FI Master Thesis Topics 2009-2010

7/31/2019 FI Master Thesis Topics 2009-2010

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Master Thesis TopicsFinance & Investments

2009-2010


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Table of Contents


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Master Thesis topic 1: The Design of Lockup Contracts in IPO Firms inEurope

A lockup contract is an agreement between initial shareholders and the underwriter that prohibits initial shareholders from selling any of their shares of stock for a specific period

of time after the IPO. The existence of lockup agreements is to reduce the chance of issuerstaking advantage of insider information, allowing more time for outside investors toresolve uncertainty in firm value without the adverse effect of insider selling. However,lockup agreements are much more diverse in Europe than in the U.S. both in terms of theamount and length of equity shares locked up after the IPO. The U.S. lockup agreementsare voluntary and mostly standardized towards 180 days while they are frequentlymandatory and involved in much longer periods in Europe. Another important feature of lockup agreements is the negative stock price reaction around the lockup expiry date whichhas been documented by numerous researchers recently. This effect is contradictory to theefficient market hypothesis which advocates that the IPO prospectus should reveal allinformation pertinent to the determinant of stock price.

Most importantly, there are also separate lockup agreements for different categories of initial shareholders within the same firm such as directors and venture capitalists. Asdirectors assume important leadership roles and they are more informed than other shareholders, thus the information asymmetry tends to be higher between directors andoutside investors than between venture capitalists and outside investors. However, venturecapitalists are repeat investors who have valuable reputation at stake which may limit their conflict of interests with outside investors acquiring shares in the IPO. Outside investorsmay not purchase shares in the IPO backed by venture capitalists who were previouslyinvolved in taking advantage of insider information and reducing the wealth of outsider investors. Besides venture capitalists also use IPO as an exit mechanism to optimally

recycle investments and maximize future returns. Hence the length and expiry of directorslockup agreements will convey significantly different information than the length andexpiry of venture capitalists lockup agreements.

Important Literatures

Aggarwal, R., Krigman, L. and Womack, K., 2002, Strategic IPO Underpricing,Information Momentum, and Lockup Expiration Selling. Journal of Financial Economics66, 105 137.

Brav, A. and Gompers, P., 2003, The Role of Lockups in Initial Public Offerings. The

Review of Financial Studies 16, 1 29.

Cornell, B. and Sirri, E., 1992, The Reaction of Investors and Stock Prices to Insider Trading. The Journal of Finance 47, 1031 1059.

Field, L. and Hanka, G., 2001, The Expiration of IPO Share Lockups. The Journal of Finance 56, 471 500.


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Gompers, P. and Lerner, J., 1998, Venture Capital Distributions: Short-Run and Long-Run Reactions. The Journal of Finance 53, 2161 2183. Lakonishok, J. and Lee, I., 2001, Are Insider Trades Informative. The Review of

Financial Studies 14, 79 111.

Lin, T. and Smith, R., 1998, Insider Reputation and Selling Decisions: The Unwinding of Venture Capital Investments during Equity IPOs. Journal of Corporate Finance 4, 241 263.

Ofek, E. and Richardson, M., 2000, The IPO Lock-Up Period: Implications for MarketEfficiency and Downward Sloping Demand Curves. Unpublished working paper, NewYork University.

Ofek, E. and Richardson, M., 2003, DotCom Mania: The Rise and Fall of Internet Stock

Prices. The Journal of Finance 53, 1113 1137.Schultz, P., 2008, Downward Sloping Demand Curve, the Supply of Shares, and theCollapse of Internet Stock Prices. The Journal of Finance 63, 351 378.


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Master Thesis topic 2: Bank Risk Management

Banks play a crucial role in the economy. They lend to agents who need capitals tofinance their long term projects. This lending activity is financed with short term deposits

put in their account in exchange of different financial services banks are able to provide.

The balance sheets of banks are structured on the asset side with long terms loans fundedon the liability side with short term deposits, debts raised on the financial markets (bonds)and on the interbank market, and finally equity provided by shareholders.

Banks are also real risk machine. The mismatch between lending long and borrowing short (deposits) exposes them to interest risk. But bank credit portfolio isconfronted with different kind of risks among which the risk of non reimbursement or default of the borrower (credit risk) is the most essential nowadays. So screening andmonitoring their borrower is an important dimension of their activity and also a source of information asymmetry over the financial market. A loss of confidence can also threatenthe sources of bank funding. Massive withdrawals on deposits or freezes of interbank loanscan lead the bank to severe liquidity problems and worse to an insolvency situation.

Bank equity is therefore the only stable resource which can be used in the differentsituations of financial disaster. That is why Regulation Authorities (Basel Committee) have progressively enforced the banking system as a whole to hold a minimum capital level.(For more information: see in www.bis.org ).

Different studies can be conducted here:-How do banks adjust their capital ratios?-What is the link between the business cycle and the amount of bank capital(procyclicity effect)?-Why do banks hold capital well in excess of the minimum capital required by theregulation (capital buffer)?

Although the first goal of this capital constraint is to ensure the soundness of the bank individually, the recent subprime mortgage crisis has clearly revealed a big drawback.Large losses due to the default on loan reimbursements have lowered dramatically thecapital forcing banks to reduce their lending activity.

Some interesting issues are:-How do banks adjust their risk-taking behaviour in their loan extension process?-What effect has the use of credit derivatives and/or credit securitization on the

bank lending activity?-What is the role of credit securitization on banking risk measured by its equity

beta?Some introducing references are:-Allen Berger & Richard Herring & Giorgio Szeg, The role of capital in financialinstitutions, Journal of banking and finance 1995.-Terhi Jokipii & Alistair Milne, The cyclical behavior of European bank capital buffers,Journal of banking and finance, 32, 2008.
http://www.bis.org/http://www.bis.org/


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-Leonardo Gambacorta & Paolo Emilio Mistrulli, Bank capital and lending behavior:Empirical evidence for Italy, Banca dItalia research department, February 2003.-Dennis Hnsel & Jan-Peter Krahnen, Does credit securitization reduce bank risk?Evidence from the European CDO market, January 2007, available on:http://ssm.com/abstract=967430

-Joe Peek & Eric Rosengren, Bank regulation and the credit crunch Journal of bankingand finance, 19, 1995.-Christina Bannier & Dennis Hnsel, Determinants of banks engagement in loansecuritization, August 2007, available on: http://ssm.com/abstract=1014305 .-Benedikt Goderis & Ian Marsh & Judit Vall Castello & Wolf Wagner, Bank behavior with access to credit risk transfer, Bank of Finland Research, Discussion paper 4/2007.
http://ssm.com/abstract=967430http://ssm.com/abstract=1014305http://ssm.com/abstract=967430http://ssm.com/abstract=1014305


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Master Thesis topic 3: The Ambiguous Role of Credit Ratings

Ratings are tools provided to evaluate the chance investors have of receiving interest and principal repayments on a debt as scheduled in the involved contract issued by the borrower. Three rating agencies Standard & Poors, Moodys and Fitch have developed or

improved specific quantitatives models to assess the credit quality of a borrower. Their importance has grown considerably those last years.Since 1980s, in order to keep the soundness of the banking system threatened by severalcrisis and bankruptcies, official regulatory authorities have stengthened the bankingregulation. On a daily basis banks must continuously adjust their capital according to theriskiness of their assets. But since Basel II they are constrained to assess regularly thedefault risk of their credit portfolio (see on www.bis.org )In reaction banks have developed new strategies and financial products in order to alleviatethis capital constraint and diversify their lending activity. Credit derivatives and structured

products based on securitization mecanism have been widely used in this process.Structured products involves the pooling of assets and the subsequent sale to investors of

tranched claims on the cash flows backed by these pools. Each tranche has a specific ratinggiven by one of the three agencies.But the recent subprime crisis have shown the limits and the fragility of a systemcompletely dependent on the rating system.and rating agencies have been widellycriticized.

Several researches are proposed here:-Are rating agencies fair in their credit notations?-Is there a cyclical pattern in the credit rating reevaluations?-Are credit ratings foreseeable?-What is the impact of credit ratings on the evaluation of the pricing of debt instruments or

on the issuing corporate or on the structured product concerned-What is the effect of multiple ratings on the pricing of the backet instrument?.

Some primary references:-Structured finance: Complexity, risk and the use of ratings, Ingo Fender & JaneMitchell, BIS Quaterly review, June 2005.CDO rating methodology: Some thoughts on model risk and its implications, BISWorking paper N163, November 2004.Corporate governance and rating: Do agencies rate mutual bank bonds fairly? K. Fisher & R. Mahfoudhi, CREFA Working paper July 2002-The effect or credit ratings on credit default swap spreads and credit spreads, K. Daniels

& M. Jensen, The journal of fixed income, December 2005.-The relationship between credit default swap spreads, bond yields and credit ratingannouncements, J Hull & M Predescu & A. White, Journal of banking and finance 2004.-Do multiple CDO ratings impact credit spreads? S. Morkoetter & S. Westerfeld, Swissinstitute of banking and finance University of St Gallen, November 2008.-The role of ratings in structured finance: issues and implications, BIS, January 2005.
http://www.bis.org/http://www.bis.org/


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Master Thesis topic 4: Mergers and Acquisitions

The vast literature of Mergers and Acquisitions (M&A) deals with issues like the effect of M&A on short/long-run firm performance, the factors for success and failure of M&A, the

benefits/losses for the shareholders of the target and/or bidding firm from M&A. The

seminal paper of Jensen and Ruback (1983) who conclude that there is evidence thatcorporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose and the highly influential article by Roll (1986) whointroduces the hubris hypothesis in an attempt to explain some of the empirical findings inthis area of research, are just a few excellent examples of this enormous literature.Although many articles are already devoted to this topic, new points of view continue toemerge. In this topic we focus on the effects of and motives for Mergers and Acquisitions.

