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on Corporate Finance |
| By: | Acharya, Viral V; Imbs, Jean; Sturgess, Jason |
| Abstract: | We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value-added output, we calculate for each state the efficient frontier for investments in the real economy. We study how rapidly different states converge to this benchmark allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries and greater distance from the efficient frontier before liberalization. These effects are robust to industries integrating across states and to the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variance-covariance properties of investment returns, rather than on their average only. |
| Keywords: | Diversification; Financial Development; Growth; Sharpe Ratio; Volatility |
| JEL: | E44 F02 F36 G11 G21 G28 O16 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6202&r=cfn |
| By: | Kristian R. Miltersen; Eduardo S. Schwartz |
| Abstract: | We develop a new approach to dealing with real options problems with uncertain maturity. This type of situation is typical for R&D investments and mine or oil exploration projects. These types of projects are characterized by significant on-going investment costs until completion. Since time to completion is uncertain, the total investment costs will also be uncertain. Despite the fact that these projects include complicated American abandonment/switching options until completion and European options at completion (because of fixed final investment costs) we obtain simple closed form solutions. We apply the framework to situations in which the owner of the project has monopoly rights to the outcome of the project, and to situations in which there are two owners who simultaneously invest, but where only one of them may obtain the rights to the outcome. We expand the real options framework to incorporate game theoretic considerations, including a generalization of mixed strategies to continuous-time models in the form of abandonment intensities. |
| JEL: | G13 G31 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12990&r=cfn |
| By: | Carlo Rosa; Giovanni Verga |
| Abstract: | This paper examines the effect of European Central Bank communication on the pricediscovery process in the Euribor futures market using a new tick-by-tick dataset. First, weshow that two pieces of news systematically hit financial markets on Governing Councilmeeting days: the ECB policy rate decision and the explanation of its monetary policy stance.Second, we find that the unexpected component of ECB explanations has a significant andsizeable impact on futures prices. This indicates that the ECB has already acquired somecredibility: financial markets seem to believe that it does what it says it will do. Finally, ourresults suggest that the Euribor futures market is semi-strong form informational efficient. |
| Keywords: | market efficiency, central bank communication, news shock, tickby-tick Euriborfutures data, event-study analysis. |
| JEL: | E52 E58 G14 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0764&r=cfn |
| By: | André Farber (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Roland Gillet (Université Paris1-Panthéon-Sorbonne, Paris and Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels, and DULBEA, Université Libre de Bruxelles.) |
| Abstract: | Farber, Gillet and Szafarz (2006) propose a general formula for the WACC in which the expected return on the tax shield appears explicitly. The classical Modigliani-Miller and Harris-Pringle WACC formulas for specific debt policies are then derived from the general formula after having determined the corresponding tax shield expected returns. Replying to Fernandez’ (2007) comment, this note explores, in addition, the validity of the general formula in the Miles-Ezzel setup with annual adjustment of the level of debt to maintain a constant market-value debt ratio. |
| Keywords: | WACC, value of tax shield. |
| JEL: | G30 G32 E22 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:07-004&r=cfn |
| By: | Diemo Dietrich; Achim Hauck |
| Abstract: | In this paper we study interdependencies between corporate foreign investment and the capital structure of banks. By committing to invest predominantly at home, firms can reduce the credit default risk of their lending banks. Therefore, banks can refinance loans to a larger extent through deposits thereby reducing firms’ effective financing costs. Firms thus have an incentive to allocate resources inefficiently as they then save on financing costs. We argue that imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs. However, the Basel II framework is shown to miss this potential. |
| Keywords: | financial contracting; multinational corporations; internal capital markets |
| JEL: | G21 F23 G28 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:4-07&r=cfn |