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on Corporate Finance |
| By: | Joao C. A. Teixeira (Lancaster University Management School) |
| Abstract: | This paper tests empirically the performance of three structural models of corporate bond pricing, namely Merton (1974), Leland (1994) and Fan and Sundaresan (2000). While the first two models overestimate bond prices, the Fan and Sundaresan model reveals an extremely good performance. When considering the prediction of credit spreads, the three models under-estimate market spreads but, again, Fan and Sundaresan has a better performance. We find rating, maturity and asset volatility effects in the prediction power, as the models under-estimate less the spreads of riskier firms and of bonds with better rating quality and longer maturity. Moreover, our results reveal the existence of a new industry effect. Spread errors are systematically related to some bond- and firm-specific variables, as well as term structure variables. |
| Keywords: | structural models, corporate debt valuation, empirical credit spreads |
| JEL: | G12 G13 |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505001&r=cfn |
| By: | Michael Magill; Martine Quinzii |
| Abstract: | This paper studies a general equilibrium model with two groups of agents, investors (shareholders) and managers of firms, in which managerial effort is not observable and influences the probabilities of firms’ outcomes. Shareholders of each firm offer the manager an incentive contract which maximizes the firm’s market value, under the assumption that the financial markets are complete relative to the possible outcomes of the firms. The paper studies two sources of inefficiency of equilibrium. First, when investors are risk averse and effort influences probability, market-value maximization differs from maximization of expected utility. Second, because the optimal contract exploits all sources of information for inferring managerial effort, when firms’ outputs are correlated the contract of a manager depends on the outcomes of other firms. This leads to an external effect of the effort of one manager on the compensation of other managers, which market-value maximization ignores. We show that under typical conditions these two effects lead to an under-provision of effort in equilibrium. These inefficiencies disappear however if each firm is replicated, and in the limit there is a continuum of firms of each type. |
| JEL: | D23 D51 D62 D82 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-22&r=cfn |
| By: | Guido Fioretti (University of Bologna) |
| Abstract: | A simple agent-based model of business units lending money to one another is sufficient to understand on what conditions avalanches of bankruptcies may arise. The model highlights the consequences of specialisation into money lending as well as the impact of preferential lending relations. |
| Keywords: | Financial Fragility, Avalanches of Bankruptcies, Agent-Based Models |
| JEL: | G |
| Date: | 2005–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505002&r=cfn |
| By: | Armando Gomes; Gordon Phillips |
| Abstract: | We examine a comprehensive set of private and public security issuance decisions by publicly traded companies. We study private and public issues of debt, convertibles and common equity securities - a total of 6 different security-market choices. The market for public firms issuing private securities is large. Of the over 13,000 issues we examine, more than half are in the private market. We find that asymmetric information and moral hazard problems play a large role in the public versus private market choice and the security type choice. Our findings show that asymmetric information impacts security choice in a particular pattern: Conditional on issuing in the public market we find a pecking order of security issuance holds, firms with higher measures of asymmetric information are less likely to issue equity. We find a reversal of this pecking order in the private market, firms with higher measures of asymmetric information are more likely to issue equity and convertibles. Second, we find risk and investment opportunities are important in determining which security type a firm issues. Firms with high risk, low profitability and good investment opportunities are more likely to choose equity and convertibles and to issue privately. The results support models of security issuance where private securities give investors more incentives to produce information and monitor the firm. |
| JEL: | G0 G2 G3 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11294&r=cfn |
| By: | Clara Cardone; Maria-Jose Casasola; Margarita Samartin |
