Frank Packer

Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan

Abstract The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and superior “certification” at the time of the initial public offerings (IPOs). Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign-owned or independent venture capitalists. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a 3-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher first-day returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of IPOs in Japan.

From Turmoil to Crisis: Dislocations in the FX Swap Market Before and After the Failure of Lehman Brothers

This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations.

Split ratings and the pricing of credit risk

Despite the fact that over 50 percent of all corporate bonds have different ratings from Moodys and Standard and Poors at issuance, most bond pricing models ignore these differences of opinion. Our work compares a number of different methods of accounting for split ratings in estimating bond pricing models. We find that pricing rules that use only the Moodys or Standard and Poors ratings produce unbiased but highly inefficient forecasts. If models rely instead on simply the higher or lower of the two ratings (but not both), greater bias is introduced with insignificant gains in efficiency. In general, the average rating is the best guide to predicting yields in terms of both bias and forecast prediction. However, the forecasting advantage from using the average rating rather than the lower rating derives almost entirely from the below-investment-grade subsample.

Institutional affiliation and the role of venture capital: evidence from initial public offerings in Japan

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and lower underpricing at the time of the IPOs. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign owned or independent venture capitalists. Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a three-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher initial returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of initial public offerings in Japan.

Loan Loss Provisioning Practices of Asian Banks

In the wake of the Asian financial crisis, many regimes in Asia adopted stricter provisioning requirements, as well as discretionary measures, with the objective of increasing provisioning in good times in response to rising levels of risk. Based on a final sample of 240 banks in 12 Asian economies, the evidence is that countercyclical loan loss provisioning has dominated throughout emerging Asia, most strikingly so in the case of India. Thus, loan loss provisioning did not simply become more conservative at all points in time subsequent to the Asian financial crisis, but actively leaned in a fashion that ameliorated swings in earnings and the macroeconomy.

How Consistent Are Credit Ratings? A Geographic and Sectoral Analysis of Default Risk

We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.

Determinants of the choice of bankruptcy procedure in Japan

Abstract This paper investigates close bank–firm relations (keiretsu) among troubled Japanese firms by examining the type of bankruptcy. In Japan, creditors control the fate of the bankrupt firm, which may be costly if managers destroy firm value to avoid bankruptcy or, alternatively, if creditors liquidate too often. Recently, researchers have argued that keiretsu banks prop up weak firms that should fail. We find that bankrupt firms affiliated with keiretsu banks are neither subject to excessive liquidation by overly powerful banks nor slower to be liquidated. Keiretsu banks liquidate via the courts often, perhaps to avoid political repercussions and organized crime.

Credit Risk in Japan's Corporate Bond Market

From the fall of 1997 to the spring of 1999, yield spreads in Japans corporate bond market increased sharply. An analysis of this rapid rise suggests that Japanese investors in corporate bonds may be paying closer attention to the credit risk of individual issuers. Such a shift in investor focus would represent a major change in the structure of this market.

Credit Ratings and the Japanese Corporate Bond Market

This paper examines the credit ratings assigned to Japanese non-financial corporations by Japanese and foreign rating agencies. More of the variance in Japanese than foreign agency ratings can be explained using financial ratios and a few dummy variables. Credit ratings are closely related to market-determined credit spreads, effectively supplementing the information content of financial indicators in the pricing of corporate risk in Japan. The market appears to take the ratings of both Japanese and foreign agencies into account when pricing the debt of Japanese corporations, for a combination of both Japanese and foreign ratings predicts spreads more precisely than any single set of ratings.

Securitization and the Supply Cycle: Evidence from the REIT Market

We analyze securitized equity interests in commercial property (the so-called listed REIT market), with a particular focus on the U.S. experience. We begin by observing that there is a strong negative relationship between new commercial property construction activity and the growth of the U.S. REIT market. Based on this and other relevant factors, we conjecture that an important reason for the muted commercial property supply response during the early and mid-2000s was the “civilizing influence” of the REIT sector. A formal test of the conjecture suggests that the REIT market indeed moderated supply outcomes in the U.S. Relationships between the REIT market and new construction activity are generally weaker in other analyzed countries, where we attribute these findings to structural differences. We conclude that attention to structural detail is essential in order to maximize the benefits associated with creating a transparent and liquid market for securitized investment interests.