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Master Thesis topic 1: The Design of Lockup Contracts in IPO Firms in Europe
A lockup contract is an agreement between initial shareholders and the underwriter that prohibits initial shareholders from selling any of their shares of stock for a specific period of time after the IPO. The existence of lockup agreements is to reduce the chance of issuers taking advantage of insider information, allowing more time for outside investors to resolve uncertainty in firm value without the adverse effect of insider selling. However, lockup agreements are much more diverse in Europe than in the U.S. both in terms of the amount and length of equity shares locked up after the IPO. The U.S. lockup agreements are voluntary and mostly standardized towards 180 days while they are frequently mandatory and involved in much longer periods in Europe. Another important feature of lockup agreements is the negative stock price reaction around the lockup expiry date which has been documented by numerous researchers recently. This effect is contradictory to the efficient market hypothesis which advocates that the IPO prospectus should reveal all information pertinent to the determinant of stock price. Most importantly, there are also separate lockup agreements for different categories of initial shareholders within the same firm such as directors and venture capitalists. As directors assume important leadership roles and they are more informed than other shareholders, thus the information asymmetry tends to be higher between directors and outside investors than between venture capitalists and outside investors. However, venture capitalists are repeat investors who have valuable reputation at stake which may limit their conflict of interests with outside investors acquiring shares in the IPO. Outside investors may not purchase shares in the IPO backed by venture capitalists who were previously involved in taking advantage of insider information and reducing the wealth of outsider investors. Besides venture capitalists also use IPO as an exit mechanism to optimally recycle investments and maximize future returns. Hence the length and expiry of directors lockup agreements will convey significantly different information than the length and expiry of venture capitalists lockup agreements. Important Literatures Aggarwal, R., Krigman, L. and Womack, K., 2002, Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling. Journal of Financial Economics 66, 105 137. Brav, A. and Gompers, P., 2003, The Role of Lockups in Initial Public Offerings. The Review of Financial Studies 16, 1 29. Cornell, B. and Sirri, E., 1992, The Reaction of Investors and Stock Prices to Insider Trading. The Journal of Finance 47, 1031 1059. Field, L. and Hanka, G., 2001, The Expiration of IPO Share Lockups. The Journal of Finance 56, 471 500.
Gompers, P. and Lerner, J., 1998, Venture Capital Distributions: Short-Run and LongRun Reactions. The Journal of Finance 53, 2161 2183. Lakonishok, J. and Lee, I., 2001, Are Insider Trades Informative. The Review of Financial Studies 14, 79 111. Lin, T. and Smith, R., 1998, Insider Reputation and Selling Decisions: The Unwinding of Venture Capital Investments during Equity IPOs. Journal of Corporate Finance 4, 241 263. Ofek, E. and Richardson, M., 2000, The IPO Lock-Up Period: Implications for Market Efficiency and Downward Sloping Demand Curves. Unpublished working paper, New York University. Ofek, E. and Richardson, M., 2003, DotCom Mania: The Rise and Fall of Internet Stock Prices. The Journal of Finance 53, 1113 1137. Schultz, P., 2008, Downward Sloping Demand Curve, the Supply of Shares, and the Collapse of Internet Stock Prices. The Journal of Finance 63, 351 378.
-Leonardo Gambacorta & Paolo Emilio Mistrulli, Bank capital and lending behavior: Empirical evidence for Italy, Banca dItalia research department, February 2003. -Dennis Hnsel & Jan-Peter Krahnen, Does credit securitization reduce bank risk? Evidence from the European CDO market, January 2007, available on: http://ssm.com/abstract=967430 -Joe Peek & Eric Rosengren, Bank regulation and the credit crunch Journal of banking and finance, 19, 1995. -Christina Bannier & Dennis Hnsel, Determinants of banks engagement in loan securitization, August 2007, available on: http://ssm.com/abstract=1014305. -Benedikt Goderis & Ian Marsh & Judit Vall Castello & Wolf Wagner, Bank behavior with access to credit risk transfer, Bank of Finland Research, Discussion paper 4/2007.
Jensen, M.C., and R.S. Ruback, 1983, The Market for Corporate Control: the Scientific Evidence, Journal of Financial Economics 11, 5-50. Roll, R, 1986, The Hubris Hypothesis of Corporate Takeovers, Journal of Business 59, 197-216.
Some references: Market Microstructure: Glosten, L. and Milgrom, P., (1985), Bid, Ask, and Transaction Prices in a Specialist Market With Heterogeneously Informed Traders, Journal of Financial Economics 14, 71-100. Kyle, A., (1985), Continuous Auctions and Insider Trading, Econometrica 53, 1315-1335. Roll, R., (1984), A simple Implicit Measure of the Effective Bid - Ask Spread in an Efficient Market, Journal of Finance, 39, 1127-1139. Ho, T. and Stoll, H. (1983), The Dynamics of Dealer Markets under Competition, Journal of Finance, 38, 10531074.
Pricing liquidity: Amihud, Y., and H. Mendelson (1986): Asset pricing and the bid-ask spread, "Journal of Finance, 17, 223-249. Amihud, Y.: 2002, Illiquidity and stock returns: cross-section and time series effects, Journal of Financial Markets 5, 3156. Pastor, L. and Stambaugh, R.: 2003, Liquidity risk and expected stock returns, Journal of Political Economy 111(3), 642685. Acharya, V. and Pedersen, L.: 2005, Asset pricing with liquidity risk, Journal of Financial Economics 77, 375410. Dick-Nielsen, Jens, Feldhtter, Peter and Lando, David, Corporate Bond Liquidity Before and after the Onset of the Subprime Crisis (February, 09 2009). EFA 2009 Bergen Meetings Paper. Note that capturing the intuition of these papers is most important, not being able to follow every technical derivation.
Master Thesis topic 7: The Role of Corporate Governance in Mergers and Acquisitions
There are vast amount of empirical literature documenting that managers conduct bad M&As which destroy shareholder value. For example, Moeller, Schlingemann and Stulz (2005) show shareholder value destruction in a massive scale in the merger wave of late 1990s. Jensen (1986) argues that managers tend to use the firms free cash flow to conduct M&As in order to build their own business empire, at the expense of shareholders. In contrast, Roll (1986) argues that managers conduct bad mergers due to their own hubris bias. A general and very interesting research topic is whether and how corporate governance plays a role in mergers and acquisitions. Can better corporate governance improve the quality of M&As? As there exist a variety of corporate governance mechanisms (such as large shareholder monitoring, corporate board monitoring, and managerial incentive compensation). It will be interesting to investigate the effectiveness of various corporate governance mechanisms in improving M&A performance. For example, possible research ideas include (but certainly are not limited to) Can the existence of large shareholder(s) improve the firms M&A quality? Can an effective board structure improve M&A performance? Can managerial compensation structure affect M&A performance? Does corporate governance play a different role in Europe than in USA or Asia? ......
