Contributions published at Corporate Finance Theory (Michel Habib)

This study examines the relationship between the European Central Bank's key interest rate and the mergers and acquisitions (M&A) activity in 12 European countries that are directly influenced by this rate. A time period of 20 years is examined, starting on 1 January 2000 and ending on 31 December 2020, to ensure a broad temporal coverage. The European Central Bank (ECB) exerts its influence through three different key interest rates which steer the interest rate business of commercial banks. The effect of the Main Refinancing Operations Rate, the interest rate at which commercial banks can borrow money from the ECB, is analysed and treated as an independent variable in this study. The takeover activity is analysed in two ways: On the one hand, the number of transactions carried out and, on the other hand, the volume of these transactions. These two figures are treated as dependent variables. In a first step, linear regressions are performed to measure the effect of the relationship, followed by a regression discontinuity analysis to find out whether there is a causal effect caused by the introduction of the zero interestrate on frequency and value of completed M&A deals. The results of the linear regressions indicate a positive significant relationship between the level of the interest rate and the activity of takeovers as well as in the volume of takeovers. A causal effect could be found through the regression discontinuity analysis between the interest rate and the number of completed transactions but not between the key interest rate and the value of transactions.

This research examines the relationship between stock price and dividend policy in China's banking industry, using the event study approach and multiple variable linear regression. The thesis utilises China's specific stock market rule that permits corporations to provide preliminary earnings reports to quantify the individual effect of dividend announcements on stock prices. The empirical study results support the hypothesis that dividends convey private information to investors. During the event window, significant abnormal returns are observed on the stock market. The thesis identifies a significant abnormal return of 0.35% one day prior to dividend announcements when dividends increase. In contrast, samples with decreasing dividends demonstrate substantially negative abnormal returns for 4 consecutive days. There is a total abnormal return of -2.25% for the week preceding the dividend announcement. The market has no abnormal return if dividends remain unchanged. The results of the regression indicate that dividend yield has a significant negative effect on stock price volatility.

The Belt and Road initiative is a road of win-win cooperation to promote joint development, achieve shared prosperity, and a path of peace and friendship to enhance understanding and communications. Since the proposal was put forward, it has been widely supported by the international community and has achieved fruitful results. This paper selects the stock markets of Italy, New Zealand, Austria, Australia, China, South Korea, India, and Vietnam as the research objects and takes the participation, withdrawal, or refusal of the Belt and Road initiative as events, and applies the event study method to study the short-term impact of the Belt and Road initiative on the stock markets of participating countries. The results show that the Chinese and Italian markets in the participating countries have obtained positive abnormal returns, while the negative returns in the Korean market during the event window show a negative attitude towards the Belt and Road. The results of other countries are not significant. Australia and India, which withdrew or refused to participate in the Belt and Road initiative, have achieved significant negative abnormal returns after the event day, which indicates that the market believes that rejecting the Belt and Road initiative is a strong negative signal. In addition, this paper also finds that the impact of the Belt and Road policy on the stock market has noticeable industry effects, and the response of the same industry to the Belt and Road policy is quite different in different markets.

This Thesis examines the relationship between abnormal returns resulting from M&As and the success of the acquiring/newly formed firm using the event study methodology, descriptive analysis, and statistical analyses. The framework applies to 134 M&A transactions in the last almost three decades. The Thesis finds evidence for a relationship between abnormal returns and future success only based on descriptive analyses. However, further statistical analysis does not allow for any significant general conclusions. Therefore, a connection must not be inferred based on the analyzed data sample.

The returns to acquiring companies involved in Mergers & Acquisitions (M&A) have represented a critical component of the literature on corporate control in the past century (Andre et al., 2004).

In this study, I examine the validity of the small-cap premium (i.e., the size effect) from 2000 to 2021, using the Swiss Performance Index (SPI) to represent the Swiss stock market. I sort SPI stocks in terms of size (market capitalisation) and value (book-to-market ratio). Then, I construct six portfolios based on these categories to analyse the size effect in relation to performance, as well as statistically. I find that the small market capitalisation portfolio and low bookto-market ratio portfolio returns significantly outperform the benchmark (SPI) over the 21-year period, with this effect amplified during the COVID-19 pandemic. However, I find no significant statistical size effect across the six portfolios.

