Contributions published at Corporate Finance Theory (Michel Habib)
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Kim Bomyi, An Empirical Analysis on the European Stock Market Around the Referendum for the Brexit , University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) On June 23, 2016, the British people have voted to leave the European Union through their referendum. Using the multivariate regression model methodology, this paper investigates the reaction of the Brexit referendum on the European stock market. This study differs from other studies of market reactions to unanticipated events because of its analysis on diverse portfolios in terms of various countries and sectors. This paper examines the market reaction on June 23, the referendum date and three trading days afterwards. Divided by two parts in the analysis, first, time series results provide evidence of rational pricing, and suggest that the market differentiated among various firms. Cross-sectional results for the abnormal returns on June 24 when the referendum result announced suggest that the market was concerned about the increased likelihood of financial distress from the Leave vote and distinguished firms based on their sectors. |
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Marco Müller, Value Creation of Mergers and Acquisitions (M&A) in the Insurance Industry, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) This master thesis analyses the shareholder wealth effect of mergers and acquisitions in the insurance industry between 1990 and 2017 on a global scale. An event study sample of 196 deals is considered, in which both the acquiring and target company are publicly listed. The data reveals that the market values various types of insurance deals differently. Post-crisis and cross-border deals show slightly higher equity market returns than pre-crisis and domestic deals. Furthermore, consolidation, vertical integration and bancassurance deals are significantly higher valued than diversification deals. On the contrary, deals in which the target company is financially stressed show significant negative returns. The analysis shows that the returns of acquiring and target companies are also influenced by the relative size of target to acquiring company and the acquirer`s leverage ratio. |
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Ugo Albertazzi, Fulvia Fringuellotti, Steven Ongena, Fixed rate versus adjustable rate mortgages: Evidence from Euro area banks, In: Bank of Italy Temi di Discussione, No. 1176, 2018. (Working Paper) Why do some residential mortgages carry a fixed interest rate and others an adjustable rate? To answer this question we studied unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguished between the conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangled these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local demand conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread. |
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Erich Walter Farkas, Fulvia Fringuellotti, Radu Tunaru, Capital Requirements with Model Risk, In: -, No. -, 2018. (Working Paper) Model risk needs to be recognized and accounted for in addition to market risk. Uncertainty in risk measures estimates may lead to false security in financial markets. We argue that quantile type risk-measures are at least as good as expected shortfall. We demonstrate how a bank can choose among competing models for measuring market risk and account for model risk. Some BCBS capital requirements formula currently in effect leads to excessive capital buffers even on an unstressed basis. We highlight that the loss to society associated with the inefficient minimum capital requirements calculations is economically substantial over time. |
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Michel Habib, Josef Falkinger, Principle or Opportunism? Discretion, Capital, and Incentives, In: ESSEC Finance Seminar. 2018. (Conference Presentation) null |
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Bruno Lüth, Market Analysis for the Business Unit SBB Personenverkehr Fahrzeugindustrie, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) The aim of this master thesis is to conduct a company and market analysis. The business unit SBB Personenverkehr Fahrzeugindustrie provides its services to internal customers. The business unit Fahrzeugindustrie is part of the business line SBB Personenverkehr Operating. The unit consists of approximately 1000 employees and generates a yearly revenue of CHF 400m. Its services are project management, planning, consulting, conceptualizing, engineering, procurement, prototyping, production and commissioning. The services are provided in retrofits, revisions, and repairs (3R) of railroad rolling stock. Thus projects are conducted for locomotives, wagons and multiple unit trains. Currently, most services are provided to internal customers. Due to changes of the railway market, the business unit FZI is required to change its strategic focus. For instance, the liberalization of the public transportation market allows intercity busses and other railway undertakings (or eventually autonomous cars) to compete with the SBB. Especially, the eventual implementation of the fourth railway package, which proposes that rail companies must be granted access to domestic passenger services in all EU Member States, will lead to an increased competition, also in Switzerland as it is likely to adopt the regulation. As a consequence, SBB's market share might decrease, reducing the volume of orders for FZI. Furthermore, the modern trains are constructed based on a modular strategy instead of a platform strategy causing obsolete components to be changed quickly. These tasks can usually be performed in light maintenance centers which also reduces the revenue of FZI. As a consequence, FZI needs to acquire new customers in order to secure its revenue stream. Accordingly, it is examined whether the business unit is competitive on the free market as an increasing number of companies such as rolling stock producers and operators offer similar services. Furthermore, it is studied whether new clients are interested to