The research projects in this area will include extensive data gathering and sound econometric analysis. For the first, experience with online data-gathering, as well as data handling in MS Excel and/or comparable software is advised. For the second, a sound knowledge of statistics, with confidence in regression models, is suggested. Proposed software includes Eviews, SAS, R or Matlab (MS Excel or SPSS can serve in certain cases). The project will involve (on a full-time basis): Month 1: Orientation, literature review, formulation of research objective. Write up of Chapter 1. Month 2: Derivation of methodology: leads to thesis proposal. Write up of Chapter 2. Month 3: Data gathering and preliminary analysis. Write up of Chapter 3. Month 4: Quantitative analysis. Month 5: Writing of remaining chapters and submission. End of month 6: Defence
Jensen, M.C., 1986, Agency Cost Of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review, 76(2): 323-329.
Moeller, S., F. Schlingemann, and R. Stulz, 2005. 'Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave', Journal of Finance vol. 60(2): 757-782. Roll, R, 1986, The Hubris Hypothesis of Corporate Takeovers, Journal of Business 59: 197-216.
Master Thesis topic 8: The Risk of Corporate Fraud and Capital Market Consequences
It is well known that investors incur disastrous losses if a firm is detected of committing fraudulent misreporting (e.g., Anron and Worldcom). Extant corporate finance theories also suggest that the incidence of fraud tends to exhibit industry and time-series clustering effects (e.g., Povel, Singh and Winton 2007, Qiu and Slezak 2008). Therefore, it may not be unreasonable for one to perceive the risk of being detected of committing fraudulent misreporting (the risk of detected fraud hereafter) as a systematic risk born by investors. If so, rational investors may require a risk premium for having to bear this risk. A general and very interesting research topic is whether the (perceived) risk of detected fraud increases the cost of capital of a firm, and if yes, by how much. Research in this area will greatly deepen our understanding of the real consequences of corporate fraud. Specifically, Does (perceived) higher risk of detected fraud increase the firms cost of equity? Does (perceived) higher risk of detected fraud affect the firms credit ratings given by the rating agencies, thus increase the firms cost of debt (yield of maturity) in the bond market? Does (perceived) higher risk of detected fraud increase the firms interest rates for bank loans? ... ...
The research projects in this area will include extensive data gathering and sound econometric analysis. For the first, experience with online data-gathering, as well as data handling in MS Excel and/or comparable software is advised. For the second, a sound knowledge of statistics, with confidence in regression models, is suggested. Proposed software includes Eviews, SAS, R or Matlab (MS Excel or SPSS can serve in certain cases). The project will involve (on a full-time basis): Month 1: Orientation, literature review, formulation of research objective. Write up of Chapter 1. Month 2: Derivation of methodology: leads to thesis proposal. Write up of Chapter 2. Month 3: Data gathering and preliminary analysis. Write up of Chapter 3. Month 4: Quantitative analysis. Month 5: Writing of remaining chapters and submission. End of month 6: Defence
Poval, P., R. Singh, and A. Winton, 2007. Booms, Busts, and Fraud. Review of Financial Studies, 20(4): 1219-1254.
Qiu, B. and S.L. Slezak, 2008. The Strategic Interaction between Committing and Detecting Fraudulent Reporting. Working paper, SSRN.
Master Thesis topic 11: The Impact of CEO Personal Characteristics on Corporate Finance Decisions
A relatively new stream of research in the corporate finance literature is about the impact of CEOs personal characteristics on financial decisions. According to Bertrand and Schoar (2003), managers characteristics play an important role in their decisions in the areas of investment, financial and organizational practices. In their survey of behavioral corporate finance literature, Baker, Ruback, and Wurgler (2004) conclude that there are very few behavioral finance studies that examine the CEOs perspective. Rather, most such studies focus mainly on investments and financing decisions. Examples of these studies are Heaton (2002) and Malmendier and Tate (2005, 2008), and Xuan (2009). The topic of this thesis is about the impact of CEOs personal characteristics on their corporate decisions. One possibility would be to consider a CEOs industry working experience or geographical experience. Another possibility is whether they show persistent behavior when working for another firm. Other suggestions are welcome as well. Baker, M., Ruback, R., Wurgler, J., 2004. Behavioral corporate finance. In: Eckbo, B. E. (Eds.), Handbook in corporate finance: Empirical corporate finance. Bertrand, M., Schoar, A., 2003. Managing with style: The effect of managers on firm policies. The Quarterly Journal of Economics 143, 1169-1208. Heaton, J., 2002. Managerial optimism and corporate finance. Financial Management 32, 33-45. Malmendier, U., Tate, G., 2005a. CEO overconfidence and corporate investment. The Journal of Finance 60, 2661-2700. Malmendier, U., Tate, G., 2008. Who makes acquisitions? CEO overconfidence and the markets reaction. Journal of Financial Economics 89, 20-43. Xuan, Y., 2009. Empire-building or bridge-building? Evidence from new CEOs internal capital allocation decisions. Review of Financial Studies, Forthcoming.
Master Thesis topic 12: Corporate finance and governance of Dutch firms in the 20th century
Many studies of corporate decisions focus on recent periods. The corporate decisions include capital structure choice, dividend policy, governance structures and mergers and acquisitions. In the Netherlands many studies have been carried out on these topics for periods starting in the 1980s. In these studies cross-sectional analyses are performed to explain capital structure choice, dividend policy, governance structures and mergers and acquisitions. Alternatively these studies measure the effects of corporate decisions on firm performance. History can add fascinating dimensions in research on corporate decision-making. First, data over longer time periods allows a study of long term corporate policies of firms. For example, why do some firms have stable dividends while other firms exhibit fluctuating dividends? Or: do long term capital structures move towards optimal ratios? Second: in historical research by nature the institutional setting changes over time. Examples are tax rules, company law and societal perceptions of good governance. These changes make it, for example, interesting to study the relation between the use of takeover defenses in firms and the development of company law. In the Netherlands, since 1903, a yearly guide is issued with information about all Dutch exchange-listed companies: Van Oss Effectengids. This guide includes a balance sheet, profit and loss statement, debt and equity issues, dividends, board members, takeover defenses and important news such as mergers and bankruptcies. The topic requires understanding of Dutch. Examples of studies that can be carried out answer questions like: - What was the impact on takeover defenses of the company law reforms in the 1920s, 1960s and 1970s? - What is the representation of board members of banks on boards of non-financial companies? How do bankers on the board influence capital structure choice? - Why do some firms have stable dividends while other firms exhibit fluctuating dividends? - Do mergers influence long-term performance, short-term performance, or both? - Do takeover defenses work? Are firms with takeover defenses less likely to be taken over? An international initiative in this field is A history of corporate ownership around the world: Family business groups to professional managers, Randall Morck (Ed.), http://www.press.uchicago.edu/presssite/metadata.epl?mode=synopsis&bookkey=160762 Especially Morcks introduction contains many useful ideas. The paper by De Jong and Rell describes existing literature for the Netherlands and the data in Van Oss Effectengids.
