Publications

  • Martin Cherkes, Jacob S. Sagi, Zhi Jay Wang
    [Show abstract] [Hide abstract]
    ABSTRACT: A Managed Distribution Policy (MDP), where investments might be partially liquidated to increase investors' cash flows, can lower the value of manager's claim on asset payoffs. This is a direct transfer of wealth from the management to the shareholders, and might be adopted by managers to deter attacks from activist shareholders. Our empirical tests on a panel of 236 closed-end funds provide strong evidence that managers respond to the presence of activists using MDPs, that this indeed constitutes an effective wealth transfer to shareholders, and that economic fundamentals (asset liquidity, share liquidity, managerial compensation) are key to understanding these effects.
    SSRN Electronic Journal 11/2012;
  • Martin Cherkes, Chester S. Spatt
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper revisits the relative pricing of Palm and 3Com at the peak of Internet pricing. We offer a simple rational explanation of the pricing during the Palm -- 3Com spin-off episode (when it was suggested that the market valued the common stock portion of Palm owned by 3Com at more than the whole of 3Com) based on the observation that Palm shares issued in the IPO had higher valuation than shares still held by 3Com due to the lending fees that Palm shares could have earned. In valuing 3Com we use Palm’s post-spin-off forward prices, which can be calculated from the market prices of calls and puts. Considering forward pricing resolves various pricing puzzles. We also re-interpret empirical evidence about the relative pricing movements between Palm and 3Com in light of the resolution of uncertainty about the spin-off.
    SSRN Electronic Journal 08/2012;
  • Source
    Martin Cherkes
    [Show abstract] [Hide abstract]
    ABSTRACT: This survey deals with the literature on closed-end funds (CEFs) in general and theories of discounts in particular. New theories have emerged over the past 10 years that reveal CEFs to be an important and efficient organizational device. Among the topics reviewed are liquidity transformation, the effects of tax overhang, the importance of managerial fees, the provision of leverage services, the impact of the potential irrationality of small investors on discounts, and IPO issues.
    SSRN Electronic Journal 05/2012; 4.
  • Source
    Martin Cherkes
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper offers an alternative explanation for the on-the-run/off-the-run phenomena in T-securities, namely, the concentration of trade in recent issues, cost-of-trading differential and price differential between recent issue and earlier – issued bonds. We claim that optimizing the cost-of-trading and economizing on the trading cost are at the heart of the phenomena. Two distinct groups of market participants trade in T-securities: long-term buy-and-hold investors and market-makers/hedgers; the bulk of trades are initiated by hedgers, who trade in T-notes for reasons exogenous to the T-securities market and who hold positions for short period of time. To minimize their trading costs, hedgers concentrate all their trades in one security out of many available; that security can be selected by fiat ( as in Japan in 1980s’), or by overt convention or by tacit understanding. Concentration of trades drives the cost of trading in that security down, and (via equilibrium considerations) causes valuation differences between new and old issues. The valuation difference brings in arbitrage opportunities and ultimately causes the emergence of "specialness". Our insight allows a parsimonious explanation of on-the-run/off-the-run yield premium, the concentration of trades in few securities and emerges of “specialness” among the on-the-run securities mainly. We also show that the OTR arrangement is societaly – optimal by minimizing the trading costs in the economy.
    SSRN Electronic Journal 02/2011;
  • Source
    Martin Cherkes, Jacob S. Sagi, Zhi Jay Wang
    [Show abstract] [Hide abstract]
    ABSTRACT: Jensen (1986) identifies the need to motivate managers to distribute funds that earn a ‘below-market’ rate of return as a major problem in corporate finance. Equity closed-end funds (CEFs) provide an example of how capital markets perform this function. CEFs exist to provide investors with portfolio services that investors cannot easily obtain on their own (e.g., liquidity or superior stock picking ability). When a fund does not convincingly provide these services, it trades at a discount to its net asset value (NAV) because managerial compensation is larger than managerial contribution. A Managed Distribution Plan (MDP), where investments might be partially liquidated to increase investors’ cash flows, lowers the value of the manager’s claim on the assets of the fund. This is a direct transfer of wealth from the manager to the shareholders á la Jensen, and will be adopted by managers who fear an eventual liquidation of the fund via a proxy vote. We model the threat of such liquidation through the intermediation of an activist shareholder. Among other things, our model predicts that MDPs are more likely to be adopted by funds that appear to be less effective in providing portfolio services to their investors and that are relatively easy to liquidate or ‘attack’. We test the model on a panel of 236 CEFs and find good agreement with our model.
