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on Corporate Finance |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | The value of tax shields depends only on the nature of the stochastic process of the net increases of debt. The value of tax shields in a world with no leverage cost is the tax rate times the current debt plus the present value of the net increases of debt. We develop valuation formulae for a company that maintains a fixed book-value leverage ratio and show that it is more realistic than to assume, as Miles-Ezzell (1980) do, a fixed market-value leverage ratio. We also show that Miles-Ezzell assume that the increase of debt is proportional to the increase of the free cash flows. |
| Keywords: | Value of tax shields; present value of the net increases of debt; required return to equity; |
| JEL: | G12 G31 G32 |
| Date: | 2005–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0612&r=cfn |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | The value of tax shields depends only on the nature of the stochastic process of the net increases of debt. The value of tax shields in a world with no leverage cost is the tax rate times the current debt plus the present value of the net increases of debt. By applying this formula to specific situations, we show that Modigliani-Miller (1963) should be used when the company has a preset amount of debt, Fernández (2004) when the company maintains a fixed book-value leverage ratio, and Miles-Ezzell (1980) when the company maintains a fixed market-value leverage ratio. |
| Keywords: | Value of tax shields; present value of the net increases of debt; required return to equity; |
| JEL: | G12 G31 G32 |
| Date: | 2005–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0613&r=cfn |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | There is a wealth of literature about discounted cash flow valuation. In this paper, we will discuss the most important papers, highlighting those that propose different expressions for the value of the tax shield (VTS). The discrepancies between the various theories on the valuation of a company's equity using discounted cash flows originate in the calculation of the value of the tax shield (VTS). This paper illustrates and analyzes 7 different theories and presents a new interpretation of the theories. |
| Keywords: | discounted cash flow valuation; cash flow valuation; value of tax shields; present value of the net increases of debt; required return to equity; |
| JEL: | G12 G31 G32 |
| Date: | 2005–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0606&r=cfn |
| By: | Viviana Fernández |
| Abstract: | There is an extensive literature on the determinants of capital structure for developed countries, but little has been said about emerging economies. This article analyzes the driving forces of capital structure in Chile for the period 1990-2002. We study aggregate leverage and interest-bearing liabilities in isolation for all firms, and firms segmented by economic sector. Our results give more support to the trade-off theory than to the pecking-order hypothesis. In particular, in recent years equity issues have followed firms’ financing deficits more closely than net debt issues have. We conjecture that tax and monetary policies might have driven this result. The contribution of our work is also methodological. Our econometric specification is based on a random-effects panel data model for censored data developed by Anderson (1986) and extended by Kim and Maddala (1992). We expand Anderson-Kim-Maddala’s work to panel data models for uncensored data, and devise specification tests for non-nested random-effects models. Most literature on capital structure focuses on the cross-section variation of the data by averaging observations over time. Or, when using panel data models, the bias of fixed-effects estimates, under a dynamic specification, is usually neglected. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:200&r=cfn |
| By: | Fabián Duarte; Andrea Repetto; Rodrigo O. Valdés |
| Abstract: | Over the past few decades, banking systems in both mature and emerging markets have experienced a wave of consolidations, and mergers and acquisitions (M&A). These developments have raised a number of questions among researchers and policy makers. A key concern refers to whether bank mergers benefit or harm borrowers. The goal of this paper is to study the effects on bank clients of these M&A deals, by analyzing their effects on the loan rates paid by a sample of Chilean manufacturing firms over the 1990-98 period. Using a unique data set on credit transactions between banks and their clients, we study whether borrowers’ terms of lending improve or worsen after the merger. Our methodology allows for a heterogeneous response of firms, depending upon the number of alternative funding sources available to them. We also allow for differences in the short- and long-term response of lending rates. Our results show that M&As do affect firms’ borrowing costs, that these effects are long-lasting, and that they critically depend on whether firms have alternative lending sources that guard them from the adverse effects that mergers may convey. These results are consistent with the hypotheses that bank lending is characterized by informational monopolies and other sources of switching costs, and that valuable client-bank relationship information may be lost over the M&A process. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:206&r=cfn |
| By: | Chen, Zhaohui; Wilhelm Jr, William J |
