View All Issues

Volume 67: Issue 6 (December 2012)


BACK MATTER

Pages: bmi-bmi  |  Published: 11/2012  |  DOI: 10.1111/jofi.12001  |  Cited by: 0


FRONT MATTER

Pages: i-vii  |  Published: 11/2012  |  DOI: 10.1111/jofi.12000  |  Cited by: 0


On the Relative Pricing of Long-Maturity Index Options and Collateralized Debt Obligations

Pages: 1983-2014  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01779.x  |  Cited by: 37

PIERRE COLLIN-DUFRESNE, ROBERT S. GOLDSTEIN, FAN YANG

We investigate a structural model of market and firm‐level dynamics in order to jointly price long‐dated S&P 500 index options and CDO tranches of corporate debt. We identify market dynamics from index option prices and idiosyncratic dynamics from the term structure of credit spreads. We find that all tranches can be well priced out‐of‐sample before the crisis. During the crisis, however, our model can capture senior tranche prices only if we allow for the possibility of a catastrophic jump. Thus, senior tranches are nonredundant assets that provide a unique window into the pricing of catastrophic risk.


Asset Fire Sales and Purchases and the International Transmission of Funding Shocks

Pages: 2015-2050  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01780.x  |  Cited by: 120

CHOTIBHAK JOTIKASTHIRA, CHRISTIAN LUNDBLAD, TARUN RAMADORAI

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds' emerging market portfolio allocations. These forced trades or “fire sales” affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of “push” effects from funds' domicile countries and “co‐ownership spillover” between markets with overlapping fund ownership.


Strategic Default and Equity Risk Across Countries

Pages: 2051-2095  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01781.x  |  Cited by: 44

GIOVANNI FAVARA, ENRIQUE SCHROTH, PHILIP VALTA

We show that the prospect of a debt renegotiation favorable to shareholders reduces the firm's equity risk. Equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country's insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, equity risk is independent of shareholders' incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the firm's equity risk.


Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities

Pages: 2097-2137  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01782.x  |  Cited by: 85

JIE JACK HE, JUN QJ QIAN, PHILIP E. STRAHAN

Initial yields on both AAA‐rated and non‐AAA rated mortgage‐backed security (MBS) tranches sold by large issuers are higher than yields on similar tranches sold by small issuers during the market boom years of 2004 to 2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004 to 2006. These results suggest that investors price the risk that large issuers received more inflated ratings than small issuers, especially during boom periods.


This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis

Pages: 2139-2185  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01783.x  |  Cited by: 174

RÜDIGER FAHLENBRACH, ROBERT PRILMEIER, RENÉ M. STULZ

Are some banks prone to perform poorly during crises? If yes, why? In this paper, we show that a bank's stock return performance during the 1998 crisis predicts its stock return performance and probability of failure during the recent financial crisis. This effect is economically large. Our findings are consistent with persistence in a bank's risk culture and/or aspects of its business model that make its performance sensitive to crises. Banks that relied more on short‐term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.


Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts

Pages: 2187-2213  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01784.x  |  Cited by: 32

JESSE EDGERTON

This paper uses novel data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross‐section, firms owned by private equity funds average 40% smaller fleets than observably similar public firms. Similar fleet reductions are observed within firms that undergo leveraged buyouts. Quantile regressions indicate that these results are driven by firms in the upper 30% of the conditional jet distribution. The results thus suggest that executives in a substantial minority of public firms enjoy excessive perquisite and compensation packages.


Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs

Pages: 2215-2246  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01785.x  |  Cited by: 36

VLADIMIR ATANASOV, VLADIMIR IVANOV, KATE LITVAK

We examine the role of reputation in limiting opportunistic behavior by venture capitalists towards four types of counterparties: entrepreneurs, investors, other VCs, and buyers of VC‐backed startups. Using a hand‐collected database of lawsuits, we document that more reputable VCs (i.e., VCs that are older, have more deals and funds under management, and syndicate with larger networks of VCs) are less likely to be litigated. We also find that litigated VCs suffer declines in future business relative to matched peers. These declines are larger for more reputable VCs, and for VCs that are defendants to multiple lawsuits or sued by entrepreneurs.


On the Life Cycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms

Pages: 2247-2293  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01786.x  |  Cited by: 144

MANJU PURI, REBECCA ZARUTSKIE

We use data over 25 years to understand the life cycle dynamics of VC‐ and non‐VC‐financed firms. We find successful and failed VC‐financed firms achieve larger scale but are not more profitable at exit than matched non‐VC‐financed firms. Cumulative failure rates of VC‐financed firms are lower, with the difference driven largely by lower failure rates in the initial years after receiving VC. Our results are not driven by VCs disguising failures as acquisitions or by certain types of VCs. The performance difference between VC‐ and non‐VC‐financed firms narrows in the post‐internet bubble years, but does not disappear.


Dynamic Agency and theqTheory of Investment

Pages: 2295-2340  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01787.x  |  Cited by: 103

PETER M. DEMARZO, MICHAEL J. FISHMAN, ZHIGUO HE, NENG WANG

We develop an analytically tractable model integrating dynamic investment theory with dynamic optimal incentive contracting, thereby endogenizing financing constraints. Incentive contracting generates a history‐dependent wedge between marginal and average q, and both vary over time as good (bad) performance relaxes (tightens) financing constraints. Financial slack, not cash flow, is the appropriate proxy for financing constraints. Investment decreases with idiosyncratic risk, and is positively correlated with past profits, past investment, and managerial compensation even with time‐invariant investment opportunities. Optimal contracting involves deferred compensation, possible termination, and compensation that depends on exogenous observable persistent profitability shocks, effectively paying managers for luck.


Private Equity Performance and Liquidity Risk

Pages: 2341-2373  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01788.x  |  Cited by: 94

FRANCESCO FRANZONI, ERIC NOWAK, LUDOVIC PHALIPPOU

Private equity has traditionally been thought to provide diversification benefits. However, these benefits may be lower than anticipated as we find that private equity suffers from significant exposure to the same liquidity risk factor as public equity and other alternative asset classes. The unconditional liquidity risk premium is about 3% annually and, in a four‐factor model, the inclusion of this liquidity risk premium reduces alpha to zero. In addition, we provide evidence that the link between private equity returns and overall market liquidity occurs via a funding liquidity channel.


MISCELLANEA

Pages: 2375-2375  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01804.x  |  Cited by: 0


ANNOUNCEMENTS

Pages: 2377-2377  |  Published: 11/2012  |  DOI: 10.1111/jofi.12002  |  Cited by: 0


INDEX TO VOLUME LXVII

Pages: 2379-2381  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01805.x  |  Cited by: 0


INDEX TO VOLUME LXVII

Pages: 2383-2385  |  Published: 11/2012  |  DOI: 10.1111/j.1540-6261.2012.01806.x  |  Cited by: 0