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on Corporate Finance |
| By: | Min Hwang (National University of Singapore); John Quigley (University of California, Berkeley); Jae Son (Kok-Kuk University) |
| Abstract: | It is generally conceded that dividend pricing models are poor predictors of asset prices. This finding is sometimes attributed to excess volatility or to a dividend process manipulated by firm managers. In this paper, we present rather powerful panel tests of the dividend pricing relation using a unique data set in which dividends are set by market forces independent of managers' preferences. We rely on observations on the market for condominium dwellings in Korea - perhaps the only market in which information on dividends and prices is publicly and continuously available to consumers and investors. We extend the "dividend-price ratio model" to panels of housing returns and rents differentiated by type and location. We find broad support for the dividend pricing model during periods both before and after the Asian Financial Crisis of 1997-1998, suggesting that the market for housing assets in Korea has been remarkably efficient. |
| Keywords: | Housing prices, |
| Date: | 2006–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:bphupl:1067&r=cfn |
| By: | Marc-Andreas Muendler (University of California, San Diego and CESifo) |
| Abstract: | Add a stage of signal acquisition to a canonical model of portfolio choice.Under fully revealing asset price, investors' information demand reflects their choice of transparency. In reducing uncertainty, financial transparency raises expected asset price and thus benefits holders of the risky asset. At a natural transparency limit, however, investors pay to inhibit further disclosure in order to forestall the erosion of the asset's expected excess return. The natural transparency limit varies with the portfolio position. There is a dominant investor with a risky asset endowment modestly above market average who single-handedly determines transparency in equilibrium. The dominant investor strictly improves welfare for investors with similar endowments but strictly reduces welfare for others when acquiring signals beyond their natural transparency limits. The welfare consequences of financial transparency are thus intricately linked to the wealth distribution. |
| Keywords: | Information acquisition; rational expectations equilibrium; fully revealing asset price; ¯nancial transparency; disclosure; gamma distributed asset returns; Poisson distributed signals, |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:2005-04r&r=cfn |
| By: | Andrew Carverhill; Ron Anderson |
| Abstract: | This paper solves for a firm's optimal cash holding policy within a continuous time, contingent claims framework that has been extended to incorporate most of the significant contracting frictions that have been identified in the corporate finance literature. Under the optimal policy the firm targets a level of cash holding that is a non-monotonic function of business conditions and an increasing function of the amount of long-term debt outstanding. By allowing firms to either issue equity or to borrow short-term, we show how share issue and dividends on the one hand and cash accumulation and bank borrowing on the other are all mutually interlinked. We calibrate the model and show that it matches closely a wide range of empirical benchmarks including cash holdings, leverage, equity volatility, yield spreads, default probabilities and recovery rates. Furthermore, we show the predicted dynamics of cash and leverage are in line with the empirical literature. Despite the presence of significant contracting frictions we show that the model exhibits a near irrelevance of long-term capital structure property. Furthermore, the optimal policy exhibits a state-dependent hierarchy among financing alternatives that is consistent with recent explorations of pecking order theory. We calculate the agency costs generated by the confliict of interest between shareholders and creditors regarding the firm's liquidity policy and show that bond covenants that establish an earnings restriction on dividend payments may be value increasing. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp573&r=cfn |
| By: | Christian Laux (Frankfurt University and CFS); Alexander Muermann (University of Pennsylvania, The Wharton School) |
| Abstract: | Mutual insurance companies and stock insurance companies are different forms of organized risk sharing: policyholders and owners are two distinct groups in a stock insurer, while they are one and the same in a mutual. This distinction is relevant to raising capital, selling policies, and sharing risk in the presence of financial distress. Up-front capital is necessary for a stock insurer to offer insurance at a fair premium, but not for a mutual. In the presence of an ownermanager conflict, holding capital is costly. Free-rider and commitment problems limit the degree of capitalization that a stock insurer can obtain. The mutual form, by tying sales of policies to the provision of capital, can overcome these problems at the potential cost of less diversified owners. |
| Keywords: | Ownership Structure, Insurance, Qwner-Manager Conflict, Capital, Default |
| JEL: | G22 G32 |
| Date: | 2006–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp2000626&r=cfn |
| By: | Christian Gollier (University of Toulouse); Alexander Muermann (University of Pennsylvania, The Wharton School) |
| Abstract: | We propose a new decision criterion under risk in which people extract both utility from anticipatory feelings ex ante and disutility from disappointment ex post. The decision maker chooses his degree of optimism, given that more optimism raises both the utility of ex ante feelings and the risk of disappointment ex post. We characterize the optimal beliefs and the preferences under risk generated by this mental process and apply this criterion to a simple portfolio choice/insurance problem. We show that these preferences are consistent with the preference reversal in the Allais’ paradoxes and predict that the decision maker takes on less risk compared to an expected utility maximizer. This speaks to the equity premium puzzle and to the preference for low deductibles in insurance contracts. Keywords: endogenous beliefs, anticipatory feeling, disappointment, optimism, decision under risk, portfolio allocation. |
| Keywords: | Endogenous Beliefs, Anticipatory Feeling, Disappointment, Optimism, Decision Under Risk, Portfolio Allocation |
| JEL: | D81 G11 |
| Date: | 2006–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp2000628&r=cfn |
| By: | Christian Laux (Frankfurt University and CFS); Uwe Walz (Frankfurt University and CFS) |
| Abstract: | Informational economies of scope between lending and underwriting are a mixed blessing for universal banks. While they can reduce the cost of raising capital for a firm, they also reduce incentives in the underwriting business. We show that tying lending and underwriting helps to overcome this dilemma. First, risky debt in tied deals works as a bond to increase underwriting incentives. Second, with limitations on contracting, tying reduces the underwriting rents as the additional incentives from debt can substitute for monetary incentives. In addition, reducing the yield on the tied debt is a means to pay for the rent in the underwriting business and to transfer informational benefits to the client. Thus, tying is a double edged sword for universal banks. It helps to compete against specialized investment banks, but it can reduce the rent to be earned in investment banking when universal banks compete against each other. We derive several empirical predictions regarding the characteristics of tied deals. |
| Keywords: | Tying, Investment Banking, Universal Banking |
| JEL: | G21 G24 D49 |
| Date: | 2006–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp2000627&r=cfn |
| By: | Dennis Gale (Joseph C. Cornwall Center for Metropolitan Studies, Rutgers-Newark) |
| Date: | 2006–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:bphupl:1026&r=cfn |