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on Corporate Finance |
| By: | Song, Han-Suck (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology) |
| Abstract: | This paper analysis the explanatory power of some of the theories that have been proposed in the literature to explain variations in capital structures across firms. In particular, this study investigates capital structure determinants of Swedish firms based on a panel data set from 1992 to 2000 comprising about 6000 companies. Swedish firms are on average very highly leveraged, and furthermore, short-term debt comprises a considerable part of Swedish firms’ total debt. An analysis of determinants of leverage based on total debt ratios may mask significant differences in the determinants of long and short-term forms of debt. Therefore, this paper studies determinants of total debt ratios as well as determinants of short-term and long-term debt ratios. The results indicate that most of the determinants of capital structure suggested by capital structure theories appear to be relevant for Swedish firms. But we also find significant differences in the determinants of long and short-term forms of debt. Due to data limitations, it was not possible decompose short-term debt and long-term debt into its elements, but the results suggest that future analysis of capital choice decisions should be based on a more detailed level. |
| Keywords: | Capital structure panel data; optimal leverage; financial markets; short term and long term debt; applied econometrics |
| JEL: | C23 C51 G32 O16 O31 |
| Date: | 2005–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0025&r=cfn |
| By: | Xavier Gine |
| Abstract: | The aim of this paper is to understand the mechanism underlying access to credit. Gine focuses on two important aspects of rural credit markets in Thailand. First, moneylenders and other informal lenders coexist with formal lending institutions such as government or commercial banks, and more recently, micro-lending institutions. Second, potential borrowers presumably face sizable transaction costs obtaining external credit. The author develops and estimates a model based on limited enforcement and transaction costs that provides a unified view of those facts. The results show that the limited ability of banks to enforce contracts, more than transaction costs, is crucial in understanding the observed diversity of lenders. This paper—a product of the Finance Team, Development Research Group—is part of a larger effort in the group to understand access to credit. |
| Keywords: | Domestic Finance; Rural Development |
| Date: | 2005–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3502&r=cfn |
| By: | Peter Woehrmann; Willi Semmler; Martin Lettau |
| Abstract: | Economic research of the last decade linking macroeconomic fundamentals to asset prices has revealed evidence that standard intertemporal asset pricing theory is not successful in explaining (unconditional) ¯rst moments of asset market characteristics such as the risk-free interest rate, equity premium and the Sharpe-ratio. Subsequent empirical research has pursued the question whether those characteristics of asset markets are time varying and, in particular, varying over the business cycle. Recently intertemporal asset pricing models have been employed to replicate those time varying characteristics. The aim of our contribution is (1) to relax some of the assumptions that previous work has imposed on underlying economic and ¯nancial vari- ables, (2) to extend the solution technique of Marcet and Den Haan (1990) for those models by nonparametric expectations and (3) to propose a new estimation procedure based on the above solution technique. To allow for nonparametric expectations in the expectations approach for numerically solving the intertemporal economic model we employ the Local Linear Maps (LLMs) of Ritter, Martinetz and Schulten (1992) to approximate conditional expectations in the Euler equation. In our estimation approach based on non-parametric expectations we are able to use full structural information and, consequently, Monte Carlo simulations show that our estimations are less biased than the widely applied GMM procedure. Based on quarterly U.S. data we also empirically estimate structural parameters of the model and explore its time varying asset price characteristics for two types of preferences, power utility and habit persistence. |
| Keywords: | Nonparametric, Estimation, Time-varying Sharpe Ratio, Asset Pricing |
| JEL: | C1 G1 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:225&r=cfn |
| By: | Andrew Atkeson; Harold Cole |
| Abstract: | We put forward a theory of the optimal capital structure of the firm based on Jensen's (1986) hypothesis that a firm's choice of capital structure is determined by a trade-off between agency costs and monitoring costs. We model this tradeoff dynamically. We assume that early on in the production process, outside investors face an informational friction with respect to withdrawing funds from the firm which dissipates over time. We assume that they also face an agency friction which increases over time with respect to funds left inside the firm. The problem of determining the optimal capital structure of the firm as well as the optimal compensation of the manager is then a problem of choosing payments to outside investors and the manager at each stage of production to balance these two frictions. |
