The Journal of Finance

The Front Men of Wall Street: The Role of CDO Collateral Managers in the CDO Boom and Bust

Published: 05/15/2017   |   DOI: 10.1111/jofi.12520

SERGEY CHERNENKO

I study the incentives of the collateral managers who selected securities for ABS CDOs—securitizations that figured prominently in the financial crisis. Specialized managers without other businesses that could suffer negative reputational consequences invested in low‐quality securities underwritten by the CDO's arranger. These securities performed significantly worse than observationally similar securities. Managers investing in these securities were rewarded with additional collateral management assignments. Diversified managers who did assemble CDOs suffered negative reputational consequences during the crisis: institutional investors withdrew from their mutual funds. Overall, the results are consistent with a quid pro quo between collateral managers and CDO underwriters.

Market Imperfections, Investment Flexibility, and Default Spreads

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00630.x

Sheridan Titman, Stathis Tompaidis, Sergey Tsyplakov

This paper develops a structural model that determines default spreads in a setting where the debt's collateral is endogenously determined by the borrower's investment choice, and a demand variable with permanent and temporary components. We also consider the possibility that the borrower cannot commit to taking the value‐maximizing investment choice, and may, in addition, be constrained in its ability to raise external capital. Based on a model calibrated to data on office buildings and commercial mortgages, we present numerical simulations that quantify the extent to which investment flexibility, incentive problems, and credit constraints affect default spreads.

Spurious Regressions in Financial Economics?

Published: 07/15/2003   |   DOI: 10.1111/1540-6261.00571

Wayne E. Ferson, Sergei Sarkissian, Timothy T. Simin

Even though stock returns are not highly autocorrelated, there is a spurious regression bias in predictive regressions for stock returns related to the classic studies of Yule (1926) and Granger and Newbold (1974). Data mining for predictor variables interacts with spurious regression bias. The two effects reinforce each other, because more highly persistent series are more likely to be found significant in the search for predictor variables. Our simulations suggest that many of the regressions in the literature, based on individual predictor variables, may be spurious.

Strategic Actions and Credit Spreads: An Empirical Investigation

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01288.x

SERGEI A. DAVYDENKO, ILYA A. STREBULAEV

Do strategic actions of borrowers and lenders affect corporate debt values? We find higher bond spreads for firms that can renegotiate debt contracts relatively easily. Consistent with theories of strategic debt service, the threat of strategic default depresses bond values ex ante, even though there may be efficiency gains from renegotiation ex post. However, the economic significance of the net effect is small, suggesting that bondholders have considerable bargaining power. The effect of strategic actions is higher when creditors are particularly vulnerable to strategic threats, including risky firms with high managerial shareholding, simple debt structures, and high liquidation costs.

Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.

Published: 04/01/2008   |   DOI: 10.1111/j.1540-6261.2008.01325.x

SERGEI A. DAVYDENKO, JULIAN R. FRANKS

Using a sample of small firms that defaulted on their bank debt in France, Germany, and the United Kingdom, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate costly aspects of bankruptcy law. In particular, French banks respond to a creditor‐unfriendly code by requiring more collateral than lenders elsewhere, and by relying on collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting very different levels of creditor protection.

Bustup Takeovers of Value‐Destroying Diversified Firms

Published: 09/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb04066.x

PHILIP G. BERGER, ELI OFEK

We examine whether the value loss from diversification affects takeover and breakup probabilities. We estimate diversification's value effect by imputing stand‐alone values for individual business segments and find that firms with greater value losses are more likely to be taken over. Moreover, those acquired firms whose losses are greatest are most likely to be bought by LBO associations, which frequently break up their targets. For a subsample of large diversified targets: (1) higher value losses increase the extent of post‐takeover bustup; and (2) post‐takeover bustup generally results in divested divisions being operated as part of a focused, stand‐alone firm.

Managerial Entrenchment and Capital Structure Decisions

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01115.x

PHILIP G. BERGER, ELI OFEK, DAVID L. YERMACK

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross‐sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment‐reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

THE AUCTION OF LONG‐TERM GOVERNMENT SECURITIES

Published: 09/01/1964   |   DOI: 10.1111/j.1540-6261.1964.tb02868.x

Robert E. Berney

Stimulating Housing Markets

Published: 10/15/2019   |   DOI: 10.1111/jofi.12847

DAVID BERGER, NICHOLAS TURNER, ERIC ZWICK

We study temporary fiscal stimulus designed to support distressed housing markets by inducing demand from buyers in the private market. Using difference‐in‐differences and regression kink research designs, we find that the First‐Time Homebuyer Credit increased home sales by 490,000 (9.8%), median home prices by $2,400 (1.1%) per standard deviation increase in program exposure, and the transition rate into homeownership by 53%. The policy response did not reverse immediately. Instead, demand comes from several years in the future: induced buyers were three years younger in 2009 than typical first‐time buyers. The program's market‐stabilizing benefits likely exceeded its direct stimulus effects.

Debt Maturity, Risk, and Asymmetric Information

Published: 11/10/2005   |   DOI: 10.1111/j.1540-6261.2005.00820.x

ALLEN N. BERGER, MARCO A. ESPINOSA‐VEGA, W. SCOTT FRAME, NATHAN H. MILLER

We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low‐risk firms are consistent with the predictions of both theoretical models, but our findings for high‐risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.

Portfolio Selection in a “Winner‐Take‐All” Environment

Published: 03/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb02082.x

PAUL D. BERGER, ZVI BODIE

The Turn‐of‐the‐Year in Canada

Published: 03/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03867.x

ANGEL BERGES, JOHN J. McCONNELL, GARY G. SCHLARBAUM

A number of investigators have reported that January stock returns in the U.S. exceed returns for other months of the year. This paper documents a similar finding for Canadian stocks over the period 1951–1980. However, Canada did not introduce a capital gains tax until 1973 and the paper reports that January returns in Canada exceed returns for other months of the year before and after this date. Thus, these data do not support the tax‐loss‐selling‐pressure hypothesis as the entire explanation for the turn‐of‐the‐year effect in stock returns, nor, by implication, do they support the tax‐loss‐selling‐pressure hypothesis as the complete explanation for the “small firm” effect in U.S. stocks returns.