In an ever more open and globalized world economy with unprecedented access to vast and increasing flows of information driven by the digital revolution of the 1990’s, competition has spiked between market players fighting for scarce resources. This is particularly the case of financing economic ventures. Investors require higher returns from their investments pressuring ventures in need for capital to promise spectacular earnings that are yet to be met. This situation on one hand pushes for innovation, but, at the same time, exposes the economy to greater uncertainty and risk, leading to a dangerous inflation of the financed projects’ potential. Furthermore, funding from traditional business lenders, such as banks and credit unions, usually requires a lengthy and complex vetting procedures and requirements that is complex for start-ups and young-stage ventures to meet when apply for funding. The need to address demand for funding from the growing number of start-ups and ventures has created a market for alternative forms of investments that are flourishing and aim to streamline the processes of application, approval, collateral, control, and repayment. The increased number of start-ups, characterized by huge expansion potential, spirit of innovation, high dynamism and government and university backing, has greatly incentivized a shift in financing methods. At the same time, the advent of these alternative forms of investments, characterized by less stringent requirements and controls and by a tendency to grant loans to riskier potentially more profitable ventures, has led in some cases to unsustainable promises that resulted in disastrous outcomes. In this context, we will focus on the health technology sector, that is highly promising and growing, but also subject to the frontier of controversial ethical and societal dilemmas. Although the potential benefits of health technologies are huge, they raise deep societal, ethical and moral questions and significant challenges regarding privacy rights and obligations to patients. To ground the discussion and provide a practical perspective, we will analyze the recent fiasco of Elizabeth Holmes’ Theranos. We will try to identify and understand the factors that led the 2 company, advertised as a breakthrough in health technology, to fraud and significant value loss.

The scientific consensus argues that greenhouse gas emissions must be drastically curtailed by 2050 to mitigate the impact of climate change caused by humankind. Spontaneous private sector engagement is paramount to achieving this objective. This research aims to assess, using an event-study design, the investors’ response following the public companies’ adherence to the Climate Pledge, a climate initiative co-founded by Amazon in 2019. Potential stock-market abnormal returns are subsequently regressed on firms’ financial metrics and announcement modalities to evaluate the main factors affecting shareholders’ perception. Consistent with prior literature, the empirical evidence does not consider corporate adhesion to the pledge as a market mover. Nonetheless, the principal finding of this research denotes that an excellent ESG rating increases companies’ reliability and translates their commitment into significant firms’ market value abnormal returns.

This thesis examines the shareholder wealth effect of spin-off announcements in the short and medium-term. I study the short-term abnormal returns based on a sample of 184 parent companies that announced a spin-off between 2000-2017. My findings indicate that spin-off announcements generate a positive cumulative adjusted average return of 4.15% within a twoday event window after the spin-off announcement. The abnormal returns are higher for larger spin-off announcements. Further, employing a Fama French three-factor model, I investigate the share performance of parent companies for up to 18 months after their spin-off announcement and find that, on average, parent companies generate a significant overperformance within the medium-term.

We study the benefits and costs of collateral requirements in bank lending markets with asymmetric information. We estimate a structural model of firms’ credit demand for secured and unsecured loans, banks’ contract offering and pricing, and firm default using detailed credit registry data in a setting where asymmetric information problems in credit markets are pervasive. We provide evidence that collateral mitigates adverse selection and moral hazard. With counterfactual experiments, we quantify how an adverse shock to collateral values propagates to credit supply, credit allocation, interest rates, default, and bank profits and how the severity of adverse selection influences this propagation.

The initial public offerings of healthcare companies at London Stock Exchange during 2013 to 2017 have been faulty long-run investments both for institutional and retail investors. By analyzing the stock performance of each issuing firm in the timeline of 3 years after the initial IPO date, the returns of investors have been severely reduced. From the derived results, it is evident that healthcare IPOs indicate much lower performance than their matching firms, that have been chosen according to specific criteria, and the alternative benchmarks that have been used to compare the returns and extract valid conclusions. The research shows positive returns by investing to the matching firms and the benchmarks. Both these trends are in consonance with the results of international empirical studies and published journal papers.

This study proposes the estimation of the equity duration of the major US equity indices, namely the S&P 500, the Dow, and the NASDAQ 100. Duration for equity assets is measured by the derivative of stocks’ prices to changes of the Implied Cost of capital. The latter is estimated by means of the Residual Income Model (RIM), which is applied to each constituent of the indices. Findings show that the equity duration of the major American indices has risen considerably above its historical average over the 2009-2018 period. Furthermore, by sorting portfolios using duration, there is evidence that equity duration can be effectively used as an alternative measure for the value factor. In addition, a duration-based stock selection strategy outperforms a passive investment in the indices in both absolute and relative terms. Finally, duration measured at the index level is found to predict future indices’ return, especially for the NASDAQ 100.