Master Thesis topic 14: Asset pricing and the economic risk factors
Different financial assets have different returns and these differences can be large. For example, investors appear to require a lower return on average for investing in growth firms (7% per annum) when compared to value firms (14% pa), and a higher return for investing in futures contracts on crude oil (10% pa) versus even negative return for futures on sugar (-10% pa). So the question is why investors require different returns for different assets or securities? Can we model or even predict these returns? And if yes, can investors earn profits by predicting future performance of the assets? Finance theory offers some explanations. For example assets will have higher expected returns when they are riskier, when they deliver low returns in bad states of the economy. Rational risk averse investors will need to be compensated by means of higher expected returns for holding such undesired assets. On the contrary, investors desire assets that deliver high payoffs in the bad states of the economy and such assets will have lower expected returns or risk premiums. This is a broad area for research within which students are encouraged to choose more specific topics. The list with example topics is included however own topics are highly appreciated: Asset pricing: How can we identify these good and bad states of the economy? How can we model (predict) expected returns? What is the nature of macroeconomic risk that drives risk premium in asset markets? Who is more responsive to changes in economic conditions: consumers or producers (consumption-based versus production-based asset pricing)? Theoretical and empirical evaluation of the eg. The Fama-French-Carhart extension of the CAPM. Investments The economic value of predicting asset returns: can an active portfolio management be profitable (in the efficient market)? Should investors hold domestic assets only or diversify internationally? Do investors hold an internationally diversified portfolio: who, why and where goes abroad or stays at home (home bias)? How to deal with currency risk in an internationally diversified portfolio?
Master Thesis topic 15: Greener Pastures for Investing: the Case of Emerging Markets
The dramatic expansion of the international stock markets of Asia, South America, Africa, the Middle East, and Eastern Europe creates increasingly important opportunities for global investors in search of better diversification and more attractive risk-return tradeoffs. Many unique features of these emerging stock markets separate them from their more developed counterparts such as U.S., U.K., and Japan. Historically, stock returns in these markets have a low correlation with developed market returns. As such, the high volatility of emerging stock markets is dampened in a global portfolio While interests in emerging markets from both academia and investment community have intensified, many important questions remain inadequately answered or unexplored. For example, the correlation between emerging market returns and the US market return tends to vary over different market conditions. In bull markets, the correlation is low and the allocation to emerging markets increases the global portfolios returns with little effects on its risk. However, recent evidence shows that the US market downturns tend to be associated with strong co-movements in emerging markets. The result is, therefore, that adding a small emerging markets allocation to a global portfolio tends to slightly reduce its return and increase its risk during US bear market. Other potential topics include the contagion of emerging market crisis or the liquidity in emerging markets. A glaring example is the 1997 Asian finance crisis, which quickly spread all over the world through the Russian Debt crisis in 1998, and then the collapse of LTCM in 1998, a giant hedge fund in the United States. How should we manage portfolios in emerging markets in this dynamic world? Lets explore it in your master theses.
Master Thesis topic 16: Understanding the global financial crisis: causes, real consequences, and lessons
The financial turmoil in 2007 and 2008 have a significant impact on the workings of financial markets and the architecture of financial institutions around the world. Despite the common attribution of the crisis to declining housing prices, enhanced leverage of the banking system, and the large exposure of financial institutions to mortgages through structured investment vehicles such as Collateralized Debt Obligations and Credit Default Swaps, it remains a puzzle why financial markets around the globe and across various seemingly unrelated asset classes exhibit strong repercussions at roughly the same time (See the Figure below). As the tide of the financial crisis starts to ebb through time, it becomes increasingly important to understand the effects of financial crisis not only on the financial sector but also on the real sector of the economy. One important channel for the effect of crisis to spread to nonfinancial corporations is the availability of credit. A recent survey of 1,050 CFOs around the world finds that the financial crisis has led credit constrained firms to deeply cut their expenditures on the R&D projects, employment, and capital spending. It would interesting to assess how deep and widespread the impact on real sectors is. Naturally, the occurrence of the current financial crisis has long-lasting implications for financial regulators and central banks. Do we need tighter financial regulations and more active monetary policy maneuvered by central banks to prevent the occurrence of or to counter the development of financial crises? Detailed analyses of the role played these visible hands during the periods of the crisis would be helpful to answer these important questions.
Master Thesis topic 17: The firms financial advisor selection with corporate finance decisions
The added value of financial advisors to acquiring firms can be threefold (Servaes and Zenner, 1996). First, financial advisors can reduce the transaction costs to acquiring firms. In particular, they can identify targets, value targets and create a bid at a lower cost than individual firms. Second, they can reduce asymmetric information between the target and acquirer. Third, financial advisors can reduce contracting costs. They act as a monitor, since their reputation depends on the quality of their advice. When selecting a financial advisor, empirical results indicate that transaction costs are the main determinants, followed by contracting costs and asymmetric information. Banks that function both as lender and as financial advisor can provide certification services, as these banks have private information about their client, which they can use in their advisory role (Allen, Jagtiani, Persistiani, and Sauders, 2004). However, conflicts of interest can arise if a firm believes that the bank is likely to reveal information that would be of interest to competitors or potential acquirers. We propose several directions for empirical research: o In studies about advisor selection, most authors exclude financial firms from their analysis. Since financial advisors mostly belong to financial firms, it would be interesting to examine how financial firms select their financial advisor. (Consider the case of ABN AMRO and Anton Veneta) o Is there a conflict of interest between clients and their financial advisors that previously acted as another type of advisor? (e.g, equity issues, debt issues, divestitures, advisor of the target, advisor of acquirer etc). o According to the Servaes and Zenner (1996), advisors can provide services at a lower cost than individual firms, due to their extensive experience in advising M&A deals. What type of experience would be important and when? E.g., industry- or country-specific experience. What would be the value implications? Servaes and Zenner (1996), The role of investment banks in acquisitions, The Review of Financial Studies, Vol. 9, p. 787 815 Allen, Jagtiani, Persistiani, and Sauders (2004), The role of banks advisors in mergers and acquisitions, Journal of Money, Credit, and Banking, Vol. 36, p.197 - 224
