Search

The secular decline in the use of secured debt by nonfinancial corporations and the relatively low level of corporate leverage observed in the 2010s have led to a decrease in the popularity and market value of bond covenants restricting negative pledge and sale-leaseback activities. Using a sample of 779 bonds issued by US nonfinancial companies and observable both before and during the COVID-19 pandemic, this study shows that the impact of these covenants on yields increases significantly once a crisis unfolds. In contrast, covenants restricting risky investments are not valued by the market in a period when companies do not have incentives to invest. Analyses accounting for the endogeneity of covenants' inclusion and focusing on the moderating role of tangible assets produce fully consistent results. Bondholders may underestimate the propensity of firms to issue secured debt during economic downturns.

Focusing on the 2016 US money market funds (MMFs) reform, this study assesses the impact of removing rating-based rules on the behavior of regulated investors and on market prices. Difference-in-differences fund-level and security-level analyses show a positive impact of the reform on the level of risk-taking by non-government MMFs. No empirical support is found for alternative explanations for the verified change in portfolio allocation. This shift has material consequences for the pricing of credit risk: all else equal, the reform-driven increase in the demand for riskier securities by MMFs is associated with a significant decrease in credit premia for commercial papers.

This chapter documents the use of debt capital by sovereign wealth funds (SWFs)—a growing and under-researched phenomenon. Three reasons are given for this. First: debt can help SWFs reach their target portfolio size. (Some do not receive regular inflows from their governments to increase their assets under management (AUM). Second: the development of capital markets is a key objective for most of the countries that have created an SWF, and debt may be especially useful for the development of the bond market. SWF bonds are quasi-governmental securities that can be used as collateral and create a reference yield curve. Third: the use of debt capital is particularly appropriate for portfolio SWFs investing in concentrated portfolios of selected companies for strategic and financial reasons. SWFs are more likely to use debt when they are non-commodity-based, come from countries with relatively less developed bond markets, and have a strategic investment style.

Using a dataset of Home Equity Loan securities issued up to June 2007 and rated by Moody’s and/or SP however, these alternative thresholds do not appear to play a role as relevant as that of the IG–SG boundary. Rating Bias is also found to have an asymmetric impact on spreads: the relevance of actual over expected ratings is greater for tranches receiving evaluations that are higher (rather than lower) than expected. Taken together, these pieces of empirical evidence point toward ratings-based regulation as an important explanation for the observed mispricing of structured finance products.

None of the models that have been developed to determine the optimal strategic asset allocation (SAA) of stabilization sovereign wealth funds (SWFs) has received direct empirical validation, primarily because there is a lack of transparency regarding some of the key parameters that characterize the problem. In this paper, building on a mean-variance framework, we derive three sets of parsimonious statistical tests to compare the actual SAA of SWFs to a theoretical optimum. We apply these tests to the portfolio of the world's largest stabilization SWF (the Norwegian Government Pension Fund—Global or GPF) for the period between 2002 and 2005. The empirical analysis confirms that the static and dynamic deviations of the GPF's SAA from the market equity portfolio are consistent with the theoretical predictions.

Focusing on the European case, in this paper we investigate the “gap-filling” explanation for corporate debt maturity choices in a multi-country setting. We argue and demonstrate empirically that companies adjust their debt maturity in response to supply shocks in the share of long-term government debt occurring both at home as well as in other European countries as a whole. Consistent with expectations, the latter association is stronger in particular for smaller countries and since the introduction of the Economic and Monetary Union (EMU). The magnitude of the moderating role of size for the EMU sub-sample is fully consistent with our prediction for countries with a common currency and monetary policy. Our results have relevant implications for the ability of individual European governments to use their debt maturity structure as a policy tool.

