Jose Liberti

The Added Value of Discretion

Hans Deryse et al. — Mon, 03 Oct 2011 12:30:15 PDT

How do banks make lending decisions? Using a unique hand-collected data-set on loans granted to small firms by an international financial institution, we show that banks rely on a combination of soft information and loan officer discretion, which we measure as deviations from the bank’s credit scoring model. We show that the soft information, which is collected at loan origination and during monitoring, guides discretion. Soft information helps in predicting loan default even when controlling for available public and private information. Loan officers use soft information when deciding on the loan amount that is being granted: one standard deviation of more favorable soft information results in the granting of 16 percent more. Discretion by itself however does not impact loan outcomes.

Uncovering Collateral Constraints

José María Liberti — Mon, 03 Oct 2011 12:23:46 PDT

Collateral may be used as commitment against ex-ante agency risk, or for hedging against ex-post realized risk. Using a panel data of 12,000 small and medium firms in 17 countries with direct measures of ex-ante agency risk and ex-post realized default, we find that the commitment motive alone explains collateralization. Going from the lowest to highest quintile of ex-ante agency risk distribution increases initial collateralization by 16 percentage points, but the same change in ex-post realized default leads to no change in collateralization. We also uncover a collateral “pecking order” driven by commitment concerns. While the bank is willing to accept firm-specific assets susceptible to agency risk (e.g. plant machinery and inventory) for low agency risk firms, it prefers non-specific assets (e.g. real estate and liquid securities) for firms prone to agency risk.

Course Syllabus: Mergers & Acquisitions, LBOs and Corporate Restructuring

Jose M. Liberti — Tue, 11 Aug 2009 14:40:24 PDT

The course involves analysis of corporate restructuring strategies including mergers, acquisitions, friendly vs. hostile takeovers, financial re-capitalization, leveraged buyouts, management buyouts, going private, and reorganization under bankruptcy. The course integrates the corporate governance and agency dimensions, financial and strategic management aspects, and legal and accounting considerations into a unified framework for investigating issues such as, pre-merger planning, fact-finding, accounting and tax implications, anti-trust problems, post-merger integration, and short-term and long-term shareholder wealth consequences of financial and organizational restructuring transactions. The course combines applied theoretical approach with the case study method through detailed analysis of domestic and global restructuring cases. The focus will be on fundamental concepts of valuation and analytical tools of corporate finance related to restructuring.

The course is roughly divided into 4 core topics:

Part A: Traditional M&A Topics and Transactions: Strategic and Financial Aspects

Part B: The Role of "Arbs" and "Corporate Raiders"

Part C: Creating Value Through Corporate Restructuring

Part D: Private Equity and Leveraged Buyouts (LBOs)

Course Outline: Mergers & Acquisitions, LBOs and Corporate Restructuring

Jose M. Liberti — Tue, 11 Aug 2009 14:30:26 PDT

This is a tentative summary of the course outline with cases.

Course Syllabus: Special Topics In Corporate Finance

Jose M. Liberti — Tue, 11 Aug 2009 14:26:38 PDT

The course focuses on fundamental themes in corporate finance in an international setting including: the analysis of cross-border investments, mergers and acquisitions, take-over battles and defenses, leverage buyouts (LBOs), project finance, corporate restructuring, companies in financial distress, real options and bank valuation. The main theme surrounding these topics is “Valuation”, more specifically the course focuses on how to maximize Enterprise Value. Accordingly, we examine the problems and practices of financial managers in key areas of international business.

Through cases, discussion of topical issues and readings, the course will give you the opportunity to analyze practical financial situations and problems, on the assumption that you are already familiar with fundamental ideas from previous finance courses such as valuation methods, portfolio selection, CAPM, capital structure and option pricing among others.

For a complete description of each of the topics please check the Summary of Course Outline. The course is roughly divided into 4 parts:

Part A: Valuation Methods. Where Is Enterprise Value Coming From?

Part B: Mergers & Acquisitions. Management Buyouts. Take-Over Attempts, Battles, Tactics and Defenses

Part C: Corporate Restructuring, Investment Decisions and Special Topics in Valuation

Part D: International Corporate Finance: Cross-Border Valuation

Course Outline: Special Topics In Corporate Finance

Jose M. Liberti — Tue, 11 Aug 2009 14:17:57 PDT

This is a tentative summary of the course outline with cases.

Course Outline: Problems In Corporate Financial Policy

Jose M. Liberti — Tue, 11 Aug 2009 14:01:14 PDT

This is a tentative summary of the course outline with cases.

