Ariadna Dumitrescu

Valuation of defaultable bonds and debt restructuring

In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lenders claim in a firms debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.

Liquidity and Optimal Market Transparency

In this paper I explore some of the consequences of greater market transparency for market performance in the presence of a strategic specialist. Although numerous studies have dealt with this issue, previous work has only considered either fully transparent or fully opaque markets. My model allows for different levels of transparency, and therefore sheds light on how transparency affects market performance. I show that an intermediate level of transparency can improve market performance relative to the more extreme cases of full transparency or no transparency at all.

The Corporate Governance - Performance Puzzle: New Insights

This paper provides new insights on governance – performance relationship using recent data (2007 to 2015) on anti-takeover provisions’ incidence in sample firms. We present “nG (new Governance) Index�?, an unequal weighted measure of corporate governance that captures the heterogeneity of its individual anti-takeover components, as an alternative to equal weighted G-Index, E-Index and Gov-Score proposed in the related literature. Our findings show that all provisions do not equally influence firms’ corporate governance quality and therefore, our proposed nG-Index traces governance – performance relationship more persistently than an equal-weighted measure. Further analysis reveals that an nG-Index based zero-investment hedge, going long on poor governance portfolio and shorting the good governance one, would have generated an abnormal return of over 1.33% per month or about 16% per year. This hedge is completely opposite to the long good governance – short poor governance strategy suggested in prior literature. We posit that such hedge reversal is an indication that, in recent years, investors underreact to good governance signals and/or seek compensation for high riskiness associated with poorly governed firms.

Information and Optimal Trading Strategies with Dark Pools

We study how asymmetric information affects market participants’ choice of trading venue (either an exchange or dark pool), and the optimal submission strategies in a sequential trading game. The exchange is organized as a fully transparent limit order book, and the dark pool is an opaque venue where orders are continuously executed at the midpoint of the bid and ask prices that prevail in the exchange. We find that when the limit order book conveys no information rational uninformed traders never trade in the dark pool due to price risk. However, price risk may be reduced when the information in the book induces an uninformed buyer (seller) to believe that the value of the asset is high (low) since the order was previously submitted by an informed buyer (seller). The optimal strategy of an informed trader takes into account the information leakage, and the strategic response of each type of trader in the subsequent stages. Our main finding is that, adding a dark pool alongside an exchange, may divert the informed trader from the exchange to the dark pool. When the execution risk in the dark pool is low, the informed trader decides to trade in the dark pool. In this case the adverse selection problem in the exchange reduces and consequently, the uninformed trader decides to switch from no trade to placing a limit order in the exchange.

Disclosure of Corporate Tax Reports, Tax Enforcement, and Insider Trading

In this paper, we analyze the effects of disclosing corporate tax reports on the performance of financial markets and the use of asset prices by the tax enforcement agency in order to infer the true corporate cash flows. We model the interaction between a firm and the tax auditing agency, and highlight the role played by the tax report as a public signal used by the market dealer and the role of prices as a signal used by the tax authority. We discuss the determinants of both the reporting strategy of the firm and the auditing policy of the tax authority. Our model suggests that, despite disclosure of the tax reports being beneficial for market performance (as the spreads and trading costs are smaller than under no disclosure), the tax agency might have incentives to not disclose the tax report when its objective is to maximize expected net tax collection.