Possible research ideas include (but are certainly not limited to)

What are the effects/is the synergy of cross-border M&A deals? Do the empirical findings also hold for non-US data? What is the impact of legislation (for example Sarbanes-Oxley) on the effects

of/motives for M&A?

Jensen, M.C., and R.S. Ruback, 1983, The Market for Corporate Control: the ScientificEvidence, Journal of Financial Economics 11, 5-50.

Roll, R, 1986, The Hubris Hypothesis of Corporate Takeovers, Journal of Business 59,197-216.


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Master Thesis topic 5: Trading Volume and Asset Prices

Fundamental shocks to the economy drive both the supply and demand of financial assetsand their prices. Thus, any asset-pricing model that attempts to establish a structural link

between asset prices and underlying economic factors also establishes links between prices

and quantities such as trading volume. In fact, asset-pricing models link the joint behavior of prices and quantities with economic fundamentals such as the preferences of investorsand the future payoffs of the assets. Therefore, the construction and empiricalimplementation of any asset-pricing model should involve both price and quantities as itskey elements. Even from a purely empirical perspective, the joint behavior of price andquantities reveals more information about the relation between asset prices and economicfactors than prices alone. Yet the asset-pricing literature has centered more on prices andmuch less on quantities. For example, empirical investigations of well-known asset-pricingmodels such as the Capital Asset Pricing Model (CAPM) and its intertemporal extensions(ICAPM) have focused exclusively on prices and returns, completely ignoring theinformation contained in quantities. This project aims at uncovering valuable information

about price dynamics from trading volume.

References: See, for example, Lo and Wang (JFE2000), Lo and Wang (JF2006), Cremersand Mei (RFS2008)


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Master Thesis topic 6: Liquidity in Asset Markets

Liquidity concerns the ease and cost at which investors can trade assets in the marketplace.Traditionally, most literature on liquidity was in the field of market microstructure, whichfocuses on the sources of (il)liquidity. In this literature, asymmetric information, inventory

costs and market designs can generate limited liquidity. However, liquidity itself can alsoaffect asset prices. It requires little imagination to see that investors typically prefer liquidover otherwise identical illiquid securities. Consequently, the liquid asset will have a higher

price and thus a lower expected return. Moreover, if liquidity varies over time, investorswill be exposed to liquidity risk. Depending on the sign of the correlation of liquidityinnovations with returns, this can amplify or reduce the total risk exposure of an investor.One difficulty about liquidity is that it is hard to measure and has different dimensions. Themarginal trading cost and the market depth are both aspects of liquidity. The first isrelatively easily measured by the bid-ask spread (but this is not always available, especiallyin OTC markets), the latter one is typically measured by Amihuds (2002) ILLIQ, which isa reasonable measure of market depth.

In this topic students can work on several aspects of liquidity, both on the marketmicrostructure side as well as on the asset pricing side.Possible research questions are:

How related are different aspects and measures of liquidity in the cross-section andtime series dimension?

Is there commonality in liquidity of different asset markets? How much of the small-value premium is due to liquidity? How does individual and market-wide liquidity react to specific events like the

Ford/GM downgrade and why? What is the effect of short selling restrictions on liquidity? Are hedgefunds with a lockup period/liquidation lag less liquid and more exposed

to liquidity risk? Can liquidity explain pricing differences in stock pairs? What happened to liquidity in the financial crisis and why (possible for several

markets)?

Some references:

Market Microstructure: Glosten, L. and Milgrom, P., (1985), Bid, Ask, and Transaction Prices in a

Specialist Market With Heterogeneously Informed Traders, Journal of FinancialEconomics 14, 71-100.

Kyle, A., (1985), Continuous Auctions and Insider Trading, Econometrica 53,1315-1335.

Roll, R., (1984), A simple Implicit Measure of the Effective Bid - Ask Spread inan Efficient Market, Journal of Finance, 39, 1127-1139.

Ho, T. and Stoll, H. (1983), The Dynamics of Dealer Markets under Competition,Journal of Finance, 38, 10531074.


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Pricing liquidity: Amihud, Y., and H. Mendelson (1986): Asset pricing and the bid-ask spread,

"Journal of Finance, 17, 223-249. Amihud, Y.: 2002, Illiquidity and stock returns: cross-section and time series

effects, Journal of Financial Markets 5, 3156. Pastor, L. and Stambaugh, R.: 2003, Liquidity risk and expected stock returns,

Journal of Political Economy 111(3), 642685. Acharya, V. and Pedersen, L.: 2005, Asset pricing with liquidity risk, Journal of

Financial Economics 77, 375410. Dick-Nielsen, Jens, Feldhtter, Peter and Lando, David, Corporate Bond Liquidity

Before and after the Onset of the Subprime Crisis (February, 09 2009). EFA 2009Bergen Meetings Paper.

Note that capturing the intuition of these papers is most important, not being able to followevery technical derivation.


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Master Thesis topic 7: The Role of Corporate Governance in Mergersand Acquisitions

There are vast amount of empirical literature documenting that managers conduct badM&As which destroy shareholder value. For example, Moeller, Schlingemann and Stulz

(2005) show shareholder value destruction in a massive scale in the merger wave of late1990s. Jensen (1986) argues that managers tend to use the firms free cash flow to conductM&As in order to build their own business empire, at the expense of shareholders. Incontrast, Roll (1986) argues that managers conduct bad mergers due to their own hubris

bias.

A general and very interesting research topic is whether and how corporate governance plays a role in mergers and acquisitions. Can better corporate governance improve thequality of M&As? As there exist a variety of corporate governance mechanisms (such aslarge shareholder monitoring, corporate board monitoring, and managerial incentivecompensation). It will be interesting to investigate the effectiveness of various corporate

governance mechanisms in improving M&A performance. For example, possible researchideas include (but certainly are not limited to)

Can the existence of large shareholder(s) improve the firms M&A quality? Can an effective board structure improve M&A performance? Can managerial compensation structure affect M&A performance? Does corporate governance play a different role in Europe than in USA or Asia? ......

The research projects in this area will include extensive data gathering and soundeconometric analysis. For the first, experience with online data-gathering, as well as datahandling in MS Excel and/or comparable software is advised. For the second, a soundknowledge of statistics, with confidence in regression models, is suggested. Proposedsoftware includes Eviews, SAS, R or Matlab (MS Excel or SPSS can serve in certaincases).

The project will involve (on a full-time basis):

Month 1: Orientation, literature review, formulation of research objective.Write up of Chapter 1.

Month 2: Derivation of methodology: leads to thesis proposal. Write up of Chapter 2.

Month 3: Data gathering and preliminary analysis. Write up of Chapter 3. Month 4: Quantitative analysis. Month 5: Writing of remaining chapters and submission. End of month 6: Defence

Jensen, M.C., 1986, Agency Cost Of Free Cash Flow, Corporate Finance, andTakeovers, American Economic Review, 76(2): 323-329.


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Moeller, S., F. Schlingemann, and R. Stulz, 2005. 'Wealth Destruction on a Massive Scale?A Study of Acquiring-Firm Returns in the Recent Merger Wave', Journal of Finance vol.60(2): 757-782.

Roll, R, 1986, The Hubris Hypothesis of Corporate Takeovers, Journal of Business 59:

197-216.


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Master Thesis topic 8: The Risk of Corporate Fraud and CapitalMarket Consequences

It is well known that investors incur disastrous losses if a firm is detected of committingfraudulent misreporting (e.g., Anron and Worldcom). Extant corporate finance theories also

suggest that the incidence of fraud tends to exhibit industry and time-series clusteringeffects (e.g., Povel, Singh and Winton 2007, Qiu and Slezak 2008). Therefore, it may not

be unreasonable for one to perceive the risk of being detected of committing fraudulentmisreporting (the risk of detected fraud hereafter) as a systematic risk born by investors. If so, rational investors may require a risk premium for having to bear this risk.

A general and very interesting research topic is whether the (perceived) risk of detectedfraud increases the cost of capital of a firm, and if yes, by how much. Research in this areawill greatly deepen our understanding of the real consequences of corporate fraud.Specifically,

Does (perceived) higher risk of detected fraud increase the firms cost of equity? Does (perceived) higher risk of detected fraud affect the firms credit ratings given

by the rating agencies, thus increase the firms cost of debt (yield of maturity) inthe bond market?

