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on Corporate Finance |
| By: | Hau, Harald |
| Abstract: | We develop a framework to explore the asset pricing implications of simultaneous supply shocks in multiple assets in a setting with limits-to-arbitrage. The portfolio approach in Greenwood (2005) is generalized to allow for asymmetric information and therefore net positions of arbitrageurs against uninformed liquidity providers. We predict that announcement returns are not only positively proportional to the asset premium change of each stock (like in Greenwood), but also negatively proportional to the risk contribution of the arbitrage position captured by the product of the squared return covariance matrix and the vector of supply changes. The redefinition of the MSCI international equity index in 2001 and 2002 provides a powerful event study to test these predictions. We find strong evidence in favour of our generalized model of limited arbitrage. Moreover, asset pricing effects of weight changes across stocks are quantitatively similar for domestic and foreign stocks. MSCI stocks are therefore priced globally and not locally. |
| Keywords: | index revisions; international equity arbitrage; portfolio theory |
| JEL: | G11 G14 G15 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6094&r=cfn |
| By: | Carlos Martins (Universidade de Aveiro) |
| Abstract: | This paper analyses the relation between dividends and the mature level of a firm, by using market-to-book ratio as a proxy for Tobin’s Q, and Tobin’s Q as a indicator of either existence of new positive NPV projects or maturity level reached. The existent theory argues that the dividend payment decision either conveys information regarding future earnings (Signalling Theory) or is based on an Agency Theory Problem, concerning both Managers-Shareholders and Shareholders-Debtholders relationships. Here, another dividend signalling power is partially found, as dividend changes in period t seem to indicate a tendency in high Q firms to became more mature in t+1. This relation was not found for low Q firms, indicating that already mature firms do not change their status after a dividend change. |
| Keywords: | Dividend Signalling, Mature Firms; Signalling Theory; Payout Policy. |
| JEL: | G35 C63 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ave:wpaper:402007&r=cfn |
| By: | Macchiavello, Rocco |
| Abstract: | Does vertical integration reduce or increase transaction costs with external investors? This paper analyzes an incomplete contracts model of vertical integration in which a seller and a buyer with no cash need to finance investments for production. The firm is modeled as a "nexus of contracts" across the intermediate input supply and the financing transaction. The costs and benefits of vertical integration depend on the relative importance of a positive "contractual centralization" effect against a negative "de-monitoring" effect: the firm centrally organizes the nexus of contracts reducing the extent of contractual externalities while the market disciplines decisions driven by private benefits. Larger projects, more specific assets, and low investors protection are determinants of vertical integration. |
| Keywords: | contractual externalities; investors protection; limited liability; theory of the firm; vertical integration |
| JEL: | D23 G32 K12 L22 O10 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6104&r=cfn |
| By: | Axelson, Ulf; Strömberg, Per Johan; Weisbach, Michael |
| Abstract: | This paper presents a model of the financial structure of private equity firms. In the model, the general partner of the firm encounters a sequence of deals over time where the exact quality of each deal cannot be credibly communicated to investors. We show that the optimal financing arrangement is consistent with a number of characteristics of the private equity industry. First, the firm should be financed by a combination of fund capital raised before deals are encountered, and capital that is raised to finance a specific deal. Second, the fund investors' claim on fund cash flow is a combination of debt and levered equity, while the general partner receives a claim similar to the carry contracts received by real-world practitioners. Third, the fund will be set up in a manner similar to that observed in practice, with investments pooled within a fund, decision rights over investments held by the general partner, and limits set in partnership agreements on the size of particular investments. Fourth, the model suggests that incentives will lead to overinvestment in good states of the world and underinvestment in bad states, so that the natural industry cycles will be multiplied. Fifth, investments made in recessions will on average outperform investments made in booms. |
| Keywords: | capital structure; leveraged buyouts; private equity |
| JEL: | G24 G32 G34 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6133&r=cfn |
| By: | Frantzeskakis, Kyriakos; Ueda, Masako |
