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on Corporate Finance |
| By: | Bena, Jan; Jurajda, Stepan |
| Abstract: | We test whether more developed financial systems are better at tackling asymmetric information proxied by firm age and size. Comparing the growth effect of financial development (FD) across firms of different type, we find that FD disproportionately fosters the growth of young companies, while there is relatively little evidence of differences in the effect across firms of different size. The disproportionate gains from FD for youngest firms are concentrated among firms with lower shares of equity capital on total assets as these firms are in more need of external financing. |
| Keywords: | Corporate growth; Financial development; Information Asymmetry |
| JEL: | F36 G15 G21 O16 O52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6392&r=cfn |
| By: | McCarthy, David; Miles, David K |
| Abstract: | We model the asset allocation decision of a defined benefit pension fund using a stochastic dynamic programming approach. Our model recognizes the fact that asset allocation decisions are made by trustees who are mandated to act in the best interests of beneficiaries - not by sponsoring employers - and that trustees face payoffs that are linked in an indirect way to the value of the underlying assets. This is because of the presence of pension insurance - which may cover a portion of deficits in the event of a sponsor default - and a sponsoring employer who may make good any shortfall in assets, and who may reclaim some pension surplus. Our model includes an allowance for uncertainty both of the future value of assets (because of uncertain investment returns) and liabilities (because of uncertainty in future longevity and in future interest rates). We find that we are able to substantially replicate observed DB pension asset allocations in the UK and conclude that institutional details - in particular asymmetries in payoffs to pension trustees - are crucial in understanding pension asset allocation. |
| Keywords: | longevity; pensions; portfolio allocation |
| JEL: | G10 G11 G23 G32 J11 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6394&r=cfn |
| By: | Bena, Jan; Jurajda, Stepan |
| Abstract: | The establishment of the EU-15 `single market' in 1993 brought about a high degree of similarity in firms' growth opportunities across countries, while substantial diversity existed in the development of national financial markets. We compare within-industry growth rates of similar `single-market' firms facing financial systems of different depth and institutional quality as of 1993. Moving from the least to the most developed financial market within the EU-15 boosts firms' annual value-added growth by about three percentage points. Our results also suggest that the growth gap due to initially under-developed financial systems was closed by 2003. |
| Keywords: | Access to financial markets; Corporate growth; Financial development |
| JEL: | F36 G15 G21 O16 O52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6395&r=cfn |
| By: | Harry DeAngelo; Linda DeAngelo; RenÃÂÃÂÃÂé M. Stulz |
| Abstract: | Firms conduct SEOs to resolve a near-term liquidity squeeze, and not primarily to exploit market timing opportunities. Without the SEO proceeds, 62.6% of issuers would have insufficient cash to implement their chosen operating and non-SEO financing decisions the year after the SEO. Although the SEO decision is positively related to a firm's market-to-book (M/B) ratio and prior excess stock return and negatively related to its future excess return, these relations are economically immaterial. For example, a 150% swing in future net of market stock returns (from a 75% gain to a 75% loss over three years) increases by only 1% the probability of an SEO in the immediately prior year. Strikingly, most firms with quintessential "market timer" characteristics fail to issue stock and a non-trivial number of mature firms do issue stock, with current and former dividend payers raising more than half of all issue proceeds. |
| JEL: | G31 G32 G35 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13285&r=cfn |
| By: | Oberndorfer, Ulrich; Ulbricht, Dirk |
| Abstract: | Around the turn of the year 2005/2006, the Russian freezing of natural gas exports to the Ukraine led to a European gas crisis. Using event study technique, we first investigate whether the Russian announcement of suspension of gas deliveries, this suspension itself as well as its withdrawal, had an effect on unsystematic volatility of European energy stocks. Secondly, we measure event effects on stock returns, taking volatility into account. Our results suggest that the announcement of the crisis and therefore a rise of Western EuropeÃÂâÃÂÃÂÃÂÃÂs energy cost and risk tended to increase market expectations with respect to energy-related firms. In contrast, market uncertainty increased when Russia reopened its valves. One reason for these findings could be windfall profits of energy-related companies due to increasing resource and electricity prices. The existence of event-induced volatility confirms our methodological approach in order to test for abnormal returns. |
| Keywords: | energy security, event study, gas crisis |
| JEL: | G14 Q41 Q43 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5689&r=cfn |
| By: | Jamshidian, Farshid |
