Corporations in many countries are run by controlling shareholders whose cash flow rights in the ... more Corporations in many countries are run by controlling shareholders whose cash flow rights in the firm are substantially smaller than their control rights. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic general equilibrium model to study the asset pricing and welfare implications of imperfect investor protection.
In the summer of 1997, several East Asian countries experienced a dramatic devaluation of their c... more In the summer of 1997, several East Asian countries experienced a dramatic devaluation of their currencies both in nominal and in real terms, stock prices collapsed and output fell. Later in that year several Latin American countries were also affected, followed by Brazil and Russia in 1998.
Abstract: When a controlling blockholder of a public corporation has a liquidity shock and is for... more Abstract: When a controlling blockholder of a public corporation has a liquidity shock and is forced to sell, he or she may sell to a party that generates a lower security value. The possibility of a liquidity shock induces a'marketability discount'on the price of shares owned by the blockholder relative to the price of the shares traded in the stock market.
Abstract We analyze the effect that real-time domestic and foreign news about fundamentals have o... more Abstract We analyze the effect that real-time domestic and foreign news about fundamentals have on the correlation of stock returns of a small open economy, Portugal, and a large open economy, the US We also study the role of public and private information in the price formation process in the US and Portuguese stock markets.
Abstract This paper analyzes the asset pricing implications of periodic dividend payments within ... more Abstract This paper analyzes the asset pricing implications of periodic dividend payments within the context of a stationary rational expectations model with heterogeneous investors. The periodicity of dividends provides a natural motivation for time-varying conditional volatility in stock returns. I show that the unconditional distribution of returns is a mixture of normals distribution, which has non-trivial skewness properties.
Abstract We analyze the effects that real-time domestic and foreign news about fundamentals have ... more Abstract We analyze the effects that real-time domestic and foreign news about fundamentals have on the co-movement between stock returns of a small, open economy, Portugal, and a large economy, the United States. Consistent with our theoretical model, we find that US macroeconomic news and Portuguese earnings news do not affect stock market co-movement, whereas Portuguese macroeconomic news lowers stock market co-movement.
Abstract: We study the determinants of private benefits of control in negotiated block transactio... more Abstract: We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value.
Abstract Aggregate stock market returns display negative skewness. Firm stock returns display pos... more Abstract Aggregate stock market returns display negative skewness. Firm stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This article provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness.
Abstract We examine trade credit links between firms as a channel of international return comovem... more Abstract We examine trade credit links between firms as a channel of international return comovement. We model firms in different countries connected by trade credit links in segmented stock markets with asymmetrically informed investors. The model predicts that the cross-serial correlation of country stock returns increases as trade credit increases. Using data from 42 countries from 1993 to 2009, we find evidence consistent with the model.
Abstract: This paper presents a contracting model of governance based on the premise that CEOs ar... more Abstract: This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favour one or the other type of compensation. The model explains why good countrywide investor protection breeds good firm governance and predicts a'race to the top'in firm-governance quality after the Sarbanes-Oxley Act.
Abstract We develop a general model of lending in the presence of endogenous borrowing constraint... more Abstract We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: the value of outstanding debt restricts current access to short-term capital, but is itself determined by future access to credit.
An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. ... more An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. We explore the pricing implications associated with the illiquidity of controlling blocks of shares in the context of a search model of block trades. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives.
ABSTRACT Standard representative-agent models have difficulty in accounting for the weak correlat... more ABSTRACT Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role.
This paper is motivated by the unparalleled increase in foreign direct investment to emerging mar... more This paper is motivated by the unparalleled increase in foreign direct investment to emerging market economies of the last 25 years. Using a large cross-country time-series data set, we evaluate the dependence of foreign direct investment on global factors, or worldwide sources of risk (ie, factors that drive foreign direct investment across several countries). We construct a globalization measure that equals the share of explained variation in direct investment attributable to global factors.
This paper characterizes optimal currency hedging in several models of downside risk. We consider... more This paper characterizes optimal currency hedging in several models of downside risk. We consider, in turn, three models of hedging:(i) a firm that chooses its hedging policy in the presence of bankruptcy costs;(ii) an all-equity firm that faces a convex tax schedule; and (iii) a firm whose manager is subject to loss aversion. In all these models, and contrary to conventional wisdom, we show that forwards dominate options as hedges of downside risk.
We study the determinants of private benefits of control in negotiated block transactions. We est... more We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb and Panunzi (2000) explicitly accounting for both block premiums and block discounts in the data. The evidence suggests that the occurrence of a block premium or discount depends on the controlling block holder's ability to fight a potential tender offer for the target's stock.