Does (perceived) higher risk of detected fraud increase the firms interest rates for bank loans?

... ... The research projects in this area will include extensive data gathering and soundeconometric analysis. For the first, experience with online data-gathering, as well as datahandling in MS Excel and/or comparable software is advised. For the second, a soundknowledge of statistics, with confidence in regression models, is suggested. Proposedsoftware includes Eviews, SAS, R or Matlab (MS Excel or SPSS can serve in certaincases).

The project will involve (on a full-time basis):

Month 1: Orientation, literature review, formulation of research objective.Write up of Chapter 1.

Month 2: Derivation of methodology: leads to thesis proposal. Write up of Chapter 2.

Month 3: Data gathering and preliminary analysis. Write up of Chapter 3.

Month 4: Quantitative analysis. Month 5: Writing of remaining chapters and submission. End of month 6: Defence

Poval, P., R. Singh, and A. Winton, 2007. Booms, Busts, and Fraud. Review of Financial Studies , 20(4): 1219-1254.


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Qiu, B. and S.L. Slezak, 2008. The Strategic Interaction between Committing andDetecting Fraudulent Reporting. Working paper, SSRN.


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Master Thesis topic 9: Credit Derivatives

The market for credit default swaps (CDS) has been growing dramatically and tradingremained relatively liquid even during the on-going crisis (Fitch 2009). The buyer of aCDS has to pay a compensation, called the CDS spread, to the seller who provides

insurance against a set of pre-defined default events of the reference entity. The CDSspread represents the cost of hedging against the reference entitys risk of default. The CDSmarket is focused on issuer default risk and main participants are large banks, insurancecompanies, and hedge funds.

Interestingly, little is known about the informational efficiency of CDS markets. Issuesrelated to information processing are of key importance for the market participants tradingmotives and the implementation of their strategies (e.g., hedging, active credit portfoliomanagement, arbitrage, and speculation). For example, the impact of corporate news,ratings announcements, earnings announcements or similar events can be studied in moredetail. The following topics can be considered to conduct research projects that examinethe information processing in CDS markets.

Intra-industry contagion in CDS markets Recovery expectations in CDS markets Market-implied default risk expectations: The failure of Lehman Brothers

ReferencesCallen, J., Livnat, J., Segal, D., 2007. The impact of earnings on the pricing of credit

default swaps. Working Paper, February 2007.Fitch Ratings (2009): Global Credit Derivatives Survey: Surprises, Challenges and the

Future. August 20, 2009.Jorion, P., Zhang, G. (2007): Good and bad credit contagion: Evidence from credit default

swaps. Journal of Financial Economics 84, 860-883.Jorion, P., Zhang, G. (2009): Credit Contagion from Counterparty Risk. Journal of

Finance , scheduled for publication in October 2009.Knaup, M., Wagner, W. (2009): A Market-Based Measure of Credit Quality and Banks'

Performance during the Subprime Crisis. European Banking Center Discussion Paper No. 2009-06S.

Norden (2008): Credit Derivatives, Corporate News, and Credit Ratings, WFA 2009 SanDiego Meetings Paper.

Uhrig-Homburg, M., Schlfer, T. (2009): Estimating Market-implied Recovery Rates fromCredit Default Swap Premia. University of Karlsruhe, Working Paper, May 2009.


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Master Thesis topic 10: Bank-Borrower Relationships

Bank loans represent the main source of external funding for companies and consumers inmany countries. The empirical banking research has documented that banks make use of different lending technologies to extend loans to their customers. These lending modes can

be classified in arms length lending and relationship lending. The existing studieshave addressed some of the benefits and costs associated with different lending modes.However, there are still many open empirical questions that matter for banks, borrowers,and from a macroeconomic perspective. It is particularly interesting to investigate thesequestions in the context of the on-going financial crisis that started in August 2007. Thetopics may also be differentiated by bank, borrower and country characteristics.

Several studies can be conducted to address the following questions: Bank lending behavior and macroeconomic conditions, especially the impact of

unemployment and labour market conditions Has bank lending to firms changed during the crisis? What happened to credit

availability and lending terms? How is default risk considered in foreign currency lending? Are there differences in

the pricing of foreign currency denominated bank loans and bonds of the same borrower?

What are the determinants of stopping, switching, and replacing bank relationships? Why do firms and/or consumers default? What determines the bank behavior before/at/after borrower default? When do

banks assist their borrowers and when do they pull the plug?

ReferencesBerger, A., Udell, G. (2006): A more complete conceptual framework for SME finance,

Journal of Banking and Finance 30, 2945-2966.Bharath, S., Dahiya, S., Saunders, A., Srinivasan, A. (2008): Lending relationships andloan contract terms, forthcoming Review of Financial Studies .

Boot, A. (2000): Relationship Banking: What do we know? Journal of Financial Intermediation 9, 7-25.

Brown, M., Ongena, S., Yesin, P. (2009): Foreign Currency Borrowing by Small Firms,Working Paper, Tilburg University.

Davydenko, S., Franks, J. (2007): Do Bankruptcy Codes Matter? A Study of Defaults inFrance, Germany, and the U.K. Journal of Finance 63, 565-608.

Ioannidou, V., Ongena, S. (2007): Time for a change: Loan Conditions and Bank Behavior when Firms Switch, Working paper, Tilburg University.

Jacobson, T., Kindell, R., Linde, J., Roszbach, K. (2009): Firm Default and AggregateFluctuations, CEPR Discussion Paper No. DP7083. Norden, L., Weber, M. (2008): Credit Line Usage, Checking Account Activity, and Default

Risk of Bank Borrowers, AFA 2008 New Orleans Meetings Paper.Rosenfeld, C. (2006): The Effect of Banking Relationships on the Future of Financially

Distressed Firms, Working Paper.


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Master Thesis topic 11: The Impact of CEO Personal Characteristics onCorporate Finance Decisions

A relatively new stream of research in the corporate finance literature is about the impact of CEOs personal characteristics on financial decisions. According to Bertrand and Schoar

(2003), managers characteristics play an important role in their decisions in the areas of investment, financial and organizational practices. In their survey of behavioral corporatefinance literature, Baker, Ruback, and Wurgler (2004) conclude that there are very few

behavioral finance studies that examine the CEOs perspective. Rather, most such studiesfocus mainly on investments and financing decisions. Examples of these studies are Heaton(2002) and Malmendier and Tate (2005, 2008), and Xuan (2009).

The topic of this thesis is about the impact of CEOs personal characteristics on their corporate decisions. One possibility would be to consider a CEOs industry workingexperience or geographical experience. Another possibility is whether they show persistent

behavior when working for another firm. Other suggestions are welcome as well.

Baker, M., Ruback, R., Wurgler, J., 2004. Behavioral corporate finance. In: Eckbo, B. E.(Eds.), Handbook in corporate finance: Empirical corporate finance.

Bertrand, M., Schoar, A., 2003. Managing with style: The effect of managers on firm policies. The Quarterly Journal of Economics 143, 1169-1208.

Heaton, J., 2002. Managerial optimism and corporate finance. Financial Management 32,33-45.

Malmendier, U., Tate, G., 2005a. CEO overconfidence and corporate investment. The

Journal of Finance 60, 2661-2700.

Malmendier, U., Tate, G., 2008. Who makes acquisitions? CEO overconfidence and themarkets reaction. Journal of Financial Economics 89, 20-43.

Xuan, Y., 2009. Empire-building or bridge-building? Evidence from new CEOs internalcapital allocation decisions. Review of Financial Studies, Forthcoming .


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Master Thesis topic 12: Corporate finance and governance of Dutchfirms in the 20th century

Many studies of corporate decisions focus on recent periods. The corporate decisionsinclude capital structure choice, dividend policy, governance structures and mergers and

acquisitions. In the Netherlands many studies have been carried out on these topics for periods starting in the 1980s. In these studies cross-sectional analyses are performed toexplain capital structure choice, dividend policy, governance structures and mergers andacquisitions. Alternatively these studies measure the effects of corporate decisions on firm

performance.

History can add fascinating dimensions in research on corporate decision-making. First ,data over longer time periods allows a study of long term corporate policies of firms. For example, why do some firms have stable dividends while other firms exhibit fluctuatingdividends? Or: do long term capital structures move towards optimal ratios? Second: inhistorical research by nature the institutional setting changes over time. Examples are tax

rules, company law and societal perceptions of good governance. These changes make it,for example, interesting to study the relation between the use of takeover defenses in firmsand the development of company law.

In the Netherlands, since 1903, a yearly guide is issued with information about all Dutchexchange-listed companies: Van Oss Effectengids . This guide includes a balance sheet,

profit and loss statement, debt and equity issues, dividends, board members, takeover defenses and important news such as mergers and bankruptcies. The topic requiresunderstanding of Dutch.

