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on Corporate Finance |
| By: | Massimo Omiccioli (Bank of Italy, Economic Research Department) |
| Abstract: | A remarkable feature of short-term business finance is the widespread use of trade credit as collateral in bank borrowing, especially by small and medium-sized firms. The paper models the incentives for a firm to collateralize accounts receivable as a trade-off between the benefit from lower interest rates and the implicit cost from the disclosure of private information associated with this form of collateral. The model shows that the share of receivables pledged as collateral is larger: i) when the borrowing firm is riskier (and the difference in interest rates between secured and unsecured lending is larger); ii) when information disclosure costs for the firm are lower (e.g., when the information is dispersed among many banks and firm’s assets are mostly made up of tangibles); iii) when the default correlation between sellers and buyers is lower; iv) when the legal protection of creditors is weaker (and suppliers have a stronger advantage over banks in monitoring and enforcing loan contracts). These predictions are supported by empirical evidence in a sample of 7,250 Italian firms. |
| Keywords: | trade credit, collateral, information disclosure |
| JEL: | G32 G33 L15 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_553_05&r=cfn |
| By: | Marcelo Reyes M.; Eugenio Saavedra G |
| Abstract: | This paper analyzes the problem of the balance sheet of an agent that invests in currencies different than those she finances. Assuming a constant rate of return and fixed financing costs, the agent can face the event of insolvency due to swings in the relevant exchange rate that is assumed to follow a geometric Brownian motion. Then, the process is generalized to allow dependency of the diffusion coefficient on the level of the exchange rate, reproducing many of the properties encountered in empirical studies of financial asset prices. The resulting hyperbolic process is calibrated via a martingale estimating function, and then we approximate the probability that the value of assets fails to match the value of liabilities at a given future date. The findings are consistent regardless the volatility assumption of the process. Finally, we give some insights to minimize the probability of such event. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:327&r=cfn |
| By: | Ignacio Velez-Pareja |
| Abstract: | In this short teaching note I explain why we subtract the change in working capital from the proper item (Earnings before interest and taxes (EBIT) or Net income) in the Income Statement. I show in detail how departing from the sales revenues and the cost of goods sold we have to subtract the change in working capital. This explanation might be seen as unnecessary given it is a common practice. However, my experience in teaching this subject indicates that some additional explanations are needed. |
| Keywords: | Cash flows, |
| JEL: | M21 |
| Date: | 2005–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:col:000135:001155&r=cfn |
| By: | Ignacio Velez-Pareja |
| Abstract: | This paper is an extension of a previous one untitled The Correct Definition for the Cash Flows to Value a Firm (Free Cash Flow and Cash Flow to Equity) . We have added a comparative analysis between the current practice of including as cash flows amounts that belong to the Balance Sheet and the proposed approach to include only as cash flows those elements that in fact are cash flows and hence are not listed in the Balance Sheet. Differences are significant. Surprisingly there is a wide range of interpretations on how to calculate the cash flows for valuation purposes. This ample definition of what the cash flows are is shared by academicians and practitioners. Some of the definitions openly contradict the essential and basic concepts of cash flow and time value of money. In this note we specify very clearly what has to be included in those cash flows and the reasons why they should be included. The main issue is related to the inclusion or exclusion of some items in the working capital and the current practice to consider that funds that appear in the Balance Sheet (cash and market securities and the like) belong to the free cash flow FCF and the cash flow to equity CFE. In the same line of reasoning, the idea is that cash flows have to be consistent with financial statements. With a hypothetical example we show the implicit financial facts reflected in the financial statements behind the practice of including as cash flow items that appear in the Balance Sheet. |
| Keywords: | Cash flows, |
| JEL: | M21 |
| Date: | 2004–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000135:001156&r=cfn |
| By: | Ignacio Velez-Pareja; Joseph Tham |
| Abstract: | Although perpetuities are somewhat artificial in the sense that in practice they do not exist, they are relevant because no matter how detailed and complex a forecasted financial plan for a firm or project could be terminal value usually is calculated as perpetuity. This terminal value might be a growing or a non growing perpetuity. On the other hand, usually terminal value is a substantial part of the firm value. In this note we examine in detail the proper discount rate for cash flows in perpetuity, the present value of tax savings and the calculation of terminal value. The findings contradict what is generally accepted in the literature. |
| Keywords: | WACC, perpetuities, |
| JEL: | D61 G31 H43 |
| Date: | 2005–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:col:000135:001271&r=cfn |