use the services of FZI. Therefore, a company and market analysis is conducted, which examines the existing demand for the provided services and the competitors of FZI's business. Additionally, the challenges are evaluated and objectives as well as measures are to be formulated how to cope with the challenges. Finally, actions are evaluated in order to improve the unit's capability of selling services to potential customers. The study finds that the market for vehicle maintenance is supposed to become more competitive in the years to come. Vehicle manufactures start to offer maintenance services as railway operators have done. The business model of incumbent maintenance companies is consequently threatened. Furthermore, modern trains require less heavy maintenance as revisions or retrofit projects. Instead, they are replaced more often or maintained by using the concept of modular revision. Accordingly, the business unit SBB Fahrzeugindustrie will face less orders from the internal customer and a more competitive environment in the market. In order to remain competitive, the business unit has to proactively cope with the named challenges and gain orders for 3R services from third parties. Fortunately for SBB FZI, it needs to be mentioned that it is already competitive on the free market. It is able to acquire orders from external customers such as BLS or Windhoff Schweiz. Despite the past success in winning new customers, the business unit further needs to increase its effort to win new customers. The thesis depicts the conditions of a changing and liberalizing market and the challenges of an incumbent market player. It is assumed that the strong position of this player will be weakened if he does not react proactively. Therefore, six global strategies are developed ranging from cooperating with OEMs to forming a European network with other railway undertakings to increasing the own efficiency. The last might be the most important and the one measure that can be implemented without coordinating with other market actors. The customer requirements have to be understood and the offered products should to be tailored accordingly. Also, lasting relationships with existing and potential customers have to be developed in order to predict precisely what demands and orders are desired at what point in time. Finally, the business unit's overheads need to be reduced in order to win contracts. It is concluded that the business unit is currently competitive on the free market. However it needs to strain to become even more competitive. Costs have to be reduced and additional customer relationships established. |
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Alexandre Munday, Big Data: Twitter sentiment as stock market predictor, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) This thesis investigates whether there is any valuable information in population mood shared on Twitter. Furthermore, we tested for relationships between sentiment contained in Tweets and the S&P 500 index returns. Rational investors in efficient markets are the foundation of traditional finance. Sentiment influencing investing behaviour is a violation of this and therefore should not exist. Moreover, if such sentiment would be observable, according to the traditional finance hypothesis, rational arbitrageurs would eliminate the effect. However, at multiple times over the years, such anomalies have been observed. These observations led to an evolution of the traditional finance field to include psychological and sociological aspect to understand empirically observed behaviour (Sewell 2007). Behavioural finance found evidence that these behavioural biases do exist, and people do not act fully rationally, and limits to arbitrage exist. Early research on stock markets state that markets follow a random walk pattern and the Efficient Market Hypothesis (Fama 1965) (Cootner 1964). The main hypothesis of the Efficient Market Hypothesis is that the prices of the different stocks react to the arrival of new information and not to the historical prices of the stocks. According to this theory the stock market will follow a random walk, because news are unpredictable, and we will not be able to predict the market with a higher accuracy than 50 percent (Qian & Rasheed 2007). More recent studies showed us the limitation of the Efficient Market Hypothesis. Many researchers show that the stock market prices do not follow a random walk and can be predicted with a precision higher than 50 percent (Qian & Rasheed 2007) (Gallagher & Taylor 2002). Other studies proved that obviously we couldn’t predict news, without committing insider trading, but that we can extract early indicators using social media like Twitter. Those early indicators may be used to predict changes in different financial and commercial indicators. If we extend the hypothesis to the stock market price, we think the population mood and public mood can be as important as news. We know from psychological research that emotions, added to information, play an important role in human decision-making (Damasio 1994) (Dolan 2002). Behavioural finance has proved that emotion and mood significantly influence the stock market prices (Nofsinger2005). We can assume therefore that sentiment and public mood can drive the market with the same strength as news, as maintained by Gilbert and Karahalios (2010). Over the last years various algorithms in sentiment analysis have been written; they are particularly efficient at extracting public mood directly from social media content and more specifically from Tweets (Abbasi, Hassan& Dhar2014). The goal of this master’s thesis is to investigate whether or not public sentiment, measured as mood by sentiment algorithm, influences stock market returns. The main purpose of this study is to investigate whether or not there is a link between how people feel and the evolution of stock markets in the United States. We have collected data continuously from Thursday, 19 March 2015 midnight UTC until Tuesday, 31 January 2017, and thus have 684 days of data. We chose as an output all the different categories of Tweets namely positive, negative, and neutral Tweets. We computed the