Financial economics | EPFL Graph Search

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance. The subject is concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment". It therefore centers on decision making under uncertainty in the context of the financial markets, and the resultant economic and financial models and principles, and is concerned with deriving testable or policy implications from acceptable as

Essays in Financial Economics

Jan Peter Kulak

In the first chapter of this thesis, I empirically show that the time delay firms face in raising outside capital affects cash holdings. I exploit the 2005 US Securities Offering Reform (the Reform) as a quasi-natural experiment. For a subset of large public US firms, the Reform relaxed the requirement to undergo the standard review process with the Securities and Exchange Commission (SEC) before raising new public capital, leading to a reduction in regulatory delay of approximately 1-1.5 months on average and exceeding half a year in extreme cases. Difference-in-differences estimates based on the event suggest a causal channel from time delay to cash holdings. Over the course of the year following the Reform, affected firms reduced their cash holdings by approximately 2-3% as a fraction of book assets relative to unaffected control-group firms. As predicted by theory, the effect is strongest among firms in cash flow volatile industries. The second chapter investigates whether seasoned equity offerings (SEOs) are accompanied by price pressure effects that models of investor inattention and slow-moving capital predict. In line with theoretical predictions, I find that the share prices of issuing firms exhibit a drop in the pre-offer week, and a positive trend in the first four to eight weeks thereafter. The pattern is systematically related to the size of an offering and to measures of the amount of attention the issuing firm receives by market participants. The resulting costs to the issuing firm are on the order of 2% as a fraction of offer proceeds for the average firm, and nearly twice as large for the tercile of firms issuing the largest quantities of illiquid stock. The price impact is so sizable and long-lasting that simple monthly trading strategies that purchase SEO stocks in the first calendar month after an offering yield monthly five-factor alphas exceeding 1.5 percentage points. The abnormal returns are most pronounced in periods of low aggregate stock market liquidity, as measured by the Pástor and Stambaugh (2003) liquidity index. The results are consistent with the interpretation that the return pattern represents a compensation to temporary liquidity providers, who require the largest compensation during periods in which funding liquidity is scarce. The third chapter is joint work with Cornelius Schmidt from the University of Lausanne. We propose a novel setting to test how the presence of attention constraints affects stock prices. Our setting exploits the particular industry exposure of vertically integrated firms. Because of inter-segment sales of goods, the relative size of individual segments within such firms, in an accounting sense, is a misleading indicator for the firm's overall exposure to industry shocks. We hypothesize that attention constrained investors will tend to neglect this detail, leading to systematic pricing mistakes after confounding, industry-specific news shocks. In line with this hypothesis, we find evidence of predictable price corrections in post-news periods – in particular in the time around firms' earnings announcements. A fully implementable long-short equity strategy based on the phenomenon leads to significant risk-adjusted excess returns. Security analysts' earnings forecasts exhibit a predictable error in the same direction as stock prices.

