Contributions published at Corporate Finance Theory (Michel Habib)

This thesis investigates the stock market and the sovereign debt market in Greece before and after the start of the Greek crisis. First the relationship of the Greek stock market and the Greek sovereign debt market seems to be non-existent before the crisis, but after the crisis the Greek government bond spread over the German bonds becomes a main driver for the Greek stock returns. The analysis also shows that both markets moved at the same time and there was no leading market in terms of information ow. Before the start of the Greek crisis the Greek government debt was assumed to be risk free from the market participants since Greece was part of the Eurozone. After the continuous large decits of the Greek state, it became clear that the sovereign debt of Greece is not risk free. This is also proved from an analysis of a large number of economic variables, which shows that none of these variables afected the Greek government spread before the crisis. After the start of the crisis, net trade was the main determinant of the Greek government spread. The same analysis shows that the stock market returns were mainly driven by the unemployment rate in Greece after the start of the crisis.

The present master’s thesis examines whether there exists an optimal rebalancing frequency for sector-specific stock portfolios, as well as the impact of portfolio construction on the rebalancing frequency. The analysis focuses on the technology and health care sectors. Both sector-specific portfolios, each constructed in two completely different ways, are rebalanced with different frequencies. The results indicate that an optimal rebalancing frequency for every sector-specific portfolio does not exist. Moreover, the analysis evidences an impact of portfolio construction on rebalancing frequency.

Using a unique, hand-collected data set of 347 realised leveraged buyouts completed between 1989 and 2019, this thesis deconstructs the value creation mechanism by PE firms on the level of individual deals into three main value creation drivers and examines those in relation to the returns generated to private equity investors. We find that profitability improvements on portfolio companies, were they the core focus for PE managers during the holding period, would lead to substantially higher returns on investment. Nonetheless, we find multiple expansion to be a fundamental factor in explaining PE returns from our data set. Furthermore, our study suggests the largest contributor to operational improvements in LBOs remains sales growth, which is likely a result of increased M&A activity as opposed to organic growth. PE-backed companies in fact appear to be more highly leveraged and enjoy far thinner margins relative to their peers in the industry. With regard to operational improvements, we find a strong influence of assuming a controlling stake in the portfolio company on its sales growth during the holdin period. Interestingly, the same could not be concluded for margin growth, which we believe is likely due to the complexity and higher risk involved in improving profitability. In terms of valuation multiple expansion, our findings contradict the assertion that PE firms are prone to overpay for deals amid increasing competition and dry powder. We find entry multiples for PE-backed companies to be significantly lower than the trading multiples of their industry peers. In addition, we provide evidence that availability of cheap debt increases entry multiples for PE funds, which is to be anticipated given the current environment.

This research is an addition to the four-moment optimization-based portfolio allocation literature. In an empirical approach, four estimators developed by recent researchers (Martellini and Ziemann 2010, Boudt et al. 2016, Cornilly and Peterson 2019) are used to approximate variance-covariance skewness-coskewness and kurtosis-cokurtosis parameters of the return distribution of three different data sets. The fundamental objective is to assess the impact of the moment-comoment estimation on the expected utility in three different universes and dimensions. In a portfolio optimization allocation using a Taylor series expansion, we found that portfolios constructed with naïve estimators perform well in a low dimension universe and badly in the case of a higher number of assets. In addition, portfolios built up with structured estimators are subject to low performances in period of volatility peak and high correlation such as the Global Financial Crisis. Moreover, the use of shrinkage estimators to optimize the allocation of random variables enables to get a constant good performance in each of the three data set. We also pointed out that the coefficient of risk aversion of a rational investor has no impact on the outcome of the optimization regardless of the type of asset and the estimator employed. Finally, the conclusion advanced by researchers that when assets returns distribution deviate from normality naïve estimators generate the lowest utility could not be clearly verified in the empirical analysis results of this research.

