nep-cfn New Economics Papers
on Corporate Finance
Issue of 2005‒03‒13
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Entry costs and stock market participation over the life cycle By ; Sule Alan
  2. What Role of Legal Systems in Financial Intermediation? Theory and Evidence By Laura Bottazzi; Marco Da Rin; Thomas Hellmann
  3. Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission By Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
  4. Explaining Returns with Cash-Flow Proxies By Peter Hecht; Tuomo Vuolteenaho
  5. Passive Creditors By Koen Schoors; Konstantin Sonin
  6. How Does Law Affect Finance? An Empirical Examination of Tunneling in an Emerging Market By Vladimir Atanasov; Conrad S. Ciccotello; Stanley B. Gyoshev
  7. Financial Development and Technology By Solomon Tadesse

  1. By: ; Sule Alan
    Abstract: Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural (state) dependence in the the stock market entry decision, which is consistent with costs of these types. However, the magnitude of these costs are not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of (annual) permanent income. My estimated model matches the zero median holding as well as the hump-shaped age-participation profile observed in the data.
    Keywords: Entry costs; Stock market; Structural estimation
    JEL: G11 D91
    Date: 2005–01
  2. By: Laura Bottazzi; Marco Da Rin; Thomas Hellmann
    Abstract: How does the relationship between an investor and entrepreneur depend on the legal system? In a double moral hazard framework, we show how optimal contracts, corporate governance, and investor actions depend on the legal system. With better legal protection, investors give more non-contractible support, demand more downside protection, and exercise more governance. Investors in better legal systems develop stronger governance and support competencies. Therefore, when investing in a different legal systems they behave differently than local investors. We test these predictions using a hand-collected dataset of European venture capital deals. The empirical results confirm the predictions of the model.
  3. By: Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
    Abstract: The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers.
    JEL: E44 F3 C5
    Date: 2005–03
  4. By: Peter Hecht; Tuomo Vuolteenaho
    Abstract: Stock returns are correlated with contemporaneous earnings growth, dividend growth, future real activity, and other cash-flow proxies. The correlation between cash-flow proxies and stock returns may arise from association of cash-flow proxies with one-period expected returns, cash-flow news, and/or expected-return news. We use Campbell's (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow proxies. In some of the popular specifications, variables that are motivated as proxies for cash-flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R2 from a regression of returns on cash-flow proxies may overstate or understate the importance of cash-flow news as a source of return variance.
    JEL: E44 G10 G12
    Date: 2005–03
  5. By: Koen Schoors; Konstantin Sonin
    Abstract: Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomenons in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.
    Keywords: creditor passivity, bankruptcy, arrears, bad loans, bank closure
    JEL: G21 G28 G33 P5
    Date: 2005–01–01
  6. By: Vladimir Atanasov; Conrad S. Ciccotello; Stanley B. Gyoshev
    Abstract: This paper documents that law affects finance in emerging markets through the methods used by controlling shareholders to “tunnel” wealth out of the firm. We find that Bulgarian securities law enabled financial tunneling via dilution and freeze-out tender offers. During the period 1999- 2001, about two-thirds of the 1,040 firms on the Bulgarian Stock Exchange were delisted. Freeze-out tender offers for minority shares averaged about 25% of the shares’ intrinsic value. Bulgarian securities law changes in 2002 made financial tunneling more costly for controlling shareholders. Subsequent increases in stock market valuations and liquidity suggest that controlling shareholders have shifted from financial tunneling to less value-destroying methods, such as transfer pricing, to extract wealth from firms.
    Keywords: Tunneling, freeze-out, controlling shareholders, appraisal rights, preemptive rights
    JEL: G34 K22
    Date: 2005–01–01
  7. By: Solomon Tadesse
    Abstract: Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector.
    Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation
    JEL: G1 G21 G32 E44 O14 O31 O34 O4
    Date: 2005–02–01

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