WWW.DISSERTATION.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Dissertations, online materials
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 | 5 |   ...   | 7 |

«4-19-2013 Leverage and Liquidity: Evidence from the Closed- End Fund Industry Yuehua Tang Follow this and additional works at: ...»

-- [ Page 1 ] --

Georgia State University

ScholarWorks @ Georgia State University

Finance Dissertations Department of Finance

4-19-2013

Leverage and Liquidity: Evidence from the Closed-

End Fund Industry

Yuehua Tang

Follow this and additional works at: http://scholarworks.gsu.edu/finance_diss

Recommended Citation

Tang, Yuehua, "Leverage and Liquidity: Evidence from the Closed-End Fund Industry." Dissertation, Georgia State University, 2013.

http://scholarworks.gsu.edu/finance_diss/22 This Dissertation is brought to you for free and open access by the Department of Finance at ScholarWorks @ Georgia State University. It has been accepted for inclusion in Finance Dissertations by an authorized administrator of ScholarWorks @ Georgia State University. For more information, please contact scholarworks@gsu.edu.

PERMISSION TO BORROW

In presenting this dissertation as a partial fulfillment of the requirements for an advanced degree from Georgia State University, I agree that the Library of the University shall make it available for inspection and circulation in accordance with its regulations governing materials of this type. I agree that permission to quote from, to copy from, or publish this dissertation may be granted by the author or, in his/her absence, the professor under whose direction it was written or, in his absence, by the Dean of the Robinson College of Business. Such quoting, copying, or publishing must be solely for the scholarly purposes and does not involve potential financial gain. It is understood that any copying from or publication of this dissertation which involves potential gain will not be allowed without written permission of the author.

YUEHUA TANG

NOTICE TO BORROWERS

All dissertations deposited in the Georgia State University Library must be used only in accordance with the stipulations prescribed by the author in the preceding statement.

The author of this dissertation is:

YUEHUA TANG

1470 DRUID VALLEY DR. NE APT #A ATLANTA, GA30329

The director of this dissertation is:

DR. VIKAS AGARWAL

DEPARTMENT OF FINANCE

J. MACK ROBINSON COLLEGE OF BUSINESS

GEORGIA STATE UNIVERSITY

35 BROAD STREET, NW, SUITE 1207 ATLANTA, GA 30303

LEVERAGE AND LIQUIDITY: EVIDENCE FROM THE CLOSED-END FUND INDUSTRY

BY

YUEHUA TANG

A Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree Of Doctor of Philosophy In the Robinson College of Business Of Georgia State University

GEORGIA STATE UNIVERSITY

ROBINSON COLLEGE OF BUSINESS

2013 Copyright by YUEHUA TANG 2013 ACCEPTANCE This dissertation was prepared under the direction of the YUEHUA TANG’s Dissertation Committee. It has been approved and accepted by all members of that committee, and it has been accepted in partial fulfillment of the requirements for the degree of Doctoral of Philosophy in Business Administration in the J. Mack Robinson College of Business of Georgia State University on April 19, 2013.

–  –  –

This paper uses the February 2008 auction rate security (ARS) market freeze to examine the spillover effects of an exogenous funding liquidity shock on the underlying asset markets. Consistent with theory, I find that the stocks held by closed-end funds (CEFs) that borrow from the ARS market experience larger declines in market liquidity and lower returns than other stocks after the ARS market freeze. These effects are more pronounced when (i) these ARS-levered CEFs hold a larger fraction of shares outstanding, (ii) the borrowing level from the ARS market is higher, and (iii) the stocks are less liquid before the ARS market freeze. The spillover effects of the ARS market freeze are temporary and diminish during the next 12 months. Further investigation shows that the spillover effects are indeed associated with the heavy selling behavior of the ARS-levered CEFs after experiencing the ARS market shock. Overall, this study provides evidence that a funding liquidity shock to financial institutions can cause a decline in both market liquidity and the prices of the underlying assets.

ACKNOWLEDGEMENT

I am very grateful for the guidance and support from my dissertation chair, Vikas Agarwal, as well as members of my committee, Lixin Huang, Wei Jiang, and Jayant Kale.

