that plague the previous literature. We find that the effectiveness of shareholder activism is influenced by segmented institutional ownerships. Particularly, shareholder activism could have both positive and negative impacts on managerial behaviors in the presence of institutional investors' interest conflicts. We show that, even in its primitive stage, Chinese shareholder activism has demonstrated positive value in corporate governance.

Abstract:
We find that variance risk premia, defined as the spread between the option-implied and expected variances, have a prominent predictability for the credit default swap spreads at individual firm level. Such a predictability cannot be crowded out by that of the market and firm level credit risk factors identified in previous research. We demonstrate that the strong predictability of implied variance for credit spreads is mostly explained by either variance premium or expected variance. Our findings suggest that variance risk premium is a relatively clean measure of a firm’s exposure to macroeconomic uncertainty or systematic variance risk, while option-implied variance may be contaminated by idiosyncratic variance risk. Such a result is consistent with the market level evidence that variance risk premium predicts credit spread variation.

variance risk premia, credit default swap spreads, option-implied variance, expected variance, realized variance