Leveraged loans: is high leverage risk priced in

This study aims to know the effect of Leverage and Asset Prices on Mutual Fund Risk. This research was conducted at equity mutual fund companies listed in OJK for the period 2018-2019. This study used purposive sampling with a total sample of 23 equity mutual funds. The type of data used is quantitative data and the data source is in the form of company annual financial reports. The data analysis tools used were descriptive statistics and panel data regression The results of this study find that mutual fund is managed by an investment manager with high leverage and high asset prices will have a high risk as well, and can be suppressed when the investment manager creates a low level of leverage and a low asset prices.
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 Keywords: Leverage, Asset Price, and Mutual Fund Risk

Prior studies demonstrate that high CEO compensation risk encourages managers to engage in risk‐seeking behavior, thus intensifying agency conflicts between creditors and borrowers. We argue and document that accounting conservatism plays an important role in mitigating debt holder and shareholder conflicts over asset substitution arising from high CEO compensation risk. Our empirical results show that firms with high CEO compensation risk tend to use more timely loss recognition and this positive relationship is more pronounced for firms with high leverage. Additional results show that the positive relationship between CEO compensation risk and borrowing costs is reduced for firms using timely loss recognition, suggesting that creditors perceive timely loss recognition as a risk‐reducing mechanism. Using the passage of FAS 123R as a quasi‐natural experiment on managerial compensation risk, we find a significant reduction in the use of timely loss recognition for firms experiencing a decrease in CEO compensation risk after the passage of FAS 123R. Lastly, we show that timely loss recognition is positively associated only with the compensation risk of the firm's primary decision maker (i.e., its CEO) and not with the compensation risk of subordinates.

Analysis Of China's Stock Market In Year 2015

We build a theory of short-term risk premia dynamics based on funding costs. The theory builds on a framework of intermediary asset pricing in a market microstructure setting. Financial intermediaries facilitate trading by market making. To fund these trading activities, intermediaries earn a risk premium. This risk premium increases in intermediary leverage and asset idiosyncratic risks. We test our theory across multiple asset classes, including equities, bonds, and currencies. Conditional on a large price shock, high intermediary leverage and asset idiosyncratic risk raise short-term risk premia by about 100 to 170 basis points. We also find evidence of risk sharing and capacity constraints among intermediaries. Intermediary leverage and asset idiosyncratic volatility are important factors in explaining the time series of risk premia in equities, bonds, and currencies.

Using a system of simultaneous equations, this study examines the relation among external audit monitoring, in the US life insurance industry. We find insurers with higher leverage risk and surplus risk are more likely to use Big‐4 auditors and to pay higher fees. In return, insurers hiring Big‐4 auditors and paying higher audit fees have lower leverage risk and surplus risk. Second, the results suggest that mutual life insurers have a higher leverage risk and surplus risk than stock life insurers. This evidence is in contrast to that for property–liability insurance companies. Third, we find insurers are less likely to hire Big‐4 auditors and to pay higher audit fees after implementation of the Sarbanes–Oxley Act (SOX). Finally, life insurers with Big‐4 auditors or paying higher audit fees are more likely to take lower risks after the implementation of SOX.

This paper examines the impact of corporate governance and audit quality on risk-taking in the U.S. property casualty insurance industry. The evidence shows that some corporate governance variables, as well as some audit quality variables are related to risk-taking. We find that longer board tenure is associated with low underwriting risk. But the higher percentage of financial experts on the board is associated with high underwriting risk. The possible reason is that financial experts possess a deep understanding of a firm’s financial situation and may encourage the management to take higher risk in anticipation of a higher return for a positive net present value project. The results are consistent with agency theory and wealth transfer hypothesis in that high risk taking is consistent with shareholder interest maximization. In addition, we find a non-monotonic relation between insider ownership and leverage risk. Finally, we do not find evidence that the Sarbanes-Oxley act have impact on the risk taking behavior.

This study investigates the influence of background diversity of bank board members on performance and risk. Using data from Indonesian banks from 2001 to 2011 covering 4200 individual year observations and 21 ethnic groups, we estimate the degree of diversity by considering various aspects (gender, citizenship, age, experience, tenure, ethnicity, nationality, education level and type) and find significant impacts on bank performance. On the whole, diversity is in general positively associated with performance except when it relates to ethnicity. It not only reduces performance per se but also increases risk. Female presence and professional diversity reduce risk but nationality and ethnicity diversities are associated with higher risk. Education diversity generally leads to higher income volatility and leverage risk. Our results are generally robust to various alternative performance measures, including risk adjusted returns, and estimation methods.

