Bhagwan Chowdhry

University of California, Los Angeles, Los Angeles, California, United States

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Publications (26)15.64 Total impact

  • Bhagwan Chowdhry, Richard Roll, Konark Saxena
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    ABSTRACT: Amartya Sen has argued that many development and freedom measures such as health, education, political and civil liberties are important constituents of human welfare. We concur with Sen and conjecture that an important reason these measures affect human welfare is because they allow individuals to better cope with risk and uncertainty that cannot be hedged using market based insurance mechanisms. We find some empirical support for this conjecture in that the volatility of consumption growth appears to be negatively related to life expectancy, political rights, and property rights (but is positively related to the rate of literacy) after controlling for the size of the country, per capita income, and openness to trade and capital flows, (which, as one would expect, also reduce consumption growth volatility) in cross-country panel regressions.
    Finance Research Letters 09/2013; 10(3):103–109. · 0.33 Impact Factor
  • Bruce Ian Carlin, Bhagwan Chowdhry, Mark J. Garmaise
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    ABSTRACT: We study a firm’s investment in organization capital by analyzing a dynamic model of language development and intrafirm communication. We show that firms with richer internal language (i.e., more organization capital) have lower employee turnover, and higher diversity in skill and wages among incumbents who are promoted from within the firm. Our results also suggest that firms in rapidly changing industries are less likely to invest in organization capital, and are more likely to have high managerial turnover. Finally, our model shows that employment protection regulations lead to more investment in organization capital but less innovation.
    Journal of Financial Intermediation 04/2012; 21(2):268–286. · 1.81 Impact Factor
  • Antonio E. Bernardo, Bhagwan Chowdhry, Amit Goyal
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    ABSTRACT: Finding the appropriate discount rate, or cost of capital, for evaluating investment projects requires an accurate estimate of project risk. This can be challenging because project risk cannot be estimated directly using the CAPM, but must instead be inferred from a set of traded securities, typically the equity betas of comparable firms in the same industry. These equity betas are then unlevered to undo the effect of comparable companies' financial leverage and obtain estimates of “asset” betas, which are then used to estimate project risk. The authors show that asset betas estimated in this way are likely to overestimate project risk. The equity returns of companies are risky not only because of their existing projects but also because of their growth opportunities. Such growth opportunities often include embedded “real options,” such as the option to delay, expand, or abandon a project. Because such real options are similar to leveraged positions in the underlying project, a company's growth opportunities are typically riskier than its existing projects. Therefore, to properly assess project risk, analysts must also unlever the asset betas derived from comparable company stock returns for the leverage contributed by their growth options. The authors derive a simple method for unlevering asset betas for growth options leverage in order to properly assess project risk. They then show that standard methods for assessing project risk significantly overestimate project costs of capital - by as much as 2–3% in industries such as healthcare, pharmaceuticals, communications, medical equipment, and entertainment. Their method should also be applied to stock return volatility to derive project volatility, an important input for determining the value of a firm's growth opportunities and the appropriate time for investing in these opportunities.
    Journal of Applied Corporate Finance 01/2012; 24(3).
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    Bhagwan Chowdhry
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    ABSTRACT: I formulate a simple and parsimonious evolutionary model that shows that because most species face a possibility of dying because of external factors, called extrinsic mortality in the biology literature, it can simultaneously explain (a) why we discount the future, (b) get weaker with age, and (c) display risk-aversion. The paper suggests that testable restrictions—across species, across time, or across genders—among time preference, aging, and risk-aversion could be analyzed in a simple framework .
    Economic Inquiry 01/2011; 49(4):1098-103. · 0.98 Impact Factor
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    ABSTRACT: Using a comprehensive panel dataset of U.S. production capacity by firm in seven commodity chemical industries, I compare the investment behavior of public and private firms when presented with near identical project opportunities. I find that private firms invest differently, and more efficiently, than public firms. Specifically, private firms are more likely than public firms to increase capacity prior to a positive demand shock (an increase in price and quantity) and less likely to increase capacity before a negative demand shock. This result holds when considering only a subsample of firms that change incorporation status. The private firm investment advantage is particularly strong among leveraged buyouts and is not explained by the level of chemical division diversification. These findings are consistent with theories in which public firms are subject to greater agency concerns, leading to sub-optimal investment relative to private firms. my fellow Ph.D. students, and the participants of the UCLA brown bag seminar series for guidance, helpful comments, and encouragement.
