nep-cfn New Economics Papers
on Corporate Finance
Issue of 2007‒03‒17
thirteen papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Firms Dynamics, Bankruptcy Laws and Total Factor Productivity By Hajime Tomura
  2. Stock Market Interactions and the Impact of Macroeconomic News – Evidence from High Frequency Data of European Futures Markets By Bea Canto; Roman Kräussl
  3. Mutual versus Stock Insurers: Fair Premium, Capital, and Solvency By Christian Laux; Alexander Muermann
  4. Public Policy and Venture Capital Financed Innovation: A Contract Design Approach By Julia Hirsch
  5. Revisiting the Home Bias Puzzle. Downside Equity Risk By Rachel A. Campbell; Roman Kräussl
  6. Does Patience Pay? Empirical Testing of the Option to Delay Accepting a Tender Offer in the U.S. Banking Sector By Rachel A. Campbell; Roman Kräussl
  7. Finance comportementale et fonds de pension By Anne Lavigne; Florence Legros
  8. The Seismography of Crashes in Financial Markets By Tanya Araujo; Francisco Louçã
  9. Le capital-risque aux Etats-Unis By Bernard Paulré
  10. Inflation Illusion, Credit, and Asset Pricing By Monika Piazzesi; Martin Schneider
  11. Optimal Asset Allocation in Asset Liability Management By Jules H. van Binsbergen; Michael W. Brandt
  12. Relationship between Corporate Governance Indicators and Firm Value: A Case Study of Karachi Stock Exchange By Javed, Attiya Y.; Iqbal, Robina
  13. Who cares about Director Independence? By Paolo, Santella; Carlo, Drago; Giulia, Paone

  1. By: Hajime Tomura
    Abstract: This paper analyzes endogenous fluctuations in total factor productivity (TFP) in a dynamic general equilibrium model with heterogeneous agents, and illustrates the interaction of credit market frictions, asset prices, the entry and exit of firms, and fluctuations in TFP in response to firm-level productivity and aggregate credit-market shocks. I also analyze the effect of bankruptcy and foreclosure laws on fluctuations in TFP through their effect on credit market frictions. Implications of the model are consistent with the features of the stagnation in Japan in the 1990s.
    Keywords: Financial stability; Productivity
    JEL: D24 E44 G33
    Date: 2007
  2. By: Bea Canto (Watson Wyatt Brans & Co.); Roman Kräussl (Vrije Universiteit Amsterdam and CFS)
    Abstract: This study analyzes the short-term dynamic spillovers between the futures returns on the DAX, the DJ Eurostoxx 50 and the FTSE 100. It also examines whether economic news is one source of international stock return co-movements. In particular, we test whether stock market interdependencies are attributable to reactions of foreign traders to public economic information. Moreover, we analyze whether cross-market linkages remain the same or whether they do increase during periods in which economic news is released in one of the countries. Our main results can be summarized as follows: (i) there are clear short term international dynamic interactions among the European stock futures markets; (ii) foreign economic news affects domestic returns; (iii) futures returns adjust to news immediately; (iv) announcement timing of macroeconomic news matters; (v) stock market dynamic interactions do not increase at the time of the release of economic news; (vi) foreign investors react to the content of the news itself more than to the response of the domestic market to the national news; and (vii) contemporaneous correlation between futures returns changes at the time of macroeconomic releases.
    Keywords: Market Microstructure,Stock Market Dynamic Interactions, Macroeconomic News, High Frequency Data, VAR Modeling, Variance Decomposition
    JEL: G14 G15
    Date: 2006–12–06
  3. By: Christian Laux (Frankfurt University and CFS); Alexander Muermann (University of Pennsylvania, The Wharton School)
    Abstract: Mutual insurance companies and stock insurance companies are different forms of organized risk sharing: policyholders and owners are two distinct groups in a stock insurer, while they are one and the same in a mutual. This distinction is relevant to raising capital, selling policies, and sharing risk in the presence of financial distress. Up-front capital is necessary for a stock insurer to offer insurance at a fair premium, but not for a mutual. In the presence of an ownermanager conflict, holding capital is costly. Free-rider and commitment problems limit the degree of capitalization that a stock insurer can obtain. The mutual form, by tying sales of policies to the provision of capital, can overcome these problems at the potential cost of less diversified owners.
