Three essays in dynamic corporate finance

Summary Throughout my thesis, I elaborate on how real and financing frictions affect corporate decision making under uncertainty, and I explore how firms time their investment and financing decisions given such frictions. While the macroeconomics literature has focused on the impact of real frictions on investment decisions assuming all equity financed firms, the financial economics literature has mainly focused on the study of financing frictions. My thesis therefore assesses the join interaction of real and financing frictions in firms' dynamic investment and financing decisions. My work provides a rationale for the documented poor empirical performance of neoclassical investment models based on the joint effect of real and financing frictions on investment. A major observation relies in how the infrequency of corporate decisions may affect standard empirical tests. My thesis suggests that the book to market sorts commonly used in the empirical asset pricing literature have economic content, as they control for the lumpiness in firms' optimal investment policies. My work also elaborates on the effects of asymmetric information and strategic interaction on firms' investment and financing decisions. I study how firms time their decision to raise public equity when outside investors lack information about their future investment prospects. I derive areal-options model that predicts either cold or hot markets for new stock issues conditional on adverse selection, and I provide a rational approach to study jointly the market timing of corporate decisions and announcement effects in stock returns. My doctoral dissertation therefore contributes to our understanding of how under real and financing frictions may bias standard empirical tests, elaborates on how adverse selection may induce hot and cold markets in new issues' markets, and suggests how the underlying economic behaviour of firms may induce alternative patterns in stock prices.

Three essays in dynamic corporate finance

The three essays constituting this thesis focus on financing and cash management policy. The first essay aims to shed light on why firms issue debt so conservatively. In particular, it examines the effects of shareholder and creditor protection on capital structure choices. It starts by building a contingent claims model where financing policy results from a trade-off between tax benefits, contracting costs and agency costs. In this setup, controlling shareholders can divert part of the firms' cash ows as private benefits at the expense of minority share- holders. In addition, shareholders as a class can behave strategically at the time of default leading to deviations from the absolute priority rule. The analysis demonstrates that investor protection is a first order determinant of firms' financing choices and that conflicts of interests between firm claimholders may help explain the level and cross-sectional variation of observed leverage ratios. The second essay focuses on the practical relevance of agency conflicts. De- spite the theoretical development of the literature on agency conflicts and firm policy choices, the magnitude of manager-shareholder conflicts is still an open question. This essay proposes a methodology for quantifying these agency conflicts. To do so, it examines the impact of managerial entrenchment on corporate financing decisions. It builds a dynamic contingent claims model in which managers do not act in the best interest of shareholders, but rather pursue private benefits at the expense of shareholders. Managers have discretion over financing and dividend policies. However, shareholders can remove the manager at a cost. The analysis demonstrates that entrenched managers restructure less frequently and issue less debt than optimal for shareholders. I take the model to the data and use observed financing choices to provide firm-specific estimates of the degree of managerial entrenchment. Using structural econometrics, I find costs of control challenges of 2-7% on average (.8-5% at median). The estimates of the agency costs vary with variables that one expects to determine managerial incentives. In addition, these costs are sufficient to resolve the low- and zero-leverage puzzles and explain the time series of observed leverage ratios. Finally, the analysis shows that governance mechanisms significantly affect the value of control and firms' financing decisions. The third essay is concerned with the documented time trend in corporate cash holdings by Bates, Kahle and Stulz (BKS,2003). BKS find that firms' cash holdings double from 10% to 20% over the 1980 to 2005 period. This essay provides an explanation of this phenomenon by examining the effects of product market competition on firms' cash holdings in the presence of financial constraints. It develops a real options model in which cash holdings may be used to cover unexpected operating losses and avoid inefficient closure. The model generates new predictions relating cash holdings to firm and industry characteristics such as the intensity of competition, cash flow volatility, or financing constraints. The empirical examination of the model shows strong support of model's predictions. In addition, it shows that the time trend in cash holdings documented by BKS can be at least partly attributed to a competition effect.

Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

Options chirurgicates pour l'insuffisance cardiaque terminale [Surgical options for terminal heart failure]

Terminal heart failure can be the cause or the result of major dysfunctions of the organisms. Although, the outcome of the natural history is the same in both situations, it is of prime importance to differentiate the two, as only heart failure as the primary cause allows for successful mechanical circulatory support as bridge to transplantation or towards recovery. Various objective parameters allow for the establishment of the diagnosis of terminal heart failure despite optimal medical treatment. A cardiac index <2.0 l/min, and a mixed venous oxygen saturation <60%, in combination with progressive renal failure, should trigger a diagnostic work-up in order to identify cardiac defects that can be corrected or to list the patient for transplantation with/without mechanical circulatory support.

Prevention and treatment options for postoperative delirium in the elderly.

PURPOSE OF REVIEW: To review recent findings and developments in strategies for prevention and treatment of postoperative delirium. RECENT FINDINGS: Current advances in the field include improved knowledge about predisposing and precipitating factors, evidence for efficacy of multicomponent prevention programmes, refinement of perioperative procedures, and promising pharmacological approaches for prophylaxis and management of postoperative delirium. SUMMARY: Postoperative delirium is a common and serious complication in elderly patients. Preoperative assessment of risk profiles and tailored multimodal prevention approaches proved effective and should be integrated into clinical practice. Despite promising recent findings, at present, the routine use of pharmacological prophylaxis cannot be recommended. Validated and easy-to-use bedside diagnostic tools are available and should be regularly applied for delirium screening in the first days after surgery. In patients developing delirium, causal conditions and contributing factors need to be identified and addressed. Whereas administration of antipsychotics may represent an option for symptomatic treatment, further studies are needed to evaluate the effects of pharmacological approaches on long-term outcomes in elderly patients with delirium.

Stereotactic body radiation therapy in stage I inoperable lung cancer: from palliative to curative options.

Surgery has historically been the standard of care for operable stage I non-small cell lung cancer (NSCLC). However, nearly one-quarter of patients with stage I NSCLC will not undergo surgery because of medical comorbidity or other factors. Stereotactic ablative radiotherapy (SABR) is the new standard of care for these patients. SABR offers high local tumour control rates rivalling the historical results of surgery and is generally well tolerated by patients with both peripheral and centrally located tumours. This article reviews the history of SABR for stage I NSCLC, summarises the currently available data on efficacy and toxicity, and describes some of the currently controversial aspects of this treatment.

Three essays in international finance

Executive Summary The first essay of this dissertation investigates whether greater exchange rate uncertainty (i.e., variation over time in the exchange rate) fosters or depresses the foreign investment of multinational firms. In addition to the direct capital financing it supplies, foreign investment can be a source of valuable technology and know-how, which can have substantial positive effects on a host country's economic growth. Thus, it is critically important for policy makers and central bankers, among others, to understand how multinationals base their investment decisions on the characteristics of foreign exchange markets. In this essay, I first develop a theoretical framework to improve our knowledge regarding how the aggregate level of foreign investment responds to exchange rate uncertainty when an economy consists of many firms, each of which is making decisions. The analysis predicts a U-shaped effect of exchange rate uncertainty on the total level of foreign investment of the economy. That is, the effect is negative for low levels of uncertainty and positive for higher levels of uncertainty. This pattern emerges because the relationship between exchange rate volatility and 'the probability of investment is negative for firms with low productivity at home (i.e., firms that find it profitable to invest abroad) and the relationship is positive for firms with high productivity at home (i.e., firms that prefer exporting their product). This finding stands in sharp contrast to predictions in the existing literature that consider a single firm's decision to invest in a unique project. The main contribution of this research is to show that the aggregation over many firms produces a U-shaped pattern between exchange rate uncertainty and the probability of investment. Using data from industrialized countries for the period of 1982-2002, this essay offers a comprehensive empirical analysis that provides evidence in support of the theoretical prediction. In the second essay, I aim to explain the time variation in sovereign credit risk, which captures the risk that a government may be unable to repay its debt. The importance of correctly evaluating such a risk is illustrated by the central role of sovereign debt in previous international lending crises. In addition, sovereign debt is the largest asset class in emerging markets. In this essay, I provide a pricing formula for the evaluation of sovereign credit risk in which the decision to default on sovereign debt is made by the government. The pricing formula explains the variation across time in daily credit spreads - a widely used measure of credit risk - to a degree not offered by existing theoretical and empirical models. I use information on a country's stock market to compute the prevailing sovereign credit spread in that country. The pricing formula explains a substantial fraction of the time variation in daily credit spread changes for Brazil, Mexico, Peru, and Russia for the 1998-2008 period, particularly during the recent subprime crisis. I also show that when a government incentive to default is allowed to depend on current economic conditions, one can best explain the level of credit spreads, especially during the recent period of financial distress. In the third essay, I show that the risk of sovereign default abroad can produce adverse consequences for the U.S. equity market through a decrease in returns and an increase in volatility. The risk of sovereign default, which is no longer limited to emerging economies, has recently become a major concern for financial markets. While sovereign debt plays an increasing role in today's financial environment, the effects of sovereign credit risk on the U.S. financial markets have been largely ignored in the literature. In this essay, I develop a theoretical framework that explores how the risk of sovereign default abroad helps explain the level and the volatility of U.S. equity returns. The intuition for this effect is that negative economic shocks deteriorate the fiscal situation of foreign governments, thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth. The increased risk of an economic slowdown abroad amplifies the direct effect of these shocks on the level and the volatility of equity returns in the U.S. through two channels. The first channel involves a decrease in the future earnings of U.S. exporters resulting from unfavorable adjustments to the exchange rate. The second channel involves investors' incentives to rebalance their portfolios toward safer assets, which depresses U.S. equity prices. An empirical estimation of the model with monthly data for the 1994-2008 period provides evidence that the risk of sovereign default abroad generates a strong leverage effect during economic downturns, which helps to substantially explain the level and the volatility of U.S. equity returns.

