Contributions in Merlin

Traditional models of sovereign debt assume that governments seek to maximize the long terminterests of their countries.We assume instead that governments borrow and default according to their own political interests. In particular they often have limited horizons and are reluctant to default strategically. This allows us to define a maximum sustainable debt to GDP ratio, and compute it as a function of the countrys fundamentals. We find that maximum sustainable debt varies a lot across countries, consistent with the notion of country specific debt (in)tolerance. Actual debt ratios are below their maximum sustainable levels, as governments seeking further terms in office fear debt-induced default that may jeopardize their prospects for reelection. The difference between actual and maximum sustainable debt ratios creates a "margin of safety" that allows governments to increase debt if necessary with little corresponding increase in default risk. The probability of default climbs precipitously once the margin of safety has been exhausted.

This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management with their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where risk averse firms decide on their hedging strategies before their product market strategies. We find that hedging modifies the pricing and production strategies of firms. This strategic effect is channelled through the risk-adjusted expected cost, i.e., the expected marginal cost under the measure induced by shareholdersrisk aversion. It has diametrically opposed impacts depending on the nature of product market competition: hedging toughens quantity competition while it softens price competition. Finally, committing to a hedging strategy is always a best response to non committing, and is a dominant strategy if firms compete à la Hotelling.

The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate, in the context of bounded financial positions, the class of surplus-invariant acceptance sets. These are characterized by the fact that acceptability does not depend on the positive part, or surplus, of a capital position. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, because it focuses on the interests of liability holders of a financial institution. We provide a dual characterization of surplus-invariant, convex acceptance sets, and show that the combination of surplus invariance and coherence leads to a narrow range of capital adequacy tests, essentially limited to scenario-based tests. Finally, we emphasize the advantages of dealing with surplus-invariant acceptance sets as the primary object rather than directly with risk measures, such as loss-based and excess-invariant risk measures, which have been recently studied by Cont, Deguest & He and by Staum, respectively.

In this paper the optimal consumption strategy of an investor who owns a fixed sized risky project is studied. The cash flows generated by the risky project follow an arithmetic Brownian motion, and the investor earns interest on cash reserves. The short-rate may be stochastic, and the time horizon may be finite. This results in a family of Hamilton-Jacobi-Bellman variational inequalities that include PDEs whose solutions must be approximated numerically. To do so an finite element approximation and a time marching scheme are employed.

A set of policy experiments regarding binding say-on-pay votes in Switzerland suggests that shareholders may prefer to have limits set on their own power. The stock price reactions indicate a trade-off: On the one hand, binding votes on executive compensation amounts enhance the alignment of management interests with those of the shareholders, reducing agency costs. On the other hand, when shareholders have the power to (partially) set pay levels retrospectively, it may increase hold-up problems by distorting executives’ incentives to make extra-contractual, firm-specific investments. These findings have implications for the design of policy.

This paper investigates the causes and economic consequences of a voluntary turn away from IFRS to Swiss GAAP. As firms are permitted to switch from IFRS to Swiss GAAP in Switzerland, we can exploit this unique setting to analyze the reasons of a turn away, the changes in reporting, and its capital market effects. Prior literature on IFRS adoption (and other disclosure literature) generally finds a decrease in information asymmetry with increasing levels of disclosure. Accordingly, turning away from IFRS should increase the information asymmetry. However, our empirical results from a difference-in-differences design do not support this prediction. We interpret this finding as evidence that the disclosure level of Swiss GAAP is sufficient to meet the demand for disclosure of the switching firms’ investors. By providing evidence that—for certain firms—a switch away from IFRS does not necessarily induce negative economic consequences, the findings contribute to the current discussion on whether IFRS fits for small- and medium-sized firms.

The paper contributes to the literature on corporate cash holdings by showing that there is a financial markets channel that affects corporations’ cash holdings. Leaning on the literature on stock price feedback to firm fundamentals, we advance the hypothesis that firms with more liquid stocks hold more cash, ceteris paribus, as ammunition to defend against negative cascades or stimulate positive ones. This contrasts with an alternative view that firms with more liquid stocks are less financially constrained and therefore hold relatively less cash. The evidence favors the cascade/cash as ammunition hypothesis, also with respect to its predictions regarding growth opportunities and cash holdings. As a robustness check, we use the introduction of tick size decimalization in 2001 as a natural experiment where liquidity was exogenously shocked. We also find evidence of two-way causality; a higher level of stock liquidity leads to more cash holdings, and vice versa.

The current financial crisis has given rise to calls to toughen considerably the codes of corporate governance put in place in many countries to regulate corporate behaviour (e.g. the UK Combined Code). These codes vary slightly in form but tend to contain a mix of non-discretionary regulations and discretionary guidance and information. Almost all such codes embody some variation or other of the comply-or-explain principle. Companies should comply with the rules or explain why they do not. In this way the code framers avoid, or perhaps enable, a one-size-fits-all approach. It is this discretion that governments are under pressure to limit, but little is known about how it is used, in what circumstances, and to what effect? In this paper we report the findings of research carried out in the UK and Germany to investigate the extent to which large public companies comply with the rules, and the attitudes of company directors and legal counsel to using comply-or-explain. We find that positive conformance with codes depends on factors such as the extent to which regulatees are engaged in the formation and revision of the code, and thus feel a sense of ownership; the existence of interested and relevant monitors; and the extent to which soft regulation is a traditional means of control in a domain. We also found that pressure, both internal and external, both real and imagined, can lead to the establishment of a norm of full compliance, with perhaps perverse outcomes, and that in any event the majority of the contents of codes become akin to hard law, where deviation is not considered acceptable. There are however a very small number of rules where temporary deviation may be unavoidable from time to time and where non-compliance accompanied by a valid explanation is accepted.

During the last three decades, scholars from communication studies, political science, sociology, cultural anthropology and management science have studied the characteristics and dynamics of meetings from different perspectives. This has resulted in a large, though very fragmented, body of knowledge about meetings and their different functions in the organization. So far, however, this knowledge has not been systematically related to the strategy process. The purpose of this review is to organize the different literatures by identifying the meeting functions (coordination, cognitive, political, symbolic and social) as well as the meeting practices (initiation, conduct and termination practices) and by outlining the impact of meetings on the strategy process. This results in an integrative framework which synthesizes the literature and which serves as a guide for future research.

The first equity future was launced in 1982 on the S&P 500 index. The future market has grown enormously since then and in more liquid than the cash market in many countries. The analysis here proves that the future market is highly efficient in many perspectives. Transaction costs in futures are on average one third of those in the cash market. Arbitrage is hardly ever possible. As futures contain information about future dividends, they can be used to analyze the market estimation for dividends. Even this proves to be quite efficient, with an exception in 2008, where the market has either underestimated the subsequent dividends or increased risk aversion caused too low market values of future dividends. Withholding taxes cause a split between the future and cash market. For investors who cannot reclaim foreign withholding taxes, it is beneficiary for them to only invest in futures, as dividend earnings implied in the future price are not taxed.