Papers by Harikumar Sankaran
Journal of Business & Economics Research, Jan 27, 2011
The Journal of Investing, Jan 8, 2019
We provide evidence on using the Black–Litterman (1991, 1992) asset allocation model and show tha... more We provide evidence on using the Black–Litterman (1991, 1992) asset allocation model and show that if investors form even partially correct opinions on small-cap and emerging market stocks, portfolio performance would have improved vis-à-vis no opinions. For the period 20006–2011, we show that the Black–Litterman expected returns for large-cap US stocks, the EAFE index, and the Bloomberg Barclays US aggregate bond index are highly correlated with future five-year returns in each of those assets. Expected returns on US small-cap and emerging market stocks have a low correlation with future returns. If an opinion was only partially correct on the latter assets, the resulting portfolios would have outperformed a market-cap-weighted benchmark portfolio. Thus, we conclude that investors may benefit more from investing resources in forming opinions on the future direction of small-cap and emerging market stocks relative to large-cap stocks.
The Journal of Investing, 2019
We provide evidence on using the Black–Litterman (1991, 1992) asset allocation model and show tha... more We provide evidence on using the Black–Litterman (1991, 1992) asset allocation model and show that if investors form even partially correct opinions on small-cap and emerging market stocks, portfolio performance would have improved vis-à-vis no opinions. For the period 20006–2011, we show that the Black–Litterman expected returns for large-cap US stocks, the EAFE index, and the Bloomberg Barclays US aggregate bond index are highly correlated with future five-year returns in each of those assets. Expected returns on US small-cap and emerging market stocks have a low correlation with future returns. If an opinion was only partially correct on the latter assets, the resulting portfolios would have outperformed a market-cap-weighted benchmark portfolio. Thus, we conclude that investors may benefit more from investing resources in forming opinions on the future direction of small-cap and emerging market stocks relative to large-cap stocks.
Journal of Accounting, Auditing & Finance, 1995
Journal of Business & Economics Research (JBER), 2011
This study examines factors related to CEO cash compensation for a sample of publicly-held firms ... more This study examines factors related to CEO cash compensation for a sample of publicly-held firms that are small, young, and growing. Our key finding is that founder CEOs accept lower cash compensation than non-founder CEOs. This evidence suggests that, for small, young, and growing firms, founder CEOs do not extract unusually large private benefits that harm outside shareholders. Weaker evidence suggests: firms with greater growth opportunities pay higher cash compensation to CEOs; firms with greater outsider representation on the board pay lower cash compensation to CEOs; and firms with greater inside director share ownership pay higher cash compensation to CEOs.
Journal of Business & Economics Research (JBER), 2010
The study proposes a new informational role for the offering price of an equity IPO. Offering pri... more The study proposes a new informational role for the offering price of an equity IPO. Offering prices are quoted either in whole prices (e.g.
Journal of Business & Economics Research (JBER), 2011
We propose using the cross-sectional (daily) average conditional volatility of commercial bank st... more We propose using the cross-sectional (daily) average conditional volatility of commercial bank stock returns as a measure of systemic risk for the U.S. banking industry. The performance of this measure is tested using data from the 2008 pre-crisis period. The measure is shown to incorporate individual bank risk as well as the cumulative riskiness of a cross-section of banks. Crosssectional regressions indicate that individual bank's probability of default is unrelated to the bank's conditional volatility during times of low, industry wide risk (as measured by average conditional volatility). However, the bank's conditional volatility significantly affects its probability of default when the industry is experiencing a high level risk. Regardless of the industry level risk, a bank's probability of default has a significant negative relation with its capital adequacy (as measured by the proportion of equity capital). Additionally, at an aggregate level, Granger causality tests indicate that the conditional volatility of 'big' banks causes the riskiness of medium and small banks to increase.
Inquiry: Critical Thinking Across the Disciplines, 2010
SSRN Electronic Journal, 2002
We propose a new informational role for the offering price of an equity IPO.
The Journal of Structured Finance, 2013
The magnitude of funds needed to improve infrastructure along the U.S.–Mexico border has substant... more The magnitude of funds needed to improve infrastructure along the U.S.–Mexico border has substantially outstripped the sources, resulting in a deteriorating environment and border security and placing the inhabitants at risk. Traditionally, the federal government in each country allocates a small budget to the North American Development Bank (NADB), a bi-national institution that manages infrastructure development. This article defines a bi-national bond that can be issued by the NADB in U.S. dollars and/or Mexican pesos and estimates the spread for default risk and premiums for the built-in hedge against adverse movements in interest rates and exchange rates. As of May 2012, the authors estimate a B rated, two-year zero, bi-national bond denominated in pesos will yield 9.645% without the hedge and 2.86% with the interest rate and exchange rate hedges. The structured feature of the bond helps in lowering the cost of financing.
Journal of Financial Research, 1994
In this paper we examine the effect of convertible debt on the investment incentives facing stock... more In this paper we examine the effect of convertible debt on the investment incentives facing stockholders. The effect depends critically on the value of existing assets relative to the firm's investment requirements. With a restrictive dividend covenant, convertible debt mitigates the overinvestment incentive associated with risky debt but exacerbates the underinvestment incentive at higher values of existing assets. A less‐restrictive dividend covenant exacerbates overinvestment under straight debt financing but reduces the underinvestment incentive induced by the conversion feature. In this context, a convertible debt contract with a less‐restrictive dividend covenant maximizes firm value.