returns of the S&P 500 and adjusted closing values obtained from Yahoo! Finance. The index offers a broad view of the financial health of the USA. We generated the positive variable (Pos) by taking the mean per minute of positive Tweets for a given day. The idea behind the mean was not to be too influenced by outliers. The negative sentiment (Neg) was generated the same way. We created the reactional (Reac) variable by adding both the positive and negative Tweets and dividing by the total number of Tweets. We used Vector Autoregressive Regression (VAR) approach for multiple reasons. It is suitable for time series; this model allows us to use several endogenous variables, and it will also permit us to investigate feedback effects. An essential need for our prediction is the possibility that the value of a variable may depend on its own lag and the lags of the other variables in the model. The results of this study from section 10 show no significant relation of investment sentiment, proxied by Tweet sentiment, and stock market returns based on S&P 500 data. Through test of causality and Impulse Response Function, the results are not identified as mood affecting the stock market returns. Additionally, the results from the whole period showed no significant relation between investor sentiment and stock market returns on the same day and the following days. Several factors explain why we could not find any effect on the stock market return. First of all, market actors might have included the bias in their investment models following the increased publicity and access to social media mood indicators, like the Twitter Happiness Index. Secondly, as described in section 2, investors learn from their mistakes. Thirdly, the analysis may fail to identify an effect following the other research cited in the study due to social media users becoming decreasingly representative investors. Additionally, the demographic distribution of social media users was found to have shifted toward lower income and less educated households, as mentioned in section 5. That could be a reason why Twitter as mood indicator became less representative for investors. What really surprised us is the little difference between the models using the sum of Tweets (models one and two) and the models using the percentages of Tweets (models three and four). We could have expected more accuracy in the percentages models because they would be less affected by bias discussed above. Lastly, most similar studies have been conducted with data from 2008 or soon after that, which was just after the financial crisis. It is possible that the findings of Bollen et al. (2011) are correlated with the excessive stress of the market. It is also possible that the time frame of their data set was too short to obtain a representative effect and with more data they would arrive at the same conclusion as we do. The robustness of our results is confirmed by the same results that we obtain through the Granger causality and the Impulse Response Functions. |
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Valentin Dafflon , The disintermediation in the financial services industry through the blockchain technology: opportunities and challenges, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) The blockchain technology came to light some years ago with the growing popularity of Bitcoin. Despite being seen by many as a worthless cryptocurrency, the underpinning technology is truly revolutionary. Indeed, this technology, the blockchain, is likely to be at the origin of a total reorganization of the economy as we know it. The blockchain technology makes it possible to remove a central authority which has recording and checking all the transactions as functions. By the way the network is designed, it is impossible to alter the data stored as all participants agree on what is the correct version of data. Since no middle-man is involved in the process of transactions, this removes the possibility of human corruptibility. Additionally, this middle-man free system enables the network to process transactions on a real-time basis and at a reduced cost. The removal of one of the key functions of the financial services as intermediaries raises the question as to whether the intermediaries were doomed to disappear. The question can be answered in the negative for various reason. First, intermediaries will still be needed in specific situations such as disputes between parties. Their role as arbitrator will be of utmost importance. Then comes the legal responsibility question for illicit actions that would hinder the transactions made on the blockchain. The question as to who will be legally responsible should be addressed by the regulators, but we can assume that the responsibility should be given to the financial institution providing the blockchain-based platform. This thesis limits itself to this assumption and thus further research in this direction would be required. Hence, we understand that the roles of financial institutions as intermediaries are likely to change. What is certain is that banks and other financial services need to be at the forefront of the development of this technology. Indeed, this is crucial as they are likely to be most threatened. Financial institutions have a strong interest in developing blockchain-based platforms that would enable them to make cross-border intrabank payments or interbank transactions. Indeed, there is a huge potential for banks in the field of cost cutting. Additionally, a distributed ledger also offers simplification in auditing as all transactions recorded can be easily traced back. Among the opportunities offered by the technology, there is also the potential for the creation of new products and services. Moreover, the blockchain technology does not stop at value transfers. It is possible to store and transfer assets or property titles and use smart contracts. Smart contracts can be designed so that outcomes are automatized given specific conditions are met. This kind of contract is very promising as it can be applied to other industries than financial services. However, despite all the advantages mentioned above, there are some open questions