Determinants of Franchise Value in the National Basketball Association
By Matthew Van Liedekerke
Franchise values in the National Basketball Association (NBA) have more than tripled over the last five years, with the average franchise worth $1.36 billion. Using panel data on NBA franchises between 2009 and 2016, this paper finds that market, performance, star players, and brand are significant determinants of franchise value at the team level and the NBA’s television contract is the primary driver of league-wide franchise value appreciation. The valuation methodologies used in this paper predict that a franchise in Seattle would be worth $1.4 billion in 2017, which could inform the NBA’s decision on expansion.
Advisors: Connel Fullenkamp, Alison Hagy, Kent Kimbrough | JEL Codes: Z2, Z23, G32
Deterring Ineffcient Gambling in Risk-Taking Agents
By Ryan Westphal
This paper proposes a model describing the incentive issues faced by principals and agents when the agent has limited liability and is capable of undertaking unidentifiable, inefficient risky behavior. We propose a contract structure by which the principal deters risk by deferring payment to the agent until she reaches an absorbing steady-state in which promised equity alone deters inefficient behavior. The paper discusses the effect of exogenous parameters on the tradeoffs facing the principal as well as the implications they have on the efficient choice of contract. We also outline extensions to the model in which the principal has access to a costly monitoring technology to identify inefficient risk taking. The theoretical results have implications for real-world employment contracts and practices in financial firms such as investment banks and private equity funds.
Advisor: Curtis Taylor | JEL Codes: D82, D86, G32, L14 | Tagged: Contract Theory, Moral Hazard., Optimal Contracts, Risk Management
Understanding SME Finance: Determinants of Relationship Lending
By Sean Suk Hyun Choi
Much of the existing literature in small and medium-sized enterprise (SME) finance surveys the impact of borrower and lender characteristics on firms’ credit availability, and it has already been established that there is a link between strong firm-bank relationship and higher level of credit availability. In this paper, I focus on what determines the strength of relationship, measured by length and exclusivity. In particular, I was able to build an original metric to gauge the strength of relationship using the inverse value of the number of financial institution that a firm deals with. Using a set of regressions, I confirm the existing theories that size of the firm and type of ownership matters. Small firms and sole proprietorships tend to have longer and more exclusive relationships, which implies their reliance on relationship lending. Firm owner characteristics are shown to be somewhat important, in that it serves as proxies for a given firm’s creditworthiness.
Advisor: Grace Kim, Michelle Connolly | JEL Codes: G02, G21, G30, L14 | Tagged: Asymmetrical information, Credit Rationing, Relationship Lending, SME Finance
Corporate Financial Distress and Bankruptcy Prediction in North American Construction Industry
By Gang Li
This paper seeks to explore the application of Altman’s bankruptcy prediction model in the construction industry by measuring its percentage accuracy on a dataset consisting of 108 bankrupt & non-bankrupt firms selected across the timeline of 1985-2013. Another main goal this paper is to explore the predictive power of an expanded variable set tailored to the construction industry and compare the results. Specifically, this measuring process is done using machine learning algorithm based on scikit-learn library that transforms a raw .csv file into clean vectorized dataset. The algorithm provides various classifiers to cross-validate the training set, which produces mixed statistics that favors neither variable set but provides insight into the reliability of the non-linear classifiers.
Advisor: Connel Fullenkamp | JEL Codes: C38, C5, G33, G34 | Tagged: Bankruptcy, Corporate, Discriminant Analysis, Distress, Machine Learning
The Impact of Macroeconomic Surprises on Mergers & Acquisitions for Real Estate Investment Trusts
By John Battinelli and John Reid
This paper examines the impact of various macroeconomics and real estate specific surprises on M&A transactions involving Real Estate Investment Trust. The 2008 financial crisis drastically affected merger & acquisitions activity, especially within the real estate market. The number of M&A transactions involving Real Estate Investment Trusts were very volatile during this period of economic turmoil and it appeared that several economic factors contributed to changing patterns in M&A activity. Our study uses time series data to draw a connection between REIT-related M&A activity and quantifiable factors. From or results we find there to be a relationship between the macroeconomic environment and REIT-related M&A activity.
