Essays on Empirical Asset Pricing

Publication: ThesisDoctoral thesis

Abstract

My thesis consists of three chapters that study the effects of capital structure decisions on asset prices. While most insights covered in this thesis are empirical, they are nonetheless founded in the theory of financial economics, and in the final chapter, a model is used to explain an observed phenomenon. The first chapter, titled "Covenant Prices in the US Corporate Bond Market", is a joint project with Lukas Handler and Rainer Jankowitsch. This paper provides a novel approach to empirically determine prices of bond covenants based on transaction data for the US corporate bond market. Thereby, we are the first to measure price effects over the whole lifetime of bond contracts. We find that covenant prices vary significantly over time and are associated with changes in market-wide credit risk, volatility, and macroeconomic variables. Apart from these time-series dynamics, there is also significant variation across bond and firm characteristics. In particular, covenant prices increase with interest rate, credit, and liquidity risk and are higher for firms that have more growth options, more tangible assets, and are smaller. Furthermore, we document a positive correlation between the prices of covenants and their subsequent inclusion rates. In the second chapter, "Dividend Signalling Effects in Corporate Bonds under Asymmetric Information", I empirically investigates the signalling content of dividend changes by studying US corporate bonds' price reactions. A key innovation of this study is the consideration of asymmetric information. Firms with higher degrees of asymmetric information experience positive bond returns following dividend increases, whereas more transparent firms show adverse reactions. On the other hand, bonds generally depreciate across the asymmetric information spectrum when firms announce dividend decreases. Yet these price drops are larger for firms with more information asymmetry. Overall, the results document dividends as a signal about firm fundamentals and the importance of information frictions for the signalling hypothesis. Finally, the third chapter, titled "The Maturity Premium", is a joint project with Maria Chaderina and Josef Zechner. We show that firms with longer debt maturities earn risk premia not explained by unconditional factors. Embedding dynamic capital structure choices in an asset pricing framework where the market price of risk evolves with the business cycle, we find that firms with long-term debt exhibit more countercyclical leverage. The induced covariance between betas and the market price of risk generates a maturity premium similar in size to our empirical estimate of 0.21% per month. We also provide direct evidence for the model mechanism and confirm that the maturity premium is consistent with observed leverage dynamics of long- and short-maturity firms.
Original languageEnglish
Awarding Institution
  • WU Vienna
Publication statusPublished - 2021

Cite this