The paper has benefited from comments from Viral Acharya, Charles Chang, Mark Chen, Qi Chen, Tarun Chordia, Susan Christoffersen, Conrad Ciccotello, Alex Edmans, Vyacheslav Fos, Thierry Foucault, Itay Goldstein, Daniel Greene, Jean Helwege, Jennifer Huang, Jiekun Huang, Peggy Huang, Zsuzsa Huszar, Di Li, Marc Lipson, Omesh Kini, Linlin Ma, Spencer Martin, Albert Menkveld, Kevin Mullally, Zhiyi Qian, Chip Ryan, Jay Shanken, Zhen Shi, Youchang Wu, Baozhong Yang, Tong Yu, and seminar and conference participants at the 2011 European Finance Association Meetings, the 2011 Financial Management Association Meetings, the 2012 Financial Intermediation Research Society Conference (FIRS), the 2012 FMA Doctoral Student Consortium and Special Ph.D. Paper Session, Cheung Kong GSB, Clemson University, Cornerstone Research (Boston), Georgia State University, Imperial College London, Miami University, Shanghai Advanced Institute of Finance (SAIF), Singapore Management University, Stevens Institute of Technology, Temple University, University of Cincinnati, University of Hong Kong, University of Kentucky, University of Massachusetts Amherst, University of New South Wales (UNSW), University of Warwick. I thank George Connaughton for research assistance. I acknowledge research support from the Center for the Economic Analysis of Risk (CEAR) at Georgia State University.





Lastly, I dedicate this dissertation to my parents Dingyuan Tang and Siying Wang and my two sisters Dehua Tang and Junhua Tang for their invaluable love and support.

Leverage and Liquidity:

Evidence from the Closed-End Fund Industry

–  –  –

ABSTRACT

This paper uses the February 2008 auction rate security (ARS) market freeze to examine the spillover effects of an exogenous funding liquidity shock on the underlying asset markets. Consistent with theory, I find that the stocks held by closed-end funds (CEFs) that borrow from the ARS market experience larger declines in market liquidity and lower returns than other stocks after the ARS market freeze. These effects are more pronounced when (i) these ARS-levered CEFs hold a larger fraction of shares outstanding, (ii) the borrowing level from the ARS market is higher, and (iii) the stocks are less liquid before the ARS market freeze. The spillover effects of the ARS market freeze are temporary and diminish during the next 12 months. Further investigation shows that the spillover effects are indeed associated with the heavy selling behavior of the ARS-levered CEFs after experiencing the ARS market shock. Overall, this study provides evidence that a funding liquidity shock to financial institutions can cause a decline in both market liquidity and the prices of the underlying assets.

JEL Classification: G01, G12, G20 Keywords: Leverage; Funding liquidity; Market liquidity; Closed-end funds * Yuehua Tang, J. Mack Robinson College of Business, Georgia State University, 35 Broad Street, Suite 1242, Atlanta, GA 30303; phone: (404) 413-7319; fax: (404)-413-7312; e-mail: ytang9@gsu.edu.

Leverage and Liquidity:

Evidence from the Closed-End Fund Industry The interaction between financial institutions’ funding liquidity and the financial markets in which they operate has received much attention in economics and finance studies. Theory shows that funding liquidity shocks to financial institutions can be transmitted to the underlying asset markets through three microeconomic mechanisms: (i) rollover borrowing (Acharya and Viswanathan (2011));

(ii) margin funding (Brunnermeier and Pedersen (2009)); and (iii) redemption (Diamond and Dybvig (1983), Shleifer and Vishny (1997)). As Brunnermeier (2009) summarizes, funding liquidity risk can take three forms: (i) rollover risk, or the risk that it will be more costly to roll over short-term borrowing, (ii) margin funding risk, or the risk that margins will change, and (iii) redemption risk, or the risk that bank depositors or investors of mutual funds and hedge funds withdraw capital.

Consistent with theory, previous studies show empirical evidence of the spillover effects of margin funding and investors’ redemption on underlying asset markets (Coval and Stafford (2007), Aragon and Strahan (2012)).

One important type of financing that has been less studied is short-term rollover borrowing.

Many types of financial institutions, such as banks, broker–dealers, hedge funds, and closed-end funds (CEFs), have substantial short-term rollover borrowing on their balance sheets. The rollover borrowing can be in the form of commercial papers, repurchase agreements (repos), and auction rate securities (ARS) that have to be rolled over during periods ranging from overnight to a few months.

Though rollover borrowing is prevalent in financial firms, there is little empirical evidence of its spillover effects on the underlying asset markets. To fill this gap, I use the CEF industry as a laboratory to examine the spillover effects on the assets held by institutions that experience an exogenous shock to their rollover financing.

