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on Corporate Finance |
| By: | Antonio Ciccone; Elias Papaioannou |
| Abstract: | Does financial development result in capital being reallocated more rapidly to industries where it is most productive? We argue that if this was the case, financially developed countries should see faster growth in industries with investment opportunities due to global demand and productivity shifts. Testing this cross-industry cross-country growth implication requires proxies for (latent) global industry investment opportunities. We show that tests relying only on data from specific (benchmark) countries may yield spurious evidence for or against the hypothesis. We therefore develop an alternative approach that combines benchmark-country proxies with a proxy that does not reflect opportunities specific to a country or level of financial development. Our empirical results yield clear support for the capital reallocation hypothesis. |
| Keywords: | Financial development, sector analysis, growth, measurement error, investment opportunities |
| JEL: | E23 E O40 F30 G10 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:982&r=cfn |
| By: | Schrimpf, Andreas; Schröder, Michael; Stehle, Richard |
| Abstract: | We study the performance of conditional asset pricing models in explaining the German cross-section of stock returns. Our test assets are portfolios sorted by size and book-to-market as in the paper by Fama and French (1993). Our results show that the empirical performance of the Capital Asset Pricing Model (CAPM) can be improved substantially when allowing for time-varying parameters of the stochastic discount factor. A conditional CAPM with the term spread as a conditioning variable is able to explain the cross-section of German stock returns about as well as the Fama-French model. Structural break tests do not indicate parameter instability of the model - whereas the reverse is found for the Fama-French model. Unconditional model specifications however do a better job than conditional ones at capturing time-series predictability of the test portfolio returns. |
| Keywords: | Asset Pricing, Conditioning Information, Hansen-Jagannathan Distance, Multifactor Models |
| JEL: | G12 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5433&r=cfn |
| By: | José Olmo (Department of Economics, City University, London) |
| Abstract: | We introduce a family of utility functions that describe the preferences of mean-variance-downside-risk (mvdr) averse investors. The risk premium on a risky asset in an economy with these individuals is given by a weighted sum of CAPM systematic risk and a systematic risk given by the level of comovements between the asset and the market in distress episodes. Hence investors require a higher reward than predicted by CAPM for holding assets correlated with the market in distress episodes, and a lower reward for holding assets with negative correlation in market downturns. The application of this pricing theory to financial sectors in FTSE-100 is illuminating. The empirical failure of standard CAPM is explained by the extra reward required by investors from market downturns. While Chemicals and Mining sectors exhibit positive comovements with FTSE downturns; Banking and Oil and Gas sectors are robust to them and Telecommunications Services exhibit negative comovements serving as refugee of investors fleeing from domestic market distress episodes. |
| Keywords: | Asset Pricing, CAPM, Downside-risk, Mean-variance |
| JEL: | G11 G12 G13 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:07/01&r=cfn |
| By: | Marcel Boyer; Donatella Porrini |
| Abstract: | We characterize the distortions in environmental liability sharing between firms and banks that the imperfect implementation of government policies implies. These distortions stem from three factors: the presence of moral hazard, the use of objective functions by firms and banks that differs from the social welfare function, and the difficulty for the court to assess the safety care level exerted by the firms. We characterize cases where the liability sharing factor is above or below its full information perfect implementation level. We derive comparative statics results indicating the sensitivity of the liability sharing factor to changes in some parameters relevant for characterizing the optimal policy toward environmental protection or the prevention of industrial accidents. <P>Nous caractérisons les distortions dans le partage de responsabilités entre banques et firmes qu'implique l'implémentation imparfaite des politiques gouvernementales. Ces distortions découlent de la présence de risque moral et de sélection adverse, de l'utilisation de fonctions-objectifs par les firmes et les banques diffèrentes de la fonction de bien-être social, et de la difficulté des cours de justice d'évaluer le niveau de précaution exercé par les firmes. Nous montrons l'existence de divers cas où le partage de responsabilités est supérieur ou inférieur au partage optimal en information et implémentation parfaites. Nous obtenons des résultats de statique comparée illustrant la sensibilité du partage des responsabilités aux paramètres pertinents à la détermination d'une politique optimale de protection environnementale ou de prévention d'accidents industriels. |
| Keywords: | liability sharing, industrial/environmental liability, safety care, moral hazard, principal-agent, partage de responsabilités, environnement, prévention, risque moral, sélection adverse, principal-agent |
| JEL: | D82 G32 K13 K32 Q28 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2007s-04&r=cfn |
| By: | Agustinus Prasetyantoko (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines]) |
