Degree Of Leverage Research Articles

Un modelo "naive" de opción barrera para la predicción de fracaso financiero

To consider capital as a call option over a firm’s assets, has allowed the development of a set of dynamic models to predict corporate financial distress and bankruptcy. Nevertheless, a downside of the above mention assumption derives from the direct and positive relationship between the capital value (prime) and the asset´s underlying volatility. This reasoning implies that the greater the risk of a firm, the larger its value has to be, leading to an inconsistency in the logic used to estimate financial distress and bankruptcy probability. An alternative approach to predict financial distress and banckruptcy is the use of exotic barrier options because its structure fits better the firm´s value–volatily relationship. Based on the existing literature, this paper proposes a “naive” barrier option model, since it simplifies the estimation of the unobservable variables such as: firm asset´s value and risk. This article is structured as follows: first, simple call option and barrier option models were developed in order to estimate the firm´s capital value and the financial distress and bankruptcy probability. Using a hypothetical case, a sensitivity analysis over volatility and time to maturity was carried out. A similar application was used to estimate the firm´s capital value and the financial distress and bankruptcy probability in two Argentinian capital firms, each with a different degree of leverage: Yacimientos Petrolíferos Fiscales S.A (YPF) and Aluar S.A (ALUAR). The analysis confirmed the consistency in the relationship volatility-valuefinancial distress probability of the proposed model. Finally, the main conclusions are drawn

An empirical evaluation of selected accounting-based value drivers in the Polish banking sector

The paper aims at empirical evaluation of selected accounting-based value drivers in the Polish banking sector. Using the analyses of correlation and regression, the study investigates the associations between banks’ charter values, proxied by Tobin’s Q, and a set of explanatory variables including size, operating efficiency, profitability, net cash flow generation capacity, leverage, asset liquidity, and risk management efficiency, each proxied by a measure based on the data available in the annual financial reports of banks. The examined sample covered all domestically-based banks listed on the Warsaw Stock Exchange over the period 1997–2014. The empirical evidence indicates a statistically significant positive impact of operating efficiency, profitability and risk management efficiency on charter values. In turn, the influence of size and leverage, although also positive, appears to be so weak, that it becomes irrelevant when combined with other explanatory variables. Additionally, no statistically significant impact was found for net cash flow generation capacity nor asset liquidity. The above findings suggest that equity investors in the Polish banking sector perceive performance and risk management efficiency as the key value drivers, practically neglecting the issues related to banks’ financial stability like the liquidity of assets or degree of leverage, thus presumably relying on the too-big-to-fail principle.

Share Repurchases in Vietnam: Why Do Firms Repurchase Shares?

This paper empirically investigated the effect of share repurchases announcement on the Vietnam stock market. Using a sample of share repurchases for the period 2005-2014, this paper provided evidences that the cumulative abnormal return (CAR) of firms’ stock repurchases gradually increased from -30 to +30 days around the stock repurchase announcement day. Examining if the announcement of stock repurchases would have more effect on small firms compared to large firm, this study found that there exist a temporary small firm effect but not over all period. To determine the motives of firms in implementing share repurchases, this study checked the CAR by using prior return, net operating cash flow (NOCF) and degree of leverage. The result supported the undervaluation hypothesis. In order to confirm this result after controlling firm characteristic variables, a regression analysis was used. From the regression results, it confirmed that the coefficient of EBIT is statistically significant at 5% level. This implies that undervaluation is the main reason why firms repurchase its stocks.