    02/2009;
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    Amit Bubna, Bhagwan Chowdhry
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    ABSTRACT: Financial intermediaries worldwide are seeking mechanisms for participating in micro lending. Using informed "local capitalists" as bank's on-lenders fails due to borrowers' incentive to default with multiple credit sources. A coalition of local capitalists may not resolve the problem in the presence of a monopoly moneylender with superior skills in lending and enforcement. A credible competitive threat to the moneylender can only arise if the local capitalist coalition also provides information sharing benefits that lower their cost of lending vis-à-vis the moneylender. Franchising allows local capitalists to form such a coalition. We analyze conditions under which welfare-enhancing franchising would obtain. Copyright 2010, Oxford University Press.
    Review of Finance 09/2007; 14(3):451-476. · 1.59 Impact Factor
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    Antonio E. Bernardo, Bhagwan Chowdhry, Amit Goyal
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    ABSTRACT: We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine a project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.
    Financial Management 06/2007; 36(2):1 - 13. · 1.36 Impact Factor
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    Bhagwan Chowdhry, Richard Roll, Yihong Xia
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    ABSTRACT: Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recognizing that relative PPP may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be "sticky," we provide a novel method for extracting a proxy for realized pure price inflation from stock returns. We find strong support for relative PPP in the short run using the extracted inflation measures.
    American Economic Review 02/2005; 95(1):255-276. · 2.69 Impact Factor
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    ABSTRACT: We present a simple, easy to implement methodology for pricing microfinance loans and loan guarantees using publicly available data on loan write-offs by Micro Finance Institutions (MFIs). Our methodology takes into account the selection bias inherent in available data in that MFIs that do not report loan write-off data are less likely to be better performers. Our quantitative analysis is consistent with pricing seen in a recent securitization deal. Our analysis suggests how securitization and loan guarantees can greatly expand the supply of funds for microfinance loans.
    Anderson Graduate School of Management, UCLA, University of California at Los Angeles, Anderson Graduate School of Management. 01/2005;
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    Antonio E Bernardo, Bhagwan Chowdhry, Amit Goyal
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    ABSTRACT: In this paper, we decompose empirically the beta for assets-in-place and the beta for growth opportunities within an industry. Our empirical results demon-strate that the beta of growth opportunities is greater than the beta for assets-in-place for virtually all industries over all periods of time dating back to 1978. The difference has important implications for determining the project cost of capital. For example, when choosing comparables to determine project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2 to 3%.
    09/2004;
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    Bhagwan Chowdhry, Mark Garmaise
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    ABSTRACT: We present a dynamic model of production in which a firm's output increases when its managers share their information. Communication of ideas depends on the quality of the firm's internal language. We prove that firms with richer languages (i.e., more organizational capital) will have higher market values. Organizational capital generates static complementarities among incumbents which implies that firms with richer languages will experience greater employee retention and higher wages. Dynamic complementarities between intertemporal investments in language generate long-run persistence in firm market-to-book and turnover ratios. We demonstrate that the optimal compensation of incumbents includes an earnings-insensitive component that is larger in firms with richer languages. In a simple model of mergers, we show that the most value-creating mergers are those between firms with highly disparate languages.