This study investigates the influence of background diversity of bank board members on performance and risk. Using data from Indonesian banks from 2001 to 2011 covering 4200 individual year observations and 21 ethnic groups, we estimate the degree of diversity by considering various aspects (gender, citizenship, age, experience, tenure, ethnicity, nationality, education level and type) and find significant impacts on bank performance. On the whole, diversity is in general positively associated with performance except when it relates to ethnicity. It not only reduces performance per se but also increases risk. Female presence and professional diversity reduce risk but nationality and ethnicity diversities are associated with higher risk. Education diversity generally leads to higher income volatility and leverage risk. Our results are generally robust to various alternative performance measures, including risk adjusted returns, and estimation methods.

This study examines the determinants of two important dividend policy decisions specifically the dividend payment decision and the dividend payout level decision of 781 sample Indian firms enlisted on National Stock Exchange (NSE) over the period, 1995–2015, comparing the business group-affiliated firms with the standalone firms. In term of characteristics, the business group-affiliated firms are larger, more profitable and more levered than the standalone firms. The empirical results suggest that the dividend policy decisions of business group-affiliated firms differ significantly from that of the standalone firms. In the case of standalone firms, the firms with high investment opportunities, high financial leverage and high business risk are less likely to pay dividends, and their dividend payout levels are lower. On the other hand, the firms affiliated with business groups are more likely to pay dividends, and their dividend payout levels are higher even when they have high investment opportunities, high financial leverage and high business risk. Overall, the findings suggest that although the business groups are able to create internal capital markets (ICMs) and shield their member firms from market imperfections, they may suffer from other information asymmetry problems.

The performance of acquisitions by high default risk bidders

Empirical evidence on the relationship of capital structure and the value of the firm among Mexican public firms

CEO compensation in the financial sector has been a controversial topic following the financial crisis. I use a new dataset with detailed information on CEO remuneration of major international banks from 2000 to 2008 to give a comprehensive overview of compensation practices in banking throughout the world, the impact on risk and bank policy choices and the determinants. I show that remuneration had an impact on bank performance during the financial crisis. Banks which endowed their CEO with high risk taking incentives performed worse in the period after the Lehman collapse in terms of accounting performance. Banks which granted more stocks performed better. Using simultaneous equation models I show that over time bank risk has been positively correlated with CEOs' risk taking incentives. From a bank policy perspective high vega low delta CEOs rely on riskier, fee based activities and higher leverage. I investigate the role of corporate governance and regulation on CEO compensation. Banks from countries with strong regulation react stronger to bank risk when setting their compensation contracts, on the other hand they grant more equity based compensation. Weak boards lead banks to rely more on equity based compensation and weak compensation committees implement option contracts with characteristics that are more favorable for the CEO.

The current study has taken the firms listed on KSE (Karachi Stock Exchange) now called Pakistan stock exchange. The data for the said purpose is collected for five years of time period from 2005 to 2010. The results obtained demonstrate that all the selected variables under study shows a highly significant impact on the determinants of capital structure except the tangibility of the asset. The insignificant relationship of tangibility with the capital structure supports the financing hierarchy theory. While the Growth, Size and profitability shows a significant and negative relationship with leverage. The negative relationship of growth shows that higher the growth of the firms lower will be the leverage maintained by the firm. Similarly, firms with smaller size show that such firms prefer high leverage as compared to firms of larger size. The results reveal that higher the profitability of the firm lower will be the leverage ratio. While the positive relationship of the volatility of the earnings states that firms with higher risks has high leverage ratio. Overall a detailed description and impact of the different variables on leverage is provided in the current study.

Extant REIT research largely overlooks operating leases as an alternative source of financing. In this study, we hand-collect lease information of 334 unique REITs over the period of 1993 to 2018, and we document that an increasing number of REITs have been including operating leases in their capital structure to finance income-generating investment properties. We examine the determinants of the operating lease decision and find that REITs which adopt operating leases tend to be larger and have more growth opportunities as measured by Tobin’s Q. But they also have higher leverage, report lower funds from operations, and higher risk. We further find that operating lease intensity for REITs is negatively affected by credit ratings, but not by growth opportunities. Lastly, we examine the market effect related to operating lease decision and find that REITs with operating leases are associated with lower shareholder returns. Overall, our findings imply that operating leases are employed as an alternative financing source by REITs that are highly levered and cannot rely much on their internal funding. As a result, the market does not view the use of operating leases in the REIT sector favorably.

We investigate the effects of unconventional monetary policy on bank lending, using a bank-firm loan-level matched dataset from 1999 to 2015 by extracting exogenous changes in unconventional monetary policies over the past 20 years in Japan. We find that an increase in the share of unconventional assets held by the Bank of Japan boosts lending to firms with higher credit risks from banks with lower liquidity ratios and higher risk appetites while an expansion of the monetary base does not have such effects. Furthermore, we find that interest rate cuts stimulate lending to risky firms from banks with higher leverage.