nep-cfn New Economics Papers
on Corporate Finance
Issue of 2004‒12‒20
six papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Market Reaction and Volatility in the Brazilian Stock Market By Otavio Ribeiro De Medeiros; Alberto Shigueru Matsumoto
  2. Sustainability in the boardroom: An empirical examination of Dow Jones sustainability world index leaders By Ricart, Joan E.; Rodriguez, Miguel A.; Sanchez, Pablo
  3. Corporate Financing Decision When Investors Take the Path of Least Resistance By Malcolm Baker; Joshua Coval; Jeremy C. Stein
  4. Strategic behavior on financial markets By Kannai,Y.; Rosenmueller,J.
  5. "Holding Company and Bank: An Historical Comparative Perspective on Corporate Governance in Japan" By Tetsuji Okazaki
  6. Executive Compensation, Incentives, and Risk By Jenter, Dirk

  1. By: Otavio Ribeiro De Medeiros (Universidade de Brasilia, Brazil); Alberto Shigueru Matsumoto (Fundacao Visconde de Cairu, Brazil)
    Abstract: We perform an event study to investigate stock returns associated to the announcement of equity issues by Brazilian firms between 1992 and 2003 aiming to determine the market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. The results show signs of insider information, negative abnormal returns around the announcement, and persistent negative abnormal returns in the long-term after the issue. The results are consistent with the extant empirical literature and show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation.
    Keywords: Brazilian stock market, event study, market reaction, GARCH
    JEL: G
    Date: 2004–12–15
  2. By: Ricart, Joan E. (IESE Business School); Rodriguez, Miguel A. (IESE Business School); Sanchez, Pablo (IESE Business School)
    Abstract: In recent years, there has been a virtual explosion of interest in corporate governance. Corporate scandals and the need to protect minority shareholders' interests, for example, are some of the reasons behind the development of corporate governance codes in numerous countries and corporations. At the same time, the concepts of "sustainable development", "corporate responsibility", and "corporate citizenship" have taken root in the business world. Although an extensive body of research treats the fields of corporate governance and sustainable development separately, less attention has been paid to the interaction between both fields. This paper attempts to bridge this gap by examining how corporate governance systems are evolving in order to integrate sustainable development thinking into them. We do so by analyzing the governance systems of the 18 corporations that are leading the market sectors considered by the Dow Jones Sustainability World Index (DJSWI). We present the results of our in depth analysis of the 18 cases and propose the Sustainable Corporate Governance Model that emerges from that analysis.
    Keywords: Corporate governance; sustainable corporate governance; sustainable enterprise; sustainable development; business in society;
    Date: 2004–11–17
  3. By: Malcolm Baker; Joshua Coval; Jeremy C. Stein
    Abstract: We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it all on the open market. If there is downward-sloping demand for acquirer shares, this leads to less price pressure than an SEO, and cheaper equity financing as a result. We develop a simple model to illustrate this idea, and present supporting empirical evidence. Both individual and institutional investors tend to hang on to shares granted them in mergers, with this tendency being much stronger for individuals. Consistent with the model and with this cross-sectional pattern in inertia, acquirers targeting firms with high institutional ownership experience more negative announcement effects and greater announcement volume. Moreover, the results are strongest when the overlap in target and acquirer institutional ownership is low and when the demand curve for the acquirer's shares appears to be steep.
    JEL: G32 G34
    Date: 2004–12
  4. By: Kannai,Y.; Rosenmueller,J. (University of Bielefeld, Institute of Mathematical Economics)
    Date: 2004
  5. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
    Abstract: In this paper I describe the outline of the historical evolution of corporate governance in Japan, and intend to derive some insights on its future. While two alternative systems, the holding company-based system and the bank-based system were available in the 1920s, the former started to proliferate. However, the experiences during the Second World War made the corporate system choose the other fork in the road, the bank-based system. The changes in employment system and production management were complementary with the changes in corporate governance and finance. The Japanese corporate system, which was faced with a bifurcation in the 1920s and the 1930s, is now facing another bifurcation.
    Date: 2004–12
  6. By: Jenter, Dirk
    Abstract: This paper analyzes the link between equity-based compensation and created incentives by (1) deriving a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzing the effect of risk on incentives, and (3) clarifying the role of the agent's private trading decisions in incentive creation. With option-based compensation contracts, the average pay-forperformance sensitivity is not an adequate measure of ex-ante incentives. Pay-for-performance covaries negatively with marginal utility and hence overstates the created incentives. Second, more noise in the performance measure implies that the manager is less certain about the effect of effort on performance, which in turn makes her less willing to exert effort. Finally, the private trading decisions by the manager have first-order effects on incentives. By reducing her holdings of the market asset, the manager achieves an effect similar to "indexing" the stock or option grant, making explicit indexation of the contract redundant.
    Keywords: executive compensation, equity-based compensation, created incentives,
    Date: 2004–12–10

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