Master Thesis topic 20: Professional asset management (mutual funds, hedge funds, pension funds)
Both individual and institutional investors, like insurers and pension funds, extensively use professional money managers. Worldwide, enormous amounts of money are invested in mutual funds or hedge funds. In a recent report, the Investment Company Institute estimates the assets under management to exceed $7 trillion in US mutual funds alone (ICI, 2004). From an academic perspective, assessing the performance of these investment vehicles is an important test of market efficiency. Persistence patterns in fund performance (i.e. the observation that some professional fund manager systematically outperform others, including passively managed index funds) would be inconsistent with the semi-strong form of the Efficient Market Hypothesis. One of the most authoritative papers in this stream of literature is that of Hendricks et al. (1993). In this study, the authors report that mutual funds that performed well over the past period, tend to do so in the near future, and vice versa. While Elton et al. (1996) come to similar findings, Carhart (1997) demonstrates that almost all of this predictability is explained by exposures to common risk factors. After correcting for these risk factors, practically all persistence disappears. Nonetheless, Bollen and Busse (2005) do find persistence in fund performance beyond over shorter periods of time. Their results suggest that a short measurement horizon provides a more precise method of identifying future top performing funds. Even though empirical evidence does no appear to unambiguously indicate that some fund managers are able to generate superior performance, investors appear to chase past winners (e.g. see Sirri and Tufano, 1998). While past winning funds are rewarded with large cash inflows, losers are not equally penalized with cash outflows. Studies by among Gruber (1996) and Zheng (1999) report a smart money effect; the authors find that funds that receive more money subsequently perform better than those that lose money. Wermers (2003) also concludes that money is smart in chasing winners, but argues that this effect might be a self-fulfilling prophesy. On the other hand, some authors argue that fund managers exploit return chasing behavior to maximize assets under management. For example, Brown et al. (1996) find that halfway each calendar year, losing fund managers tend to take more portfolio risk to increase the probability to end the year among the winning funds. On the other hand, winning fund managers seem to lock-in performance when they are ahead. Brown et al (2001) document similar behavior when they investigate this tournament-behavior among CTAs (commodity trading advisors) and hedge funds. Cooper et al (2004) provide even more striking evidence of seemingly irrational behavior by mutual fund investors when allocating assets across mutual funds. They find that cash flows to funds increase dramatically when funds change their names to look more like the current hot return styles. In fact, this relationship even seems to hold for the funds whose holdings after the name change do not materially reflect the style implied by their new name, and is the strongest among funds with the greatest increases in marketing expenditures (and ironically the lowest subsequent performance). The academic literature on mutual funds and hedge funds is fairly large and increasing. For more information, you might consider the books by Haslem (2003) and
Lhabitant (2004). Recent academic work can also be found at www.ssrn.com. Within this master thesis topic, alternative thesis topics can be derived, mostly relating to the performance of professionally managed investment vehicles, money flows, fees, and the behavior of fund managers and investors. (For example, by investigating several issues for a particular subset of funds.) Extensive data sets on mutual funds (CRSP) and hedge funds (TASS) are available at the department, although for some topics additional data may have to be collected. Each thesis project involves (i) a comprehensive literature review, (ii) (manual) data collection and manipulation, (iii) and empirical analysis using techniques from the literature. Accordingly, thesis topics are mostly targeted at students with strong quantitative skills, a well-developed background in financial management, and a fluent in English. Relevant references J. B. Berk and R. C. Green. Mutual fund Flows and performance in rational markets. Journal of Political Economy, 112:1269-1295, 2004. N. Bollen and J. Busse. On the timing ability of mutual fund managers. The Journal of Finance, 56:1075-1094, 2001. N. P. Bollen and J. A. Busse. Short-term persistence in mutual fund performance. The Review of Financial Studies, forthcoming, 2005. S. Brown and W. Goetzmann. Performance persistence. The Journal of Finance, 50:679698, 1995. S. J. Brown, W. Goetzmann, and W. N. Park. Careers and survival: competition and risk in the hedge fund and CTA industry. The Journal of Finance, 5:1869-1886, 2001. S. J. Brown, W. Goetzmann, R. G. Ibbotson, and S. A. Ross. Survivorship bias in performance studies. The Review of Financial Studies, 5:553-580, 1992. K. C. Brown, W. V. Harlow, L.T. Starks. Of Tournaments and temptations: an analysis of managerial incentives in the mutual fund industry. The Journal of Finance , 51: 85-110, 1996. J. Busse. Volatility timing in mutual funds: Evidence from daily returns. The Review of Financial Studies, 12:1009-1041, 1999. M. Carhart. On persistence in mutual fund performance. The Journal of Finance, 52:5782, 1997. G. Conner, and M. Woo. An Introduction to Hedge Funds, working paper, London School of Economics, 2003. M. Carhart, R. Kaniel, D. Musto, and A. Reed. Leaning for the tape: Evidence of gaming behavior in equity mutual funds. The Journal of Finance, 57:661-693, 2002.
M. Cooper and H. Gulen. Changing names with style: Mutual fund name changes and their effects on fund flows. The Journal of Finance, forthcoming, 2005. E. J. Elton, M. J. Gruber, and C. R. Blake. The persistence of risk-adjusted mutual fund performance. The Journal of Business, 69:133-157, 1996. E. J. Elton, M. J. Gruber, and C. R. Blake. A first look at the accuracy of the CRSP mutual fund database and a comparison of the CRSP and Morningstar mutual fund databases. The Journal of Finance, 56:2415-2429, 2001. E. J. Elton, M. J. Gruber, S. Das, and M. Illavka. Efficiency with costly information: A reinterpretation of evidence from managed portfolios. The Review of Financial Studies, 6:1-22, 1993. W. E. Ferson and R. W. Schadt. Measuring fund strategy and performance in changing economic conditions. The Journal of Finance, 51:425-461, 1996. W. N. Goetzman and R. G. Ibbotson. Do winners repeat? Journal of Portfolio Management, 20:9-18, 1994. M. J. Gruber. Another puzzle: The growth in actively managed mutual funds. The Journal of Finance, 51:783-810, 1996. J.A. Haslem, 2003, Mutual Funds. Risk and Performance Analysis for Decision Making, Blackwell Publishing. D. Hendricks, J. Patel, and R. Zeckhauser. Hot hands in mutual funds: Short-run persistence of relative performance, 1974-1988. The Journal of Finance , 48:93-130, 1993. D. Hendricks, J. Patel, and R. Zeckhauser. The j-shape of performance persistence given survivorship bias. The Review of Economics and Statistics, 79:161-166, 1997. F.-S. Lhabitant, 2004, Hedge Funds. Quantitative Insights, John Wiley and Sons. B. Malkiel. Returns from investing in equity fund 1971 to 1991. The Journal of Finance, 50:549-572, 1995. E. R. Sirri and P. Tufano. Costly search and mutual fund Flows. The Journal of Finance, 53:1589-1622, 1998. R. Wermers. Is money really smart? New evidence on the relation between mutual fund flows, manager behavior, and performance persistence. Working paper University of Maryland, 2003. L. Zheng. Is money smart? A study of mutual fund investors selection ability. The Journal of Finance, 54:901-933, 1999.