| Abstract: | Small and medium-sized companies are extremely important for the Spanish economy. However, they face difficulties when trying to obtain financing (credit rationing). As a result, and given their limited possibilities to obtain finance in the capital market, they turn to the credit market, which is the main provider of funds for such companies. The main aim of this study is to provide an insight into the banking relationships that are developed in this market and their impact on credit rationing. Previous literature has studied this situation by focusing on price rationing and quantity rationing. This study furthers research into banking relationships by examining the effects that these relationships may have on compensation demanded for debt and the relationship with long-term credit rationing. After studying 386 SMEs listed in the Spanish Guide of Exporting Companies, the main conclusions drawn were as follows: i) SMEs working with larger numbers of financial entities and with longer relationships with these entities enjoy better access to credit; ii) SMEs that develop banking relationships by contracting financial products manage to reduce their credit costs; iii) SMEs that have longer banking relationships with banking entities benefit from better long-term credit conditions; and iv) the maintenance of banking relationships through the rendering of services reduces bank requirements in terms of guarantees in credit applications. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb052806&r=cfn |
| By: | Pagano, Marco; von Thadden, Ernst-Ludwig |
| Abstract: | In this Paper, we document how in the wake of monetary unification the markets for euro area sovereign and private-sector bonds have become increasingly integrated. Issuers and investors alike have come to regard the euro area bond market as a single one. Primary and secondary bond markets have become increasingly integrated on a pan-European scale. Issuance of corporate bonds has taken off on an unprecedented scale in continental Europe. In the process, both investors and issuers have reaped the considerable benefits afforded by greater competition in the underwriting of private bonds and auctioning of public ones, and by the greater liquidity of secondary markets. Bond yields have converged dramatically in the transition to EMU. The persistence of small and variable yield differentials for sovereign debt under EMU indicates that euro area bonds are still not perfect substitutes. However, to a large extent this does not reflect persistent market segmentation but rather small differentials in fundamental risk. Liquidity differences play at most a minor role, and this role appears to arise partly from their interaction with fundamental risk. The challenges still lying ahead are numerous. They include the unbalance between the German-dominated futures and the underlying cash market; the vulnerability of the cash markets’ prices to free-riding and manipulation by large financial institutions; the possibility of joint bond issuance by euro area countries; the integration of clearing and settlement systems in the euro area bond market, and the participation of new accession countries’ issuers to this market. |
| Keywords: | bond market; bond yield differential; euro; financial integration |
| JEL: | G15 G32 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4779&r=cfn |
| By: | Andy Cosh; Douglas Cumming; Alan Hughes |
| Abstract: | This paper investigates the internal versus external financing decisions among 1900 early stage privately held UK firms in 1996-1997. We study the factors that affect rejection rates in applications for outside finance among the different types of investors, taking into account the non-randomness in a firm’s decision to seek outside finance. The data support the traditional pecking order theory; firms with greater capital expenditures / profits are more likely to seek finance and apply for more external finance. The data further indicate growth oriented firms are much more likely to apply for external finance. There are some differences in the internal versus external financing of female and male founder CEO firms, but these differences are largely attributable to growth orientation. Firms in industries with a greater proportion of larger competitors are less likely to obtain all of their desired outside capital. The data also indicate banks are less likely to finance completely new startups, while venture capital funds are more likely to finance innovative and growth orientated firms. Overall, the data do not indicate the presence of a capital gap in entrepreneurial finance; rather, firms seeking capital are able to secure their requisite financing from at least one of the many different available sources. |
| Keywords: | Entrepreneurial Finance, Capital Gaps, Pecking Order, Adverse Selection, Gender |
| JEL: | G21 G22 G23 G24 G31 G32 G35 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp301&r=cfn |
| By: | John Armour; Douglas Cumming |
