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on Corporate Finance |
| By: | Philippe Gaud; Martin HOesli; André Bender |
| Abstract: | Using a sample of over 5,000 European firms, we document the driving factors of capital structure policies in Europe. Controlling for dynamic patterns and national environments, we show how these policies cannot be reduced to a simple trade-off or pecking order model. Both corporate governance and market timing impact upon capital structure. European firms limit themselves to an upper barrier to leverage, but not to a lower one. Debt constrains managers to payout cash, and equity may become cheap during windows of opportunity. Internal financing, when available, is preferred over external financing, but companies limit future excess of slack as it constitutes a potential source of conflict. |
| Keywords: | dynamic capital structure; debt-equity choice; trade-off; agency; pecking order |
| JEL: | G32 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp152&r=cfn |
| By: | Duffy, Michael |
| Abstract: | Recent increases in Iowa farmland values and the turbulence in the stock market have resurrected a perennial question. Which is a better investment—the stock market or farmland? |
| Date: | 2005–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12401&r=cfn |
| By: | Catalin Starica (Chalmers & Gothenburg University); Stefano Herzel (University of Perugia); Tomas Nord (Chalmers University of Technology) |
| Abstract: | The paper investigates from an empirical perspective aspects related to the occurrence of the IGARCH effect and to its impact on volatility forecasting. It reports the results of a detailed analysis of twelve samples of returns on financial indexes from major economies (Australia, Austria, Belgium, France, Germany, Japan, Sweden, UK, and US). The study is conducted in a novel, non-stationary modeling framework proposed in Starica and Granger (2005). The analysis shows that samples characterized by more pronounced changes in the unconditional variance display stronger IGARCH effect and pronounced differences between estimated GARCH(1,1) unconditional variance and the sample variance. Moreover, we document particularly poor longer-horizon forecasting performance of the GARCH(1,1) model for samples characterized by strong discrepancy between the two measures of unconditional variance. The periods of poor forecasting behavior can be as long as four years. The forecasting behavior is evaluated through a direct comparison with a naive non-stationary approach and is based on mean square errors (MSE) as well as on an option replicating exercise. |
| Keywords: | stock returns, volatility forecasting, GARCH(1,1), IGARCH effect, hedging, non-stationary, longer horizon forecasting |
| JEL: | C14 C32 |
| Date: | 2005–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0508003&r=cfn |
| By: | Theodore Panagiotidis (Loughborough University) |
| Abstract: | The behaviour of an emerging market, the Athens Stock Exchange (ASE), after the introduction of the euro is investigated. The underlying assumption is that stock prices would be more transparent; their performance easier to compare; the exchange rate risk eliminated and as a result we expect the new currency to strengthen the argument, in favour of the EMH. The General ASE Composite Index and the FTSE/ASE 20, which consists of “high capitalisation” companies, are used. Five statistical tests are employed to test the residuals of the random walk model: the BDS, McLeod-Li, Engle LM, Tsay and Bicovariance test. Bootstrap and asymptotic values of these tests are estimated. Alternative models from the GARCH family (GARCH, EGARCH and TGARCH) are also presented in order to investigate the behaviour of the series. Lastly, linear, asymmetric and non-linear error correction models are estimated and compared. |
| Keywords: | Non-Linearity, Market Efficiency, Random Walk, GARCH, non- linear error correction |
| JEL: | C22 C52 G10 |
| Date: | 2005–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0507022&r=cfn |
| By: | Bernard Paranque (Euromed Marseille Ecole de Management); Walter Baets (Euromed Marseille Ecole de Management); Henry Pruden (Euromed Marseille Ecole de Management) |
| Abstract: | An important literature has pointed out the coordination problems faced by the agents, in particular the financial one when they have to manage risk and their portfolio. If we follow Kaldor and its definition of speculation, then we could point out that in this case agents are short term oriented because they have to face to an uncertain reality: uncertainty about the behaviour of their competitors at present time and in the future, and uncertainty about the future reality which will be built by their own decision and action. Then each agent tries to anticipate the behaviour of the others, on one hand to do the same (then in average it is a way to avoid lost), on another hand to try to find an opportunity which has not been seen by the other (the way to earn money, doing what the other can’t or may not do), that means mimetic versus opportunism (or free rider behaviour). In both case, we have a kind of reproduction of habits without any collective perspective. The latent hypothesis is that individual decision produces the people satisfaction, the social welfare. We thinks there are three reasons to disagree with this hypothesis ( cancelling that it does not work in reality): a lack of specific tool allowing us to anticipate change and communicate about it; a lack of understanding “what is the common reality”; a lack of an agreement on “what and how can we do together”. That means that we need to understand that rules are not a constraint like they could be in the contract theory but more a through out line to help us to coordinate a collective action |
| Keywords: | Financial behaviour , holism , agent , financial market , social welfare , value maximization , stakeholder |
| JEL: | C61 D6 D82 E44 G14 G30 |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0508001&r=cfn |
| By: | Li, Fei; Ueda, Masako |
| Abstract: | We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory. |
| Keywords: | Principal-Agent problem; sorting |
| JEL: | G39 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5119&r=cfn |
| By: | Laeven, Luc; Levine, Ross |
| Abstract: | This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates that engage in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium. |
| Keywords: | agency costs; banking; corporate diversification; economies of scope |
| JEL: | G20 G30 L20 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5121&r=cfn |
| By: | Devriese, Johan; Mitchell, Janet |
