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on Corporate Finance |
| By: | John Knight; Stephen Satchell |
| Abstract: | We revisit the problem of calculating the exact distribution of optimal investments in a mean variance world under multivariate normality. The context we consider is where problems in optimisation are addressed through the use of Monte-Carlo simulation. Our findings give clear insight as to when Monte-Carlo simulation will, and will not work. Whilst a number of authors have considered aspects of this exact problem before, we extend the problem by considering the problem of an investor who wishes to maximise quadratic utility defined in terms of alpha and tracking errors. The results derived allow some exact and numerical analysis. Furthermore, they allow us to also derive results for the more traditional nonbenchmarked portfolio problem. |
| Keywords: | alpha, tracking error, mean-variance, Monte-Carlo |
| JEL: | G11 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0513&r=cfn |
| By: | Samuel Hanson; M. Hashem Pesaran; Til Schuermann |
| Abstract: | This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic and idiosyncratic risks and the nature of firm heterogeneity. The theoretical results obtained indicate that if firm-specific risk exposures (including their default thresholds) are heterogeneous but come from a common parameter distribution, for sufficiently large portfolios there is no scope for further risk reduction through active credit portfolio management. However, if the firm risk exposures are draws from different parameter distributions, say for different sectors or countries, then further risk reduction is possible, even asymptotically, by changing the portfolio weights. In either case, neglecting parameter heterogeneity can lead to underestimation of expected losses. But, once expected losses are controlled for, neglecting parameter heterogeneity can lead to overestimation of risk, whether measured by unexpected loss or value-at-risk. The theoretical results are confirmed empirically using returns and credit ratings for firms in the U.S. and Japan across seven sectors. Ignoring parameter heterogeneity results in far riskier credit portfolios. |
| Keywords: | risk management, correlated defaults, heterogeneity, diversification, portfolio choice |
| JEL: | C33 G13 G21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1531&r=cfn |
| By: | James Vickery |
| Abstract: | Although small firms are most sensitive to interest rate and other shocks, empirical work on corporate risk management has focused instead on large public companies. This paper studies fixed-rate and adjustable-rate loans to see how small firms manage their exposure to interest rate risk. The cross-sectional findings are as follows: credit-constrained firms consistently favor fixed-rate loans, minimizing their exposure to rising interest rates; firms adjust their exposure depending on how interest rate shocks covary with industry output; and "fixed versus adjustable" outcomes are correlated with lender characteristics. In a twenty-eight-year time series, the aggregate share of fixed-rate bank loans moves with interest rates in a manner consistent with recent evidence on debt market timing. I conclude that the "fixed versus adjustable" dimension of financial contracting helps small U.S. firms ameliorate interest rate risk, and discuss the implications for risk management theories and the credit channel of monetary policy. |
| Keywords: | Interest rates ; Risk management ; Commercial loans |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:215&r=cfn |
| By: | Nigel Driffield (Aston Business School); Vidya Mahambare (Cardiff Business School); Sarmistha Pal (Department of Economics & Finance, Brunel University) |
| Abstract: | Despite the seminal work of Claessens et al. (2002), role of ownership structure on capital structure and firm performance in East Asian corporattions remains much unexplored. Within the framework of Bajaj et al. (1998), the present paper empirically examines the effects of a controlling manager and degree of monitoring (a measure of moral hazard) on capital structure and firm performance among a sample of Korean and Indonesian firms. In doing so, we not only allow for simultaneity between capital structure and firm performance (a la Berger and di Patti, 2003), but also the non-linearity in these relationships. Our empirical results in essence depend on whether a firm is run by a family and also whether there is a manager who is also a controlling owner. There is evidence that family ownership could mitigate the problem of moral hazard though it could exacerbate the problem of over-lending in our samples. Also the effects of ownership structure on firm performance cannot be delineated from its effects on leverage. As such, the results presented here confirm and extend the essential findings of Claessens et al. (2002) and Bajaj et al. (1998). |
| Keywords: | Asian Crisis, Corporate Governance, Capital structure, Firm performance, Expropriation of minority shareholders, 3SLS estimates, Simultaneity bias, Non-linearity. |
| JEL: | G32 |
| Date: | 2005–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0509028&r=cfn |
| By: | Prof. Purusottam Nayak (North-Eastern Hill University) |
| Abstract: | The movement of entrepreneurship promotion and development in the past few decades has gone a long way in North East India, particularly in the state of Assam. Both governments and various industrial promotion and support institutions are making considerable efforts to facilitate the process of emergence of new entrepreneurs for setting up enterprises in small scale sector. These efforts involved making attractive schemes for availability of finance and various other assistances including technical know how, training, sales, purchases, etc. It is believed that these efforts have made a favorable impact on the growth of these enterprises in the State as well as in the region. There are today a large number of organizations like North Eastern Industrial and Technical Consultancy Organization (NEITCO), National Institute of Small Industry Extension Training (NISIET) [till it was merged with the Indian Institute of Entrepreneurship (IIE)] and the North Eastern Industrial Consultants Ltd (NECON) who has been actively involved in entrepreneurship development activities in the region. Their efforts have been supported by the North Eastern Council (NEC) in general and financial institutions like Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI), North Eastern Development Finance Corporation Limited (NEDFi) and various commercial banks in particular. The present paper in this regard is an attempt to examine the role of financial institutions in promoting small scale and tiny industries in terms of growth of entrepreneurs, enterprises and its contribution to State Domestic Products. |