Master Thesis topic 21: Banking Beyond the Too Big to Fail Hypothesis
For many decades the too big to fail hypothesis has assumed that very large banks would never go bankrupt simply because the impact on an economy would be too big. The idea was that if a very large bank would enter into financial distress, there would always be a government safety net. Over the past years, we have witnessed that bank size is not necessarily a guarantee for survival or good performance. In this MSc thesis topic you are encouraged to analyse modern banking practices that apparently work different than we have thought for many decades. Does internationalisation add value to banks? Even though many studies try to explain the internationalisation of banks, but the evidence on the impact of internationalisation on performance remains mixed (e.g., Amel, Panetta & Salleo, 2004; Amihud, DeLong & Saunders, 2002; Berger, 2007; Berger & DeYoung, 2001; Berger, DeYoung & Udell, 2001; Miller & Parkhe, 2002; Molyneux & Seth, 1998; Peek, Rosengren & Kasirye, 1999; Seth, Song & Pettit, 2002; Wan, Yiu, Hoskisson & Kim, 2008). You may investigate the impact of internationalisation on performance at the corporate level, the stockholder level, or the bondholder level. Are stockholders able to correctly price stocks of complex organisations as banks? Many studies suggest that due to functional diversification, geographic diversification, the trade in complex products, etc., stockholders have difficulty properly valuing bank assets due to their opaqueness (e.g., Amel et al., 2004; DeLong & DeYoung, 2007; Flannery et al., 2004). Do bondholders prefer large banks over smaller ones? To some extent, one could argue that more (domestic) assets serve as more collateral for the bondholders, and increases in the asset base should thus lead to lower bond yield spreads (everything else equal). Yet, also for bondholders the increased organisational complexity could be associated with more opaqueness or increased risk (e.g., Warga & Welch, 1993), and hence less precise pricing. See e.g., Laeven & Levine (2007); Ongena & Penas (2009); Penas & Unal (2004). The above questions are only meant as an example. You are encouraged to define your own research. Many alternative themes are allowed, but you must define a fundamental theme for which you design your own problem statement. References Amel, D., Barnes, C., Panetta, F., & Salleo, C. 2004. Consolidation and efficiency in the financial sector: A review of the international evidence. Journal of Banking & Finance, 28(10): 2493-2519. Amihud, Y., DeLong, G., & Saunders, A. 2002. The effects of cross-border bank mergers on bank risk and value. Journal of International Money and Finance, 21(6): 857-77. Berger, A.N. 2007. International comparisons of banking efficiency. Financial Markets, Institutions & Instruments, 16(3): 119-44. Berger, A.N., Buch, C.M., DeLong, G., & DeYoung, R. 2004. Exporting financial institutions management via foreign direct investment mergers and acquisitions. Journal of International Money and Finance, 23(3): 333-66.
Berger, A.N., & DeYoung, R. 2001. The effects of geographic expansion on bank efficiency. Journal of Financial Services Research, 19(2-3): 163-84. Berger, A.N., DeYoung, R., & Udell, G.F. 2001. Efficiency barriers to the consolidation of the European financial services industry. European Financial Management, 7(1): 117-30. Flannery, M.J., Kwan, S.H., & Nimalendran, M. 2004. Market evidence on the opaqueness of banking firms assets. Journal of Financial Economics, 71(3): 419-60. Laeven, L., & Levine, R. 2007. Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2): 331-67. Miller, S.R., & Parkhe, A. 2002. Is there a liability of foreignness in global banking? An empirical test of banks X-efficiency. Strategic Management Journal, 23(1): 55-75. Molyneux, P. & Seth, R. 1998. Foreign banks, profits and commercial credit extension in the United States. Applied Financial Economics, 8(5): 533-9. Ongena, S., & Penas, M.F. 2009. Bondholders wealth effects in domestic and crossborder bank mergers. Journal of Financial Stability, forthcoming, doi:10.1016/j.jfs.2008.08.003. Peek, J., Rosengren, E.S., & Kasirye, F. 1999. The poor performance of foreign bank subsidiaries: Were the problems acquired or created? Journal of Banking and Finance, 23(2): 579-604. Penas, M.F., & Unal, H. 2004. Gains in bank mergers: Evidence from the bond markets. Journal of Financial Economics, 74(1): 149-79. Seth, A., Song, K.P., & Pettit, R.R. 2002. Value creation and destruction in cross-border acquisitions: An empirical analysis of foreign acquisitions of US firms. Strategic Management Journal, 23(10): 921-40. Wan, W.P., Yiu, D.W., Hoskisson, R.E., & Kim, H. 2008. The performance implications of relationship banking during macroeconomic expansion and contraction: A study of Japanese banks social relationships and overseas expansion. Journal of International Business Studies, 39(3): 406-27. Warga, A., & Welch, I. 1993. Bondholder losses in leveraged buyouts. The Review of Financial Studies, 6(4): 959-82.
Master Thesis topic 23: The Role of Banks in the 2008/2009 Financial Crisis
Background Banks play a crucial role in developed economies. They provide liquidity by financing long-term investments with short-term funding (Kashyap, Rajan, and Stein, 2002; Gatev and Strahan, 2006; Berger and Bouwman, 2009). However, many economists identify the behavior of banks as one of the main causes of the current financial crisis (e.g., Brunnermeier, 2009). Banks have been blamed for, among other things, too much risk taking, irresponsibly increasing their leverage, betting on the real estate bubble, investing too much in securities markets instead of old-fashioned bank loans, creating perverse incentives through excessive compensation packages, relying too much on short-term inter-bank financing, using off-balance sheet constructions to hide their exposure to risk, and issuing complex securities that nobody understands (think of CDO-squareds). Literature A number of theoretical papers among others, Brunnermeier and Pedersen (2009) describe the liquidity spirals or asset market feedback loops through which the behavior of financial intermediaries can affect financial markets and vice versa. Adrian and Shin (2007) provide an empirical illustration of how the leverage of U.S. investment banks affects financial market liquidity. Recently, a few papers appeared that analyze the role of banks in the financial crisis (e.g., Beltratti and Stulz, 2009; Fahlenbrach and Stulz, 2009). And there is a long tradition of research on the role of banks in the economy and on the impact of financial regulation on bank behavior and economic performance (e.g., Barth, Caprio, and Levine, 2004; Demirgc-Kunt, Laeven, and Levine, 2004; Laeven and Levine, 2008; Demirgc-Kunt and Huizinga, 2009). Research topic Many important questions remain unanswered. What short-term and long-term trends in bank behavior can we distinguish before the crisis? Can these trends be attributed to the corporate governance of banks, developments in financial markets, or changes in financial regulation? Which banks did better during the financial crisis and why? Can we identify important changes in bank behavior (and in particular funding and risk taking) since the start of the crisis? Are there important differences across countries? Can we explain those differences using information on the characteristics of the financial sector in those countries? Can we uncover a direct link between bank behavior and financial market variables such as market liquidity? Master thesis If you are a talented and motivated student interested in doing an empirical study on the role of banks in the financial crisis for your Master thesis, read the articles below and try to come up with a broad thesis topic. Once you know in which direction you want to go, read at least 10 additional articles on that specific topic. Make sure you do a thorough search for recent research on this topic using scholar.google.com and www.ssrn.com. The next step is to formulate a specific research question that has not been answered before and that is feasible in terms of data availability, methodology, and time frame.
