nep-cfn New Economics Papers
on Corporate Finance
Issue of 2005‒02‒27
eight papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Do Firms Benefit from Multiple Banking Relationships?: Evidence from Small and Medium-Sized Firms in Japan By Masayo Shikimi (Tomiyama)
  2. Corporate Rent-Seeking and the managerial soft-budget constraint By Rodolfo Apreda
  3. Investment Timing, Agency, and Information By Steven R. Grenadier; Neng Wang
  4. The Management of Projects and Product Experimentation: Lessons from the Entertainment Industries By Mark Lorenzen & Lars Frederiksen
  5. Can An ”Estimation Factor” Help Explain Cross-Sectional Returns? By Lundtofte, Frederik
  6. Growth, Uncertainty and Finance. By K Blackburn; D Varvarigos
  7. Statistical Properties of a Heterogeneous Asset Price Model with Time-Varying Second Moment By Carl Chiarella; Xue-Zhong He; Duo Wang
  8. Capital Asset Pricing for Markets with Intensity Based Jumps By Eckhard Platen

  1. By: Masayo Shikimi (Tomiyama)
    Abstract: This paper examines empirically the effects of multiple banking relationships on the cost and availability of credit. The analysis is based on an unbalanced panel data set for Japanese small and medium-sized firms over the period 2000-2002. The Hausman-Taylor estimator is used to allow for possible correlation between unobservable heterogeneity among firms and multiple banking relationships. The results suggest that the cost of credit is positively correlated with the number of banking relationships when the endogeneity of the banking relationships is considered. Multiple banking relationships have a positive effect on the availability of credit for financially constrained firms.
  2. By: Rodolfo Apreda
    Abstract: This paper seeks to expand on two topical strands in Government Finance and Political Science literature, rent-seeking and the soft-budget constraint, so as to bring forth a strong linkage with corporate governance environments. It will attempt to accomplish this task by setting up a distinctive framework of analysis that hinges on incremental cash flows. Firstly, it claims that both rent-seeking behavior and the soft-budget constraint are worthy of being applied to corporate governance learning and practice. Secondly, the paper contributes to focus on cash-flows reliability and managers’ accountability. Thirdly, it is shown how conflicts of interest underlie rent-seeking behavior, and how the latter relates to the soft-budget constraint.
    Keywords: Rent-Seeking, Soft-Budget Constraint, Corporate Governance, Incremental Cash Flow model, Conflicts of Interest.
    JEL: G30 G34 D72 D74 D82
    Date: 2004–12
  3. By: Steven R. Grenadier; Neng Wang
    Abstract: This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The implied investment behavior differs significantly from that of the first-best no-agency solution. In particular, greater inertia occurs in investment, as the model predicts that the manager will have a more valuable option to wait than the owner.
    JEL: E31 E32 E5
    Date: 2005–02
  4. By: Mark Lorenzen & Lars Frederiksen
    Abstract: The paper analyses management of product innovation in project-based industries, offering a view on management not only of firms, but also of markets. It first argues that projects are prominent in industries where the nature of consumer demand means that product innovation takes place as experimentation. Then, the paper argues that if skills needed for projects are very diverse and projects are complex, there are few internal managerial economies of projects, and the scope for management then transcends the boundaries of firms. In these cases, markets become organized in combinations of people, contracts, and other institutions, in order to facilitate the coordination of market-based projects. While contracts play a role, a continuous, active role of knowledgeable managers (leaders and boundary spanners) is also often necessary. Such managers ? and thus (core parts of) whole industries ? are embedded in project ecologies at particular places, which is why we see geographical clusters in many project-based industries. The paper is mainly conceptual, but develops its argument by drawing examples from the Entertainment industries throughout.
    Keywords: Project organization, product innovation, portfolio management of projects, entertainment
    JEL: L22 O31 L82
  5. By: Lundtofte, Frederik (Department of Economics, Lund University)
    Abstract: We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent’s estimate. In the empirical specification, this ”estimation factor” is based on realized growth in aggregate dividends and earnings. We test our model by using GMM and compare it to the Fama-French model. The results suggest that the estimation factor is priced. Moreover, the Hansen-Jagannathan distances show that the conditional and static versions of our derived model perform on a par with the corresponding versions of the Fama-French model.
    Keywords: learning; incomplete information; equilibrium; factor pricing models
    JEL: C13 G12
    Date: 2005–02–24
  6. By: K Blackburn; D Varvarigos
    Abstract: We study the effects of uncertainty on long-run growth in two model economies, where households fund risky investment projects of entrepreneurs in the presence of financial market imperfections. Imperfections in the first model are due to asymmetric information which is resolved through costly state verification. In this case, some entrepreneurs may decide at the outset not to borrow and not to run projects. Imperfections in the second model are due to incomplete enforceability of loan contracts. In this case, all entrepreneurs are willing to borrow, but some of them may choose not to run projects, preferring to abscond with their loans, instead. We show that, in both cases, an increase in uncertainty increases the rate of interest on loans which increases the number of entrepreneurs who abstain from running projects. This reduces capital accumulation and growth. We also show that financial market frictions have similar effects, and that the effects of uncertainty disappear when these frictions are absent.
    Date: 2005
  7. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Duo Wang
    Abstract: Stability and bifurcation analysis of deterministic systems has been widely used in modeling financial markets. However, the impact of such dynamic phenomena on various statistical properties of the corresponding stochastic model, including skewness and excess kurtosis, various autocorrelation (AC) patterns of under and over reactions, and volatility clustering characterised by the long-range dependence of ACs, is not clear and has been very little studied. This paper aims to study this issue. Through a simple behavioural asset pricing model with fundamentalists and chartists, we examine the statistical properties of the model and their connection to the dynamics of the underlying deterministic model. In particular, our analysis leads to some insights into the type of mechanism that may be generating some of the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data.
    Keywords: fundamentalists; chartists, stability; bifurcation; investors' under- and over-reactions; stylized facts
    JEL: D83 D84 E21 E32 C60
    Date: 2004–11–01
  8. By: Eckhard Platen (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper proposes a unified framework for portfolio optimization, derivative pricing, modeling and risk measurement in financial markets with security price processes that exhibit intensity based jumps. It is based on the natural assumption that investors prefer more for less, in the sense that for two given portfolios with the same variance of its increments, the one with the higher expected increment is preferred. If one additionally assumes that the market together with its monetary authority acts to maximize the long term growth of the market portfolio, then this portfolio exhibits a very particular dynamics. In a market without jumps the resulting dynamics equals that of the growth optimal portfolio (GOP). Conditions are formulated under which the well-known capital asset pricing model is generalized for markets with intensity based jumps. Furthermore, the Markowitz efficient frontier and the Sharpe ratio are recovered in this continuous time setting. In this paper the numeraire for derivative pricing is chosen to be the GOP. Primary security account prices, when expressed in units of the GOP, turn out to be supermartingales. In the proposed framework an equivalent risk neutral martingale measure need not exist. Fair derivative prices are obtained as conditional expectations of future payoff structures under the real world probability measure. The concept of fair pricing is shown to generalize the classical risk neutral and the actuarial net present value pricing methodologies.
    Keywords: benchmark model; jump diffusions; growth optimal portfolio; market portfolio; effiient frontier; Sharpe ratio; fair pricing; actuarial pricing
    JEL: G10 G13
    Date: 2004–12–01

This nep-cfn issue is ©2005 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.