Association between Degree of Leverages and Firm Value

<p>This study aims to empirically investigate the association between degree of leverages, operating and financial, and firm value in the context of India, one of big ten emerging markets (Garten, 1997). This study examines this association for 231 manufacturing firms listed in National Stock Exchange (NSE) in India over a period from 2001-2002 to 2010-2011. The independent variables, degrees of operating and financial leverage, and a market price-based dependent variable, called price-earnings ratio as a proxy of firm value, are taken to examine this relationship by using standard ordinary least square regression models at the levels of individual firm and portfolio of firms. The findings of this study show a statistically significant negative relationship between firm value and degree of operating leverage and a statistically insignificant relationship between firm value and degree of financial leverage both at the levels of individual firm and portfolio of firms. Using the data from a country like India, one of fastest growing emerging markets in the world, this study provides an important insight on the effect of leverages on the firm value, the association between independent accounting variables and stock price-based dependent variable, to the practitioners, the scholars and the finance managers. </p>

Grey and the Russian Threat to India, 1892–1915

ABSTRACTAs Parliamentary Under-Secretary of State for Foreign Affairs in the Liberal Government from August 1892 to June 1895, Sir Edward Grey was exposed to the damage that an anti-British, Franco-Russian Alliance could do to the interests of the British Empire. The experience of those years left an enduring impression upon him. Between June 1895 and December 1905 Grey espoused the cause of agreement with the Russian Empire wherever possible. As Foreign Secretary, he advanced this cause through the Anglo-Russian Conventions of August 1907, whose objectives were to achieve what he described as ‘repose’ on the North West Frontier of India, and the reduction of Russian pressure on Persia in particular. So far as the outbreak of war in 1914 is concerned, Grey's known propensity to maintain good terms with Russia gave the latter a degree of leverage which they exploited to the full in insisting on British support in standing up to Germany and Austria-Hungary following the assassination of Archduke Franz Ferdinand. Grey's position within the Liberal Government, and his clear determination to resign unless Russian demands were met, swung the British government from a neutralist stance to one of full participation in the Great War.

Credit-fuelled bubbles

We develop a model of credit-fuelled bubbles in which lenders accept risky assets as collateral. Asset prices and credit reinforce each other, as booming asset prices allow lenders to extend more credit, enabling investors to bid prices even higher. If investors are asymmetrically informed, there exist equilibria in which it is optimal to ride bubbles, buying overvalued assets in hopes of reselling at a profit to a greater fool. Lucky investors sell the bubbly asset at peak prices, only to buy it again at or below fundamental value after the crash. Unlucky investors, who buy at the peak hoping that the bubble continues to grow at least a bit longer, suffer losses. If the degree of leverage is sufficiently high, lenders repossess and liquidate the assets of unlucky investors, and may continue to seize their endowments until debts are fully repaid. In our model, raising interest rates and regulating maximal loan-to-value and loan-to-income ratios can reduce or even eliminate bubbles.

Execute Trading Policies on Optimal Portfolio When Stochastic Volatility and Inflation Effect Were Considered

Tempting to formulate the long-term investment strategy for investors who dynamically adjust her portfolio over her lifetime, we are interested to optimize the end-of-period terminal wealth using Bellman Principles. We designed the portfolio to be replete with risky asset and risk-less asset/fixed-income asset in the continuous framework. The stochastic volatility model is depicted in risky asset dynamic known as Constant Elasticity of Variance (CEV), because the empirical bias of Leverage effect in stock price evolution founded by Black Scholes can be directly examined. Meanwhile the bond pricing analysis was no longer classified as risk-free asset because it was analyzed under the stochastic Inflation and Interest rate of affine structures named Vasicek. Because we want to reflect their mean-reverting behavior as they're hovering around their long-term mean. Later, state space was constructed and portion of risky asset was elected to be control variables for supremum over value function. The concept of investment decision is intertemporal, as today decision affected tomorrow's, which finding its optimal rate would be trade-off for investor. For this, we framed the decision criteria with investor's utility function from class Decreasing Absolute Risk Aversion (DARA), the class that generally most investor mostly consistent with [Friend & Blumme 1975]. The problem description above can be represented as stochastic optimal control problem and it was solved with dynamic programming argument with modified verification theorem to tackle the issue of Stochastic Differential Equation well-posedness violation. Through stages of change variables, we were able to find the closed form trading solution from corresponding Hamilton Jacobi Bellman (HJB) equation. Compare to standard Merton model, our trading strategies strength are determining interest rate, inflation rate and degree of leverage for improvement and hence have inline economic logic reasoning for our solutions.

