Articles Flashcards Preview

Financial Economics > Articles > Flashcards

Flashcards in Articles Deck (150)
Loading flashcards...
1

Two Pillars of Asset Pricing (Fama)

What is "bubble"?

“Bubble” - an irrational strong price increase that implies a predictable strong decline.

1

From Efficient Markets Theory to Behavioral Finance (Shiller)

What does in mean that markets are "micro efficient but macro inefficient"?

Across firms there is predictable future path of their dividends and other movements (correspond to EMH) but in aggregate these movements are hardly predictable due to excess noise.

1

Hedge Funds: Past, Present, and Future (Stulz)

Name 4 popular hedge fund strategies.

1. Long-short equity (identifying over-/undervalued stocks)
2. Event-driven (significant transactional events such as mergers, bankruptcies etc.)
3. Macro (mispriced valuations in stock markets, interest rates etc.)
4. Fixed –income (arbitrage in fixed income markets)

1

HOW DEBT MARKETS HAVE MALFUNCTIONED IN THE CRISIS

Why do haircuts rise in crisis?

Due to lower liquidity

1

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

Functions of CDS

allow to sell debt short 

Supposed to make markets more efficient 

Provide information

1

Agency problems at Dual- Class companies

Major economic advantages of dual- class shares?

  • Allows a company to grow (selling CF rights, while keeping voting rights), founders or owners of the company can retain control, thus, influence the development of the company;
  • Prices of CF shares are lower è You can receive some benefits,
  • In case you are not interested in the control, but just the cashflows from company’s operations;

1

 Survey of corporate governance

The most common manifestations of agency costs:

  • Managers resist takeovers (from the target’s perspective) to protect PBoC rather than defend the interest of shareholders;
  • Managers overinvest rather than return money to investors (potentially in NPV
  • When an executive (bad one) dies, then share price goes up (largest for greedy corporations);
  • Privatizing at a huge premium (Russia);

2

The market reaction to cross-listings: Does the destination market matter?

Advantages of Cross-listing

liquidity (leads to lower cost of capital)
market segmentation (overcomes international barriers; matters most for emerging markets)
information disclosure (requirements, more attention from media and analysts)
investor protection (legislation)

3

The Political Economy of Finance

Interventions in financial markets happen when...

How?

 

WHEN?

  • There is a crisis
  • Pressure or political interests of the intervening party

HOW?

  • Case by case basis
  • Policy level

4

U.S. Equity return premium (De Longe, Magin)

What is "equity premium puzzle"?

The gains from equity are significantly higher, yet investment in stocks remains disproportionally low.

4

Two Pillars of Asset Pricing (Fama)

What is Joint hypothesis problem?

We need to know WHAT the market is supposed to do to know whether it does it. If the test fail you can’t tell which of the part failed – asset pricing model or assumptions.

4

Two Pillars of Asset Pricing (Fama)

Why "bubbles" are based only on beliefs and have no evidence?

• Large swings in stock prices predict real economic activity

• ”Price corrections” of bubbles usually wiped out soon after

4

The Law of One Price in Financial Markets (Lamont, Thaler)

Name 2 main arguments why LOOP is violated.

• Behavioural biases

• Arbitrage isn't perfect

4

Forensic Finance (Ritter)

How academia can help regulators and law officials?

1. Attracting attention

2. Looking at long-run trends

4

Forensic Finance (Ritter)

What has Sarbanes–Oxley Act changed?

Sarbanes–Oxley Act requires executives to report insider trades (including receipt of stock grants) within two days of the transaction (instead of 10th day of the following month).

4

Hedge Funds: Past, Present, and Future (Stulz)

What is the future of hedge funds?

1. Worse performance (more of them)

2. More instutionalized (institutional investors need more info)

3. More regulated

4

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

Problems with CDS

no need for monitoring

perverse incentives (drive into bankruptcy)

4

 Survey of corporate governance

Drawbacks of being a large investor?

  • Bear extensive risk due to lack of diversification
  • Advocate own interests sometimes at expense of other investors
    • Detrimental to efficiency
  • Too soft
    • Own agency problems
    • Want to exit (failed to terminate their position)

5

The politics of Financial Development: Evidence from Trade liberalization

What is political economy?

 

  • Looks at power balances that impact the allocation of social and economic resources (instead of looking GDP, other macro variables, we look at the power, who possess it, where, when, etc. ) 

6

HOW DEBT MARKETS HAVE MALFUNCTIONED IN THE CRISIS

Three areas crucial in all debt market decisions:

risk capital and risk aversion

repo financing and haircuts

counterparty risk

6

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

CDS (def)

insurance against default of a company

7

 Survey of corporate governance

Various forms of expropriation:

 

stealing
transfer pricing (trade with manager's affiliates)
private benefits of control (PBoC)
entrenchment

8

The Political Economy of Finance

 

2 goals of privatization?

  • Raise revenue
  • promote competition and economic reform

9

Private benefits of control: An International Comparison

 

How can we measure PBoC? 

Two ways:

  • Control Premium approach (looking at the private negotiations where controlling blocks are sold, typically, for a premium, the question is, what premium do they sell at?);
  • Voting rights approach (dual class shares and voting shares trade at a premium that includes probability of a control contest premium for control); 

10

Leveraged buyouts and private equity

What is special about Private Equity from financial perspective?

Mgmt. incentives (give stock, make mrg invest) – equity illiquid, has to perform
Leverage – pressure not to waste money (reduces AC), increases value through TS, but can’t be too high

10

Agency problems at Dual- Class companies

What are the ways to allianate (expropriate) outside investors?

  • Increase compensation
  • Acquisition
  • Invest in negative NPV projects (not favorable by all shareholders)

12

Capital Asset Pricing Model (Perold)

Is expected return influenced by internal company characteristics? (e.g. CFs)

E(r) is not characterized by internal company characteristics

12

Agency problems at Dual- Class companies

4 channels of how the difference between Cash Flow rights and insiders control rights lead to lower shareholder’s value?

In other words, how managers of the company can decrease shareholder's value?

  • Engage in value destroying activities;
  • Demand excessive remuneration;
  • Misuse corporate cash reserves;
  • Make poor capital decisions;

14

Coase Versus Coasians

What is coase theory about?

What is coasians theory about?

  • Coase- when there is a well defined property rights, transaction costs are zero, there are no taxes ==> you don’t need any intervention from the government. Rather market participants will organize their transactions in ways that achieve efficient outcomes
  • most securities transactions involve private arrangements to achieve efficiency, need contracts. Effective and complicated contracts need effective judicial enforcement. (main assumption: judges must be able and willing to read complex contracts!!!!)

 

 

15

U.S. Equity return premium (De Longe, Magin)

Why equity premium is predicted to decline in the future?

1. Institutional changes:

• removed constrains on investing in equities

• easier to invest

• rise of mutual funds (easier to achieve diversification benefits)

2. More long-term oriented market participants