Dan Amiram

THE DETERMINANTS OF CDS SPREADS

This study proposes models that can be used as shorthand analysis tools for CDS spreads and CDS spread changes. For this purpose we examine the determinants of CDS spreads and spread changes on a broad database of 718 US firms during the period from early 2002 to early 2013. Contrary to previous studies, we discover that market variables still have explanatory power after controlling for firm-specific variables inspired by structural models. Three explanatory variables appear to overshadow the other variables examined in this paper: Stock Return, ∆Volatility (the change in stock return volatility) and ∆MRI (change in the median CDS spread in the rating class). We also discover that models used in the event study literature to explain spread changes can be improved by using additional market variables. Further, we show that ratings explain cross-section variation in CDS spreads even after controlling for structural model variables.

Financial Information Globalization and Foreign Investment Decisions

This paper investigates the association between the adoption of international accounting standards and foreign investment decisions. Prior research suggests that information asymmetries between local and foreign investors and behavioral biases caused by unfamiliarity of the foreign markets contribute to investors preferring to invest in their home markets. Because one of the goals of the adoption of international accounting standards is to establish a high quality, internationally familiar set of accounting standards, I predict that foreign investments will increase in countries that adopted International Financial Reporting Standards (IFRS) after the adoption and that this increase is driven by the familiarity of IFRS. I find that foreign equity portfolio investments (FPI) increase in countries that adopt IFRS. More importantly, I find that this relation is driven by foreign investors from countries that also use IFRS. Moreover, the effect of accounting familiarity is more pronounced when investor and investee countries share language, legal origin, culture, and region. I also find that countries with lower corruption and better investor protection experience larger increases in FPI after they adopt IFRS relative to other IFRS users. These findings are consistent with the hypothesis that familiar accounting information drives foreign investment decisions.

Market Reaction to Securitization Retained Interest Impairments during the Financial Crisis of 2007-2008: Are Implicit Guarantees Worth the Paper They’re Not Written On?

The collapse of the securitization market during the 2007-2008 Financial Crisis resulted from investors’ concern with the value of securitized assets and securities issued by special purpose entities (SPEs). Research has shown that prior to the Crisis, investors valued equity of sponsor-originator banks (S-Os) as if there were an implicit guarantee extended to SPE creditors that would be fully honored. We predict that the Crisis caused investors to value S-O equity as if such guarantees would not be honored. We test this prediction in two ways: by estimating cross-sectional equity valuation models for banks before and during the Financial Crisis, and by testing for changes in various market metrics in response to retained interest writedown events during the Financial Crisis. The valuation tests reveal that whereas prior to the Crisis SPE debt and equity was valued similarly to S-O debt and equity, this relation ceased to hold after the Crisis unfolded. The event study results reveal an increase in trading volume, equity volatility, and spread when retained interest writedowns are announced, which is consistent with the market viewing such events as providing significant, but ambiguous information regarding whether S-Os would honor their implicit guarantees. Additional analyses reveal that investor reaction is concentrated among those S-Os where there is ambiguity as to whether they will honor their implicit guarantees.

How Are Analysts’ Forecasts Affected by High Uncertainty?

This study examines whether key characteristics of analyst forecasts — timeliness, accuracy, and bias — change at a time when investor demand for information is likely to be especially high, i.e., during periods of high market uncertainty. Findings reveal that when market uncertainty is high, analysts’ forecasts are less timely as aggregate news between forecasts increases and forecasts are issued with a greater delay following earnings announcements. In contrast, when idiosyncratic firm uncertainty is high, there is only a slight increase in aggregate news between forecasts and forecasts are issued sooner following earnings announcements. Findings also reveal that, when market uncertainty is high, forecasts are less accurate and more biased. This result is larger for market uncertainty than firm uncertainty, and only for market uncertainty holds in both down and up markets. We also provide evidence that analysts are less sensitive to news when market uncertainty is high, which could explain this decline in timeliness and accuracy and increase in bias. However, despite the changes in characteristics of analysts’ forecasts when market uncertainty is high, evidence indicates that these forecasts nevertheless reduce bid-ask spreads, even to a greater extent than forecasts made when market uncertainty is low or when firm uncertainty is high.

