Bank Reputation in the Private Debt Market

We examine the impact of lead arrangers’ reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.private debt;syndicated loans;bank reputation;syndication;certification

Tranching in the Syndicated Loan Market

We use data comprising over 100,000 loans from 115 countries during 1995-2009 to examine factors that affect the extent of loan tranching, and the range of tranche spreads. The data show five factors that drive them: asymmetric information, borrower risk, transaction costs, the presence of institutional investors, and the legal system. Tranching is more extensive and generates greater differences in spreads between tranches of a same loan when asymmetric information and risk are more pronounced. Economic and institutional factors driving tranching are more directly applicable to non-investment grade loans. For developing countries, the data highlight factors that affect the extent of tranching but such factors show little sensitivity to the pricing of the relative spreads.Loan;Debt finance;Tranche;Law and finance

The Economic Impact of Forming a European Company

Ever since 2004 companies located in Member States of the European Economic Area have been able to opt to incorporate in a supranational legal form, the Societas Europaea. We found that companies located in Member States where the Societas Europaea offers additional legal arbitrage opportunities benefit most. Moreover, our results show that the stock price reaction is positive when the decision to incorporate as an Societas Europaea involves moving the firm's registered office and that firms are moving to jurisdictions with significantly lower corporate tax rates. Finally, we found evidence of uncertainty at the registration date but not at the time of the shareholder meeting

Voluntary disclosure of corporate venture capital investments

In this paper, we investigate drivers of corporate venture capital investment announcements. Consistent with voluntary information disclosure theories, we find that a public announcement is less likely to be made when the start-up firm is in the seed stage but more likely when the parent company is large, active in concentrated markets and in non-high-tech industries; spends heavily on internal R&D and capital expenditures; has low leverage ratio; and faces more information asymmetry problems. In addition, corporate venture capital programs managed externally disclose more often than internal programs. We find that parent companies facing more severe asymmetric information problems enjoy the highest abnormal returns in response to announcements. This study contributes to the literature on voluntary information disclosure in that it evidences that larger corporations use disclosure of some of their investments in innovative startups strategically as a way to convey valuable information to the market

Does risk explain persistence in private equity performance?

In this paper, we investigate whether fund-specific risk helps explain performance persistence in private equity funds, using detailed deal-level cash flow information at both the fund and deal levels. We further extend existing findings to international evidence on buyout and venture capital (VC) by testing the impact of various risk measures. We find that risk is an important driver of performance persistence and helps explain such persistence. We also find persistence in risk in private equity, in particular persistence in downside volatility for both buyout and VC funds. Finally, we document that fund performance is more strongly affected by fund managers able to minimize downside losses than selecting outperforming portfolio companies. This effect is strongest for buyout but, to a weaker extent, also holds for VC. Our results are further robust to controlling for legal factors at the country level

Diversification, risk, and returns in venture capital

We explore an alternative, finance theory-based explanation for the documented positive relationship between fund diversification (or lack of fund specialization) and performance in venture capital (VC). Our proposed “Risk Hypothesis” posits that the expected negative impact of diversification on fund risk induces fund managers to endogenously select riskier investments, which in turn leads to higher performance of more diversified funds. While other channels may also be at play, we provide results that support this hypothesis for an international sample of VC funds. However, this effect is weakened when expertise is limited. The study offers implications of how VC fund managers' investment decisions are influenced by strategic portfolio considerations, which in turn affect which innovative ventures receive funding