This thesis studies the effects of the credit ratings in mergers and acquisitions (M&As). The first chapter establishes that credit ratings affect the choice of payment method in mergers and acquisitions. I find that bidders holding a high rating level are more likely to use cash financing in a takeover. I attribute this finding to lower financial constraints and enhanced capability of highly rated firms to access public debt markets as implied by their higher credit quality. The second chapter investigates the effect of the proximity to credit rating changes on the acquisition decisions of the bidding firms. I apply different measures to proxy for a potential credit rating change and 1 find a non-linear association between firms' real credit rating levels (cred it quality) and acquisition decisions. Furthermore. I show that all my proxies for future credit rating upgrades (downgrades) are positively (negatively) associated with acquisition decisions. Overall the findings in this chapter support my hypotheses and specifically. document the real impact of CRAs' ratings and opinions on firms' takeover policies. The third chapter re-examines the shareholder wealth effects around the announcements of mergers between bidders and targets that complement each other on the levels of debt capacity and growth opportunities, when high degrees of information asymmetry prevail. In sum I find that this type of merger transactions creates value for the combined firms as also for the bidding firms. Regarding the target firms there is some evidence of value destruction which nonetheless. comes at the benefit of the combined and bidding firms as the latter firms avoid overpayment. Additionally. the significant effect of the complementary fit on synergy, bidding and target firm returns is mainly driven by the group of target firms that operate under a high information asymmetry environment.

This thesis is an empirical credit risk study, developing a multi-factor quadratic term structure model in discrete time and investigating credit risk. There are three main contributions. First, I examine the corporate credit default swap premia. I estimate parameters using an extended Kalman filter. The results show that the discrete quadratic term structure model is able to avoid some of the drawbacks associated with continuous models and affine term structure models. In addition, it was found that two state variables are enough to explain most of the variation in corporate credit spread. Second, I use an empirical study to analyze how market priced default component and nondefault component were incorporated into corporate bonds during 2005 - 2009. I jointly model the corporate bonds and credit default swaps using a three-factor quadratic term structure model and an extended Kalman filter. The evidence shows that the default component is not the major part of the corporate spread for most firms in my dataset, rather it is the time-varying nondefault component. Lastly, I study a large range of sovereign and bank credit default swap premia. I use a quadratic term structure model to define credit risk and decompose bank credit default swap premia into three factors: sovereign, common and bank-specific factors. The results indicate that banks in the dataset in all countries outside the United States (US) are very sensitive to common factors, and relatively sensitive to sovereign factors. The US banks, however, show more sensitivity to sovereign factors. Although sovereign and common factors explain a large portion of bank credit default swap premia, bank- specific factors played a major role, especially after the Lehman's failure. I also examine how the market priced the default component in both the dollar and sterling LIBOR (London Interbank Offered Rate). The evidence shows that the default component of LIBOR no longer reflects the panel banks' credit risks. Before September 2008, the default component of LIBOR was mainly driven by the coeffects of the sovereign and common factors. After that, both dollar and sterling LIBOR were reduced to an historic low. The sterling LIBOR are almost driven by sovereign factors while the dollar LIBOR reflects an even smaller credit risk than the sovereign risk. This evidence confirms market participants' thoughts that the dollar LIBOR should be higher than the observed rate.

This thesis focuses on an empirical analysis of credit spreads from three different perspectives. The first analysis investigates the price discovery process of credit risk by means of single-name credit spreads obtained from four main markets, namely the credit default swap (CDS), the bond, the equity and the option markets. This study is the first which quantifies the credit risk price discovery by considering the four markets jointly. By using two main measures of price discovery derived from widely used common factor models, results show that, during periods of high volatility, price discovery occurs primarily in the option market, whereas, during stable periods, it takes place in the equity market. Furthermore, evidence of volatility spillovers from the option market towards the other markets is found in highly volatile periods. Finally. an innovative way to use GARCH volatility models is introduced, which allows to generate time-varying measures of price discovery. The second analysis examines novel trading strategies based on the information about the price discovery of credit spreads obtained from the CDS and equity markets for US and European single-name obligors. The profitability of the new strategies is compared with that of the popular "capital structure arbitrage (CSA)" strategy. The latter is based on the discrepancy between the CDS spread and its equity-implied spread but does not take into account the price discovery process in credit spreads. Results show that the new strategies outperform the CSA strategy during the financial crisis of 2007-2009. Moreover, the correlation of the new trading rules with the CSA is low or negative during the crisis, which suggests that by combining new and old rules, portfolio managers could reap diversification benefits at times when diversification, and hence risk reduction, was hardly achievable. The final contribution adds to the literature on credit spreads by analysing, for the first time, the forecasting performance of both linear and nonlinear models of CDS spreads. The statistical and economic significance of the models' forecasts are evaluated by employing various metrics and trading strategies, respectively. Linear models, in particular, generate positive Sharpe ratios for some of the strategies implemented, thus placing some doubts on the efficiency of the European CDS index market.

