AFFI - Association Francaise de Finance (French Finance Association)

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Volume 36 - Numéro 2

juin 2015

Rethinking Zero Returns in the Liquidity Puzzle of a Limit Order Market - 25 juin 2015

Paolo MAZZA

The frequency of zero returns has often been used as a proxy for illiquidity in the literature. Based on Euronext intraday data, we show that zero returns are significantly related to liquidity instead. We conduct an event study and run conditional logit regressions using spread, depth, dispersion and slope measures as liquidity variables. Although we find that zero returns are associated with less informed trading as previously outlined in the literature, this does not necessarily lead to higher illiquidity.

Too much of a good thing? The impact of a new bankruptcy law in Canada - 25 juin 2015

Timothy C.G. FISHER, Jocelyn MARTEL

A new, more debtor-friendly bankruptcy law in Canada is associated with a tenfold increase in the proportion of insolvent firms choosing reorganization over liquidation. Comparing before-and-after samples of randomly-selected firms, we find that firms reorganizing under the new law are smaller and weaker with a capital structure exhibiting significantly higher tax claims. Reflecting the bargaining power shift towards debtors, we find the new law is also associated with 25% lower creditor recovery rates and a longer time in reorganization. Unintended effects of the new law include a possible increased government role in financing small businesses and an incentive for secured creditors to favour bankruptcy over other forms of distress resolution.

On Path-Dependent Structured Funds: Complexity Does Not Always Pay (Asian versus Average Performance Funds) - 25 juin 2015

Philippe BERTRAND, Jean-Luc PRIGENT

As emphasized by the U.S. Dodd-Frank Act and the European MiFID directive, financial institutions are required to “categorise their clients and assess their suitability for each type of investment product.” In this framework, this paper examines several standard financial structured products whose performances are based on smoothing the return of an underlying risky asset and providing a guarantee at maturity. We use various criteria such as probabilities of providing merely the guarantee at maturity and Kappa measures. Surprisingly, our study reveals that funds based on averages of calls generally do better than Asian funds.