Value relevance of the degree of leverages

This study empirically investigates the impact of the degree of leverages on the stock returns for the firms operating in an emerging market. We examine this phenomenon on 232 manufacturing firms listed in National Stock Exchange (NSE) in India over a period from 2002 to 2011. The findings of this study indicate that the degrees of operating, financial and total leverage have statistically significant impact on the stock returns of the select listed Indian manufacturing firms over the period under study. This study is limited to the Manufacturing firms in India for a period from 2002 to 2011 including the recessionary period. Our study provides an important insight to the practitioners, the researchers and the investors for the significance of accounting numbers in the context of India, one of fastest growing emerging markets in the world.

Heteroskedasticity-Consistent Covariance Matrix Estimators in Small Samples with High Leverage Points

The aim of this paper is to demonstrate the impact of high leverage observations on the performances of prominent and popular Heteroskedasticity-Consistent Covariance Matrix Estimators (HCCMEs) with the help of computer simulation. Firstly, we figure out high leverage observations, then remove them and recalculate the HCCMEs without these observations in order to compare the HCCME performances with and without high leverage points. We identify high leverage observations with the Minimum Covariance Determinant (MCD). We select from among different covariates and disturbance term variances from the related literature in simulation runs in order to compare the percentage difference between the expected value of the HCCME and true covariance matrix as well as the symmetric loss function. Our results revealed that the elimination of high leverage (high MCD distance) observations had improved the HCCME performances considerably and under some settings substantially, depending on the degree of leverage. We hope our theoretical findings will be benefited for practical purposes in applications.

Leverage and linkage: how regionalism shapes regime dynamics in Africa

Differences in African regime dynamics are clustered in sub-regions and thus might not be driven entirely by domestic variables such as the coercive capacity of states or the cohesion of ruling parties. The main argument of the paper is that leverage by regional organisations and by regional hegemons as well as specific types of regional linkages matter for domestic political developments. There is huge variation in terms of the competencies of regional organisations to influence democratisation processes, a varying availability of hegemons to enforce regional democratic standards and varying degrees of leverage vis-a-vis member states, which partly explain the regional patterns of regime dynamics. In the African context regional linkage is important in explaining how leverage is used by regional organisations and hegemons.

The Impact of Diversification on Performance in the Insurance Industry: The Roles of Globalisation, Financial Reforms and Global Crisis

This paper builds on the diversity–performance relation in the cross-country literature by examining the property-liability insurance industry across 62 countries. It is, to the best of our knowledge, the first paper to explore the heterogeneity across countries over time by utilising the dynamic panel generalised method of moments approach, thus connecting directly with the current debates on the diversity–performance relation. The results show that a higher level of diversification leads to higher returns and insurers’ risk, while intending to decrease the degree of leverage. Furthermore, globalisation and financial reforms have more significant impacts on performance in non-high-income countries. The results indicate that income diversity can improve an insurer’s performance under the condition of financial reforms, but liberalisation with direct credit and interest rate control variables leads to higher competition and erodes an insurer’s profitability. During global crisis periods, insurers in high-income countries that are well diversified are able to adjust their leverage ratio faster than insurers in non-high-income countries.

Systemic risk of the Greek financial institutions: application of the SRISK model

This paper proposes a conditional approach to estimate the systemic risk which allows decomposing the risk of the aggregate financial system of Greece (measured by Expected Shortfall). We use the SRISK index to measure the systemic risk contribution of a financial firm. SRISK represents a function of the firm's financial size, its degree of leverage and its expected equity loss conditional on a market downturn. We employ the SRISK to examine the systemic risk of top Greek financial institutions between June 2007 and December 2014 which corresponds to the period of the financial crisis of 2007. The results show that after the crisis of 2007, the SRISK reached its maximum during 2012 and 2013. Then, we find that the Bank of Greece, the National Bank, Piraeus Bank, the Eurobank Ergasias and the Alpha Bank present the top of systemic risk in Greece. In addition, we remark that the change of SRISK, DEBT, EQUITY and RISK of Greek banks is very important which explains the higher degree of instability and recession of the financial system of Greece.