    04/2003;
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    Shu Yan, Robert Z. Aliber, Bhagwan Chowdhry
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    ABSTRACT: More than two decades ago, James Tobin suggested imposing a tax on all foreign exchange transactions (Tobin, 1978). Similar proposals for imposing transaction tax on trading of other securities (see Schwert and Seguin, 1993 for a review) are also often made by eminent economists (Stiglitz, 1989, Summers and Summers, 1989). One of the putative benefits of a transaction tax is that this may decrease the volatility of prices. The intuitive rationale behind this, believed to be first articulated by Keynes in 1936, is that a transaction tax would hurt the speculators disproportionately more because they tend to trade much more frequently. An implicit assumption in this argument is that speculative trading is on average destabilizing which in turn causes prices to be more volatile. A contrasting view is offered by Milton Friedman who argued (Friedman, 1953) that rational speculators may in fact help stabilize prices. The relative merits of these opposing views can only be judged by analyzing this issue empirically. The empirical evidence on the effect of transactions taxes on volatility of prices is rare. Umlauf (1993), using Swedish stock market data from the 1980s, shows that the introduction of, or an increase in Swedish tax, led to an increase in volatility of stock prices; Jones and Seguin (1997) show that the reduction in the commission portion of the transactions costs in 1975 led to a decrease in volatility (and increase in volume) of stock prices. However, there appears to be no empirical evidence in the extant literature on the effect of a transaction tax in the foreign exchange market on the volatility of exchange rates. In this paper, we provide some evidence. Our results, suggest that a Tobin tax on foreign exchange transactions may, in fact, lead to an increase in the volatility of exchange rates which is exactly the opposite to the claim made by Tobin and proponents of his suggestion such as Jeffrey Frankel who recently resurrected Tobin's argument (see Frankel, 1996). We estimate the effective transactions costs in the foreign exchange market for the period 1977 to 1999 using foreign currency futures data. Our approach in estimating the transactions costs in the foreign exchange market makes a contribution in two ways. First, we show that previous approaches for estimating the transactions costs in the foreign exchange market (Frenkel and Levich, 1975, 1977, 1979 and McCormick, 1979) had some methodological problems arising from the incorrect use of bid and ask price data and from the use of non-synchronous data in the spot and forward markets. Second, we measure transactions costs faced by the marginal investors that set prices in the foreign exchange markets which is unlike the previous approaches which, if implemented correctly, would measure transactions costs in foreign exchange market that are faced by commercial customers of banks. While the estimates of transactions costs useful for judgements about the impacts of alternative exchange rate regimes on the levels of trade, might be those incurred by commercial firms, the estimates of cost relevant for determining prices, in contrast, are the smaller costs incurred by large commercial banks who are likely to be marginal investors determining prices in the foreign exchange market. We estimate that transactions costs over the last two decades on average were no more than one-twentieth of one percent, and in the last decade may have fallen to as low as one-fiftieth of one percent. We then, using our approach, construct time series of monthly estimates of effective transactions costs for four currencies, the British Pound, the Deutsche Mark, the Japanese Yen and the Swiss Franc. We also construct time series of monthly volatility (i.e., standard deviation) of foreign currency futures returns and monthly volume (i.e., number of futures contracts traded) for the four currencies. Using regression analysis, we document that volatility is positively associated with the level of transactions costs and that volume is negatively associated with the level of transactions costs. Thus our results are consistent with the notion that an increase in transactions costs does indeed lead to a reduction in volume of trading as one might expect, but its effect on volatility is exactly opposite of what proponents of Tobin tax would have liked to see.
    European Finance Review 02/2003; 7(3):481-510.
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    ABSTRACT: A security design model shows that multinational firms needing to finance their operations should issue different securities to investors in different countries in order to aggregate their disparate information about domestic and foreign cash flows. However, if the firm becomes bankrupt, investors may face uncertain costs of reorganizing assets in a foreign country and thus may value foreign assets at their average value. This penalizes superior firms with low reorganization costs. Such firms minimize the adverse selection penalty by designing securities that allocate all the cash flow in bankruptcy to investors for which the adverse selection costs are the smallest given the exchange rate. We show that this sharing rule can be implemented with currency swaps because these instruments allow the priorities of claims in bankruptcy to switch depending on the exchange rate.
    Journal of Political Economy. 02/2002; 110(3):609-633.