Examples of studies that can be carried out answer questions like:

- What was the impact on takeover defenses of the company law reforms in the1920s, 1960s and 1970s?- What is the representation of board members of banks on boards of non-financial

companies? How do bankers on the board influence capital structure choice?- Why do some firms have stable dividends while other firms exhibit fluctuating

dividends?- Do mergers influence long-term performance, short-term performance, or both?- Do takeover defenses work? Are firms with takeover defenses less likely to be

taken over?

An international initiative in this field is A history of corporate ownership around the

world: Family business groups to professional managers, Randall Morck (Ed.),http://www.press.uchicago.edu/presssite/metadata.epl?mode=synopsis&bookkey=160762 Especially Morcks introduction contains many useful ideas. The paper by De Jong andRell describes existing literature for the Netherlands and the data in Van Oss Effectengids.
http://www.press.uchicago.edu/presssite/metadata.epl?mode=synopsis&bookkey=160762http://www.press.uchicago.edu/presssite/metadata.epl?mode=synopsis&bookkey=160762


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Master Thesis topic 13: The Governance of Banks

The governance of financial institutions is currently the topic of a broad debate in theinstitutions, legislators and society at large. The current crisis has uncovered theweaknesses of present governance systems, as well as the major consequences on the realeconomy. The topic of this item - corporate governance in financial institutions - intends toevoke discussion about the antecedents and evolution of the management, control,ownership and regulation in financial corporations.

In particular, the topic can focus on four topics:- Models of corporate governance: the European or Anglo-Saxon model? Do specificmodels of governance perform better than other models? Can we observe convergence ingovernance models?- Governance mechanisms in financial institutions: ownership. What are optimal ownershipstructures for banks and insurance firms? Does ownership influence performance?- Governance mechanisms in financial institutions: boards. What are optimal boardstructures (size, independence, experience) for banks and insurance firms? Does boardstructure influence performance?- Regulation and legislation of governance. What is the role of governments in thegovernance of banks and other financials. How do governments operate as shareholdersand board members?

Literature.Many interesting papers are currently written. See ssrn.com for the newest insights: E.g.Fahlenbrach & Stulz, 2009, Bank CEO Incentives and the Credit Crisis,http://www.ssrn.com/abstract=1439859
http://www.ssrn.com/abstract=1439859http://www.ssrn.com/abstract=1439859


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Master Thesis topic 14: Asset pricing and the economic risk factors

Different financial assets have different returns and these differences can be large. For example, investors appear to require a lower return on average for investing in growthfirms (7% per annum) when compared to value firms (14% pa), and a higher return for

investing in futures contracts on crude oil (10% pa) versus even negative return for futureson sugar (-10% pa). So the question is why investors require different returns for differentassets or securities? Can we model or even predict these returns? And if yes, can investorsearn profits by predicting future performance of the assets?

Finance theory offers some explanations. For example assets will have higher expectedreturns when they are riskier, when they deliver low returns in bad states of the economy.Rational risk averse investors will need to be compensated by means of higher expectedreturns for holding such undesired assets. On the contrary, investors desire assets thatdeliver high payoffs in the bad states of the economy and such assets will have lower expected returns or risk premiums.

This is a broad area for research within which students are encouraged to choose morespecific topics. The list with example topics is included however own topics are highlyappreciated:

Asset pricing:How can we identify these good and bad states of the economy?How can we model (predict) expected returns?What is the nature of macroeconomic risk that drives risk premium in asset markets?Who is more responsive to changes in economic conditions: consumers or producers(consumption-based versus production-based asset pricing)?

Theoretical and empirical evaluation of the eg. The Fama-French-Carhart extension of theCAPM.

InvestmentsThe economic value of predicting asset returns: can an active portfolio management be

profitable (in the efficient market)?Should investors hold domestic assets only or diversify internationally?Do investors hold an internationally diversified portfolio: who, why and where goes abroador stays at home (home bias)?How to deal with currency risk in an internationally diversified portfolio?


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Master Thesis topic 15: Greener Pastures for Investing: the Case of Emerging Markets

The dramatic expansion of the international stock markets of Asia, South America, Africa,the Middle East, and Eastern Europe creates increasingly important opportunities for global

investors in search of better diversification and more attractive risk-return tradeoffs. Manyunique features of these emerging stock markets separate them from their more developedcounterparts such as U.S., U.K., and Japan. Historically, stock returns in these marketshave a low correlation with developed market returns. As such, the high volatility of emerging stock markets is dampened in a global portfolio

While interests in emerging markets from both academia and investment community haveintensified, many important questions remain inadequately answered or unexplored. For example, the correlation between emerging market returns and the US market return tendsto vary over different market conditions. In bull markets, the correlation is low and theallocation to emerging markets increases the global portfolios returns with little effects on

its risk. However, recent evidence shows that the US market downturns tend to beassociated with strong co-movements in emerging markets. The result is, therefore, thatadding a small emerging markets allocation to a global portfolio tends to slightly reduce itsreturn and increase its risk during US bear market.

Other potential topics include the contagion of emerging market crisis or the liquidity inemerging markets. A glaring example is the 1997 Asian finance crisis, which quicklyspread all over the world through the Russian Debt crisis in 1998, and then the collapse of LTCM in 1998, a giant hedge fund in the United States.

How should we manage portfolios in emerging markets in this dynamic world? Lets

explore it in your master theses.


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Master Thesis topic 16: Understanding the global financial crisis:causes, real consequences, and lessons

The financial turmoil in 2007 and 2008 have a significant impact on the workings of financial markets and the architecture of financial institutions around the world. Despite the

common attribution of the crisis to declining housing prices, enhanced leverage of the banking system, and the large exposure of financial institutions to mortgages throughstructured investment vehicles such as Collateralized Debt Obligations and Credit DefaultSwaps, it remains a puzzle why financial markets around the globe and across variousseemingly unrelated asset classes exhibit strong repercussions at roughly the same time(See the Figure below).

As the tide of the financial crisis starts to ebb through time, it becomes increasinglyimportant to understand the effects of financial crisis not only on the financial sector butalso on the real sector of the economy. One important channel for the effect of crisis tospread to nonfinancial corporations is the availability of credit. A recent survey of 1,050

CFOs around the world finds that the financial crisis has led credit constrained firms todeeply cut their expenditures on the R&D projects, employment, and capital spending. Itwould interesting to assess how deep and widespread the impact on real sectors is.

Naturally, the occurrence of the current financial crisis has long-lasting implications for financial regulators and central banks. Do we need tighter financial regulations and moreactive monetary policy maneuvered by central banks to prevent the occurrence of or tocounter the development of financial crises? Detailed analyses of the role played thesevisible hands during the periods of the crisis would be helpful to answer these importantquestions.

World wide stock markets over the past two years

Source: Yahoo Finance


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Master Thesis topic 17: The firms financial advisor selection withcorporate finance decisions

The added value of financial advisors to acquiring firms can be threefold (Servaes andZenner, 1996). First, financial advisors can reduce the transaction costs to acquiring firms.

In particular, they can identify targets, value targets and create a bid at a lower cost thanindividual firms. Second, they can reduce asymmetric information between the target andacquirer. Third, financial advisors can reduce contracting costs. They act as a monitor,since their reputation depends on the quality of their advice. When selecting a financialadvisor, empirical results indicate that transaction costs are the main determinants,followed by contracting costs and asymmetric information.

Banks that function both as lender and as financial advisor can provide certificationservices, as these banks have private information about their client, which they can use intheir advisory role (Allen, Jagtiani, Persistiani, and Sauders, 2004). However, conflicts of interest can arise if a firm believes that the bank is likely to reveal information that would

be of interest to competitors or potential acquirers.

We propose several directions for empirical research:

o In studies about advisor selection, most authors exclude financial firms fromtheir analysis. Since financial advisors mostly belong to financial firms, it would beinteresting to examine how financial firms select their financial advisor. (Consider the case of ABN AMRO and Anton Veneta)

o Is there a conflict of interest between clients and their financial advisors that previously acted as another type of advisor? (e.g, equity issues, debt issues,

divestitures, advisor of the target, advisor of acquirer etc).

o According to the Servaes and Zenner (1996), advisors can provide services at alower cost than individual firms, due to their extensive experience in advisingM&A deals. What type of experience would be important and when? E.g., industry-or country-specific experience. What would be the value implications?

Servaes and Zenner (1996), The role of investment banks in acquisitions, The Review of Financial Studies , Vol. 9, p. 787 815

Allen, Jagtiani, Persistiani, and Sauders (2004), The role of banks advisors in mergers and

acquisitions, Journal of Money, Credit, and Banking , Vol. 36, p.197 - 224


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Master Thesis topic 18: Residential Mortgage lending

ContentThings were hectic on the housing and mortgage markets in the last two decades. Althoughthe time and depth of the cycles differed from one European country to another, mortgage

markets have grown in size, expanded in product variation and improved borrowersaccessibility to mortgage credit. During the last two decades outstanding mortgage debt hastripled; nowadays, outstanding mortgage debt across Europe is 6.1 trillion. Mortgagetake-up on a household level reflects those cross-country differences. The major drivers of these developments were, of course, a prosperous economy during the 1990s and early2000s, leading to a significant increase in household income coupled with low mortgageinterest rates. These conditions led to higher demand for property at increased prices. Sincethe vast majority of households need a mortgage to finance their property, increasedhousing demand let to a similar growth in mortgage demand; a demand that was generousfacilitated by the mortgage industry.The fall of US housing and mortgage markets in 2007/8 has yet given another dimension

towards the integration of international markets and of the necessity to rethink retailmortgage lending practices.

