nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒01‒01
twenty papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. A more complete conceptual framework for financing of small and medium enterprises By Udell, Gregory F.; Berger, Allen N.
  2. Taking the bad with the good : volatility of foreign portfolio investment and financial constraints of small firms By Knill, April M.
  3. Disclosure of environmental violations and the stock market in the Republic of Korea By Mamingi, Nlandu; Laplante, Benoit; Jong Ho Hong; Dasgupta, Susmita
  4. Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options By Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
  5. Cash breeds Success: The Role of Financing Constraints in Patent Races By Enrique Schroth; Dezsö Szalay
  6. Distribution Risk and Equity Returns By Jean-Pierre Danthine; John B. Donaldson; Paolo Siconolfi
  7. The Influence of Managerial and Organizational Determinants of Horizontal Knowledge Exchange on Competence Building and Competence Leveraging By Mom, T.J.M.; Bosch, F.A.J. van den; Volberda, H.W.
  8. Order Submission: The Choice between Limit and Market Orders By Ingrid Lo; Stephen G. Sapp
  9. Are there asymmetries in the response of bank interest rates monetary shocks? By Valerio Crispolti; Daniela Marconi
  10. Are there asymmetries in the response of bank interest rates monetary shocks? By Leonardo Gambacorta; Simonetta Iannotti
  11. Financing of Competing Projects with Venture Capital By Ekaterina Goldfain; Eugen Kovac
  12. What determines financial development? By Yongfu Huang
  13. Debt, hedging, and human capital By Stephen D. Smith; Larry D. Wall
  14. Internationalization and Stock Market Liquidity By Ross Levine; Sergio Schmukler
  15. Global Factors and Emerging Market Spreads By Eduardo Levy Yeyati; Martín González Rozada
  16. The treatment of companies under cash flow taxes : some administrative, transitional, and international issues By Sunley, Emil M.
  17. Initial Performance of Greek IPOs, Underwriter’s Reputation and Oversubscription By Dimitris Kenourgios; Spyros Papathanasiou; Emmanouil Rafail Melas
  20. How Independent are Independent Directors? The Case of Italy By Paolo Santella; Giulia Paone; Carlo Drago

  1. By: Udell, Gregory F.; Berger, Allen N.
    Abstract: The authors propose a more complete conceptual framework for analysis of credit availability for small and medium enterprises (SMEs). In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. They emphasize a causal chain from policy to financial structures which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies, plus relationship lending. The authors argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadv antaged in lending to opaque SMEs.
    Keywords: Banks & Banking Reform,Financial Intermediation,Investment and Investment Climate,Economic Theory & Research,Financial Crisis Management & Restructuring
    Date: 2005–12–01
  2. By: Knill, April M.
    Abstract: The author examines the impact of the volatility of foreign portfolio investment on the financial constraints of small firms. Using a dataset of over 195,000 firm-year observations across 53 countries, she examines the impact of foreign portfolio investment instability on capital issuance and firm growth across countries and firm characteristics, in particular size. After controlling for the endogeneity of foreign portfolio investment instability, as well as for firm-, industry-, and country-level characteristics such as GDP growth, as well as the levels of foreign portfolio and direct investment, the author finds that the volatility of foreign portfolio investment is only significantly associated with a decreased ability to issue publicly-traded securities for small firms in years when nations are considered less " creditworthy. " The volatility of foreign portfolio investment only hinders the growth of small firms significantly in periods when nations are deemed less " creditworthy. " These results underscore both the significance of a good financial system that minimizes ca pital flow volatility, as well as the influence of property rights and country creditworthiness to instill confidence in foreign investors.
    Keywords: Investment and Investment Climate,Economic Theory & Research,Capital Flows,Financial Intermediation,Markets and Market Access
    Date: 2005–12–01
  3. By: Mamingi, Nlandu; Laplante, Benoit; Jong Ho Hong; Dasgupta, Susmita
    Abstract: For almost 20 years, the Ministry of Environment of the Republic of Korea has published on a monthly basis a list of enterprises that fail to comply with national environmental laws and regulations. In this paper, the authors examine the reaction of investors to the publication of these lists and show that enterprises appearing on these lists have experienced a significant decline in their market valuation. Firms in developing countries are often said to have no incentives to invest in pollution control because they typically face weak monitoring and enforcement of environmental regulations. The findings of the authors, however, indicate that the inability of formal institutions to control pollution through fines and penalties may not be as serious an impediment to pollution control as is generally argued. Environmental regulators in developing countries could harness market forces by introducing structured programs to release firm-specific information about environmental performance.