Review of Quantitative Finance and Accounting, 2004
This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing ... more This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing models using call options data for British Pounds, Swiss Francs and Japanese Yen. The daily exchange rates exhibit an overwhelming presence of volatility clustering, suggesting that a richer model with ARCH/GARCH effects might have a better fit with actual prices. We perform dominant tests and calculate average percent mean squared errors of model prices. Our findings indicate that the Black-Scholes model outperforms the GARCH models. An implication of this result is that participants in the currency call options market do not seem to price volatility clusters in the underlying process.
The Quarterly Review of Economics and Finance, 1997
Some academics believe that the linear pro-ration of accrued interest transferred fiorn the buyer... more Some academics believe that the linear pro-ration of accrued interest transferred fiorn the buyer to the seller when a coupon bond trades between interest payment dates leads to an overstatement of the fGl1 value of the bond and imputes a bias into conventional yield to maturity algorithms. This paper provides an analytical resolution to the debate about the correct role of the accrued interest component and demonstrates that current practice reflects the actual cash flows traded between bondholders. In addition, we show that yield to maturity calculations which incorporate linearly pro-rated accrued interest are unbiased.
Managerial and Decision Economics, 1999
ABSTRACT
Journal of Business Finance & Accounting, 2002
The intrinsic value approach amortizes over the life of the option, the difference between the st... more The intrinsic value approach amortizes over the life of the option, the difference between the stock price on the date of the grant and the exercise price of the option. The fair market value approach amortizes over the life of the option, the market value of stock options on the date of the grant. These approaches do not reflect the changes in the option–based compensation cost after the grant date. This paper proposes an economic cost approach that not only adjusts for the changes in the value of the options during its life but also records the issuance of the stock at fair market value on the exercise date.
Journal of Business Finance & Accounting, 1995
The debt issues made for refunding outstanding debt do not add to the managers' pool of discretio... more The debt issues made for refunding outstanding debt do not add to the managers' pool of discretionary funds. In the absence of retention of funds, we do not anticipate the stock price reaction to be related to the level of free cash flow in the firm. Our study controls for the information effects of other issue related variables such as change in leverage, type of debt offered, risk, and seniority. The results indicated that the abnormal stock returns and the level of free cash flow have no significant relation in the non-retention sample. This evidence suggests that in the absence of any discretionary funds generated by the proceeds, the investors do not impute additional agency cost by conditioning their response on the free cash flow in the firm. In the case of debt offerings for financing capital expenditure, working capital, and general purpose, the abnormal stock returns are significantly negatively related to the free cash flow across firms. These two observations are consistent with the hypothesis that non-retention of funds is an important requirement in the control hypothesis. Jensen (1986) suggests that the agency problem associated with free cash flow is most severe among firms with fewer growth opportunities. We stratify the samples into high growth and low growth firms using Tobin's q as a proxy for growth. An average q greater than unity indicates that managers have been making value increasing investment decisions and an average q less than unity suggests that managers have been making investments in negative net present value projects. We find that the negative relation between abnormal stock returns and free cash flow in the retention sample is driven by firms with q less than unity. Thus, debt issues made by low q firms are perceived to increase the agency costs due to the free cash flow problem, if the proceeds are retained within the firm. Although, the overall sample of offerings made for non-retention purposes does not indicate an agency problem due to free cash flow, the sub-sample of firms with q less than unity indicates a significant negative relation between abnormal stock returns and the level of free cash flow. In the absence of detailed reasons for the refunding issue, we are unable to explain why non-retention offers made by firms with q less than unity indicate presence of agency costs. While the overall sample supports the control hypothesis, the results for firms with fewer growth opportunities suggests that 'non-retention' of proceeds is not sufficient to control the agency problem as perceived by the investors. The rest of the paper is laid out as follows: related literature is presented in the next section; the data selection procedure and the variables used are discussed in the third section; the fourth section presents the results of the paper; and the final section contains the conclusion. RELATED LITERATURE Mann and Sicherman (1991) provide indirect evidence in favor of the control hypothesis. They examine the announcement effects of debt and equity issues 0 Blackwell Publishers Ltd. 1995
International Review of Economics & Finance, 1992
... Earnings and Dividend Announcements 143 4. The value V + tD is positive, increasing in theatt... more ... Earnings and Dividend Announcements 143 4. The value V + tD is positive, increasing in theattribute K and nondecreasing in the dividend D. 5. 9( Zo Hzpp only for a as given in ... 2. See alsoAmbarish, John, and Williams (1987), Bhattacharya (1979), and Miller and Rock (1985). ...
Applied Financial Economics, 2004
This study extends the microstructure literature by examining the offering prices in the United S... more This study extends the microstructure literature by examining the offering prices in the United States Initial Public Offering (IPO) market for the presence of clusters. It is found that the use of whole prices is more frequent in the IPO market than in secondary stock markets. Offering prices in the IPO market exhibit a dominant clustering at whole fives and
Journal of Financial Research, 1991
The manager of a depository institution is shown to exhibit risk‐taking behavior under the curren... more The manager of a depository institution is shown to exhibit risk‐taking behavior under the current insurance arrangement. Perfect monitoring or risk‐based deposit insurance would eliminate this incentive if information were symmetric between bank managers and the insuring agency. Absent symmetric information, it is shown that a recently suggested scheme, where insurers collect insurance premiums based on projected and actual risk levels, does not control the risk‐taking incentive. The only way to control this incentive through insurance rates is to levy a relatively high premium, which is not actuarially fair.
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Papers by Harikumar Sankaran