This broad topic aimed is to explore the multiple relationship between mortgage andhousing markets. Students are encouraged to come up with their own specific topics; whatfollows are just some examples:

Instability and interdependence of (national) housing and (international) capitalmarkets.

The pros and cons of different modes of mortgage funding (MBS versus bonds/savings)

Redefining of the relationship between consumers and lenders ( i.e. responsible

lending initiatives)

Required skillsThis thesis project will require a strong background in financial economics and a thoroughunderstanding (or interest) in statistical modeling techniques (e.g. causality testing andVAR modeling). Further, the usual ones: motivation; familiar with Excel; good writingand analytical skills.

ReferencesMaclennan, D., Muellbauer, J. and Stephens, M. (1998), Asymmetries in Housing and

Financial Market Institutions and EMU, Oxford Review of Economic Policy , 14,

54-80.Miles, D. and Pillonca, V. (2008), Financial Innovation and European Housing and

Mortgage Markets, Oxford Review of Economic Policy , 24, 1, 145-175.Green, R.K. and Wachter, S.M. (2005), The American Mortgage in Historical and

International Context, Journal of Economic Perspectives , 19, 93-114.


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Master Thesis topic 19: Private equity

Private equity has known a long history but it has been until the 1980s before it developedinto a key source of financing for companies. Private equity refers to the investment incompanies that are not traded on the stock exchange. Private equity is used for growth

financing, the financing of a buyout of (a division of) a company, taking public firms private (going-private transactions), turnaround financing of financially distressed firmsand the financing of young start-up companies (venture capital). In exchange for itsinvestment the private equity investor receives shares in the company.

Over the past two decades, private equity and venture capital have played an increasinglyimportant role in the European economy. The value of European private equity investmentshas increased from 2.4 billion in 1985 to 71.1 billion in 2006. In the Netherlands asimilar picture emerges. Private equity investments in the Netherlands have grown from

111.4 million in 1985 to almost 2.4 billion in 2006. The economic impact of privateequity is significant. A study of the Nederlandse Vereniging voor

Participatiemaatschappijen (NVP) claims that Dutch companies that are backed by privateequity investors generate aggregate sales equal to 66.5 billion which constitutes nearly 15 perent of the Gross Domestic Product (GDP) of the Netherlands. These companies employ400,000 people which is eight percent of total Dutch employment in the private sector.

Today private equity is in the news because of the mega buyouts of listed companies. In the Netherlands examples include VNU and VendexKBB. These going-private transactions aretypically motivated by the perceived undervaluation of the firms shares on the stock market. This undervaluation limits managements ability to use the benefits available to

public companies such as the accessibility of funds required to finance projects or acquisitions. Private equity assists management to take their company from the stock

market and provides the necessary funds to finance projects or acquisitions.

However, private equity also includes financing entrepreneurial firms (venture capital).These entrepreneurial firms typically do not have a track record and face difficultyobtaining bank loans given their lack of collateral. They therefore rely mostly on outsideequity to finance the early and expansion stages of their development. Investing in theseyoung, start-up companies is important since it can lead to innovative new products andcontribute to economic growth and job creation. For example, Apple Computers,Microsoft and Google received venture capital in their early stages of development whichhas helped these companies to grow further.


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Master Thesis topic 20: Professional asset management (mutual funds,hedge funds, pension funds)

Both individual and institutional investors, like insurers and pension funds, extensively use professional money managers. Worldwide, enormous amounts of money are invested in

mutual funds or hedge funds. In a recent report, the Investment Company Instituteestimates the assets under management to exceed $7 trillion in US mutual funds alone (ICI,2004).

From an academic perspective, assessing the performance of these investmentvehicles is an important test of market efficiency. Persistence patterns in fund performance(i.e. the observation that some professional fund manager systematically outperform others,including passively managed index funds) would be inconsistent with the semi-strong formof the Efficient Market Hypothesis. One of the most authoritative papers in this stream of literature is that of Hendricks et al. (1993). In this study, the authors report that mutualfunds that performed well over the past period, tend to do so in the near future, and viceversa. While Elton et al. (1996) come to similar findings, Carhart (1997) demonstrates that

almost all of this predictability is explained by exposures to common risk factors. After correcting for these risk factors, practically all persistence disappears. Nonetheless, Bollenand Busse (2005) do find persistence in fund performance beyond over shorter periods of time. Their results suggest that a short measurement horizon provides a more precisemethod of identifying future top performing funds.

Even though empirical evidence does no appear to unambiguously indicate thatsome fund managers are able to generate superior performance, investors appear to chase

past winners (e.g. see Sirri and Tufano, 1998). While past winning funds are rewarded withlarge cash inflows, losers are not equally penalized with cash outflows. Studies by amongGruber (1996) and Zheng (1999) report a smart money effect; the authors find that fundsthat receive more money subsequently perform better than those that lose money. Wermers(2003) also concludes that money is smart in chasing winners, but argues that this effectmight be a self-fulfilling prophesy.

On the other hand, some authors argue that fund managers exploit return chasing behavior to maximize assets under management. For example, Brown et al. (1996) find thathalfway each calendar year, losing fund managers tend to take more portfolio risk toincrease the probability to end the year among the winning funds. On the other hand,winning fund managers seem to lock-in performance when they are ahead. Brown et al(2001) document similar behavior when they investigate this tournament-behavioramong CTAs (commodity trading advisors) and hedge funds.

Cooper et al (2004) provide even more striking evidence of seemingly irrational behavior by mutual fund investors when allocating assets across mutual funds. They findthat cash flows to funds increase dramatically when funds change their names to look morelike the current hot return styles. In fact, this relationship even seems to hold for thefunds whose holdings after the name change do not materially reflect the style implied bytheir new name, and is the strongest among funds with the greatest increases in marketingexpenditures (and ironically the lowest subsequent performance).

The academic literature on mutual funds and hedge funds is fairly large andincreasing. For more information, you might consider the books by Haslem (2003) andLhabitant (2004). Recent academic work can also be found at www.ssrn.com . Within this
http://www.ssrn.com/http://www.ssrn.com/


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master thesis topic, alternative thesis topics can be derived, mostly relating to the performance of professionally managed investment vehicles, money flows, fees, and the behavior of fund managers and investors. (For example, by investigating several issues for a particular subset of funds.) Extensive data sets on mutual funds (CRSP) and hedge funds(TASS) are available at the department, although for some topics additional data may have

to be collected. Each thesis project involves (i) a comprehensive literature review, (ii)(manual) data collection and manipulation, (iii) and empirical analysis using techniquesfrom the literature. Accordingly, thesis topics are mostly targeted at students with strongquantitative skills, a well-developed background in financial management, and a fluent inEnglish.

Relevant references

J. B. Berk and R. C. Green. Mutual fund Flows and performance in rational markets. Journal of Political Economy , 112:1269-1295, 2004.

N. Bollen and J. Busse. On the timing ability of mutual fund managers. The Journal of

Finance , 56:1075-1094, 2001.

N. P. Bollen and J. A. Busse. Short-term persistence in mutual fund performance. The Review of Financial Studies, forthcoming , 2005.

S. Brown and W. Goetzmann. Performance persistence. The Journal of Finance , 50:679-698, 1995.

S. J. Brown, W. Goetzmann, and W. N. Park. Careers and survival: competition and risk inthe hedge fund and CTA industry. The Journal of Finance , 5:1869-1886, 2001.

S. J. Brown, W. Goetzmann, R. G. Ibbotson, and S. A. Ross. Survivorship bias in performance studies. The Review of Financial Studies , 5:553-580, 1992.

K. C. Brown, W. V. Harlow, L.T. Starks. Of Tournaments and temptations: an analysis of managerial incentives in the mutual fund industry. The Journal of Finance , 51: 85-110,1996.

J. Busse. Volatility timing in mutual funds: Evidence from daily returns. The Review of Financial Studies , 12:1009-1041, 1999.

M. Carhart. On persistence in mutual fund performance. The Journal of Finance , 52:57-82,

1997.G. Conner, and M. Woo. An Introduction to Hedge Funds, working paper, London Schoolof Economics, 2003.

M. Carhart, R. Kaniel, D. Musto, and A. Reed. Leaning for the tape: Evidence of gaming behavior in equity mutual funds. The Journal of Finance , 57:661-693, 2002.M. Cooper and H. Gulen. Changing names with style: Mutual fund name changes and their effects on fund flows. The Journal of Finance, forthcoming, 2005.


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E. J. Elton, M. J. Gruber, and C. R. Blake. The persistence of risk-adjusted mutual fund performance. The Journal of Business , 69:133-157, 1996.