Data A number of interesting databases is available for research in this area: Bankscope (available through the university library) contains detailed annual balance sheet data for a large universe of banks; Datastream contains stock market data for listed banks around the world. The World Banks Bank Regulation and Supervision Dataset is a good source for information on bank regulation in different countries, see: http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,c ontentMDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00. html The Federal Reserve Board provides weekly balance sheet data of the aggregate U.S. banking sector on the following website: www.federalreserve.gov/datadownload/Choose.aspx?rel=H.8 The Federal Reserve Bank of Chicago provides quarterly balance sheet and income statement data for all individual insured U.S. commercial banks through the Consolidated Report of Condition and Income Database (also known as the Call Reports). See Kashyap and Stein (2000). Available at: www.chicagofed.org/economic_research_and_data/commercial_bank_data.cfm Laeven and Valencia (2009) have constructed a database on banking crises Ross Levine has developed a number of interesting international databases related to banks and bank regulation. See his websites for links. There are many other potential databases. Check what existing papers are using and search online for alternatives. Selected references Adrian, T., and H.S. Shin, 2007, Liquidity and leverage, working paper. Barth, T., G. Caprio, and R. Levine, 2004, Bank regulation and supervision: What works best?, Journal of Financial Intermediation 13, 205-248. Beck, T., A. Demirg-Kunt, and R. Levine, 2000, A new database on financial development and structure, World Bank Economic Review 14, 597-605. Update available on http://econ.worldbank.org/programs/finance. Beltratti, A., and R.M. Stulz, 2009, Why did some banks perform better during the credit crisis? A cross-country study of the impact of governance and regulation, working paper. Berger, A., and C. Bouwman, 2009, Bank liquidity creation, monetary policy, and financial crises, working paper. Brunnermeier, M.K., 2009, Deciphering the liquidity and credit crunch 2007-2008, Journal of Economic Perspectives 23, 77-100. Brunnermeier, M.K., and L.H. Pedersen, 2007, Market Liquidity and Funding Liquidity, Review of Financial Studies, forthcoming. Demirgc-Kunt, A., and H. Huizinga, 2009, Bank activity and funding strategies: The impact on risk and return, working paper, World Bank / Tilburg University. Demirgc-Kunt, A., L. Laeven, and R. Levine, 2004, Regulations, market structure, institutions, and the cost of financial intermediation, Journal of Money, Credit and Banking 36, 593-622.
Fahlenbrach, R., and R.M. Stulz, 2009, Bank CEO incentives and the credit crisis, working paper. Gatev, E., and P.E. Strahan, 2006, Banks advantage in hedging liquidity risk: Theory and evidence from the commercial paper market, Journal of Finance 61, 867892. Kashyap, A.K., R. Rajan, and J. Stein, 2002, Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking, Journal of Finance 57, 33-73. Kashyap, A.K., and J. Stein, 2000, What do a million observations on banks say about the transmission of monetary policy?, American Economic Review 90, 407-428. Laeven, L., and R. Levine, 2008, Bank governance, regulation, and risk taking, Journal of Financial Economics, forthcoming. Laeven, L., and F. Valencia, 2009, Systemic banking crises: A new database, working paper.
Master Thesis topic 25: Carry trade profits during periods of crisis
One of the main puzzles in international finance has been the carry trade puzzle, i.e. the failure of uncovered interest rate parity. In words, the carry trade puzzle is the observation that excess returns can be obtained by investing in high interest rate countries. Three types of explanations are typically put forward in the literature: irrational expectations, risk premia and Peso problems. Although each explanation is in theory possible it has been proven hard to empirically test the latter two theories as they rely on extreme events (crises) occurring. The current financial crisis provides a unique opportunity to test the Peso problem and the risk premium theory for the carry trade puzzle. Brunnermeier, Nagel and Pederesen (2007) Carry Trades and Currency Crashes, working paper http://www.princeton.edu/~markus/
Master Thesis topic 26: Asset markets and disaster risk: Asset pricing of asymmetric returns
Typical CAPM models assume that the risk of an asset is fully captured by the comovement of the asset with the market, i.e. its beta. This statement implies, among other things, that the CAPM model ignores the higher moments of the returns. For instance the probability of extreme events (kurtosis) or the skewness of the returns is (according to the CAPM) irrelevant. More recent theories, e.g. Dittmar (2004), show that higher moments ( i.e. skewness and kurtosis) also require a risk premium: assets with skewed negative returns or with more extreme returns typically incorporate an additional risk premium. The idea of this line of research is to update existing studies with the information contained in the financial crisis. The crisis is particularly relevant in this respect given that it has generated negatively skewed and extreme returns. Hence it provides a good case study to test these newer theories. Dittmar (2002), Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the Cross-Section of Equity Returns, Journal of Finance, 57, 369-403
Mills, E.S. (1992), Office Rent Determinants in the Chicago Area, Journal of the American Real Estate and Urban Economics Association, Vol. 20(1), pp. 273-287. Rosen, S. (1974), Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition, Journal of Political Economy, Vol. 82(1), pp. 34-55.
6. Chen, R., X. Cheng, L. Wu, 2005, Dynamic Interactions between interest rate, credit and liquidity risks: Theory and evidence form the term structure of credit default swaps, Working Paper, Rutgers Business School and City University of New York. 7. Longstaff, F., S. Mithal, E. Neis, 2005, Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap market, The Journal of Finance Volume 60 Issue 5, Pages 2213 2253. 8. Tang, D., H. Yong, 2007, Liquidity and Credit Default Swap Spreads, Working Paper, Kennesaw State University and University of South Carolina.
Master Thesis topic 29: Asset Pricing and Mutual Fund Performance
Asset returns may contain risk premia that compensate investors for bearing a variety of uncertainties in their investment portfolios. Capital Asset Pricing Models (Sharp, 1964; Lintner, 1965; Black, 1972) have been extensively studied and used to test the existence of other risk factors besides the market portfolio. Fama and French (1992, 1993) introduced size and value factors, which started the new and enthusiastic discussions and studies on asset pricing. There have been a plethora of studies investigating the relationship between risk factors (market, value, size, momentum, liquidity, inflation and so on) and the cross-section of stock returns. Are there actually any anomalies that can be exploited by investors? Do investors believe in market efficiency? Can one explain and even predict expected stock returns based on the public information at hand? There are still a lot of room for research in this direction. Multi-factor asset pricing models, GRS test, GMM methodologies, etc, can all be potentially used in such empirical studies. For students who are interested, there are a lot to learn and there are a lot to be achieved. Within the modern asset pricing framework, there have also been a lot of studies focusing on mutual fund returns rather than stock returns. Grinblatt and Titman (1992), Hendricks, Patel and Zeckhauser (1993), Carhart (1997) inter alia started the discussion of mutual fund performance persistence. As for the issue whether an average mutual fund manager is able to outperform the passive benchmark before and after fees, the evidences are mixed. Are investors able to identify certain outperforming mutual funds? Is the outperformance due to the embedded superior managerial abilities or just to luck? Are the fees requested by mutual fund industry too high compared to their performance? Is there any other risk factor that can take away the significance of different performance metrics? Do fund flows matter? Can we gain more insights into fund performance based on the holdings information published regularly? What is the influence of survival of mutual funds on these metrics? References Black, F., 1972. Capital market equilibrium with restricted borrowing. Journal of Business, 45: 444-455.
Carhart, M., 1997. On persistence in mutual fund performance. The Journal of Finance 52(1), 57-82.
Fama, E.F. and French, K., 1992. The cross section of expected stock returns. The Journal of Finance, 47: 427-466. Fama, E.F. and French, K., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33: 3-56.
Hendricks, D., Patel, J., Zechhauser, R., 1993. Hot hands in mutual funds: Short-run persistence of relative performance, 1974-1988. The Journal of Finance 1, 93-130.
Grinblatt, M., Titman, S., 1992. The persistence of mutual fund performance. The Journal of Finance 5, 1977-1984.
