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on Corporate Finance |
| By: | Kwang-Won Lee; Ian Sharpe (Australian Prudential Regulation Authority) |
| Abstract: | We investigate the relationship between the borrowing firm’s abnormal loan announcement return and the lending bank’s monitoring ability using a new, well-specified, ex-ante proxy for the bank’s monitoring ability. While recent studies have suggested that bank loan relationships and the related monitoring services may no longer matter, we find significant loan announcement returns over the 1995-1999 period and, controlling for borrower and loan characteristics, a strong positive relationship between a labour input based proxy for monitoring ability and the borrowing firm’s abnormal return. Our results are consistent with banks with superior monitoring ability adding more value to the borrower than less capable banks.<p> |
| Date: | 2006–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:apr:aprewp:wp2006-04&r=cfn |
| By: | Greg Caldwell |
| Abstract: | The author develops a dynamic model of banking competition to determine which capital instrument is most effective in disciplining banks' risk choice. Comparisons are conducted between equity, subordinated debentures (SD), and uninsured deposits (UD) as funding sources. The model, adapted from Repullo (2004), analyzes the effectiveness of regulatory capital when banks incorporate charter value and competition for depositors into their risk-taking decision. The paper's main finding is that although all three instruments can induce market discipline on banks, equity weakly dominates SD and UD (with SD weakly dominating UD). |
| Keywords: | Financial institutions |
| JEL: | G21 G28 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-9&r=cfn |
| By: | Claessens, Stijn; Schmukler, Sergio |
| Abstract: | This paper studies international financial integration analyzing firms from various countries raising capital, trading equity, and/or cross-listing in major world stock markets. Using a large sample of 39,517 firms from 111 countries covering the period 1989-2000, we find that, although international financial integration increases substantially over this period, only relatively few countries and firms actively participate in international markets. Firms more likely to internationalize are from larger and more open economies, with higher income, better macroeconomic policies, and worse institutional environments. These firms tend to be larger, grow faster, and have higher returns and more foreign sales. While changes occur with internationalization, these firm attributes are present before internationalization takes place. The results suggest that international financial integration will likely remain constrained by country and firm characteristics. |
| Keywords: | access to capital markets; globalization of financial markets; international financial integration; internationalization |
| JEL: | G15 G18 G20 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6137&r=cfn |
| By: | Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)) |
| Abstract: | Changes in the Swedish tax code during the 1990s were structured in a way that offers an opportunity to test whether ex-dividend prices were determined by the taxation of domestic individual investors. The results presented in this paper indicate that ex-dividend prices were not influenced by the relatively large tax changes for domestic individual investors. In addition, there was no evidence that the taxation of domestic individual investors influenced ex-dividend prices for any specific dividend yield group. |
| Keywords: | Taxation; trading; ex-dividend prices |
| JEL: | G11 G18 |
| Date: | 2005–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:huiwps:0003&r=cfn |
| By: | Alex Coad (Centre d'Economie de la Sorbonne) |
| Abstract: | Complicated neoclassical models predict that if investment is sensitive to current financial performance, this is a sign that something is "wrong" and is to be regarded as a problem for policy. Evolutionary theory, on the other hand, refers to the principle of "growth of the fitter" to explain investment-cash flow sensitives as the workings of a healthy economy. In particular, I attack the neoclassical assumption of managers maximizing shareholder-value. Such an assumption is not a helpful starting point for empirical studies into firm growth. One caricature of neoclassical theory could be "Assume firms are perfectly efficient. Why aren't they getting enough funding ?", whereas evolutionary theory considers that firms are forever struggling to grow. This essay highlights how policy guidelines can be framed by the initial modelling assumptions, even though these latter are often chosen with analytical tractability in mind rather than realism. |
| Keywords: | Financial constraints, firm growth, evolutionary theory, neoclassical theory, investment. |
| JEL: | L21 G30 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:r07008&r=cfn |
| By: | Markus K. Brunnermeier; Christian Gollier; Jonathan A. Parker |
| Abstract: | Human beings want to believe that good outcomes in the future are more likely, but also want to make good decisions that increase average outcomes in the future. We consider a general equilibrium model with complete markets and show that when investors hold beliefs that optimally balance these two incentives, portfolio holdings and asset prices match six observed patterns: (i) because the cost of biased beliefs are typically second-order, investors typically hold biased assessments of probabilities and so are not perfectly diversified according to objective metrics; (ii) because the costs of biased beliefs temper these biases, the utility costs of the lack of diversification are limited; (iii) because there is a complementarity between believing a state more likely and purchasing more of the asset that pays off in that state, investors over-invest in only one Arrow-Debreu security and smooth their consumption well across the remaining states; (iv) because different households can settle on different states to be optimistic about, optimal portfolios of ex ante identical investors can be heterogeneous; (v) because low-price and low-probability states are the cheapest states to buy consumption in, overoptimism about these states distorts consumption the least in the rest of the states, so that investors tend to overinvest in the most skewed securities; (vi) finally, because investors with optimal expectations have higher demand for more skewed assets, ceteris paribus, more skewed asset can have lower average returns. |
| JEL: | D1 D8 G11 G12 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12940&r=cfn |
| By: | Wolfram J. Horneff; Raimond H. Maurer; Olivia S. Mitchell; Michael Z. Stamos |
| Abstract: | Retirees confront the difficult problem of how to manage their money in retirement so as to not outlive their funds while continuing to invest in capital markets. We posit a dynamic utility maximizer who makes both asset location and allocation decisions when managing her retirement financial wealth and annuities, and we prove that she can benefit from both the equity premium and longevity insurance in her retirement portfolio. Even without bequests, she will not fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her financial wealth and declines with age. Welfare gains from this strategy can amount to 40 percent of financial wealth (depending on risk parameters and other resources). In practice, it turns out that many retirees will do almost as well by purchasing a variable annuity invested 60/40 in stocks/bonds. |
| JEL: | D14 G11 G22 G23 H55 J26 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12942&r=cfn |
| By: | Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos |
| Abstract: | We show, in an exchange economy with default, liquidity constraints and no aggregate uncertainty, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of Dubey and Geanakoplos (1992). Two agents trade goods and nominal assets (Arrow-Debreu (AD) securities) to smooth consumption across periods and future states, in the presence of cashin-advance financing costs. We show that, with Von Neumann-Morgenstern logarithmic utility functions, the price of AD securities, are inversely related to liquidity. The upshot of our argument is that agents’ expectations computed using risk-neutral probabilities give more weight in the states with higher interest rates. This result cannot be found in a Lucas-type representative agent general equilibrium model where there is neither trade or money nor default. Hence, an upward yield curve can be supported in equilibrium, even though short-term interest rates are fairly stable. The risk-premium in the term structure is therefore a pure default risk premium. |
| Keywords: | cash-in-advance constraints; risk-neutral probabilities; state prices; term structure of interest rate |
| JEL: | E43 G12 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2007fe01&r=cfn |