E. J. Elton, M. J. Gruber, and C. R. Blake. A first look at the accuracy of the CRSP mutualfund database and a comparison of the CRSP and Morningstar mutual fund databases. The

Journal of Finance , 56:2415-2429, 2001.

E. J. Elton, M. J. Gruber, S. Das, and M. Illavka. Efficiency with costly information: Areinterpretation of evidence from managed portfolios. The Review of Financial Studies ,6:1-22, 1993.

W. E. Ferson and R. W. Schadt. Measuring fund strategy and performance in changingeconomic conditions. The Journal of Finance , 51:425-461, 1996.

W. N. Goetzman and R. G. Ibbotson. Do winners repeat? Journal of Portfolio Management , 20:9-18, 1994.

M. J. Gruber. Another puzzle: The growth in actively managed mutual funds. The Journal of Finance , 51:783-810, 1996.

J.A. Haslem, 2003, Mutual Funds. Risk and Performance Analysis for Decision Making,Blackwell Publishing.

D. Hendricks, J. Patel, and R. Zeckhauser. Hot hands in mutual funds: Short-run persistence of relative performance, 1974-1988. The Journal of Finance , 48:93-130, 1993.

D. Hendricks, J. Patel, and R. Zeckhauser. The j-shape of performance persistence givensurvivorship bias. The Review of Economics and Statistics , 79:161-166, 1997.

F.-S. Lhabitant, 2004, Hedge Funds. Quantitative Insights , John Wiley and Sons.

B. Malkiel. Returns from investing in equity fund 1971 to 1991. The Journal of Finance ,50:549-572, 1995.

E. R. Sirri and P. Tufano. Costly search and mutual fund Flows. The Journal of Finance ,53:1589-1622, 1998.

R. Wermers. Is money really smart? New evidence on the relation between mutual fundflows, manager behavior, and performance persistence. Working paper University of

Maryland, 2003.

L. Zheng. Is money smart? A study of mutual fund investors selection ability. The Journal of Finance, 54:901-933, 1999.


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Master Thesis topic 21: Banking Beyond the Too Big to FailHypothesis

For many decades the too big to fail hypothesis has assumed that very large banks wouldnever go bankrupt simply because the impact on an economy would be too big. The idea

was that if a very large bank would enter into financial distress, there would always be agovernment safety net. Over the past years, we have witnessed that bank size is notnecessarily a guarantee for survival or good performance. In this MSc thesis topic you areencouraged to analyse modern banking practices that apparently work different than wehave thought for many decades. Does internationalisation add value to banks? Even though many studies try to explainthe internationalisation of banks, but the evidence on the impact of internationalisation on

performance remains mixed (e.g., Amel, Panetta & Salleo, 2004; Amihud, DeLong &Saunders, 2002; Berger, 2007; Berger & DeYoung, 2001; Berger, DeYoung & Udell,2001; Miller & Parkhe, 2002; Molyneux & Seth, 1998; Peek, Rosengren & Kasirye, 1999;Seth, Song & Pettit, 2002; Wan, Yiu, Hoskisson & Kim, 2008). You may investigate the

impact of internationalisation on performance at the corporate level, the stockholder level,or the bondholder level. Are stockholders able to correctly price stocks of complex organisations as banks? Manystudies suggest that due to functional diversification, geographic diversification, the tradein complex products, etc., stockholders have difficulty properly valuing bank assets due totheir opaqueness (e.g., Amel et al., 2004; DeLong & DeYoung, 2007; Flannery et al.,2004). Do bondholders prefer large banks over smaller ones? To some extent, one could arguethat more (domestic) assets serve as more collateral for the bondholders, and increases inthe asset base should thus lead to lower bond yield spreads (everything else equal). Yet,also for bondholders the increased organisational complexity could be associated with

more opaqueness or increased risk (e.g., Warga & Welch, 1993), and hence less precise pricing. See e.g., Laeven & Levine (2007); Ongena & Penas (2009); Penas & Unal (2004).

The above questions are only meant as an example. You are encouraged to define your ownresearch. Many alternative themes are allowed, but you must define a fundamental themefor which you design your own problem statement.

ReferencesAmel, D., Barnes, C., Panetta, F., & Salleo, C. 2004. Consolidation and efficiency in the

financial sector: A review of the international evidence. Journal of Banking & Finance ,28(10): 2493-2519.

Amihud, Y., DeLong, G., & Saunders, A. 2002. The effects of cross-border bank mergerson bank risk and value. Journal of International Money and Finance , 21(6): 857-77.Berger, A.N. 2007. International comparisons of banking efficiency. Financial Markets,

Institutions & Instruments , 16(3): 119-44.Berger, A.N., Buch, C.M., DeLong, G., & DeYoung, R. 2004. Exporting financial

institutions management via foreign direct investment mergers and acquisitions. Journal of International Money and Finance , 23(3): 333-66.


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Berger, A.N., & DeYoung, R. 2001. The effects of geographic expansion on bank efficiency. Journal of Financial Services Research , 19(2-3): 163-84.

Berger, A.N., DeYoung, R., & Udell, G.F. 2001. Efficiency barriers to the consolidation of the European financial services industry. European Financial Management , 7(1): 117-30.

Flannery, M.J., Kwan, S.H., & Nimalendran, M. 2004. Market evidence on the opaquenessof banking firms assets. Journal of Financial Economics , 71(3): 419-60.Laeven, L., & Levine, R. 2007. Is there a diversification discount in financial

conglomerates? Journal of Financial Economics , 85(2): 331-67.Miller, S.R., & Parkhe, A. 2002. Is there a liability of foreignness in global banking? An

empirical test of banks X-efficiency. Strategic Management Journal , 23(1): 55-75.Molyneux, P. & Seth, R. 1998. Foreign banks, profits and commercial credit extension in

the United States. Applied Financial Economics , 8(5): 533-9.Ongena, S., & Penas, M.F. 2009. Bondholders wealth effects in domestic and cross-border

bank mergers. Journal of Financial Stability , forthcoming,doi:10.1016/j.jfs.2008.08.003.

Peek, J., Rosengren, E.S., & Kasirye, F. 1999. The poor performance of foreign bank subsidiaries: Were the problems acquired or created? Journal of Banking and Finance ,23(2): 579-604.

Penas, M.F., & Unal, H. 2004. Gains in bank mergers: Evidence from the bond markets. Journal of Financial Economics , 74(1): 149-79.

Seth, A., Song, K.P., & Pettit, R.R. 2002. Value creation and destruction in cross-border acquisitions: An empirical analysis of foreign acquisitions of US firms. Strategic

Management Journal , 23(10): 921-40.Wan, W.P., Yiu, D.W., Hoskisson, R.E., & Kim, H. 2008. The performance implications of

relationship banking during macroeconomic expansion and contraction: A study of Japanese banks social relationships and overseas expansion. Journal of International

Business Studies , 39(3): 406-27.Warga, A., & Welch, I. 1993. Bondholder losses in leveraged buyouts. The Review of

Financial Studies , 6(4): 959-82.


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Master Thesis topic 22: Sustainability in the Real Estate Market

In 2002 European leaders promised each other to reduce the CO2 emissions and limit theuse of scarce natural resources. The real estate market is one of the main users of naturalresources (for instance 40% of the global wood consumption) and one of the main issuers

of CO2. Hence, the real estate market has committed itself to innovate and fuel thesustainability of the market for the years to come. Various initiatives have been developed,among which the introduction of energy certificates.

The market of sustainability is vast, but also populated by lobbyists, who reason the benefits without seeking for evidence. In this thesis topic, students are invited to criticallyassess the dynamics, evolution and effects of sustainability initiatives within the real estatearena. Although the topic is still young, empirical research is feasible and needed.

Students are advised to have a close look at the related literature (see for some references below) and contemplate the empirical opportunities that are available. Working with data

and regression analysis is a must in the topic and student need to be aware of this beforestarting.

Some literature

Brounen, D., N. Kok, and J.M. Quigley, 2009, Energy Performance Certification in theResidential Sector: Implementation and Valuation in the European Union, Berkeley:

Institute of Business and Economic Research

Eichholtz, P.M.A., Kok, N. and Quigley, J.M. "Doing Good by Doing Well: Green OfficeBuildings," 2009. American Economic Review , forthcoming

Miller, N. , Spivey, J. and A. Florance. Does Green Pay Off?, 2008. Journal of Real Estate Portfolio Management 14(4)

Schipper, L. "Improved Energy Efficiency in the Industrialized Countries: PastAchievements, Co2 Emission Prospects " Energy Policy , 1991, 19(2), pp. 127-37.


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Master Thesis topic 23: The Role of Banks in the 2008/2009 FinancialCrisis

BackgroundBanks play a crucial role in developed economies. They provide liquidity by financing

long-term investments with short-term funding (Kashyap, Rajan, and Stein, 2002; Gatevand Strahan, 2006; Berger and Bouwman, 2009). However, many economists identify the

behavior of banks as one of the main causes of the current financial crisis (e.g.,Brunnermeier, 2009). Banks have been blamed for, among other things, too much risk taking, irresponsibly increasing their leverage, betting on the real estate bubble, investingtoo much in securities markets instead of old-fashioned bank loans, creating perverseincentives through excessive compensation packages, relying too much on short-term inter-

bank financing, using off-balance sheet constructions to hide their exposure to risk, andissuing complex securities that nobody understands (think of CDO-squareds).