Insuffisance rénale severe sur maladie des emboles de cholestérol: controverses thérapeutiques revisitées [Severe renal insufficiency secondary to renal cholesterol emboli: therapeutical options revisited]

Disseminated cholesterol crystal embolism is observed in elderly men with severe atherosclerosis. This syndrome may be triggered by arterial catheterizations, major vascular surgery, thrombolytic and/or anticoagulation treatment. Cutaneous signs, subacute renal insufficiency, a marked inflammatory syndrome and eosinophilia are common. Immunologic testing is normal except for hypocomplementaemia. The diagnosis may be confirmed by biopsy (skin, gastrointestinal or renal), and/or by a fundoscopic examination. The treatment consists in withdrawing all form of anticoagulation, proscribing vascular surgery and arterial catheterization, prescribing aspirin and statins, and controlling arterial blood pressure. Corticosteroids may be given in refractory cases. The prognosis of cholesterol crystal embolism is poor but may be improved by statins.

Appropriate end-points for right results in the age of antiangiogenic agents: Future options for phase II trials in patients with recurrent glioblastoma.

The progression-free survival rate at 6months (PFS-6) has long been considered the best end-point for assessing the efficacy of new agents in phase II trials in patients with recurrent glioblastoma. However, due to the introduction of antiangiogenic agents in this setting, and their intrinsic propensity to alter neuroradiological disease assessment by producing pseudoregression, any end-point based on neuroradiological modifications should be reconsidered. Further, statistically significant effects on progression-free survival (PFS) only should not automatically be considered reliable evidence of meaningful clinical benefit. In this context, because of its direct and unquestionable clinical relevance, overall survival (OS) represents the gold standard end-point for measuring clinical efficacy, despite the disadvantage that it is influenced by subsequent therapies and usually takes longer time to be evaluated. Therefore, while awaiting novel imaging criteria for response evaluation and/or new imaging tools to distinguish between 'true' and 'pseudo'-responses to antiangiogenic agents, the measurement of OS or OS rates should be considered primary end-points, also in phase II trials with these agents.

Canakinumab for acute gouty arthritis in patients with limited treatment options: results from two randomised, multicentre, active-controlled, double-blind trials and their initial extensions.