| Abstract: | In our model, information-producing agents can opt to produce from the sell-side, in which case they can only sell their information to other market participants, or produce from the buy-side, in which case they agent can trade in the financial market. If sell-side information substitutes for that produced on the buy-side, some form of subsidy is necessary to sustain sell-side production in equilibrium because sell-side agents cannot commit to narrow dissemination of their information among buy-side agents. Competition among buy-side agents leaves buy-side (private) information as the primary source of trading profits. Subsidizing sell-side research promotes welfare because such information enters financial market prices and thereby improves real investment decisions. But subsidies compromise welfare through conflicts of interest facing the sell-side analyst. We derive conditions under which the net welfare effect is positive and shed light on means of managing the tradeoff. |
| Keywords: | conflicts of interest; financial analysts; industrial organization; investment banking; securities regulation |
| JEL: | D82 G14 G24 L22 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5314&r=cfn |
| By: | Bütler, Monika; Teppa, Federica |
| Abstract: | We use a unique dataset on individual retirement decisions in Swiss pension funds to analyze the choice between an annuity and a lump sum at retirement. Our analysis suggests the existence of an 'acquiescence bias', meaning that a majority of retirees chooses the standard option offered by the pensions fund or suggested by common practice. Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behaviour or a magnitude effect. We hardly find evidence for adverse selection effects in the data. Single men, for example, whose money’s worth of an annuity is considerably below the corresponding value of married men, are not more likely to choose the capital option. |
| Keywords: | annuity; choice anomalies; lump sum; occupational pension |
| JEL: | D91 H55 J26 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5316&r=cfn |
| By: | Feijen, Erik; Perotti, Enrico C |
| Abstract: | While financial liberalization has in general favourable effects, reforms in countries with poor regulation is often followed by financial crises. We explain this variation as the outcome of lobbying interests capturing the reform process. Even after liberalization, market investors must rely on enforcement of investor protection, which may be structured so as to block funding for new entrants, or limit their access to refinance after a shock. This forces inefficient default and exit by more leveraged entrepreneurs, protecting more established producers. As a result, lobbying may deliberately worsen financial fragility. After large external shocks, borrowers from the political elite in very corrupt countries may successfully lobby for weak enforcement, and retain control of collateral. We provide evidence that industry exit rates and profit margins after banking crises are higher in the most corrupt countries. |
| Keywords: | entry; exit; financial crises; inequality; political economy; refinancing; strategic default |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5317&r=cfn |
| By: | Viviana Fernández |
| Abstract: | In this article, we formulate a time-scale decomposition of an international version of the CAPM that accounts for both market and exchange-rate risk. In addition, we derive an analytical formula for time-scale value at risk and marginal value at risk (VaR) of a portfolio. We apply our methodology to stock indices of seven emerging economies belonging to Latin America and Asia, the sample period 1990-2004. Our main conclusions are the following. First, the estimation results hinge upon the choice of the world market portfolio. In particular, the stock markets of the sampled countries appear to be more integrated with other emerging countries than with developed ones. Second, value at risk depends on the investor’s time horizon. In the short run, potential losses are greater than in the long run. Third, additional exposure to some specific stock indices will increase value at risk to a greater extent, depending on the investment horizon. Our results go in line with recent research in asset pricing that stresses the importance of heterogeneous investors. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:203&r=cfn |
| By: | Koji Sakai; Iichiro Uesugi; Tsutomu Watanabe |
| Abstract: | This paper investigates how a firm's borrowing cost evolves as it ages. Using a new data set of more than 200,000 bank-dependent small firms in 1997-2002, we find the following. First, the distribution of borrowing cost tends to become less skewed to the right over time. Second, this shift of the distribution can be partially attributable to "selection" (i.e., firms with lower quality and higher borrowing costs exit from markets), but mainly explained by "adaptation" (i.e., surviving firms' borrowing costs decline as they age). Third, we find an age dependence of a firm's borrowing costs even if we control for firm size, but fails to find an age dependence of its profits volatility once we control for firm size. Empirical results suggest that age dependence of borrowing costs comes not from the Diamond's reputation-acquisition mechanism, but from bank's learning about borrower's true quality over the duration of bank-borrower relationship. |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:05026&r=cfn |
| By: | José Miguel Benavente; Alexander Galetovic; Ricardo Sanhueza |