    Keywords: Pollution Management & Control,Health Economics & Finance,Environmental Economics & Policies,Water and Industry,Decentralization,Environmental Economics & Policies,Energy and Environment,Health Economics & Finance,Access to Markets,Markets and Market Access
    Date: 2004–06–01
  4. By: Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
    Abstract: Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S&P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S&P 500 put options have become ‘expensive’ relative to the Black-Scholes benchmark. Many researchers (e.g., Liu, Pan and Wang (2005)) have argued that such prices cannot be justified in a general equilibrium setting if the representative agent has ‘standard preferences’ and the endowment is an i.i.d. process. Below, however, we use the insight of Bansal and Yaron (2004) to demonstrate that the ‘volatility smirk’ can be rationalized if the agent is endowed with Epstein-Zin preferences and if the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. We identify a realistic calibration of the model that simultaneously matches the empirical properties of dividends, the equity premium, the prices of both at-the-money and deep out-of-the-money puts, and the level of the risk-free rate. A more challenging question (that to our knowledge has not been previously investigated) is whether one can explain within a standard preference framework the stark regime change in the volatility smirk that has maintained since the 1987 market crash. To this end, we extend the model to a Bayesian setting in which the agent updates her beliefs about the average jump size in the event of a jump. Note that such beliefs only update at crash dates, and hence can explain why the volatility smirk has not diminished over the last eighteen years. We find that the model can capture the shape of the implied volatility curve both pre- and post-crash while maintaining reasonable estimates for expected returns, price-dividend ratios, and risk-free rates.
    JEL: G21 G28 P51
    Date: 2005–12
  5. By: Enrique Schroth; Dezsö Szalay
    Abstract: This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.
    Keywords: patent race; incumbent; entrant; financial constraints; empirical estimation
    JEL: G24 G32 L13
    Date: 2005–05
  6. By: Jean-Pierre Danthine; John B. Donaldson; Paolo Siconolfi
    Abstract: In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share variations represent a risk factor of ¯rst-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.
    Keywords: income shares; distribution risk; equity premium; limited market participation
    JEL: E3 G1
    Date: 2005–11
  7. By: Mom, T.J.M.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Both in theory as in practice insight is limited about how firms in dynamic environments could organize to manage concurrently both the strategic processes of competence building and competence leveraging. To contribute to this issue, a conceptual framework is developed which considers the ability to exchange knowledge across organization units as a prerequisite for firms to achieve both the goals of competence building and leveraging. The framework shows how several important managerial and organizational determinants, associated with cross-unit knowledge exchange, may stimulate competence-building processes and how they may stimulate competence-leveraging processes. The conceptual framework will be illustrated by two case studies in different contexts of Novartis, one of the leading European life-science companies. These two contexts of respectively ?organization-enabled? and ?web-enabled? knowledge exchange appear to be complementary. The conceptual framework and cases provide insight into (1) possibilities about how firms could organize to deal with the tension between competence building and leveraging processes, and (2) how managing the determinants of horizontal knowledge exchange can contribute to changing a firm?s actual mixture of competence building/leveraging processes into a more desired strategic mixture.
    Keywords: Competence Building;Competence Leveraging;Exploration & Exploitation;Horizontal Knowledge Flows;Novartis;
    Date: 2005–12–19
  8. By: Ingrid Lo; Stephen G. Sapp
    Abstract: Most financial markets allow investors to submit both limit and market orders, but it is not always clear what affects the choice of order type. The authors empirically investigate how the time between order submissions, changes in the state of the order book, and price uncertainty influence the rate of submission of limit and market orders. The authors measure the expected time (duration) between the submissions of orders of each type using an asymmetric autoregressive conditional duration model. They find that the execution of market orders, as well as changes in the level of price uncertainty and market depth, impact the submissions of both best limit orders and market orders. After correcting for these factors, the authors also find differences in behaviour around market openings, closings, and unexpected events that may be related to changes in information flows at these times. In general, traders use more market (limit) orders at times when execution risk for limit orders is highest or the risk of unexpected price movements is highest.
    Keywords: Exchange rate; Financial institution; Market structure and pricing
    JEL: D4 G1
    Date: 2005
  9. By: Valerio Crispolti (Bank of Italy, Economic Research Department); Daniela Marconi (Bank of Italy, Economic Research Department)
    Abstract: In this paper we investigate two potential channels of international technology transfer towards developing countries: trade and foreign direct investments. We study the extent to which, through these channels, research and development expenditures (R&D) performed by advanced countries affect total factor productivity (TFP) levels in a panel of 45 developing countries over the period 1980-2000. Paying particular attention to the potential spillovers effects stemming from human capital, we estimate a TFP equation using the FMOLS technique. Our findings show that both channels induce substantial technology transfer across countries. In addition each developing country, for a given amount of foreign R&D, enjoys bigger spillovers the higher its educational level.