| Keywords: | Financial Institutions and Entrepreneurship Development |
| JEL: | A |
| Date: | 2005–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0509018&r=cfn |
| By: | Thorsten V. Köppl (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | When people share risk in financial markets, intermediaries provide costly enforcement for most trades and, hence, are an integral part of financial markets’ organization. We assess the degree of risk sharing that can be achieved through financial markets when enforcement is based on the threat of exclusion from future trading as well as on costly enforcement intermediaries. Starting from constrained efficient allocations and taking into account the public good character of enforcement we study a Lindahl-equilibrium where people invest in asset portfolios and simultaneously choose to relax their borrowing limits by paying fees to an intermediary who finances the costs of enforcement. We show that financial markets always allow for optimal risk sharing as long as markets are complete, default is prevented in equilibrium and intermediaries provide costly enforcement competitively. In equilibrium, costly enforcement translates into both agent-specific borrowing limits and price schedules that include a separate default premium. Enforcement costs - or, equivalently, default premia - increase borrowing costs, while interest rates per se depend on the change in enforcement over time. |
| Keywords: | Limited Commitment; Enforcement Intermediaries; Lindahl-equilibrium; Endogenous Borrowing Constraints |
| JEL: | C73 D60 G10 H41 K42 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040319&r=cfn |
| By: | Silvia Ardagna (Wellesley College, Department of Economics, 106 Central Street Wellesley, MA 02481, USA.) |
| Abstract: | Using a panel of OECD countries from 1960 to 2002, this paper shows that financial markets value fiscal discipline. Interest rates, particularly those of long-term government bonds, decrease when countries' fiscal position improves and increase around periods of budget deteriorations. Stock market prices surge around times of substantial fiscal tightening and plunge in periods of very loose fiscal policy. In addition, the paper shows that results depend on countries' initial fiscal conditions and on the type of fiscal consolidations. Fiscal adjustments that occur in country-years with high levels of government deficit, that are implemented by cutting government spending, and that generate a permanent and substantial decrease in government debt are associated with larger reductions in interest rates and increases in stock market prices. |
| Keywords: | Fiscal stabilizations; fiscal expansions; interest rates; stock market prices. |
| JEL: | E62 E44 H62 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040390&r=cfn |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, SBARD, University of Wales Bangor, Gwynedd, Bangor, LL57, 2DG, United Kingdom.); David Marqués Ibáñez (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | An unprecedented process of financial consolidation has taken place in the European Union over the past decade. Building on earlier US evidence, we examine the impact of strategic similarities between bidders and targets on post-merger financial performance. We find that, on average, bank mergers in the European Union resulted in improved return on capital. By making the assumption that balance-sheet resource allocation is indicative of the strategic focus of banks, we also find significantly different results for domestic and cross-border mergers. For domestic deals, it could be quite costly to integrate dissimilar institutions in terms of their loan, earnings, cost, deposits and size strategies. For cross-border mergers and acquisitions (M&As), differences of merging partners in their loan and credit risk strategies are conducive to a higher performance whereas diversity in their capital, cost structure as well as technology and innovation investments strategies are counterproductive from a performance standpoint. |
| Keywords: | Banks; M&As; strategic similarities. |
| JEL: | G21 G34 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040398&r=cfn |
| By: | Giulia Iori (Department of Mathematics, Kings College Strand, London WC2R 2LS, United Kingdom.) |
| Abstract: | This paper compares securities settlement gross and netting architectures. It studies settlement risk arising from exogenous operational delays and compares settlement failures between the two architectures as functions of the length of the settlement interval under different market conditions. While settlement failures are non-monotonically related to the length of settlement cycles under both architectures, there is no clear cut ranking of which architecture delivers greater stability. We show that while, on average, netting systems seem to be more stable than gross systems, rare events may lead to contagious defaults that could affect the all system. Furthermore netting system are very sensitive to the number and initial distribution of traded shares. |
| Keywords: | Security clearing and settlement; gross and net systems; systemic risk. |
| JEL: | C6 D4 G20 O33 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040404&r=cfn |
| By: | El?d Takáts (Department of Economics, Princeton University, Fisher Hall, Princeton, 08544-1021 NJ, USA.) |