Dźwignia finansowa a struktura kapitału przedsiębiorstw górniczych w Polsce

This article presents an empirical study on the use of financial leverage by mining companies in Poland. The level of involvement of foreign capital is an important element in the structure of capital, which has a direct impact on the value of the company. The study uses statistical data widely available in financial reports of the surveyed mining companies. It shows the dynamics of changes in the participation of foreign capital, sets ROE, the degree of leverage and determines when the leverage has a positive effect on the company's activities.

Estimating cross-sectional regressions in event studies with conditional heteroskedasticity and regression designs that have leverage

Purpose– In the finance literature, fitting a cross-sectional regression with (estimated) abnormal returns as the dependent variable and firm-specific variables (e.g. financial ratios) as independent variables has becomede rigueurfor a publishable event study. In the absence of skewness and/or kurtosis the explanatory variable, the regression design does not exhibit leverage – an issue that has been addressed in the econometrics literature on the finite sample properties of heteroskedastic-consistent (HC) standard errors, but not in the finance literature on event studies. The paper aims to discuss this issue.Design/methodology/approach– In this paper, simulations are designed to evaluate the potential bias in the standard error of the regression coefficient when the regression design includes “points of high leverage” (Chesher and Jewitt, 1987) and heteroskedasticity. The empirical distributions of test statistics are tabulated from ordinary least squares, weighted least squares, and HC standard errors.Findings– None of the test statistics examined in these simulations are uniformly robust with regard to conditional heteroskedasticity when the regression includes “points of high leverage.” In some cases the bias can be quite large: an empirical rejection rate as high as 25 percent for a 5 percent nominal significance level. Further, the bias in OLS HC standard errors may be attenuated but not fully corrected with a “wild bootstrap.”Research limitations/implications– If the researcher suspects an event-induced increase in return variances, tests for conditional heteroskedasticity should be conducted and the regressor matrix should be evaluated for observations that exhibit a high degree of leverage.Originality/value– This paper is a modest step toward filling a gap on the finite sample properties of HC standard errors in the event methodology literature.

Market Tantrums and Monetary Policy

Assessments of the risks to financial stability often focus on the degree of leverage in the system. In this report, however, we question whether subdued leverage of financial intermediaries is sufficient grounds to rule out stability concerns. In particular, we highlight unlevered investors as the locus of potential financial instability and consider the monetary policy implications. Our focus is on market “tantrums” (such as that seen during the summer of 2013) in which risk premiums inherent in market interest rates fluctuate widely. Large jumps in risk premiums may arise if non-bank market participants are motivated, in part, by their relative performance ranking. Redemptions by ultimate investors strengthen such a channel. We sketch an example and examine three empirical implications. First, as a product of the performance race, flows into an investment opportunity drive up asset prices so that there is momentum in returns. Second, the model predicts that return chasing can reverse sharply. And third, changes in the stance of monetary policy can trigger heavy fund inflows and outflows.Using inflows and outflows for different types of open-end mutual funds, we find some support for the proposition that market tantrums can arise without any leverage or actions taken by leveraged intermediaries. We also uncover connections between the destabilizing flows and shocks to monetary policy. We draw five principal conclusions from our analysis. First, in contrast with the common presumption, the absence of leverage may not be sufficient to ensure that monetary policy can disregard concerns for financial stability. Second, the usual macroprudential toolkit does not address instability driven by non-leveraged investors. Third, forward guidance encourages risk taking that can lead to risk reversals. In fact, our example suggests that when investors infer that monetary policy will tighten, the instability seen in summer of 2013 is likely to reappear. Fourth, financial instability need not be associated with the insolvency of financial institutions. Fifth, the tradeoffs for monetary policy are more difficult than is sometimes portrayed. The tradeoff is not the contemporaneous one between more versus less policy stimulus today, but is better understood as an intertemporal tradeoff between more stimulus today at the expense of a more challenging and disruptive policy exit in the future.Of course, our analysis neither invalidates nor validates the policy course the Federal Reserve has actually taken. Any such conclusion depends on an assessment of the balance of risks given the particular circumstances, which lies beyond the scope of our paper. Instead, our paper is intended as a contribution to developing the analytical framework for making policy judgments. But our analysis does suggest that unconventional monetary policies (including QE and forward guidance) can build future hazards by encouraging certain types of risk-taking that are not easily reversed in a controlled manner.

