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on Corporate Finance |
| By: | Peter F. Christoffersen (McGill University and CIRANO); Francis X.Diebold (Department of Economics, University of Pennsylvania and NBER) |
| Abstract: | We consider three sets of phenomena that feature prominently - and separately - in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis. |
| Keywords: | Conditional Mean Dependence, Conditional Volatility Dependence, Sign Dependence, VIX |
| JEL: | C22 C53 |
| Date: | 2003–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:04-009&r=cfn |
| By: | Yochanan Shachmurove (The City College of The City University of New York and the University of Pennsylvania) |
| Abstract: | The incredible profits of Initial Public Offerings have often been emphasized in the media as a popular investment for the public. This paper takes a few steps towards refuting such an assertion by investigating the performance of 2,895 venture capital backed IPOs between 1968 and September 1998. The paper finds that it is incorrect to assume that investors demand very high annualized and cumulative rates of return to compensate for the risks they are taking by financing ventures in different sectors of the economy. The mean rates of return are found to be, in practice, very moderate, and often, negative. |
| Keywords: | Initial public offering; venture capita; annualized and cumulative rates of return; Information Technology; Medical, Health and Life Science; Non-High Technology; Biotechnology; Communications; Computer Industry; Semiconductor and Other Electronics Industries |
| JEL: | C12 D81 D92 E22 G12 G24 G3 M13 M21 O16 O3 |
| Date: | 2004–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:04-030&r=cfn |
| By: | Rafael Rob (Department of Economics, University of Pennsylvania); Tadashi Sekiguchi (Kobe University - General) |
| Abstract: | We consider a repeated duopoly game where each firm privately chooses its investment in quality, and realized quality is a noisy indicator of the firm’s investment. We focus on dynamic reputation equilibria, whereby consumers ‘discipline’ a firm by switching to its rival in the case that the realized quality of its product is too low. This type of equilibrium is characterized by consumers’ tolerance level - the level of product quality below which consumers switch to the rival firm - and firms’ investment in quality. Given consumers’ tolerance level, we determine when a dynamic equilibrium that gives higher welfare than the static equilibrium exists. We also derive comparative statics properties, and characterize a set of investment levels and, hence, layoffs that our equilibria sustain. |
| Keywords: | Reputation, consumer switching, moral hazard, repeated games |
| JEL: | C73 D82 L14 L15 |
| Date: | 2004–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:04-032&r=cfn |
| By: | Thomassen L.; Van Wouwe Martine |
| Abstract: | We reintroduced the idea of an n-fold compound option as a generalization of Geske’s (2-fold) compound option in the same framework of constant interest rates. For the valuation of long-term financial agreements (life insurance products) this assumption is not always realistic. So that the stochastic modelling of the interest rates might be a better approach. According to Miltersen et al., we will use the requirement of simple interest rates over a fixed finite period to be log-normal distributed, instead of the continuously compounded interest rates. With these assumptions, closed-form solutions are determined for the n-fold compound call options written on zero-coupon bonds. |
| Date: | 2003–05 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2003010&r=cfn |
| By: | Deloof Marc; Weets V. |
| Abstract: | This paper analyses how financial characteristics and institutional factors affect the timeliness of financial reporting in Belgium. The analysis is based on a sample of 1892 non-financial Belgian companies for 1996. The contribution of this paper is to investigate how external financing affects the timeliness of financial reporting of closely held companies in continental Europe. Moreover, we investigate to what extent the determinants of the timeliness of the annual financial statement affect the timeliness of the annual shareholder meeting. We find evidence of a relationship between financial characteristics and the timeliness of the financial statements. Large companies, listed companies, companies with financial debt (especially bank loans), and companies with a low debt ratio, high liquid reserves and high investment tend to file their annual statements faster. Moreover, companies reporting an extraordinary profit also file their annual statements faster. Loss making companies and companies with high debt ratios and low investments wait longer to call the annual shareholder meeting. These results are consistent with the hypothesis that the more companies are confronted with outside users of the financial statements, the faster they file their financial statements. Companies in bad financial health delay financial reporting. |
| Date: | 2003–04 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2003014&r=cfn |
| By: | De Schepper A.; Heijnen B. |
| Abstract: | In spite of the power of the Black & Scholes option pricing method, there are situations in which the hypothesis of a lognormal model is too restrictive. One possibility to deal with this problem, consists of a weaker hypothesis, fixing only successive moments and eventually the mode of the price process of a risky asset, and not the complete distribution. The consequence of this generalization is the fact that the option price is no longer a unique value, but a range of several possible values. We show how to find upper and lower bounds, resulting in a rather narrow range. We give results in case two moments, three moments, or two moments and the mode of the underlying price process are fixed. |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2004004&r=cfn |
| By: | Jeremy Grant; Thomas Kirchmaier |
| Abstract: | In this paper, we show that ownership structures vary considerably across Europe, and that the dominant form ofownership is not necessarily the most efficient one. These findings are in contradiction to similar research basedon US samples. The results also demonstrate that firms without a dominant shareholder tend to outperform theircountry peer groups. We base our analysis on a new and unique dataset of uniform ownership data of the largest100 firms in the five major European economies. We quantify the differences in ownership by comparing threedistinct ownership structures of firms and relating them to performance. For the first time we employ aHodrick-Prescott Filter, a methodology widely used in macroeconomics to isolate the trend growth componentsfrom cyclical fluctuations, to estimate the share price trend of each firm. We take this trend as a good indirectindicator of the quality of governance. |