| Abstract: | Any factor that makes acquisition more appealing should increase the number of acquisition that occur. This idea has been captured in standard static models in the literature. However, an increase in the number of acquisitions today means fewer firms exist to perform acquisitions in the future. This dynamic, which we explore, is not well understood. We study a model of mergers motivated by efficient reallocation of projects. A firm may conceive a project that it may not be able to develop successfully. It can be acquired by an established firm that has already proved its ability to develop such projects successfully. We find that, when acquisition costs are low established firms acquire young firms (but not other established firms) in the steady state. More strikingly, if the likelihood of project success decreases for young firms, we find that a higher fraction of young firms attempt to develop their projects rather than to be acquired. This contrasts the previous literature's findings on acquisitions. The explanation for this result is that an increased likelihood of firms' failures causes a shortage of established firms that can then acquire new young firms. Finally, if acquisition costs are moderate we find that established firms acquire other established firms, but not young firms. |
| Keywords: | firm's life cycle; mergers as reallocation |
| JEL: | D83 D92 G34 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6079&r=cfn |
| By: | Perotti, Enrico C; Schwienbacher, Armin |
| Abstract: | This paper argues that historical political preferences on the role of capital markets shaped national choices on pension reliance on private funding. Under democratic voting, a majority will support investor protection and a privately funded pension system when the middle class has significant financial participation, while high wealth concentration favors a state-funded retirement system and weak investor rights. We present evidence that pension funding is well explained by wealth distribution shocks in the first half of the 20th Century. The effect is very significant: a large shock reduces the stock of private retirement assets by 58% of GDP. The results stand after controlling for complementary explanations, such as legal origin, past and current demographics, religion, electoral voting rules, national experiences with financial market performance, or other major financial shocks that were not specifically redistributive. |
| Keywords: | inflationary shocks; pension; political economy; redistribution; retirement finance |
| JEL: | G21 G28 G32 J26 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6100&r=cfn |
| By: | Christopher F. Baum (Boston College); Mustafa Caglayan (University of Sheffield); Dorothea Schaefer (DIW Berlin); Oleksandr Talavera (DIW Berlin) |
| Abstract: | This paper empirically investigates the link between political patronage and bank performance for Ukraine during 2003Q3-2005Q2. We find significant differences between politically affiliated and non-affiliated banks. We present evidence that affiliated banks have significantly lower interest margins. Politically affiliated banks also seem to increase their capital ratio. We conjecture that the reason behind these behavioral differences is to attract foreign investors; we report several mergers that recently took place between affiliated and foreign banks. |
| Keywords: | Political patronage, Ukraine, banking |
| JEL: | G32 G38 |
| Date: | 2007–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:657&r=cfn |
| By: | Mitchell, Mark; Pedersen, Lasse Heje; Pulvino, Todd |
| Abstract: | We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While multi-strategy hedge funds who were not capital constrained increased their positions, a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm (not just relative to outside investors) can lead to capital constraints for trading desks with mark-to-market losses. Our findings suggest that real world frictions impede arbitrage capital. |
| Keywords: | capital constraint; convertible bond; frictions; hedge funds; limits of arbitrage; liquidity; merger arbitrage; risk management; valuation |
| JEL: | G1 G12 G14 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6117&r=cfn |
| By: | Giannetti, Mariassunta; Yu, Xiaoyun |
| Abstract: | Casual observation suggests that capital allocation is often driven by favouritism and connections rather than by market mechanisms and information on future expected returns. We investigate when favouritism or markets emerge as an equilibrium outcome in the allocation of capital. We show that when information is unreliable and costly, financiers do not have incentives to investigate distant investment opportunities and allocate capital to entrepreneurs they are familiar with (favouritism). If the pool of saving is relatively small, favouritism can lead to an efficient allocation of investment. As the economy develops and its pool of saving increases, information production and the identification of distant investment opportunities (markets) become crucial for efficient investment decisions. Nevertheless, favouritism may emerge in equilibrium and investors may find it optimal to fund low quality entrepreneurs if they are familiar with them. Since competition for capital is low in an equilibrium with favouritism, entrepreneurs enjoy high rents. Thus, even high quality entrepreneurs may have no incentive to join markets with standards that foster information acquisition, but rather run inefficiently small firms. |
| Keywords: | competition for capital; exchange competition; finance and growth; information production |
| JEL: | G1 G3 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6124&r=cfn |
| By: | Dyck, Alexander; Morse, Adair; Zingales, Luigi |