Course Syllabus: Problems In Corporate Financial Policy

Jose M. Liberti — Tue, 11 Aug 2009 13:51:28 PDT

The main aim of this course is to enable you to apply the theoretical concepts in finance, covered in the basic finance course (FIN 555: Financial Management), to problems in the area of corporate finance with all the complexities that the real world entails.

Through cases and discussion of topical issues, the course will give you the opportunity to analyze practical financial situations and problems, on the assumption that you are already familiar with fundamental ideas from previous finance courses such as valuation methods (Weighted Average Cost of Capital, Free Cash Flow and Capital Cash Flow, Adjusted Present Value, Trading and Transaction Multiples), portfolio selection, CAPM and in-depth capital structure analysis.

We will use the case method to motivate our discussion to close the gap between rigorous finance theory and its application to practical problems in corporate finance, and the thought-process required when faced with this gap.

Initiative, Incentives and Soft Information. How does Delegation Impact the Role of Bank Relationship Managers?

Jose M. Liberti — Tue, 11 Aug 2009 13:46:38 PDT

This paper empirically examines how changes in the hierarchical structure of a large organization can affect incentives. The empirical analysis exploits a change in the hierarchical structure of the Corporate Division of a private foreign commercial bank in Argentina between 1999 and 2001. Using detailed hand collected data on credit approvals, as well as perceived effort measures for each relationship manager from quality surveys done to borrowing firms, I test whether delegation of authority and reduction of oversight improves or decreases the provision of effort by account managers. Results suggest that "empowering managers" increases the time relationship managers spend with their corporate clients, increases perceived effort and reduces the number of complaints the bank receives from its clients. Alternative explanations and several tests are constructed to examine the different channels through which effort measures could have increased other than the change in organizational structure. I then test whether the improvement is really because managers make better use of their decision making authority rather than they simply waste less time in filing reports to their superiors. I find that individuals who receive more authority use their soft information more compared to individuals to whom authority is only partially delegated. This suggests that delegation of authority increases managerial effort not only because management spends less time reporting to bosses, but also because they recognize that their effort will have greater impact on outcomes. Hence, transmission of, and reliance on, soft information are higher under decentralized than centralized structures. Finally, I test whether the change in structure was meaningful and productive from the bank's financial perspective. I find that cross-selling measures and bank's financial ratios increased after the organizational change.

Public Information and Coordination: Evidence from a Credit Registry Expansion

Andrew Hertzberg et al. — Tue, 11 Aug 2009 12:54:57 PDT

This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that made lenders' negative private assessments about their borrowers public. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of the reaction by other lenders to the same firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.

Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation

Andrew Hertzberg et al. — Tue, 11 Aug 2009 12:48:31 PDT

We present evidence that reassigning tasks among agents can alleviate moral hazard in communication. A rotation policy that routinely reassigns loan officers to borrowers of a commercial bank affects the officers' reporting behavior. When an officer anticipates rotation, reports are more accurate and contain more bad news about the borrower's repayment prospects. As a result, the rotation policy makes bank lending decisions more sensitive to officer reports. The threat of rotation improves communication because self-reporting bad news has a smaller negative effect on an officer's career prospects than bad news exposed by a successor.

Collateral Spread and Financial Development

Jose M. Liberti et al. — Tue, 11 Aug 2009 12:10:50 PDT

We show that institutions that promote financial development ease borrowing constraints by lowering the collateral spread and shifting the composition of acceptable collateral towards "firm-specific assets." Collateral spread is defined as the difference in collateralization rates between high and low risk borrowers. The average collateral spread is large but declines rapidly with improvements in financial development driven by stronger institutions. We also show that the composition of collateralizable assets shifts towards non-specific assets (e.g., land) with borrower risk. However the shift is considerably smaller in developed financial markets, enabling risky borrowers to use a larger variety of assets as collateral.

Estimating the Effect of Hierarchies on Information Use

Jose M. Liberti et al. — Tue, 11 Aug 2009 12:05:55 PDT

Theory suggests that greater hierarchical distance between a subordinate and his boss makes it more diffcult to share abstract and subjective information in decision making. A novel data set put together from credit dossiers of large corporate loan applicants enables us to observe the information collected by loan offcers and also how it is used by the ultimate loan approving officer. We find that greater hierarchical/geographical distance between the information collecting agent and the loan approving officer leads to less reliance on subjective information and more on objective information. By exploiting non-linearities in the "assignment rules" that determine an applicant's hierarchical distance, and using information collecting agent fixed effects, we show that our result cannot be driven by endogenous assignment of applicants. We also find that higher frequency of interactions between the information collecting agent and loan approving officer, both over time and through geographical proximity, helps mitigate the effects of hierarchical distance on information use. Our results show that hierarchical distance influences information use, and highlights the importance of "human touch" in communication.