Securitization without Adverse Selection: The Case of CLOs

In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by CLOs. We employ two different datasets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show underperformance relative to the rest of the CLO portfolio. While there is some evidence of underperformance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other asset classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral

Muslim family law, prenuptial agreements and the emergence of dowry in

Abstract Existing theoretical and empirical research on dowries has difficulty accounting for the large changes in dowry levels observed in many countries over the past few decades. To explain trends in dowry levels in Bangladesh, we draw attention to an institutional feature of marriage contracts previously ignored in the literature: the mehr or traditional Islamic brideprice, which functions as a prenuptial agreement in Bangladesh due to the default practice of being only payable upon divorce. We develop a model of marriage contracts in which mehr serves as a barrier to husbands exiting marriage and a component of dowry is an amount that ex ante compensates the groom for the cost of mehr. The contracts are welfare-improving because they induce husbands to internalize the social costs of divorce for women. We investigate how mehr and dowry respond to exogenous changes in the costs of polygamy and divorce, and show that our model gives a different set of predictions than traditional models of dowry payments without contractible mehr. To test the model's predictions empirically, we use data collected on marriage contracts between 1956 and 2004 from a large household survey from the Northwest region of the country, and make use of changes to religious personal law governing divorce. We show that major changes in dowry levels took place precisely after the legal changes, corresponding to simultaneous changes in levels of mehr. * We are grateful to the Institute for Advanced Study, Harvar

Stock-Based Compensation and CEO (Dis)Incentives

Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm’s investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become overvalued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.CEO compensation; Sub-optimal investments

Vegetation change in a lichen-rich inland drift sand area in the Netherlands

In this paper we compare the cryptogam vegetation in the Spergulo-Corynephoretum and Genisto-Callunetum in an inland drift-sand area in three periods (1968, 1993 and 2004). In the early period the lichen diversity in these plant communities appeared to be very high. The aspect was formed by Corynephorus canescens and Polytrichum piliferum. The highest numbers of lichen species are found in the S.-C. cladonietosum, irrespective of the period. In all years, variants of this subassociation are found, with many lichen species. In time pH decreases and organic matter, % total N and % total P increase by humus production. Cover sands having relatively high content of cations form a suitable substrate for lichens. Since the 1970s the neophytic moss Campylopus introflexus, a species adapted to acidic, nutrient-poor sand, has invaded the sand dunes. These changes have been attributed to the high aerial deposition of N in this central part of the Netherlands. In the more recent periods the actual lichen diversity did not really diminish, but the cover of lichen-rich plant communities was clearly reduced when encroaching mosses outgrew the lichens in all succession stages. However, when C. introflexus is less vital because of ageing, desiccation or burial under wind-blown sand, common humicole, aero-hygrophytic and even pioneer lichen species may locally establish on or between the moss cushions. The former succession series starting with P. piliferum and ending with lichen-rich Calluna heath (1968) has been partly replaced by one including C. introflexus (1993 and 2004). Process management is necessary to keep the sand blowing and hereby reduce the colonization by C. introflexus. Habitat restoration by small-scale management consisting of cutting down self-sown trees and removing the top soil has positively influenced lichen diversity and needs to be continued