that still need to be addressed. Among the main challenges, we find regulatory concerns and security. Indeed, there is still a need to determine what is compliant with the Know Your Customer regulations and what is not. On the security level, a hacker being able to access the private key of an individual could make transactions on his behalf. Hence, finding a way to store safely the private key is crucial. Then, the technology being still not mature enough to be implemented, the companies need to keep researching and experimenting. But here comes a key element. What is of utmost importance is to work with other firms, even competitors, to create common platforms. The business models that we know will need to be adapted to take into consideration decentralization of data. The network built by the participants, i.e. the firms, is a prerequisite for creating strong platforms that will meet the needs of each player. Coordination between the firms is central to be able to set up a strong platform and define what standards and obligations should be applied within the network. |
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Lukas Fischer, Expected Value of Corporate Tax Inversions to Shareholders , University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) After the turn of the century, the United States of America remained as one of the only developed countries which taxes corporations based on the so-called worldwide approach. The rationale of this tax regime is to tax the worldwide economic activity of a company. Thus, American companies with subsidiaries outside the United States are liable twice on their income created in those entities: First in the country in which the subsidiary is domiciled and secondly in the United States. A nexus of rules and tax treaties govern the taxation of these entities and usually the American parent company can deduct taxes already paid in foreign jurisdictions and therefore mitigate this problem of double taxation. However, as the United States has one of the highest tax in the developed world, the secondary taxation of the funds earned in other jurisdictions is often substantial. Because the taxation of those earnings can be postponed until the funds are repatriated in form of dividends to the U.S. parent company, many chose to retain their foreign earnings in off-shore jurisdictions or invested the funds in growth projects abroad. Postponing the repatriation of those funds indefinitely is obviously not a desirable solution as the parent company may need these funds or wants to distribute them to their shareholders. To do that while avoiding secondary taxation by the U.S. tax authorities some firms discovered a loophole in the legislation allowing them to effectively move their company domicile to a foreign country. These restructurings are called inversions as the companies structured is basically turned upside down. The main benefit is the avoidance of taxation on earnings from outside the United States. After several changes to the tax code most possibilities to invert were prohibited. However, exploiting an exception rule in the legislation a new wave of inversions occurred between 2004 and 2016. The method used was to merge with a smaller foreign competitor and move the domicile of the newly combined firm to the target company’s jurisdiction. Although the merging partner had to be at least a quarter of the acquirer’s size the method was widely used, especially in the healthcare sector. This study’s objective is, apart from providing the historical context and legal ramifications surrounding inversions, to measure the expectation of shareholders to the announcement of inversion mergers. The effect on the stock price’s abnormal return during the period in question was measured both in absolute terms and in comparison to a group of comparable transactions. The returns were calculated for the acquiring and target firms separately and combined. As an additional thesis an examination of the dependency between the target company’s return and the acquirers relative size was conducted as well. The method used to measure the expected value creation was to conduct an event study of the firm’s stock price returns during the period in which the merger was announced. The model chosen to estimate normal returns is the single-factor market model. The necessary estimation period during which a linear regression is used to calculate the stocks ordinary dependency to the market is set at 200 days. The relevant event window is defined as beginning two days before the announcement to two days thereafter. This is done to account for a possible run-up due to insider trading and to allow for a dragging reaction after the announcement. Only transactions with sufficient and undistorted data of both, the acquirer and the target company, were included. The comparable transactions were chosen based on industry, timing, absolute and relative size (to each other). Cross border were preferred to domestic mergers. The event studies show highly significant (0.1% level) combined cumulative abnormal returns (CAR) to the announcement of inversion mergers and the control group. Nevertheless, with a combined abnormal return of around 12.8% show inversions a significantly stronger performance than the control group sample which averaged a return of 3.3%. This can be interpreted as proof of additional value creation by inversion mergers based on their tax savings. The acquirer’s individual results expose the main reason for the gap between the two groups: While inversions average a highly significant CAR of 10% the control group’s acquirer display a loss of 1.8% during the announcement period. This loss is significant at the 5% level. Inverting firms are therefore clearly able to retain some of the value creation to their shareholders while ordinary acquisitions are regarded much more skeptical by the investing community. The value destruction to the acquiring shareholders is not certain but possible. The target returns differ less but with inversions averaging 15.6% and the control group 6.7% the discrepancy is highly significant nonetheless. This implies that targets are able to obtain some of the gains