    SSRN Electronic Journal 11/2009;
  • Source
    Martin Cherkes, Jacob Sagi, Richard Stanton
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper develops a rational, liquidity-based model of closed-end funds (CEFs) that provides an economic motivation for the existence of this organizational form: They offer a means for investors to buy illiquid securities, without facing the potential costs associated with direct trading and without the externalities imposed by an open-end fund structure. Our theory predicts the patterns observed in CEF initial public offerings (IPOs) and the observed behavior of the CEF discount, which results from a trade-off between the liquidity benefits of investing in the CEF and the fees charged by the fund's managers. In particular, the model explains why IPOs occur in waves in certain sectors at a time, why funds are issued at a premium to net asset value (NAV), and why they later usually trade at a discount. We also conduct an empirical investigation, which, overall, provides more support for a liquidity-based model than for an alternative sentiment-based explanation. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
    Review of Financial Studies 01/2009; 22(1):257-297. · 4.75 Impact Factor
  • Source
    Martin Cherkes
    [Show abstract] [Hide abstract]
    ABSTRACT: The paper offers a positive theory of the closed-end fund as an efficiency-driven organizational form of fund management. The theory is based on the observation that a closed-end fund is a public company with a guaranteed, long-term annual compensation for Fund management and on an assumption (acceptable within the classical rational-and-efficient-markets paradigm) that some small investors may place a lower premium on an asset's liquidity than the Market, yet are unable to acquire the asset directly. A closed-end fund serves this clientele; the value of the closed end fund's shares is an algebraic sum of the assets-under-management plus the [capitalized] value-added by clientele service minus the [capitalized] value of the costs-of-management. This approach is rich enough to explain the persistence of discounts, the relationship between a Fund's discount and its dividend policy, the zero correlation between discounts and interest rates, and the excess volatility of a Fund's share price. The paper's arguments are supported by our preliminary empirical study.
    SSRN Electronic Journal 07/2003;
  • Source
    Martin Cherkes
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper offers an explanation to the puzzle of the closed-end fund's initial public offering. We show that CEFs belong to a sub-class of investment vehicles (the other members are Real Estate Investment Trusts and Master Limited Partnerships) that has a number of unusual characteristics. For example, buyers pay the IPO costs via IPO overpricing and underwriters provide prolonged aftermarket price support. (The latter is a necessary supplement to the IPO overpricing.) We show that these characteristics are not anti-competitive, neither are they predatory. Rather, they are a by-product of the peculiar features of this sub-class. We derive the no-arbitrage price-support schedule and argue that this type of price management appears to be legal. The predictions of the no-arbitrage price-support schedule guide our empirical analyses of new-entry patterns. We collected comprehensive 1986-2000 IPO data; it shows that new CEFs concentrate in a limited number of narrowly defined asset classes. Within this reference group, there is no irrationality in the new CEF's IPO and post-IPO behavior: new entry will occur when the proposed Fund is expected to trade in the near future at a premium and when existing same-asset Funds trade at a premium. Two groups of researchers (the Lee-Shleifer-Thaler team, and Katherine Hanley-Weiss and her collaborators) pioneered the intense interest of financial economists in the peculiar behavior of CEFs. Their work (as well as that of many others) contributed to our understanding of that complicated asset class. My current work is a direct extension of their previous efforts.
