Collectivism and the Costs of High Leverage

Prior literature shows that high leverage is associated with losses in market share due to unfavorable actions by customers and competitors. Building on this literature, we investigate the effect of collectivism on the product market performance of highly leveraged firms. Using a sample of 46 countries over the 1989–2016 period, we find significantly lower costs of high leverage for countries with higher collectivism scores. Moreover, we find that the impact of collectivism on high leverage costs is more pronounced for firms with high product specialization and with financially healthy rivals. In additional analysis, we find that collectivism helps highly leveraged firms retain employees and obtain trade credit from suppliers. Our findings thus suggest that a country’s culture affects corporate financial outcomes by influencing the actions of firm stakeholders

Does Corporate Social Responsibility Reduce the Costs of High Leverage? Evidence from Capital Structure and Product Market Interactions

Research on capital structure and product market interactions shows that high leverage is associated with substantial losses in market share due to unfavorable actions by customers and competitors. We examine whether corporate social responsibility (CSR) affects firms’ interactions with customers and competitors, and whether it can reduce the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. By reducing adverse behavior by customers and competitors, CSR helps highly leveraged firms keep customers and guard against rivals’ predation. Our results support the stakeholder value maximization view of CSR

Expectations Hypothesis of the Term Structure of Implied Volatility: Re-examination

Previous studies have tested the expectations hypothesis of the term structure of implied volatility using xed-interval time-series of at-the-money options. We show, using a stochastic volatility option pricing model, that even the implied volatilities of at-the-money options are not necessarily unbiased and that the xed-interval time-series can produce misleading results. We then suggest an alternative approach and test the expectations hypothesis using S&P 500 stock index options. Our results do not support the expectations hypothesis: long-term volatilities rise relative to short-term volatilities but the increases are not matched as predicted by the expectations hypothesis. In addition, an increase in the current long-term volatility relative to the current short-term volatility is followed by a subsequent decline.published or submitted for publicationnot peer reviewe

Settling the debate on multinational capital structure using the CEPR measure

Portfolio theory suggests that because of diversification benefits, multinational corporations (MNCs) should have lower risk and therefore could have more debt. Empirical studies, however, have repeatedly shown that MNCs from the US face higher risks and have lower debt levels. Burgman (1996) suggests that agency costs as well as political and exchange rate risks are the explanation. Kwok and Reeb (2000) explain this puzzle, presenting an upstream-downstream hypothesis suggesting that MNCs from emerging markets reduce their risk by going international (they go to safer markets), while firms from developed countries increase their risk by going abroad (they go to riskier markets). By introducing a new measure of Country Export Partner Risk (CEPR), we show that the weighted average risk level of a country's export trading partners is negatively related to the leverage of its multinationals, thus confirming the upstream-downstream hypothesis. Furthermore, once controlling for CEPR, we find that the multinationality of the firm is positively related to leverage, thus lending support to the traditional diversification argument. Our findings, therefore, help settle the debate between these two opposing streams of multinational capital structure literature.Capital structure Multinationality International trade

The Influence of Managerial Incentives on the Resolution of Financial Distress

This study investigates the influence of managerial incentives on the resolution of financial distress. Our model predicts that when creditors and equityholders prefer different resolution methods, the likelihood of choosing Chapter 11 over private renegotiation is related to the ownership structure of the distressed firm. Empirical test results using a sample of 81 voluntary Chapter 11 firms and 65 private workout firms support the model\u27s prediction. We show that managerial ownership is positively related to the incidence of Chapter 11 filing when there is conflict between equityholders and creditors over the choice between Chapter 11 and a private renegotiation. Consistent with prior literature, we also find that the choice of resolution methods depends on the extent of creditor holdout problems and the level of economic distress. We also performed the analysis of a subsequent 5 years of post-distress performance for all sample firms. The majorities of firms that file for Chapter 11 lose their independence and are either acquired or liquidated. However, more than half of firms in private workouts survived as independent firms

Cultural practices and life insurance consumption: An international analysis using GLOBE scores

This cross-disciplinary study examines how national culture practice affects cross-country variations in life insurance consumption. To proxy for national culture dimensions, we use the refined measure of the GLOBE project which includes several additional cultural dimensions not included in Hofstede's analysis. Using 1966-2004 data across thirty-eight countries, our analysis reveals a strong relationship between life insurance consumption and the practice scores of in-group collectivism as well as power distance. These relationships continue to hold, even after controlling for other country-level variables such as national income, expected inflation rate, banking sector development, investor protection index, dependency ratio, life expectancy, and religion.Culture GLOBE Individualism Power distance Life insurance consumption