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on Corporate Finance |
| By: | Norman Schürhoff (HEC, University of Lausanne, FAME.) |
| Abstract: | This paper studies the corporate policy distortions caused by realization-based capital gains taxation at the personal level in a dynamic trade-off theory model. The Lock-in effect of embedded capital gains creates severe conflicts of interest between incumbent and new investors. The firm's optimal policy exhibits path-dependency and non-stationarity, since the taxe basis of the firm's owners is a valuable conditioning variable for corporate decisions. Ex-ante identical firms follow very different investment and financial policies depending on their stock price evolution. Firms delay irreversible investment further the lower tax basis of their owners falls. The reason is the investment hedge provided by personal tax loss offsets weakens as investors reset their basis. Capital gains taxation also creates incentives to time equitzy issues. Firms employ more equity in their capital structure the higher the stock price-to-basis ratio, since locked-in investors with out-of-the-money tax timing options value the firm less than the market. The value gain from conditioning on the owner's tax basis is substantial. Using simulated data I show the combined effects are consistent with recent empirical evidence on the relation between leverage, Tobin's Q, and past performance. |
| Keywords: | Capital Gains Taxation, Real Options, Capital Structure, Trade-off Theory, Market Timing. |
| JEL: | G3 G32 H24 H32 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp131&r=cfn |
| By: | Philippe BACCHETTA (Study Center of Gerzensee, University of Lausanne and CEPR); Eric VAN WINCOOP (University of Virginia and NBER) |
| Abstract: | In this paper, we examine formally Keynes' idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs. In a dynamic noisy rational expectations model, higher order expectations add an additional term, which we call the higher order wedge, to a standard asset pricing equation. Consistent with Keynes' reasoning we show that investment decisions are based not just on expected future payoffs, but also on anticipated future expectational errors made by the market. The latter are captured by the higher order wedge. We show that the expectation of future expectational errors by the market is perfectly rational when investors have both noisy public and private information. The main effect of this additional asset pricing term is to disconnect the price from the present value of future payoffs. We show that this effect can be quantitatively significant. |
| Keywords: | Beauty contest; Heterogeneous information |
| JEL: | G12 G14 D82 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp110&r=cfn |
| By: | Séverine CAUCHIE (HEC-University of Geneva); Martin HOESLI (HEC-University of Geneva, FAME and University of Aberdeen (School of Business)) |
| Abstract: | Empirical evidence suggests that U.S. REITs are integrated with common stocks, but not with bonds. The design of the real estate security is likely to impact upon results, however, and it would seem important to analyze the topic of integration for another type of real estate security. Swiss real estate funds constitute an ideal candidate for such an examination as their institutional and legal setup differs substantially from that of other countries. We analyze the integration of such funds with both the stock and bond markets using an APT framework. We employ both the Xu (2003) method and an innovative procedure to determine endogenous and exogenous factors, respectively. Integration is assessed by means of two alternative tests. Our results suggest that Swiss real estate funds are more integrated with stocks than with bonds. Further, we show that the degree of integration between real estate and stocks is due to a stock market factor and changes in expected inflation. No integrating factor is found between real estate and bond funds. Finally, it is found that unexpected inflation is a segmenting factor between real estate securities and financial assets. |
| Keywords: | Securitized Real Estate; Statistical APT; Macroeconomic APT; Market Integration; Risk Factors |
| JEL: | G12 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp111&r=cfn |
| By: | Jean-Marc Bonnisseau (CERMSEM); Oussama Lachiri (CERMSEM) |
| Abstract: | In a multi-period, multi-commodity economy with stock markets, we try to extend the work of Drèze (1974) to define the behavior of the firms. We exhibit first order necessary conditions for a constrained Pareto optimal allocation. The financial constraints lead to non-colinear suppporting spot prices for the consumers at each node. Nevertheless, the firms are satisfying a first order necessary condition for profit maximization with respect to a price computed as the Drèze's prices. These prices are also consistent in the sense that the present value of the firms computed with the personal prices of the stockholders and with the Drèze's prices coincide when short sales are allowed. We also show that these conditions are simpler if we consider an allocation at which each consumer maximizes his preferences, when they are smooth. This allows us to give a formal definition for the objective of the firms, which extend the Drèze's criterion. We also discuss different definitions of constrained feasibility and we provide the related necessary conditions, which do not differ for the production sector. |