EPFL2012

Essays in Financial Economics

Christoph Helmut Peter Herpfer

This thesis contains four chapters, each of which utilizes new or unusual data sources to analyze a different area of financial economics. In the first chapter, I construct a novel dataset linking individual bankers to large borrowers in the U.S. syndicated loan market to analyze the impact of bankers on bank lending. I find that time invariant banker fixed effects have at least as much explanatory power as bank fixed effects across key loan outcome variables. One channel through which bankers impact lending is through personal relationships with borrowers. I address the endogenous nature of relationship formation by exploiting shocks to relationships from the departure of bankers and find that stronger personal relationships are associated with significantly lower interest rates charged to clients. Reduced interest rates of relationship loans reflect superior information of bankers, rather than nepotism. Loans issued by bankers that have stronger personal relationships with borrowers are associated with fewer bankruptcies and no more beneficial terms upon renegotiation. The second chapter, which is joint work with Stefano Colonnello, exploits a U.S. Supreme Court ruling on diversity of citizenship in legal disputes to estimate the contribution of the court system to firm value. In an event study, we find that an increase in state court quality from bottom to top tercile is associated with an average increase in equity value of 0.45%, or about $8.7 million on the event day. This effect appears to be driven by courts¿ attitude towards businesses more than by their competency and is more pronounced for firms in industries with high litigation risk. We also test whether firms benefit from the ability to steer lawsuits into friendly courts, so called forum shopping. We provide evidence that a reduction in firms¿ ability to forum shop decreases firm value, whereas a reduction in plaintiffs¿ ability to forum shop increases firm value. We further document that the ruling had significant real effects. Firms which previously stayed out of regions with potentially problematic courts subsequently increased their operations in those regions. The third chapter is coauthored with Matthias Effing, Rüdiger Fahlenbrach, and Philipp Krüger and examines the impact of a sudden home currency appreciation on the valuation and behavior of corporations in a developed economy. The Swiss National Bank surprisingly repealed the minimum exchange rate of 1.2 Swiss francs per Euro on January 15, 2015. On that day the franc appreciated by 15% and the main stock market index dropped by 8.7%. The impact was largest for export oriented firms with high domestic costs. These firms experienced 5% lower announcement returns, subsequently faced economically sizeable reductions in sales and profitability, and responded by reducing investment by 8.1% while only slightly reducing employment. In the fourth chapter, which is joint work with Cornelius Schmidt and Aksel Mjøs, we exploit exogenous shocks to the distance between corporate borrowers and banks to analyze the role of distance in commercial bank lending. We find that a reduction in travel time due to improved infrastructure increases the likelihood of initiating a new borrowing relationship, evidence that closer distance creates a surplus from lower transaction costs. In existing lending relationships, however, banks capture a fraction of this surplus by increasing interest rates.

EPFL2017

Essays in Financial Economics

Kornelia Fabisik

This thesis consists of three parts that study separate subjects in corporate finance and corporate governance. The overarching theme is ownership by CEOs and other insiders. In the first part, which is co-authored work with Rüdiger Fahlenbrach, René M. Stulz, and Jerôme Taillard, we build the largest database of managerial ownership information ever used in the literature. We show that the empirical relation between a firm's Tobin's q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, we confirm earlier findings of an increasing and concave relation between Tobin's q and managerial ownership. We show that cumulative past performance and liquidity can explain these seemingly contradictory results. Better performing firms have more liquid equity, which enables firms and insiders to more easily sell shares after the IPO, and they also have a higher Tobin's q. In the second part, I conduct the first large-scale empirical analysis of the pledging phenomenon among U.S. CEOs. Pledging allows the owner of shares to put them up as collateral to a third party in exchange for cash. I show that between 2007 and 2016, 7.6% of publicly listed U.S. firms disclosed that their CEOs had pledged company stock as collateral for a loan. On average, CEOs pledge 38% of their shares. The mean loan value is an economically sizeable $65 million. CEOs use the funds to either double down (6.0%), hedge their ownership (3.5%), or to obtain liquidity while maintaining ownership (90.5%). My event study results reveal that stock market participants view pledging as value-enhancing. Similarly, I find no evidence of its negative shareholder value consequences, except for CEOs who engage in significant pledging. In the third part, I provide the first in-depth analysis of U.S. pledging CEOs who faced margin calls. A margin call occurs whenever the value of collateral backing a loan falls below a certain pre-specified amount. I find that 15% of CEOs with margin loans have at some point faced margin-call-induced selling. The mean (median) drop in CEO ownership following margin-call-induced sales is 31.2% (22.0%). More than 87% of firms do not introduce any type of an anti-pledging policy post margin-call sales by their CEOs which could explain the absence of any major changes in CEO compensation contracts. Corporate policies in firms with CEOs who lost a sizeable ownership stake are not indicative of weakened incentives.

EPFL2020

Essays in Financial Economics

Christoph Helmut Peter Herpfer

EPFL2017

Essays in Financial Economics

Kornelia Fabisik

EPFL2020

Essays in Financial Economics

Jan Peter Kulak

EPFL2012