The Securities and Exchange Act of 1934 charged the US Securities and Exchange Commission (SEC) with regulating financial markets as “necessary or appropriate in the public interest or for the protection of investors.”1 Many came to believe this language gave the SEC too little guidance and too much discretion. In 1996, Congress directed the SEC to consider, in addition to the protection of investors, whether a proposed rule will promote “efficiency, competition, and capital formation.”2 As the SEC interpreted these words beginning in 2012, the Act requires it to incorporate economic analysis into the rulemaking process. Absent a clear statutory mandate to impose a specific rule, the analysis must justify the rule by identifying a market failure as well as the rule’s likely effect on market outcomes.3

In the thesis, I test the power of several variables to explain and predict returns on the stock of the company, targeted in an M&A deal over 30 days after the announcement of the deal. Some independent variables such as size, momentum, value, and liquidity represent classical characteristics found by academics to explain stock returns. Independent variables, including company-specific sentiments, market-level sentiments, news coverage of the company, and sentiments contained in a piece of specific news, are based on results of research papers, analysing effects of news sentiments on stock returns. I conclude that on the analysed period from 2008 to 2016, only news coverage and shares trading volume of the target company before the deal announcement and the deal type are statistically significant for explaining returns to target shareholders over 30 days after the announcement. Based on these results, I construct an investment strategy, which achieves mean returns of 21% per annum out of sample on the period from 2017 to 2021 and outperforms market returns of 15%, represented by the S&P 1500 Index and Merger Arbitrage strategy returns of 7%, represented by the HFRI 500 Merger Arbitrage Index. From 2017 to 2021, the Sharpe Ratio of constructed investment strategy amounts to 2.53.

The purpose of this thesis lies in providing a critical review and uses of commodity indices through the analysis of the three generations of commodity indices which are constructed with futures contracts. Concepts of price determination, returns, and roll yields for futures are elab-orated and highlight the importance of the term structure when constructing indices. Commod-ity indices evolved from informational and benchmarking channels to sophisticated blueprint-ing and contracting vehicles providing further value to various stakeholders. Third generation indices using active signals for long-short allocations prove their superiority by presenting greater returns and lower risk measures as their predecessors.

This thesis examines the effect of the negative interest rate policy on the asset allocation of Swiss pension funds. A complete inventory count builds the basis for the statistical analysis which led to the extensive study of 992 pension funds from 2014 to 2015. Using a differencein-differences analysis the study finds that Swiss pension funds reallocate their assets away from cash and bonds towards equities, real estate and infrastructure, without increasing the volatility. Although the results are statistically significant, the results have to be read with caution, as the underlying data does not follow a normal distribution and might therefore be distorting the results.

This thesis uses extensive data of 744 Chinese stocks over the period 2006 to July 2021 to conducts an empirical research of how the liquidity factors impact and explain the excess return of Chinese stocks by constructing new multi-factor models, which are based on the original Fama-French five-factor model (2015). The newly added liquidity factors are constructed with Amihud illiquidity ratio (2002 & 2021) and turnover rate. This thesis finds out that new six-factor models perform better in explaining variations on excess returns of Size-B/M and Size-OP portfolios, compared to the original five-factor model. And turnover rate has more convincing power than the Amihud illiquidity ratio in explaining the value effect, profitability effect, investment effect and liquidity effect in the Chinese stock market.

This research aims to analyze the impact of COVID-19 on Initial Public Offerings in three different dimensions: the monthly sum of successfully completed IPOs, the volume of capital raised by the IPOs and the level of underpricing (or first day returns). Although the pandemic seemed like a devastating event, the results of this research showed that in the case of the monthly sum of IPOs the countries which suffered more stringent countermeasures has risen, the volume of capital raised has generally risen as well and the first day returns were higher, especially in countries with harsher countermeasures. This results suggest that the pandemic could be defined as a hot market cycle, according to the definition provided by the research of Helwege and Liang (2004).

The empirical analysis of the underlying thesis showed that there is a significant correlation measurable for the abnormal aftermarket returns of US companies (2005-2015) grouped into similar ages compared to the rest of the dataset. Additionally, it was shown that this significant correlation does differ amongst different industry sectors. It concludes that there might be an optimal age for companies to go public and to use the raised equity in the best possible way, therefore generating an abnormal return in the first three to five years on the market. The four sectors that were examined were technology, manufacturing, service, and trade.

Current economy and financial market globalization is pushing the China stock market open to the world. In recent years, China’s securities market regulators have introduced a variety of foreign policies to attract foreign capital. Foreign ownership can provide financial support, management experience, and technological innovation; But on the other hand, they may also bring short-term speculation and international risk which is not conducive to the company. This paper studies the relationship between foreign ownership and stock price volatility. The study period is from 2011 to 2019, and I use a fixed e↵ects model to conduct the research. Additionally, I also divide the foreign shareholder into institution and individual, use domestic institution and individual as control variables to check whether the e↵ect of di↵erent investors is di↵erent between foreigner shareholders and domestic shareholders. Furthermore, I also divide the sample period into “before stock connect” and “after stock connect” to check whether the e↵ect changes in di↵erent market condition. My result shows that foreign shareholding is significant positively correlated with companies’ stock price volatility. I also study the relationship under di↵erent market conditions and find that “after stock connect” foreign shareholding has a larger positive e↵ects on stock price volatility than previously. Finally I conduct robustness tests to further prove my results. The empirical results with interaction terms indicates that foreign ownership influences firm-level volatility via liquidity.