Hsien-Hsing Liao

Information Uncertainty, Information Asymmetry and Corporate Bond Yield Spreads

This study examines the effects of information uncertainty and information asymmetry on corporate bond yield spreads using American bond data from year 2001 to 2006. Empirical results show that corporate bond investors charge a significant risk premium on both information uncertainty and information asymmetry when controlling for well-known variables. The results are robust even when additionally controlling for corporate credit rating. Results also reveal that non-accounting related factors of information uncertainty and information asymmetry are more important determinants for bond yield spreads than an accounting one. Moreover, information uncertainty and information asymmetry help structural credit models in explaining yield spreads of bonds with short maturities.

Labor Unions, Bargaining Power and Corporate Bond Yield Spreads: Structural Credit Model Perspectives

This study investigates labor union effects on bond yield spreads from perspectives of structural credit models by employing American bond observations from 2001 to 2007. This research finds that union strength significantly and positively relates to bond yield spreads (this effect is roughly equal to that of issuer rating for one standard deviation change when controlling for well-known variables). The empirical results also show that the positive effects become weaker when management has higher bargaining power. Additionally, union strength volatility significantly and negatively relates to bond yield spreads and capital structure (leverage). The above results are robust when controlling for credit ratings, collinearity concerns, industry effect and tax effect. 2011 Elsevier B.V. All rights reserved.

Predicting Construction Contractor Default with Option-Based Credit Models—Models' Performance and Comparison with Financial Ratio Models

Construction contractor evaluation is a critical issue in successfully completing a project. It is important for project owners and other stakeholders to identify potentially failing contractors and to avoid awarding them contracts. Previous studies developed construction contractor default prediction models incorporating managerial or economic variables into traditional financial ratio models to enhance predicting power. However, managerial variables are subjective and qualitative, and both economic variables and financial ratios are only available periodically and may not provide the necessary information in time. This study predicts contractor default by employing three option-based credit models (BSM, CB, and BS) based on stock market information, and the empirical results show that all of the models have strong discriminatory power in ranking contractors from riskiest to safest. The misclassification rates of the three models are BSM: 10%, CB: 10%, and BS: 12.7%, all of which are smaller than that of...

A Flow-Based Corporate Credit Model

The main purpose of this paper is to develop a flow-based corporate credit model. This model can concurrently and endogenously generate a firm’s multi-period probabilities of liquidity crunch and expected liquidity shortfalls. This study builds a state-dependent internal liquidity model that incorporates both systematic and idiosyncratic shocks into corporate internal liquidity dynamics. The flow-based credit model differs from structural form credit models in that it considers a flow-based insolvency rather than a stock-based one, and has a potential to capture short-term credit information. Additionally, it differs from both reduced form and traditional accounting-based bankruptcy prediction models in that it is able to provide multi-period expected liquidity shortfalls endogenously.

Predicting Construction Contractor Default with Barrier Option Model

AbstractThis is the first study to apply the barrier option model to predict defaults of construction contractors and to assert that the path-dependent characteristic of the model is very suitable for describing the behavior of contractor default. Different from existing contractor-default prediction models, this research uses a much larger contractor sample in empirical analyses to alleviate sample-selection biases, and employs a Receiver Operating Characteristics (ROC) curve to assess the model performance. Empirical results of this study show that the proposed model outperforms traditional financial ratio models in differentiating the risk of defaulted and nondefaulted construction contractors. Additionally, the barrier option model has markedly better discriminatory power than when applied to non–construction-related industries. The results of this paper support the postulation that the barrier option model has significant advantages for the construction industry.

A Cash Flow Based Multi-Period Corporate Credit Model

Among the structural form credit models, this is one of the first few studies that suggest an intrinsic valuation approach that uses the present value of a firms future cash flows instead of its equity market value to estimate its asset value distribution. We employ an industrial cyclicality linked mean-reverting Gaussian process to model a firms free cash flows to generate its multi-period unconditional asset value distributions. A firms unconditional multi-period probability of defaults and expected recovery rates can then be estimated endogenously. The credit information is also useful in pricing corporate bonds.

Underlying asset liquidity, heterogeneously informed investors, and REITs excess returns

Purpose - – Real estate investment trust (REIT) stocks are well known for limited management discretion in investment, financing, and payout policies, implying little information asymmetry between informed and uninformed investors. Besides, due to the renowned illiquidity and complexity of physical real estate markets, investors may be heterogeneously informed. The authors aim to investigate these arguments using REIT panel data from 1993 to 2010. Design/methodology/approach - – The authors simultaneously investigate the effects of heterogeneous information (PSOS) and information asymmetry (ADJPIN) on REIT excess returns by estimating panel data regressions controlling for both firm- and time-fixed effects. Findings - – The results confirm that heterogeneous information (PSOS) is significantly and positively associated with REIT excess returns while information asymmetry (ADJPIN) is insignificant when controlling for other variables well known for affecting REIT excess returns. Originality/value - – The effects of information asymmetry (ADJPIN) and heterogeneous information (PSOS) on REITs excess returns are rarely simultaneously discussed in the related literature, especially from the perspectives of limited managerial discretions, regulated dividend policy, and underlying asset liquidity (physical real estate markets). The results confirm the heterogeneous information arguments. Besides, the heterogeneous information (PSOS) effects become stronger when leverage and dividend yield are higher. Finally, the above effects of PSOS and ADJPIN on REIT excess returns are also robust during the real estate market growth period (2001-2008).

A Factor-Dependent Interest Rate Model-A Combination of GARCH (1,1) and Varying Coefficient Model Approach

By integrating a varying coefficient model with a GARCH (1,1) model, this study develops a factor-dependent interest rate model framework which is able to dynamically adjust the parameters of the model to reflect both the changes of the factor of the macro-economy and the effects of volatility clustering. Using American one-month treasury rate, empirical results of this study show that the proposed factor-dependent models outperform fixed-parameter models in different shapes of term structure (downward-sloping, upward-sloping, and flat) and in different estimation periods. Additionally, this study also finds that the term-spread variable is more informative when term structure is downward-sloping.

Internal Liquidity and REIT Excess Returns

Because tax codes require real estate investment trusts (REITs) to distribute at least 90% of taxable income to shareholders, REITs are stocks with less managements discretion in payout policy and most of their investors demand high dividends. Investors therefore may charge a premium for the risk that REITs are unable to pay legally required dividends due to insufficient internal liquidity. Our firm-level results confirm this premium. The internal liquidity effect becomes weaker (stronger) when a REITs information uncertainty (leverage) is lower (higher). Besides, empirical investigations at aggregate level produce similar results. Moreover, empirical results also show that the influence of internal liquidity on REIT excess returns is larger in the subprime mortgage crisis period than in the pre-subprime mortgage crisis period.These findings are robust when controlling for other variables affecting REITs excess returns.

Information Flow Risk, Supply Chain Characteristics and Corporate Bond Yield Spreads

This study explores the relations between information flow risk, supply chain characteristics, and corporate bond yield spreads by employing American bond market data. This study finds that suppliers’ information flow risk plays an important role in explaining bond yield spreads when controlling for credit ratings and other well known variables. The empirical results also show that bond yield spreads positively relate to the degree of concentration of supplier/ customer industries (concentration effects) while they negatively relate to the R&D intensities of its suppliers (R&D effects). Specifically, information asymmetry (proxy of information flow risk) of suppliers significantly alleviates their concentration effects on bond yield spreads, whereas it less likely mitigates the R&D effects.