Debt Contracts, Loss Given Default and Accounting Information

We investigate an unexplored channel — loss given default — through which accounting information can shape the design of debt contracts. Using a sample of defaulted bonds, we find that borrower accounting measures available at contract initiation possess significant power for predicting realized loss given default at the subsequent default date. We then use this prediction model to construct an accounting-based measure of expected loss given default at the contracting date for a large sample of bond issuances. We find that this measure is positively associated with the issuance date interest spread and covenant use. We further document that the relation between accounting-based expected loss given default and contract terms is not an artifact of its potential association with probability of default. Our results increase our understanding of both the informational role and contracting role of accounting information.

The Effects of CDS Trading on Information Asymmetry in Syndicated Loans

This study shows that the initiation of CDS trading for an entity’s debt increases the share of loans retained by loan syndicate lead arrangers and the incidence of sole lending loans. Further evidence shows this finding is consistent with CDS initiation reducing the effectiveness of a lead arranger’s stake in the loan to serve as a mechanism to address the adverse selection/moral hazard problem in the syndicated loan market. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency and for loans originated by a lead arranger with a strong reputation in this market.This study shows that the initiation of CDS trading for an entity’s debt increases the share of loans retained by loan syndicate lead arrangers and the incidence of sole lending loans. Further evidence shows this finding is consistent with CDS initiation reducing the effectiveness of a lead arranger’s stake in the loan to serve as a mechanism to address the adverse selection/moral hazard problem in the syndicated loan market. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency and for loans originated by a lead arranger with a strong reputation in this market.

Tax Avoidance at Public Corporations Driven by Shareholder Taxes: Evidence from Changes in Dividend Tax Policy

We exploit exogenous changes in a country’s shareholder dividend tax policy to quantify the impact shareholder demand has on corporate tax avoidance by managers of public corporations. Specifically, we examine changes in corporate tax avoidance after the elimination, as well as enhancement, of imputation systems using a difference-in-difference design. We estimate shareholder demand contributes to an increase in corporate tax avoidance of approximately 10% of pre-tax income upon elimination of the imputations systems, which reflects a decrease of 30% from the corporate statutory tax rate for the average public corporation.In a complementary country-level analysis, we find aggregate corporate tax revenues decreased after the elimination of the imputation systems, consistent with an increase in corporate tax avoidance. The analysis of the cross-sectional variation in our difference-in-difference results provides evidence that the incentive for managers to engage in corporate tax avoidance to benefit shareholders varies by public corporations’ foreign operations and ownership concentration. Our findings also inform the debates over tax reform in various countries and have implications for future international studies in a variety of disciplines including financial accounting and finance.

Volatility, Liquidity, and Liquidity Risk

A central theme in existing literature is that increased disclosure and transparency reduce the level of information asymmetry between market makers and informed traders and thus increase liquidity. In contrast, in this study we propose and empirically investigate a new and unexplored channel through which the information environment can affect liquidity. We predict that for a given level of information asymmetry, or even absent information asymmetry, reduced disclosure and less transparent information environments make changes in the firms stock price more discontinuous (jumpy) and hence change the structure of volatility. We further predict that market makers reduce liquidity as a result, because it is significantly more difficult for them to hedge discontinuous price changes (jump volatility) to their inventory than continuous price changes (diffusive volatility). Using both associations and causal tests we find a negative relation between the transparency of the information environment and jump volatility. We then show that jump volatility is negatively associated with liquidity, even after controlling for information asymmetry, while diffusion has a positive association. Finally, we present causal evidence that the information environment affects liquidity through jump volatility. Our findings have implications for our understanding of liquidity, corporate finance decisions, and policy-makers.

Do Executive Compensation Contracts Maximize Firm Value? Evidence from a Quasi-Natural Experiment

We find significant positive abnormal returns surrounding a surprising and quick enactment of a law that restricts executive pay to a binding upper limit in a few industries. We find that the effect is concentrated only for firms in which the restriction is binding. We also find that the increase in value is greater for firms with weaker corporate governance and smaller for firms that grant a greater portion of equity-based compensation to their executives. These results provide indications that, on average, compensation contracts can be set in a way that does not maximize firm value.

Industry Sensitivity to External Forces and Firm-Level Disclosure

This paper examines whether analysts have an industry-level information advantage over managers when forecasting a firm’s earnings. We argue that such an advantage is more likely to exist for firms that operate in industries that are characterized by more uncertain operating environments due to industry-level shocks. We find that for firms in such industries, analysts provide more accurate forecasts than managers. We further find that managers of firms in such industries provide fewer and less precise (e.g., range versus point estimates) forecasts, and that these results are more pronounced when analyst following and institutional ownership are higher. These findings suggest that analysts have an informational advantage over managers with respect to industry-level information for industries with certain characteristics.