In this paper I investigate the role of activist hedge funds in the restructuring of a sample of 469 firms that attempted to resolve distress either out of court, in conventional Chapter 11, or via prepackaged restructuring. Activist hedge funds strategically gain a position of influence in the restructuring of economically viable firms with contracting problems that prevent efficient restructuring without outside intervention. I find that hedge fund involvement is associated with a higher probability of completing prepackaged restructurings, faster restructurings, and greater debt reduction. Overall, the evidence in this article suggests that activist hedge funds can create value by enabling more efficient contracting.

The unique characteristics of options enable investors to create nonnormal portfolio return distributions that cannot be replicated with other assets. This analysis explores the power of various investment selection criteria to identify efficient portfolios from investment strategies involving call options and treasury bills, stocks, and covered option writing. The preference structure for strategies incorporating options is compared to traditional stock-fixed income investments, and the importance of options to investor utility maximization is illustrated. This study reveals that rules of stochastic dominance that place few restrictions on investor preference functions and asset return distribution are appropriate criteria by which to rank portfolios containing options and other assets.

There is widespread agreement that corporate debts’ recovery rates are time varying, but empirical work in this area is limited. We show that the joint information from the term structure of senior and subordinate credit default swaps can identify the level and the dynamics of recovery rates. We estimate a reduced-form no-arbitrage model on 46 firms across different industries. We find that the term structure of expected recovery rates is, on average, downward sloping. However, an inversion occurs during the 2008 crisis, suggesting the market expects higher recoveries conditional on short-term survival. The inversion is more pronounced for firms in distressed industries.

To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk-arbitrage portfolio by 3.7% annually on a risk-adjusted basis, whereas non–hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds’ superior performance does not reflect fund managers’ ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers’ superior performance is attributed to their ability to manage downside risk.

This paper analyzes the loss allocation to first, second, and third loss positions in European collateralized debt obligation transactions. The quality of the underlying asset pool plays a predominant role for the loss allocation. A lower asset pool quality induces the originator to take a higher first loss position, but, in a synthetic transaction, a smaller third loss position. The share of expected default losses, borne by the first loss position, is largely independent of asset pool quality but lower in securitizations of corporate loans than in those of corporate bonds. Originators with a good rating and low Tobin’s Q prefer synthetic transactions.

We compare two bootstrap methods for assessing mutual fund performance. The first produces narrow confidence intervals due to pooling over time, whereas the second produces wider confidence intervals because it preserves the cross correlation of fund returns. We then show that the average U.K. equity mutual fund manager is unable to deliver outperformance net of fees under either bootstrap. Gross of fees, 95% of fund managers on the basis of the first bootstrap and all fund managers on the basis of the second bootstrap fail to outperform the luck distribution of gross returns.

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.

We propose a model of volatility tail behavior in which investors display aversion to both low-volatility and high-volatility states, and hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors who have heterogeneity in beliefs about volatility outcomes and maximize their utility by choosing volatility-contingent cash flows. Our empirical examination suggests that the model is better suited to reproduce data features in the left tail of the volatility distribution, both qualitatively and quantitatively.

We examine the role of shareholder takeup in rights offerings on the subscription period price reaction and liquidity. Our results indicate that takeup information is reflected in price adjustments over the subscription period and that quality-related information disclosed on the rights announcement date further impacts prices in this period. Higher shareholder takeup improves liquidity. We do find some evidence of inefficiencies in the adjustment process over the subscription period that, in part, is consistent with a model where markets are characterized by overconfident investors and that also articulates with takeup information arriving in the market.

Several studies indicate the presence of large abnormal returns accruing to shareholders of merged firms in the period immediately before the merger. For example, Mandelker [18] reports that stockholders of acquired firms earn abnormal returns of approximately 14 percent in the seven months preceding merger. Franks, Broyles, and Hecht [15] find abnormal returns of 26 percent for British firms during the four months prior to merger; Elgers and Clark [11] report 43 percent abnormal returns accruing over two years before merger to shareholders of acquired firms.

The Arrow-Debreu approach to general equilibrium in an economy has been recognized as one of the most general and conceptually elegant frameworks for the study of financial problems under uncertainty [2], [9]. Equally well known is its elusiveness when it comes to ready application to practical problems (like capital budgeting) or empirical testing. (See [6], [15]–[18].) However, some recent research (see [1], [3], [6], [12]–[16], [18], and [19]) has made a serious attempt to put the state-preference theoretic model in an operational setting. Breeden and Litzenberger [6] have developed an interesting approach to derive constructively the prices of elementary Arrow-Debreu securities from the prices of call options on aggregate consumption. Banz and Miller [3] use a similar technique to value capital budgeting projects based on values for state-contingent claims computed from prices of call options written on the market portfolio. The “supershare” securities proposed by Hakansson [14]–[16] and related work by Garman [13], Ross [24], etc., have also served to give the so-called “state-contingent” approach a practical flavor.