Lintner, J., 1965. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, 47: 13-37. Sharp, W.F., 1964. Capital assets prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19: 425-442.
Tetlock et al. (2008) What are the differences in the characteristics of various convertible debt types? Motivation: US companies often issue convertibles with exotic-sounding names such as PERCs, DECs, LYONs etc. This research question examines the differences in the contract terms, the issuer motivations and the stockholder wealth impact of these different convertible debt types. Useful reference: Arzac (1997)
Convertible bond issues are issued at a discount to the theoretical value, which varies over time. In this project we examine why the discount varies over time and across issuers. Useful reference: Choi et al. (2008)
Analysis of the design characteristics of convertible debt offerings Motivation: Convertible debt offerings are characterized by a large set of design parameters, e.g., conversion premium, soft and hard call features, maturity, etc. This research topic examines how these features are related to each other (for example, do convertibles with a call feature generally have a longer maturity?) and how they affect the stockholder reactions to convertible debt announcements. Useful reference: Lewis et al. (1998)
What are the motivations for combined offerings of convertible debt with other security types (i.e., debt and/or equity)? Motivation: This research question is inspired by the empirical observation that firms often combine convertible debt offerings with either straight debt or equity offerings. It examines the firm-specific and/or macroeconomic determinants driving these dual offerings, and thus extends previous security choice studies that tend to exclude dual security offerings from their analysis. Useful reference: Billingsley et al. (1994)
What are the motivations for exchangeable debt offerings? Motivation: As mentioned earlier, the motivations for exchangeable debt offerings remain a puzzle. More particularly, it is hard to understand why firms issue exchangeable bonds instead of directly selling their equity stake in the target firm on the market. This research question examines the differences in the determinants (both firmspecific and macroeconomic) driving exchangeable debt offerings and secondary equity offerings. The analysis is conducted on a sample of Western European firms, since exchangeables are much more prevalent in Europe than in the US. Useful reference: Ghosh et al. (1990)
When designing convertible bonds, issuers choose several parameters such as the yield to offer, the conversion premium, maturity and provisions. These depend on factors that are related to both the straight debt and option part of the convertible bond, such as interest rates, investor sentiment and issuer volatility and credit rating. How do these factors vary over time and how does the design of convertible bonds change to accommodate these factors. Are issuers of convertible bonds also issuers of other types of securities, or are they firms that can only raise finance by issuing convertible debt? In addition, how do the characteristics of convertible issuers change over time? There are some companies that have multiple convertible bond issues over time; do they structure their issue in the same way over time or adopt it to suit market conditions? By looking at the quarterly balance sheet of firms with outstanding convertibles, we can see how much has been converted or called in. This project involves obtaining this data and examining why there are variations.
References Ammann, M., Fehr, M., Seiz, R., 2006. New evidence on the announcement effect of convertible and exchangeable bonds. Journal of Multinational Financial Management 16, 43-63. Arzac, E.R., 1997. Percs, Decs, and other mandatory convertibles. Journal of Applied Corporate Finance 10, 54-63. Bancel, F., Mittoo, U.R., 2004. Why do European firms issue convertible debt? European Financial Management 10, 339-373.
Bayless, M., Chaplinsky, S., 1996. Is there a window of opportunity for seasoned equity issuance? Journal of Finance 51, 253--278. Billingsley, R.S., Smith, D.M., Lamy, R.E., 1994. Simultaneous debt and equity issues and capital structure targets. Journal of Financial Research 4, 495-516. Brennan, M., Schwartz, E., 1988. The case for convertibles. Journal of Applied Corporate Finance 1, 5564. Choi, D., Getmansky M., Henderson B., and Tookes H. 2008. Convertible Bond Arbitrageurs as Suppliers of Capital, WP Ghosh, C., Varma, R., Woolridge, J.R., 1990. An analysis of exchangeable debt offers. Journal of Financial Economics 28, 251-263. Henderson, B., 2005. Convertible bonds: new issue performance and arbitrage Opportunities. Unpublished working paper. University of Illinois. Lewis, C.M., Rogalski, R.J., Seward, J.K., 1998. Agency problems, information asymmetries, and convertible debt security design. Journal of Financial Intermediation 28, 32-59. Lewis, C.M., Rogalski, R.J., Seward, J.K., 1999. Is convertible debt a substitute for straight debt or for common equity? Financial Management 28, 5-27. Lewis, C., Rogalski, R., Seward, J., 2002. Risk changes around convertible debt offerings. Journal of Corporate Finance 8, 67-80. Lummer, S.L., Riepe M.W., 1993. Convertible bonds as an asset class; 1957-1992. Journal of Fixed Income 3, 4757. Ranaldo, A., Ackmann A., 2004. Convertible bonds: characteristics of an asset class. Working Paper (UBS). Tetlock, P.C., Saar-Tsechansky, M., Macskassy, S., 2008. More than words: Quantifying language to measure firms fundamentals. Journal of Finance (forthcoming).
Master Thesis topic 31: Dividend Policy of Dutch Firms in the 20th Century
This thesis topic is exclusively for students that are interested in gaining a better understanding of the development of dividend policy or possibly want to make an attempt to resolve part of the so-called dividend puzzle. Dividend policy is one of the main themes in corporate finance. Thusfar, students seem to neglect this topic, which is actually full of interesting opportunities. The most important aspects of that can be investigated are tax, asymmetric information and incomplete contracts (agency models), imperfect capital markets, share repurchases (Lease et al, 2000; Allen and Michaely, 2003). As such dividend policy decisions are closely related to most of the other corporate finance decisions and firm performance (e.g. capital structure choice, governance structures). Students are also welcome to look beyond usual suspects, for other interesting ideas look into Journal of Finance of Journal, Financial Economics or other journals. Most studies of dividend policy decisions focus on recent periods. In the Netherlands some studies have been carried out on these topics for periods starting in the 1980s. History can add fascinating dimensions in research on corporate decision-making. Data on longer time periods allow long-term studies on dividends and dividend policy of firms. It allows investigating the structural changes i.e. changes in the economic or the institutional setting (tax rules, company law, perception of dividends, etc) over time. Both mentioned dimensions can be extended to other corporate finance decisions and firm performance. An excellent source for historical data is Van Oss Effectengids. This annually published guide contains diverse information about all Dutch exchange-listed companies. It includes actual and statutory profit distributions (dividends), firm characteristics (such as firm goal, firm type and main activities); balance sheets, profit and loss statements, debt and equity issues, dividends, board members, takeover defenses and important news such as mergers and bankruptcies. The topic requires understanding of Dutch. Examples of studies that can be carried out answer questions like: - How did dividends develop over time? What factors affected this development? - What firms initiate, increase, decrease, omit or have stable dividends in the 20 th century? - Testing the Lintner model for different periods in the 20th century? - What is the effect of e.g. catering theory on dividend policy? - How were dividends and dividend policy perceived during different periods in the 20th century? E.g. pre-World War II or post-World War II. This would require an extensive literature study, and students are encouraged to combine this with some empirical analysis. This could be a splendid topic for students that are not really into statistical analysis. References Allen, F. and R. Michaely (2003). Payout policy. In Handbook of the economics of finance, G.M. Constantinides, M. Harris and R. Stulz (eds), Elsevier (or via http://ssrn.com/abstract=309589). Lease, R.C., K. John, A. Kalay, U. Loewenstein and O.H. Sarig (2003). Dividend policy: Its impact on firm value, Harvard Business Press.