    Keywords: Ownership Structure, Insurance, Qwner-Manager Conflict, Capital, Default
    JEL: G22 G32
    Date: 2006–12–07
  4. By: Julia Hirsch (Universidad Iberoamerica and CFS)
    Abstract: The effects of public policy programs which aim at internalizing spill-overs due to successful innovation are analyzed in a sequential double-sided moral hazard doublesided adverse selection framework. The central focus lies in analyzing their impact on contract design. We show that in our framework only ex post grants are a robust instrument for implementing the first-best situation, whereas the success of guarantee programs, ex ante grants and some types of investment grants depends strongly on the characteristics of the project: in certain cases they not only give no further incentives but even destroy contract mechanisms and so worsen the outcome.
    Keywords: Public Policy, Contract Design, Venture Capital, Moral Hazard, Asymmetric Information
    JEL: D82 G24 G32 H25 H81
    Date: 2006–12–08
  5. By: Rachel A. Campbell (Maastricht University); Roman Kräussl (Free University of Amsterdam and CFS)
    Abstract: Deviations from normality in financial return series have led to the development of alternative portfolio selection models. One such model is the downside risk model, whereby the investor maximizes his return given a downside risk constraint. In this paper we empirically observe the international equity allocation for the downside risk investor using 9 international markets’ returns over the last 34 years. The results are stable for various robustness checks. Investors may think globally, but instead act locally, due to greater downside risk. The results provide an alternative view of the home bias phenomenon, documented in international financial markets.
    Keywords: Asset Pricing, Home Bias, Downside Risk, Prospect Theory
    JEL: G11 G12 G15
    Date: 2006–12–20
  6. By: Rachel A. Campbell (Maastricht University); Roman Kräussl (Free University of Amsterdam and CFS)
    Abstract: We examine the empirical predictions of a real option-pricing model using a large sample of data on mergers and acquisitions in the U.S. banking sector. We provide estimates for the option value that the target bank has in waiting for a higher bid instead of accepting an initial tender offer. We find empirical support for a model that estimates the value of an option to wait in accepting an initial tender offer. Market prices reflect a premium for the option to wait to accept an offer that has a mean value of almost 12.5% for a sample of 424 mergers and acquisitions between 1997 and 2005 in the U.S. banking industry. Regression analysis reveals that the option price is related to both the price to book market and the free cash flow of target banks. We conclude that it is certainly in the shareholders best interest if subsequent offers are awaited.
    Keywords: Option-pricing Model, Mergers and Acquisitions, U.S. Banking Industry
    JEL: G34 C10
    Date: 2006–12–21
  7. By: Anne Lavigne (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Florence Legros
    Abstract: La finance comportementale remet en question deux hypothèses fondamentales de la théorie des marchés efficients, d'une part la rationalité des investisseurs, d'autre part l'absence d'opportunité d'arbitrage. S'agissant de la rationalité, les investisseurs individuels sont sujets à des biais cognitifs, qui modifient et leurs croyances (anticipations) et leurs préférences (attitude vis-à-vis du risque). Quant à l'absence d'opportunité d'arbitrage, elle se heurte à des contraintes structurelles et institutionnelles. On peut alors conjecturer que les investisseurs collectifs que sont les fonds de pension puissent être soumis à des biais cognitifs différents des investisseurs individuels. Ils n'acquièrent pas l'information au même coût, ils disposent d'une capacité supérieure de traitement de cette information, ils n'ont pas les mêmes préférences que leurs mandants, ni les mêmes contraintes de gestion. Dans la plupart des travaux existants, la finance comportementale s'intéresse au comportement individuel. L'accent est mis sur les actions des agents sur les marchés financiers et peu sur les équilibres, même si ces équilibres sont la conséquence d'actions. La finance comportementale considère des investisseurs isolés (et les expériences qu'elle mène portent sur des individus). Or les fonds de pension sont des organismes, composés d'individus aux intérêts divergents (sponsor, manager, société de gestion déléguée, salariés, retraités) et donc soumis à des relations d'agence. Ces relations d'agence sont susceptibles d'infléchir leur comportement, dans le sens d'un amoindrissement ou d'un renforcement des phénomènes mis en évidence par la finance comportementale pour des investisseurs individuels. En tant qu'investisseurs institutionnels, ils peuvent avoir accès à des informations privées. Ils peuvent également exercer un activisme (i.e. influencer les performances des titres des sociétés dans lesquelles ils investissent). Dans cette contribution qui présente une revue de littérature, nous défendons la thèse selon laquelle, dans leur allocation stratégique, les fonds de pension ont des comportements "anormaux" qui sont le reflet des individus dont ils sont les mandataires. En revanche, dans l'allocation tactique, les fonds de pension ont des biais comportementaux qui sont le reflet des relations d'agence auxquelles ils sont soumis.