A Leverage-Based Measure of Financial Instability

The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system's potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.

Market-oriented banking, financial stability and macro-prudential indicators of leverage

In order to complement the macro-prudential framework introduced in Basel III, we propose a new breed of indicators based on the degree of leverage which helps track the time-varying dimension of bank systemic risk—a key aspect of financial stability. Given the new sources of liquidity generated by off-balance-sheet activities, time-varying indicators of leverage become more informative of the leverage dynamics. We introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up of financial imbalances—as measured by the increase in bank risk—years before what the traditional assets to equity ratio predicts. Most elasticity measures we propose appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that market-oriented banking exerts a stronger influence on leverage during expansion periods.

Real interest rates, leverage, and bank risk-taking

Do low interest rate environments lead to greater bank risk-taking? We show that, when banks can adjust their capital structures, reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function. However, if the capital structure is fixed, the effect depends on the degree of leverage: following a decrease in interest rates, well capitalized banks increase risk, while highly levered banks may decrease it if loan demand is linear or concave. Further, the capitalization cutoff depends on the degree of bank competition. This effect therefore should vary across countries and over time.

The Network Contract

This paper studies costs and benefits of firm networks, and related industrial policies, with a focus on the recently introduced in the Italian legislation. Incentives to networks creation could be useful to foster future mergers, but may prove ineffective as a substitute for firms' growth. The network contract is a comparatively more flexible instrument, but its potential is hindered by the indeterminacy of its contents: some standardization would be beneficial. The contract adds to a plethora of incentives that distort firms' choices. Members of a network contract have often a pre-established relationship, and are located in classical marshallian industrial districts. One novel aspect is that sometimes partner firms are located in faraway regions. Probit regressions show: i) the probability of entering a network contract increases with firm's size and growth; this shows that the network does not seem to be the solution to small size problems; ii) the degree of leverage does not discriminate between firms in networks and the others.

Mapping the Urban Debtscape: The Geography of Household Debt in Canadian Cities

Vulnerability resulting from debt is part and parcel of the risk society and a salient characteristic of current neoliberal times under financialized global capitalism. Rising indebtedness increases the susceptibility of homeowners to housing and labor market restructuring, and if the degree of leverage is very high, can threaten the solvency, living standards, and social stability of local communities. However, very little is understood regarding how levels of household indebtedness are spatially distributed within or across cities, and how private debt maps onto the geography of race, class, housing, urban form, and other social variables, especially outside of the United States. It remains unknown whether and how higher and unsustainable levels of indebtedness might be associated with urban growth, decline, suburbanization, gentrification, immigration, racialization, and/or greying. This article examines the spatial distribution of household debt in Canadian cities at multiple scales of analysis. It analyzes how levels of household debt relate to a number of key socio-demographic and housing variables from the census, including those related to changes occurring over the 2000s. It simultaneously models the geography of debt at the metropolitan and neighborhood scales using multi-level hierarchical linear modeling methods, and in doing so, it identifies some key drivers and correlates of household debt and the scales at which they operate. The article concludes by discussing the implications of the empirical findings for understanding the role of the emerging urban debtscape in the restructuring of the social geography of the city.