This thesis investigates whether Swiss family-owned firms performed differently than non-familyowned firms between 2008 and 2018. An empirical analysis with panel data is conducted covering 145 Swiss firms using the fixed effects and random effects model. The main findings suggest that familyowned firms generally exhibit an inferior performance across most but not all financial indicators. This can primarily be explained with the agency theory, the fact of altruistic characteristics in family firms as well as varying capital structures. Additionally, the thesis reveals that during the financial crisis in 2008 and 2009 no difference in performance can be found.

Sustainable investments have grown rapidly in recent years and created new markets for investors. This thesis contributes to a new field of sustainable investments by analysing the sustainability bonds and particularly the World Bank’s Pandemic Emergency Financing Facility. It examines how sustainable investment opportunities can be regarded as a private market solution to support the provisioning of a global public good and analyses whether sustainability bonds mobilise the private market for sustainable development. This question is explored by analysing the maturity and trading size condition on the sustainability bond market. The results suggest a small negative effect on maturity and no difference in trading size.

The purpose of this study is to examine the industrial status the European banking, describing the developments after the financial crisis and to investigate the profitability improvements resulting from consolidation. In particular, this work tries to assess the profitability behavior of bank-specific variables using a dataset of European credit institutions in relation to economic and industrial indicators. After a brief introduction on the current situation of the banking industry and sector M&A, followed by literature review of both general and specific matter studies, this paper focuses on two main elements: • firstly, it addresses the question as to whether there is excess capacity in the European banking sector, examining the main industrial metrics and highlighting inconsistencies and discrepancies between banking and macroeconomic developments for the period between 2012 and 2017. • secondly, it investigates the relationship between efficiency and industrial concentration (or consolidation) in 2017. While most of similar works use an event study to examine the effect of M&A announcements to stock returns (abnormal returns), this paper focuses on accounting measures of profitability. A key result is that the effect of concentration is positive on top-line profitability, mainly due to superior pricing-power, and is not statistically significant on bottom-line profitability, given the ambiguity resulting from the interrelationship with country-specific situations (different stage in the economic cycle and bank reforms etc.). Indeed, concentration has different impacts on different P&L items, both in terms of magnitude and direction (positive or negative). This work is a good starting point for enhancing further research, especially once bank regulation in respect to capital requirements will be stable and banks will have transitioned to the new regime (which might reduce differences across countries).

This paper examines the specific corporate governance problems of a cooperative bank. It is based on the corporate governance affair of the Raiffeisen Switzerland cooperative and examines why the traditional institutions and mechanisms of corporate governance failed in this case. Furthermore, this analysis recommends measures to help improve corporate governance. The analysis suggests that corporate governance was severely weakened by the cooperative composition of the board of directors, the apathetic cooperative members, the dominance of the central cooperative, the absence of blockholders and the missing threat of hostile takeovers.

This thesis observes the diversification effect of cryptocurrencies and gives an overview of the dynamic crypto market environment. Institutional investors show increasing interest in the market. Various products are being developed to facilitate their market entry. Furthermore, it is researched whether a passive investment in a diversified cryptocurrency fund improves the risk-return profile of a pure equity or bond portfolio. The chosen performance measure is the Omega ratio for one-year holding periods. The results show no constant risk-adjusted outperformance for the time period considered (01/05/201631/05/2019). However, an allocation of 1% shows interesting results and should be further investigated.

This paper examines the phenomenon of merger waves and its impact on the stock price performance of acquirors’ firms after the completion of a M&A. Evidence is found that merger waves do appear. But there is an incline in the frequency and magnitude of merger waves towards the end of the observation period. Simultaneously, the performance becomes less negatively affected by merger waves. This can to some extent be explained by the market sentiment which does not seem to be characterised by optimism as it was before the financial crisis in 2008 and therefore less value-destroying deals are initialised.

