Wealth Transfer Effect Research Articles

Stock buybacks and credit default swap spread changes

The authors investigate whether the effects of stock buyback announcements on credit default swap (CDS) spread changes for US firms depend on macroeconomic conditions. The authors find that abnormal CDS spreads increase for small-sized firms announced to repurchase a higher share ratio during the normal period. In contrast, abnormal CDS spreads decrease for big-sized firms regardless of the magnitude of the repurchase ratio during the crisis period. The results of this study suggest that the wealth transfer effect dominates the signaling effect for small-sized firms with higher target ratios during the normal period. In contrast, the signaling effect is stronger for bondholders of big-sized firms during the crisis period.

The asymmetric effects of international oil prices, oil price uncertainty and income on urban residents’ consumption in China

This study employs the nonlinear autoregressive distributed lag (NARDL) model to investigate the asymmetric effects of international oil prices (oil price uncertainty) and urban residents’ income on consumption in China. The empirical results show that the asymmetric effects of oil prices (oil price uncertainty) and urban residents’ income on consumption are significant in the both the short- and long-term. Specifically, increasing urban residents’ consumption significantly respond to a decline in oil prices while there is no obvious decreased consumption response to a rise in oil prices due to the wealth transfer effect. We also observe that the stimulating effect of falling oil price uncertainty on urban residents’ consumption is noticeably stronger than the adverse effect of increasing oil price uncertainty on consumption because of the expectation effect. Finally, we find that the asymmetric effect of income changes on consumption is significant due to the ratchet effect, whereby an income increase has a stronger stimulus effect than the reducing effect of income decline on consumption.

The dynamic moderating function of the exchange rate market on the oil-stock nexus

Oil price movements have an important impact on the stock market, and this impact could be dynamically moderated by the exchange rate, which could not be effectively depicted by VAR or GARCH methods widely used in previous studies. This paper adopts a more flexible nonlinear model to investigates this dynamic moderating effect of the exchange rate market on the oil-stock nexus for 45 major countries from November 30, 2005 to November 22, 2019. We also compare the differences in this moderating effect between oil-importing and oil-exporting countries and confirm the presence of a wealth transfer effect. Specifically, the empirical results show that (1) In the stage where domestic currency depreciation or appreciation degree is not serious (the growth rate is less than 0.1), an increase in crude oil prices has a positive impact on stock market returns, and this positive impact is weakened when the growth rate of the exchange rate return approaches zero. (2) As the local currency continues to appreciate (the growth rate is greater than about 0.22), the increase in crude oil prices may negatively influence stock market returns to an increasingly greater extent among crude oil importers. (3) The increase in crude oil prices may have a short-term positive impact on stock market returns in oil-exporting countries due to the wealth transfer effect when the domestic currency appreciates at a faster rate. Finally, we discuss the policy implications of our findings to help investors avoid risks due to fluctuations in international oil prices.

Dividend commitment and bond yields: An examination of wealth transfer effects

This paper examines a new type of corporate governance mechanism that has emerged in China, namely, dividend commitment, and documents its wealth transfer effects on bond yields. We find the larger-commitment group exhibits greater bond yields than the smaller-commitment group. Further analysis reveals that bondholders pay more attention to the wealth transfer effects when government bailouts are not available, when investing in exchange-traded bonds, and when other guarantees are not offered. This study sheds light on the effects of a unique governance mechanism in the Chinese bond market and contributes to the literature on global finance and corporate governance.

Do Oil Price Shocks Affect Exchange Rates in Oil-importing Countries: A Case of the Zambian Economy using the SVAR Approach

