nep-cfn New Economics Papers
on Corporate Finance
Issue of 2005‒05‒29
six papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Responsible ownership, shareholder value and the new shareholder activism By John Roberts; Paul Sanderson; John Hendry; Richard Barker
  3. Illusionary Finance and Trading Behavior By Malika, HAMADI; Erick, RENGIFO; Diego SALZMAN
  4. Is systematic downside beta risk really priced? Evidence in emerging market data By Don U.A. Galagedera; Robert D. Brooks
  5. Financing development: debt versus equity By Joël van der Weele
  6. Matched asymptotic expansions in financial engineering By Sam Howison

  1. By: John Roberts; Paul Sanderson; John Hendry; Richard Barker
    Abstract: In this paper we use interview data to explore the Ônew shareholder activism of mainstream UK institutional investors. We describe contemporary practices of corporate governance monitoring and engagement and how they vary across institutions, and explore the motivations behind them. Existing studies of shareholder activism mainly assume that it is motivated by a desire to maximise shareholder value, and we find some evidence both of this and of alternative political/moral motivations related to ideas of responsible ownership. We conclude, however, that in the current situation both these act primarily as rationalisations rather than as genuine motivators. The main driving force behind the new shareholder activism is the institutions own profit maximisation and the need to position themselves against competitor institutions in the context of political and regulatory changes that have significantly changed the non-financial expectations of their clients.
    Keywords: corporate governance, institutional investors, shareholder value, stock market
    JEL: G3 G2 G30
    Date: 2204–12
  2. By: Gerard Llobet; Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defense of a petent and, thus, the prospects of infrigement and the effective protection of the innovator. We compare the resort to a financier once the infrigement has occurred (ex-post financing) with patent litigation insurance (PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropiate deductible) so as to implement the innovator's second-best outcome: a situation in which patent predaction is deterred without inducing excessive litigation.
    Keywords: Financial strategy, intellectual property, litigation, predation.
    JEL: G32 O34 O52
    Date: 2005–02
  3. By: Malika, HAMADI; Erick, RENGIFO; Diego SALZMAN
    Abstract: One important aspect of financial market is that there might be some traders that intentionally mislead other market participants by creating illusions in order to obtain a profit. We call this new concept illusionary finance. We present an analysis of how illusions can be created and disseminated in financial markets based on certain psychological principles that explain agents’ decisions under time pressure and polysemous signals. We develop a simple model that incorporates the illusions in the price formation process. Furthermore, using powerful simulations, we show how illusions can be incorporated, directly or indirectly, in the expected prices of the traders.
    Keywords: Illusionary Finance; Behavioral Finance; Evolutionary Finance; Neuroeconomics
    JEL: C32 C35 G10
    Date: 2004–09–15
  4. By: Don U.A. Galagedera; Robert D. Brooks
    Abstract: Several studies advocating safety first as a major concern to investors propose downside beta risk as an alternative to the traditional systematic risk-beta. Downside measures are concerned with a subset of the data and therefore the results in the studies that consider the downside beta only may be biased. This study addresses this issue by including downside co-skewness risk in addition to the downside beta risk in the pricing model. In a sample of 27 emerging markets two-stage rolling regression analysis fails to support pricing models with downside risk measures. In a cross-sectional analysis inclusion of downside co-skewness improves model fit. When considered together, downside beta is potential and downside co-skewness is a risk to the rational investor. Even though our results are inconclusive the evidence strongly suggests a need for further investigation of co-skewness risk in pricing models that adopt a downside risk framework.
    Keywords: Beta, Downside risk, Emerging markets
    JEL: G12 G15
    Date: 2005–05
  5. By: Joël van der Weele
    Abstract: In this paper we investigate the impact of the balance between debt and equity finance on the financial stability of developing countries. Employing extreme bounds analysis to deal with model uncertainty, we estimate a model of an exchange rate pressure index depending on various financial capital stocks and flows. We find evidence for a stabilizing effect of FDI and a destabilizing effect of short-term debt and publicly guaranteed flows to commercial banks. We also investigate the path dependency of different types of capital flows controlling for different push and pull factors. In general, we find that existing stocks of short-term debt make it harder for a country to obtain new finance. Furthermore, the level of capital market development has an important impact on the composition of capital flows to a country.
    Keywords: emerging markets; capital flows; currency crises; robust estimation
    JEL: C33 C52 F21
    Date: 2005–05
  6. By: Sam Howison
    Abstract: Modern financial practice depends heavily on mathematics and a correspondingly large theory has grown up to meet this demand. This paper focuses on the use of matched asymptotic expansions in option pricing; it presents illustrations of the approach in `plain vanilla' option valuation, in valuation using a fast mean-reverting-stochastic volatility model, and in a model for illiquid markets. A tentative framework for matched asymptotic expansions applied directly to stochastic processes of diffusion type is also proposed.
    Date: 2005

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