nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒07‒28
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. In Search of Distress Risk By John Y. Campbell; Jens Hilscher; Jan Szilagyi
  2. Agency Conflicts, Asset Substitution, and Securitization By Yingjin Hila Gan; Christopher Mayer
  4. A Skeptical Appraisal of Asset-Pricing Tests By Jonathan Lewellen; Stefan Nagel; Jay Shanken
  5. Real Exchange Rate Volatility and Asset Market Structure By Christoph Thoenissen
  6. Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version By Suleyman Basak; David Cass; Juan Manuel Licari; Anna Pavlova
  7. Ownership concentration and firm performance: Evidence from an emerging market By Irena Grosfeld
  8. Financing constraints and firms’ cash policy in the euro area. By Annalisa Ferrando; Rozália Pál
  9. Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation By Christian Keuschnigg

  1. By: John Y. Campbell; Jens Hilscher; Jan Szilagyi
    Abstract: This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.
    JEL: G1
    Date: 2006–07
  2. By: Yingjin Hila Gan; Christopher Mayer
    Abstract: Asset-backed securities represent one of the largest and fastest growing financial markets. Under securitization, agents perform functions (for fees) that would alternatively be performed by a vertically integrated lender with ownership of a whole loan. We examine how outsourcing impacts performance using data on 357 commercial mortgage-backed securities deals with over 46,000 individual loans. To alleviate agency conflicts in managing troubled loans, underwriters often sell the first-loss position to the special servicer, the party who is charged with handling delinquencies and defaults. When holding the first-loss position, special servicers appear to behave more efficiently, making fewer costly transfers of delinquent loans to special servicing, but liquidating a higher percentage of loans that are referred to special servicing. Special servicers are also more likely to own the first loss position in deals that require additional effort (deals with higher delinquencies). Market pricing reflects the existence of agency costs. Despite the apparent reduction of agency costs, the first-loss position is increasingly owned by a party other than the special servicer. We pose a number of explanations, including conflicts between junior and senior securities holders (the asset substitution problem) and risk aversion among special servicers. Consistent with asset substitution, we show that special servicers delay liquidation when they hold the first-loss position in deals with more severe delinquency problems.
    JEL: D8 G2 G3 L2
    Date: 2006–07
  3. By: Kazuhiko Nishina (Graduate School of Economics, Osaka University, Japan); Nabil Maghrebi (Graduate School of Economics, Wakayama, Japan University)
    Abstract: This paper examines nonlinearities in the dynamics of volatility expectations using benchmarks of implied volatility for the US and Japanese markets. The evidence from Markov regime-switching models suggests that volatility expectations are likely to be governed by regimes featuring a long memory process and significant leverage effects. Market volatility is expected to increase in bear periods and decrease in bull periods. Leverage effects constitute thus an important source of nonlinearities in volatility expectations. There is no evidence of long swings associated with financial crises, which do not have the potential of shifting volatility expectations from one regime to another for long protracted periods.
    Keywords: Markov Regime Switching, Implied Volatility Index, Nonlinear Modelling.
    JEL: C32 C51 G13 G15
    Date: 2006–07
  4. By: Jonathan Lewellen; Stefan Nagel; Jay Shanken
    Abstract: It has become standard practice in the cross-sectional asset-pricing literature to evaluate models based on how well they explain average returns on size- and B/M-sorted portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset-pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) in fact provides quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models don’t work as well as originally advertised.
    JEL: G12
    Date: 2006–07
  5. By: Christoph Thoenissen
    Abstract: We examine the influence of financial asset market structure for the volatility of the real exchange rate. Adding distribution costs to two-country two-sector models has been shown to increase the volatility of the terms of trade and thus the real exchange rate. We argue that incomplete markets are a necessary condition for the terms of trade and real exchange rate to display realistic levels of volatility. We also illustrate that for some parameter values, how one models incomplete markets also matters for international business cycle properties of the these models.
    Keywords: Real exchange rate volatility, financial market structure, non-traded goods, distribution costs.
    JEL: F31 F41
    Date: 2006–07
  6. By: Suleyman Basak (London Business School and CEPR, Institute of Finance and Accounting); David Cass; Juan Manuel Licari; Anna Pavlova
    Abstract: This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.
    Keywords: Multiple equilibria, asset pricing, portfolio constraints, indeterminacy, financial equilibrium
    JEL: G12 D52
    Date: 2006–03–01
  7. By: Irena Grosfeld
    Abstract: The initial view of the advantages of ownership concentration in joint stock companies was determined by the concern about the opportunistic managerial behavior. The growing importance of knowledge and human capital in the operation of firms shifts the focus of concern: excessive ownership concentration may stifle managerial initiative. This may be particularly true, and the results obtained in this paper support this hypothesis, in firms with high share of knowledge related activities. I explore the determinants of ownership concentration and the relationship between ownership structure and firm value in the context of a transition economy, i.e. an economy undergoing important changes in its legal and regulatory framework, in macroeconomic policy and most of all, in its property rights allocation. I focus on all non-financial companies traded on the Warsaw Stock Exchange since its inception in 1991 and up to 2003. We can observe that ownership of companies becomes more dispersed with the number of years of listing. The results reported in this paper suggest that firm adjust their ownership structure to firm specific characteristics and that firms belonging to the sector of high technology tend to have lower ownership concentration. The positive impact of ownership concentration on firm value detected in OLS regressions becomes even stronger when we control for the endogeneity of ownership.
    Date: 2006
  8. By: Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rozália Pál (European University Viadrina Frankfurt (Oder), Grosse Scharrnstr. 59, D-15230 Frankfurt (Oder) 15230, Germany.)
    Abstract: This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classiffication based on micro data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Contrary to previous evidence based mainly on US firms, our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing onditions, the internal cash flow is used in a systematic pattern for the inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms. JEL Classification: D92; G3; G32.
    Keywords: financing conditions; cash policy decisions.
    Date: 2006–06
  9. By: Christian Keuschnigg
    Abstract: The routine way of anticipating the effects of the corporate (profit) tax on investments and location choice is to calculate the effective marginal and average tax rates. This paper introduces a model of monopolistic competition to show how investment on the extensive and intensive margins responds to changes in the effective marginal and average tax rates. Intensive investment reflects the marginal expansion of established businesses. Extensive investment refers to the location of new production sites and reflects the choice between exports and foreign direct investments as alternative strategies of foreign market access. The paper calculates the comparative static effects of the corporate tax and shows how the dead weight loss of the tax depends on the elasticities of extensive and intensive investments.
    Keywords: Exports, foreign direct investment, corporate tax, dead weight loss
    JEL: D21 F23 H25 L11 L22
    Date: 2006–07

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