| Keywords: | Corporate governance, ownership structures, performance, Europe |
| JEL: | G32 G34 G38 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0631&r=cfn |
| By: | Anne Vila Wetherilt; Simon Wells |
| Abstract: | This paper revisits the issue of long-horizon equity return predictability for the United Kingdom in the context of the dynamic dividend discount model of Campbell and Shiller. This model attributes predictable variation in equity prices to predictable variation in expected returns. The model is supported by the theoretical asset pricing literature, which shows how the variation in expected returns can be related to investors' time-varying preferences for risk. The paper considers various empirical specifications that are consistent with the Campbell and Shiller model and finds that they are supported by UK equity data. In particular, there is weak evidence that the dividend yield has predictive ability for long-horizon excess returns. The paper also examines some of the econometric issues brought up by recent research, in particular the small-sample bias, and applies appropriate statistical corrections. It further shows that the model's predictive ability depends greatly on the sample period over which the model is estimated. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:244&r=cfn |
| By: | Jerome Stein |
| Abstract: | The focus is upon equilibrium real exchange rates, optimal external debt and their interaction, in a world where both the return on investment and the real rate of interest are stochastic variables. These theoretically based measures are applied empirically to answer the following questions: What is a theoretically based empirical measure of an "excess debt" that increases the probability of a debt crisis? What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a currency/balance of payments crises? Two theoretical tools are used to derive Early Warning Signals. One is the NATREX model to estimate the equilibrium real exchange rate. The second is stochastic optimal control/dynamic programming to derive the optimal debt and endogenous growth rate. Examples are given of these applications. |
| Keywords: | stochastic optimal control, foreign debt, NATREX, vulnerability to external shocks, sustainable current account, warning signals of debt crisis, exchange rate misalignments |
| JEL: | C61 D81 D90 F30 F31 F34 F40 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1363&r=cfn |
| By: | Nan-Kuang Chen; Hsiao-Lei Chu |
| Abstract: | We investigate the foreclosure policy of collateral-based loans in which the endogenous collateral value plays acrucial role. If creditors are able to commit, then the equilibrium arrangement is more likely to featureforebearance lending by specifying a lower level of liquidation (or roll over all of the loans) relative to the expostefficiency criterion for each realization of the interim signal. The key is that collateral value may drop toolow when banks call in loans by auctioning off borrowers¿ collateral and this makes clearing up non-performingloans less attractive. We attribute the banks¿ leniency as we have observed in Japan during the 1990s to anequilibrium arrangement where banks can commit due to either relationship banking or an implicit lenderborrowercontract, such as the arrangement under Japan¿s main-bank system. |
| Keywords: | Collateral value, forbearance lending, government guarantee. |
| JEL: | E44 E51 G3 |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0603&r=cfn |
| By: | Beuselinck C.; Deloof M.; Manegart S. |
| Abstract: | We investigate whether a firm’s disclosure policy is affected by the changing corporate setting and intensified corporate governance associated with private equity (PE) investments. For a unique sample of unquoted PE backed firms we observe a significant switch to increased financial disclosure in the pre-investment year, consistent with the hypothesis that entrepreneurs attempt to reduce information asymmetries inherent to the PE application by increasing their disclosure levels. Further, we document that the governance and professionalization impact of PE investors affects their portfolio firms’ financial disclosure positively. Finally, differentiating on investor type (government versus non-government related) reveals no overall effect on disclosure, both in the pre- as in the post-investment years. Results are robust to various sensitivity checks. |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2004025&r=cfn |
| By: | J Dawson; Neal Knight-Turvey; Andrew Neal; M West |
| Abstract: | The current study examined the impact of the human resource function and financing strategyon the financial performance of 104 UK manufacturing firms. Hypotheses are drawn from aresource-based perspective on human resource management and a financial theoryperspective on capital structure. Results show that an innovative HR function is significantlyrelated to economic performance. However, the relationship between an innovative HRfunction and economic performance was moderated by the firm¿s financing strategy. Firmsobtained higher returns from an innovative HR function when pursuing a low leveraging(debt) financing strategy, a finding consistent with modern finance theory notions that firmspecificstrategic assets provide greatest value when financed primarily through equity asopposed to debt. |
| Keywords: | human resource function, manufacturing, firm performance, asset characteristics |
| JEL: | M11 M12 J5 J24 J51 J71 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0630&r=cfn |
| By: | Philip R. Lane; G Milesi-Feretti |
| Abstract: | The founders of the Bretton Woods System sixty years ago were primarily concerned with orderly exchange rateadjustment in a world economy that was characterized by widespread restrictions on international capitalmobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for theinternational monetary system. In particular, large gross cross-holdings of foreign assets and liabilities meansthat the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional tradebalance channel. Accordingly, this paper empirically explores some of the inter-connections between financialglobalization and exchange rate adjustment and discusses the policy implications. |
| Keywords: | Financial integration, capital flows, external assets and liabilities |
| JEL: | F31 F32 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0662&r=cfn |