    Keywords: Technology transfer, Economic growth, Trade, FDI
    JEL: O47 F12 F21
    Date: 2005–11
  10. By: Leonardo Gambacorta (Bank of Italy, Economic Research Department); Simonetta Iannotti (Bank of Italy, Supervision and Regulation Department)
    Abstract: This paper examines the velocity and asymmetry in the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model (AVECM), it analyses the pass-through of changes in the money market rates to retail bank interest rates in Italy in the period 1985-2002. The main results of the paper are: 1) the speed in adjustment of bank interest rates to monetary policy changes have significantly increased after the introduction of the 1993 Consolidated Law on Banking; 2) interest rate adjustment, in response to positive and negative shocks, are asymmetric in the short run, but not in the long run; 3) banks adjust their loan (deposit) rate at a faster rate during period of monetary tightening (easing); 4) this asymmetry has almost vanished since the nineties.
    Keywords: monetary policy transmission, interest rates, asymmetries, liberalization
    JEL: E43 E44 E52
    Date: 2005–11
  11. By: Ekaterina Goldfain; Eugen Kovac
    Abstract: We analyze innovation race in a moral hazard setting. We develop a model in which two competing entrepreneurs work independently on the same project. The entrepreneurs do not possess any wealth of their own and their research is financed by a venture capitalist. The project, if successful, generates a prize, which is to be shared between the winning entrepreneur and the venture capitalist. The venture capitalist cannot observe the allocation of funds he provides, which creates a moral hazard problem. We compare a competitive setting with a benchmark case where the venture capitalist finances only one entrepreneur. We show that the venture capitalist can increase the efficiency of research (hence, his own expected profit from investments) and alleviate the moral hazard problem if he finances both entrepreneurs. This conclusion is unambiguous, when the entrepreneurs are at the same (the last) stage of R&D. It holds for a reasonably large range of parameters, when the entrepreneurs are at different stages of R&D.
    Keywords: venture capital, moral hazard, optimal contract, innovation race
    JEL: G32 G34 O31
    Date: 2005–12
  12. By: Yongfu Huang
    Abstract: This paper studies the fundamental determinants of cross-country differences in finnancial development. Two prominent tools for addressing model uncertainty, Bayesian Model Averaging and Automatic Model Selection using PcGets, are jointly applied to investigate the financial development effects of a wide range of variables taken from various sources. The analysis suggests that the level of financial development in a country is determined by its institutional quality, macroeconomic policies, and geographic characteristics, as well as the level of income and cultural characteristics.
    Keywords: Financial development, Model uncertainty, Bayesian Model Averaging, PcGets
    JEL: O16 E44
    Date: 2005–12
  13. By: Stephen D. Smith; Larry D. Wall
    Abstract: This paper provides a theory of debt and hedging based on human capital. We distinguish human capital from physical capital in two ways: (1) human capital is inalienable and can exercise a one-sided option to leave the firm, and (2) human capital is not perfectly replaceable. We show that a firm may reach the first best solution while issuing debt or equity to outsiders provided that either the insiders receive a senior claim or that the firm hedges. We then show that, given asymmetric information concerning costs, the only viable solution has the firm issuing debt to outsiders and hedging.
    Date: 2005
  14. By: Ross Levine; Sergio Schmukler
    Abstract: What is the impact of internationalization (firms raising capital and trading in international markets) on the liquidity of the remaining firms in domestic markets? To address this question, we assemble a panel database of nearly 2,900 firms from 45 emerging economies over the period 1989-2000, constructed from annual and daily data. First, we find evidence of migration. The domestic trading of firms that cross-list or issue depositary receipts in foreign public exchanges tends to decrease, while a significant proportion of their trading activity concentrates in international markets. Second, this migration is negatively related to the liquidity of the remaining firms in their home market through two separate channels. There are liquidity spillovers within markets, with aggregate domestic trading activity being positively associated with the liquidity of individual firms in the same market. Moreover, the proportion of trading abroad is negatively related to the liquidity of firms in the domestic market.
