Three essays on SMEs credit risk and capital structure

The main purpose of this study is to provide further insight into the SMEs’ credit risk and capital structure. Thus, this thesis presents three essays on SMEs probability of bankruptcy and capital structure in chapter 3 to chapter 5. The first empirical chapter investigates the extent to which size affects the SMEs probabilities of bankruptcy. I use a dataset of (11,117) US non-financial firms, of which (465) filed for insolvency under chapters 7/11 between 1980 and 2013. I forecast the bankruptcy probabilities by developing four discrete-time duration-dependant hazard models for SMEs, Micro, Small, and Medium firms. A comparison of the default prediction models for medium firms and SMEs suggest that an almost identical set of explanatory variables affect the default probabilities leading us to believe that treating each of these groups separately has no material impact on the decision making process. However, comparisons of the micro and small firms with the SMEs firms strongly suggest that they need to be considered separately when modelling credit risk for them.The second empirical chapter investigates the reasons for SMEs’ choice of being debt-free in their capital structure. Furthermore, I study to what extent different SME size segments (namely micro, small, and medium) affect the debt-free decision. I use a dataset of 95,450 firm-year observations of which there are 18,764 debt-free firm-year observations. I find that borrowing constraints and financing activities play a significant role in the debt-free capital structure decisions of the SMEs. A surprising result is that a large number of debt-free SMEs pay significantly higher dividends than their counterparts with debt. Finally, I find that pension obligations, and lease commitments do not play a significant role in explaining the debt-free policy. However, when conducting the logit regressions on entry and exit decisions of the debt-free SMEs I find that the NDTS plays a significant role in explaining the firm’s decision whether to enter or exit the debt-free status.According to the capital structure hypothesis, if firms deviate too far from their optimum capital structure they will not maximize their value. However, an increasing number of firms across different countries follow a debt-free policy, preferring to have no leverage compared to that which would maximize the firm value. In line with the above statement, the third chapter tries to address the question of what is the impact of a debt-free decision on the default risk of SMEs in the US market and how this substantial deviation from the optimal capital structure affects the SMEs’ probabilities of failure compared to their leveraged counterparts. I forecast the bankruptcy probabilities by developing two discrete-time duration-dependant hazard models for debt and debt-free models. A comparison between the models shows that four explanatory variables: the research and development ratio, tangible assets, abnormal capital expenditure, and asset sales affect the probability of bankruptcy differently for each model, thus suggesting a potential need to treat debt and debt-free SMEs separately when modelling credit risk

An empirical study of the cross market efficiency of the index options market: A case study from the Italian derivatives market

© 2020, Emerald Publishing Limited. Purpose: This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices. Design/methodology/approach: Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag. Findings: The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period. Research limitations/implications: This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads). Originality/value: There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market

An empirical study of the cross market efficiency of the Index Options Market: a case study from the Italian Derivatives Market

This study examines the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) between 1st October 2007 and 31st December 2012, a period including the financial crisis, using daily option prices. Two fundamental no-arbitrage conditions are tested: the lower boundary condition (LBC) and the put/call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex-post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex-post tests, ex-ante tests were applied to PCP violations occurring within a one-day lag. The results showed a significant drop in the number of profitable arbitrage strategies. Overall, the number and monetary value of the violations reported declined during the post financial crisis period compared to those during the financial crisis period. The findings obtained from these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported

On the dynamics of small and medium-sized enterprises: Evidence from Japan

Different types of small and medium-sized enterprises respond uniquely to changes in macroeconomic conditions depending on their size, growth, investment, and financing needs. We examine how changes in macroeconomic conditions (the global financial crisis) relate to investment and financial decision making for each of the different size categories of small and medium-sized enterprises (SMEs). We use a large dataset of 764,963 observations in Japan for the time period from 2006 to 2014 to understand the heterogeneity of SMEs in financing and investment decision making, such in size, industry, and region. Our findings are of particular importance for regulators because we show that SMEs are dynamic in nature where they change their financial behavior in response to any macroeconomic shock. In addition, we report differences among the different size subsample at the sales growth and state/industry GDP growth levels. Hence, this requires designing a unique set of regulations for each group accordingly to effectively enhance the growth potential for each group and for SMEs as a whole. These findings have implications for lenders, especially banks, which should treat each size group within SMEs differently while lending or assessing creditworthiness

An empirical study of the cross market efficiency of the Index Options Market: a case study from the Italian Derivatives Market

This study examines the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) between 1st October 2007 and 31st December 2012, a period including the financial crisis, using daily option prices. Two fundamental no-arbitrage conditions are tested: the lower boundary condition (LBC) and the put/call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex-post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex-post tests, ex-ante tests were applied to PCP violations occurring within a one-day lag. The results showed a significant drop in the number of profitable arbitrage strategies. Overall, the number and monetary value of the violations reported declined during the post financial crisis period compared to those during the financial crisis period. The findings obtained from these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported

Reviewing the hedge funds literature II:hedge funds' returns and risk management characteristics

This paper summarizes the literature on hedge funds (HFs) developed over the last two decades, particularly that which relates to risk management characteristics (a companion piece investigates the managerial characteristics of HFs). It discusses the successes and the shortfalls to date in developing more sophisticated risk management frameworks and tools to measure and monitor HF risks, and the empirical evidence on the role of the HFs and their investment behaviour and risk management practices on the stability of the financial system. It also classifies the HF literature considering the most recent contributions and, particularly, the regulatory developments after the 2007 financial crisis

Reviewing the hedge funds literature I:hedge funds and hedge funds' managerial characteristics

This paper summarizes the literature on hedge funds (HFs) developed over the last two decades, particularly that which relates to managerial characteristics (a companion piece covers the return and risk management characteristics of HFs). It classifies, the current HF literature, suggesting which critical problems have been “solved” and which problems have not been yet adequately addressed. It also discusses the effects of past financial regulation and the prospects for the effect of new financial regulation on the HF industry and its performance and risk management practices, and suggests new avenues for research. Furthermore, it highlights the importance of managerial characteristics for HF performance, and the successes and the shortfalls to date in developing more sophisticated HF-related risk management tools

Engaged ETFs and Firm Performance

ETFs have often tracked indices and charged low fees so their incentives to improve firm performance are questionable although little empirical work has investigated this issue. Theoretically, however, we expect firms to perform better when held by more engaged ETFs. We develop a new measure of engagement using a weighted-average concentration measure which captures the combined effect of the concentration of the portfolios of the ETFs investing in a firm and the ownership of the firm by those ETFs. Using ETFs’ investment in US-listed firms for the period 2000-2019, we confirm our expectations that more engaged ETFs improve firm performance

The Bank of Japan’s equity purchases and stock illiquidity

Using the large-scale index-linked exchange-traded fund (ETF) purchase program of the Bank of Japan (BOJ), we examine the role of unconventional equity-based monetary policies in the market liquidity of the underlying securities. Using a large sample of Japanese stocks, we document a significant increase in stock illiquidity when a firm's ownership by the BOJ increases. Intensified ETF arbitrage activities partially mediate such effect. The increased illiquidity is concentrated among small and young firms and those whose shares are likely subject to strong buying pressure. Finally, BOJ ownership increases comovement in liquidity and reduces informational efficiency