OBJECTIVES: Gouty arthritis patients for whom non-steroidal anti-inflammatory drugs and colchicine are inappropriate have limited treatment options. Canakinumab, an anti-interleukin-1β monoclonal antibody, may be an option for such patients. The authors assessed the efficacy/safety of one dose of canakinumab 150 mg (n=230) or triamcinolone acetonide (TA) 40 mg (n=226) at baseline and upon a new flare in frequently flaring patients contraindicated for, intolerant of, or unresponsive to non-steroidal anti-inflammatory drugs and/or colchicine. Core study co-primary endpoints were pain intensity 72 h postdose (0-100 mm visual analogue scale and time to first new flare. METHODS: Two 12-week randomised, multicentre, active-controlled, double-blind, parallel-group core studies with double-blind 12-week extensions (response in acute flare and in prevention of episodes of re-flare in gout (β-RELIEVED and β-RELIEVED-II)). RESULTS: 82.6% patients had comorbidities. Mean 72-h visual analogue scale pain score was lower with canakinumab (25.0 mm vs 35.7 mm; difference, -10.7 mm; 95% CI -15.4 to -6.0; p<0.0001), with significantly less physician-assessed tenderness and swelling (ORs=2.16 and 2.74; both p≤0.01) versus TA. Canakinumab significantly delayed time to first new flare, reduced the risk of new flares by 62% versus TA (HR: 0.38; 95% CI 0.26 to 0.57) in the core studies and by 56% (HR: 0.44; 95% CI 0.32 to 0.60; both p≤0.0001) over the entire 24-week period, and decreased median C-reactive protein levels (p≤0.0001 at 72 h and 7 days). Over the 24-week period, adverse events were reported in 66.2% (canakinumab) and 52.8% (TA) and serious adverse events were reported in 8.0% (canakinumab) and 3.5% (TA) of patients. Adverse events reported more frequently with canakinumab included infections, low neutrophil count and low platelet count. CONCLUSION: Canakinumab provided significant pain and inflammation relief and reduced the risk of new flares in these patients with acute gouty arthritis.

Topics in public finance: social security and taxation

Summary The field of public finance focuses on the spending and taxing activities of governments and their influence on the allocation of resources and distribution of income. This work covers in three parts different topics related to public finance which are currently widely discussed in media and politics. The first two parts deal with issues on social security, which is in general one of the biggest spending shares of governments. The third part looks at the main income source of governments by analyzing the perceived value of tax competition. Part one deals with the current problem of increased early retirement by focusing on Switzerland as a special case. Early retirement is predominantly considered to be the result of incentives set by social security and the tax system. But the Swiss example demonstrates that the incidence of early retirement has dramatically increased even in the absence of institutional changes. We argue that the wealth effect also plays an important role in the retirement decision for middle and high income earners. An actuarially fair, but mandatory funded system with a relatively high replacement rate may thus contribute to a low labor market participation rate of elderly workers. We provide evidence using a unique dataset on individual retirement decisions in Swiss pension funds, allowing us to perfectly control for pension scheme details. Our findings suggest that affordability is a key determinant in the retirement decisions. The higher the accumulated pension capital, the earlier men, and to a smaller extent women, tend to leave the workforce. The fact that early retirement has become much more prevalent in the last 15 years is a further indicator of the importance of a wealth effect, as the maturing of the Swiss mandatory funded pension system over that period has led to an increase in the effective replacement rates for middle and high income earners. Part two covers the theoretical side of social security. Theories analyzing optimal social security benefits provide important qualitative results, by mainly using one general type of an economy. Economies are however very diverse concerning numerous aspects, one of the most important being the wealth level. This can lead to significant quantitative benefit differences that imply differences in replacement rates and levels of labor supply. We focus on several aspects related to this fact. In a within cohort social security model, we introduce disability insurance with an imperfect screening mechanism. We then vary the wealth level of the model economy and analyze how the optimal social security benefit structure or equivalently, the optimal replacement rates, changes depending on the wealth level of the economy, and if the introduction of disability insurance into a social security system is preferable for all economies. Second, the screening mechanism of disability insurance and the threshold level at which people are defined as disabled can differ. For economies with different wealth levels, we determine for different thresholds the screening level that maximizes social welfare. Finally, part three turns to the income of governments, by adding an element to the controversy on tax competition versus tax harmonization.2 Inter-jurisdictional tax competition can generate at least two potential benefits or costs: On a public level, tax competition may result in a lower or higher efficiency in the production of public services. But there is also a more private benefit in the form of an option for individuals to move to a community with a lower tax rate in the future. To explore the value citizens attach to tax competition we analyze a unique popular vote for a complete tax harmonization between communities in the third largest Swiss canton, Vaud. Although a majority of voters would have seemingly benefited from replacing the current tax rate by a revenue-neutral average tax rate, the proposal was rejected by a large margin. Our estimates suggest that the estimated combined perceived benefit from tax competition is in the range of 10%.