    JEL: G15 F36 F20
    Date: 2005–12
  15. By: Eduardo Levy Yeyati; Martín González Rozada
    Abstract: This paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite (as reflected in the spread of high yield corporate bonds in developed markets), global liquidity (measured by the international interest rates) and contagion (from systemic events like the Russian default). This link has remained relatively stable over the history of the emerging market class, is robust to the inclusion of country-specific factors, and helps provide accurate long-run predictions. Overall, the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies.
    Date: 2005
  16. By: Sunley, Emil M.
    Abstract: The paper begins by outlining the major administrative and compliance issues of a cash flow tax. There are problems with the system because of the numerous possibilities for gaming the system. The paper goes on to discuss the problems involved in the transition from a corporate income tax to a cash flow tax. There are ways around these problems but they cause further problems. The paper outlines these secondary problems and possible solutions to them, but concludes that there is no easy way to orchestrate a totally smooth transition. The international aspects of imposing a cash flow tax are most troublesome. After a summary of the major international income tax rules, the paper discusses how the cashflow tax treats inbound investment, outbound investment, and exports and imports. The paper concludes by proposing one way to fix up the income tax. It suggests that the tax base be defined in terms of financial income with certain specific adjustments, such as for depreciation and extraordinary items. The proposal is of some depth, including a simplified system of tax depreciation.
    Keywords: Public Sector Economics & Finance,Environmental Economics & Policies,Economic Theory & Research,Tax Policy and Administration,International Terrorism & Counterterrorism
  17. By: Dimitris Kenourgios (University of Athens); Spyros Papathanasiou (Hellenic Open University); Emmanouil Rafail Melas (London School of Economics)
    Abstract: This paper provides additional international evidence on the IPOs by examining the initial performance and two main determinants of short-run underpricing of 169 IPOs listed on the Athens Stock Exchange (ASE) over the period 1997-2002. The initial performance of the IPOs is measured by calculated two formulas: the raw returns and the excess or adjusted returns of the first, fifth and twenty first day respectively. Furthermore, we use a proxy to rank the underwriters’ prestige along with the times of oversubscription, which are introduced as explanatory variables in our model. The results of the analysis provide evidence of significant underpricing. Furthermore, the cross sectional analysis on the determinants of the IPOs shows that both the underwriters’ prestige and the times of oversubscription significantly affect the underpricing level of the IPOs over the most important and “hot” period for the Greek emerging stock market since its establishment, in terms of growth rates, acceleration of the going public process and volatility of market and stock returns.
    Keywords: IPOs, underpricing, oversubscription, underwriters’ prestige, Athens Stock Exchange.
    JEL: G24 G32
    Date: 2005–12–22
  18. By: Sarmistha Pal (Brunel University)
    Abstract: One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long- term debt in the sample countries in the pre-crisis period.
    Keywords: Asian Crisis, Efficiency of internal and external funds, Moral hazard of bad loans, Financial constraint, Random effects model with selection
    JEL: G32 O16
    Date: 2005–12–21
  19. By: Fadil Govori (Institute of Finance & Management)
    Abstract: Economic system relies heavily on financial resources and transactions, and economic efficiency rests in part on efficient financial markets. Financial markets consist of agents, brokers, institutions, and intermediaries transacting purchases and sales of securities. The many persons and institutions operating in the financial markets are linked by contracts, communications networks which form an externally visible financial structure, laws, and friendships. The financial market is divided between investors and financial institutions.
    Keywords: Markets and Institutions
    JEL: G
    Date: 2005–12–22
  20. By: Paolo Santella (European Commission, DG Internal Market); Giulia Paone (Dartmouth College - Tuck School of Business); Carlo Drago (University of Naples 'Federico II')
    Abstract: In this article, we provide an interpretation for the voluntary independence requirements contained in the Italian Corporate Governance Code (Preda Code) checking them against a proxy for international best practice, the independence criteria provided in the EC Recommendation on non-executive and supervisory directors of 2005. We then check to what extent company disclosure for 2003 allows the verification of the independence of directors qualified as independent by the Italian 40 blue chips. We find that the Preda Code (currently under revision) should be updated in several respects in order to make it abreast with best practice in the European Union. We also find that for two key independence requirements (not to have business relationships with the company and not to have too many concurrent commitments outside of the company) the level of compliance is dramatically low (4% and 16% respectively). Overall, for only 5 out of the 284 directors declared as independent by the Italian blue chips is it possible to verify the respect of all the Italian independence standards (and for only 4 directors with respect to the EC standards). This raises the problem of who should monitor what listed companies declare.
    Keywords: Independent directors, Corporate governance
    JEL: G3 K K2 K22
    Date: 2005–12–25

This nep-cfn issue is ©2006 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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