nep-cfn New Economics Papers
on Corporate Finance
Issue of 2005‒05‒23
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Debt maturity, risk, and asymmetric information By Allen N. Berger; Marco A. Espinosa-Vega; W. Scott Frame; Nathan H. Miller
  2. Financial development, financial constraints, and the volatility of industrial output By Borja Larrain
  3. Defaultable debt, interest rates, and the current account By Mark Aguiar; Gita Gopinath
  4. Implications of alternative operational risk modeling techniques By Patrick de Fontnouvelle; Eric Rosengren; John Jordan
  5. The forecast ability of risk-neutral densities of foreign exchange By Ben R. Craig; Joachim G. Keller
  6. SBA-loan guarantees and local economic growth By Ben R. Craig; William E. Jackson, III; James B. Thomson
  7. Financial contracting and the choice between private placement and publicly offered bonds By Simon H. Kwan; Willard T. Carleton
  8. Asset Float and Speculative Bubbles By Harrison Hong; Jose Scheinkman; Wei Xiong
  10. Financial Markets of the Middle East and North Africa: The Past and Present By Yochanan Shachmurove

  1. By: Allen N. Berger; Marco A. Espinosa-Vega; W. Scott Frame; Nathan H. Miller
    Abstract: We test the implications of Flannery’s (1986) and Diamond’s (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data from more than 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond’s model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.
    Date: 2004
  2. By: Borja Larrain
    Abstract: More financially developed countries show lower volatility of industrial output. Volatility is particularly reduced in industries that are more financially dependent. Most of the reduction is in idiosyncratic volatility. Systematic volatility is reduced less strongly, implying that industries are more closely correlated with GDP in more financially developed countries. At the firm level, short-term debt is negatively correlated with output as financial development increases, suggesting that debt is used in a countercyclical way to stabilize production. The results indicate that financial development relaxes financial constraints mainly to smooth negative cashflow shocks
    Keywords: Financial modernization ; Industrial productivity
    Date: 2004
  3. By: Mark Aguiar; Gita Gopinath
    Abstract: World capital markets have experienced large-scale sovereign defaults on a number of occasions, the most recent being Argentina’s default in 2002. In this paper, we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates than in slumps. Our ability to match these facts within the framework of an otherwise standard business-cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets.
    Keywords: Default (Finance) ; Emerging markets ; Debt ; Interest rates ; Balance of payments
    Date: 2004
  4. By: Patrick de Fontnouvelle; Eric Rosengren; John Jordan
    Abstract: Quantification of operational risk has received increased attention with the inclusion of an explicit capital charge for operational risk under the new Basle proposal. The proposal provides significant flexibility for banks to use internal models to estimate their operational risk, and the associated capital needed for unexpected losses. Most banks have used variants of value at risk models that estimate frequency, severity, and loss distributions. This paper examines the empirical regularities in operational loss data. Using loss data from six large internationally active banking institutions, we find that loss data by event types are quite similar across institutions. Furthermore, our results are consistent with economic capital numbers disclosed by some large banks, and also with the results of studies modeling losses using publicly available “external” loss data.
    Keywords: Bank capital ; Risk management ; Basel capital accord
    Date: 2004
  5. By: Ben R. Craig; Joachim G. Keller
    Abstract: We estimate the process underlying the pricing of American options by using higher-order lattices combined with a multigrid method. This paper also tests whether the risk-neutral densities given from American options provide a good forecasting tool. We use a nonparametric test of the densities that is based on the inverse probability functions and is modified to account for correlation across time between our random variables, which are uniform under the null hypothesis. We find that the densities based on the American option markets for foreign exchange do quite well for the forecasting period over which the options are thickly traded. Further, simple models that fit the densities do about as well as more sophisticated models.
    Keywords: Foreign exchange futures ; Options (Finance) ; Economic forecasting
    Date: 2004
  6. By: Ben R. Craig; William E. Jackson, III; James B. Thomson
    Abstract: Increasingly policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.
    Date: 2005
  7. By: Simon H. Kwan; Willard T. Carleton
    Abstract: Private placement bonds have unique financial contracting in controlling borrower-lender agency conflicts due to direct monitoring and the relative ease of future renegotiation. Our data show that private placements are more likely to have restrictive covenants and are more likely to be issued by smaller and riskier borrowers. We find the determinants of bond yield spreads to be quite different between private placements and public issues, reflecting the different institutional arrangements between the two markets. Finally, in issuing bonds, we find that firms self-select the bond type to minimize both the financing costs and the transaction costs.
    Keywords: Finance ; Corporate bond
    Date: 2004
  8. By: Harrison Hong; Jose Scheinkman; Wei Xiong
    Abstract: We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover and volatility decrease with float and prices drop on the lock-up expiration date.
    JEL: G0 G1
    Date: 2005–05
  9. By: João Fernandes (Banco BPI)
    Abstract: The literature on corporate credit risk modeling for privately-held firms is scarce. Although firms with unlisted equity or debt represent a significant fraction of the corporate sector worldwide, research in this area has been hampered by the unavailability of public data. This study is an empirical application of credit scoring and rating techniques applied to the corporate historical database of one of the major Portuguese banks. Several alternative scoring methodologies are presented, thoroughly validated and statistically compared. In addition, two distinct strategies for grouping the individual scores into rating classes are developed. Finally, the regulatory capital requirements under the New Basel Capital Accord are calculated for a simulated portfolio, and compared to the capital requirements under the current capital accord.
    Keywords: Credit Scoring, Credit Rating, Private Firms, Discriminatory Power, Basel Capital Accord, Capital Requirements
    JEL: C13 C14 G21 G28
    Date: 2005–05–13
  10. By: Yochanan Shachmurove (Department of Economics, University of Pennsylvania, and City College of the City University of New York)
    Abstract: The recent political developments in the Middle East have prompted increased scrutiny of the economies of the nations lying in this region. Over the past few months, the financial markets of Middle East and North Africa (MENA) have been affected by the speculations that existed before the war in Iraq as well as its subsequent repercussions. Factors such as lagging domestic, political reforms, government interference, and inflexible monetary and fiscal policies remain obstacles to privatization, globalization, and foreign investment in MENA economies. As the economies enter the post-war recovery phase, reform of financial markets seems necessary to accelerate economic growth.
    Keywords: Middle East and North African (MENA) Emerging Financial Markets; Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, Turkey; Foreign Direct Investment; Globalization and Growth; Iraq War; Gulf War; Macroeconomic and Financial Indicators
    JEL: E0 E1 F3 F4 G1 N2 O4 O5
    Date: 2003–06–01

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