| Abstract: | The contract is described and market examples given. Essential theoretical developments are introduced and cited chronologically. The principles and techniques of hedging and unique pricing are illustrated for the two simplest nontrivial examples: the classical Black-Scholes/Merton/Margrabe exchange option model brought somewhat up-to-date from its form three decades ago, and a lesser exponential Poisson analogue to illustrate jumps. Beyond these, a simplified Markovian SDE/PDE line is sketched in an arbitrage-free semimartingale setting. Focus is maintained on construction of a hedge using Ito's formula and on unique pricing, now for general homogenous payoff functions. Clarity is primed as the multivariate log-Gaussian and exponential Poisson cases are worked out. Numeraire invariance is emphasized as the primary means to reduce dimensionality by one to the projective space where the SDE dynamics are specified and the PDEs solved (or expectations explicitly calculated). Predictable representation of a homogenous payoff with deltas (hedge ratios) as partial derivatives or partial differences of the option price function is highlighted. Equivalent martingale measures are utilized to show unique pricing with bounded deltas (and in the nondegenerate case unique hedging) and to exhibit the PDE or closed-form solutions as numeraire-deflated conditional expectations in the usual way. Homogeneity, change of numeraire, and extension to dividends are discussed. |
| Keywords: | Hedging; self-financing trading strategy; numeraire invariance; predictable representation; unique pricing; arbitrage-free; martingale; homogeneous payoff; Markovian; It\^o's formula; SDE; PDE; geometric Brownian motion; exponential Poisson process. |
| JEL: | G13 |
| Date: | 2007–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4131&r=cfn |
| By: | Khumalo, Bhekuzulu |
| Abstract: | Knowledge is the most important commodity and resource human beings can have. Having these qualities allows knowledge to be at the forefront of economics, as it should be. Knowledge economics demonstrates the power of knowledge theory into investment decision making policy by individuals and institutions. The paper discusses the different research types that take place and the different risks associated with each type of risk been associated with time. Strategy using game theory is used in a dynamic situation because firms are not static. Knowledge is the tool the investor needs to make more clarified decisions |
| Keywords: | Knowledge; research type; research risk; consistency; game theory |
| JEL: | G11 Z0 D81 |
| Date: | 2007–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4201&r=cfn |
| By: | Danijela MiloÃÂàÃÂá (Faculty of Economics and Business, University of Zagreb); Metka TekavÃÂÃÂÃÂÃÂiÃÂÃÂÃÂÃÂ; ÃÂàÃÂýeljko ÃÂàÃÂàeviÃÂÃÂÃÂà|
| Abstract: | This paper presents the extensive literature survey based both on theoretical rationales for hedging as well as the empirical evidence that support the implications of the theory regarding the arguments for the corporate risk management relevance and its influence on the companyÃÂâÃÂÃÂÃÂÃÂs value. The survey of literature presented in this paper has revealed that there are two chief classes of rationales for corporate decision to hedge - maximisation of shareholder value or maximisation of managersÃÂâÃÂÃÂÃÂàprivate utility. If corporate hedging decisions are capable of increasing firm values, they can do so by reducing the volatility of cash flows. The literature survey presented in this paper has revealed that, by hedging financial risks firms can decrease cash flow volatility, what leads to a lower variance of firm value. This means that not only a firm value is moving less, but that the probability of occurring low values is smaller than without hedging. Reduced volatility of cash flows results in decreased costs of financial distress and expected taxes, thereby enhancing the present value of expected future cash flows. Additionally, it reduces the costs associated with information ÃÂâÃÂÃÂÃÂÃÂasymmetriesÃÂâÃÂÃÂÃÂàby signalling management's view of the company's prospects to investors, or it reduces agency problems. In addition, reducing cash flow volatility can improve the probability of having sufficient internal funds for planned investments eliminating the need either to cut profitable projects or bear the transaction costs of obtaining external funding. However, it needs to be emphasised that there is no consensus as to what hedging rationale is the most important in explaining risk management as a corporate policy. It can be concluded that, the total benefit of hedging is the combination of all these motives and, if the costs of using corporate risk management instruments are less than the benefits provided via the avenues mentioned in this paper, or any other benefit perceived by the market, then risk management is a shareholder-value enhancing activity. |
| Keywords: | corporate risks, rationales of risk management |
| JEL: | G32 G39 |
| Date: | 2007–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:0714&r=cfn |
| By: | Donato Masciandaro (University of Bocconi - Department of Economics (DEP)); MarÃÂÃÂÃÂÃÂa J. Nieto (Banco de EspaÃÂÃÂÃÂña); HenriÃÂÃÂÃÂëtte Prast (de Nederlandsche Bank (Netherlands Central Bank)) |
| Abstract: | This article analyses the economics of financing banking supervision and attempts to respond to two questions: What are the most common financing practices? Can the differences in current financing practices be explained by country specific factors? We perform an empirical analysis that identifies the determinants of the financing structure of banksÃÂÃÂÃÂô prudential supervision using a sample of 90 banking supervisors (central banks and financial authorities). We conclude that supervisors in central banks are more likely publicly funded, while financial authorities are more likely funded via a levy on the regulated banks. The financing rule is also explained by the structure of the financial systems. Public funding is more likely in bank oriented structures. Finally, the geographical factor is also significant: European bank supervisors are more oriented towards the private funding regime. In general, we do not find evidence of the role of the political factor, the size of the economy, the level of development and the legal tradition. |
| Keywords: | banking supervision, budgetary governance, central banks, financial authorities |
| JEL: | D78 G21 G28 O17 P16 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0725&r=cfn |