Advisors: Connel Fullenkamp, Kent Kimbrough, Marjorie McElroy,
JEL Codes: G10, G14, G34 | Tagged: Macroeconomic Surprises, Mergers & Acquisitions, Real Estate Investment Trust
The Hidden Costs of Central Bank Borrowing
By Shane Hunt
This paper explores a previously overlooked unintended consequence of a private bank accepting Central Bank loans as a lender of last resort. Applying the basic Markowitz Security Model, I explore the potential effect of a private bank accepting a Central Bank loan as a signal of increased risk of investment in that private bank to the private markets. Finding a possibility that private investors will charge a penalty risk premium for having sought Central Bank financing, I consider the effects of this premium in three different game theoretic scenarios, each with a different set of assumptions that could apply in different Economic settings. Depending on the specific environment, possible effects include dependence on Central Bank financing, bankruptcy, or an eventual return to the private financial markets for future funding.
Advisor: Marjorie McElroy, Nir Jaimovich | JEL Codes: E58, G02, G21, G28, G32 | Tagged: Banking, Central Banking, Finance
Auctions as an Alternative to Book Building in the IPO Process: An Examination of Underpricing for Large Firms in France
By John Mekjian
A relevant factor in determining the quality of an initial public offering (IPO) mechanism is the level and variability of underpricing that occurs. The percentage difference between the IPO price and the closing price after one day of trading is a common way to define the “underpricing” of the stock. Although companies may value a small amount of positive underpricing, they certainly want this to be controlled. Both extreme positive and extreme negative underpricing are undesirable for a company. Building off of a paper that found a lower mean and variability of underpricing for firms that use the auction IPO mechanism as opposed to the book building IPO mechanism, this paper argues that auctions are not disadvantaged when only large firms are considered. Although this paper finds that the book building mechanism controls underpricing better than the auction mechanism, the advantage disappears when considering only large firms. This analysis is relevant because, aside from two companies, only small companies have used the auction IPO mechanism in the United States. Due to the lack of auction IPOs in the United States, this paper uses French data in its analysis. By showing that large firms using the auction mechanism are not disadvantaged when compared to large firms using the book building mechanism, this paper attempts to encourage large firms in the United States to consider using the auction method for their IPOs.
Advisor: James Roberts, Marjorie McElroy | JEL Codes: G12, G14, G20, G30 | Tagged: Auction, IPO, Underpricing
A Further Exploration of Reverse Takeovers as an Alternative to Initial Public Offerings
By Matt LoSardo and Zhunliang Zhu
In theory a reverse takeover (RTO) should be a viable alternative to initial public offerings (IPO) for private companies looking to access the public capital markets. Since the IPO process can be very timely and include significant costs, both direct and indirect, we analyze reverse takeovers as an alternative method. Recent papers have posed some similar questions, evaluating underpricing and market-timing, which we look to confirm. However, our paper seeks to build on these analyses, with a particular focus on long-term returns for RTO stocks. Overall we find that reverse takeovers can be successfully used instead of IPOs and should be sustainable long-term investments.
Advisor: Edward Tower, Marjorie McElroy | JEL Codes: G12, G24, G32, G34 | Tagged: Finance, Initial Public Offering, Reverse Takeover
Taming the Dragon: The Modernization of the Chinese Equity Markets and its Effects on IPO Underpricing
By William Benesh
The extreme underpricing of Chinese Initial Public Offerings in the early days of the Chinese equity markets was reduced by several reforms instituted by the Chinese government from around 2000 to 2002. These reforms reduced 1-day returns on IPOs from 295% to 72%. The reforms reduced IPO underpricing by decreasing the inequality between IPO supply and demand. These reforms, while announced between 2000 and 2002, likely took until around 2004 to take full effect. In addition to inequality between supply and demand, other factors such as information asymmetry and government/quality signaling contributed to underpricing both before and after the reforms.
Advisors: Francesco Bianchi, Kent Kimbrough | JEL Codes: G14, G15, G28, G30 | Tagged: China, Initial Public Offerings, Regulation, Stock Markets, Underpricing