| Keywords: | Constrained Pareto optimality, multi-period, firm's behavior, incomplete markets, Drèze's criterion, stock market. |
| JEL: | C60 D51 D52 D60 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b04122&r=cfn |
| By: | Amine JALAL (HEC-University of Lausanne and FAME); Michael ROCKINGER (HEC-University of Lausanne, FAME and CEPR) |
| Abstract: | We investigate the consequences for value-at-risk and expected short-fall purposes of using a GARCH filter on various mis-specified processes. We show that careful investigation of the adequacy of the GARCH filter is necessary since under mis-specifications a GARCH filter appears to do more harm than good. Using an unconditional non filtered tail estimate appears to perform satisfactorily for dependent data with a degree of dependency corresponding to actual market conditions. |
| Keywords: | Extreme value theory; Value at Risk (VaR); Expected shortfall; GARCH; Markov switching; Jump diffusion; Backtesting. |
| JEL: | G12 C32 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp115&r=cfn |
| By: | Philippe GAUD (HEC - University of Geneva); Martin HOESLI (HEC - University of Geneva, FAME and University of Aberdeen (School of Business)); André BENDER (HEC - University of Geneva & FAME) |
| Abstract: | Using a large sample of 5,365 European firms,we document the driving factors of debt-equity choices. Adjustments to a target debt level play a modest role except when debt exceeds an upper barrier, a result that underlines the importance of debt capacity. Preference for internal financing, leverage deficit prior to equity issues, as well as a high level of slack of firms seeking to reduce equity constitute further evidence in favor of pecking order models. It is also found that managers try to time the market by issuing shares when returns are high, but that there is a link between financing and investment activities as predicted by agency models. |
| Keywords: | Dynamic capital structure; Debt-equity choice; Tradeoff models; Pecking order models |
| JEL: | G32 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp114&r=cfn |
| By: | Simonsen, Ola (Department of Economics, Umeå University) |
| Abstract: | This paper considers an extension of the univariate autoregressive conditional duration model to which durations from a second stock are added. The model is empirically used to study durations in two traded stocks, Ericsson B and AstraZeneca, on the Stockholm Stock Exchange. It is found that including durations from a second stock may add explanatory power to the univariate model. Ericsson B is Granger causing durations in AstraZeneca, while AstraZeneca is not Granger causing durations in Ericsson B. Volume, spread and trade intensity changes have significant effects for both series. |
| Keywords: | multivariate; duration; transaction data; market microstructure |
| JEL: | C12 C32 C41 G14 |
| Date: | 2005–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0657&r=cfn |
| By: | Kpate ADJAOUTE Author-Workplace-Name: HSBC Private Bank (Suisse) SA and FAME; Jean-Pierre DANTHINE (HEC-University of Lausanne, CEPR and FAME) |
| Abstract: | This paper analyses the consequences of the process of financial and economic integration on European equity markets. It documents significant changes in fundamentals, notably an increased synchronisation of macroeconomic activities, and a non-negligible evolution in pricing, with a decrease in the cost of capital and converging equity premia. As to equity returns themselves, in the face of what could turn out to be long run upward trends in the correlations among both country and sector returns and a narrowing of the superiority of country factors, the stakes of searching for diversification opportunities at a higher level of disaggregation appear to be higher than ever. |
| Keywords: | European integration; Equity markets; Diversification |
| JEL: | F36 G10 G15 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp117&r=cfn |
| By: | Pascal BOTTERON (Institute of Banking and Finance, HEC-University of Lausanne and Ernst & Young Ltd.); Jean-François CASANOVA (Strategic Risk Management) |
| Abstract: | In this paper we show the advantages of staged investments for venture capitalists. We develop an option-pricing model that enables to evaluate the flexibility acquired by a venture capitalist when he stages his investment process. Instead of investing a fixed amount at the beginning of the investment, the venture capitalist proceeds to a staged investment (one first investment and a second investment). The second investment will be triggered by a successful achievement of the first investment. Should the first investment be unsuccessful, the second investment will not be executed. Staging the investment in two phases enables the investor to reduce its uncertainty at the beginning of the project. As it will be demonstrated in the paper, the decision to proceed to the second investment can be modelled as a portfolio of a call option and a binary option. |
| Keywords: | real options, staged investments, structured products, embedded options |
| JEL: | G12 G30 G31 G32 G34 M13 |
| Date: | 2003–05 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp85&r=cfn |
| By: | Séverine CAUCHIE (HEC-University of Geneva); Martin HOESLI (HEC-University of Geneva; FAME; University of Aberdeen (Business School)); Dušan ISAKOV (HEC-University of Geneva and FAME) |