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    ABSTRACT: A security design model shows that (i) firms needing to finance their operations should issue dierent securities to different groups of investors in order to aggregate their disparate information and (ii) each security should be highly correlated (closely aligned) with the private information signal of the investor to whom it is marketed. This alignment reduces the adverse selection penalty paid by a firm with superior information. Adverse selection costs are often contingent on ex post publicly observable and contractible state variables such as exchange rates. In such cases, currency swaps dominate debt contracts. Moreover, optimal securities are derivative contracts that are contingent on state variables like exchange rates that influence adverse selection costs. This is because these swap-like derivative contracts alter the state-by-state seniority of different claims in a desirable way.
    09/2000;
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    Antonio E. Bernardo, Bhagwan Chowdhry
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    ABSTRACT: A firm's resources are difficult to identify and imitate. Firms learn about their resources by undertaking real investments and observing the outcomes. The types of real investments a firm will make depends on what the firm is expected to learn from the outcomes of these investments and the real options that are available for it to exploit in the future. We predict that firms will follow a life-cycle in which they specialize when young, diversify after some time and then either expand into a large diversified firm or focus and specialize. We explain why similar investment opportunities are valued dierently by firms, offer a possible explanation for the well-documented diversification discount, and characterize the heterogeneity in corporate investment behavior and in the market price reaction of firms' traded securities to signals of firm performance.
    06/2000;
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    ABSTRACT: A ¯rm's resources are di±cult to identify and imitate. Firms learn about their resources by undertaking real investments and observing the outcomes. The types of real investments a ¯rm will make depends on what the ¯rm is expected to learn from the outcomes of these investments and the real options that are available for it to exploit in the future. We predict that ¯rms will follow a life-cycle in which they specialize when young, diversify after some time and then either expand into a large diversi¯ed ¯rm or focus and specialize. We explain why similar investment opportunities are valued di®erently by ¯rms, o®er a possible explanation for the well-documented diversi¯cation discount, and characterize the heterogeneity in corporate investment behavior and in the market price reaction of ¯rms' traded securities to signals of ¯rm performance.
    04/2000;
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    Bhagwan Chowdhry
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    ABSTRACT: Since lenders cannot observe the riskiness of the projects that borrowers could choose, interest rates alone cannot be used as an instrument to discipline borrowers. A credible threat to exclude borrowers who default more than a certain number of times from participating in the capital markets makes international debt contracts incentive compatible. Since larger borrowers get fewer chances to default, they choose safer projects and are therefore charged lower interest rates. Also, borrowers, after each successive default, switch to safer and safer projects, which may result in lower and lower interest rates. This paper provides empirical evidence supporting these two predictions.
    Pacific-Basin Finance Journal 02/2000; 8(3-4):333-345. · 0.55 Impact Factor
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    Robert Z. Aliber, Bhagwan Chowdhry, Shu Yan
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    ABSTRACT: One issue in the argument about the merits of pegged and floating exchange rates involves the magnitude of transactions costs in the foreign exchange market under alternative exchange rate regimes. The higher the transactions costs, the greater the deterrence to international trade. Moreover, the higher these costs, the greater the scope for national monetary independence, and more fully the monetary authority in one country could follow policies that might cause the rates of return on assets denominated in its currency to di‹er from rates of return on comparable assets denominated in other currencies, for any given impact in inducing flows of short-term capital. In contrast, the lower the transactions costs in the foreign exchange market, the more the case for national monetary independence must rest on other deterrents to the shifts of funds among national financial centers, such as uncertainty about changes in exchange rates. Transactions costs in the foreign exchange market are not explicit, as in the markets with stan- dardized commissions like the home real estate market and organized security and commodity exchanges. Instead, transactions costs are implicit, as in the over-the-counter security market, and are collected by broker-dealers, primarily the large commercial banks, in the spreads between the prices at which they buy and sell foreign exchange. The transactions costs in the foreign exchange market may di‹er by the pair of currencies involved, by the size of the transaction, by the customer buying the foreign exchange, by the bank selling the foreign exchange, and even by the center in which a particular transaction such as the purchase of dollars with sterling occurs. However, from the point of view providing insights about the scope for monetary independence, the key consider- ation is the estimate of transactions costs incurred by those who pay the lowest costs – the banks in their transactions with each other. The next section di