| JEL: | G3 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11083&r=cfn |
| By: | De Clercq, D.; Dimov, Dimo P. |
| Abstract: | Using a unique methodological approach, we examine factors related to venture capital firms’ (VCFs’) involvement in syndication. We argue that VCFs’ investment strategy matters in terms of the extent to which VCFs engage in syndication. We test several hypotheses pertaining to VCFs’ syndication behavior based on a longitudinal data set of realized strategies of 200 U.S.-based VCFs over a twelve-year period. Overall, we find support for both knowledge-based and financial arguments for why VCFs engage in syndication. We discuss our results and provide avenues for future research. |
| Date: | 2004–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2004-18&r=cfn |
| By: | Ambec, S. |
| Abstract: | This paper examines an entrepreneur-investor relationship in a stylized model where (i) investment needs are unknown ex ante and arise sequentially (ii) a major decision must be reached at a maturity strage, (iii) this decision depends on entrepreneur's private information, observable by the investor at some cost. The two partners agree on a corporate governance system which includes a split of futre cash-flows and an allocation of control on the above decision contingently on investment. It turns out that control is assigned to the entrepreneur for low investment levels and then switches to the investor when investment exceeds a threshold. ...French Abstract : Cet article analyse une relation entrepreneur-investisseur dans une modèle stylisée dans lequel (i) les besoins financiers, inconnus ex ante, se présentent de manière séquentielle, (ii) une décision majeure doit être prise à la maturité du projet, (iii) cette décision dépend d'une information privée détenue par l'entrepreneur mais observable par l'investisseur à un certain coût. Les deux partenaires s'entendent sur un système de gouvernance incluant un partage des cash-flow futurs et une allocation du contrôle sur la décision contingentement à l'investissement. L'article montre que le contrôle doit être confié à l'entrepreneur pour des niveaux d'investissement faible, mais qu'il doit être transféré à l'investisseur lorsque l'investissement dépasse un certain seuil. |
| Keywords: | CONTINGENT CONTROL; CORPORATE GOVERNANCE; VENTURE CAPITAL; BIOTECHNOLOGY |
| JEL: | G24 G32 L22 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:rea:gaelwp:200406&r=cfn |
| By: | Margit Osterloh; Bruno S. Frey |
| Abstract: | The most influential theory of corporate governance, principal agency theory, does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder interests by making the board more responsible to shareholders, and strengthening the monitoring of top management by independent outside directors. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firm-specific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this conflict: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm making firm-specific knowledge investments. (3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they connect agency theory with the knowledge-based theory of the firm. |
| Keywords: | conflict management, corporate governance, agency theory, firm-specific investment, knowledge capital |
| JEL: | J24 J33 J41 J53 M12 M52 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:228&r=cfn |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University); Tim Bollerslev (Department of Economics, Duke University); Peter F. Christoffersen (Faculty of Management, McGill University); Francis X. Diebold (Department of Economics, Univerrsity of Pennsylvania) |
| Abstract: | What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions - in particular, real-time risk tracking in very high-dimensional situations - impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds. |
| JEL: | G10 |
| Date: | 2005–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:05-007&r=cfn |
| By: | Rene M. Stulz |
| Abstract: | Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been remarkably limited. I argue that country attributes are still critical to financial decision-making because of what I call the twin agency problems. These twin agency problems arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization. The twin agency problems help explain why the impact of financial globalization has been limited and why financial globalization can lead to capital flight and financial crises. The impact of financial globalization will remain limited as long as these agency problems are significant. |
| JEL: | F36 F30 G32 G10 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11070&r=cfn |
| By: | Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold |
| Abstract: | What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions %uF818 in particular, real-time risk tracking in very high-dimensional situations %uF818 impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds. |
| JEL: | G1 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11069&r=cfn |
| By: | Byström , Hans (Department of Economics, Lund University); Kwon, Oh Kang (Discipline of Finance,University of Sydney.) |
| Abstract: | In this paper we describe a simple way of analytically computing entire ìterm structures of default probabilities using information embedded in the corporate bond market data. This market-based approach of estimating the creditworthiness of firms gives probabilities of default at various maturities, and has the advantage over traditional credit ratings in that it is dynamic and forward looking. |