Literature

A number of theoretical papers among others, Brunnermeier and Pedersen (2009) describe the liquidity spirals or asset market feedback loops through which the

behavior of financial intermediaries can affect financial markets and vice versa. Adrian andShin (2007) provide an empirical illustration of how the leverage of U.S. investment banksaffects financial market liquidity. Recently, a few papers appeared that analyze the role of

banks in the financial crisis (e.g., Beltratti and Stulz, 2009; Fahlenbrach and Stulz, 2009).And there is a long tradition of research on the role of banks in the economy and on theimpact of financial regulation on bank behavior and economic performance (e.g., Barth,Caprio, and Levine, 2004; Demirgc-Kunt, Laeven, and Levine, 2004; Laeven and Levine,2008; Demirgc-Kunt and Huizinga, 2009).

Research topicMany important questions remain unanswered. What short-term and long-term trends in

bank behavior can we distinguish before the crisis? Can these trends be attributed to thecorporate governance of banks, developments in financial markets, or changes in financialregulation? Which banks did better during the financial crisis and why? Can we identifyimportant changes in bank behavior (and in particular funding and risk taking) since thestart of the crisis? Are there important differences across countries? Can we explain thosedifferences using information on the characteristics of the financial sector in thosecountries? Can we uncover a direct link between bank behavior and financial marketvariables such as market liquidity?

Master thesisIf you are a talented and motivated student interested in doing an empirical study on therole of banks in the financial crisis for your Master thesis, read the articles below and try tocome up with a broad thesis topic. Once you know in which direction you want to go, readat least 10 additional articles on that specific topic. Make sure you do a thorough search for recent research on this topic using scholar.google.com and www.ssrn.com . The next step isto formulate a specific research question that has not been answered before and that isfeasible in terms of data availability, methodology, and time frame.
http://c/Documents%20and%20Settings/Administrator/Desktop/temp%20artikelen/scholar.google.comhttp://www.ssrn.com/http://www.ssrn.com/http://c/Documents%20and%20Settings/Administrator/Desktop/temp%20artikelen/scholar.google.comhttp://www.ssrn.com/


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DataA number of interesting databases is available for research in this area: Bankscope (available through the university library) contains detailed annual balance

sheet data for a large universe of banks; Datastream contains stock market data for listed banks around the world. The World Banks Bank Regulation and Supervision Dataset is a good source for

information on bank regulation in different countries, see:http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html

The Federal Reserve Board provides weekly balance sheet data of the aggregate U.S. banking sector on the following website:www.federalreserve.gov/datadownload/Choose.aspx?rel=H.8

The Federal Reserve Bank of Chicago provides quarterly balance sheet and incomestatement data for all individual insured U.S. commercial banks through theConsolidated Report of Condition and Income Database (also known as the CallReports). See Kashyap and Stein (2000). Available at:

www.chicagofed.org/economic_research_and_data/commercial_bank_data.cfm Laeven and Valencia (2009) have constructed a database on banking crises Ross Levine has developed a number of interesting international databases related to

banks and bank regulation. See his websites for links. There are many other potential databases. Check what existing papers are using and

search online for alternatives.

Selected referencesAdrian, T., and H.S. Shin, 2007, Liquidity and leverage, working paper.Barth, T., G. Caprio, and R. Levine, 2004, Bank regulation and supervision: What works

best?, Journal of Financial Intermediation 13, 205-248.Beck, T., A. Demirg-Kunt, and R. Levine, 2000, A new database on financial

development and structure, World Bank Economic Review 14, 597-605. Updateavailable on http://econ.worldbank.org/programs/finance .

Beltratti, A., and R.M. Stulz, 2009, Why did some banks perform better during the creditcrisis? A cross-country study of the impact of governance and regulation, working

paper.Berger, A., and C. Bouwman, 2009, Bank liquidity creation, monetary policy, and

financial crises, working paper.Brunnermeier, M.K., 2009, Deciphering the liquidity and credit crunch 2007-2008,

Journal of Economic Perspectives 23, 77-100.Brunnermeier, M.K., and L.H. Pedersen, 2007, Market Liquidity and Funding Liquidity,

Review of Financial Studies , forthcoming.Demirgc-Kunt, A., and H. Huizinga, 2009, Bank activity and funding strategies: The

impact on risk and return, working paper, World Bank / Tilburg University.Demirgc-Kunt, A., L. Laeven, and R. Levine, 2004, Regulations, market structure,

institutions, and the cost of financial intermediation, Journal of Money, Credit and Banking 36, 593-622.

Fahlenbrach, R., and R.M. Stulz, 2009, Bank CEO incentives and the credit crisis,working paper.
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00.htmlhttp://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00.htmlhttp://www.federalreserve.gov/datadownload/Choose.aspx?rel=H.8http://www.chicagofed.org/economic_research_and_data/commercial_bank_data.cfmhttp://econ.worldbank.org/programs/financehttp://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00.htmlhttp://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20345037~pagePK:64214825~piPK:64214943~theSitePK:469382,00.htmlhttp://www.federalreserve.gov/datadownload/Choose.aspx?rel=H.8http://www.chicagofed.org/economic_research_and_data/commercial_bank_data.cfmhttp://econ.worldbank.org/programs/finance


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Gatev, E., and P.E. Strahan, 2006, Banks advantage in hedging liquidity risk: Theory andevidence from the commercial paper market, Journal of Finance 61, 867-892.

Kashyap, A.K., R. Rajan, and J. Stein, 2002, Banks as liquidity providers: An explanationfor the coexistence of lending and deposit-taking, Journal of Finance 57, 33-73.

Kashyap, A.K., and J. Stein, 2000, What do a million observations on banks say about the

transmission of monetary policy?, American Economic Review 90, 407-428.Laeven, L., and R. Levine, 2008, Bank governance, regulation, and risk taking, Journal of Financial Economics , forthcoming.

Laeven, L., and F. Valencia, 2009, Systemic banking crises: A new database, working paper.


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Master Thesis topic 24: The informational content of yield curves

The yield curve is an important information source for many (macroeconomic) analysts.For instance, central banks decompose the yield curves on a daily basis. Typically, analystswill scrutinize the yield curve and decompose it into level, slope and curvature factors.

Subsequently, these factors are used and seen as indicators for future macroeconomicdevelopments, including future recessions, inflation scares or even financial turmoil.

The reasons why these yield curve factors (level, slope and curvature) are informative withrespect to macroeconomic factors remain an open question. Some have argued that it isrelated to the extended expectations hypothesis and the conduct of monetary policy,relating short term rates to current macroeconomic conditions.

The above topic allows for various types of more detailed and focused research questions.A non-exhaustive list of possible topics is listed below:

1. What type of macroeconomic information is contained in the level, slope andcurvature factors?2. Why does the macroeconomic information get integrated in the yield curve?3. Is the information content of yield curves stable over time?4. Can we use the yield curve information to generate hedging against fundamental

macroeconomic risks?5. Are the term premiums in the yield curve related to macroeconomic risks?6. .

Additional detailed information can be found in the FAQ section of the FED site:

http://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://www.newyorkfed.org/research/capital_markets/

The topics require some knowledge of (affine) yield curve theory. You may want to consultthe investment course notes.
http://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://www.newyorkfed.org/research/capital_markets/http://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://www.newyorkfed.org/research/capital_markets/


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Master Thesis topic 25: Carry trade profits during periods of crisis

One of the main puzzles in international finance has been the carry trade puzzle, i.e. thefailure of uncovered interest rate parity. In words, the carry trade puzzle is the observationthat excess returns can be obtained by investing in high interest rate countries. Three types

of explanations are typically put forward in the literature: irrational expectations, risk premia and Peso problems. Although each explanation is in theory possible it has been proven hard to empirically test the latter two theories as they rely on extreme events(crises) occurring. The current financial crisis provides a unique opportunity to test thePeso problem and the risk premium theory for the carry trade puzzle.

Brunnermeier, Nagel and Pederesen (2007) Carry Trades and Currency Crashes, working paper http://www.princeton.edu/~markus/


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Master Thesis topic 26: Asset markets and disaster risk: Asset pricing of asymmetric returns

Typical CAPM models assume that the risk of an asset is fully captured by thecomovement of the asset with the market, i.e. its beta. This statement implies, among other

things, that the CAPM model ignores the higher moments of the returns. For instance the probability of extreme events (kurtosis) or the skewness of the returns is (according to theCAPM) irrelevant. More recent theories, e.g. Dittmar (2004), show that higher moments( i.e. skewness and kurtosis) also require a risk premium: assets with skewed negativereturns or with more extreme returns typically incorporate an additional risk premium.The idea of this line of research is to update existing studies with the information containedin the financial crisis. The crisis is particularly relevant in this respect given that it hasgenerated negatively skewed and extreme returns. Hence it provides a good case study totest these newer theories.

