nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒01‒24
seventeen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Does SIZE Matter? Liquidity Provision by the Nasdaq Anonymous Trading Facility By Bruce Mizrach
  2. Assessing debt sustainability in emerging market economies using stochastic simulation methods By Karam, Philippe; Hostland, Dou g
  3. The Day of the Week Effect Patterns on Stock Market Return and Volatility: Evidence for the Athens Stock Exchange By Dimitris Kenourgios; Aristeidis Samitas; Spyros Papathanasiou
  4. Equity and Efficiency under Imperfect Credit Markets By Reto Foellmi; Manuel Oechslin
  5. Market Discipline, Information Processing, and Corporate Governance By Martin Hellwig
  6. Corporate Governance Reforms and Firm Ownership Around the World By Jordan A. Otten; Hans Schenk; Pursey M.A.R. Heugens
  7. The Value of Stock Options to Non-Executive Employees By Kevin F. Hallock; Craig Olson
  8. La Value-at-Risk: Modèles de la VaR, simulations en Visual Basic (Excel) et autres mesures récentes du risque de marché By Francois-Éric Racicot; Raymond Théoret
  9. Bubbles and self-fulfilling crises. By Edouard Challe; Xavier Ragot
  10. Does The Stock Market Punish Corporate Malfeasance? A Case Study of Citigroup By Bruce Mizrach; Susan Zhang Weerts
  11. Favouritism and financial incentives: A natural experiment By Robert Witt; Neil Rickman
  12. Real Options Theory for Law Maker. By Marie Obidzinski; Bruno Deffains
  13. Releasing constraints to growth or pushing on a string ? the impact of credit, training, business associations, and taxes on the performance of Mexican micro-firms By Rojas, Gabriel V. Montes; Maloney, William F.; Fajnzylber, Pablo
  14. The Dynamics of the Short-Term Interest Rate in the UK By Diether Beuermann; Antonios Antoniou; Alejandro Bernales
  15. Methodology and Implementation of Value-at-Risk Measures in Emerging Fixed-Income Markets with Infrequent Trading. By Gonzalo Cortazar; Alejandro Bernales; Diether Beuermann
  16. The Indexing Paradox -- Be Thankful for Irrational Investors By David Eagle
  17. Stock market returns and economic activity: evidence from wavelet analysis By Marco Gallegati

  1. By: Bruce Mizrach (Rutgers University)
    Abstract: I examine the effects of Nasdaq's introduction of an anonymous trading facility called SIZE. I compare SIZE to competing ECNs in terms of liquidity and market impact. Despite rapid growth, SIZE has not yet attained a significant market share and rarely influences short-run price evolution. I conclude with discussion of the Nasdaq-ECN mergers and speculate about a role for SIZE in trading listed securities.
    Keywords: ECN; Super Montage; Total View; market impact;
    JEL: G14 G20
    Date: 2006–01–09
  2. By: Karam, Philippe; Hostland, Dou g
    Abstract: The authors apply stochastic simulation methods to assess debt sustainability in emerging market economies and provide probability measures for projections of the external and public debt burden over the medium term. The vulnerability of public debt to adverse shocks is determined by a number of interrelated factors, including the volatility of output, financial fragility, the endogenous response of the risk premium, and sudden stops in private capital flows. The vulnerability of external debt is sensitive to the determination of the exchange rate and to the pricing of traded goods. The authors show that fiscal policy can act in a preemptive manner to prevent the debt burden from rising significantly over the medium term. This requires flexibility in fiscal planning, which many emerging market economies lack. Emerging market economies therefore face a difficult tradeoff between managing the risk of a debt crisis and pursuing other important fiscal policy objectives.
    Keywords: Economic Theory & Research,Strategic Debt Management,Settlement of Investment Disputes,Macroeconomic Management,External Debt
    Date: 2006–01–01
  3. By: Dimitris Kenourgios (University of Athens); Aristeidis Samitas (University of Aegean); Spyros Papathanasiou (Hellenic Open University)
    Abstract: This paper investigates the day of the week effect in the Athens Stock Exchange (ASE) General Index over a ten year period divided into two subperiods: 1995-2000 and 2001-2004. Five major indices are also considered: Banking, Insurance, and Miscellaneous for the first subperiod, and FTSE-20 and FTSE-40 for the second subperiod. Using a conditional variance framework, which extends previous work on the Greek stock market, we test for possible existence of day of the week variation in both return and volatility equations. When using the GARCH (1,1) specification only for the return equation and the Modified-GARCH (1,1) specification for both the return and volatility equations, findings indicate that the day of the week effect is present for the examined indices of the emerging ASE over the period 1995-2000. However, this stock market anomaly seems to loose its strength and significance in the ASE over the period 2001-2004, which might be due to the Greek entry to the Euro-Zone and the market upgrade to the developed.