achieved through the tax savings. The positive returns of target companies are generally no surprise as premiums offered to facilitate such mergers are common. The abnormal returns of targets are subject of a further hypothesis which stated that the abnormal return should tend to be greater the smaller the company is in comparison to its acquirer. The rationale is that bigger tax savings should increase an acquirer’s willingness to pay and a small size may also reduce the relevance a possible overpayment would have on its shareholders. Indeed, a regression test shows a positive correlation between the relative size of the acquirer and the targets CAR during the announcement period. The estimated slope is significant at the 5% level while the intercept is non-significant. In conclusion it can be stated that inversions are perceived to create additional value to both involved parties and the tax savings seem to be regarded as a collective good shared among the two entities. However, thanks to major changes to the U.S. tax code at the end of 2017 inversions are likely to disappear for the time being. |
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Michel Habib, Josef Falkinger, Principle or Opportunism? Discretion, Capital, and Incentives, In: ICEF, Moscow. 2018. (Conference Presentation) null |
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Dimitrios Lazaris, Challenges of Implementing VAT in the EU E-Commerce, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) The modernization of VAT in the European e-commerce is a hot topic in our days. In the end of 2017 all the Member States have agreed that the current VAT rules were created for a different era and they cannot cope with the needs of the modern society. This thesis gives a comprehensive overview on this topic. It gives a short introduction of all the fundamental concepts of VAT and e-commerce, in order to give a full view even to readers that are not familiar with this topic. Then it explains the reason why these changes were necessary, the rationale behind the proposed measures by the European Commission, the challenges that the Commission faced on implementing these changes and lastly how these challenges were overcome. Furthermore, this research is analysing the potential influence of disrupting new technologies, such as 3D-printing and blockchain in our society and more specifically on VAT. It tries to point the finger not only to the challenges that might arise by using such technologies (3D-printing) but also the fruitful benefits that tax authorities can receive by integrating these technologies to their systems (blockchain). All in all, this thesis is trying to provide a summary of all the changes that occurred in the European VAT system in e-commerce in the past three years and try to outline future topics that might be in the highlight in the years to come, due to the digitisation of our era. |
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Michel Habib, Discussant, In: Eastern Finance Association, Philadelphia. 2018. (Conference Presentation) null |
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Michel Habib, Multifaceted Transactions and Organizational Ownership, Review of Corporate Finance Studies, Vol. 7 (1), 2018. (Journal Article) I provide a unified explanation for shareholder ownership, partnerships, mutuals, government ownership, cooperatives, and vertical and horizontal control: each ownership form constitutes a variation on a single underlying theme, the assignment of ownership to a subset of firm stakeholders. When not every facet of a transaction is contractible and high-powered incentives might divert investment toward the transaction’s contractible facets, to the overall transaction’s possible detriment, optimal organizational ownership allocates the right to set the power of managerial incentives to those stakeholders most affected by the noncontractible facets of the organization’s paramount transaction. |
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Michel Habib, Josef Falkinger, Principle or Opportunism? Discretion, Capital, and Incentives, In: CEPR Discussion Paper, No. DP12690, 2018. (Working Paper) When should shareholders afford a manager the discretion to be opportunistic and when should they constrain him to be principled? We show that discretion is associated with lower powered incentives than is constraint: opportunism may put shareholder capital at risk; shareholder can lessen that risk by lowering the power of managerial incentives, thereby decreasing the manager's incentives to spurn principle for opportunity. We further show that the cost of capital plays a central role in favoring discretion over constraint: the use of capital constitutes an externality; when the cost of capital is low, the externality is of relatively little importance, and the manager is afforded the discretion to be opportunistic. |
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Luca Hany, Do Activist Investors Add Value?, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Bachelor's Thesis) Although the roots of activism – commonly defined as an intervention of a shareholder to unlock value in some form – go back to the beginning of the 20iest century, the topic attracted considerable attention in the past two decades, with more than 60% of all activist campaigns taking place after 2007. As these campaigns are often accompanied by martial communication by the activists, media often portray this investor type as reckless and greedy. Hence, the public perception is that the interventions are detrimental to the target company’s value. This thesis aims to answer the question whether activists truly achieve their goal in unlocking value when executing an intervention at their respective target or not. Existing academic literature has come to the conclusion that this is the case (e.g Brav et al (2008), Clifford (2008), Goodwin (2015)). As in the past, researchers have primarily focused on analyzing the value generation for (1) the shareholder (expressed by excess returns) or (2) for the targeted company (expressed by an improvement of the operations) or (3) the debt providers (expressed by lower credit risk); I introduce