| Abstract: | What external control mechanisms are most effective in detecting corporate fraud? To address this question we study in depth all reported cases of corporate fraud in companies with more than 750 million dollars in assets between 1996 and 2004. We find that fraud detection does not rely on one single mechanism, but on a wide range of, often improbable, actors. Only 6% of the frauds are revealed by the SEC and 14% by the auditors. More important monitors are media (14%), industry regulators (16%), and employees (19%). Before SOX, only 35% of the cases were discovered by actors with an explicit mandate. After SOX, the performance of mandated actors improved, but still account for only slightly more than 50% of the cases. We find that monetary incentives for detection in frauds against the government influence detection without increasing frivolous suits, suggesting gains from extending such incentives to corporate fraud more generally. |
| Keywords: | corporate finance; corporate governance |
| JEL: | G3 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6126&r=cfn |
| By: | T. Clifton Green; Narasimhan Jegadeesh; Yue Tang |
| Abstract: | We study the relation between gender and job performance among brokerage firm equity analysts. Women's representation in analyst positions drops from 16% in 1995 to 13% in 2005. We find women cover roughly 9 stocks on average compared to 10 for men. Women's earnings estimates tend to be less accurate. After controlling for forecast characteristics, the difference in accuracy is roughly equivalent to four years of experience. Despite reduced coverage and lower forecast accuracy, we find women are significantly more likely to be designated as All-Stars, which suggests they outperform at other aspects of the job such as client service. |
| JEL: | G14 G29 J44 J7 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12897&r=cfn |
| By: | Mariano M. Croce; Martin Lettau; Sydney C. Ludvigson |
| Abstract: | We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long-run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long- run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, so that high-return value stocks are short-duration assets while low-return growth stocks are long-duration assets, as in the data. We also show that, in order to explain empirical finding that long-horizon equity is less risky than short-horizon equity, the properties of the cash flow model and the values of primitive preference parameters must be quite different from those emphasized in the existing long-run risk literature. |
| JEL: | E44 G10 G12 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12912&r=cfn |
| By: | Govori, Fadil |
| Abstract: | Credit derivatives offer a flexible way to protect against credit risk and provide opportunities to enhance yield by purchasing credit synthetically. They are privately negotiated contracts with payoffs linked to a credit-related event, such as a default or credit rating downgrade. Credit risk is the possibility that a counterparty involved in debt contract will fail to service or repay a debt. Credit risk affects both debtors and creditors. The two most common aspects of credit risk are the market risk of the contracts and the default or downgrade risk. There are two steps in calculating credit risk: estimating the credit exposure and calculating the probability of default. Once we have calculated these two statistics, we can quantify the credit risk. Banks and dealers have worked with lawyers to develop techniques that help mitigate the credit exposure inherent in derivatives transactions. These techniques are: Netting, collateral, third-party guarantee, leverage. Based on the type of risk being transferred, credit derivatives may be broadly classified into the following: Credit default swaps; credit spread options; total return swaps; credit linked notes and equity default swaps A credit default swap is an agreement between two counterparties that allows one party to be long a third-party credit risk, and the other to be short the same credit risk. A credit default swap option represents the right but not the obligation to buy or sell protection on an underlying reference credit at a specified strike spread at a specified date in the future. A total return swap is a contract that allows an investor to receive the total economic return of an asset (security) without actually owning the asset. A credit-linked note is a security in which the coupon or the price of the note links to the performance of a reference asset (security). It offers borrowers a hedge against credit risk and investors a higher yield for buying a credit exposure. A credit derivative contract may be reference to a single reference entity, or a portfolio of reference entities - accordingly it is called single name credit derivative, or portfolio credit derivative. A special variant of a portfolio trade is a basket default swap. Trading of credit derivatives is not without its own special risks and costs. Although credit derivatives can be used to help manage risks of other instruments, they also have risks of their own. The risks associated with credit derivatives are neither new nor unique. They are the same kinds of risks associated with traditional debt, equity, or currency instruments. |
| Keywords: | Credit Derivative; Credit Swaps; Securitization; Asset-Backed Securities; Credit Risk |
| JEL: | G13 G21 G15 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1834&r=cfn |