    Anderson Graduate School of Management, UCLA, University of California at Los Angeles, Anderson Graduate School of Management. 01/2000;
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    Bhagwan Chowdhry, Jonathan T.B. Howe
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    ABSTRACT: Under what conditions will a multinational corporation alter its operations to manage its risk exposure? We show that multinational firms will engage in operational hedging only when both exchange rate uncertainty and demand uncertainty are present. Operational hedging is less important for managing short-term exposures, since demand uncertainty is lower in the short term. Operational hedging is also less important for commodity-based firms, which face price but not quantity uncertainty. When the fixed costs of establishing a plant are low or the variability of the exchange rate is high, a firm may benefit from establishing plants in both the domestic and foreign location. Capacity allocated to the foreign location relative to the domestic location will increase when the variability of foreign demand increases relative to the variability of domestic demand or when the expected profit margin is larger. For firms with plants in both a domestic and foreign location, the foreign currency cash flow generally will not be independent of the exchange rate and consequently the optimal financial hedging policy cannot be implemented with forward contracts alone. We show that the optimal financial hedging policy can be implemented using foreign currency call and put options and forward contracts.
    Review of Finance 06/1999; · 1.59 Impact Factor
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    ABSTRACT: We consider a dynamic model of the capital structure of a firm with callable debt that takes into account that equity holders and debt holders have a common interest in restructuring the firm's capital structure in order to avoid bankruptcy costs. Far away from the bankruptcy threat the equity holders use the call feature of the debt to replace the existing debt in order to increase the tax advantage to debt. When the bankruptcy threat is imminent, the equity holders propose a restructuring of the existing debt in order to avoid bankruptcy. This proposal makes both debt holders and equity holders better off and re-optimize the firm's capital structure. Both the lower and upper restructuring boundaries are derived endogenously by the equity holders' incentive compatibility constraints. Our way of renegotiating the debt when the bankruptcy treat is imminent is different from the way the coupons of the debt is renegotiated in the the strategic debt service models of, e.g., Anderson and Sundaresan (1996) and Mella-Barral and Perraudin (1997). In our model the entire debt (principal as well as all future coupon rates) is restructured. It is not just the current coupon payment which is fine tuned. An important part of the debt renegotiation is to derive endogenously the value of debt and equity if the debt restructuring proposal is rejected since this determines the relative bargaining power between the two parties. However, since these values are off the equilibrium path, they have to be derived by an iterative procedure. Our model offers a rational explanation for violations of the absolute priority rule. In equilibrium the debt holders do accept a restructuring proposal from the equity holders which leaves some value to the equity holders even though the debt holders do not get their full principal back. The reason why the debt holders do accept such a proposal is that the alternative if they reject the equity holders' proposal is not necessarily an immediate liquidation of the firm. In most cases the equity holders would continue to pay the existing coupons until the conditions become even worse before eventually withholding the coupons and de facto forcing the firm into bankruptcy. Since the value of the debt in this alternative situation is lower than the value the debt holders get if they accept the equity holders' proposal, they are willing to accept the proposal even though the equity holders also get a piece of the pie. We also find that the firm's objective function is fairly flat over a large area so the capital structure of the firm can vary a lot without any significant costs or losses to the firm's stake holders. We investigate how firm value, equity value, debt value, par coupon rates, leverage, and yield spreads change in a static comparative analysis. Our results show that optimal leverage is inversely related to both growth options and earnings risk., and other seminar participants for valuable comments and suggestions. The first, third, and fourth authors gratefully acknowledge financial support of the Danish Social Science Research Council. In addition, the fourth author gratefully acknowledges financial support of Danske Bank. Document typeset in L A T E X.
    CEPR Conference the Norwegian School of Management. 04/1999;