In this work we provide a critical summary of the debate about sovereign wealth funds (SWFs). We start by explaining what a SWF is and what it is not according to the various definitions that have been proposed. We then present the main concerns and hopes which SWFs have raised and explain why these threats and opportunities are often exaggerated, incorrect or, at the best, not yet supported by any serious empirical evidence. We devote particular attention to the issue of the transparency of SWFs and show that, while there still is ample room for improvement, SWFs are clearer now than what they used to be before the Santiago principles were signed. We also point out, however, that there are sound reasons to believe that transparency, if pushed too far, could be detrimental to both SWFs and recipient countries. Finally, we present the results of the first attempts made by academics and practitioners to provide systematic evidence on SWF investment behaviour. Keywords: sovereign wealth funds, transparency, global imbalances, foreign investments Parole chiave: fondi sovrani, trasparenza, squilibri globali, investimenti esteri Jel Classification: F21 - G15 - H27

We investigate the power and specification of statistical tests and adjustment methods used to detect abnormal credit default swap spread changes. We find that the sign test is better specified than the signed-rank test and more powerful than both the signed-rank test and the t-test. The rating-matched method, which is the most used in the literature, is often misspecified. We propose an alternative method, the spread-matched method, which is correctly specified in all our analyses and subsamples. The spread-matched method is also more powerful than the rating-matched method, and especially so for companies and periods characterized by high levels of credit risk. Several additional analyses (e.g., including non-US companies and focusing on cumulative abnormal changes) confirm the spread-matched method as preferable to traditionally used adjustment methods. Finally, we examine abnormal spread changes around downgrades to illustrate how the use of different tests and methods can affect inference.

Using a dataset of Home Equity Loan securities issued up to June 2007 and rated by Moody’s and/or SP however, these alternative thresholds do not appear to play a role as relevant as that of the IG-SG boundary. Rating Bias is also found to have an asymmetric impact on spreads: the relevance of actual over expected ratings is greater for tranches receiving evaluations that are higher (rather than lower) than expected. Taken together, these pieces of empirical evidence point toward ratings-based regulation as an important explanation for the observed mispricing of structured finance products. JEL classification: G01, G14, G24, G38

International audience; None of the models that have been developed to determine the optimal strategic asset allocation (SAA) of stabilization sovereign wealth funds (SWFs) has received direct empirical validation, primarily because there is a lack of transparency regarding some of the key parameters that characterize the problem. In this paper, building on a mean-variance framework, we derive three sets of parsimonious statistical tests to compare the actual SAA of SWFs to a theoretical optimum. We apply these tests to the portfolio of the world's largest stabilization SWF (the Norwegian Government Pension Fund—Global or GPF) for the period between 2002 and 2005. The empirical analysis confirms that the static and dynamic deviations of the GPF's SAA from the market equity portfolio are consistent with the theoretical predictions.

This paper compares conflict of interest incentives and reputational concerns of credit rating agencies (CRAs) in the context of the subprime crisis. We argue that, during up-market periods, ratings levels are affected by both a strong tendency for alignment across CRAs and ratings “shopping” by issuers, while, during periods of economic slowdown, these distortions disappear since CRAs are then more concerned about their long-run reputation. We test our hypotheses by analyzing the gap between Moodys and S&Ps ratings on US residential, subprime mortgage-backed securities before and after the 2007 crisis. Overall, our results show a clear reduction in ratings alignment. Moreover, we find strong evidence that harsher downgrades came from S&P, which had higher ratings before the crisis, and that the gap reduction is strongly correlated with the rating gap before the crisis. We interpret this as evidence that CRAs try to “reverse the gap”, to reduce the impact on their (relative) reputation. Finally, we find that harsher downgrades tend to occur for securities not jointly rated and that the relation between downgrades and initial rating is significantly different across the two agencies, this being consistent with the rating shopping hypothesis.

In order to comply with listing requirements and overcome information asymmetries, listing companies may be encouraged to adapt themselves with market standards („isomorphism‟) in the setting of governance devices in order to reduce the perceived uncertainty and obtain legitimacy towards investors. In this work we evaluate the isomorphism of IPO companies with respect to the board characteristics (i.e. board size and members‟ age). By analyzing a sample of 121 companies listed from 1999 to 2008 on the Italian Exchange, we find that mimetic strategies are frequent in IPO companies, and that the majority of them exhibit a reduction in the differences of board characteristics in the year after the flotation, compared to listed firms in the same sector. The percentage of mimicking companies is even larger if we consider only companies that introduce changes in the board composition. Multivariate analyses suggest that isomorphism strategies are targeted to signal the IPO firm‟s quality, and are an alternative to issuing underpriced shares.