| Abstract: | This paper deals with the sensitivity relation between firm-level investment and its internal liquidity by splitting samples into two different groups of firms, which are tradable (T) and non-tradable (N) sector. The study includes 226 listed companies in Jakarta Stock Exchange (JSX) by at least five consecutive years in the period of 1994 – 2004. This paper finds that during boom period, N-sector is less financially constrained, but in burst period, N-sector has greater financial constraints. It leads us to the explanation that during boom period N-sector grows faster than T-sector, but when crisis hits T-sector recovers more easily. By employing panel data analysis, our findings support an argument that asymmetric financing opportunities among N and T-sector are common in developing countries. Accordingly, this paper provides important explanations on firm-level investment behavior around financial crisis, which could be pivotal considerations in monetary and other relevant policies |
| Keywords: | asymmetric financing opportunities ; financing constraint ; firm investment ; financial crisis |
| Date: | 2007–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00133964_v1&r=cfn |
| By: | Mark V. Pauly (The Wharton School, University of Pennsylvania) |
| Abstract: | This brief is actually going to have two levels. One level will go with the advertised title, and I’ll tell you my current views on the truth about moral hazard and adverse selection. Adverse selection will serve as somewhat of a handmaid of moral hazard, as you will see. That’s one level. The other level, though, which continues to surprise me, is that these two topics—they’re two buzzwords from insurance theory—have generated an enormous amount of policy interest and, yes, passion. Some people passionately believe some things about moral hazard that others passionately disbelieve. And so as part of this second level I will draw back a bit from the actual subject matter to ask a kind of positive public policy question: Why is it that some people can get so passionate about a subject that seems fairly esoteric? |
| Keywords: | health insurance, adverse selection, moral hazard |
| JEL: | D80 G18 G22 I10 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:max:cprpbr:36&r=cfn |
| By: | Giles ATKINSON; Susana MOURATO |
| Abstract: | This paper provides a brief overview of the options available for environmental valuation and is organised as follows. After an introduction, section 2 discusses the concept of total economic value that provides a framework for describing, in economic terms, the ways in which environmental changes might affect peoples’ well-being. Sections 3 and 4 then review the main techniques that have been used to estimate total economic value (or its components). Some of these techniques estimate original values while others make use of (or ‘transfer’ to use the jargon) the findings of existing studies and apply to a new policy or project context. Finally, some concluding comments are offered. |
| Keywords: | Environmental valuation, Cost-benefits analysis, Benefit transfers |
| JEL: | H43 G23 D61 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:mil:wpdepa:2007-07&r=cfn |
| By: | Ullrich, Katrin |
| Abstract: | The confidence that financial markets are able to discipline the debt behaviour of governments is not very high. Therefore, the Stability and Growth Pact has been implemented as an institutional constraint to substitute for the market mechanism. With the weakening of the Pact, market discipline could gain importance again. To strengthen market discipline, reasons for its failure in the euro area have to be analysed. One possible reason could be that the European Central Bank accepts all European government bonds without distinction in its monetary policy auctions as collateral. This could provide the financial market with a signal that these government securities are equally (non-)risky and that a differentiation with respect to risk premia is not needed. |
| Keywords: | Stability and Growth Pact, Market Discipline, Collateral, Repo |
| JEL: | E51 E52 G12 H63 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5436&r=cfn |
| By: | Vulpes, Giuseppe; Brasili, Andrea |
| Abstract: | The aim of this paper is to verify whether and to which extent co-movements in EU banks’ risk, i.e. their degree of exposures of European banks to common shocks, have increased in time, following the completion of Monetary Union, the introduction of the euro and the process of European banking integration. To this end, we provide a measure of co-movements in bank risk by means of a dynamic factor model, which allows to decompose an indicator of bank fragility, the Distance-to-Default, into three main components: an EU-wide, a country-specific and a bank-level idiosyncratic component. Our results show the commonality in bank risk appears to have significantly increased since 1999, in particular if one concentrates on large banks. We also show that co-movements in EU banks’ fragility are only in part related to common macro shocks and that a banking system specific component at the EU-wide level appears relevant. This has obvious consequences in terms of systemic stability, but may also have far reaching policy implications with regards to the structuring of banking supervision in Europe |
| Keywords: | Co-movements; dynamic factor models; distance-to-default; Systemic risk |
| JEL: | C51 G21 G15 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1964&r=cfn |
| By: | Roberto Blanco (Banco de España); Fernando Restoy (Banco de España) |
| Abstract: | This paper analyses the behaviour of real interest rates in the Spanish economy over the last 15 years. Since inflation-indexed-bonds are not available, changes in implicit real interest rates are estimated using several approaches suggested by macroeconomic and financial theory. In particular, we employ equilibrium conditions of a representative agent under several specifications of preferences. Moreover, we exploit no-arbitrage conditions in securities markets. The evidence we report indicates that inflation uncertainty could account for a notable part of the observed decrease in nominal rates. Consequently, the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest. |
| Keywords: | real interest rates, intertemporal marginal rate of substitution |
| JEL: | E43 G12 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0704&r=cfn |