Cesario Mateus

Debt and Taxes: Evidence from Bank-financed Small and Medium-sized Firms

This paper analyzes the impact of corporate taxes on the capital structure in a country where bank financing is the main external financing source. It is found that the existence of a debt tax shield and provisions for tax loss carry-forwards has an important impact on the capital structure of the firm. These results differ from the general result in the literature that taxes do not matter for the capital structure decision. The main difference is that these results are obtained from a bank based financing system where asymmetric information and agency problems are solved differently than under a market-based system where most of the general results from the literature are obtained. Consistent with this, the pecking order theory of capital structure is rejected. Finally, it is found that small firms may be credit rationed by the banks.

Do Portuguese private firms follow pecking order financing

This paper tests for pecking order behavior in medium-sized private Portuguese firms. In contrast to the usual split between internal funds, debt, and external equity, we separate debt into four components – cheap trade credits (CTC), bank loans (BL), other loans, and expensive credits (EC). We use breakpoint tests to identify when firms switch between funding sources by examining the change in each funding source based on the financing deficit remaining after the previous pecking order funding source has been used. Our tests indicate that Portuguese companies generally move from lower cost to higher cost financing sources, but they do not exhaust each type of debt before moving on to the next funding source in the pecking order. Such behavior is consistent with a loose interpretation of pecking order financing, but not a strict interpretation of the theory. Instead, Portuguese firms may be balancing pecking order financing with a need to maintain some degree of financing flexibility.

Physical versus Synthetic Exchange Traded Funds. Which One Replicates Better

This paper investigates the tracking performance of physical and synthetic equity exchange traded funds listed (ETFs) on the London Stock Exchange (LSE) during the period 2008 to 2013. We examine the ETFs accuracy in replicating their benchmark returns, with different geographical focus, applying several tracking metrics and including the financial crisis period. First, we did not find evidence that synthetic ETFs outperformed physical ETFs in terms of lower daily tracking performance. Second, the results show that the ability of ETFs to replicate its benchmark index’s returns depends on characteristics of the securities composing the index. Third, we provide evidence that the 2008-2009 financial crises had negative impact on daily tracking performance for all ETFs. Fourth, the method to estimate the tracking error impacts the results.

Volatility Risk and Stock Return Predictability on Global Financial Crises

Purpose - The purpose of this paper is to investigate the role of volatility risk on stock return predictability specified on two global financial crises: the dot-com bubble and recent financial crisis. Design/methodology/approach - Using a broad sample of stock options traded on the American Stock Exchange and the Chicago Board Options Exchange from January 2001 to December 2010, the effect of different idiosyncratic volatility forecasting measures are examined on future stock returns in four different periods (Bear and Bull markets). Findings - First, the authors find clear and robust empirical evidence that the implied idiosyncratic volatility is the best stock return predictor for every sub-period both in Bear and Bull markets. Second, the cross-section firm-specific characteristics are important when it comes to stock returns forecasts, as the latter have mixed positive and negative effects on Bear and Bull markets. Third, the authors provide evidence that short selling constraints impact negatively on stock returns for only a Bull market and that liquidity is meaningless for both Bear and Bull markets after the recent financial crisis. Practical implications - These results would be helpful to disclose more information on the best idiosyncratic volatility measure to be implemented in global financial crises. Originality/value - This study empirically analyses the effect of different idiosyncratic volatility measures for a period that involves both the dotcom bubble and the recent financial crisis in four different periods (Bear and Bull markets) and contributes the existing literature on volatility measures, volatility risk and stock return predictability in global financial crises.

A Tale of Two States: Asymmetries in the UK Small, Value and Momentum Premiums

ABSTRACT This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs.

Volatility Risk and Stock Return Predictability

This paper investigates the role of volatility risk on stock return predictability. Using 596 stock options traded at the American Stock Exchange and the Chicago Board Options Exchange (CBOE) for the period from January 2001 to December 2010 we examine the relation between different idiosyncratic volatility measures and expected stock returns for a period that involves both the dotcom bubble and the recent financial crisis. We first show that implied idiosyncratic volatility is the best stock return predictor among the different volatility measures used. Second, cross-section firm-specific characteristics are important on stock returns forecast. Third, we provide evidence that higher short selling constraints impact negatively stock returns having liquidity the opposite effect.