a novel empirical model which accounts for all three components of value at once. My sample is based on SharkWatch50, a database which comprises all campaigns initiated by the top 50 activist hedge funds according to SharkRepellent. Given the importance of the filing system as a source of information, I removed all targets which weren’t having a primary listing in the US. As the operational performance was also in the spotlight of this empirical analysis, no targets operating in the financial industry were represented due to the different composition of the accounting measures compared to the other industries. Additionally, I removed all targets with a market capitalization below USD 20m at the time of the campaign announcement. The final, adjusted sample consists of 720 campaigns, resulting in 512 unique targets with a primary listing in the US. Compared to existing research, this sample is featuring the most actual time span (from January 1st, 2007 to July 26th, 2017) and hence mitigates the prevailing criticism in academia of the use of outdated samples. In order to find an econometric solution to the question of this thesis, I use linear regressions. In the empirical model, I introduce three dependent variables accounting for excess returns, 24 for operating performance and six for the capital structure. Then, six different independent variables are presented: Size measured by market capitalization (at the campaign announcement date), campaign duration (i.e. time span between announcement and end of campaign), number of campaigns in industry of activist target, activist campaign objective: Activist seeking board control rather than board representation only, 13D filing submission rate of the activist when initiating a campaign, submission rate of publicly disclosed letters to management. My findings - which are statistically significant - indicate that an activist generates (1) value for the shareholder through excess returns in the following cases: (i) target’s market capitalization is small, (ii) the campaign duration is short, (iii) the activist density in the general industry is high, (iv) the activist is seeking solely board representation as opposed to board control, (v) a 13D filing was submitted and (vi) a publicly disclosed letter to the target’s management was sent. In contrast, no final conclusion can be drawn on how their campaigns improve operational performance and hence (2) value for the target as none of the effects is significant: credit risk, measured by the evolution of the capital structure and hence representing (3) the value for a debt provider, is minimized if the target has (i) a low market capitalization, (ii) a long campaign duration, (iii) the activist is obtaining board control as opposed to board representation only and (iv) submits a 13D form with all effects being significant. While this thesis helps gaining a deeper understanding of the value generation process, two fundamental limitations exist: First, the results of the empirical model show that value creation takes place when the campaign has certain characteristics. Nevertheless it fails at quantifying the extent the activist was solely responsible for this effect as opposed to value generation that happened independently of the campaign. Second: The model only quantifies excess value generation for the shareholder (expressed by excess returns). For the two other components of value, the model does only deliver an answer to the question if value was generated but not if they were generated in excess compared to their respective peers which weren’t targeted by activists. |
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Hao Xing, Determinants of Capital Structure of Chinese Listed Firms, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) In this study, I analyze the capital structure problem of Chinese listed firms by examining the capital structure determinants in the first part and testing selected theories in the second part. A hand-collected sample consisting 1220 Chinese listed firms from 2007 to 2016 is used to offer the latest view of this problem. Considering the hierarchical structure of the dataset, this study applies the hierarchical linear modeling technique to assess the relative importance of the time, firm and industry level and estimate the effects of relevant characteristics in determining the capital structure. Results show that the time- and firm-level account for the majority of leverage variation. Meanwhile, a set of determinants have been found significant in explaining firms’ leverage. The tests of the market timing theory and the pecking order theory get some new findings compared to previous literature. With a direct measure of the implied cost of equity, the Market Timing Testing Model shows firms tend to increase their leverage when their cost of equity is high, implying the market timing theory holds for the Chinese listed firms nowadays. As for the pecking order theory, testing results show the first rung of pecking order doesn’t hold while on the second rung, firms prefer debt financings over equity financing. Instead of confirming the suitability of the theory on my sample, I find out the above results are more likely due to firms’ limited access to the financial markets. This conclusion is verified by the relevant findings in the first part of the study. |
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Meng Zhou, Impact of Shadow Banking on the Financial Stability of China, University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) The thesis aims to investigate the impact of shadow banking on the financial stability in China both theoretically and empirically. Most of the existing researches on shadow banking sector stay on the theoretical level. Firstly, an overview of the shadow banking system in China is given based on existing researches. The thesis concludes the characteristics of shadow banking and builds up a criterion to define the shadow banking. Based on the criterion, the shadow banks calling for urgent attention are included when measuring the system size. Secondly, stability indexes for four sectors are introduced by combining individual indicators. Previous studies and official publications are taken into consideration when choosing the indicators. Finally, the empirical study confirms the long-run relations among shadow banking and sectors' stabilities as well as the threshold effect of shadow banking size on banking system's stability. |
