Yaxuan Qi

State Laws and Debt Covenants

We examine whether state laws impact the use of debt covenants by using a sample of U.S. public bond issues from 1987 to 2004. We consider variation in state laws with respect to the minimum asset‐to‐debt ratio necessary for a payout and with respect to antitakeover statutes. We find that firms incorporated in states with stricter restrictions on distributions are less likely to include debt covenants that constrain payouts, limit additional debt, or restrict the sale of assets. Thus, state payout restrictions appear to be a substitute for the use of these debt covenants. On the other hand, firms incorporated in states with stronger antitakeover statutes are somewhat more likely to use debt covenants. This finding is consistent with the notion that firms with antitakeover protection are more likely to suffer from agency problems and, thus, are more likely to use debt covenants to minimize agency costs.

Political Uncertainty and Public Financing Costs: Evidence from U.S. Gubernatorial Elections and Municipal Bond Markets

This research investigates how political uncertainty around U.S. gubernatorial elections influences the borrowing costs of public debt, measured by yields of municipal bonds. We find that yields of municipal bonds increase sharply by 6 to 8 basis points before elections and then reverse afterward. Elections have more pronounced impact during economic downturns, when outcomes are less predictable, and when states have more outstanding debt. Several state institutions, such as GAAP-budgeting, spending limits and tax-increase limits, help to mitigate the adverse impact of political uncertainty. Evidence from detailed municipal bonds transactions suggests that declining demand due to investor aversion to political uncertainty is the driving force behind the increases in yields prior to elections. The findings suggest that investors are averse to political uncertainty and demand compensation for bearing this risk.

Debt Covenants, Bankruptcy Risk, and Issuance Costs

Riskier firms use more covenants, yet effective covenants should reduce the probability of bankruptcy by restricting management’s actions. We disentangle these two relations between covenant use and bankruptcy risk by considering predicted and actual covenant use. We find that predicted covenant use is associated with a higher probability of bankruptcy and shorter firm survival, whereas actual covenant use is associated with a lower probability of bankruptcy and longer firm survival. This evidence is consistent with the notion that the use of covenants reduces bankruptcy risk. However, theory suggests that two covenants -- stock issuance restrictions and rating decline puts -- do not reduce the probability of bankruptcy. Empirically, we find that the use of either of these covenants implies a higher probability of bankruptcy and a shorter survival time. On the cost side, we find evidence that corporate bonds with more restrictive covenants have higher issuance costs. While we find some evidence that bonds with more covenants are more difficult to sell, we argue that this covenant-issue cost relation is mainly driven by the risk to underwriters. Overall, these results both confirm some essential aspects of, and expand upon, Smith and Warner’s (1979) costly contracting hypothesis.

From Birth To Death: The Lifecycle Of A Hedge Fund Investment Strategy

AbstractThe following sections are included:IntroductionTheoretical Change in Alpha over TimeAlpha Behavior of the Size AnomalyAlpha Behavior of the Momentum AnomalyAlpha Behavior of the Accrual AnomalyExtending The Lifecycle Through DiversificationHedge Fund Lifecycle ChecklistHedge Fund Alpha Tear Sheet — Chapter 14End NotesReferences