Master Thesis topic 32: Dividend Policy and Life Cycle Theory
This thesis topic is exclusively for students that are interested in gaining a better understanding of the development of dividend policy or possibly want to make an attempt to resolve part of the so-called dividend puzzle. Dividend policy is one of the main themes in corporate finance. Dividend policy is closely related to most of the other corporate finance decisions and firm performance (e.g. capital structure choice, governance structures). The main aspects in dividend research are effects of tax, asymmetric information and incomplete contracts (agency models), imperfect capital markets, share repurchases (Lease et al., 2000; Allen and Michaely, 2003). A recent development is the increased interest in understanding the effect of life cycles on dividends (e.g. DeAngelo et al., 2006). How do individual life cycle stages affect dividends. This topic can be investigated best in longer time periods. Examples of studies that can be carried out answer questions like: - What is the effect of life cycle theory on dividend policy? - What firms initiate, increase, decrease, omit or have stable dividends? References Allen, F. and R. Michaely (2003). Payout policy. In Handbook of the economics of finance, G.M. Constantinides, M. Harris and R. Stulz (eds), Elsevier (or via http://ssrn.com/abstract=309589). DeAngelo, H. and L. DeAngelo (2007) Payout Policy Pedagogy: What Matters and Why, European Financial Management, Vol.13 (1), pp. 11-27. DeAngelo, H., L. DeAngelo and M. Stulz (2006) Dividend Policy and earned/Contributed Capital mix: a test of the lifecycle theory, Journal of Financial Economics, Vol. 81, No.2, pp. 227-254. Lease, R.C., K. John, A. Kalay, U. Loewenstein and O.H. Sarig (2003). Dividend policy: Its impact on firm value, Harvard Business Press.
next step is to formulate a specific research question that has not been answered before and that is feasible in terms of data availability, methodology, and time frame. Data Liquidity cannot be measured directly. Several proxies have been established in the literature, e.g. the bid-ask spread or the Amihud (2002) measure. Goyenko et al (2009) provide the most recent overview. A number of interesting databases can be explored to find liquidity data and other explanatory variables. Datastream contains stock and bond price and volume data around the world. Bloomberg provides stock and bond data including bid-ask spreads The World Banks Bank Regulation and Supervision Dataset is a good source for information on regulation in different countries, see: http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,content MDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00.Html IMF World Economics Outlook provides global macroeconomic data http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/index.aspx TAQ - Daily transaction data from the New York Stock Exchange There are many other potential sources of data. Check what existing papers are using and search online for alternatives. References Amihud, Y. (2002) Illiquidity and stock returns: cross-section and time-series effects; Journal of Financial Markets, 5 (1), 31-56 Brunnermeier, M.; Pedersen, L. (2007) Market Liquidity and Funding Liquidity; Review of Financial Studies, 2009, 22 (6), 2201-2199 Cohen, B.; Shin, H. (2004) Positive feedback trading under stress: Evidence from US Treasury securities market; working paper Goyenko, R.; Holden C.; Trzcinka, C. (2009) Do liquidity measures measure liquidity? Journal of Financial Economics 92 153-181 Morris, S.; Shin, H. (2004) Liquidity Black Holes; Review of Finance 8, 1-18 Persaud, A. (2002) Liquidity Black Holes; UN discussion paper No. 2002/31 Reinhart, C.; Rogoff, K. (2008) Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison; American Economic Review: Papers & Proceedings 2008, 98:2, 339344 Shim, I.; Von Peter, G. (2007) Distressed Selling and Asset Market Feedback; BIS working paper No. 229 Spiegel, M. (2008) Patterns in cross market liquidity; Finance Research Letters 5 210
Related Literature: Bailey, M., R. Muth and H. Nourse. 1963. A Regression Method for Real Estate Price Indmex Construction. Journal of the American Statistical Association 58: 933942. Case, B. and J. Quigley. 1991. The Dynamics of Real Estate Prices. Review of Economics and Statistics 73: 5058. Case, K. and R. Shiller. 1987. Prices of Single-Family Homes since 1970: New Indexes for Four Cities. New England Economic Review September/October: 4556. Clapp, J.M. and C. Giaccotto. 1999. Revisions in Repeat-Sales Price Indexes: here Today, Gone Tomorrow? Real Estate Economics 27: 79-104. Malpezzi, S. 2002. Hedonic Pricing Models: A Selective and Applied Review. Prepared for Housing Economics: Essays in Honor of Duncan Maclennan. Edited by K. Gibbs and A. OSullivan. Quigley, J.M. 1995. A Simple Hybrid Model for Estimating Real Estate Price Indexes. Journal of Housing Economics 4: 112. Rosen, S. 1974. Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition, Journal of Political Economy 82: 34-55. Sheppard, S., 1999. Hedonic Analysis of Housing Markets. In Paul C. Chesire and Edwin S. Mills (eds.), Handbook of Regional and Urban Economics, volume 3. Sirmans, G., D. A. Macpherson and E. N. Zietz. 2005. The Composition of Hedonic Pricing Models, Journal of Real Estate Literature 13: 3-43.
Master Thesis topic 36: The Subprime Crises- Real Estate Contagion
Commercial property lending has been a recurring cause of troubled assets in the banking industry over the past few decades. Direct real estate investments were strongly associated with failure and with resolution costs in the saving and loans crisis. Economists maintain that the main cause of the Asian crises was excessive real estate speculation. House prices have implications for banking and price stability. The subprime crises again illustrates that real estate busts impact the ability to lend which in turn affects liquidity and eventually the underlying economy. Banking crises and property crashes often go hand in hand. The disruptions in the subprime market quickly soared into other areas of the financial markets. Contagion refers to the phenomenon that episodes of financial turbulence tend to affect various countries, sectors or asset classes at once. One possible thesis subject could be related to understanding the ripple effect caused by the subprime crises through the world wide economy. Students should think of the following possible research venues in relation to real estate markets: - Contagion - Market interdependence - Sector substitutes (Flight to quality) Starting References: Brunnermeier M. 2008. Deciphering the 2007-2008 liquidity and credit crunch . Journal of Economic Perspectives. Forthcoming. Dooley, M., D. Folkerts-Landau and P. Garber. 2008. Will subprime be a twin crises for the U.S.?, NBER working paper 13978. Greenlaw, D., J. Hatzius, A. Kashyap and H. Shin. 2008. Leveraged losses: lessons from the mortgage market meltdown. Mian, A. and A. Sufi. 2008. The consequences of the mortgage credit expansion: evidence from the 2007 mortgage default crisis, NBER working paper 13936 Reinhart, C. and K. Rogoff. 2008. Is the U.S. subprime financial crises so different? An international historical comparison. American Economic Review forthcoming,