Dittmar (2002), Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the

Cross-Section of Equity Returns, Journal of Finance , 57, 369-403


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Master Thesis topic 27: Commercial Real Estate

One of the factors shared by all real estate types is that their characteristics are veryheterogeneous. It is difficult to compare prices for two office buildings because factors likeage, size and maintenance level are very unlikely to be the same whereas identical locations

can always be ruled out. It is possible to study the monetary value of heterogeneous property characteristics with the use of so called hedonic regression analysis. Hedonicregression analysis is a statistical tool used to disentangle a property into differentcomponents and to assign values to different characteristics. Traditionally hedonicregression analysis has been applied to objects like cars, planes and houses but advances indata availability make studies of commercial real estate assets feasible.

This project uncovers the specific variables that contribute to asking rent levels for retail,office or industrial properties. Analysis of this type is very dependent on and can be partlyhampered by data availability but creative appliance of different data sources can make thedifference. For this research project it is possible to use the data of one of the major US

commercial real estate data providers. Based on available data it is possible to examine ahuge number of topics which can range from property valuation to urban economicquestions.Some issues to think of are:

- The impact of green labels on office building asking rents (Eicholtz, Kok andQuigley (2009)

- Impact of clustering of office rents (Jennen and Brounen, 2009; Archer and Smith,2003)

- Consistency of factors in a cross-city comparison (Cox, 2009)

Students interested in this topic should have a basic understanding of regression analysis. A

nice introductory textbook on real estate is Geltner et al, 2007 (available at the universitylibrary).

Related literature:Archer, W. and M. Smith (2003), Explaining Location Patterns of Suburban Offices, Real

Estate Economics , Vol. 31(2), pp. 139-164.

Cox, R.H.G.M (2009), The impact of office density on rents, localization economies in anetwork Perspective, Master Thesis Finance & Investments, available at BIC

Eichholtz,P., Kok, N., Quigley, J. (2009), Doing well by doing good? Green office

buildings, forthcoming in American Economic ReviewGeltner, D., Miller, N., Clayton, J., Eicholtz, P. (2007), Commercial Real Estate Analysis& Investments, 2 nd edition, Thomson South-Western

Jennen, M. and D. Brounen (2009), The Effect of Clustering on Office Rents, Evidencefrom the Amsterdam Market, Real Estate Economics , Vol. 37(2), pp.185-208


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Mills, E.S. (1992), Office Rent Determinants in the Chicago Area, Journal of the American Real Estate and Urban Economics Association , Vol. 20(1), pp. 273-287.

Rosen, S. (1974), Hedonic Prices and Implicit Markets: Product Differentiation in PureCompetition, Journal of Political Economy , Vol. 82(1), pp. 34-55.


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Master Thesis topic 28: Financial derivatives as proxies of liquiditycrises

During the last couple of months we have been witnessing a global financial turmoil thatfirst emerged in US on August 2007, but since then has expanded tremendously affecting

both developed and emerging markets in Europe and Asia. Significant financial institutionswent bankrupt (e.g. Lehman Brothers, WaMu) others have been nationalized (e.g. FannieMae, Freddie Mac, Bradford & Bingley) or acquired by other institutions (e.g. MerrillLynch, Wachovia, Bear Stearns) not only in US but in the whole world. But what is thecause of this crisis? What inflicted such distress in the global financial system?

Warren Buffet had long ago described derivatives as financial weapons of massdestruction. Instead of being used to hedge risk, derivatives are often blamed for servingspeculating purposes whereas in some cases are so complicated that can become extremelydifficult to evaluate. In the present crisis, derivatives hold a very significant role. It iscommonly considered that CDOs and other similar asset backed securities are mainly to

blame for triggering this crisis. CDS is another instrument which gained notoriety for allowing speculators to bet or even manipulate the market against a company, further deteriorating financial stability in periods of distress.

It would be interesting to examine derivatives as proxies of liquidity crises. For this purpose someone could study indices of such derviatives (e.g. ABX, CDX) and try torecognize causality patterns with the indices of the corresponding underlying securities or apply a liquidity measure for the derivative (e.g. bid-ask spread or Amihuds proxy) andcheck how this could be related with the liquidity of the underlying (e.g. CDS liquiditycould be related not only with the liquidity of the insured bonds but also with the liquidityof the corresponding equity). The purpose of the thesis is to make a student familiar with

the existing literature, understand the role of derivatives in the crisis (including the onesaforementioned) and develop new ideas about how certain derivatives could have indicatedthe individual companies or even more the economic sectors that are mostly affected by thecurrent liquidity crisis.

References:

1. Amihud Amihud, Yakov, 2002, Illiquidity and stock returns: cross-section and time-series effects, Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-562. Brenner, M., R. Eldor, S. Hauser, 1999, The Price of Options Illiquidity, New York University, Leonard N. Stern School Finance Department Working Paper Series 99-086

3. Chen, R., X. Cheng, L. Wu, 2005, Dynamic Interactions between interest rate, creditand liquidity risks: Theory and evidence form the term structure of credit default swaps,Working Paper, Rutgers Business School and City University of New York.4. Bongaerts, D., D., F. Jong, Joost Driessen, 2008, Liquidity and liquidity risk premia inthe CDS market , Preliminary Version, University of Amsterdam5. Das, S., D. Duffie, N. Kapadia, L. Saida, 2007,Common Failings: How corporateDefaults are Correlated, Journal of Finance, Vol. 62, No. 1, pp. 93-117


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6. Chen, R., X. Cheng, L. Wu, 2005, Dynamic Interactions between interest rate, creditand liquidity risks: Theory and evidence form the term structure of credit default swaps,Working Paper, Rutgers Business School and City University of New York.7. Longstaff, F., S. Mithal, E. Neis, 2005, Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap market, The Journal of Finance

Volume 60 Issue 5, Pages 2213 2253.8. Tang, D., H. Yong, 2007, Liquidity and Credit Default Swap Spreads, Working Paper,Kennesaw State University and University of South Carolina.


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Master Thesis topic 29: Asset Pricing and Mutual Fund Performance

Asset returns may contain risk premia that compensate investors for bearing a variety of uncertainties in their investment portfolios. Capital Asset Pricing Models (Sharp, 1964;Lintner, 1965; Black, 1972) have been extensively studied and used to test the existence of

other risk factors besides the market portfolio. Fama and French (1992, 1993) introducedsize and value factors, which started the new and enthusiastic discussions and studies onasset pricing. There have been a plethora of studies investigating the relationship betweenrisk factors (market, value, size, momentum, liquidity, inflation and so on) and the cross-section of stock returns. Are there actually any anomalies that can be exploited byinvestors? Do investors believe in market efficiency? Can one explain and even predictexpected stock returns based on the public information at hand? There are still a lot of room for research in this direction. Multi-factor asset pricing models, GRS test, GMMmethodologies, etc, can all be potentially used in such empirical studies. For students whoare interested, there are a lot to learn and there are a lot to be achieved.

Within the modern asset pricing framework, there have also been a lot of studies focusingon mutual fund returns rather than stock returns. Grinblatt and Titman (1992), Hendricks,Patel and Zeckhauser (1993), Carhart (1997) inter alia started the discussion of mutualfund performance persistence. As for the issue whether an average mutual fund manager isable to outperform the passive benchmark before and after fees, the evidences are mixed.Are investors able to identify certain outperforming mutual funds? Is the outperformancedue to the embedded superior managerial abilities or just to luck? Are the fees requested bymutual fund industry too high compared to their performance? Is there any other risk factor that can take away the significance of different performance metrics? Do fund flowsmatter? Can we gain more insights into fund performance based on the holdingsinformation published regularly? What is the influence of survival of mutual funds on these

metrics?

References

Black, F., 1972. Capital market equilibrium with restricted borrowing. Journal of Business , 45: 444-455.

Carhart, M., 1997. On persistence in mutual fund performance. The Journal of Finance 52(1),57-82.

Fama, E.F. and French, K., 1992. The cross section of expected stock returns. The Journal of Finance , 47: 427-466.

Fama, E.F. and French, K., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics , 33: 3-56.

Hendricks, D., Patel, J., Zechhauser, R., 1993. Hot hands in mutual funds: Short-run persistenceof relative performance, 1974-1988. The Journal of Finance 1, 93-130.


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Grinblatt, M., Titman, S., 1992. The persistence of mutual fund performance. The Journal of Finance 5, 1977-1984.

Lintner, J., 1965. The valuation of risk assets and the selection of risky investments instock portfolios and capital budgets, Review of Economics and Statistics , 47: 13-37.

Sharp, W.F., 1964. Capital assets prices: A theory of market equilibrium under conditionsof risk. The Journal of Finance , 19: 425-442.


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Master Thesis topic 30: Convertible and exchangeable bond offerings

Most studies on corporate capital structure policies focus on straight debt or equityissuance decisions. Next to these standard financing instruments, companies can also issueso-called hybrid securities that have characteristics of both debt and equity. Two

examples of suc