| Abstract: | This paper studies the potential impact on securities settlement systems (SSSs) of a major market disruption, caused by the default of the largest player. A multi-period, multi-security model with intraday credit is used to simulate direct and second round settlement failures triggered by the default, as well as the dynamics of settlement failures, arising from a lag in settlement relative to the date of trades. The effects of the defaulter's net trade position, the numbers of securities and participants in the market, and participants' trading behaviour are also analysed. We show that in SSSs – contrary to payment systems – large and persistent settlement failures are possible even when ample liquidity is provided. Central bank liquidity support to SSSs thus cannot eliminate settlement failures due to major market disruptions. This is due to the fact that securities transactions involve a cash leg and a securities leg, and liquidity can affect only the cash side of a transaction. Whereas a broad program of securities borrowing and lending might help, it is precisely during periods of market disruption that participants will be least willing to lend securities. Interestingly, settlement failures continue to occur beyond the period corresponding to the lag in settlement. This is due to the fact that, upon observation of a default, market participants must form expectations about the impact of the default, and these expectations affect current trading behaviour. If, ex post, fewer of the previous trades settle than expected, new settlement failures will occur. This result has interesting implications for financial stability. On the one hand, conservative reactions by market participants to a default - for example by limiting the volume of trades – can result in a more rapid return of the settlement system to a normal level of efficiency. On the other hand, limitation of trading by market participants can reduce market liquidity, which may have a negative impact on financial stability. |
| Keywords: | contagion; liquidity risk; securities clearing and settlement; systemic risk |
| JEL: | C60 D80 G20 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5123&r=cfn |
| By: | Giannetti, Mariassunta; Ongena, Steven |
| Abstract: | An extensive empirical literature has documented the positive growth effects of equity market liberalization. However, this line of research ignores the impact of financial integration on a category of firms crucial for economic development, i.e. the small entrepreneurial firms. This paper aims to fill this void. We employ a large panel containing almost 60,000 firm–year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and leverage, but the effect is dampened for small firms. We also find that the most connected businesses benefit least from foreign bank entry. This finding suggests that foreign banks can help mitigate connected lending problems and improve capital allocation. |
| Keywords: | competition; emerging markets; foreign bank lending; lending relationships |
| JEL: | G21 L11 L14 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5151&r=cfn |
| By: | Pascual Berrone; Jordi Surroca; Josep A. Tribó |
| Abstract: | This article studies the relationship between the presence of large shareholders in the ownership structure of firms and R&D investment. In our analysis, we consider the influence of three types of blockholders: banks, non-financial corporations, and individuals. Moreover, we incorporate an additional feature largely ignored in previous research, namely the number of blockholders. Consistent with our theoretical contention, our results indicate that the impact of large shareholders on the R&D investment is (1) negative when blockholders are banks, (2) positive when blockholders are non- financial corporations, and (3) null when blockholders are individuals. In addition, we find a systematic negative relationship between the number of blockholders and R&D investment. Finally, we contribute to current literature by extending our analysis in two novel ways. First, we test the impact of each blockholder type contingent to the life-cycle stage of firms. Second, we analyze the influence that the combined effect between blockholder type and R&D investment has on the firm’s economic performance. Results of these extensions provide relevant implications for policy makers and academic research. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb054611&r=cfn |
| By: | Jean Helwege; Christo Pirinsky; René M. Stulz |
| Abstract: | We consider IPO firms from 1970 to 2001 and examine the evolution of their insider ownership over time to understand better why and how U.S. firms that become widely held do so. In our sample, a majority of firms has insider ownership below 20% after ten years. We find that a firm's stock market performance and trading play an extremely important role in its insider ownership dynamics. Firms that experience large decreases in insider ownership and/or become widely held are firms with high valuations, good recent stock market performance, and liquid markets for their stocks. In contrast and surprisingly, variables suggested by agency theory have limited success in explaining the evolution of insider ownership. |
| JEL: | G30 G32 D0 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11505&r=cfn |
| By: | Susan Thorp (School of Finance and Economics, University of Technology, Sydney); George Milunovich (Division of Economic and Financial Studies, Macquarie University) |
| Abstract: | Empirical research shows that stock volatilities and correlations between markets rise more after negative shocks than after positive returns shocks of the same size. We measure the importance of these asymmetric e¤ects for mean-variance investors holding portfolios of international equities who use dynamic conditional covariance forecasts to reweight their portfolios. Portfolio weights are computed using ex ante predictions from symmetric GARCH DCC and asymmetric GJR ADCC models, and a spectrum of expected returns. Data are weekly returns to equity price indices for the USA, Japan, UK and Australia. We ?nd that the majority of realised portfolio standard deviations are less when we reweight using the asymmetric covariance model. Reductions in portfolio risk are signi?cant according to Diebold-Mariano tests. Investors who are moderately risk averse and have longer rebalancing horizons bene?t more from the asymmetric model than less risk averse, shorter-horizon investors, and would be prepared to pay up to 107 basis points annually to use it instead of the symmetric model. Bene?ts are greater for investors holding US equities. |
| Date: | 2005–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:160&r=cfn |
| By: | Silvio John Camilleri (Banking & Finance Department - FEMA, University of Malta) |
| Abstract: | The paper consolidates the summarised financial statements of the main banks operating in Malta during the year 2002, to form a Typical Large Bank and a Typical Small Bank. The rofitability, risk and growth prospects of the two institutions are analysed through Return on Equity decomposition and the use of other financial ratios. Various differences between large and small institutions emerge. In particular, larger institutions realised higher profitability and cost control; they were more capitalised in absolute terms and relied relatively less on interest income. Smaller institutions generated comparatively more revenue; they were more capitalised in relative terms, were relatively more provisioned against loan losses and held a higher proportion of liquid assets. |
| Keywords: | Return on Equity Model, Banks, Malta, Indicators |
| JEL: | G20 G21 |
| Date: | 2005–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0507021&r=cfn |