nep-cfn New Economics Papers
on Corporate Finance
Issue of 2007‒06‒18
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Corporate governance and corporate ownership: The investment behaviour of Japanese institutional investors By Yener Altunbaş; Alper Kara; Adrian van Rixtel
  2. Including estimates of the future in today's financial statements By Mary Barth
  3. Do accounting changes affect the economic behaviour of financial firms? By Anne Beatty
  4. Risk and liquidity in a system context By Hyun Song Shin
  5. Risk in financial reporting: status, challenges and suggested directions By Claudio E. V. Borio; Kostas Tsatsaronis

  1. By: Yener Altunbaş (Centre for Banking and Financial Studies, SBARD, University of Wales); Alper Kara (Aberdeen Business School, The Robert Gordon University); Adrian van Rixtel (Banco de España)
    Abstract: In this paper, we investigate the investment behaviour of institutional investors in terms of their shareholdings in 2,938 companies listed on the Tokyo and Osaka Stock Exchanges at the end of June 2002. By doing so, we provide one of the first detailed empirical analyses of the involvement of institutional investors in the ownership structure of Japanese listed firms. At the same time, we compare this aspect of Japanese corporate governance with the shareholdings of banks in the same group of firms. Our results show that the equity investments of financial investors — institutional investors and banks — in Japanese listed companies at the end of June 2002 were predominantly in the high-tech manufacturing, traditional manufacturing and communications industries. All financial investors combined held more than 60% of the equity capital of the firms listed on the Tokyo and Osaka Stock Exchanges, with banks being the largest group of these financial investors. Further analysis shows that on average most financial investors were minority shareholders, holding up to 3% of a firm’s total shares. Domestic financial investors tended to have higher levels of ownership than foreign institutions, and small and minority shareholdings were more common among foreign financial investors than among domestic banks and institutional investors. Finally, the average shareholdings of six large Japanese financial groups in Japanese listed companies were considerable, representing an average ownership level of 3.3% of a firm’s stock. However, they were not as high as to exert a significant degree of corporate control. All in all, we conclude that as of end-June 2002, banks continued to be important shareholders of Japanese listed firms, owing around 34% of the market capitalisation of all listed firms on the Tokyo and Osaka Stock Exchanges. At the same time, institutional investors, predominantly investment firms and insurance companies, were important shareholders as well, accounting for around 27% of total market capitalisation. Moreover, we found that foreign investment funds were very important shareholders of Japanese listed firms, which confirms the general perception that foreign ownership of Japan’s corporate sector has become a rather crucial characteristic of the system of corporate governance in Japan.
    Keywords: banks, corporate governance, institutional investors, japan
    JEL: G21 G30 G34
    Date: 2007–05
  2. By: Mary Barth (Stanford Graduate School of Business)
    Abstract: This paper explains why the question is how, not if, today's financial statements should include estimates of the future. Including such estimates is not new, but their use is increasing. This increase results primarily because standard setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful information for making economic decisions, which is the objective of financial reporting. This is why standard setters seem focused on fair value accounting. How estimates of the future are incorporated in financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits are recognised. Note disclosures can help users understand recognised estimates, and can provide information about unrecognised estimates. Including more estimates of the future in today's financial statements would result in an income measure that differs from today's income, but arguably provides better information for making economic decisions.
    Keywords: financial statements, fair value, financial reporting
    JEL: E58 G15 M41
    Date: 2006–08
  3. By: Anne Beatty (Ohio State University - Department of Accounting & Management Information Systems)
    Abstract: This study examines whether accounting changes result in changes in the economic behaviour of financial institutions. The results of several papers examining how banks respond to accounting changes that affect their regulatory capital ratios are consistent with Furfine's (2000) summary that "capital regulation, broadly speaking, can significantly influence bank decision-making." These papers do not attempt to disentangle the effects of capital regulation versus market discipline. This paper examines banks' response to recent changes in accounting for Trust Preferred Securities that effect how these securities are reported in the balance sheet but do not change the calculation of Tier 1 capital. This provides a good setting to examine whether accounting changes induce changes in banks' economic behaviour in the absence of an effect on regulatory capital. I test five hypotheses related to banks' decisions to issue Trust Preferred Stock during the period from 1997 through 2004. Specifically, I examine whether there was an overall decrease in banks' propensity to issue these securities after the accounting change, whether publicly traded banks and those that access the external debt markets were more likely to issue these securities before the accounting change but not after, and whether banks with low regulatory capital ratios and with high marginal tax rates were more likely to issue these securities both before and after the accounting change. The results suggest that accounting changes can lead to changes in banks' economic behaviour even when the change in accounting does not affect regulatory capital calculations. This is consistent with bank managers acting as if they are concerned with the markets' response to the numbers reported after the accounting change.
    Keywords: Bank capital, taxation, trust preferred securities, financial reporting
    JEL: G21 G32 M41
    Date: 2006–08
  4. By: Hyun Song Shin (Princeton University - Department of Economics)
    Abstract: This paper explores the pricing of debt in a financial system where the assets that borrowers hold to meet their obligations include claims against other borrowers. Assessing financial claims in a system context captures features that are missing in a partial equilibrium setting. It is possible for spreads to fall as debts rise, as debt-fuelled increases in asset prices and stronger balance sheets reinforce each other. Conversely, it is possible that de-leveraging leads to increases in spreads, as is often observed during crises.
    Keywords: systemic risk, leverage, asset prices, liquidity
    JEL: D5 G12 M4
    Date: 2006–08
  5. By: Claudio E. V. Borio; Kostas Tsatsaronis
    Abstract: Advances in risk measurement technology have reshaped financial markets and the functioning of the financial system. More recently, they have been reshaping the prudential framework. Looking forward, they have the potential to reshape financial reporting too. Recent initiatives to improve financial reporting standards have brought to the fore significant differences in perspective between accounting standard setters and prudential authorities. Building on previous work, we argue that risk measurement and management technology can be instrumental in bridging this gap and, by the same token, in improving financial reporting. Risk measurement plays a crucial role in the measurement, verification and validation of valuations. It is the basis for giving more prominence to risk and measurement error information in public disclosures. And it could act as more of a focal point in the design of accounting standards, as greater consistency between sound risk management practices and accounting standards can help to narrow the wedge between accounting and underlying economic valuations.
    Keywords: risk measurement and management, accounting, regulation, financial reporting
    JEL: D52 G00 G12 G28 M41
    Date: 2006–08

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