Erasmo Giambona

Explaining the Variation in Reit Capital Structure: The Role of Asset Liquidation Value

We test the Shleifer-Vishny hypothesis that asset liquidation values influence both firm leverage and the choice of debt maturity. Using panel data on real estate investment trusts, we estimate a simultaneous equation model and find that firms specializing in the most (least) liquid assets use more (less) leverage and longer (shorter) maturities. The evidence also suggests that, for REITs, debt maturity and leverage are substitutes, consistent with the theory and predictions of Barclay, Marx and Smith.

Managing Risk Management

We survey and analyze risk management goals, policies, and perceptions of risk managers in businesses and organizations around the world. With more than 1,100 responses and a global scope, we ask specific questions about risk management behavior in six risk areas: interest rate, foreign exchange, commodity, energy, credit, and geopolitical risk. We question risk managers about their firms exposures to these risks areas as well as their financial and operational methods used to in risk management. In addition, we pose specific questions about the interaction between risk management and the firms investing and financing policies as well as the impact of recent and possible changes to derivatives market regulation on the firms derivative usage. As some questions in the survey are drawn directly from earlier surveys we are also able to assess changes in policy and practice over time. Finally, we link the personal characteristics of risk managers to their practices. For example, we are able to determine whether a managers personal risk aversion is linked to the risk management policy that manager oversees. Overall the results suggest that in the post global financial crisis world, risk management is an important part of corporate activities and that best practice in risk management policy and behavior has become global.

A View Inside Corporate Risk Management

Why do firms manage risk? According to theory, firms hedge to mitigate credit rationing, to alleviate information asymmetry, and to reduce the risk of financial distress. Empirical support for these theories is mixed. Our paper addresses the “why�? by directly questioning the managers that make risk management decisions. Our results suggest that personal risk aversion in combination with other executive traits plays a key role in hedging. Our analysis also indicates that risk averse executives are more likely to rely on (more conservative) fat-tailed distributions to estimate risk exposure. While most theories of risk management ignore the human dimension, our results suggest that managerial traits play an important role. Presentation slides for this paper and other research are presented in “A Guide to Corporate Risk Management�? which is available at http://ssrn.com/abstract=2479483.

Real Assets, Collateral and the Limits of Debt Capacity

We develop a model in which better quality firms separate themselves by issuing unsecured debt and committing to maintain a strong balance sheet, something lower quality firms find too costly to do. Lower quality firms, in contrast, pledge real assets in secured debt transactions. However, during turbulent financial periods, pooling occurs in the secured debt market, which raises the average quality of firms in that market. We use the 1998 Russian crisis together with the role played by Fannie Mae and Freddie Mac for apartment REITs to highlight the relation between financing outcomes and firm type. This article is protected by copyright. All rights reserved

The Theory and Practice of Corporate Risk Management: Evidence from the Field

We survey more than 1,100 risk managers from around the world regarding their risk management policies. We find evidence consistent with some traditional theories of risk management, but not with all. We then study “why” or “why not” firms hedge and find that almost 90% of risk managers in nonfinancial firms hedge to increase expected cash flow. We also find that 70% to 80% of risk managers hedge to smooth earnings or to satisfy shareholders’ expectations. Our analysis also suggests that regulatory changes implemented to increase market stability (e.g., Dodd‐Frank Act) could discourage corporate hedging. Finally, we provide evidence regarding hedging in six areas of risk: interest rate, foreign exchange, commodity, energy, credit, and geopolitical. We find that operational hedging is more common than financial hedging in all risk areas except foreign exchange.

Unveiling the Price of Obscenity: Evidence from Closing Prostitution Windows in the Netherlands

This paper estimates the externality created by sinful activities on housing demand. We study the case of overt prostitution in Amsterdam, where this industry is legalized. To pin down the sin factor in house prices, we exploit a spatial discontinuity in the location of brothel windows, combined with a policy that changed their location. Our results show that homes are 30% cheaper if next door to sex workers. Interestingly though, we also present evidence that allowing prostitution increases local employment. Our findings suggest that households tend to be against the visible presence of sinful businesses, regardless of their socio-economic benefits.

Derivatives Supply and Corporate Hedging: Evidence from the Safe Harbor Reform of 2005

This article analyzes the importance of supply-side fluctuations for corporate hedging. To establish a causal link, we exploit a regulatory change that allows derivatives counterparties to circumvent the Bankruptcy Code’s automatic stay: the Safe Harbor Reform of 2005. Following the reform-induced expansion in the availability of derivatives, fuel hedging by airlines nearing financial distress (those that benefited most from the reform) increased significantly in comparison with financially sound airlines. Similarly, we find that the hedging propensity increased in a general sample of non-financial firms. In line with theory, we also find that operating performance increased for the affected firms.

Real Assets and the Limits of Debt Capacity: Theory and Evidence

This paper considers how collateral is used to finance a going concern. The theory shows that better quality (unobservably higher-valued) firms separate themselves by committing to maintain a strong balance sheet, something lesser quality firms find too costly to do. Lower quality firms instead issue secured debt by pledging real collateral. During turbulent financial periods, however, pooling occurs in the secured debt market, which raises the average quality of firms choosing to finance in that market. Empirical results support model predictions, where we use the 1998 Russian crisis in combination with the role played by Fannie Mae and Freddie Mac for apartment REITs to highlight the relation between financing outcomes and firm type.