    Keywords: Day of the week effect; mean stock returns; volatility; GARCH
    JEL: G10 G12
    Date: 2005–12–28
  4. By: Reto Foellmi; Manuel Oechslin
    Abstract: Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth. Limited borrowing prevents the less affluent individuals from investing the efficient amount, and the inefficiencies are considered to become stronger as inequality rises. This paper, though, argues that higher inequality may actually boost aggregate output even with convex technologies and limited borrowing. Less equality in the middle or at the top end of the distribution is associated with a lower borrowing rate and hence better access to credit for the poor. We find, however, that rising relative poverty is unambiguously bad for economic performance. Hence, we suggest that future empirical work on the inequality-growth nexus should use more specific measures of inequality rather than measures of “overall” inequality such as the Gini index.
    Keywords: capital market imperfections, inequality, growth, efficiency
    JEL: O11 F13 O16
    Date: 2006–01
  5. By: Martin Hellwig (Max-Planck-Institute for Research on Collective Goods)
    Abstract: The paper reviews and assesses our understanding of the notion of “market discipline” in corporate governance. It questions the wholesale appeal to this notion in policy discussion, which fails to provide an account of the underlying mechanisms in terms of theory and empirical analysis. Discipline that is provided by the “market” must be compared to discipline that is provided by other institutions, e.g., intermediaries acting as “delegated monitors”. The comparative assessment depends on (i) the information technology, (ii) the role of strategic interactions, and (iii) the disciplinary mechanism itself. Concerning (i), the question is whether the benefits of multiple sources of information exceed the costs. Concerning (ii), strategic interactions concern the free-rider problem in acquiring information that benefits all financiers, as well as distributive externalities involved in exploiting an information advantage to the detriment of other financiers. Concerning (iii), the question is whether investors have explicit intervention rights or whether “discipline” results from managerial acquiescence. As for the acquisition and aggregation of information in organized markets, positive welfare effects arise only if the information is put to productive use, either through improvements in real investment and managerial incentives, or through changes in corporate control. Necessary conditions for such benefits to arise are fairly restrictive, especially if the changes that occur are based on managerial acquiescence rather than the legal intervention rights of investors. The expansion of market-based managerial incentives in the nineties had little to do with these theoretical accounts. The experience of moral hazard that has accompanied this expansion, on the side of gatekeeping institutions as well as corporate management, confirms the predictions of theory about the potential for shortfalls in market discipline and the agency costs of equity finance through the open market.
    Date: 2005–10
  6. By: Jordan A. Otten; Hans Schenk; Pursey M.A.R. Heugens
    Abstract: Corporate governance reforms have traditionally been studied from the opposing perspectives of global convergence and local persistence, but empirical support for each of these alternatives is mixed at best. Our study of corporate governance reforms in no less than 22 wealthy nations around the world suggests an alternative conceptualization of the reform process: local repairs in light of global ideals. We find that the direction of governance change can be predicted from the dominant ownership patterns in a given country, if we assume that all developed nations seek greater wealth through the broadening and deepening of capital markets.
    Keywords: Corporate governance, Comparative studies, Governance reforms, Managerial control, Information disclosure, Privatization.
    Date: 2006–01
  7. By: Kevin F. Hallock; Craig Olson
    Abstract: This study empirically investigates the value employees place on stock options using information from the option exercise behavior of individuals. Employees hold options for another period if the value from holding them and reserving the right to exercise them later is higher than the value of exercising them immediately and collecting a profit equal to the stock price minus the exercise price. This simple model implies the hazard describing employee exercise behavior reveals information about the value to employees of holding options another time period. We show the parameters of this model are identified with data on multiple option grants per employee and we apply this model to the disposition of options received in the 1990s by a sample of over 2000 middle-level managers from a large, established firm outside of manufacturing. Exercise behavior is modeled using a random effects probit model of monthly exercise behavior that is estimated using simulated maximum likelihood estimation methods. Our estimates show there is substantial heterogeneity (observed and unobserved) among employees in the value they place on their options. Our estimates show most employees value their options at a value greater than the option's Black-Scholes value.