| Abstract: | Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers’ attention. Recent initiatives both in the UK and at EU level have sought to promote entrepreneurship by reducing the harshness of the consequences of personal bankruptcy law. Whilst there is an intuitive link between the two, little attention has been paid to the question empirically. We investigate the link between bankruptcy and entrepreneurship using data on self employment over 13 years (1990-2002) and 15 countries in Europe and North America. We compile a new index of the level of how ‘forgiving’ personal bankruptcy laws are, reflecting the time to discharge. This measure varies over time and across the countries studied. We show that bankruptcy law has a more statistically and economically significant effect on self employment rates relative to GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers. |
| Keywords: | Personal Bankruptcy Law, Entrepreneurship |
| JEL: | K35 M13 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp300&r=cfn |
| By: | William Lazonick (INSEAD and University of Massachusetts); Andrea Prencipe (Università G. D’Annunzio di Pescara, and SPRU, University of Sussex) |
| Abstract: | The aim of this paper is to document the role that career engineers played in the investment strategies and eventual survival of an organization producing large high technology capital goods. Using the theory of innovative enterprise developed by Lazonick and O'Sullivan (2000), we analyze the locus of strategic control and its interactions with the cognitive and behavioral dimensions of Rolls-Royce, nowadays a successful industrial firm. The company has been analyzed during an intense period of radical changes in the ownership structure of the company that followed the firm's misdemeanors. Analysis of the role of engineers is paralleled with an analysis of what influence the firm's exposure to the stock market had on its innovative activities. The case analyzed shows that there was a clear lead by the engineering-related functions, while other functions had little say in important investment decisions. Company decisions were driven by the creed of engineering excellence transmitted from generation to generation of engineers via the recruitment and apprentice systems that were at the basis of the company's internal training policy. |
| Keywords: | career engineers, investment strategies, Rolls-Royce, innovative processes |
| JEL: | L10 L62 O31 |
| Date: | 2005–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:sru:ssewps:121&r=cfn |
| By: | Panayotis Dessyllas; Alan Hughes |
| Abstract: | In this paper we investigate the incidence of high technology acquisitions using a large international sample of acquisitions by public high technology firms. Controlling for firms’ financial characteristics, we examine the impact of the following innovation-related factors on the propensity to acquire: R&D-intensity as a proxy for R&D inputs; the citation-weighted patent-intensity as a proxy for R&D output; the stock of citation-weighted patents as a proxy for the accumulated stock of knowledge generated by past R&D efforts. The following conclusions can be drawn with respect to the characteristics of acquirers of non-public targets - mainly private firms and former subsidiaries. First, we find support for the view that the propensity to acquire new knowledge-related assets through acquisitions is driven by declining returns from the exploitation of a firm’s existing knowledge base. Second, we find evidence in favour of the make-or-buy theory that acquisitions are a substitute for in-house R&D activity. Third, our results are in accordance with the theoretical argument that a large stock of accumulated knowledge enhances a firm’s ability to absorb external knowledge through acquisitions. These results suggest that smaller acquisitions can be seen as part of an innovation strategy by acquiring firms with relatively low levels of internal R&D which seek to offset low R&D productivity by exploring a range of potential innovation trajectories in new and smaller business units. Interestingly, we find that these interpretations cannot be made for acquirers of the larger public companies. |
| Keywords: | Mergers and acquisitions, acquisition likelihood, R&D, patents |
| JEL: | G34 O30 L20 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp298&r=cfn |
| By: | Craig McIntosh (University of California, San Diego); Alain de Janvry (University of California, Berkeley); Elisabeth Sadoulet (University of California, Berkeley) |
| Abstract: | This paper uses data from Uganda's largest incumbent microfinance institution to analyze the impact of entry by competing lenders on client behavior. We first examine the geographic placement decisions of competitors, and find that placement decisions are strongly affected by district-level characteristics. We observe that increased competition induces a decline in repayment performance and in savings deposited with the incumbent Village Bank, suggesting multiple loan-taking by clients. Urban clients take multiple loans primarily from lenders with more individual methodologies, while rural clients borrow from several group lenders. Individuals who operate larger businesses are the ones most likely to leave the incumbent Village Bank when a Solidarity Group lender enters the marketplace. |
| Keywords: | microfinance, competition, credit markets, |
| Date: | 2003–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:agrebk:987&r=cfn |