Pearson Prizes for the Best Papers in Financial Management

Every two years, Financial Management’s Editors, Associate Editors, and Advisory Editors choose the best papers from all of the journal articles published during the past two years through a double ranking procedure. Thanks to the generous support of Pearson, the winner is awarded a cash prize of $7,500 and the runner-up paper is awarded a cash prize of $2,500.

Congratulations to the 2018 award winners! 

Winner

CMBS Subordination, Ratings Inflation, and Regulatory-Capital Arbitrage (Spring 2018, Volume 47, Issue 1)
Richard Stanton, University of California, Berkeley & Nancy Wallace, University of California, Berkeley

Using detailed origination and performance data on a comprehensive sample of commercial mortgage‐backed security (CMBS) deals, along with their underlying loans and a set of similarly rated residential mortgage‐backed securities (RMBS), we apply reduced‐form and structural modeling strategies to test for regulatory‐capital arbitrage and ratings inflation in the CMBS market. We find that the spread between CMBS and corporate‐bond yields fell significantly for ratings AA and AAA after a loosening of capital requirements for highly rated CMBS in 2002, whereas no comparable drop occurred for lower rated bonds (which experienced no similar regulatory change). We also find that CMBS rated below AA upgraded to AA or AAA significantly faster than comparable RMBS (for which there was no change in risk‐based capital requirements). We use a structural model to investigate these results in more detail and find that little else changed in the CMBS market over this period except for the rating agencies' persistent reductions in subordination levels between 1997 and late 2007. Indeed, had the 2005 vintage CMBS used the subordination levels from 2000, there would have been no losses to the senior bonds in most CMBS structures.

Runner-Up

Do Outside Directors with Government Experience Create Value? (Summer 2018, Volume 47, Issue 2)
Jun-Koo Kang, Nanyang Technological University & Le Zhang, Australian National University

We examine whether outside directors with government experience add value to their firms. We find that government directors are more likely to miss board meetings and that their appointment announcements are greeted more negatively. Firms with government directors also experience poorer operating performance and more negative merger announcement returns, although their mergers are less likely to be challenged by antitrust authorities. These adverse valuation effects are largely alleviated when firms have large government sales, when they operate in regulated industries, or when government directors are politically connected. Using close gubernatorial election outcomes as a natural experiment and an instrumental variables approach to control for endogeneity bias do not change the results.