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on Corporate Finance |
| By: | Alain Coen (Département de stratégie des affaires, Université du Québec (Montréal)); 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: | This paper proposes to revisit both the CAPM and the three-factor model of Fama and French (1993) in presence of errors in the variables. To reduce the bias induced by measurement and specification errors, we transpose to the cost of equity an estimator based on cumulants of order three and four initially developed by Dagenais and Dagenais (1997) and lated generalized to financial models by Racicot (2003). Our results show that our technique has great and significant consequences on the measure of the cost of equity. We obtain ipso facto a new estimator of the Jensen alpha. |
| Keywords: | Errors in the variables, cumulants, higher moments, instrumental variables, cost of equity, Jensen alpha. |
| JEL: | C13 C49 G12 G31 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:142006&r=cfn |
| 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)); Alain Coen (Département de stratégie des affaires, Université du Québec (Montréal)) |
| Abstract: | In this paper, we propose a new empirical version of the Fama and French Model based on the Hausman (1978) specification test and aimed at discarding measurement errors in the variables. The proposed empirical framework is general enough to be used for correcting other financial and accounting models of measurement errors. Removing measurement errors is important at many levels as information disclosure, corporate governance and protection of investors. |
| Keywords: | Asset pricing, portfolio selection, errors in variables, measurement errors, higher moments, instrumental variables, Specification test, corporate governance, protection of investors. |
| JEL: | C13 C19 C49 G12 G31 |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:132006&r=cfn |
| By: | Felicitas Nowak-Lehmann D. (Universität Göttingen, Ibero-Amerika Institut); Dierk Herzer (Universität Frankfurt / Universität Göttingen); Sebastian Vollmer (Universität Göttingen, Ibero-Amerika Institut); Inmaculada Martínez-Zarzoso (Universität Göttingen, Ibero Amerika Institut) |
| Abstract: | It is the objective of this paper to analyze Chile’s development of market shares in the EU market in the period of 1988 to 2002, testing for the impact of price competitiveness on market shares with panel data. Price competitiveness is considered a decisive determinant of Chile’s market shares since Chile’s successful export products are rather homogeneous products (fish, fruit, beverages, ores, copper, and wood and products thereof). Six EU countries, namely France, Germany, Italy, the Netherlands, Spain and the UK, with perceptible imports from Chile in the above-mentioned sectors, serve as cross-sections in this study. It is found that Chile’s market shares in all seven sectors under investigation were unstable in economic terms in the 1988-2002 period. From a statistical point of view market shares were non-stationary variables, integrated of order one (I(1)) and so were Chile’s relatives prices and its competitors’ relative prices, which turned out to be I(1), too. All variables being I(1), a panel cointegration test was conducted. Pedroni’s residual based cointegration test revealed cointegration between market shares and relative prices in all seven sectors allowing regression coefficients to be estimated by means of Dynamic Ordinary Least Squares (DOLS). The DOLS results were then compared with the ones obtained by the Three Stage Feasible Generalized Least Squares (3SFGLS) and the Generalized Method of Moments (GMM) technique. |
| Keywords: | Market shares, panel unit root tests, panel cointegration tests, panel DOLS modeling, 3SLS - |
| JEL: | F14 F17 C23 |
| Date: | 2006–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:got:iaidps:139&r=cfn |
| By: | Paul Willen; Felix Kubler |
| Abstract: | We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: the gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock. |
| JEL: | G11 D14 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12309&r=cfn |
| By: | Marco Realdon |
| Abstract: | This paper presents an equity valuation model that employs risk-neutral valuation under stochastic interest rates along the lines of Ohlson and Feltham (1999). Closed form valuation formulae for equities are presented in a discrete time setting whereby the short term interest rate is modelled by a quadratic term structure model. Earnings are driven by mean reverting return on equity (ROE). The term strcture of interest rates, and in particular the variance of the future short rates, is found to be a primary dterminant of equity value tat has been largely overlooked by the previous equity valuation literature. Equity value decreases in the correlation between the short interest rate and ROE and can be very sensitive to such correlation when the ROE process is very persistent. This suggests that equity value dreceases in the degree of pro-cyclicality of the firm's profitability. |
| Keywords: | Equity valuation, residual income valuation, stochastic interest rates, quadratic term structure model in discrete time, mean reverting return on equity |
| JEL: | G12 G13 M41 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:06/12&r=cfn |
| By: | Paola Giuliano (International Monetary Fund and IZA Bonn); Marta Ruiz-Arranz (International Monetary Fund) |
| Abstract: | Despite the increasing importance of remittances in total international capital flows, the relationship between remittances and growth has not been adequately studied. This paper studies one of the links between remittances and growth, in particular how local financial sector development influences a country’s capacity to take advantage of remittances Using a newly-constructed dataset for remittances covering about 100 developing countries, we find that remittances boost growth in countries with less developed financial systems by providing an alternative way to finance investment and helping overcome liquidity constraints. The study also explores some common myths about remittances and suggests that they are predominantly profit-driven and mostly pro-cyclical. |
| Keywords: | remittances, financial development, growth |
| JEL: | F22 F43 O16 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2160&r=cfn |