Invited for Revise and Resubmit at the Review of Financial Studies.
Abstract: The predominant explanation for arbitrage crashes is a lack of investor capital to exploit mispricing. This paper shows that slow-moving capital is only partially responsible for the past arbitrage crashes in the convertible bond market. Even when convertible bonds were severely underpriced, some investors continued to buy strictly dominated straight bonds from the same issuers. Our findings suggest that both market segmentation and slow-moving capital obstructed the recovery from the arbitrage crashes. Furthermore, exploiting the market segmentation with a long/short trading strategy provides positive abnormal returns after accounting for transaction costs.
“The Value of Bond Underwriter Relationships” (with Stine Louise Daetz and Mads Stenbo Nielsen).
Presented at the EFA annual meeting 2018 (Warsaw).
Abstract: We show that corporate bond issuers benefit from utilizing existing underwriter relationships when rolling over bonds, but at the same time become exposed to underwriter distress. A strong relationship enables the underwriter to credibly certify the issuer resulting in lower direct issuance costs and lower underpricing. However, if the underwriter becomes distressed, this spills over to the issuer's credit risk, because it weakens the relationship and increases the risk of involuntary relationship termination. The credit risk spillover is more pronounced for risky, opaque issuers with high rollover exposure, i.e., those issuers most in need of certification by an underwriter.
“The Cost of Capital for Banks” (with Jacob Gyntelberg and Christoffer Thimsen).
Presented at the AFA 2020 in San Diego, Tshinghua University, BIS, Swiss National Bank, and Danish Central Bank).
Abstract: We use analyst earnings forecasts to extract cost of capital measures for banks. Both the cost of equity and debt capital are decreasing in the tier 1 ratio, whereas total cost of capital is independent of the tier 1 ratio. Our findings suggest that investors adjust their expectations in accordance with the conservation of risk principle (Modigliani and Miller, 1958), also around episodes of equity issuances. Extrapolating from our results; a 10 pp increase in the tier 1 ratio is associated with a 2-8 bps increase in customer borrowing rates due to a loss of tax shield. Finally, we find that increased deposits and off-balance sheet liabilities tend to lower total cost of capital.
Last updated by: Jens Dick-Nielsen 06/02/2020