| Abstract: | The paper investigates small business lending as an information problem. It models the effects of information asymmetries within the bank combined with fixed wages. Two kinds of inefficiencies arise in equilibrium: the credit officer either sometimes shirks or he is occasionally fired. In both cases lending falls below the first-best level. The solution, when the bank accepts the information asymmetries, is called the centralized structure. Under decentralized structure the bank employs additional supervisors to mitigate the information asymmetries within its organization. Decentralized banks manage to finance more small firms, but incur higher costs than centralized ones. Small banks are interpreted as a bank with relatively few credit officers, whom can be monitored without information asymmetries. The specification allows for investigating the effects of banking consolidation and technological change on small business lending. The model suggests that not banking size, but organizational structure is decisive in small business lending. |
| Keywords: | Corporate governance; banking; small business lending; efficiency wage. |
| JEL: | G21 G34 J30 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040407&r=cfn |
| By: | Darius P. Miller (Southern Methodist University, Cox School of Business); John J. Puthenpurackal (Ohio University) |
| Abstract: | This paper examines the potential benefits of security fungibility by conducting the first comprehensive analysis of Global bonds. Unlike other debt securities, Global bonds’ fungibility allows them to be placed simultaneously in bond markets around the world; they trade, clear and settle efficiently within as well as across markets. We test the impact of issuing these securities on firms’ cost of capital, issuing costs, liquidity and shareholder wealth. Using a sample of 230 Global bond issues by 94 companies from the U.S. and abroad over the period 1996-2003, we find that firms are able to lower their cost of (debt) capital by issuing these fungible securities. We also document that the stock price reaction to the announcement of Global bond issuance is positive and significant, while comparable domestic and Eurobond issues over the same time period are associated with insignificant changes in shareholder wealth. |
| Keywords: | Global bonds; security fungibility; cost of capital; international capital raising |
| JEL: | F3 G1 G3 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050426&r=cfn |
| By: | Vicente Pons-Sanz (Yale School of Management) |
| Abstract: | This paper uses a unique sample of 175 Spanish equity offerings from 1985 to 2002 to test who benefits from IPO underpricing and why. Institutions receive nearly 75% of the profits in underpriced issues, while they have to bear only 56% of the losses in overpriced offerings. Superior information regarding first day underpricing cannot completely explain the institutional abnormal profits. Underwriters are better informed about the companies they take public, and use that information to favor their long term clients. The preferential treatment of institutional investors, however, does not come at the expense of retail investors. Retail investors earn positive profits from participating in the new issues market. The driving factor behind the relative retail large allocation in overpriced issues when compared to underpriced offerings is not the underwriter allocation bias in favor of institutional investors. Retail investors subscribe more heavily to underpriced issues, consistent with individuals being partially informed. |
| Keywords: | Initial Public Offerings, Allocations, Retail Investors, Winner's Curse |
| JEL: | G32 G24 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050428&r=cfn |
| By: | Claudia M. Buch (Department of Economics, Eberhard Karls Universität Tübingen); John C. Driscoll (Federal Reserve Board); Charlotte Ostergaard (Department of Finance, Norwegian School of Management) |
| Abstract: | Taking the mean-variance portfolio model as a benchmark, we compute the optimally diversified portfolio for banks located in France, Germany, the U.K., and the U.S. under different assumptions about currency hedging. We compare these optimal portfolios to the actual cross-border assets of banks from 1995-1999 and try to explain the deviations. We find that banks over-invest domestically to a considerable extent and that cross-border diversification entails considerable gain. Banks underweight countries which are culturally less similar or have capital controls in place. Capital controls have a strong impact on the degree of underinvestment whereas less political risk increases the degree of over-investment. |
| Keywords: | International banking, portfolio diversification, international integration |
| JEL: | G21 G11 E44 F40 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050429&r=cfn |
| By: | Marco Da Rin (Department of Economics and Finance, Turin University); Giovanna Nicodano (Department of Economics and Finance, Turin University); Alessandro Sembenelli (Department of Economics and Finance, Turin University) |
| Abstract: | We study how public policy can contribute to increase the share of early stage and high-tech venture capital investments, thus helping the development of active venture capital markets. A simple extension of the seminal model by Holmstrom and Tirole (1997) provides a theoretical base for our analysis. We then explore a unique panel of data for 14 European countries between 1988 and 2001. We have several novel findings. First, the opening of stock markets targeted at entrepreneurial companies positively affects the shares of early stage and high-tech venture capital investments; reductions in capital gains tax rates have a similar, albeit weaker, effect. Second, a reduction in labor regulation creases the share of high-tech investments. Finally, we find no evidence of a shortage of supply of venture capital funds, and no evidence of an effect of increased public R&D spending on the share of high-tech or early stage venture capital investments. |
| Keywords: | Venture Capital; Capital Gains Tax; Public R&D Expenditure; Barriers to Entrepreneurship; Stock Markets; Public Policy |
| JEL: | G10 G24 H20 O30 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050430&r=cfn |