Found 6 article(s) for author 'Malcolm Baker'

Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds. Malcolm Baker, George Serafeim, April 27, 2018, Paper, “Estimates suggest that mitigating and adapting to climate change will cost trillions of dollars. We study the developing market for green bonds, which are bonds whose proceeds are used for environmentally sensitive purposes. After an overview of the U.S. corporate and municipal green bonds market, we study pricing and ownership patterns of municipal green bonds using a framework that incorporates assets with nonpecuniary
sources of utility. The results support the prediction that green bonds are issued at a premium to otherwise similar ordinary bonds—that is, with lower yields—on an after-tax basis.Link

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Risk Neglect in Equity Markets

Risk Neglect in Equity Markets. Malcolm Baker, Spring 2016, Paper. “The link between measures of risk and return within the equity market has been very weak over the past 47 years: in the United States, returns on high-risk stocks have cumulatively fallen short of the returns on low-risk stocks, during a period when the equity market as a whole experienced high returns relative to Treasury bills. In the spirit of Fischer Black’s 1993 article “Beta and Return,” published in this journal, the author takes seriously the idea that this evidence reflects a risk anomaly—a mispricing of risk for behavioral and institutional reasons—and revisits the associated implications for investing and corporate finance, examining asset allocation, high leverage in financial firms, low leverage in industrial firms, private equity, venture capital, and bank capital regulation along the way. Many of these implications fit nicely with Black’s original conjectures, and the author highlights refinements and additions to the original list.Link

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Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low-Risk Anomaly

Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low-Risk Anomaly. Malcolm Baker, May 2015, Paper, Traditional capital structure theory predicts that reducing banks’ leverage reduces the risk and cost of equity but does not change the weighted average cost of capital, and thus the rates for borrowers. We confirm that the equity of better-capitalized banks has lower beta and idiosyncratic risk. However, over the last 40 years, lower risk banks have not had lower costs of equity (lower stock returns), consistent with a stock market anomaly previously documented in other samples.Link

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The Risk Anomaly Tradeoff of Leverage

The Risk Anomaly Tradeoff of Leverage. Malcolm Baker, December 14, 2014, Paper. “The “low risk anomaly” refers to the empirical pattern that apparently high-risk equities do not earn commensurately high returns. In this paper, we consider the possibility that the risk anomaly represents mispricing, not a misspecification of risk, and develop the implications for corporate capital structure. The risk anomaly generates a simple tradeoff model: Starting at zero leverage, the overall cost of capital initially falls as leverage increases equity risk. As debt becomes risky, however, the marginal benefit of increasing equity risk declines. The optimum is reached at lower leverage for firms with high asset risk. Consistent with a risk anomaly tradeoff, firms with low-risk assets choose higher leverage. In addition, leverage is inversely related to systematic risk, holding constant total risk; a large number of firms maintain small or zero leverage despite high marginal tax rates; and many others maintain high leverage despite little tax benefit.Link

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Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low Risk Anomaly

Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low Risk Anomaly, Malcolm Baker, January 2015, Paper, The instability of banks in the financial crisis has led to stricter bank capital requirements, both globally through Basel III and in the U.S. through further constraints imposed by the Federal Reserve. Setting these requirements requires balancing many costs and benefits, both social and private. In this paper, we argue that an important cost has heretofore been neglected: All else equal, making banks less risky is likely to raise their cost of capital—with consequent implications for investment and growthLink

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Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly

Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly. Malcolm Baker, May 2013, Paper. “Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks’ leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data…”  Link verified March 28, 2014

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