–  –  –

than redemption and margin funding risks. Many CEFs experienced a negative shock to their rollover borrowing when a primary borrowing source, the ARS market, froze in early February 2008. Since forces such as liquidity withdrawals of large broker–dealers were responsible for the ARS market freeze (Han and Li (2009)), it can be used as an exogenous funding liquidity shock to the CEF industry. I refer to CEFs that borrow from the ARS market as ARS-levered CEFs. Using this experiment, I find systematic evidence of the spillover effects of the ARS market freeze on stocks held by ARS-levered CEFs. My evidence suggests that the ARS market freeze caused a decline in both market liquidity and the prices of the stocks held by ARS-levered CEFs.

The CEF industry provides an ideal setting to examine the issues related to rollover borrowing for the following reasons. First, CEFs are frequent users of leverage. The average borrowing level of U.S. CEFs is about 25% of their total assets (Cherkes, Sagi, and Stanton (2009)).

Unlike hedge funds, which are largely unregulated and therefore do not have to report leverage, CEF leverage data are available on their balance sheets. Second, CEFs typically need to roll over their short-term borrowing because many of them obtain financing from the ARS market. The interest rates of auction rate securities are reset through auctions every one or four weeks. Third, unlike openend mutual funds and hedge funds, CEFs are not subject to redemption or margin funding risks because they are closed to fund flows and generally do not trade on margin. This feature allows me to focus on rollover risk without the confounding effects of other types of funding liquidity risk.

Lastly, CEFs experienced a negative shock to their funding liquidity when the ARS market froze in February 2008. The ARS market freeze caused CEF borrowing costs to increase substantially.

The reason is that when an auction fails, a CEF’s borrowing rate is automatically reset to the predetermined maximum rate according to the security prospectus, which can be as high as 20% (Han and Li (2009)). The ARS market freeze forced ARS-levered CEFs to liquidate assets to redeem

–  –  –

half of the 668 CEFs in their report had auction rate securities outstanding at the end of the first quarter of 2008, with a total liquidation preference of about $64 billion.1 In 2008 U.S. domestic equity CEFs redeemed about 60% of their ARS borrowing. While the deleveraging of the CEF industry may not have affected the overall stock market, it can have had substantial effects on commonly held stocks when many CEFs that experienced the funding liquidity shock attempted to sell these positions simultaneously.

Using data on all U.S. domestic equity CEFs, I examine the spillover effects of the ARS market freeze on stocks held by ARS-levered CEFs. I use a difference-in-differences approach to compare changes in market liquidity and returns of stocks held by ARS-levered CEFs (the treatment group) to stocks not held by these CEFs (the control group) during the four quarters of 2008. My main results show that stocks held by ARS-levered CEFs experience larger declines in market liquidity and lower stock returns after the ARS market freeze than stocks not held by ARS-levered CEFs. The magnitude of the spillover effect is increasing in (i) the fraction of shares outstanding held by ARS-levered CEFs, (ii) the borrowing ratio from the ARS market of ARS-levered CEFs, and (iii) the illiquidity of stocks before the ARS market freeze. These spillover effects are also economically significant. For instance, for a given stock, a one standard deviation increase in the percentage of shares outstanding held by ARS-levered CEFs induces a 4.5 percentage point drop in annualized stock returns. In counterfactual tests, I do not find similar results before the funding liquidity shock (i.e., during 2006 and 2007).

An alternative explanation of the results mentioned above is that there is some unobserved new information about the fundamentals of stocks held by ARS-levered CEFs. To test this alternative hypothesis, I investigate whether the spillover effects of the ARS market freeze on stock returns are 1 See http://www.ici.org/policy/markets/domestic/08_sec_amps_com.

–  –  –

only concentrated in the three-month period after the quarter-end holding date of ARS-levered CEFs and disappear over the next three quarters. Thus, the spillover effects of the ARS market freeze are temporary and unlikely to be driven by the arrival of new information.



Pages:   || 2 | 3 | 4 | 5 |   ...   | 7 |


Similar works:

«How Should Suburbs Help Their Central Cities? Growth and Welfare Enhancing Intra-metropolitan Fiscal Distributions by Andrew F. Haughwout Federal Reserve Bank of New York Robert P. Inman University of Pennsylvania and National Bureau of Economic Research Abstract Cities are the location of the great majority of economic activity in the United States, and produce a disproportionate share of output. It is thus critical for the economy’s long term growth that cities operate efficiently. In this...»