This thesis builds on previous publications on the subject of stock returns predictability across economically linked firms, which mainly concerned the U.S. market, and attempts to validate those findings with respect to the European market. Using a proprietary dataset of firms’ supply chain relationships, two supply chain networks sampled from the latter market, were constructed, characterized respectively by quantified and unquantified directed edges in terms of firms’ sales exposure. These networks served to test the hypothesis that contemporaneous and lagged returns of relative customers and suppliers may explain a firm own returns. I find evidence of a consistent contemporaneous comovement pattern in the returns of linked firms drawn from both networks. Moreover, for the quantified network, the one-month customer lagged returns appear to be also significant, and the backtested self-financing strategy that leverages such customer momentum factor yields significant abnormal returns as well.

Since the 2008 financial crisis, developed economies have shown a rapid increase in their debt levels; this has been accompanied by a change in the debt structure that favors shorter maturities. A similar trend has been observed in Swiss municipalities, where the average share of short-term debt has nearly doubled between 2009 and 2016. Based on the literature, this thesis investigates the financial and nonfinancial factors that may influence the choice of debt maturities in Swiss municipalities. Using a fixed and random effects estimator on a panel of 125 cities, the results show that factors such as financing costs, refinancing risks, fiscal responsibility, and cantonal law on budget deficits, play an important role in shaping the debt structure of Swiss municipalities.

Diversification is not possible only from the personal perspective, but firm can also engage into various activities to decrease the correlation of profits across their operations. Diversification in theory can have value increasing effects due to reduction in the earning`s volatility, hedging the unsystematic risk on the firm level, higher operating efficiency, better access to capital markets, tax optimization and additional growth opportunities. In contrary, diversification can come in the cost of using the extra resources to fund negative net present value projects, potential higher agency costs and possibility for the worse performing sectors living of better performing sector. Research studies tried to answer the question if the benefits or costs prevail with the inconclusive answer. The first wave of studies in USA found the value increasing effects dominates, which was reversed by later studies in USA. However, the results of the second wave were questioned on the ground of endogeneity and selection bias, benchmarking of the diversification discount and segment reporting manipulation. The international evidence also was not able to fully explain this discount, but it tried to assign it to on attributes such as ownership, frictions in the capital, labour and products market, level of diversification and dynamisms of industries. My thesis covers the research gab in the diversification studies by focusing on the countries of Austria, Czech Republic, Hungary and Slovakia from 2013 to 2017. My analysis is using the methodology proposed by Berger and Ofek (1995), which is based on the calculation of the excess value derived from the industry multiple of the single-segment companies. The results of my study show that diversified companies are valued at significant discount of 35.5% for the sales multiple in the Basic Model with control variables of size, efficiency and growth opportunities, when the excess value is calculated with median multiplier. The main result of my thesis is finding that diversification discount is largely influenced by ownership structure, when the main driver for the diversification discount is identified as institutional ownership between 10% and 50%. Additionally, the significant results with the biggest impact on the diversification values are ownership with holdings above 50% such as corporate, government, insider and institutional ownership. My results also support the view that diversification is country varying, but I am unable to assign this diversification discount into individual countries.

In this paper, we analyze the performance of UCITS (Undertakings for Collective Investment in Transferable Securities) hedge funds after the global financial crisis from January 2010 to October 2018 by comparing them with offshore hedge funds. In addition, three strategy portfolios, including Fixed Income Arbitrage, Long/Short Equity, and Global Macro strategies, are examined. In the first part, we provide valuable insights into the hedge fund industry and the UCITS regulation. In the second part, we process to a descriptive analysis of the monthly returns. We find that UCITS hedge funds (or alternative UCITS funds) deliver lower raw returns, although positive, and higher volatility than the traditional hedge funds. However, regulated vehicles tend to face less extreme losses. Finally, we use four performance measurement models, including the CAPM (Capital Asset Pricing Model) (Sharpe, 1964) and Jensen’s Alpha (1968) Model, the Fama French (1993) Three-Factor Model, the Carhart’s (1997) Four-Factor Model and the Fung and Hsieh (2004) Eight-Factor Model, to identify the different risk exposures of the funds and evaluate their risk-adjusted performances. Our results show that UCITS hedge funds significantly underperform their offshore equivalents on a risk-adjusted basis, although both generate negative alphas over the full sample period. We argue that the lack of freedom, which UCITS funds managers cope with due to the regulation restrictions, may explain the lower performances of these new alternative funds. Thus, this study may offer useful information to actual or potential investors.

