nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒11‒12
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Economic and Financial Crises and the Predictability of U.S. Stock Returns By Hartmann, Daniel; Kempa, Bernd; Pierdzioch, Christian
  2. Bidding in mandatory bankruptcy auctions: Theory and evidence By Eckbo, B. Espen; Thorburn, Karin S.
  3. The choice of seasoned-equity selling mechanism: Theory and evidence By Eckbo, B. Espen; Norli, Øyvind
  4. International Comparison of Interest Rate Guarantees in Life Insurance By Cummins, J. David; Miltersen, Kristian R.; Persson, Svein-Arne
  5. Stock market volatiltity around national elections By Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
  6. The perpetual American put option for jump-diffusions: Implications for equity premiums By Aase, Knut K.
  7. Political orientation of government and stock market returns By Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz

  1. By: Hartmann, Daniel; Kempa, Bernd; Pierdzioch, Christian
    Abstract: We argue that the use of publicly available and easily accessible information on economic and financial crises to detect structural breaks in the link between stock returns and macroeconomic predictor variables improves the performance of simple trading rules in real time. In particular, our results suggest that accounting for structural breaks and regime shifts in forecasting regressions caused by economic and financial crises has the potential to increase the out-of-sample predictability of stock returns, the performance of simple trading rules, and the market-timing ability of an investor trading in the U.S. stock market.
    Keywords: Forecasting stock returns; financial and economic crises; trading rules
    JEL: C53 G11 E44
    Date: 2006–10
  2. By: Eckbo, B. Espen (Tuck School of Business, Dartmouth College); Thorburn, Karin S. (Tuck School of Business, Dartmouth College)
    Abstract: We analyze bidding incentives and present evidence on takeover premiums in mandatory Swedish bankruptcy auctions, where three-quarters of the firms are sold as going concerns. The bankrupt firms’ main creditors (banks) cannot bid in the auction and thus cannot directly influence the winning price. However, we find that the banks often finance bidders. We show that the optimal bid strategy for a bank-bidder coalition mimics a monopolist sales price, in effect getting around the institutional constraint on direct bank bidding. The final auction premium increases with a measure of the bank’s debt impairness observed at the beginning of the auction. Cross-sectional regressions with the auction premium as dependent variable support this prediction. There is no empirical support for the proposition that the auctions lead to fire-sale prices, where we use the number of bidders, the degree of industry-wide financial distress, and the business cycle as proxies for auction demand. Moreover, premiums in transactions where insiders repurchase the firm (salebacks) are on average indistinguishable from premiums in sales to company outsiders, which fails to support self-dealing arguments.
    Keywords: Bankruptcy auctions; Optimal bid strategy
    JEL: D44
    Date: 2004–12–17
  3. By: Eckbo, B. Espen (Tuck School of Business, Dartmouth College); Norli, Øyvind (Rotman School of Management, University of Toronto)
    Abstract: Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.
    Keywords: Seasoned-equity selling mechanism; Sequential pooling equilibrium; Oslo Stock Exchange; Flotation methods
    JEL: D50
    Date: 2004–12–17
  4. By: Cummins, J. David (Wharton School, University of Pennsylvania); Miltersen, Kristian R. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Interest rate guarantees seem to be included in life insurance and pension products in most countries. The exact implementations of these guarantees vary from country to country and are often linked to different distribution of investment surplus mechanisms. In this paper we first attempt to model practice in Germany, the UK, Norway, and Denmark by constructing contracts intended to capture practice in each country. All these contracts include rather sophisticated investment surplus distribution mechanisms, although they exhibit subtle differences. Common for Germany, Denmark, and Norway is the existence of a bonus account, an account where investment surplus is set aside in years with good investment returns to be used to cover the annual guarantee in years when the investment return is lower than the guarantee. The UK contracts do not include annual bonus distribution, instead they include a potential bonus distribution at maturity of the contract. <p> These contracts are then compared with universal life insurance, a popular life product in the US market, which also includes annual guarantees and investment surplus distribution, but no bonus account. The contract parameters are calibrated for each contract so that all contracts have ’fair’ prices, i.e., the theoretical market price of the contract equals the theoretical market price of all future insurance benefits at the inception of the contract. <p> For simplicity we ignore mortality factors and assume that the benefit is paid out as a lump sum in 30 years. <p> We compare the probability distribution of the future payoff from the contracts with the payoff from simply investing in the market index. Our results indicate that the payoffs from the Danish, German and UK contracts are surprisingly similar to the payoff from the market index. We are tempted to conclude that the presence of annual guarantees and sophisticated investment surplus distribution, annual or at maturity only, have virtually no impact on the probability distribution of the payoff. The Norwegian contract has lower risk than the mentioned contracts, whereas the universal life contract offers the lowest risk of all contracts. Our numerical analysis therefore indicates that the relative simple and more transparent US contract provides the insurance customer with a less risky future benefit than the more complex (and completely obscure?) European counterparts.
    Keywords: Interest rate guarantees; Life insurance; Pension products
    JEL: G22 G23
    Date: 2004–12–17
  5. By: Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
    Abstract: This paper investigates a sample of 27 OECD countries to test whether national elections induce higher stock market volatility. It is found that the country-specific component of index return variance can easily double during the week around an Election Day, which shows that investors are surprised by the election outcome. Several factors, such as a narrow margin of victory, lack of compulsory voting laws, change in the political orientation of the government, or the failure to form a coalition with a majority of seats in parliament significantly contribute to the magnitude of the election shock. Our findings have important implications for the optimal strategies of risk-averse stock market investors and participants of the option markets.
    Keywords: Political risk; National elections; Stock market volatility
    JEL: G12 G14 G11
    Date: 2006–01
  6. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper we solve an optimal stopping problem with an infinite time horizon, when the state variable follows a jump-diffusion. Under certain conditions our solution can be interpreted as the price of an American perpetual put option, when the underlying asset follows this type of process. <p> The probability distribution under the risk adjusted measure turns out to depend on the equity premium, which is not the case for the standard, continuous version. This difference is utilized to find intertemporal, equilibrium equity premiums. <p> We apply this technique to the US equity data of the last century, and find an indication that the risk premium on equity was about two and a half per cent if the risk free short rate was around one per cent. On the other hand, if the latter rate was about four per cent, we similarly find that this corresponds to an equity premium of around four and a half per cent. <p> The advantage with our approach is that we need only equity data and option pricing theory, no consumption data was necessary to arrive at these conclusions. <p> Various market models are studied at an increasing level of complexity, ending with the incomplete model in the last part of the paper.
    Keywords: Optimal exercise policy; American put option; perpetual option; optimal stopping; incomplete markets; equity premiums; CCAPM
    JEL: D52
    Date: 2004–12–17
  7. By: Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
    Abstract: Prior research documented that U.S. stock prices tend to grow faster during Democratic administrations than during Republican administrations. This letter examines whether stock returns in other countries also depend on the political orientation of the incumbents. An analysis of 24 stock markets and 173 different governments reveals that there are no statistically significant differences in returns between left-wing and right-wing executives. Consequently, international investment strategies based on the political orientation of countries' leadership are likely to be futile.
    Keywords: Stock market returns; Politics; Presidential puzzle
    JEL: G14 G11 G15
    Date: 2006–07

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