| By: | Ignacio Velez-Pareja |
| Abstract: | Usually a great deal of effort is devoted in typical financial textbooks to the mechanics of the calculations of time value of money equivalencies: payments, future values, present values, etc. This is necessary. However little or no effort is devoted to how to arrive at the figures required to calculate the Net Present Value NPV or Internal Rate of Return, IRR. In the paper, pro forma financial statements (Balance Sheet (BS), Income Statement (IS) and Cash Budget (CB) are presented. From the CB, the Free Cash Flow FCF, the Cash Flow to Equity CFE, the Cash Flow to Debt CFD and the Capital Cash Flow are derived. Also, the FCF and the CFE are calculated with the typical approach found in the literature: from the IS and it is specified how to construct them. In doing this, working capital is redefined: the result is that it has to include some items that are not taken into account in the traditional methods. An example is presented to illustrate the procedure to calculate the cash flows. In the Appendixes we show how to arrive to the levered equity and firm value. |
| Keywords: | Free cash flow, cash flow to equity, cash flow to debt, project evaluation, |
| JEL: | D92 E22 E31 G31 |
| Date: | 2005–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:col:000135:001272&r=cfn |
| By: | Alejandro Balbas; Anna Downarowicz; Javier Gil-Bazo |
| Abstract: | Oil-linked derivatives are becoming very important in Modern Investment Theory. Accordingly, the analysis of Pricing Techniques and Portfolio Choice Problems involving these securities is a major topic for both managers and researchers. We focus on both the No-Arbitrage Approach and Stochastic Discount Factor (SDF) based methods in order to study oil-linked derivatives available at The New York Mercantile Exchange, Inc, one of the world's largest markets in energy and precious metals. First, we generalize some theoretical properties of the SDF in order to capture the effects induced by the bid-ask spread when analyzing dominated/efficient portfolios. Secondly, we apply our findings and empirically analyze the existence of dominated assets and portfolios in the oil derivatives market. Our results reveal the systematic presence of dominated prices, which should be taken into account by traders when composing their portfolios. Additionally, the test yields pricing and portfolio choice methods as well as new strategies that may allow brokers to outperform their service for their clients. It is worth to point out that the conclusions of the test have two important characteristics: On the one hand, they are very precise since we draw on perfectly synchronized bid/ask prices, as provided by Reuters. On the other hand, they are robust in the sense that they do not depend on any assumption about the underlying asset price dynamics. Finally, despite the empirical test focuses on oil derivatives, the methodology is general enough to apply to a broad range of markets. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb055013&r=cfn |
| By: | Ralph de Haas; Ilko Naaborg |
| Abstract: | On the basis of focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States, the development of small-business lending by foreign banks is analysed. Our approach allows us to complement the standard empirical literature, which has difficulty in analysing qualitative issues such as the role of changing lending technologies. It is found that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply towards large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail markets. |
| Keywords: | foreign banks; transition economies; small-business lending |
| JEL: | F23 F36 G21 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:050&r=cfn |
| By: | Bernadette A. Minton; René Stulz; Rohan Williamson |
| Abstract: | This paper examines the use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2003 only 19 large banks out of 345 use credit derivatives. Though few banks use credit derivatives, the assets of these banks represent on average two thirds of the assets of bank holding companies with assets in excess of $1 billion. Few banks are net buyers of credit protection and disclose using credit derivatives to hedge loans. Banks are more likely to be net protection buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios. The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a bank's loan portfolio and negatively or not related to other types of bank loans. The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks. |
| JEL: | G10 G20 G21 D82 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11579&r=cfn |
| By: | Gavin C. Reid; Julia A. Smith |
| Abstract: | This paper is an empirical investigation into the ways in which venture capitalists value (and invest in) high technology firms, focusing on financial reporting, risk disclosure and intangible assets. It is based on questionnaire returns from UK investors in diverse sectors, ranging from biotechnology, through software/ computer services, to communications and medical services. This evidence is used to examine: (a) the usefulness of financial accounts; (b) the implications of technopole investment; (c) the extent of investor control over the investee’s AIS; and (d) the role of investor opinion (e.g. on disclosure, due diligence and risk reporting) in determining the level of equity provision. |
| Keywords: | venture capital, high technology, accounting information, intangible assets |
| JEL: | D81 D82 G24 G32 M13 M41 O31 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0510&r=cfn |