nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒01‒29
four papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Collateral and Debt Maturity Choice. A Signaling Model By Lensink, Robert; Tra, Pham Thi Thu
  2. Distribution Risk and Equity Returns By Danthine, Jean-Pierre; Donaldson, John B; Siconolfi, Paolo
  3. A Reappraisal of the Border Effect on Relative Price Volatility By Yin-Wong Cheung; Kon S. Lai
  4. Financial performance and outreach : a global analysis of leading microbanks By Morduch, Jonathan; Demirguc-Kunt, Asli; Cull, Robert

  1. By: Lensink, Robert; Tra, Pham Thi Thu (Groningen University)
    Abstract: This paper derives optimal loan policies under asymmetric information where banks offer loan contracts of long and short duration, backed or unbacked with collateral. The main novelty of the paper is that it analyzes a setting in which high quality firms use collateral as a complementary device along with debt maturity to signal their superiority. The least-cost signaling equilibrium depends on the relative costs of the signaling devices, the difference in firm quality and the proportion of good firms in the market. Model simulations suggest a non-monotonic relationship between firm quality and debt maturity, in which high quality firms have both long-term secured debt and short-term secured or non-secured debt.
    Date: 2005
  2. By: Danthine, Jean-Pierre; Donaldson, John B; Siconolfi, Paolo
    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 labour relations. We show that this view implies that income share variations represent a risk factor of first-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: distribution risk; equity premium; income shares; limited market participation
    JEL: E3 G1
    Date: 2006–01
  3. By: Yin-Wong Cheung; Kon S. Lai
    Abstract: Engel and Rogers (1996) find that crossing the US-Canada border can considerably raise relative price volatility and that exchange rate fluctuations explain about one-third of the volatility increase. In re-evaluating the border effect, this study shows that cross-country heterogeneity in price volatility can lead to significant bias in measuring the border effect unless proper adjustment is made to correct it. The analysis explores the implication of symmetric sampling for border effect estimation. Moreover, using a direct decomposition method, two conditions governing the strength of the border effect are identified. In particular, the more dissimilar the price shocks are across countries, the greater the border effect will be. Decomposition estimates also suggest that exchange rate fluctuations actually account for a large majority of the border effect.
    Keywords: price volatility, exchange rate volatility, national border, distance, dissimilar shocks
    JEL: F31 F41
    Date: 2006
  4. By: Morduch, Jonathan; Demirguc-Kunt, Asli; Cull, Robert
    Abstract: Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Economic Adjustment and Lending,Investment and Investment Climate,Rural Finance
    Date: 2006–02–01

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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