    JEL: J3 G3
    Date: 2006–01
  8. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais) et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal))
    Abstract: Since the end of the nineties, Basle Committee has required that banks compute periodically their VaR and maintain sufficient capital to pay the eventual losses projected by VaR. Unfortunately, there is not only one measure of VaR because volatility, which is a fundamental component of VaR, is latent. Therefore, banks must use many VaR models to compute the range of their prospective losses. These computations might be complex because the distribution of high frequency returns is not normal. This article analyses many VaR models and produces their programs in Visual Basic. It considers also other new measures of market risk and the use of copulas and Fourier Transform for the computation of VaR.
    Keywords: Ingénierie financière, simulation de Monte Carlo, banques, copules, transformée de Fourier.
    JEL: G12 G13 G33
    Date: 2006–01–12
  9. By: Edouard Challe; Xavier Ragot
    Abstract: Financial crises are often associated with an endogenous credit reversal followed by a fall in asset prices and serious disruptions in the financial sector. To account for this sequence of events, this paper constructs a model where the excessive risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, "Bubbles and Crises", Economic Journal, 2000), and where the supply of credit to these investors is endogenous. We show that the interplay between the risk shifting problem and the endogeneity of credit may give rise multiple equilibria associated with different levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an inefficient liquidity dry-up at the intermediate date, a market crash, and widespread failures of borrowers. The possibility of multiple equilibria and self-fulfilling crises is showed to be related to the severity of the risk shifting problem in the economy.
    Date: 2005
  10. By: Bruce Mizrach (Rutgers University); Susan Zhang Weerts (Rutgers University)
    Abstract: This paper examines how well the market anticipates regulatory sanction. We look at key dates of SEC, NASD, FTC, Congressional and foreign investigations and their subsequent resolution. Our event study confirms that the settlements provide little new information to the market. In six major case groupings, we find highly accurate predictions from market capitalization changes of settlements and associated private litigation.
    Keywords: SEC; subpoena; probe; settlement; event study;
    JEL: K22
    Date: 2006–01–09
  11. By: Robert Witt (University of Surrey); Neil Rickman (University of Surrey)
    Abstract: Principals who exercise favouritism towards certain agents may harm those who are not so favoured. Other papers have produced evidence consistent with the presence of such favouritism but have been unable to consider methods for controlling it. We address this issue in the context of a natural experiment from English soccer, where one particular league introduced professional referees in 2001-02, thereby changing the financial incentives and monitoring regime faced by these referees. Because the change was not effected in all leagues, the ‘experiment’ has both cross-sectional and intertemporal dimensions. We study the effects of professional referees on an established measure of referee bias: length of injury time in close matches. We find that referees exercised favouritism prior to professionalism but not afterwards, having controlled for selection and soccer-wide effects. The results are consistent with a financial incentive effect as a result of professional referees and indicate that subtle aspects of principal-agent relationships (such as favouritism) are amenable to contractual influence.
    Keywords: Favouritism, financial incentives, soccer, referee
    JEL: D8 J2 J44
    Date: 2005–02
  12. By: Marie Obidzinski; Bruno Deffains
    Abstract: In rapidly changing areas of law, the writing of rules is a challenging issue for lawmakers. Obsolescence impede law to capture the objective of an underlying policy. The legislator, the judge and the regulator are considered as producers of law who have to decide whether or not to invest in a particular type of law. In order to get more information on the context, lawmakers may also choose to wait before investing in law. Using the real options framework, we show that the degree of precision should be considered as a degree of flexibility of legal rules and we describe how it affects the value of the investment. We then analyze the trade-off between waiting and reducing the degree of precision and we show that the degree of precision of legal rules positively affects the value of waiting in lawmaking.
    Keywords: Obsolescence, Rulemaking, Degree of Precision, Real Options.