«The Economic Consequences of Accounting in the English and Welsh Water Industry: A non-shareholder perspective Magda Abou-Seada Christine Cooper Firoozeh Ghaffari Richard Jones Orthodoxia Kyriacou Mary Simpson 1 In recent years a plethora of academic studies have emerged which focus upon varying themes relating to the UK water industry since it was privatized in 1989. (For a selection see, Shaoul, 1997a, 1997b; Ogden, 1995; Ogden and Anderson, 1999; Letza and Smallman, 2001). Since 1989, the UK...»

«Vijay Mehrotra Department of Finance and Quantitative Analytics School of Business and Professional Studies University of San Francisco 415-422-2257 / vmehrotra@usfca.edu EDUCATION Stanford University, Stanford, CA • PhD, Operations Research, 1992 Advisor: Professor Frederick S. Hillier Dissertation: “An Approximation Procedure for General Closed Multiclass Queueing Networks” • MS, Operations Research, 1989 Focus on Optimization, Stochastic Methods, Policy, and Applications Key Papers:...»

«Georgia State University ScholarWorks @ Georgia State University Finance Dissertations Department of Finance 1-12-2012 Agency Problems in Target-Date Funds Vallapuzha Sandhya Georgia State University Follow this and additional works at: http://scholarworks.gsu.edu/finance_diss Recommended Citation Sandhya, Vallapuzha, Agency Problems in Target-Date Funds. Dissertation, Georgia State University, 2012. http://scholarworks.gsu.edu/finance_diss/19 This Dissertation is brought to you for free and...»

«THE GOOD PERSON OF SZECHWAN Note We will be working on a version of the play that Brecht wrote while living in America in the late 40’s, generally called the “Santa Monica” version. If you have read the original “Zurich” script, you will see that this version is shorter and faster; it eliminates a few characters and a couple of scenes. The plot is also different in that Shu Ta chooses to set up a drug business rather than a tobacco factory. Brecht felt this version of the story cast a...»

«INFORMS | Vijay Mehrotra interviews Fred Hillier, November 2, 2015 VIJAY I'm Vijay Mehrotra, professor of business analytics and information systems at the University MEHROTRA: of San Francisco. And I have the pleasure and privilege of having a chance to interview my dissertation advisor, Professor Frederick S. Hillier of Stanford University. Fred, I want to take you back to your days in high school. If I think about that, kind of 1950 to 1954, what was it like in those post World War II days,...»

«Education Policy in the Republic of Korea: Building Block or Stumbling Block? Jisoon Lee School of Economics Seoul National University Copyright © 2002 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. The World Bank enjoys copyright under protocol 2 of the Universal Copyright Convention. This material may nonetheless be copied for research, educational, or scholarly purposes only in the member countries of The World...»

«Cash Intensive Businesses Audit Techniques Guide Chapter 16 Scrap Metal NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date. Contents Introduction General...»

«STLtoday.com Printer friendly Ethanol plants come with hidden cost. http://www.stltoday.com/stltoday/emaf.nsf/Popup?ReadForm&db=stlto. PRINTER FRIENDLY [Print] [Close] Ethanol plants come with hidden cost: Water By Bill Lambrecht POST-DISPATCH WASHINGTON BUREAU CHIEF Sunday, Apr. 15 2007 ROGERSVILLE, Mo. — David Pitts doesn't begrudge the farmers and investors who see a new ethanol plant as a way to make some good money. He's just worried he won't have any water to drink when they're through....»

«The ADOR MVD SCRAP web application provides you a way to verify that all vehicles needing to be scrapped do not currently have a lien against their title and are not flagged by NCIC as stolen. SCRAP also updates the titling system by cancelling the current title and issuing a junk cancellation title on the vehicle’s VIN.SCRAP USER MANUAL Distributed by ADOR MVD CONTENTS Introduction Register Your Business Registration Wizard – Facility Information Registration Wizard – User Information...»

«13 Vijay K. Bhatia* & Christopher N. Candlin* Analysing Arbitration Laws across Legal Systems Abstract In this paper, the national Indian and Chinese statutes on arbitration are compared with the UNCITRAL Model Law. After a presentation of the GILD-MMC project, focus is especially on textual aspects indicating attitudes towards the relation between the administrative powers and the parties in commercial arbitration. Thus, looking at the features all-inclusiveness, information load, information...»

«SHOULD SUBURBS HELP THEIR CENTRAL CITY? by Andrew F. Haughwout* and Robert P. Inman** April, 2002 ABSTRACT Should suburbs help finance the core public services of their central city? Previous arguments for such assistance have stressed spillovers from city services to suburban residents or the fact that suburban residents (should?) care about their city’s poor. We explore the validity of a third possible argument for such assistance, one now stressed by many large city mayors. Suburban...»





 
<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.