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The leading online blog in the fields of corporate governance and financial regulation.
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    The presence of equity-based incentives in executive pay, by linking the value of compensation to stock return volatility and to stock price, are seen as aligning the interests of managers with those of shareholders (Brockman et al. [2010]; Coles et al. [2006]; Dow and Raposo [2005]; Lo [2003]). Another effect of these incentives is, however, […]

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    In our article, Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants, which was recently accepted for publication in the Journal of Finance, we provide evidence that binding financial contracts have a large impact on employees and are an amplification mechanism of economic downturns. A fundamental question in both finance and macroeconomics is whether […]

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    On June 30, 2016, the United States Senate passed the “Puerto Rico Oversight, Management and Economic Stability Act” (“PROMESA”) and it was quickly signed into law by President Obama. PROMESA enables the Commonwealth of Puerto Rico and its public corporations and other instrumentalities in financial distress to restructure their debt. The goal of PROMESA is […]

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    Leveraged buyouts are a powerful tool to alter incentives in firms and improve their corporate governance. Despite these benefits, the use of the buyout transaction varies wildly over time. In the U.S., peak buyout years exhibit close to one hundred public-to-private transactions and trough years as few as ten. What explains this dramatic time-variation in […]

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  • 09/07/16--07:01: Political Lending
  • In a new paper, Political Lending, we investigate a previously unexplored channel that could be used by firms to enhance the wealth of individual politicians: the amount and terms of the personal debt taken on by politicians and their close family members. Personal debt is economically significant as liabilities are close to 40% of the […]

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    Facing a self-declared “death spiral” of public debt, the Governor of Puerto Rico announced a debt moratorium earlier this year, halting payments to bondholders. A series of missed payments followed, including a landmark default on constitutionally guaranteed bonds in July. At the same time, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act […]

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    In a decision issued on September 19, 2016, the U.S. District Court for the Southern District of New York ruled that bondholders were entitled to a “make-whole” redemption premium, as opposed to a repayment at par, following a default by the issuer under the related bond indenture. The decision raises important considerations for issuers of […]

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  • 11/22/16--01:01: Corporate Deleveraging
  • Deleveraging is central to capital structure dynamics, yet systematic analysis of the phenomenon is limited to a handful of prior studies that examine changes in average leverage for samples of firms selected to have high and/or recently increased leverage ratios. Having a more complete understanding of the nature and extent of deleveraging is of first-order […]

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    On November 17, the U.S. Court of Appeals for the Third Circuit (the “Court”) made clear its stance on the question of enforceability of make-whole provisions in bankruptcy. Bucking the recent trend seen in cases such as In re MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531 B.R.321 […]

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    On January 17, 2017, the Second Circuit Court of Appeals (the “Court”) held that Section 316(b) of the Trust Indenture Act of 1939, as amended (“TIA”), prohibits only non-consensual amendments to an indenture’s core payment terms (the amount of principal and interest owed and the date of maturity) . This holding reversed the decision of […]

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    Empirical evidence suggests that asset pledgeability, debt complexity, and valuable control rights of dispersed debt influence the resolution of financial distress. Firms that borrow from multiple uncoordinated creditors and have more tangible assets often fail to renegotiate debt out of court and inefficiently file for bankruptcy. But the current theoretical literature is at odds with […]

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    Minority equity investments in public companies are on the rise. These are often structured as an investment in convertible preferred stock to give the investor a senior position to other equity while preserving equity upside through the ability to convert to common stock. This trend is likely sparked by a search for higher yield than […]

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    A make-whole premium is a contractual penalty a borrower must pay for prepaying a loan. In several recent bankruptcy cases, the court ruled that the debtor triggered its make-whole obligations by voluntarily filing for bankruptcy and thereby accelerating all of its debts. In such cases, the questions then arise whether, and at what level of […]

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    The article Corporate Debt Maturity Profiles, forthcoming in the Journal of Financial Economics, studies a novel aspect of a firm’s capital structure, namely the dispersion of debt maturities. Extant literature offers little guidance on this aspect of capital structure, and lack of evidence is at variance with practitioners emphasizing that rollover risk affects debt maturity […]

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    This paper is motivated by two considerations. First, prior research argues that as a firm grows older, it should use more debt as it has more assets-in-place and fewer growth options. Second, prior research argues that as firms age after going public, their governance should adapt to their changing needs. Thus, our paper combines both […]

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    The view that bankers’ compensation created the incentives that led to the latest financial crisis has prompted numerous proposals to regulate pay at financial institutions.  However, despite the attention devoted to executive pay by regulators, extant research provides mixed support for the hypothesis that CEO compensation in the run-up to the crisis influenced bank risk […]

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    Final bill retains key aspects of House and Senate proposals with some surprise last-minute modifications. On December 15, 2017, a conference committee composed of members of the US House of Representatives and the US Senate approved a Conference Report (the Report) reconciling the tax reform bills passed by each chamber. Both the House and the […]

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    A casual observer of recent policy debates might reasonably conclude that sovereign debt crises of the sort that have ravaged Argentina, Greece, Ukraine, and Venezuela would be less frequent and less damaging if only debtors and creditors could tweak a few words in their bond contracts. Contract reform got a boost from successful enforcement litigation […]

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    In our paper, Are Financial Constraints Priced? Evidence from Textual Analysis, forthcoming in the Review of Financial Studies, we develop a new measure of financial constraints based on the narrative portions of company annual reports and use this measure to revisit the question of whether financial constraints affect stock returns. Financial constraints arise from frictions […]

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    We have recently seen an increase in contentious disputes, some public and many not, between companies and their debt investors. Clashes between borrowers and their lenders are as old as debt itself, but what we are seeing now is something different. In these situations, debt investors are not merely seeking to enforce their contractual entitlement […]