Oil price shocks have been argued to impact Real Effective Exchange Rates (REERs) in net oil importing countries, mostly through the wealth-transfer effect, which involves the transfer of wealth from net oil-importers to net oil-exporters, and the Terms of Trade Channel. Since this analysis had not been done for the Zambian case by decomposing oil price shocks, a Structural Vector Autoregressive Model (SVAR) was used to measure the contemporaneous impact of oil price shocks on REERs, and was complemented by Impulse Response Functions (IRFs), Granger Causality Tests and Forecast Error Variance Decomposition (FEVD). The long-run impact was analyzed by the Vector Error Correction Model (VECM) after satisfaction of cointegration requirements. The findings revealed that decomposed oil price shocks had no short-run contemporaneous impact on REERs at the 5% level. Similarly, it was found that decomposed oil price shocks and the combined effect of all the variables in the system did not granger-cause Zambia’s REERs, while FEVD results showed that oil price shocks were attributed for a minute proportion of the variation in REERs. These findings were attributed to Zambia’s profile as a predominantly copper and cobalt exporter, historic exchange rate controls, fuel subsidies, and price controls. Johansen’s cointegration test revealed the existence of at least one cointegrated equation in the system, so the subsequent VECM which was constructed revealed that decomposed oil price shocks had no long-run impact on REERs in Zambia, but that the Error Correction Term (ECT) which measures the speed to adjustment back to equilibrium after a short-run disturbance, was significant.

Distributive inefficiency in horizontal mergers: Evidence from wealth transfers between merging firms and their customers

The ultimate goal of antitrust enforcement is to maximize the surplus consumers enjoy by enhancing production efficiency and eliminating market power. Previous literature focuses on the average net wealth effects on merging firms and their stakeholder firms and reports evidence of efficiency gains while no evidence of market power in horizontal mergers. In this paper, we examine how efficiency gains distribute between the merging firms and their customer firms. We find a significant negative relation between the combined abnormal returns on the merging firms and those on their customer firms, demonstrating a wealth transfer effect. Such a negative relation is more pronounced when market power is likely to be more intensive. On average, the merging firms gain, and their customers do not lose. Our results suggest that market power allows merging firms to withhold merger gains that would have been passed to the downstream under perfect competition and prevents customers from enjoying the whole consumer surplus. Distributive inefficiency exists in horizontal mergers.

Wealth Effects of Dividend Announcements on Bondholders: The Case of Taiwan Bond Market

Although bonds play an important role in U.S. capital markets, this financial instrument is less common in the emerging markets. Taiwan is a typical case. In fact, both bond issuances and bond transactions in Taiwan have been declining in the past years. Consistent with the previous studies, this research documents that wealth transfer effects exist between bondholders and stockholders. We hypothesize that this wealth transfer discourages investors from investing in bond markets because companies in Taiwan seem to care less about the interest of bondholders. Using the event study methodology, we examine the price change of bonds and stocks in Taiwan capital market around cash dividend announcements. We find that there are significant abnormal returns before cash dividend announcements from 30 days to 60 days and that there is insignificant price change of bonds during the three-day period around the announcement. Possible explanations of the results include low bond trading volumes, insider trading before announcements, and mixing signaling and wealth transfer effects. Although this study cannot prove that the results are directly related to management holdings, we tend to believe that insider trading somehow matters.

Information-based Market Manipulation and Wealth Transfer Effect: Evidence from Insiders’ Shares Selling

Recently, a large number of cases show that information-based market manipulation has become a serious problem in China’s capital market. Information-based market manipulation involves the distribution of information as a mean of boosting stock prices. Different from traditional market manipulation, information-based market manipulation involves both listed companies and institutional investors in the secondary market. Institutional investors usually collude with executives from listed companies to disseminate information to boost share prices before dumping their holdings. Information-based market manipulation has longer-term and wider-ranging effects on the stock market, which is more likely to mislead market participants and wealth transfer.Prior research indicates that insiders time their trades strategically around voluntary disclosures to maximize their wealth. However, there is little evidence to show the association between information-based market manipulation and wealth transfer. This is the question we want to examine in this paper. Instead of treating voluntary disclosures as exogenous, we consider information disclosure as a strategic plan that allows insiders to profitably trade in their companies’ stocks. Specifically, we investigate whether managers change the timing or content of information disclosure in response to insider trading considerations.Using insider selling activities in China’s A-share market between 2008 and 2016, this paper examines the effect of information-based market manipulation and wealth transfer, including its characteristics, motivation and economic consequences. Empirical analysis shows that information-based market manipulation happens during insider selling, as shown by the distribution of good news and abnormal stock price movements. The motivation of information-based market manipulation is wealth transfer. Taking advantage of the release of misleading good news, insiders sell their shares when stock prices go up. Insider selling activities cannot be explained by liquidity improvement as insiders would buy these stocks when stock prices go down. As to economic consequences, stock prices continue to fall and the future performance get worse after information-based market manipulation. This reflects that the distribution of good news during insider selling tends to deceive investors.The contribution of this paper is threefold. Firstly, it reveals a new path that the captical market may affect the real economy. We find that managers may distort companies’ production and operation activities in order to sell their shares at a high price. Secondly, it expands the existing literature on market manipulation by studying the relationship between information-based market manipulation and wealth transfer during the period of insiders’ shares selling. This paper is the first empirical study on information-based market manipulation based on big data in China, which supplements the existing literature mainly based on case analysis or theoretical analysis. Thirdly, the results show that information disclosure arbitrage may be the root of market mispricing, which provides new evidence for the debate and reasons about the divergence between the virtual economy and the real economy. The findings of this paper also have important implications for the regulation of information-based market manipulation and insider trading.