    SSRN Electronic Journal 01/2003;
  • Source
    Martin Cherkes
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper offers a new explanation to the closed-end funds' puzzles. It is driven by two observations: the fact the closed-end fund is a public company with a guaranteed, long-term annual compensation for Fund's entrenched management; and the assumption (acceptable within classical rational-and-efficient-markets paradigm) that management adds value to assets-under-their-management. As a result, the value of the closed end fund's shares is an algebraic sum of assets-under-management plus the [capitalized] value-added by the management minus the [capitalized] value of the costs-of-management. This approach is rich enough to explain several of perceived "puzzles", such as the persistence of discounts, relationship between a Fund's discount and its dividend policy, the zero correlation between discounts and interest rates, and the excess volatility of Fund's share price. It suggests a positive theory of the closed-end fund as an efficiency-driven organizational form of fund management. The paper's arguments are supported by our preliminary empirical study. The approach provides a number of empirically testable hypotheses.
    SSRN Electronic Journal 12/2001;
  • Source
    Martin Cherkes, Uzi Yaari
    [Show abstract] [Hide abstract]
    ABSTRACT: Recent empirical findings by Allan and Clark (NBER WP1677, 1985) show that the pension wealth of union beneficiaries is dramatically greater than that of nonunion beneficiaries. Other findings by these and other authors show that union pension plans are more likely to be underfunded. Ippolito (JLE 1978) reports that the average funding ratio of union pension plans is substantially lower than that of nonunion plans. In parallel, he reports that the rate of pension-plan termination due to bankruptcy is significantly higher where the extent of firm unionization is greater. This paper shows that risk-averse shareholders choose to underfund a defined-benefits pension plan despite a substantial tax advantage of full funding. The two parameters entering the funding decision are the perceived probability of default and the risk-free rate of interest. For feasible values of these parameters, underfunding is shown to be the optimal policy where the extent of underfunding increases with the probability of default. The effect of unions on default risk is likely to further decrease the optimal funding ratio. This result explains the evidence that unionized firms tend to have larger pension plans, which are characterized by a lower funding ratio and a shorter life span.
    Journal of Economics and Business 02/1988; 40(3):239-242.
  • Martin Cherkes, Joseph Friedman, Avia Spivak
    [Show abstract] [Hide abstract]
    ABSTRACT: In a recent article in this Review, Robert McCormick, William Shughart, and Robert Tollison (1984) addressed the issue of monopoly deregulation. The authors put forward the provocative idea that "because under most conditions Tullock costs cannot be recouped, the returns to deregulation are lower than previously thought." We point out that McCormick et al. have not actually shown, as they claim, that "such a deregulating program can easily impose more costs than it is worth" (p. 1075).
    American Economic Review 02/1986; 76(3):559-63. · 2.69 Impact Factor
  • Source
    Martin Cherkes, Jacob Sagi, Richard Stanton
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper develops a rational, liquidity-based model of closed-end funds (CEFs) that provides an economic motivation for the existence of this organizational form: they provide a means for investors to buy illiquid securities, without facing the costs associated with direct trading should they later need to liquidate their positions, and without the externalities imposed by the open-end fund structure. Our model explains both the patterns observed in CEF IPO behavior, and the observed behavior of the CEF discount, which results from a tradeoff between the liquidity benefits of investing in the CEF and the fees charged by the fund's managers. In particular, the model predicts, as observed, that IPOs will occur in waves in certain sectors at a time, that funds will be issued at a premium to net asset value (NAV), and that they will later usually trade at a discount. Finally, calibrating the model leads to our overturning several previously accepted "stylized facts" about the CEF discount. The model predicts that, at the time of an IPO, existing funds in the same sector should be trading at a premium, and that reversion to a discount should typically take several years. These last two predictions contradict the conclusions of prior researchers, who found that (i) CEFs come to the market at a premium at the same time as existing funds are trading at a discount, and (ii) that the reversion from a premium at IPO to a discount is of the order of months. However, their conclusions were the result of looking at the wrong, or non-representative, data. A more careful analysis shows that the model's predictions are, indeed, correct.
  • Martin. Cherkes
    [Show abstract] [Hide abstract]
    ABSTRACT: Thesis (Ph. D.)--University of Pennsylvania, 1984. Includes bibliographical references (leaves 160-164). Microfiche of typescript.

3 Following View all

8 Followers View all