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on Corporate Finance |
| By: | Frank Milne (Queen's University); Xing Jin (University of Warwick) |
| Abstract: | Most financial asset pricing models assume frictionless, competitive markets that imply the absence of arbitrage opportunities. Given the absence of arbitrage opportunities and complete asset markets, there exists a unique martingale measure that implies martingale pricing formulae and replicating asset portfolios. In incomplete markets, or markets with transaction costs, these results must be modified to admit non-unique measures and the possibility of imperfectly replicating portfolios. Similar difficulties arise in markets with taxation. Some theoretical research has argued that some taxation functions will imply arbitrage opportunities and the non-existence of a competitive asset economy. In this paper we construct a multi-period, discrete time/state general equilibrium model of asset markets with transaction costs and taxes. The transaction cost technology and the tax system are quite general, so that we can include most discrete time/state models with transaction costs and taxation. We show that a competitive equilibrium exists. Our results require careful modeling of the government budget constraints to rule out tax arbitrage possibilities. |
| Keywords: | Taxation, Transaction Costs, General Equilibrium, Asset Economy |
| JEL: | D52 G38 G12 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1111&r=cfn |
| By: | Anita Anand (University of Toronto); Frank Milne (Queen's University); Lynnette Purda (Queen's University) |
| Abstract: | We model firms’ incentives to voluntarily adopt corporate governance mechanisms and hypothesize that management’s ability to extract private benefits, the need for external funds, and the ease with which a firm’s assets may be monitored are important determinants of the level of governance. Using hand-collected data, we test these hypotheses and examine firms’ propensity to adopt recommended but not required governance standards from their home and neighboring country’s jurisdictions. We document that a significant level of voluntary adoption occurs and that this level has been both increasing over time and declining in variability across firms. Governance mechanisms are least likely to be voluntarily implemented when management controls a significant portion of common stock votes or a majority owner exists. In contrast, voluntary adoption increases when the firm faces significant investment opportunities and employs large levels of expenditures which are difficult to monitor such as research and development expenses. |
| Keywords: | Corporate Governance, Empirial Finance |
| JEL: | G34 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1112&r=cfn |
| By: | Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Chiara Osbat (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthias Sydow (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We apply the Campbell-Shiller return decomposition to exchange rate returns and fundamentals in a stationary panel vector autoregression framework. The return decomposition is then used to analyse how different investor segments react to news as captured by the different return components. The results suggest that intrinsic value news are dominating for equity investors and speculative money market investors while investors in currency option markets react strongly to expected return news. The equity and speculative money market investors seem able to distinguish between transitory and permanent FX movements while options investors mainly focus on transitory movements. We also find evidence that offsetting impact on the various return components can blur the effect of macroeconomic data releases on aggregate FX excess returns. JEL Classification: C23, F31, F32, G15. |
| Keywords: | FX return prediction, investor flows, news surprises, panel estimation, stationary VAR. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060706&r=cfn |
| By: | Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussel and Credit Agricole Asset Management SGR, Paris.); Ombretta Signori (Credit Agricole Asset Management SGR, Paris.); Kokou Topeglo (Credit Agricole Asset Management SGR, Paris.) |
| Abstract: | Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that Fed Chairman A. Greenspan described their behaviour as a “conundrum.” Comparing long term rates to their theoretical level based on fundamental valuation model, we show that the anomaly was in average 40 bp. Various explanations have been put forward: investors’ changed attitude toward risk, and the rise in US Treasury purchases by different categories of buyers. We show that, if these variables could theoretically be responsible for bond risk premium decline, by incorporating them in a fundamental model of bond rates, they can explain less than half of the anomaly. Their recent changing influence could nevertheless justify their use for prospective analysis of bond rates. |
| Keywords: | interest rates, central banks, flows of funds, financial markets. |
| JEL: | E37 E43 E58 G23 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:06-024&r=cfn |
| By: | Luca Barzanti (University of Bologna); Corrado Corradi (University of Bologna); Martina Nardon (Department of Applied Mathematics, University of Venice) |
| Abstract: | Richardson extrapolation (RE) is a commonly used technique in financial applications for accelerating the convergence of numerical methods. Particularly in option pricing, it is possible to refine the results of several approaches by applying RE, in order to avoid the difficulties of employing slowly converging schemes. But the effectiveness of such a technique is fully achieved when its repeated version (RRE) is applied. Nevertheless, its application in financial literature is pretty rare. This is probably due to the necessity to pay special attention to the numerical aspects of its implementation, such as the choice of both the sequence of the stepsizes and the order of the method. In this contribution, we consider several numerical schemes for the valuation of American options and investigate the possibility of an appropriate application of RRE. As a result, we find that, in the analyzed approaches in which the convergence is monotonic, RRE can be used as an effective tool for improving significantly the accuracy. |
| Keywords: | Richardson extrapolation, repeated Richardson extrapolation, American options, randomization technique, flexible binomial method |
| JEL: | C15 C63 G13 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpaper:147&r=cfn |
| By: | Vittoria Cerasi; Sonja Daltung |
| Abstract: | When a firm has external debt and monitoring by shareholders is essential, managerial bonuses are shown to be an optimal solution. A small managerial bonus linked to firm's performance not only reduces moral hazard between managers and shareholders, but also between creditors and monitoring shareholders. A negative relation between corporate bond yields and managerial bonuses can be predicted. Furthermore, the model shows how higher managerial pay-performance sensitivity goes hand in hand with greater company leverage and lower company diversification. These predictions find some support in the empirical literature. |
| Keywords: | managerial compensation; financial structure; monitoring; diversification. |
| JEL: | G32 M12 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:mis:wpaper:20061102&r=cfn |
| By: | Elena Carletti; Vittoria Cerasi; Sonja Daltung |
| Abstract: | This paper analyzes the optimality of multiple-bank lending, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending leads to higher per-project monitoring whenever the benefit of greater diversification dominates the costs of free-riding and duplication of effort. The model predicts a greater use of multiple-bank lending when banks are highly leveraged, firms are less profitable and monitoring costs are high. These results are consistent with some empirical observations concerning the use of multiple-bank lending in small and medium business lending. |
| Keywords: | multiple monitors, diversification, free-riding problem, multiple-bank lending. |
| JEL: | D82 G21 G32 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:mis:wpaper:20061103&r=cfn |
| By: | Fiorentino, Elisabetta; Karmann, Alexander; Koetter, Michael |
| Abstract: | We investigate the consistency of efficiency scores derived with two competing frontier methods in the financial economics literature: Stochastic Frontier and Data Envelopment Analysis. We sample 34,192 observations for all German universal banks and analyze whether efficiency measures yield consistent results according to five criteria between 1993 and 2004: levels, rankings, identification of extreme performers, stability over time and correlation to standard accounting-based measures of performance. We find that non-parametric methods are particularly sensitive to measurement error and outliers. Furthermore, our results show that accounting for systematic differences among commercial, cooperative and savings banks is important to avoid misinterpretation about the status of efficiency of the total banking sector. Finally, despite ongoing fundamental changes in Europe’s largest banking system, efficiency rank stability is very high in the short run. However, we also find that annually estimated efficiency scores are markedly less stable over a period of twelve years, in particular for parametric methods. Thus, the implicit assumption of serial independence of bank production in most methods has an important influence on obtained efficiency rankings. |
| Keywords: | Cost Efficiency, Banks, Stochastic Frontier Approach, Data Envelopment Analysis |
| JEL: | D24 G21 L25 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:5157&r=cfn |