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Michel Habib, Fabrice Collard, Jean-Charles Rochet, The Reluctant Defaulter: A Tale of High Government Debt, In: Swiss Finance Institute Research Paper, No. 17-39, 2018. (Working Paper) We seek to account for the very high levels of public debt recently reached in many OECD countries. We do so by assuming that governments do their utmost to stave off default, which occurs only when a government fails to muster the funds needed for debt service. This distinguishes our work from existing work on sovereign debt, which has assumed that governments weigh the costs of debt service against those of default. The debt ratios we compute are quite close to prevailing levels: our baseline case has debt-to-GDP ratio slightly above 80%. |
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Sacha Ravinger, Brexit: Possible consequences and implications for the Value Added Tax in the United Kingdom , University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) This Master’s thesis examines the possible consequences and implications on the UK VAT system caused by Brexit. A comprehensive analysis on possible future scenarios, consideration of current political discussions and interviews with various tax experts predict small direct changes for the UK VAT system by exiting the EU. With Brexit the UK will be free to set its own VAT rates, apply zero-rating again and will not be bound by decisions of the European Court of Justice anymore. Due to the lack of the “intra-Community” transaction type, all non-UK supplies and purchases of goods will be treated as exports and imports causing higher administrative burdens, longer processing times and therefore higher costs for UK companies trading with EU businesses and vice versa. For the British financial services sector Brexit might bring unexpected benefits from a VAT perspective. With Brexit, British financial services institutes might be able to deduct input VAT on the services provided to companies being established in the EU. After Brexit, the UK will not be able to participate in further VAT harmonization measures of the EU. Of highest importance will therefore be, that the UK will monitor changes in the EU VAT area closely and will try to align. Only an aligned VAT system will support frictionless trade between EU and UK companies by reducing complexity and minimizing double or non-taxation. |
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Sacha Ravinger, Brexit: Possible consequences and implications for the Value Added Tax in the United Kingdom , University of Zurich, Faculty of Business, Economics and Informatics, 2018. (Master's Thesis) On the 23rd June 2016 the British citizens voted in a referendum to leave the European Union (EU). This decision known as Brexit-vote will end the 46 years lasting EU membership of the United Kingdom (UK) on the 30th March 2019. This Master’s thesis analyses the practical consequences and implications arising from Brexit for UK companies with regards to Value Added Tax (VAT). With Brexit, the EU VAT Directive ceases to be applicable in the UK and therefore the national legislation, the Value Added Tax Act 1994 (VATA), will not be restricted or bound by this framework legislation anymore. In a first step, an extensive research on the Brexit in general was conducted. Thereafter, the above-mentioned legislations were analysed whereby the author focused on the major consequences of becoming a non-EU country for the UK. Being mainly interested in the practical effects for the British economy and for individual UK companies, the author interviewed four leading tax experts from Switzerland and Belgium. In these interviews the direct effects of Brexit on UK VAT, the implications especially related to the financial services industry of the UK and the long-term consequences for the tax system were discussed. Simultaneously, the author assessed four different future partnership scenarios for the UK and the EU while continuously monitoring political developments, discussions and the uncertain way forward. The main part of this thesis is based on written sources dating latest 22nd November 2017 while the reader is informed in a special chapter on recent political developments by 8th December 2017. Due to the timeliness of Brexit and a strongly divided UK parliament, the uncertainty on a possible future partnership remains high. The consequences as presented below were drawn up under the assumption that no special tailor-made partnership between EU and UK in terms of VAT is going to be reached and are based on the fact of the UK being no further a member of the EU as from spring 2019. With Brexit the UK would theoretically be able to abolish the VAT or to replace it by a different tax. However, contributing around 20 per cent to the overall revenue of Her Majesty’s Revenue and Customs (HMRC) and being applied in more than 165 countries worldwide, the VAT system is expected to stay in place in the UK after Brexit. Furthermore, the UK will be free to determine its own standard VAT rate not being restricted anymore by the minimum 15 per cent rate applying for EU member states. However, the current standard VAT rate of 20 per cent is not expected to be lowered in the near future. Outstanding financial contributions payable to the EU, pressure to lower corporate taxes, bureaucratic and infrastructure costs of Brexit and the global trend suggest rather an increase of the VAT in the long-term. Even if the UK will not be restricted in the amount of reduced VAT rates or the list of exempt products in the future, major changes are not expected. Small adaptions could occur to show potential benefits of Brexit to the public. However, it is suggested to keep the VAT system as lean as possible and to reduce the complexity to prevent higher administrative costs or additional complications for businesses. The UK will not be obliged anymore to