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Preview: Review of Financial Studies - current issue

The Review of Financial Studies Current Issue

Published: Mon, 16 Oct 2017 00:00:00 GMT

Last Build Date: Mon, 16 Oct 2017 10:55:15 GMT




In the version of “The Economic Effects of a Borrower Bailout: Evidence from an Emerging Market” by Xavier Giné and Martin Kanz (10.1093/rfs/hhx073) that originally published online, two citations (Mian and Sufi, 2014 and Behn, Haselmann, et al. 2014) were not hyperlinked and a wording was incorrect in the reference Agarwal, S., et al. 2017.

De Facto Seniority, Credit Risk, and Corporate Bond Prices


We study the effect of a bond’s place in its issuer’s maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers’ maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices.Received January 1, 2016; editorial decision June 6, 2017 by Editor Robin Greenwood.

Risk-Based Capital Requirements for Banks and International Trade


We test the trade finance channel of exports by controlling for the bank credit channel. Using Turkey’s July 2012 adoption of Basel II as a quasi-natural experiment, we examine whether shocks to trade financing costs affect exports. With data for 16,662 Turkish exporters shipping 2,888 different products to 158 countries, we find that the share of letters-of-credit-based exports decreases (increases) when the associated risk weights for counterparty exposure increase (decrease) after the adoption of Basel II. However, growth of firm-product-country-level exports remains unaffected. Trade financing might have a lesser role in exports than previously suggested by the previous literature.Received October 26, 2014; editorial decision March 15, 2017 by Editor Philip Strahan.

The Dynamics of Investment, Payout and Debt


We develop a dynamic agency model of a public corporation. Managers underinvest because of risk aversion. They smooth rents and payout. They do not exploit interest tax shields fully. The interactions of investment, debt, and payout decisions can change drastically depending on managers’ preferences. Managers with power utility set investment, debt, and payout proportional to the firm’s net worth, generating a constant (possibly negative) net debt ratio. With exponential utility, investment decisions are separated from decisions about debt and payout. More profitable firms become cash cows, and less profitable firms accumulate debt, as in a pecking-order model.Received July 9, 2015; editorial decision January 30, 2017 by Editor Itay Goldstein.

Contingent Capital, Tail Risk, and Debt-Induced Collapse


We study the design and incentive effects of contingent convertible debt. With contingent convertibles, the endogenous bankruptcy boundary can be at either of two levels: one with lower default risk or one at which default precedes conversion. An increase in debt moves the firm from the first regime to the second, a phenomenon we call debt-induced collapse. Setting the conversion trigger sufficiently high avoids this hazard. Given this condition, we investigate the effect of contingent capital and debt maturity on optimal capital structure, debt overhang, and asset substitution. We calibrate the model to large banks during the financial crisis.Received April 10, 2015; editorial decision March 20, 2017 by Editor Leonid Kogan.

Credit-Induced Boom and Bust


This paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. First, the preemption regulation resulted in an 11% increase in annual lending in the 2004–2006 period, which is associated with a 3.3% rise in annual house price growth rate and a 2.2% expansion of employment in nontradable sectors. This was followed by a sharp decline in subsequent years. Furthermore, we show that the increase in the supply of credit reduced delinquencies during boom years, but increased them in bust years.Received June 7, 2015; editorial decision December 22, 2016 by Editor Robin Greenwood.

The Effects of Quantitative Easing on Bank Lending Behavior


Banks’ exposure to large-scale asset purchases, as measured by the relative prevalence of mortgage-backed securities on their books, affects lending following unconventional monetary policy shocks. Using a difference-in-differences identification strategy, this paper finds strong effects of the first and third round of quantitative easing (QE1 and QE3) on credit. Highly affected commercial banks increase lending by 2% to 3% relative to their counterparts. QE2 had no significant impact, consistent with its exclusive focus on Treasuries sparsely held by banks. Overall, banks respond heterogeneously, and the type of asset being targeted is central to QE.Received January 13, 2016; editorial decision January 18, 2017 by Editor Philip Strahan.

Speculation and the Term Structure of Interest Rates


We develop and estimate a tractable equilibrium term structure model populated with rational but heterogeneously informed traders that take on speculative positions to exploit what they perceive to be inaccurate market expectations about future bond prices. The speculative motive is an important driver of trading volume. Yield dynamics due to speculation are (1) statistically distinct from classical term structure components due to risk premiums and expectations about future short rates and are orthogonal to public information available to traders in real time and (2) quantitatively important, accounting for a substantial fraction of the variation of long maturity U.S. bond yields.Received May 12, 2014; editorial decision May 10, 2016 by Editor Pietro Veronesi.

When Are Modifications of Securitized Loans Beneficial to Investors?


Loan modification is widely discussed as an alternative to foreclosure, but little research has focused on quantifying its effect on loan performance. I quantify this effect early in the housing crisis by exploiting exogenous variation in the incentives to modify securitized nonagency loans. An additional modification reduces loan losses by 35.8% relative to the average loss; this reduction suggests that the marginal benefit of modification likely exceeded the marginal cost. Consistent with the idea that high-income borrowers may be better equipped to withstand bad economic times, I find that modifications are especially beneficial when borrowers have larger loans.Received April 25, 2016; editorial decision March 24, 2017 by Editor Philip Strahan.

Do Professional Norms in the Banking Industry Favor Risk-taking?


In recent years, the banking industry has witnessed several cases of excessive risk-taking that frequently have been attributed to problematic professional norms. We conduct experiments with employees from several banks in which we manipulate the saliency of their professional identity and subsequently measure their risk aversion in a real stakes investment task. If bank employees are exposed to professional norms that favor risk-taking, they should become more willing to take risks when their professional identity is salient. We find, however, that subjects take significantly less risk, challenging the view that the professional norms generally increase bank employees’ willingness to take risks.Received May 5, 2016; editorial decision August 21, 2016 by Editor Philip Strahan.

Endogenous Leverage and Advantageous Selection in Credit Markets


I study asset price amplification in an asymmetric information model. Entrepreneurs issue debt to finance investments in a physical asset. They have private information about their success probabilities. For a given debt level, higher asset prices require entrepreneurs to invest more of their own funds. This makes bad entrepreneurs more reluctant to mimic good ones; as a result, good entrepreneurs increase their equilibrium leverage and invest more, and this amplifies the initial asset price increase. This model generates predictions about the credit market that are qualitatively consistent with existing evidence.Received April 24, 2015; editorial decision June 15, 2016 by Editor Itay Goldstein.