This thesis discusses three topics in the area of quantitative finance in relation to risk and credit portfolio management. Chapter 2 investigates the issue of estimating and testing the goodness-of-fit of a model for a dependence break. The dependence is modelled by copulas and an unknown break of dependence structure is allowed for by including a dummy variable in the copula. The model is selected by minimizing the Akaike Information Criterion (AIC) of each candidate breaking point. The candidate models are estimated by a well-established two-step Maximum Likelihood (ML) approach, namely "Inference Function for Margin" (IFM). Moreover, we examine 5 single-factor copulas and compare them to each other by AIC criteria. A parametric bootstrap goodness-of-fit test is also proposed. Empirically, the dependence structures of stock indices between the US-UK and US-Japan markets during the Subprime crisis are examined. We found breaks in both dependence structures. In Chapter 3, a new general approach is developed for optimizing a credit portfolio by minimizing the default risk of a whole credit portfolio subject to a certain target premium. The approach is rooted in concepts from Modem Portfolio Theory. The default risk is measured by a quadratic form of weights and a matrix containing information about default correlations between any two single-names and default intensities of each single-name. The default correlation and the default intensities are modelled by a new binomial intensity model. A Genetic Algorithm (GA) approach is also introduced to optimize a credit portfolio with the purpose of overcoming limitations of the analytical method and the traditional numerical method based on the first order condition. Empirically, the approach is applied to optimize Credit Default Swap (CDS) portfolios consisting of members of iTraxx and CDX indices. In Chapter 4, we focus on modelling counterparty risks of two important financial instruments: the Interest Rate Swap (IRS) and the CDS. Analytical solutions are derived for the theoretical fair prices of the IRS and the CDS under various assumptions of defaults of counterparties. Also a Monte Carlo approach is proposed as a numerical solution for the fair prices. Numerical experiments are designed to study the effects of various factors on the fair price. Empirically, we examine the counterparty risk of a CDS portfolio, composed of randomly selected single-names from iTraxx series 10.

Despite more than 45 years of debate among international marketers about the right way to tackle the standardisation versus adaptation of products, no clear answer has yet emerged. Academics argue along the "Standardisation- Differentiation Continuum" with proponents of standardisation on the one side and opponents on the other. Most researchers however take the middle ground stating that only the right degree of standardisation really matters, though few attempts have been made to define how this degree can be clearly defined. Hence, companies typically standardise products for supply side reasons such as cost savings and scale economies, rather than considering the consumer dimension as well. To offer a solution to the issue, recently international market segmentation has been cited as a possible way forward. By targeting market segments of homogeneous consumers that transcend across borders, ideally measured on marketing variables such as attitudes and preferences, standardised products must be possible. To this present time, limited empirical evidence is however provided to confirm whether this can indeed solve the issue. Therefore, this research aspires to broaden the knowledge in this field further. First, it provides empirical evidence on the theory that market segmentation based on marketing variables indeed provides a meaningful solution to the standardisation versus adaptation issue. To substantiate this, three different consumer segments across national borders were identified in which differences in consumer preferences for a product category were substantially reduced. Second and perhaps more importantly, a concept with high practical relevance for "consumer centric product standardisation" is provided, integrating consumer variables instead of supply-side arguments to determine the right degree of standardisation. It is argued that this approach allows standardisation to become an integral part of marketing strategy. It may therefore be a better alternative than the supply-side driven approach as practised in international companies today. To arrive at these findings and to test theory an explanatory case study approach was chosen using a survey strategy. As a un it of analysis, the focus was placed specifically on the British, Italia n, Polish and German cat food market, with individual consumers purchasing cat food as the unit of observation. A substantial sample of 1,233 consumers across the markets was generated using social medial platforms. Analysis of variance (ANOVA) was used to test for differences in product preferences, which were found to be significant between the different countries. Hierarchical Cluster Analysis was subsequently utilised to segment the market on attitudinal variables and three consumer segments were found and named as a) The Proud Cat l over, b) The Germanic Cat Owner and c) The Practical Food Provider .. Following the segmentation process evidence was found that the magnitude of differences between the markets was substantially reduced supporting the theoretical proposition in the literature. Fin ally, a product standardisation matrix was developed; enabling marketing practitioners to evaluate the right degree of product standardisation on product attribute level

