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21 posts on "Corporate Finance"

October 22, 2018

Tax Reform and U.S. Effective Profit Taxes: From Low to Lower



LSE_Tax Reform and U.S. Effective Profit Taxes: From Low to Lower


The Tax Cuts and Jobs Act (TCJA) reduced the federal corporate profit tax rate from 35 percent to 21 percent. Adding in state profit taxes, the overall U.S. tax rate went from 39 percent, one of the highest rates in the world, to 26 percent, about the average rate abroad. The implications of the new law for U.S. competitiveness depend on how these statutory tax rates compare with the actual rates faced by U.S. and foreign companies. To address this question, this post presents new evidence on tax payments as a share of profits, as well as analytical measures of tax impacts on profitability. We find that the U.S. effective tax rate was already below the average rate abroad prior to enactment of the TCJA, and that it is now well below the rate in most countries.

Continue reading "Tax Reform and U.S. Effective Profit Taxes: From Low to Lower" »

Posted by Blog Author at 7:00 AM in Corporate Finance, International Economics | Permalink | Comments (0)

October 01, 2018

Regulatory Changes and the Cost of Capital for Banks



LSE_Regulatory Changes and the Cost of Capital for Banks

In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks’ cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act (DFA), banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries (NBFI).

Continue reading "Regulatory Changes and the Cost of Capital for Banks" »

Posted by Blog Author at 7:02 AM in Bank Capital, Banks, Corporate Finance, Crisis, Dodd-Frank | Permalink | Comments (0)

November 29, 2017

Did Investor Sentiment Affect Credit Risk around the 2016 Election?



LSE_2017_Did Investor Sentiment Affect Credit Risk around the 2016 Election?

Immediately following the presidential election of 2016, both consumer and investor sentiments were buoyant and financial markets boomed. That these sentiments affect financial asset prices is not so surprising, given past stock market evidence and episodes such as the dot-com bubble. Perhaps more surprising, the risk of corporate default—which is driven mainly by firms’ financial health but also by bond liquidity—also fell following the election, as indicated by lower yield spreads. In this post, I show that, although expectations of better corporate and macroeconomic conditions were the primary drivers of lower credit risk, improved investor sentiment also contributed.

Continue reading "Did Investor Sentiment Affect Credit Risk around the 2016 Election?" »

Posted by Blog Author at 7:00 AM in Corporate Finance, Financial Markets | Permalink | Comments (0)

May 15, 2017

Do Credit Markets Watch the Waving Flag of Bankruptcy?



Personal bankruptcy is surprisingly common in the United States. Almost 15 percent of the U.S. population has filed for bankruptcy sometime over the past twenty-five years, based on my calculations using the New York Fed Consumer Credit Panel/Equifax (CCP). In 2015, roughly 800,000 debtors filed for bankruptcy, according to court records, representing 0.64 percent of U.S. households. One of the consequences for filers is a mark on their credit report—a bankruptcy “flag”—which indicates that the consumer has filed for bankruptcy.

Continue reading "Do Credit Markets Watch the Waving Flag of Bankruptcy?" »

Posted by Blog Author at 7:00 AM in Corporate Finance, Household Finance | Permalink | Comments (0)

November 09, 2016

Performance Bonds for Bankers: Taking Aim at Misconduct



LSE_Performance_bonds_for_bankers_iStock_671704_460x288

Given the long list of problems that have emerged in banks over the past several years, it is time to consider performance bonds for bankers. Performance bonds are used to ensure that appropriate actions are taken by a party when monitoring or enforcement is expensive. A simple example is a security deposit on an apartment rental. The risk of losing the deposit motivates renters to take care of the apartment, relieving the landlord of the need to monitor the premises. Although not quite as simple as a security deposit, performance bonds for bankers could provide more incentive for bankers to take better care of our financial system.

Continue reading "Performance Bonds for Bankers: Taking Aim at Misconduct" »

October 12, 2016

Let the Light In: How Financial Reporting and Transparency Improve Corporate Governance



Let the Light In: How Financial Reporting and Transparency Improve Corporate Governance

Financial reporting is valuable because corporate governance—which we view as the set of contracts that help align managers’ interests with those of shareholders—can be more efficient when the parties commit themselves to a more transparent information environment. This is a key theme in our recent article “The Role of Financial Reporting and Transparency in Corporate Governance,” which reviews the literature on the part played by financial reporting in resolving agency conflicts among managers, directors, and shareholders. In this post, we highlight some of the governance issues and recommendations discussed in the article.

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October 05, 2016

Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?



LSE_Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?

Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread—the yield of a corporate bond minus the yield of a Treasury bond of the same maturity—of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non‑energy firms also rose even though many non‑energy firms might be expected to benefit from lower energy‑related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non‑energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.

Continue reading "Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?" »

February 18, 2016

Are Asset Managers Vulnerable to Fire Sales?



Update: A technical appendix has been added to the post.

Liquidity Series III: Ninth of eleven posts

According to conventional wisdom, an open-ended investment fund that has a floating net asset value (NAV) and no leverage will never experience a run and hence never have to fire-sell assets. In that view, a decline in the value of the fund’s assets will just lead to a commensurate and automatic decline in the fund’s equity—end of story. In this post, we argue that the conventional wisdom is incomplete and then explore some of the systemic risk consequences of investment funds’ vulnerabilities to fire-sale spillovers.

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June 22, 2015

Becoming a Large Bank? It’s Not Easy



LSE_2015_becoming-large-bank_de_450_art

Size is usually seen as the leading indication of the costs that a bank failure would impose on society. As a result, the Dodd-Frank Act of 2010 requires banks to have adequate capital and liquidity to mitigate default risk and imposes additional requirements on larger banks to enhance their safety. In this post, we show that it is highly uncommon for banks to reach sizes at which they are considered systemically important.

Continue reading "Becoming a Large Bank? It’s Not Easy" »

Posted by Blog Author at 7:00 AM in Banks, Corporate Finance, Financial Institutions | Permalink | Comments (2)

June 01, 2015

What Drives Buyout Booms and Busts?



Buyout activity by financial investors fluctuates substantially over time. In the United States, peak years result in close to one hundred public-to-private buyout transactions and trough years in as few as ten. The typical buyout is primarily funded by debt, hence the term “leveraged buyout” (or LBO). As a result, analysis of buyout fluctuations has focused on the availability and cost of debt financing. However, in a recent staff report, we find that the overall cost of capital, rather than debt alone, is the primary driver of buyout activity. We argue that it is the common changes in both the cost of debt and the cost of equity—the aggregate risk premium—that are the source of booms and busts in buyout activity.

Continue reading "What Drives Buyout Booms and Busts?" »

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