| Abstract: | This paper examines the determinants of stock returns in a small open economy using an APT framework. The analysis is conducted for the Swiss stock market which has the particularity of including a large proportion of firms that are exposed to foreign economic conditions. Both a statistical and a macroeconomic implementation of the model are performed for the period 1986-2002 with monthly returns on industrial sector indices. The results show that the statistically determined factors yield a better representation of the determinants of stock returns than the macroeconomic variables and that stock returns are influenced by both global and local economic conditions. This suggests that the Swiss stock market is an internationally imperfectly integrated market. |
| Keywords: | Statistical APT, Macroeconomic APT, Market integration, Risk factors |
| JEL: | G12 G15 |
| Date: | 2003–05 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp54&r=cfn |
| By: | Leach, J. Chris (Leeds School of Business, University of Colorado at Boulder); Moyen, Nathalie (Leeds School of Business, University of Colorado at Boulder); Yang, Jing (California State University, Fullerton) |
| Abstract: | In capital intensive industries, firms face complicated multi-stage financing, investment, and production decisions under the watchful eye of existing and potential industry rivals. We consider a two-stage simplification of this environment. In the first stage, an incumbent firm benefits from two first-mover advantages by precommiting to a debt financing policy and a capacity investment policy. In the second stage, the incumbent and a single-stage rival simultaneously choose production levels and realize stochastic profits. We characterize the incumbent's first-stage debt and capacity choices as factors in the production of an intermediate good we call "output deterrence." In our two-factor deterrence model, we show that the incumbent chooses a unique capacity policy and a threshold debt policy to achieve the optimal level of deterrence coinciding with full Stackelberg leadership. When we remove the incumbent's first-mover advantage in capacity, the full Stackelberg level of deterrence is still achievable, albeit with a higher level of debt than the threshold. In contrast, when we remove the incumbent's first-mover advantage in debt, the Stackelberg level of deterrence may no longer be achievable and the incumbent may suffer a dead-weight loss. Evidence on the telecommunications industry shows that firms have increased their leverage in a manner consistent with deterring potential rivals following the 1996 deregulation. |
| Keywords: | Industrial organization; Deregulation; Deterrence; Capital structure; Capacity; Telecommunications |
| JEL: | D43 G32 L13 L96 |
| Date: | 2004–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0033&r=cfn |
| By: | Garance Genicot (Georgetown University) and Debraj Ray (New York University) (Department of Economics, Georgetown University) |
| Abstract: | In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of “bargaining power” between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all “bad” states in which loans are taken. In the latter case, in contrast, the borrower’s consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way. Classification-JEL Codes: O120, O160, G190 |
| Keywords: | credit, no commitment, enforcement, bargaining power |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~05-05-09&r=cfn |
| By: | Kind, Hans Jarle (Norwegian School of Economics and Business Administration); Nilssen, Tore (Dept. of Economics, University of Oslo); Sørgard, Lars (Norwegian Competition Authority) |
| Abstract: | This paper analyses how competition between media firms influences the way they are financed. In a setting where monopoly media firms choose to be completely financed by consumer payments, competition may lead the media firms to be financed by advertising as well. The closer substitutes the media firms’ products are, the less they rely on consumer payment and the more they rely on advertising revenues. If media firms can invest in programming, they invest more the less differentiated the media products are perceived to be. |
| Keywords: | Media; Advertising; Two-sided markets |
| JEL: | L22 L82 L86 M37 |
| Date: | 2005–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_001&r=cfn |
| By: | HÉCTOR OCHOA; JUAN CARLOS GOMEZ LAGUADO; JOSÉ ORLANDO INFANTE DÍAZ |
| Abstract: | El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución. El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución.El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución. El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución.El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución. El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución.El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución. El negocio de las remesas es tan importante para Colombia ue para el año 2004 es la segunda fuente de divisas, después del petróleo. Debido a esta situación, los principales grupos financieros colombianos han decidido entrar al negocio. Este caso contempla el análisis económico, social y de mercado del negocio de las remesas en Colombia y deja planteada su evolución. |
| Keywords: | Remesas |
| Date: | 2004–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:col:000117:000794&r=cfn |