    Keywords: Finance comportementale ; fonds de pension
    Date: 2007–03–07
  8. By: Tanya Araujo; Francisco Louçã
    Abstract: This paper investigates the dynamics of stocks in the S&P500 for the last 33 years, considering the population of all companies present in the index for the whole period. Using a stochastic geometry tech- nique and defining a robust index of the dynamics of the market struc- ture, which is able to provide information about the intensity of the crises, the paper proposes a seismographic classification of the crashes that occurred during the period. The index is used in order to inves- tigate and to classify the impact of the twelve crashes between July 1973 and March 2006 and to discuss the available evidence of change of structure after the fin de sicle.
    Keywords: Keywords: financial markets; stochastic geometry; complexity; market spaces; market structures.
    JEL: C0 G1
  9. By: Bernard Paulré (MATISSE - Modélisation Appliquée, Trajectoires Institutionnelles et Stratégies Socio-Économiques - [CNRS : UMR8595] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Sur une période longue de trente années, l'évolution du capital-risque aux Etats-Unis est caractérisée par une montée en puissance progressive marquée par quelques cycles mineurs et débouchant sur un cycle d'une amplitude relative considérable entre 1995 et 2001. A partir des données primaires tirées de la base de données Venture Expert et de traitements originaux, nous apportons des éléments d'information quantifiés sur l'évolution du système de capital-risque aux Etats-Unis et, notamment, sur certains aspects de sa structure : place de l'intervention des groupes, types de fonds, places relatives du capital-risque et du capital-transmission, structure sectorielle des investissements, délais séparant les différents tours de table, nature et caractéristiques des sorties etc.<br /><br />Un certain nombre de règles et de normes ont joué un rôle important dans le franchissement d'étapes significatives du développement du système de capital-risque. Des événements exogènes également (taxation des gains en capitaux, règles prudentielles des Fonds de pension notamment). Ces éléments ont eu vraisemblablement un rôle plus important que l'évolution conjoncturelle. C'est parce que le système était en place et “ bien structuré ” dès le début des années quatre-vingt qu'il a pu occuper la place qui a été la sienne durant les années quatre-vingt dix. Dans une perspective dynamique et historique nous fournissons les éléments permettant de justifier la thèse selon laquelle le système capital-risque est un système dont l'émergence traduit un phénomène d'auto-organisation.<br /><br />Dans cette étude nous mettons à mal l'image banale du capital-risque présenté comme réservé au financement de sociétés très jeunes ou en cours de création dans des secteurs de pointe. Nous approfondissons également sa dimension industrielle. Nous mettons en évidence les trajectoires de certains secteurs et soulignons les enchaînements de cycles technologiques qui caractérisent la dynamique de longue période du système. La répartition des investissements en capital-risque entre secteurs de haute technologie les autres secteurs est également approfondie.<br /><br />L'étude comprend trois chapitres. Dans le premier nous rendons compte de la structure du système à partir de certains ratios et de l'évolution de quelques grandeurs agrégées. Nous analysons plus particulièrement les caractéristiques de l'activité des acteurs du système : les investisseurs, les Fonds, les sociétés de capital-risque et les compagnies bénéficiaires. Nous insistons sur les difficultés méthodologiques d'appréciation de ces caractéristiques. Dans le second chapitre nous mettons en perspective le fonctionnement du système de capital-risque en soulignant son rôle comme système de gestion de l'incertitude. Nous approfondissons certains aspects de son fonctionnement qui illustrent cette dimension ainsi que les interfaces entre ce système et la sphère industrielle. Nous soulignons la montée en puissance des sorties par acquisition alors que l'on évoque le plus souvent les sorties par introduction en bourse. Nous fournissons quelques arguments statistiques tendant à montrer que le comportement des groupes industriels, lorsqu'ils investissent en capital-risque, est analogue à celui des Fonds privés indépendants. Dans le troisième et dernier chapitre, nous abordons le système de capital-risque sous l'angle de la dynamique longue et des fluctuations.
