Learning Production Process Heterogeneity Across Industries: Implications of Deep Learning for Corporate M&A Decisions

Using deep learning techniques, we introduce a novel measure for production process heterogeneity across industries. For each pair of industries during 1990-2021, we estimate the functional distance between two industries' production processes via deep neural network. Our estimates uncover the underlying factors and weights reflected in the multi-stage production decision tree in each industry. We find that the greater the functional distance between two industries' production processes, the lower are the number of M&As, deal completion rates, announcement returns, and post-M&A survival likelihood. Our results highlight the importance of structural heterogeneity in production technology to firms' business integration decisions

Credit default swaps around the world

We analyze the impact of the introduction of credit default swaps (CDSs) on real decision-making within the firm. Our structural model predicts that CDS introduction increases debt capacity more when uncertainty about the credit events that trigger CDS payment is lower. Using a sample of more than 56,000 firms across 51 countries, we find that CDSs increase leverage more in legal and market environments where uncertainty about CDS obligations is reduced and when property rights are weaker. Our results highlight the importance of legal uncertainty in the interpretation of the underlying trigger events of global credit derivatives

COMPREHENSIVE LABORATORY PERFORMANCE EVALUATION OF WMA WITH LEADCAP ADDITIVES

ABSTRACT This paper presents the laboratory test and analysis results from a reference hot-mix asphalt (HMA) mixture and warm mix asphalt (WMA) mixtures modified by two different LEADCAP additives (KW3 and KW6) of a wax type. The performance characteristics investigated in this study include rutting, fatigue cracking, and moisture susceptibility. Rutting performance is evaluated by the triaxial repeated load permanent deformation (TRLPD) test and the asphalt pavement analyzer (APA) test. Fatigue performance of the mixtures with and without moisture conditioning is evaluated using the direct tension cyclic test following the simplified viscoelastic continuum damage (S-VECD) protocol. The resulting damage characteristics and dynamic modulus are used in the layered viscoelastic analysis program to assess the fatigue performance and the moisture susceptibility of these mixtures in pavement structures with different asphalt layer thicknesses. Both the TRLPD and APA test results show that the KW3 and KW6 mixtures exhibit more resistance to rutting than the HMA mixture. In particular, the rutting resistance of the KW3 mixture is superior to that of the HMA and KW6 mixtures. In addition, the HMA and KW6 mixtures exhibit approximately the same favorable characteristics of fatigue resistance, whereas the KW3 mixture's fatigue performance is worse than that of the HMA and KW6 mixtures. However, the moisture susceptibility results indicate that the KW6 mixture is more susceptible to moisture damage than the HMA mixture in terms of fatigue resistance. This increased moisture susceptibility in the KW6 mixture is currently being addressed by modifying the KW6 additive. This study demonstrates the importance of the comprehensive performance testing of mixtures for the development and optimal design of a WMA additive

Corporate Finance in Family Business Groups

I present a theory of the optimal capital structure and dividend policy for expanding family business groups vertically or horizontally. When private control benefits are substantial, takeover threats impose a constraint on external equity financing. Debt can overcome this restriction but introduces the possibility of bankruptcy where control benefits are also lost. Relative to a horizontal structure, a vertical pyramid enhances internal capital financing, but the family has to share more of the profit from the new firm with its existing shareholders, implying that a pyramid is more likely when external financing constraints are more severe, or the new firm is less profitable but capital intensive. In equilibrium, subsidiaries are less leveraged than horizontal entities directly controlled by the family, because the parent firm supports subsidiaries with greater amounts of internal capital. Within a pyramid, the leverage ratio should decrease from top to bottom because the parent firm has a larger collateralized debt capacity. At the same time, dividend payout should increase from top to bottom because this is how the family transfers wealth out of the subsidiaries, without selling control shares to ensure its control over the parent firm against default. Therefore, the theory predicts a decreasing leverage ratio from top to bottom of the pyramid, supported by a dividend policy where the parent firm pays out less to maximize group internal capital, while subsidiaries pay out more to service th

Top Managers' Political Conservatism and External Governance Choices

We develop a theory of corporate governance conservatism that reflects the preference of politically conservative chief executive officers (CEOs) for stability and continuity in corporate governance provisions without managerial entrenchment. Our theory suggests that conservative CEOs tend to prefer corporate governance provisions against hostile takeover and drastic board turnover, but their emphasis on hard work and self-discipline are likely to lead them to run their firms more efficiently with less debt. Using a sample of 2,339 U.S. corporations in the 1996-2006 period, we find strong empirical support for this new theory. Firms with Republican CEOs, who are known to be politically conservative, are more likely to stagger the terms and elections of directors, limit shareholders' ability to amend corporate bylaws and require supermajority for approval of mergers, but those CEOs are not associated with a significant impairment in shareholders' value. Rather, we find firms run by Republican CEOs tend to have higher return on assets and lower leverage, consistent with the results documented by Hutton, Jiang, and Kumar (2014). Overall, our theory and empirical results highlight an important spillover effect of top managers'political conservatism on corporate governance choices. We further discuss other dimensions of corporate governance that could also reflect top managers' political conservatism. [ABSTRACT FROM AUTHOR] Copyright of Seoul Journal of Business is the property of Seoul National University, College of Business Administration and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.

CDS Momentum: Slow-Moving Credit Ratings and Cross-Market Spillovers

This paper highlights the adverse consequences of sluggish credit rating updates in creating information efficiency distortions and investment anomalies. We first document significant credit default swap (CDS) return momentum yielding 7.1% per year. We further show that cross-market momentum strategies based on information in past CDS performance generates an alpha of 10.3% per year in stocks and 7.3% per year in bonds. These CDS momentum and cross-market effects are stronger among more liquid, informationally rich CDS contracts whose CDS spreads move in anticipation of important, yet slow-moving, credit rating changes.Y

Credit Default Swaps around the World

© 2021 The Authors 2021. Published by Oxford University Press.We analyze the impact of the introduction of credit default swaps (CDSs) on real decision-making within the firm. Our structural model predicts that CDS introduction increases debt capacity more when uncertainty about the credit events that trigger CDS payment is lower. Using a sample of more than 56,000 firms across 51 countries, we find that CDSs increase leverage more in legal and market environments where uncertainty about CDS obligations is reduced and when property rights are weaker. Our results highlight the importance of legal uncertainty in the interpretation of the underlying trigger events of global credit derivatives.N