nep-cfn New Economics Papers
on Corporate Finance
Issue of 2005‒12‒14
five papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Uncertainty Determinants of Corporate Liquidity By Christopher F. Baum; Mustafa Caglayan; Andreas Stephan; Oleksandr Talavera
  2. The Implied Equity Risk Premium - An Evaluation of Empirical Methods By David Schröder
  3. Capital Markets and E-fraud : Policy Note and Concept Paper for Future Study By Tom Kellermann; Valerie McNevin
  4. The Role of Factoring for Financing Small and Medium Enterprises By Leora Klapper
  5. Learning, Investment, and Entrepreneurial Survival By Junjian Miao; Neng Wang

  1. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow); Andreas Stephan (Europa-Universitat Viadrina; DIW Berlin); Oleksandr Talavera (DIW Berlin)
    Abstract: This paper investigates the link between the optimal level of non-financial firms' liquid assets and uncertainty. We develop a partial equilibrium model of precautionary demand for liquid assets showing that firms change their liquidity ratio in response to changes in uncertainty. We test this proposition using a panel of non-financial US firms drawn from the COMPUSTAT quarterly database covering the period 1993--2002. The results indicate that firms increase their liquidity ratios when macroeconomic uncertainty or idiosyncratic uncertainty increases. We demonstrate that our results are robust with respect to the inclusion of interest rates and the index of leading indicators.
    Keywords: liquidity, uncertainty, non-financial firms, dynamic panel data
    JEL: C23 D8 D92 G32
    Date: 2005–12–07
  2. By: David Schröder
    Abstract: A new approach of estimating a forward-looking equity risk premium (ERP) is to calculate the implied risk premium using present value (PV) formulas. This paper compares implied risk premia obtained from dierent PV models and evaluates them by analyzing their underlying firmspecific cost-of-capital estimates. It is shown that specific versions of dividend discount models (DDM) and residual income models (RIM) lead to similar ERP estimates. However, the results of cross-sectional regression tests of individual firm risk suggest that there are qualitative dierences between both approaches. Expected firm risk obtained from the DDM is more in line with standard asset pricing models and performs better in predicting future stock returns than estimates from the RIM.
    Keywords: equity risk premium, cost of capital, expected stock returns
    JEL: G12
    Date: 2005–05
  3. By: Tom Kellermann (The World Bank); Valerie McNevin (The World Bank)
    Abstract: The technological dependency of securities exchanges on internet-based (IP) platforms has dramatically increased the industry's exposure to reputation, market, and operational risks. In addition, the convergence of several innovations in the market are adding stress to these systems. These innovations affect everything from software to system design and architecture. These include the use of XML (extensible markup language) as the industry IP language, STP or straight through processing of data, pervasive or diffuse computing and grid computing, as well as the increased use of Internet and wireless. The fraud is not new, rather, the magnitude and speed by which fraud can be committed has grown exponentially due to the convergence of once private networks on-line. It is imperative that senior management of securities markets and brokerage houses be properly informed of the negative externalities associated with e-brokerage and the possible critical points of failure that exist in today's digitized financial sector as they grow into tomorrow's exchanges. The overwhelming issue regarding e-finance is to determine the true level of understanding that senior management has about on-line platforms, including the inherent risks and the depth of the need to use it wisely. Kellermann and McNevin attempt to highlight the various risks that have been magnified by the increasing digitalization of processes within the brokerage arena and explain the need for concerted research and analysis of these as well as the profound consequences that may entail without proper planning. An effective legal, regulatory, and enforcement framework is essential for creating the right incentive structure for market participants. The legal and regulatory framework should focus on the improvement of internal monitoring of risks and vulnerabilities, greater information sharing about these risks and vulnerabilities, education and training on the care and use of these technologies, and better reporting of risks and responses. Public/private partnerships and collaborations also are needed to create an electronic commerce (e-commerce) environment that is safe and sound.
    Keywords: Domestic finance
    Date: 2005–05–01
  4. By: Leora Klapper (The World Bank)
    Abstract: Around the world, factoring is a growing source of external financing for corporations and small and medium-size enterprises (SMEs). What is unique about factoring is that the credit provided by a lender is explicitly linked to the value of a supplier's accounts receivable and not the supplier's overall creditworthiness. Therefore, factoring allows high-risk suppliers to transfer their credit risk to their high-quality buyers. Factoring may be particularly useful in countries with weak judicial enforcement and imperfect records of upholding seniority claims because receivables are sold, rather than collateralized, and factored receivables are not part of the estate of a bankrupt SME. Empirical tests find that factoring is larger in countries with greater economic development and growth and developed credit information bureaus. In addition, the author finds that creditor rights are not related to factoring. The author also discusses reverse factoring, which is a technology that can mitigate the problem of borrowers' informational opacity in business environments with weak information infrastructures if only receivables from high-quality buyers are factored. She illustrates the case of the Nafin reverse factoring program in Mexico and highlights how the use of electronic channels and a supportive legal and regulatory environment can cut costs and provide greater SME services in emerging markets.
    Keywords: Domestic finance
    Date: 2005–05–01
  5. By: Junjian Miao (Department of Economics, Boston University); Neng Wang (Columbia Business School)
    Abstract: Empirical evidence shows that entrepreneurs on average do not earn more than paid em- ployees in terms of present value. One may ask why individuals what to stay in business and take entrepreneurial activities. To address this question, we propose a continuous time real options model in which entrepreneurs do not know their investment quality and learn about it over time. We show that due to the option value of learning, an entrepreneur may stay in business even though the net present value (NPV) is negative. We also show that risk aversion erodes option value and lowers private ¯rm value so that a highly risk averse entrepreneur may exit even when the NPV is positive. We also show that a more risk averse or a more pessimistic entrepreneur exits earlier. Finally, the model can generate the positive relation between wealth and survival duration without liquidity constraints.
    Keywords: real options, learning, private firm value, survival, precautionary savings
    JEL: D80 D91 G11 E21
    Date: 2005–07

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