Risk and the Market’s Reaction to M&A Announcements

We estimate how an acquiring firm’s risk changes depending on whether the market initially judges the acquisition to be neutral, strongly negative, or strongly positive for the shareholders of the acquiring firm. We found that for an average neutral acquisition, the annualized standard deviation of an acquiring firm’s total return declines by 5%. In contrast, acquisitions judged negatively by the market result in a 5% increase in total risk, while acquisitions judged positively by the market feature a 30-basis-point increase in total risk. We found the median acquisition to be value creating, not value destructive. Value destruction tends to be concentrated among large firms and to be associated with extreme negative outliers. Acquiring firms with longholder CEOs are more prone to undertake acquisitions and more prone to take on risk, but are less prone to engage in value-destructive acquisitions than acquiring firms with non-longholder CEOs. In this respect, acquiring firms with non-longholder CEOs are more apt to undertake risky bad acquisitions, especially when their prior returns lie above the industry average. In addition, acquiring firms with non-longholder CEOs are less prone to take on good acquisitions that are high in risk. As a general matter, firms with longholder CEOs are less risk sensitive to changes in prior returns than firms with non-longholder CEOs.

Local Bankruptcy and Geographic Contagion in the Bank Loan Market*

We examine whether corporate bankruptcies influence bank loan characteristics of geographically proximate firms. Controlling for industry contagion and local economic conditions, firms headquartered near a bankruptcy event experience a 7 basis point increase in loan spreads. The effect is transitory and cannot be fully explained by local correlated information or lenders’ financial health. Instead, the effect is more pronounced for informationally opaque bankruptcies and borrowers, and weakened among loans with relationship lenders and lenders with significant local presence.

Financial Development, Default Rates and Credit Spreads

US corporate default rates increased dramatically from an annual average of 0.32% between 1950 and 1984 up to 1.65% since 1985. Meanwhile, credit spreads rose by just 6 basis points. We argue that financial development—intended as an exogenous reduction in the fixed cost of borrowing—accounts for this evidence. In a heterogeneous firm model financial development boosts both default rates and firms’ expected recovery rates. These two effects offset each other, muting the change in the credit spreads. The model explains 63% of the rise in default rates and predicts a 6 basis point drop in the credit spreads.

THE STUDY OF MARKET TIMING IMPLEMENTATION IN INDONESIAN STOCK MARKET

This study is intended to discuss about implementation of market timing as an investment alternative strategic in Indonesian Stock Market. Market timing is procedure for changing portfolio asset allocation to deal with changes in business cycle. The market timing indicator used in this study is interest rate of Bank Indonesia. The active portfolio consist of IHSG and bond for simple rotation strategy. Sector rotation strategy consist of cyclical and non cyclical sector index. The dissecting cycle analyse by two methods, Hamilton Filter and indicator change assumptions. The secondary data used in this study have a span of time from January 2005 - December 2017. The result showed that active strategies produced better performance than passive strategy, and sector rotation were the best performance among other alternative strategies. Optimal performance of simple rotation occurs when change of variable BI rate by ±2% and optimal performance of sector rotation occurs when change of variable BI rate by ±4%. Keywords—Hamilton Filter; Market Timing; Sector Rotation; Simple Rotation AbstrakPenelitian ini bertujuan untuk membahas tentang penerapan market timing sebagai tindakan strategi investasi aktif di pasar modal Indonesia. Market timing merupakan prosedur perubahan alokasi aset portfolio untuk menghadapi perubahan siklus bisnis di suatu negara. Indikator market timing yang digunakan dalam penelitian ini adalah suku bunga acuan Bank Indonesia. Portfolio aktif terdiri dari IHSG dan obligasi untuk strategi aktif rotasi sederhana dan indeks sektor siklikal dan non siklikal untuk rotasi sektoral. Pemilahan siklus dilakukan dengan dua metode yaitu Hamilton Filter dan asumsi perubahan variabel indikator. Seluruh data sekunder yang digunakan dalam penelitian ini memiliki rentang waktu dari Januari 2005 - Desember 2017. Hasil penelitian menunjukkan bahwa strategi aktif menghasilkan kinerja lebih baik relatif terhadap strategi pasif, dan strategi rotasi sektoral secara keseluruhan lebih baik dibandingkan dengan alternatif strategi lain. Strategi rotasi sederhana optimal pada penggunaan asumsi perubahan variabel ±25 bps (basis point) dan strategi rotasi sektoral optimal pada penggunaan asumsi perubahan variabel ±100 bps (basis point). Kata kunci— Hamilton Filter, Market Timing, Rotasi Sederhana, Rotasi Sektoral

The UK Economy

GDP is forecast to grow by nearly 2 per cent this year and in 2019. Our forecasts have been revised higher since November.Annual consumer price inflation peaked at 3 per cent in the final quarter of 2017 and is forecast to ease back to the target rate of 2 per cent over the next eight quarters.We expect the Bank of England to continue normalisation by raising Bank Rate in May by 25 basis point steps and every six months after that until the policy rate reaches 2 per cent.