nep-cfn New Economics Papers
on Corporate Finance
Issue of 2007‒03‒24
eight papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Stakeholders vs. shareholders in corporate governance By Chilosi, Alberto; Damiani, Mirella
  2. Corporate governance of banks: the current state of the debate. By Polo, Andrea
  3. Asset Prices in the Presence of a Tax Authority By Marc Rapp; Bernhard Schwetzler
  4. Market Liquidity and Funding Liquidity By Brunnermeier, Markus K; Pedersen, Lasse Heje
  5. Estimation Risk Effects on Backtesting For Parametric Value-at-Risk Models By Juan Carlos Escanciano; Jose Olmo
  6. Pricing Fund Liquidity Provision By Marco Rossi
  7. Investors Facing Risk II: Loss Aversion and Wealth Allocation When Utility Is Derived From Consumption and Narrowly Framed Financial Investments By Erick W. Rengifo; Emanuela Trifan
  8. Role of the Egyptian securities market on saving development By Alasrag, Hussien

  1. By: Chilosi, Alberto; Damiani, Mirella
    Abstract: The paper is divided in two coordinate parts. The first considers in general the issue of stockholders vs. stakeholders oriented governance systems and their relative merits and demerits. The second part deals specifically with the issue of the principal-agent problem in a stakeholder context.
    Keywords: Stakeholders; Corporate Governance; Varieties of Capitalism
    JEL: P1 L2 G3
    Date: 2007–03–20
  2. By: Polo, Andrea
    Abstract: Since banks are among the most important sources not only of finance but also of external governance for firms, the corporate governance of banks is a crucial factor for growth and development. Despite its importance, this topic has been explored only by a few studies. While some authors support, with different arguments in the course of time, the specificity of banks, other authors, among whom Ross Levine and his co-authors from the World Bank, question heavily the present banking regulatory framework. The debate on the corporate governance of banks has a direct bearing on the current discussions on the future of banking regulatory design: should the regulatory intervention be the most important corporate control mechanism in banking or should regulators focus on introducing incentives for appropriate market behaviour?
    Keywords: Financial economics; Corporate Governance; Banking; Regulation and Supervision; Market Discipline; Securities Law
    JEL: K22 G28 G21 G34 G18
    Date: 2007–03–19
  3. By: Marc Rapp (Leipzig Graduate School of Management (HHL)); Bernhard Schwetzler (Leipzig Graduate School of Management (HHL))
    Abstract: This paper examines the equilibrium effect of a shift in the capital income tax rate upon state prices, risk-neutral probabilities, and corresponding security prices in a single-period binomial model economy with an exogenous risk-free rate. The policy design under consideration consists of a simple linear tax code that applies the economic rent as a tax base. It is shown that if tax proceeds are transferred to outsiders, a shift in the tax rate affects state prices, risk-neutral probabilities as well as equilibrium security prices. Thereby, the effect for the equilibrium price of a security is sensitive with respect to the correlation between its own payoff and the payoff of the market portfolio. If in contrast tax proceeds are redistributed within the cohort of market participants, risk-neutral probabilities, and security prices are unaffected by a change in the tax rate, although state prices are sensitive with respect to the tax rate.
    Keywords: Equilibrium security prices, capital income tax, risk-neutral probability measure,
    JEL: D50 G12 G31
  4. By: Brunnermeier, Markus K; Pedersen, Lasse Heje
    Abstract: We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to 'flight to quality', and (v) comoves with the market, and it provides new testable predictions.
