AFFI - Association Francaise de Finance (French Finance Association)

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Volume 32 - Numéro 2

décembre 2011

Ownership Structure and Board Characteristics as Determinants of CEO Turnover in French-Listed Companies - 15 décembre 2012

NGUYEN, Bang Dang

This paper investigates whether ownership structure and board characteristics determine CEO turnover in a sample of largest French-listed firms from 1994 to 2001. The results show that CEO turnover is negatively and significantly related to prior accounting and stock performance. Controlling for prior performance, ownership structure and characteristics of boards of directors impact the sensitivity of CEO turnover to prior performance. Firms with blockholders, high government ownership, two-tier boards, and larger boards are less likely to dismiss CEOs for poor performance. Institutional investors and their co-existence with large blockholders, do not impact the sensitivity of CEO turnover to prior performance

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A Structural Balance Sheet Model of Sovereign Credit Risk - 15 décembre 2012

FRANÇOIS, Pascal ; HÜBNER, Georges ; SIBILLE, Jean-Roch

This article studies sovereign credit spreads using a contingent claims model and a balance sheet representation of the sovereign economy. Analytical formulae for domestic and external debt values as well as for the financial guarantee are derived in a framework where recovery rate is endogenously determined as the solution of a strategic bargaining game. The approach allows to relate sovereign credit spreads to observable macroeconomic factors, and in particular accounts for contagion effects through the corporate and banking sectors. Pricing performance as well as predictions about credit spread determinants are successfully tested on the Brazilian economy.

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The Link between Social Rating and Financial Capital Structure - 15 décembre 2011


This article focuses on the link between a firm’s corporate financial structure and its social rating. We propose a new general model showing that less socially engaged firms issue more debt in order to avoid the financial market penalties experienced by non-socially responsible firms. With growing investor interest in social responsibility, these non-SR firms bear a higher financing cost when issuing equity capital. However, they can issue debt at the same cost as their SR counterparts given that banks do not take into account SR criteria in their interest rate determinations. Debt will thus be preferred by non-socially responsible companies while socially responsible firms take advantage of issuing equity capital. We tested the main implications of our model on the European market. Our sample consists of 562 firms which were rated by the Vigeo rating agency from 1999 to 2007. We use regression methodology to study the link between a firm’s debt ratio and its social rating. Our regressions used for explaining firm debt ratios include various control variables (as explanatory variables) such as bankruptcy costs, tax rates, agency and adverse selection variables. Our results show that European firms with a lower social rating tend to exhibit a higher or increasing debt ratio over the period 1999-2007. In particular, when considering the top and bottom quartile firms in term of their social rating, a firm’s social rating has a negative and highly significant influence on its debt ratio. Moreover, we get a significant and negative link between the debt ratio variation and each social dimension rating, except the environmental and the community involvement ones. Globally, our results seem to show that debt financing is a way for firms with low social commitment to avoid the equity market penalty.

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Misunderstanding risk and return? - 15 décembre 2011

LIOUI, Abraham ; PONCET, Patrice

In a seminal contribution, Campbell (1996) [Campbell, J., 1996, Understanding Risk and Return, Journal of Political Economy 104(2), 298-345] proposed a methodology based on a VAR(1) process to test Merton’s Intertemporal CAPM. Innovations in predictors of portfolio returns are estimated and used as risk factors in an asset pricing model. One key element is the triangularization of the VAR system used to obtain orthogonal innovations. We show that this procedure makes the cross-sectional prices of risk associated with the predictors non identifiable. This is because they depend on the arbitrary ordering of the variables in the VAR. Moreover, since the factors are orthogonal to the market and to one another, the comparison with alternative multi-factor models is problematic. To illustrate, we revisit recent results that allegedly showed that innovations in the predictors drive the two Fama-French factors out in the cross section of portfolio excess returns and concluded that HML and SMB proxy for time-varying investment opportunities. We show that these results are mainly a statistical artifact of the methodology used to obtain orthogonal innovations.

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