    JEL: C61 G12 K00 K40
    Date: 2006
  13. By: Rojas, Gabriel V. Montes; Maloney, William F.; Fajnzylber, Pablo
    Abstract: The authors employ propensity score matching and a traditional control function approach to examine the impact of participation in various societal institutions on microfirm performance in Mexico. They find that firms that participate in credit markets, receive training, pay taxes, and belong to business associations exhibit significantly higher profits, even after controlling for the various factors that drive participation in those institutions. They also find that firms that borrow from formal or informal sources and those that pay taxes are significantly more likely to stay in business, but firms that received credit exhibit lower rates of income growth. Overall, the results suggest that even if the best performing micro-firms are more likely to be selected into participating in societal institutions, causality also runs in the opposite direction. In particular, increases in strictly or broadly defined formality have the potential for increasing profits and survival rates, and appear to bring micro-firms closer to their optimal sizes.
    Keywords: Economic Theory & Research,Science Education,Scientific Research & Science Parks,Investment and Investment Climate,Educational Sciences
    Date: 2006–01–01
  14. By: Diether Beuermann (Inter-American Development Bank); Antonios Antoniou (Durham Business School); Alejandro Bernales (Inter-American Development Bank)
    Abstract: We estimate and test different continuous-time short-rate models for the UK. The preferred model encompasses both the “level effect” of Chan, Karolyi, Longstaff and Sanders (1992a) and the conditional heteroskedasticity effect of GARCH type models. Our findings suggest that including a GARCH effect in the specification of the conditional variance, almost halves the dependence of volatility on rate levels. We also find weak evidence of mean-reversion and volatility asymmetries in the stochastic behavior of rates. Extensive diagnostic tests suggest that the Constant Elasticity of Variance model of Cox (1975), with an added GARCH effect, provides a reliable description of short-rate dynamics. We demonstrate that the most important feature in short-rate modeling is the correct specification of the conditional variance of changes in rates; suggesting that the conditional mean characterization is of second order.
    Keywords: Short-rate, level effect, GARCH effect.
    JEL: C22
    Date: 2005–12–28
  15. By: Gonzalo Cortazar (Pontificia Universidad Catolica de Chile); Alejandro Bernales (Inter-American Development Bank); Diether Beuermann (Inter-American Development Bank)
    Abstract: This paper deals with the issue of calculating daily Value-at-Risk (VaR) measures within an environment of thin trading. Our approach focuses on fixed income portfolios with low frequency of transactions in which the missing data problem makes VaR measures difficult to calculate. We propose and implement a methodology to calculate VaR measures with an incomplete panel of prices. The methodology is composed of three phases: Phase I, generates a complete panel of prices, using a term-structure dynamic model of interest rates. Phase II, calculates portfolio VaR measures with several alternative methods using the complete panel data generated in phase I. Phase III, shows how to back-test the VaR measures obtained in phase II using the original incomplete panel of prices. We provide an empirical implementation of the methodology for the Chilean fixed income market. The proposed methodology seems to provide reliable VaR measures for thinly traded markets addressing an important issue for financial risk management in emerging markets.
    Keywords: Risk, Value-at-Risk, Fixed Income, Incomplete Panels, Term- Structure Dynamic Models, Extreme Value, GARCH, Kalman Filter.
    JEL: C51 C52 G11 G15
    Date: 2005–12–28
  16. By: David Eagle (Eastern Washington University)
    Abstract: This paper introduces the indexing paradox, which states that it if all investors are rational with rational expectations and have a common risk-averse investment performance measure, then no investor can expect to do better than the market. If the cost of indexing is less than the cost of active investing, then all investors would index, which would result with no mechanism to price the possible investments. This paradox relies merely on understanding averages. It does not rely on markets being “informationally efficient,” as demonstrated in a model where different investors have differing degrees of informational advantages and disadvantages.
    Keywords: index funds, indexing paradox
    JEL: G
    Date: 2005–12–30
  17. By: Marco Gallegati (Department of Economics, Università Politecnica delle Marche)
    Abstract: In this paper we investigate the relationship between stock market returns and economic activity by using signal decomposition techniques based on wavelet analysis. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the DJIA stock price index and the industrial production index for US over the period 1961:1- 2005:3 and using the definitions of wavelet variance, wavelet correlation and cross-correlations analyze the association as well as the lead/lag relationship between stock prices and industrial production at the different time scales. Our results show that stock market returns tends to lead the level of economic activity but only at the highest scales (lowest frequencies), corresponding to periods of 16 months and longer, and that the periods by which stock returns lead output increase as the wavelet time scale increases.
    Keywords: stock market, industrial production, wavelet analysis
    JEL: C32 E44
    Date: 2005–12–27

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