A guide to survival of momentum in UK style portfolios

In this study we estimate the survival time of momentum in six UK style portfolio returns from October 1980 to June 2014. We utilise the Kaplan-Meier estimator, a non-parametric method that measures the probability that momentum will persist beyond the present month. This probability enables us to compute the average momentum survival time for each of the six style portfolios. Discrepancies between these empirical mean survival times and those implied by theoretical models [Random Walk and ARMA (1, 1)] show that there is scope for profiting from momentum trading. We illustrate this by forming long-only, short-only and long-short trading strategies that exploit positive and negative momentum and their average survival time. These trading strategies yield considerably higher Sharpe ratios than the comparative buy-and-hold strategies at a feasible level of transaction costs. This result is most pronounced for the long/short strategies. Our findings remain robust during the 2007/2008 financial crisis and the aftermath, suggesting that Kaplan-Meier estimator is a powerful tool for designing a profitable momentum strategy.

Oil Prices, Stock Markets and Firm Performance: Evidence from Europe

This paper extends the understanding of the relationship between oil prices, stock markets and financial performance of oil and gas firms over the past decade. Firstly it studies the impact of oil price fluctuations on stock markets in Europe. Secondly, it examines the volatility spillovers between oil and European stock markets. As oil price changes do not equally affect all industries, the study conducts both market-level and sector-level analysis. Thirdly, it examines the impact of crude oil price changes on the financial performance measure of oil and gas firms, both listed and unlisted, from the Western European region. The findings show existence of the one-way directional relationship between oil and most of the European sector stock markets. Furthermore, the results indicate volatility spillovers between returns in oil price and stock markets. It was found that crude oil prices significantly and positively impact the performance of listed oil and gas firms in Western Europe. In the case with unlisted firms, the results suggest existence of other factors that have an impact on their performance. The geopolitical crisis (2014) negatively affected the financial performance of both listed and unlisted firms. On the other hand, financial performance of only listed oil and gas firms was negatively influenced by the global financial crisis (2008-2009).

Global Financial Crisis and Price Discovery between Credit Default Swaps Premia and Bond Yield Spreads

This paper examines the relationship between CDS and bond markets in the context of the financial crisis by employing daily data between January 2007 and September 2014. To the best of our knowledge this is the first study that analyses the incorporation of new information for CDSs and bonds quoted in British pound from the viewpoint of price discovery process. A lead-lag relation is found between the markets, in which changes in CDS premia consistently forecast changes in bond spreads. Moreover, it was found less bond market reaction for an increase on the insurance premium to investment grade bonds.

What Explains European Banks Risk-Taking? A Simultaneous Equations Approach

The global financial crisis has led to an increasingly focused attention on excessive bank risk-taking. One of the consequences is that the role of internal governance mechanisms (such as the board of directors) in monitoring risk has come under greater scrutiny. In this paper we examine the impact of board structure, ownership structure, risk governance mechanisms and other bank-specific factors on bank risk-taking for a sample of 72 publicly listed European banks. Using a simultaneous equations approach, our main findings indicate that the proportion of independent directors, board size and Chief Executive Officer (CEO) power (or CEO authority) negatively affect bank risk-taking during the financial crisis. On the contrary, institutional shareholders positively influence bank risk-taking and both the existence of a risk committee and a Chief Risk Officer (CRO) who is a member of the board have no significant impact. The results remain unchanged when applying both three-stage least squares (3SLS) and the two-stage least squares (2SLS) estimation methods as well as when all variables are winsorised. Additionally, we extend our analysis for the period before the financial crisis (proxy for “stable” periods) to test whether the impact of governance mechanisms and other determinants of risk-taking depend on environmental conditions and we conclude that it is indeed sensitive to the economic context. In fact, we find that some of governance mechanisms are relevant in crisis conditions but not in non-crisis conditions and thus, their impact depends on macroeconomic conditions.