nep-cfn New Economics Papers
on Corporate Finance
Issue of 2007‒09‒24
six papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Capital Market, Severity of Business Cycle, and Probability of Economic Downturn By Tharavanij, Piyapas
  2. Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure By Kesternich, Iris; Schnitzer, Monika
  3. Why Managers Hold Shares of Their Firms: An Empirical Analysis By Ulf von Lilienfeld-Toal; Stefan Ruenzi
  4. Sophistication in Risk Management, Bank Equity, and Stability By Jan Wenzelburger; Hans Gersbach
  5. What does excess bank liquidity say about the loan market in Less Developed Countries? By Khemraj, Tarron
  6. Financial Intermediation: Economics, Structure, and Services By govori, fadil

  1. By: Tharavanij, Piyapas
    Abstract: This paper investigates the effect of capital market development on severity of economic contraction, and probability of economic downturn. The major finding is that countries with deeper capital market would face less severe business cycle output contraction, and lower chance of an economic downturn. The results hold even after controlling for other relevant variables, country specific effects, and state dependence. However, marginal effects are relatively small. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004.
    Keywords: business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based
    JEL: C34 G00 G21 E44 E32 C35 C33
    Date: 2007–09–09
  2. By: Kesternich, Iris; Schnitzer, Monika
    Abstract: This paper investigates how multinational firms choose the capital structure of their foreign affiliates in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, such as expropriation, corruption and confiscatory taxation. In our theoretical analysis we find that, as political risk increases, the ownership share always decreases, whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.
    Keywords: capital structure; leverage; Multinational firms; ownership structure; political risk
    JEL: F21 F23 G32
    Date: 2007–09
  3. By: Ulf von Lilienfeld-Toal; Stefan Ruenzi
    Abstract: We examine the relationship between CEO ownership and stock market performance. Firms in which the CEO voluntarily holds a considerable share of outstanding stocks outperform the market by more than 10% p.a. after controlling for traditional risk factors. The effect is most pronounced in firms that are characterized by large managerial discretion of the CEO. The abnormal returns we document are one potential explanation why so many CEOs hold a large fraction of their own company’s stocks. We also examine several potential explanations why the existence of an owner CEO is not fully reflected in prices but leads to abnormal returns.
    Keywords: CEO-Ownership, Asset Pricing with large shareholders.
    JEL: G12 G30
    Date: 2007–09
  4. By: Jan Wenzelburger (Keele University, Centre for Economic Research and School of Economic and Management Studies); Hans Gersbach (Center of Economic Research at ETH Zurich and CEPR)
    Abstract: We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks with low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system.
    Keywords: Financial intermediation, macroeconomic risks, risk management, risk premia, banking regulation, rating.
    JEL: D40 E44 G21
    Date: 2007–08
  5. By: Khemraj, Tarron
    Abstract: Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts.
    Keywords: bank liquidity; oligopoly banking; loan market; monetary policy
    JEL: O10 L13 O16 G10 O12
    Date: 2007–06
  6. By: govori, fadil
    Abstract: Financial intermediaries funnel the flow of savings from savers to ultimate investors in real assets. Compared to direct investment, financial intermediaries offer some advantages, including pooling of savings, diversification of investment risks, economies of scale in monitoring information and evaluating investment risks, and lower transactions costs. In addition, individual types of intermediaries provide specialized services.
    Keywords: Financial Intermediation; Financial Markets; Financial Institutions; Financial Services
    JEL: G24 G21 G22 G23
    Date: 2007–06–16

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