Taxation of digitalised companies and multinational enterprises going digital: impact, challenges and opportunities in the European Union issues caused by digitalisation. The OECD has developed 15 Actions to tackle Base Erosion and Profit Shifting. Meanwhile, the European Commission has proposed an interim measure for the short term, a 3% tax on digital revenues, and a long term solution, a more comprehensive corporate tax framework. However, many criticisms resulted from these proposals. More specifically from the United States, where most of the multinationals and critics consider the interim measure as unfair and discriminatory. The potential impact of the short term measure on the Net Income/Net Loss of large US companies is estimated. Some inequality of treatment for taxation purposes is shown using dataset from Hufbauer and Lu (2018). To complement this analysis, digital and tax experts are interviewed on tax challenges arising from digitalisation and on future perspectives. The latest unilateral measures taken by several EU members are also presented.

The objective of the current thesis is to identify the chances and risks of digitalization in the Swiss private banking and wealth management sector on both theoretical and empirical levels. On both levels, the results of the analysis suggest that digitalization clearly offers more chances than risks. The individual components of digitalization, such as robotic process auto-mation, robo-advisors, artificial intelligence, advanced data analytics and blockchain, and FinTech firms are not replacing but rather supporting and transforming the sector. The only major risk posed by digitalization is that of cyberattacks and cybercrime. These results rely on the critical assumption that private banks and wealth managers proactively address the topic of digitalization.

The public and private sector costs of capital differ in the presence of taxes, because taxes are a cost to the private but not the public sector. We use a quasi-arbitrage approach to show how to include taxes in a comparison of capital costs. We find that taxes induce distortions that generate a systematic private sector preference for assets with rapid tax depreciation, high debt capacity, and low risk. We examine the implications of that preference for privatization, government outsourcing, and regulation. Our approach facilitates the analysis of transactions such as pure risk transfers, otherwise difficult using standard discounting methods.

ICO is a new technology which represents much more than just a new form of startup financing, it is the promoter of a disintermediation trend which leads to the rise of decentralized technologies and boosts innovation. Little is known about ICOs in general and the current literature provides limited data on the topic. This research aims to identify the challenges that investors might face when dealing with ICOs and the potential future implications of ICOs on the financial markets. ICO experts’ interviews confirmed the following challenges for token holders – regulatory, legal, taxation, cybersecurity and crowdfunding risks – and in future they expect ICOs to become more regulated, investor protection to increase, stronger focus on STOs, new technologies to born and the entry of institutional investors in the ICO space. The findings are valuable for investors, startups, entrepreneurs and regulators interested in ICOs.

In the sphere of corporate taxation, there is an intense international tax competition, which has been increasingly criticized by tax authorities and governments since the middle of the last decade. The most significant projects are the action plans developed respectively by the US and the OECD against the erosions of the tax base and the transfer of profits. In Switzerland there are some companies that benefit from a special status taxation and the EU considers these tax regimes a sort of State aid and consequently has placed Switzerland on a grey list (the fact of being on this list would severely limit the international export of Switzerland) and allowed a period of time, until 31.12.2018, to remove these facilities and re-enter the OECD parameters. Therefore, the tax reductions currently in force in Switzerland, which include taxation for holding, domiciliary and mixed companies, are no longer compatible with international standards and must be abolished. Switzerland has consequently revised the taxation of companies and developed a reform of the tax system to adapt it to international standards. Without the current tax advantages, there is a risk that the privileged tax companies transfer their seats and place of effective management abroad, also in consideration of the fervent proposals of neighbouring States. This work aims to give an overview of the Swiss reform presented to adapt its tax system to European standards and analyse the impact that this reform will have on a pool of Cantons.

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