Corporate Payout Policy and Credit Risk: Evidence from Credit Default Swap Markets

We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of the CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth-transfer effect. This paper was accepted by Kay Giesecke, finance.

Market effects of private equity placement: Evidence from Chinese equity and bond markets

Research has provided empirical evidence for the stock market reaction toward private placement; however, similar research has not been conducted in terms of the bond market. Using the event study method, we empirically examine the explanatory power of the signaling, free cash flow, and wealth transfer hypotheses based on the reaction of the stock market, bond market, and firm abnormal returns to the private placement announcement. The results show that the stock market has a negative reaction toward private placement, whereas the bond market has a positive reaction. The results also show that the scale of private placement is correlated with the severity of the market reaction. Abnormal returns indicate no significant change both before and after the private placement, and they are unaffected by the scale of private placement. These results are consistent with the wealth transfer hypothesis; however, the market reaction is not attributable to the signaling hypothesis and the free cash flow hypothesis. Extensive research shows that the abnormal returns of private placement change dramatically in non-state-owned enterprises and firms with low credit rating bonds, whereas the bond maturity has no significant impact on the abnormal returns—the wealth transfer effect of private placement is stronger in non-state-owned enterprises and firms with low credit rating bond.

When are dividend increases bad for corporate bonds?

AbstractEmploying an event study approach, we examine 5,574 bond return reactions to unexpected quarterly dividend change announcements in the U.S. corporate bond market over the period 2002–2014. On average, bond price reaction is in the same direction as dividend changes, which supports the hypothesis that dividend changes signal future firm performance. However, the price reaction varies significantly in the spectrum of bond's risk. Importantly, we document that some bondholders react negatively to unexpected dividend increases, indicating a wealth transfer effect. Such wealth transfer effect is most likely to occur in very high risk bond approaching maturity issued by firms with a low level of cash and incorporated outside Delaware.

Standalone Firms, Conglomerates, and Bond Return

Over the past two decades, an increasing number of corporations have become large conglomerates by expanding into multiple industries. In this paper, we investigate whether this trend yields an impact on bond returns based on a sample of corporate bonds from 1994 to 2015. We find that bonds issued by conglomerates have significantly higher returns than bonds issued by single-industry firms after controlling for bond characteristics, firm characteristics, and market systematic factors. Bond return of standalone firms exhibits greater volatility and is more sensitive to market shocks. Further analysis suggests that bond return drops significantly when a firm initially ventures from single to multiple industries, which is consistent with the value-reducing effect of diversification suggested by the diversification discount literature. As a conglomerate diversifies further, the value-reducing effect diminishes and bond return increases as the risk-reducing or wealth transfer effect associated with diversification becomes a dominant value driver for bondholders.

Corporate Payout Policy and Credit Risk: Evidence from CDS Markets

We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth transfer effect.

The effect of shareholder activism on bondholders and stockholders

Abstract We examine the wealth effect of shareholder activism on bond returns, as well as the extent to which wealth is transferred from bondholders to shareholders, which we refer to as the wealth-transfer effect. Our activist dataset includes both hedge funds and other large shareholders. Our bond dataset covers both investment-grade and speculative-grade bonds, and extends beyond the 2007–2009 financial crisis period. We find that activists’ demands cause a significant decline in bond returns, and affect long-term bonds the most. There exists a strong association between the bond price declines and dividend increases following the activists’ demands, with dividends acting as a proxy for the transfer of wealth from bondholders to shareholders. The wealth transfer affects long-term and lower rated bonds more significantly. With stock returns to targeted firms positive, our findings suggest an inverse association between bond returns and stock returns at firms targeted by activists.

