nep-cfn New Economics Papers
on Corporate Finance
Issue of 2007‒04‒21
four papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. The Invisible Hand in Corporate Governance By Chhaochharia, Vidhi; Laeven, Luc
  2. Why are Buyouts Levered? The Financial Structure of Private Equity Funds By Axelson, Ulf; Strömberg, Per; Weisbach, Michael S.
  3. Direct Evidence of Dividend Tax Clienteles By Dahlquist, Magnus; Robertsson, Göran; Rydqvist, Kristian
  4. Estimating Liquidity Using Information on the Multivariate Trading Process By Katarzyna Bien; Ingmar Nolte; Winfried Pohlmeier

  1. By: Chhaochharia, Vidhi; Laeven, Luc
    Abstract: We evaluate the impact of firm-level corporate governance provisions on the valuation of firms in a large cross-section of countries. Unlike previous work, we distinguish between governance provisions that are set at the country-level and those that are adopted at the firm-level. We find that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. Our results indicate that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what can be considered the norm in the country, and these improvements in corporate governance have a positive effect on firm valuation. These findings contribute to the current debate on the extent to which corporate governance reform can be left to the “invisible hand” of the market or requires government interference.
    Keywords: corporate governance; firm valuation; government policy; laissez faire
    JEL: G3
    Date: 2007–04
  2. By: Axelson, Ulf (Swedish Institute for Financial Research); Strömberg, Per (Swedish Institute for Financial Research); Weisbach, Michael S. (University of Illinois at Urbana Champaign)
    Abstract: This paper presents a model of the financial structure of private equity firms. In the model, the general partner of the firm encounters a sequence of deals over time where the exact quality of each deal cannot be credibly communicated to investors. We show that the optimal financing arrangement is consistent with a number of characteristics of the private equity industry. First, the firm should be financed by a combination of fund capital raised before deals are encountered, and capital that is raised to finance a specific deal. Second, the fund investors' claim on fund cash flow is a combination of debt and levered equity, while the general partner receives a claim similar to the carry contracts received by real-world practitioners. Third, the fund will be set up in a manner similar to that observed in practice, with investments pooled within a fund, decision rights over investments held by the general partner, and limits set in partnership agreements on the size of Particular investments. Fourth, the model suggests that incentives will lead to overinvestment in good states of the world and underinvestment in bad states, so that the natural industry cycles will be multiplied. Fifth, investments made in recessions will on average outperform investments made in booms.
    Keywords: LBO funds; capital structure; private equity; ex ante financing; ex post financing; incentives in private equity
    JEL: G23 G32
    Date: 2007–02–15
  3. By: Dahlquist, Magnus (Swedish Institute for Financial Research); Robertsson, Göran (Swedish Institute for Financial Research); Rydqvist, Kristian (Binghamton University)
    Abstract: We study a large data set of stock portfolios held by individuals and organizations in the Swedish stock market. The dividend yields on these port-folios are systematically related to investors' relative tax preferences for dividends versus capital gains. Tax-neutral investors earn 40 basis points higher dividend yield on their portfolios than investors which face higher effective taxation of dividends than capital gains. We conclude that there are dividend tax clienteles in the market. We also argue that the abundant portfolio holdings by private corporations, despite triple taxation at a combined marginal tax rate as high as 77.5%, is a consequence of taxation.
    Keywords: Tax incidence; dividend tax clienteles; capital gains tax; stock ownership
    JEL: G11 G35
    Date: 2007–03–15
  4. By: Katarzyna Bien (University of Konstanz); Ingmar Nolte (University of Konstanz); Winfried Pohlmeier (University of Konstanz)
    Abstract: In this paper we model the dynamic multivariate density of discrete bid and ask quote changes and their associated depths. We account for the contemporaneous relationship between these trading marks by exploiting the concept of copula functions. Thereby we show how to model truncations of the multivariate density in an easy way. A Metropolized-Independence Sampler is applied to draw from the dynamic multivariate density. The samples drawn serve to construct the dynamic density function of the quote slope liquidity measure, which enables us to quantify time varying liquidity risk. We analyze the influence of the decimalization at the NYSE on liquidity.
    Keywords: Liquidity, Copula Functions, Trading Process, Decimalization, Metropolized-Independence Sampler
    JEL: G10 F30 C30
    Date: 2006–03–31

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