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Corporate finance
In this section, the reports deal with articles on corporate finance: capital structure, corporate financial policy, IPOs, share buybacks, CEO compensations, stock options, managerial incentives, debt issuance, tax issues, the empirical studies etc..

Managerial Miscalibration

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Managerial Miscalibration

by Itzhak Ben-David (Ohio State University), John R. Graham and Campbell R. Harvey (Duke University)

Graham and Harvey are well known for their CFO survey of the equity risk premium. In this paper, they test whether these executives are miscalibrated, i.e. the distribution of their expectations is not correct. They use a unique panel that includes over 12,500 probability distributions of future stock market returns collected from top financial executives over nearly a decade. They find that executives are severely miscalibrated: realized market returns are within the executives’ 80% confidence intervals only 33% of the time. These executives seem therefore to be overconfident in their views. They show that miscalibration improves following poor market performance periods because forecasters are influenced by extreme negative past returns. Poor returns are salient events that seem to influence these executives. They also find that the degree of miscalibration is strongly correlated with the confidence interval that executives provide to their own-firm project returns. Finally, executives’ miscalibration is correlated with their own-firms’ level of investment.

This is an interesting paper that shows that the risk premium is very difficult to forecast even by professional executives and seems to cast doubt on the efficient market hypothesis since their expectations seem to be systematically miscalibrated and therefore wrong. This is also a cautionary tale for not relying on surveys to forecast macro and financial variables, even when the participants are sophisticated executives. At the same time, their forecasts can guide their investment decisions; public policy makers should take note and provide better public forecasts to complement the private miscalibrated forecasts.

You can read the paper here .

 

Bank Liquidity Creation

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Bank Liquidity Creation

Allen N Berger and Christa H S Bouwman

The modern theory of financial intermediation suggests that the central role of banks in economy is to create liquidity and transform risk. These theories argue that banks create liquidity on the balance sheet by financing relatively illiquid assets with relatively liquid liabilities. According to the risk transformation theories, banks transform risk by issuing riskless deposits to finance risky loans.

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The Composition and Priority of Corporate Debt

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The Composition and Priority of Corporate Debt: Evidence from Fallen Angels
Joshua D. Rauh, Amir Sufi

Large body of theoretical research explores the optimal composition and priority of corporate debt for different types of firms. The primary source of variation in theoretical models that explore optimal debt structure is a firm’s credit quality. Few empirical research have suggested that credit ratings themselves have an important impact on a variety of corporate finance issues, such as firms’ securities prices, debt agreements, financial policy, and investment policy.

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The Effects of Bond Supply Uncertainty

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The Effects of Bond Supply Uncertainty on the Leverage of the Firm
Massimo Massa, Ayako Yasuda

In the standard theory of corporate finance, demand conditions in the credit market have been considered as the prominent determinants of the firm’s financing decisions and resulting capital structure of the firm instead of supply conditions. But of late this demand centric approach to understand capital structure have been questioned.

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Control of Corporate Decisions: Shareholders vs. Management

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Control of Corporate Decisions: Shareholders vs. Management

Milton Harris, Artur Raviv

Proponents of increased shareholder participation argue that such participation is needed to counter the agency problems associated with management decisions. Opponents offer several arguments such as that shareholders lack the requisite knowledge and expertise to make effective decisions or that shareholders may have incentives to make value-reducing decisions.

 

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