| Abstract: | Las pyme pagan más que las empresas grandes por su financiamiento, se les exigen garantías, se las financia a plazos cortos y muchas no se pueden endeudar. Se piensa que estas prácticas son fallas de mercado que deberían corregirse con intervenciones regulatorias. Sin embargo, nosotros argumentamos que son respuestas apropiadas a (i) el mayor costo medio de los préstamos pequeños; (ii) el problema de la selección originado por la salida y reemplazo de firmas que ocurre en todas las industrias, que es más intenso cuando se trata de pymes; (iii) la necesidad de alinear los incentivos de deudores y acreedores cuando la información es asimétrica. Mostramos que estas prácticas también son comunes en países con mercados de capitales desarrollados. Finalmente, proponemos medidas para mejorar el financiamiento de las pyme. SMEs pay more for credits than large firms, their loans tend to be granted against collateral and on short repayment terms, and many are redlined. These practices have usually been interpreted as financial-market imperfections that discriminate against SMEs. We argue that they are responses to (i) the higher average cost of smaller loans; (ii) the selection problems due to the natural replacement of business in all industries, which is much more acute among SMEs; (iii) the need to align the incentives of financiers and entrepreneurs when information is asymmetric. We show that these practices are widspread in countries where capital markets are developed. We also make several proposals to increase access to financing by SMEs |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:201&r=cfn |
| By: | Kumar Aniket |
| Abstract: | This paper shows that subsidising the cost of capital restricts the ability of the poorest to participate in the group lending mechanisms that include saving opportunities. We document the group lending mechanism used by a typical microfinance lender in Haryana, India. Individuals can participate in the group either as a borrower or a saver. The lender requires that the borrower partly self-finance their project with their own cash wealth. Consequently, a borrower requires a minimum amount of cash wealth to borrow. The poorest participate in the group by co-financing the borrower's project with their meagre savings. In return, they obtain higher than market returns on their savings. Subsidising the cost of capital reduces the cash wealth required to participate in the group as a borrower. Conversely, it increases the cash wealth required to participate as a saver, thus curtailing the opportunity for the poorest to enrich themselves. |
| Keywords: | Group Lending, Microfinance, Savings, Outreach |
| JEL: | D82 G20 O12 O2 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:138&r=cfn |
| By: | Arito Ono; Iichiro Uesugi |
| Abstract: | This paper investigates the role of collateral and personal guarantees in small business lending using the unique data set of Japan's small business loan market. Consistent with conventional theory, collateral is more likely to be pledged by riskier borrowers, implying they may be useful in mitigating debtor moral hazard. Contrary to conventional theory, we find that banks whose claims are either collateralized or personally guaranteed monitor borrowers more frequently. We also find that borrowers who establish long-term relationships with their main banks are more likely to pledge collateral. Our empirical evidence thus suggests that collateral and personal guarantees are complementary to relationship lending. |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:05027&r=cfn |
| By: | Wako WATANABE |
| Abstract: | We analyze how loans to Japanese small and medium entities by their main banks are priced using the matched data of firms and their main banks. The data on firms include informational characteristics of firms collected in the survey. Our findings are: 1. The borrower's transparency (to its main bank) does not affect the borrowing rate. 2. The firm's solvency reduces the borrowing rate. These are consistent with predictions of finance theories based on information economics. We also found that treating non-price terms of a loan contract as endogenous is crucial in consistently estimating the firm's borrowing rate. |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:05028&r=cfn |
| By: | L Angeles |
| Abstract: | This paper presents a model where opening the capital account of an economy causes more bankruptcies to take place in the non tradables sector. Non tradable firms must forecast the future state of the economy when investing since the demand for their goods depends on this. In our model the interest rate is a powerful signal that non tradable firms use when the capital account is closed, but its informational content decreases once the capital account opens up and international (as well as domestic) shocks affect it. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:65&r=cfn |
| By: | Tano Santos; Pietro Veronesi |
| Abstract: | A habit persistence, general equilibrium model with multiple assets matches both the time series properties of the market portfolio and the cross-sectional predictability of returns on price sorted portfolios, the value premium. Consistent with empirical evidence, the model shows that (a) value stocks are those with higher cash-flow risk; (b) the size of the value premium is larger in “bad times,” due to time variation in risk preferences; (c) the unconditional CAPM fails, because of general equilibrium restrictions on the market portfolio. The dynamic nature of the value premium rationalizes why the conditional CAPM and a Fama and French (1993) HML factor outperform the unconditional CAPM. |
| JEL: | G12 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11816&r=cfn |