We study the consumption-investment problem of an agent with a constant relative risk aversion preference function, who possesses noisy information about the future prospects of a stock. We also solve for the value of information to the agent in closed form. We find that information can significantly alter consumption and asset allocation decisions. For reasonable parameter ranges, information increases consumption in the vicinity of 25%. Information can shift the portfolio weight on a stock from 0% to around 70%. Thus, depending on the stock beta, the weight on the market portfolio can be considerably reduced with information, causing the appearance of underdiversification. The model indicates that stock holdings of informed agents are positively related to wealth, unrelated to systematic risk, and negatively related to idiosyncratic uncertainty. We also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion.

We find a positive relation between the amount of pension deficits and the cost of bank loans. The effect of pension deficits on the cost of bank loans is driven by financial constraints, information-asymmetry problems, and higher pension-investment risk. Banks tighten lending terms for firms with larger pension deficits by requiring collateral, increasing the number of loan covenants, and shortening loan maturity. Borrowers with larger pension deficits are also more likely to violate covenants in the future. Collectively, these findings indicate that pension deficits represent an additional source of risk priced by banks.

We investigate the implications of providing loan officers with a nonlinear compensation structure that rewards loan volume and penalizes poor performance. Using a unique data set provided by a large international commercial bank, we examine the main activities that loan officers perform: loan prospecting, screening, and monitoring. We find that when loan officers are at risk of losing their bonuses, they increase prospecting and monitoring. We further show that loan officers adjust their behavior more toward the end of the month when bonus payments are approaching. These effects are more pronounced for loan officers with longer tenures at the bank.

We study the role of domestic and global factors in the payoffs of portfolios mimicking carry, dollar-carry, and momentum strategies. Using factors summarizing large data sets of macroeconomic and financial variables, we find that global equity-market factors are predictive for carry-trade returns, whereas U.S. inflation and consumption variables drive dollar-carry-trade payoffs, momentum returns are predominantly driven by U.S. inflation factors, and global factors capture the countercyclical nature of currency premia. We also find predictability in the exchange-rate component of each strategy and demonstrate strong economic value for risk-averse investors with mean-variance preferences, regardless of base currency.

In a sample of underwritten seasoned equity offerings (SEOs), issuers with boards dominated by independent directors experience higher abnormal announcement returns than issuers with boards dominated by insiders. Firm size, transparency, and other governance characteristics do not explain the effect of board independence. The positive relation between board independence and SEO returns is more pronounced for firms with lower monitoring costs and more severe financial constraints. The evidence suggests that independent directors have a positive effect because of their role in controlling both shareholder–manager conflicts (monitoring the use of funds) and current–new shareholder conflicts (certification of the issue’s value).

This paper presents the first empirical analysis of the choice of firms regarding whether to release private information (“prepare the market”) in advance of a possible dividend cut and the consequences of such market preparation. We use a hand-collected data set of dividend cutting firms, which allows us to distinguish between prepared and nonprepared dividend cutters and to test the implications of two alternative theories: the “signaling through market preparation” theory and the “stock return volatility reduction” theory. We document several important differences between prepared and nonprepared dividend cutters. Overall, our empirical results are consistent with the signaling theory.

We study the impact of permanent open market operations (POMOs) by the Federal Reserve on U.S. Treasury market liquidity. Using a parsimonious model of speculative trading, we conjecture that i) this form of government intervention improves market liquidity, contrary to conclusions drawn by existing literature; and ii) the extent of this improvement depends on the market’s information environment. Evidence from a novel sample of Federal Reserve POMOs during the 2000s indicates that bid–ask spreads of on-the-run Treasury securities decline when POMOs are executed, by an amount increasing in proxies for information heterogeneity among speculators, fundamental volatility, and POMO policy uncertainty, consistent with our model.

Using debt crowdfunding data, we investigate whether borrowers’ writing style is associated with an online lender and borrower behaviors, whether the information contained in linguistic style can mitigate information asymmetry in peer-to-peer markets, and whether online investors correctly interpret the economic value of written texts. Peer-to-peer lenders bid more aggressively, are more likely to fund, and charge lower rates to online borrowers whose writing is more readable, more positive, and contains fewer deception cues. Moreover, such borrowers are less likely to default. Online investors, however, fail to fully account for the information contained in borrowers’ writing.

Published scholarly research is asserted to be a major criteria used to judge or assess the quality of a university's faculty. This assertion has been supported in many of the academic disciplines by comparing peer ratings of graduate programs and the research productivity of the faculty of those programs. In the economics area, John J. Siegfried [ 7] found a significant relationship between peer ratings of economics departments, using the ratings of the first American Council on Education study by Cartter, and the number of available pages contributed by the department to the leading economic academic journals. A recent study by Klemkosky and Tuttle [6] found the same relationship between an academic institution's published research productivity and the quality of the institution's graduate finance programs as rated by peers, using the survey results of Brooker and Shinoda [3] to determine peer ratings. The importance of published research in turn is recognized by many academic institutions since the relative quality and quantity of published research is one of the major criteria used in making faculty promotion and tenure decisions.