Wealth transfer between owners and lenders of European stock corporations

Wealth transfer effects between company owners and lenders based on changes in a firm’s credit rating have primarily been examined a) for one type of security; b) on U.S. capital markets; and c) by applying standard event study methods. In contrast to these studies, we compared the price effects of stocks and corporate bonds of the same issuer using robust event study methods. Our findings indicated that downgrades cause negative price effects for owners and lenders of European firms, whereas upgrades only induced positive price effects for lenders. However, we did not find evidence for the existence of wealth transfer effects between owners and lenders on European capital markets.

Corporate Bond Price Reactions to Dividend Changes

Employing an event study approach, we examine 5,574 bond return reactions to unexpected quarterly dividend change announcements in the U.S. corporate bond market over the period 2002–2014. Overall, we report a significant bond price reaction in the same direction as dividend changes, which supports the hypothesis that dividend changes signal future firm performance. We also find that the bond return reaction is more pronounced if the dividends are reduced than if they are increased. We document a wealth transfer effect when riskier bonds are issued by firms with a low cash ratio and are approaching maturity. These results still hold after we control for the financial crisis and dividend covenants and when we use alternative variables to capture the dividend surprise.

Do Announced Credit Rating Revisions Create Wealth Transfer Effects between Stockholders and Bondholders of European Firms?

Wealth transfer effects between stockholders and bondholders on the announcement date of changes in a firm’s credit rating have primarily been examined a) for one type of security; b) on US capital markets; and c) by applying standard event study methods. In contrast to these investigations, we compare the price effects of stocks and corporate bonds of the same issuer using state-of-the-art event study methods. Our findings indicate that downgrades convey new information for stockholders and bondholders, whereas upgrades are only perceived positively by bondholders. Finally, we do not find evidence for the existence of wealth transfer effects on capital markets.

The Impact of Initial Margin

Since the global financial crisis, two significant regulatory initiatives have been introduced in the form of the central clearing mandate and bilateral margin requirements. A major implication of these initiatives is the need for major players in the OTC derivative market to post collateral, in the form of initial margin, against their transactions. In this paper, we discuss some of the problems associated with initial posting, such as the quantification of the residual counter party risk and associated capital requirements. We also characterise a wealth transfer mechanism when parties post initial margin which causes OTC derivative creditors to become more senior at the expense of other creditors. Initial margin has clear funding implications in the form of margin value adjustment (MVA) and the pricing of the underlying wealth transfer effect in unsecured lending transactions.

The wealth effects of dividend announcements on bondholders: New evidence from the over-the-counter market

This paper investigates the announcement effect of dividend changes on bondholders using bond transaction data from the over-the-counter market. Abnormal bond returns over a three-day event window are positive surrounding dividend increase announcements and negative surrounding dividend omission announcements. The bond market reaction to the dividend increases is more positive for larger dividend increases, speculative grade bonds and the period from 2008 to 2010. Most of the results are consistent with the signaling hypothesis. Additionally, bond market reactions to dividend decreases and initiations are insignificant. The stock market reacts negatively to dividend decreases and positively to dividend initiations. The bond and stock market reactions to dividend decreases and initiations suggest that there is also a wealth transfer effect.

The Wealth Effects of Dividend Announcements on Bondholders: New Evidence from the Over-the-Counter Market

Evidence is scarce and inconclusive on the announcement effect of dividend changes on bondholders due to poor quality and availability of bond price data. This paper fills this gap using daily bond transaction data from the over-the-counter market. Most of my results are more consistent with the signaling hypothesis than the wealth transfer hypothesis. I find that abnormal bond returns over a three-day event window surrounding an increased (omitted) dividend announcement are positive (negative) and statistically significant. Consistent with the signaling hypothesis, the bond market reaction to the dividend increases announcement is more positive for larger percentage dividend increases, speculative grade bonds, and the period from 2008 to 2010. While most of my results are consistent with the signaling hypothesis, my findings of insignificant (insignificant) bond market price reaction and significantly negative (positive) stock market price reaction to dividend decreases (initiations) announcements suggest that there is also a wealth transfer effect.