| Keywords: | bond market; default probability term structure |
| JEL: | C20 G33 |
| Date: | 2005–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_007&r=cfn |
| By: | Pandey Ajay |
| Abstract: | Initial returns (or underpricing) and long run performance of IPOs have been researched extensively across countries. Recent research on IPOs has also been focused on differences in pricing and allocation mechanisms across countries. Indian IPO markets provide a natural setting for comparing the characteristics of issuers, initial returns and long run performance of IPOs coming out with fixed price versus book building route. On a sample of 84 Indian IPOs (20 book-build and 64 fixed-price) from the period 1999 to 2002, we find that the fixed price offerings are used by issuers offering large proportion of their capital by raising a small amount of money. In contrast, book building is opted for by issuers offering small proportion of their stocks and mobilizing larger sums of money. Unlike in the early nineties, the activity in Indian IPO markets is now increasingly following trend of “industry-specific waves” of IPOs as most of the IPOs in our sample are from sectors, which were “hot” during the period. Consistent with the evidence from other countries, initial returns are higher and more uncertain on fixed price offerings. Again in line with evidence elsewhere, all types of Indian IPOs in our sample under performed in the first two years subsequent to listing. We also find some evidence that the IPOs from issuers belonging to industries under the spell of “hot issue” market, under perform more than the rest. |
| Date: | 2005–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2005-01-07&r=cfn |
| By: | C. Mónica Capra; Matilde Fernández; Irene Ramírez-Comeig |
| Abstract: | This paper tests the separating role of contracts that involve both interest rates and collateral in credit markets with asymmetric information. To test this prediction data from real credit markets and controlled experiments are used. Using a sample of credits to small and medium-sized firms in Valencia, Spain, we relate two different types of contracts with an objective approximation to each ex ante borrower risk, i. e., the real outcome of each loan and other relevant variables. Moreover, two incentive compatible contracts are designed and decisions analyzed under two different experimental treatments, one with moral hazard. Results confirm that borrowers of lower risk choose contracts with higher collateral and a lower interest rate. However, it is ascertained that moral hazard reduces separation. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0505&r=cfn |
| By: | Kenneth Kletzer (University of California Santa Cruz) |
| Date: | 2004–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1026&r=cfn |
| By: | Keld Laursen; Ammon Salter |
| Abstract: | The strategies firms use to protect their intellectual property and knowledge can strongly influence their ability to capture the benefits of their innovative efforts. In attempting to appropriate their innovations, firms can chose from a range of mechanisms, including patents, trade secrets and lead times. Yet, little is known about how the use of different appropriability mechanisms may shape innovative performance. Using a large-scale database of UK manufacturing firms, we examine how legal (such as patents) and first mover (such as secrecy) appropriability strategies shape performance. We find that both strategies are curvilinearly (taking an inverted U-shape) related to innovative performance, indicting that some firms may suffer from a myopia of protectiveness, relying too heavily on appropriation to the detriment of other activities. |
| Keywords: | Appropriability; Intellectual property rights; Innovation; Innovative Performance |
| JEL: | C24 O32 O34 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:aal:abbswp:05-02&r=cfn |
| By: | Kristin Forbes (MIT); Menzie Chinn (University of Wisconsin, Madison) |
| Abstract: | This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by: global, sectoral, and cross-country factors (returns in large financial markets), and country-specific effects. Then it uses a new data set on bilateral linkages between the world's 5 largest economies and about 40 other markets to decompose the cross-country factor loadings into: direct trade flows, competition in third markets, bank lending, and foreign direct investment. Estimates suggest that both cross-country and sectoral factors are important determinants of stock and bond returns, and that the U.S. factor has recently gained importance, while the Japanese and U.K. factors have lost importance. From 1996-2000, real and financial linkages became more important determinants of how shocks are transmitted from large economies to other markets. In particular, bilateral trade flows are large and significant determinants of cross-country linkages in both stock and bond markets. Bilateral foreign investment is usually insignificant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how movements in the world's largest markets affect financial markets around the globe. |
| Keywords: | trade linkages, bank lending, factor models, financial integration, interdependence, |
| Date: | 2003–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1041&r=cfn |