interpret the UK’s VAT legislation consistently with judgements of the Court of Justice of the European Union (CJEU) after Brexit. Nevertheless, the author expects a strong alignment to EU VAT legislation in the future to reduce possible double or non-taxation of cross-border transactions. The UK’s core objective of free and most frictionless trade between the EU and the UK underlines the need for continuous harmonization of the British VAT system with the EU VAT Directive in the long-term. However, this alignment will mostly be limited to the taxation of services, considering the upcoming changes in the EU VAT area and the fact that the lack of EU membership might lead to increased disadvantages in VAT compared to nowadays. An expansion of the Mini-One-Stop-Shop (MOSS) to all kind of goods and services by the EU, thereby considerably facilitating the cross-border supply between EU countries, could lead to a significant disadvantage for UK companies after Brexit compared to the status quo. In order for them to profit from these simplification schemes, an increase in VAT registrations by UK companies in the EU is expected, triggering larger costs, longer processing times and growth in complexity. An advantage of the EU’s VAT Action Plan for the UK might be the EU’s intention to give more rights to individual member states regarding VAT rates policies. Loosening the current regulations and increasing freedom for individual EU countries might help to mitigate a possible divergence between the EU countries and the UK, all of them being free to set their VAT rates. While the EU VAT Directive and consequently the VATA distinguish between domestic supply, export and intra-Community supply, the last transaction type will vanish after Brexit. All supplies to non-UK companies will be treated as exports from a UK VAT perspective. On one hand, UK companies will be exempt from the Intrastat reporting requirements monitoring the movement of goods between EU member states and providing information on potential VAT fraud. On the other hand, all supplies to non-UK countries will have to be accompanied by export documents thereby causing an increase in administrative efforts. With Brexit, the simplification scheme “Triangulation” for cross-border supply of goods will also cease to apply for UK companies having large effects on international supply chains and in the worst case, leading to the dislocations of affected companies. The lack of the intra-Community transaction type will not have a direct impact on the VAT revenue of the UK government, because intra-Community supplies and exports are both exempt from VAT. For British financial services institutes Brexit might bring unexpected benefits from a VAT perspective as there might be the possibility to deduct input VAT from the generally exempt financial services in the future. However, even more severe than the VAT consequences for the businesses will be the drop out of the single market and the customs union and potential customs duty. For the UK this implies the requirement of border controls and origin checks. Cross-national differences in regulations can lead to delays at the border impacting international supply chains in general and companies working on a just-in-time principle particularly. Considering the interconnectedness of the UK and the EU, this might lead to less trade, higher prices and ultimately to a decrease in living standards and prosperity for both parties. Especially affected by the drop out are going to be financial services institutes by potentially losing passporting rights and the ability to serve EU countries from within the UK. The huge fragmentation in the regulation of financial services, only partially existing equivalence regimes and prevailing uncertainty already trigger the dislocations of well-known international companies having first serious effects on the global financial centre London. However, the latest political developments suggest a strong alignment of the UK to the single market and the EU customs union. Even a continuance in the single market and the EU customs union seems possible, considering the most recent deal on the withdrawal of the UK. This is caused by the recent agreement to leave the border between Northern Ireland and the Republic of Ireland open for people and trade. It remains unclear how Theresa May intends to simultaneously leave the single market and the customs union while having an open border with the Republic of Ireland, the latter being an EU member state. Nevertheless, nothing is agreed until everything is agreed and the path to a final deal remains long and stony. In 2018, phase two and therefore negotiations on a future cooperation between the UK and the EU will finally start after having reached an agreement on the divorce of these two parties by December 2017. These negotiations could lead to mutually beneficial agreements and to the desired deep and special partnership which was outlined multiple times by Theresa May. This of course could mitigate the described consequences by signing tax treaties favouring both sides or by granting the UK a special status for VAT treatment. Analysing the negotiating power of the two parties and keeping the first deal in mind makes clear, that the UK will face tough negotiations to achieve a special and beneficial treatment without granting considerable financial contributions or the acceptance of the Free Movement Directive. This Master’s thesis was written in the hot phase of the first negotiations therefore giving an overview on possible economic consequences of Brexit and particularly focusing on the implications for the UK VAT. The practical perspective, gained through interviewing leading tax experts, gives first-hand business insights to the reader and generates awareness for the VAT issue as a rather shortly discussed topic. The presented consequences are for sure not conclusive but provide a solid basis for further detailed analyses. Having reached a first agreement by the end of 2017, increases the likelihood for certain scenarios leading to the possibility to focus in further researches on less possible negotiations outcomes and increase therefore the level of detail. |