    Keywords: counterparty credit risk; leverage; liquidity risk management; margins; systemic risk; value-at-risk
    JEL: G1 G2
    Date: 2007–03
  5. By: Juan Carlos Escanciano; Jose Olmo (City University, London)
    Abstract: One of the implications of the creation of Basel Committee on Banking Supervision was the implementation of Value-at-Risk (VaR) as the standard tool for measuring market risk. Thereby the correct specification of parametric VaR models became of crucial importance in order to provide accurate and reliable risk measures. If the underlying risk model is not correctly specified, VaR estimates understate/overstate risk exposure. This can have dramatic consequences on stability and reputation of financial institutions or lead to sub-optimal capital allocation. We show that the use of the standard unconditional backtesting procedures to assess VaR models is completely misleading. These tests do not consider the impact of estimation risk and therefore use wrong critical values to assess market risk. The purpose of this paper is to quantify such estimation risk in a very general class of dynamic parametric VaR models and to correct standard backtesting procedures to provide valid inference in specification analyses. A Monte Carlo study illustrates our theoretical findings in finite-samples. Finally, an application to S&P500 Index shows the importance of this correction and its impact on capital requirements as imposed by Basel Accord, and on the choice of dynamic parametric models for risk management.
    Keywords: Backtesting; Basel Accord; Model Risk; Risk Management; Value at Risk; Conditional Quantile
    JEL: C52 C22 G21 G32
    Date: 2007–03
  6. By: Marco Rossi
    Abstract: This paper presents a market-based framework for pricing Fund liquidity assistance that accounts for the credit risk and the insurance benefit involved in such operations. It is based on the isomorphic correspondence between Fund liquidity and common stock put options. Although only illustrative, the simulations presented in this paper show that the value of the liquidity guarantee provided by the Fund could range from a few to over one hundred basis points depending on the borrower's creditworthiness, the volatility of capital flows to the borrowing country, and the amount of funds potentially needed to meet the borrower's external obligations.
    Keywords: Fund financing facility , lender of last resort , liquidity provision , option pricing , Fund liquidity , Pricing policy , Economic models ,
    Date: 2007–02–28
  7. By: Erick W. Rengifo (Department of Economics. Fordham University, New York); Emanuela Trifan (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: This paper studies the attitude of non-professional investors towards financial losses and their decisions concerning wealth allocation among consumption, risky, and risk-free financial assets. We employ a two-dimensional utility setting in which both consumption and financial wealth fluctuations generate utility. The perception of financial wealth is modelled in an extended prospect-theory framework that accounts for both the distinction between gains and losses with respect to a subjective reference point and the impact of past performance on the current perception of the risky portfolio value. The decision problem is addressed in two distinct equilibrium settings in the aggregate market with a representative investor, namely with expected and non-expected utility. Empirical estimations performed on the basis of real market data and for various parameter configurations show that both settings similarly describe the attitude towards financial losses. Yet, the recommendations regarding wealth allocation are different. Maximizing expected utility results on average in low total-wealth percentages dedicated to consumption, but supports myopic loss aversion. Non-expected utility yields more reasonable assignments to consumption but also a high preference for risky assets. In this latter setting, myopic loss aversion holds solely when financial wealth fluctuations are viewed as the main utility source and in very soft form.
    Keywords: prospect theory, Value-at-Risk, loss aversion, expected utility, non-expected utility
    JEL: C32 C35 G10
    Date: 2007–02
  8. By: Alasrag, Hussien
    Abstract: This thesis studies the role of the Egyptian securities market on saving development.It`s divided into two sections.section one studies the natural and importance of securities market through defining both the capital and securities markets ,determining the requirements of setting up stock market.then its studies the relation between securities market and some aggregate variables in the economy and its position in both the classical and the modern theory.the thesis goes on to studies the factors affecting the stock market performance. the importance of this market and the relation between saving and securities market.then it sheds lights on the securities in both the Egyptian and the global capital markets .section two focuses on the role of the Egyptian securities market on saving development during (1982-2000).so it studies the Egyptian securities market development.then it evaluate the role of both the primary and secondary markets on saving development during the period under review. Finally the thesis explains and recommends some policies in order to activate the Egyptian market. it also analyzes more particularly some guiding principles to develop and activate the role of both the primary and secondary markets on saving development .
    JEL: G1 E01 G18 G15 E24 E00
    Date: 2002–03

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