Two Essays on Recent Innovations in Finance: Microfinancing and Floating Rate Convertibles
Padhi, Michael Stanley
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The first essay provides theory concerning the risk-taking incentives of microfinance borrowers in varying cases: individual liability, group liability without social sanctions, and group liability with social sanctions. The results provide insight into how a community's social capital and a country's credit rights interact to induce recipients of microfinance programs to take risk. Consistent with recent anecdotal evidence that suggests a "dark side" to microfinance, the results show that communal ties among joint liability borrowing groups may not lead to higher repayment rates and may have worse welfare effects on the recipients by making the poorest group members unwilling to take the risks necessary to grow a business. The second essay considers floating rate convertibles (FRCs). FRCs are a category of PIPE securities that receive negative associations in both the academic and professional literature. This study sheds light on the managerial relationship to the decision to issue FRCs and to the variation in market response to these issues. One main result of the study identifies influence of the CFO relative to the CEO as significant in the decision to issue FRCs and in the market's immediate reaction to the issuance. Another main result is that FRC issuing firms with CFOs without prior public equity issuance experience have significantly negative long run abnormal returns, whereas FRC issuing firms with experienced CFOs do not.