Contingent Capital Trigger Effects: Evidence from Liability Management Exercises

Boris  Vallée

Article | Review of Corporate Finance Studies | September 2019

Contingent Capital Trigger Effects: Evidence from Liability Management Exercises

Abstract

This paper investigates the so called liability management exercises by European banks, which bear comparable effects to triggering contingent capital. I first explore the determinants of these exercises. I then study market reactions to these operations as well as banks' economic performance following them. Debtors positively receive these exercises, while stockholders discriminate according to the terms of the operation. Moreover, banks implementing liability management exercises exhibit higher economic performance than the ones that do not. These findings point towards contingent capital offering an effective solution to the dilemma of bank capital regulation.

Keywords: contingent capital; financial distress; regulatory capital; Financial Institutions; Legal Liability; Management; Banking Industry; Europe;

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Vallée, Boris. "Contingent Capital Trigger Effects: Evidence from Liability Management Exercises." Review of Corporate Finance Studies 8, no. 2 (September 2019): 235–259.

Marketplace lending relies on large-scale loan screening by investors, a major deviation from the traditional banking paradigm. Theoretically, participation of sophisticated investors in marketplace lending improves screening outcomes but also creates adverse selection. In maximizing loan volume, the platform trades of these two forces by choosing intermediate levels of platform pre-screening and information provision to investors. We use novel investor-level data to test these predictions. We empirically show that more sophisticated investors screen loans differently and systematically outperform less sophisticated investors. However, the outperformance shrinks when the platform reduces information provision to investors, consistent with platforms managing adverse selection.

Case | HBS Case Collection | February 2018 (Revised August 2018)

OpenInvest

Shawn Cole, Boris Vallée and Nicole Tempest Keller

Founded by a team of hedge fund and NGO alumni, OpenInvest launched its platform in 2015 to enable retail investors to tailor their portfolios to their personal values in an automated way, for instance by screening out weapons manufacturers stocks or overweighting LGBTQ friendly companies, while still closely tracking the overall stock market performance. In 2017, bolstered by $3.25 million in seed funding from Andreessen Horowitz, OpenInvest was preparing to launch an app targeted at millennial customers that would include a novel proxy voting feature that allowed clients to vote on shareholder resolutions with a simple swipe. With this technological addition, OpenInvest was well on its way towards realizing its mission of democratizing socially responsible investing, bringing transparency to the financial services market, and enabling retail investors to invest their capital in a way that aligned with their values. However, getting to scale and profitability in the crowded robo-advisors space was a critical challenge. The case closes with the founders contemplating expanding or migrating their model from B2C to B2B in order to achieve scale and profitability faster. The case is an opportunity to discuss the theoretical underpinning of creating impact in public markets, to explore how portfolio performance might be affected by Socially Responsible Investment (SRI) screens, and to understand drivers of demand for impacting investing more broadly. The case also explores the challenges the founders face when aiming to design a new product to meet an emerging need and which distribution channel to choose for doing so.

Keywords: fintech; impact investing; Investment Portfolio; Customization and Personalization; Technological Innovation; Social Issues; Growth and Development Strategy; Business Model; Financial Services Industry;

Citation:

Cole, Shawn, Boris Vallée, and Nicole Tempest Keller. "OpenInvest." Harvard Business School Case 218-064, February 2018. (Revised August 2018.) View Details

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Contingent Capital Trigger Effects: Evidence from Liability Management Exercises

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