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on Corporate Finance |
| By: | Guimarães, Bernardo |
| Abstract: | This paper analyses whether sovereign default episodes can be seen as contingencies of optimal international lending contracts. The model considers a small open economy with capital accumulation and without commitment to repay debt. Taking first order approximations of Bellman equations, I derive analytical expressions for the equilibrium level of debt and the optimal debt contract. In this environment, debt relief generated by reasonable fluctuations in productivity is an order of magnitude below that generated by shocks to world interest rates. Debt relief prescribed by the model following the interest rate hikes of 1980-81 accounts for a substantial part of the debt forgiveness obtained by the main Latin American countries through the Brady agreements. |
| Keywords: | default; optimal contract; sovereign debt; world interest rates |
| JEL: | F3 F4 G1 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6035&r=cfn |
| By: | Örs, Evren; Rice, Tara |
| Abstract: | We examine whether “imputed” interest rates obtained from bank financial statements are unbiased estimates of “offered” interest rates that the same banks report in surveys. We find evidence of a statistically significant amount of bias. However, the statistical bias that we document does not appear to be economically significant. When used as dependent variables in regression analysis, imputed rates and offered rates lead to the same policy conclusions. Our work has important methodological implications for empirical research that examines the product market competition among depository institutions. |
| Keywords: | deposit rates; imputed prices; product market; transaction prices |
| JEL: | G21 L11 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6036&r=cfn |
| By: | Anderson, Ronald W; Carverhill, Andrew |
| 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 conflict 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. |
| Keywords: | capital structure; dynamic corporate finance; liquidity |
| JEL: | G30 G32 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6044&r=cfn |
| By: | Ravina, Enrichetta; Sapienza, Paola |
| Abstract: | We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement. |
| Keywords: | Boards of directors; Corporate governance; Independent Directors |
| JEL: | G34 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6046&r=cfn |
| By: | Pástor, Lubos; Taylor, Lucian; Veronesi, Pietro |
| Abstract: | We develop a model in which an entrepreneur learns about the average profitability of a private firm before deciding whether to take the firm public. In this decision, the entrepreneur trades off diversification benefits of going public against benefits of private control. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7,183 IPOs in the U.S. between 1975 and 2004. |
| Keywords: | Diversification; IPO; Learning |
| JEL: | G1 G3 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6061&r=cfn |
| By: | Naohito Abe; Yessica C.Y. Chung |
| Abstract: | This study investigates the determinants of companies' voluntary information disclosure. Employing a large and unique dataset on the companies' own earnings forecasts and their frequencies, we conducted an empirical analysis of the effects of a firm's ownership, board, and capital structures on information disclosure. Our finding is consistent with the hypothesis that the custom of cross-holding among companies strengthens entrenchment by managers. We also find that bank directors force managers to disclose information more frequently. In addition, our results show the borrowing ratio is positively associated with information frequency, suggesting that the manager is likely to reveal more when his or her firm borrows money from financial institutions. However, additional borrowings beyond the minimum level of effective borrowings decrease the management's disclosing incentive. |
| Keywords: | Voluntary information Disclosure, Corporate Governance, management earnings forecast |
| JEL: | G10 G14 G18 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d06-203&r=cfn |
| By: | Michael Kuhn (University of Rostock, Department of Economics and Social Sciences, and MPIDR) |
| Abstract: | We consider resource allocation within an organisation and show how delegation bears on moral hazard and adverse selection when agents have a preference for autonomy. Agents may care about autonomy for reasons of job-satisfaction, status or greater reputation when performing well under autonomy. Separating allocations (overall budget and degree of delegation) are characterised depending on the preference for autonomy. As the latter increases, the degree of delegation assigned to productive and unproductive agents converges. If agents' preferences for monetary rewards are weak, the principal will not employ financial transfers. Pooling then arises under a strong preference for autonomy. |
| Keywords: | adverse selection, capital budgeting, delegation, intrinsic motivation, moral hazard |
| JEL: | D82 G31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ros:wpaper:69&r=cfn |
| By: | Antonio Nicolo’ (University of University of Padua, IFS and CEPR); Loriana Pelizzon (pelizzon@unive.it; Department of Economics, University Of Venice Ca’ Foscari) |
| Abstract: | How does bank capital regulation affect the design of credit derivative contracts? How does the opacity of the OTC credit derivative markets affect these contracts? In this paper we address these issues and characterize the optimal security design in several settings. We show that both the level of the banks' cost of capital and the opacity of the credit derivative markets do affect the form of the optimal separating contract and the level of the banks' profits. Moreover, our results suggest that the optimal contracts are largely dependent on bank regulation. More specifically, the introduction of Basel II may prevent the use of the equity tranche in CDO contracts as a signaling device. In addition, the presence of private credit derivative contracts would make the use of signaling contracts able to solve the adverse selection problem quite expensive. |
| Keywords: | Credit derivatives, Signalling contracts, Capital requirements |
| JEL: | G21 D82 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:58_06&r=cfn |