Stephen Phillip Huffman

Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk?

Abstract Using a unique dataset, this study examines the relationship between foreign-denominated debt (FDD), foreign currency exposure and foreign currency derivative (FCD) use, for a sample of US multinational corporations. We find a positive relationship between the exposure to foreign currency risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover, FDD is negatively related to the use of FCD. We interpret this as further evidence that FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk.

Foreign exchange derivatives, exchange rate changes, and the value of the firm: U.S. multinationals’ use of short-term financial instruments to manage currency risk

Abstract This paper examines the firm value effects of exchange rate changes in relation to the use of short-term foreign exchange derivatives (FXD) for U.S. multinationals. We provide evidence that the lagged firm value effects of changes in exchange rates are particular to low FXD users, and that the magnitude of such currency exposure decreases monotonically across FXD user groups. Additional analyses consider multiple lagged exchange rate changes and both firm size and degree of foreign involvement, and confirm our primary findings. Moreover, our results indicate that cross-sectional differences in the magnitude of lagged currency exposure are inversely related to FXD use.

The prediction of default for high yield bond issues

Abstract Bondholders and financial analysts have long sought models which will predict financial distress in corporations. Prior research has produced a number of useful models to predict bankruptcy in the short term. This paper looks at four models which predict default based upon public information at the time of issuance of high yield bonds. Multivariate results using logistic regression analysis indicate that high yield issues that default are characterized by having higher asset growth rates, lower operating profit margins, larger levels of collateralizable assets, and larger changes in net working capital. Models using Altman (1968) variables have lower likelihood ratio indexes than models employing alternative explanatory variables. Predictive ability tests of models excluding the traditional variables on a holdout sample are able to correctly predict 73.3 percent of the defaulted bonds and 68.6 percent of the nondefaulted bonds.

Integrating the top‐down approach in a simulated trading program

Purpose - The purpose of this paper is to illustrate the effectiveness of integrating a portfolio simulation-based trading program with the top-down approach to fundamental analysis in a security analysis course. The simulation allows for the application of class material using a combination of group and individual projects. Design/methodology/approach - Students enrolled in the class completed a survey about the integrated approach and the required simulated trading. Findings - Over 87 per cent of students agreed that the economic analysis provided more educational value as a group project than as an individual project, while over two-thirds of the students disagreed that the trading simulation had more education value as a group project. Research limitations/implications - Although the authors focus on the top-down approach, the concepts of technical analysis, hedging, and income generation could be more formally incorporated into the trading simulation. Practical implications - The outline of how to integrate a trading simulation into the top-down approach, using a combination of group projects and a cumulating project completed by each student, can be used as a guide for how to make the top-down approach a more meaningful task. Social implications - The integration of the portfolio simulated trading program with the top-down approach makes the course more applied and more enjoyable for both the students and the faculty. Originality/value - The paper outlines how to integrate a trading simulation and the top-down approach and reports the finding that students preferred the group approach to economic analysis and individual projects for the simulation and the company analysis.

The FX exposure puzzle: insights from SEC disclosures

Purpose - Using firm-specific SEC currency risk disclosures, this paper aims to provide insight into the puzzling absence of significant returns-based foreign exchange exposure (FXE). Such a hand gathered disclosure data identify the bilateral exchange rate to which the firm is most vulnerable (BRV) and the firms FX hedge techniques. Design/methodology/approach - The BRV-based estimates of FXE are compared to the FXE estimates using the broad trade-weighted index (TWI) data that are prevalent in prior research. Multivariate regression and sample partitioning by level of value and size premiums are used to analyze these alternative FXE estimates. Findings - The univariate results reveal a higher percentage of firms with significant BRV-estimated FXE compared to TWI-estimated FXE. Multivariate tests indicate a negative relation between firm-specific financial hedging and BRV-estimated FXE (but not TWI-estimated FXE), controlling for firm-specific non-financial/operational hedging, size and industry effects. Moreover, firms in the first and fifth quintiles for measures of value/growth and size have higher levels of FXE. Practical implications - Using SEC currency risk disclosures improves the analysis of firm-specific FXE, allowing investors to better estimate risk and cost of capital. Originality/value - The paper helps resolve the FX exposure puzzle using a unique dataset of firm-specific currency risk disclosures. The improved estimates of FXE provide a more detailed risk profile of multinational firms.

Stock price effect of high-yield debt issues

This paper investigates the common stock price reaction at the announcement of the issuance of high-yield straight debt. The two-day announcement period abnormal returns are not different from zero for the 164 bond issues in the sample. No difference is found between announcement period abnormal returns of firms with bonds that default and firms with bonds that do not default. Results from statistical tests indicate that the announcement period abnormal returns are not explained by issuance year, bond-rate class, underwriter, issuance size, takeover activity or prior high-yield debt issuance experience. The findings are not consistent with the models by Miller and Rock (1985), Jensen (1986), Myers and Majluf (1984) and Krasker (1986). However, results indicate that existing stockholders are not harmed or helped by the issuance of the high-yield straight debt.

The Impact of Asymmetry on Expected Stock Returns: An Investigation of Alternative Risk Measures

We investigate the relation between various alternative risk measures and future daily returns using a sample of firms over the 1988-2009 time period. Previous research indicates that returns are not normally distributed and that investors seem to care more about downside risk than total risk. Motivated by these findings and mixed empirical evidence supporting theoretical positive risk-return relationship, we model the relation between future returns and risk measures and investigate the following questions: (1) Are investors compensated for total risk and/or asymmetric measures of risk? (2) How does the degree of risk aversion in the lower tail of the return distribution impact the predictability of future returns? (3) Is upside risk or downside risk a better predictor of future returns? We find that, although investors seem to be compensated for total risk, measures of downside risk, such as the lower partial moment, are better at explaining future returns. Further, when comparing downside risk to upside risk, we find that investors are more concerned about downside risk. That is, downside risk is a better predictor of future returns. Our results are robust to the addition of traditional control variables, including size, book-to-market ratio of equity (B/M), leverage, and market risk measures, including beta, downside beta and co-skewness. Our findings are an important contribution to the literature as we document a positive risk-return relationship, using both total and asymmetric measures of risk.