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Determinants of a well-functioning market-based home-financing system for MENA Housing finance is a cross-cutting topic of major economic, social, and political significance. It enables middle-class households and other targeted people to turn need for housing into effective demand by extending finance to buy their homes. Housing finance in Middle East and North African (MENA) countries is underdeveloped compared with countries of a similar level of income and stage of development. Existing literature cites many causes for this underdevelopment, among which is path dependency and culture. The study aims to address the path dependency issue by identifying attributes of a well-functioning housing finance system with the objective of contributing to the design of housing finance systems in MENA countries. To fulfil its objectives, the study uses primary and secondary research. Using comparative case analysis, firstly, housing finance systems in nine developed and emerging economies were assessed. Secondly, housing finance supply in nine countries in MENA were evaluated using a framework of analysis developed as part of the research. By conducting a survey in three MENA countries, the study attempts to understand people in terms of beliefs and attitudes towards housing finance, and characteristics of demand for housing finance. The findings of the study demonstrate the pivotal role of governments, and the significant influence of private financial institutions in the evolution and performance of any HFS. MENA countries have a fragmented supply of housing finance rather than a system, mainly due to a performance gap of players, lack of diversity in products, and self-exclusion of people from housing finance. Generally, people prefer finance from friends and family members and lack proper understanding of Islamic finance in Muslim dominated population. In conclusion, transferability and development of a well-functioning market-based housing finance system necessitates adoption of right public policies; regulators who supervise and enable financial institutions. Product diversifications is crucial to tailor to the needs of consumers, while engaging people by spreading awareness and protecting consumers.

This Thesis investigates the recent regulatory reforms applied to the credit ratings industry in Europe and the US. It analyses the impact on credit rating agencies (CRAs) and financial markets. The prior literature on CRA regulation is focused on the US markets and is limited to investigations of competition between CRAs. The impact of recently implemented regulations for CRAs in Europe has received very little academic attention and presents a highly topical research avenue. This Thesis makes several novel contributions to the literature, including (i) critical perspectives on the new regulation, especially in the EU; (ii) the impact of the solicitation status of sovereign ratings upon bank ratings; and (iii) whether European Securities Markets Authority (ESMA) rating identifiers affect the quality of ratings. Several methodologies are applied to enhance the robustness of the findings, including ordered probit analyses, fixed effects models, covariate matching (CVM) and propensity score matching (PSM). An extensive sample of rating actions by the largest CRAs (Fitch, Moody’s and S&P) during 2006 to 2014 is utilised. The critical review of the EU’s CRA regulation sheds light on several shortcomings and raises a need for reassessment. Some assumptions presented by the European Commission (EC) lack underlying evidence and are subjective in nature. Disclosures by CRAs have been inconsistent, which may reflect ambiguity in the regulations. Compliance with new regulation has affected the CRAs’ operating costs, which confirms earlier fears expressed by CRAs. Additional evidence is presented relating to CRAs’ business models. The second empirical chapter identifies that changes to the solicitation status of sovereigns induced by new disclosure rules have an adverse effect on banks domiciled in these countries. This has policy implications for regulators and banks since the ceiling effect identified in the study can lead to higher costs and harm the intermediaries. In the final empirical chapter, ESMA’s requirement for rating identifiers is questioned since it does not have any discernible impact on the quality of ratings reported by CRAs. This finding is of interest to policymakers, market participants and academics since the quality of ratings is linked to banking regulation and affects financial stability.

In February 2015 the U.S. Department of Justice confirmed that it had reached an agreement with Standard & Poor’s, the largest credit rating agency, so that it would pay a record $1.375 billion fine for defrauding investors during the Financial Crisis. This record fine has been heralded as an indicator of the State’s ability to effectively punish transgressions within the financial markets. However, upon closer inspection, the credit rating agencies have continued transgressing. Therefore, this thesis aims to show why this discipline has been ineffective in terms of impacting upon the credit rating agencies’ appetite, and ability, to transgress. In focusing upon one small, yet significant, aspect of the credit rating industry, this thesis examines the effect of ancillary service provision upon the conduct of the credit rating agencies. It is found that the revenues and profits garnered from the ancillary service divisions of Standard & Poor’s and Moody’s far outweigh the record fines that are being given to them. This fact, when combined with the understanding that these divisions have no positive impact upon the transparency, or indeed the accuracy of credit rating agency output, means that the discipline deemed appropriate by the State is being entirely nullified by divisions that can be removed; this thesis therefore calls for that removal and presents a detailed proposal to that end. This thesis embarks upon this endeavour in an attempt to reduce the ability of such a critically-important component of the financial sector to transgress. This is important because the impact of destructive finance upon society in 2008, and ever since, has not been witnessed since the Great Depression. In order to spare society from bearing the brunt of another collapse because of the iniquities of the marketplace, this thesis also calls for the reimagining of the economic reform process so that the safeguarding of society, and in particular the most vulnerable in society, is prioritised over the extraction of wealth by a small number of people.

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