Corporations in many countries are run by controlling shareholders whose cash flow rights in the ... more Corporations in many countries are run by controlling shareholders whose cash flow rights in the firm are substantially smaller than their control rights. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic general equilibrium model to study the asset pricing and welfare implications of imperfect investor protection.
In the summer of 1997, several East Asian countries experienced a dramatic devaluation of their c... more In the summer of 1997, several East Asian countries experienced a dramatic devaluation of their currencies both in nominal and in real terms, stock prices collapsed and output fell. Later in that year several Latin American countries were also affected, followed by Brazil and Russia in 1998.
Abstract: When a controlling blockholder of a public corporation has a liquidity shock and is for... more Abstract: When a controlling blockholder of a public corporation has a liquidity shock and is forced to sell, he or she may sell to a party that generates a lower security value. The possibility of a liquidity shock induces a'marketability discount'on the price of shares owned by the blockholder relative to the price of the shares traded in the stock market.
Abstract We analyze the effect that real-time domestic and foreign news about fundamentals have o... more Abstract We analyze the effect that real-time domestic and foreign news about fundamentals have on the correlation of stock returns of a small open economy, Portugal, and a large open economy, the US We also study the role of public and private information in the price formation process in the US and Portuguese stock markets.
Abstract This paper analyzes the asset pricing implications of periodic dividend payments within ... more Abstract This paper analyzes the asset pricing implications of periodic dividend payments within the context of a stationary rational expectations model with heterogeneous investors. The periodicity of dividends provides a natural motivation for time-varying conditional volatility in stock returns. I show that the unconditional distribution of returns is a mixture of normals distribution, which has non-trivial skewness properties.
Abstract We analyze the effects that real-time domestic and foreign news about fundamentals have ... more Abstract We analyze the effects that real-time domestic and foreign news about fundamentals have on the co-movement between stock returns of a small, open economy, Portugal, and a large economy, the United States. Consistent with our theoretical model, we find that US macroeconomic news and Portuguese earnings news do not affect stock market co-movement, whereas Portuguese macroeconomic news lowers stock market co-movement.
Abstract: We study the determinants of private benefits of control in negotiated block transactio... more Abstract: We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value.
Abstract Aggregate stock market returns display negative skewness. Firm stock returns display pos... more Abstract Aggregate stock market returns display negative skewness. Firm stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This article provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness.
Abstract We examine trade credit links between firms as a channel of international return comovem... more Abstract We examine trade credit links between firms as a channel of international return comovement. We model firms in different countries connected by trade credit links in segmented stock markets with asymmetrically informed investors. The model predicts that the cross-serial correlation of country stock returns increases as trade credit increases. Using data from 42 countries from 1993 to 2009, we find evidence consistent with the model.
Abstract: This paper presents a contracting model of governance based on the premise that CEOs ar... more Abstract: This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favour one or the other type of compensation. The model explains why good countrywide investor protection breeds good firm governance and predicts a'race to the top'in firm-governance quality after the Sarbanes-Oxley Act.
Abstract We develop a general model of lending in the presence of endogenous borrowing constraint... more Abstract We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: the value of outstanding debt restricts current access to short-term capital, but is itself determined by future access to credit.
An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. ... more An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. We explore the pricing implications associated with the illiquidity of controlling blocks of shares in the context of a search model of block trades. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives.
ABSTRACT Standard representative-agent models have difficulty in accounting for the weak correlat... more ABSTRACT Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role.
This paper is motivated by the unparalleled increase in foreign direct investment to emerging mar... more This paper is motivated by the unparalleled increase in foreign direct investment to emerging market economies of the last 25 years. Using a large cross-country time-series data set, we evaluate the dependence of foreign direct investment on global factors, or worldwide sources of risk (ie, factors that drive foreign direct investment across several countries). We construct a globalization measure that equals the share of explained variation in direct investment attributable to global factors.
This paper characterizes optimal currency hedging in several models of downside risk. We consider... more This paper characterizes optimal currency hedging in several models of downside risk. We consider, in turn, three models of hedging:(i) a firm that chooses its hedging policy in the presence of bankruptcy costs;(ii) an all-equity firm that faces a convex tax schedule; and (iii) a firm whose manager is subject to loss aversion. In all these models, and contrary to conventional wisdom, we show that forwards dominate options as hedges of downside risk.
We study the determinants of private benefits of control in negotiated block transactions. We est... more We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb and Panunzi (2000) explicitly accounting for both block premiums and block discounts in the data. The evidence suggests that the occurrence of a block premium or discount depends on the controlling block holder's ability to fight a potential tender offer for the target's stock.
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Papers by Rui Albuquerque