    Keywords: capital-risque ; Etats-Unis ; capital-investissement ; capital-transmission ; cycle du capital-investissement ; investissement ; innovation ; financement en capitaux propres ; gestion de l'incertitude
    Date: 2007–03–07
  10. By: Monika Piazzesi; Martin Schneider
    Abstract: This paper considers asset pricing in a general equilibrium model in which some, but not all, agents suffer from inflation illusion. Illusionary investors mistake changes in nominal interest rates for changes in real rates, while smart investors understand the Fisher equation. The presence of smart investors ensures that the equilibrium nominal interest rate moves with expected inflation. The model also predicts a nonmonotonic relationship between the price-to-rent ratio on housing and nominal interest rates -- housing booms occur both when the nominal rate is especially low and when it is especially high. In either situation, disagreement about real interest rates between smart and illusionary investors stimulates borrowing and lending and drives up the price of collateral. The resulting housing boom is stronger if credit markets are more developed. We document that many countries experienced a housing boom in the high-inflation 1970s and a second, stronger, boom in the low-inflation 2000s.
    JEL: E2 E4 G1
    Date: 2007–03
  11. By: Jules H. van Binsbergen; Michael W. Brandt
    Abstract: We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.
    JEL: G0 G11 G23
    Date: 2007–03
  12. By: Javed, Attiya Y.; Iqbal, Robina
    Abstract: We investigated whether differences in quality of firm-level corporate governance can explain the firm-level performance in a cross-section of companies listed at Karachi Stock Exchange. Therefore, we analysed the relationship between firm-level value as measured by Tobin’s Q and total Corporate Governance Index (CGI) and three sub-indices: Board, Shareholdings and Ownership, and Disclosures and Transparency for a sample of 50 firms. The results indicate that corporate governance does matter in Pakistan. However, not all elements of governance are important. The board composition and ownership and shareholdings enhance firm performance, whereas disclosure and transparency has no significant effect on firm performance. We point out that those adequate firm-level governance standards can not replace the solidity of the firm. The low production and bad management practices can not be covered with transparent disclosures and transparency standards.
    Keywords: Corporate Governance; Firm Performance; Tobin’s Q; Agency Problem; Board Size; Shareholdings; Disclosures; Leverage Code of Corporate Governance.
    JEL: G38 G34 G12
    Date: 2007
  13. By: Paolo, Santella; Carlo, Drago; Giulia, Paone
    Abstract: In this article we have expanded the analysis of the new dataset we created in Santella, Paone, Drago (2005) which analysed and quantified corporate disclosure on directors formally identified as independent by the forty Italian Blue Chips. We find here a general low level of compliance with independence requirements for both financial and non-financial companies, particularly with regard to the two key independence criteria of not having too many concurring commitments and not having business relationships with the company or an associated company. We also find that financial companies show a lower level of compliance than non-financial ones and are connected with each other and with a few non-financial companies through networks of cross-directorships: two directors (one independent and one executive) who also sit at the same time on another company board. Finally, those non-financial companies that have a relatively fragmented shareholder structure tend to be characterised by higher levels of compliance and disclosure (but not always by lower levels of not compliance) than tightly-controlled non-financial companies, presumably because of sensitivity to a larger pool of small shareholders. Peculiarly, financial companies with fragmented shareholder structure tend to be characterised by low disclosure levels, although such companies are also subject to strong financial supervision.
    Keywords: G3; K; K2; K22
    JEL: K2 K0 K22 G3
    Date: 2007–03–14

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