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on Corporate Finance |
| By: | Teodora Paligorova |
| Abstract: | I examine the effect of the Sarbanes-Oxley Act of 2002 (SOX) on the structure of executive pay. Specifically, I consider the increased board oversight implied by SOX, which is expected to weaken the pay-for-performance link under traditional agency models. Alternatively, if entrenched CEOs managed to capture the pay process before SOX, stronger boards are expected to reduce CEO pay for luck and strengthen pay for performance. Using ExecuComp data, I find that the pay-for-performance link increases after 2002, while pay for luck decreases only in firms with weaker board oversight prior to 2002, that is, in firms more affected by SOX stipulations. In contrast, the pay-for-performance link changes little in firms with independent boards. |
| Keywords: | Corporate governance, The Sarbanes-Oxley Act, incentive pay. |
| JEL: | G38 J33 M52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp331&r=cfn |
| By: | Giannetti, Mariassunta; Laeven, Luc |
| Abstract: | Sweden offers a unique natural experiment to analyze the microeconomic effects of institutionalized saving on ownership structure, corporate governance and performance of listed companies. First, the Swedish pension reform increased the participation of pension funds in the domestic stock market and caused a significant reshuffling in the ownership of the existing pension funds. Second, the availability of detailed data on firm ownership allows us to document the effects of the pension reform. We show that the effects of institutional investment on firm performance depend on the industry structure of pension funds. In particular, we find that firm performance improves if large independent private pension funds and public pension funds increase their equity stakes in the firm, but not if smaller pension funds and pension funds related to financial institutions and industrial groups increase their shareholdings. Additionally, controlling shareholders appear reluctant to relinquish control and the control premium increases if public pension funds acquire shares. |
| Keywords: | Control premium; Controlling shareholders; Dual class shares; Pension funds |
| JEL: | G23 G3 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6489&r=cfn |
| By: | Giroud, Xavier; Mueller, Holger M |
| Abstract: | By reducing the fear of a hostile takeover, business combination (BC) laws weaken corporate governance and create more opportunity for managerial slack. Using the passage of BC laws as a source of identifying variation, we examine if such laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in non-competitive industries experience a substantial drop in performance, firms in competitive industries experience virtually no effect. Though consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the stronger view expressed by A. Alchian, M. Friedman, and G. Stigler that managerial slack cannot survive in competitive industries. When we examine which agency problem competition mitigates, we find evidence consistent with a “quiet-life” hypothesis. While capital expenditures are unaffected by the passage of BC laws, input costs, wages, and overhead costs all increase, and only so in non-competitive industries. We also conduct event studies around the dates of the first newspaper reports about the BC laws. We find that while firms in non-competitive industries experience a significant decline in their stock prices, the stock price impact is small and insignificant in competitive industries. |
| Keywords: | corporate governance; product market competition |
| JEL: | G34 L1 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6446&r=cfn |
| By: | Cerqueiro, Geraldo; Degryse, Hans; Ongena, Steven |
| Abstract: | We propose a heteroscedastic regression model to identify the determinants of the dispersion in interest rates on loans granted to small and medium sized enterprises. We interpret unexplained deviations as evidence of the banks’ discretionary use of market power in the loan rate setting process. “Discretion” in the loan-pricing process is most important, we find, if: (i) loans are small and uncollateralized; (ii) firms are small, risky and difficult to monitor; (iii) firms’ owners are older, and, (iv) the banking market where the firm operates is large and highly concentrated. We also find that the weight of “discretion” in loan rates of small credits to opaque firms has decreased somewhat over the last fifteen years, consistent with the proliferation of information-technologies in the banking industry. Overall, our results reflect the relevance in the credit market of the costs firms face in searching information and switching lenders. |
| Keywords: | financial intermediation; loan rates; price discrimination; variance analysis |
| JEL: | G21 L11 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6450&r=cfn |
| By: | John Y. Campbell |
| Abstract: | To estimate the equity premium, it is helpful to use finance theory: not the old-fashioned theory that efficient markets imply a constant equity premium, but theory that restricts the time-series behavior of valuation ratios, and that links the cross-section of stock prices to the level of the equity premium. Under plausible conditions, valuation ratios such as the dividend-price ratio should not have trends or explosive behavior. This fact can be used to strengthen the evidence for predictability in stock returns. Steady-state valuation models are also useful predictors of stock returns given the high degree of persistence in valuation ratios and the difficulty of estimating free parameters in regression models for stock returns. A steady-state approach suggests that the world geometric average equity premium was almost 4% at the end of March 2007, implying a world arithmetic average equity premium somewhat above 5%. Both valuation ratios and the cross-section of stock prices imply that the equity premium fell considerably in the late 20th Century, but has risen modestly in the early years of the 21st Century. |
| JEL: | G12 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13423&r=cfn |
| By: | Fernando Broner; Alberto Martin; Jaume Ventura |
| Abstract: | There is a large and growing literature that studies the effects of weak enforcement institutions on economic performance. This literature has focused almost exclusively on primary markets, in which assets are issued and traded to improve the allocation of investment and consumption. The general conclusion is that weak enforcement institutions impair the workings of these markets, giving rise to various inefficiencies. But weak enforcement institutions also create incentives to develop secondary markets, in which the assets issued in primary markets are retraded. This paper shows that trading in secondary markets counteracts the effects of weak enforcement institutions and, in the absence of further frictions, restores efficiency. |
| Keywords: | Enforcement, default, secondary markets, sovereign risk, weak law enforcement |
| JEL: | F34 F36 G15 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1049&r=cfn |
| By: | Marco Realdon |
| Abstract: | This paper presents an extended structural credit risk model that pro- vides closed form solutions for fixed and floating coupon bonds and credit default swaps. This structural model is an "extended" one in the following sense. It allows for the default free term structure to be driven by the a multi-factor Gaussian model, rather than by a single factor one. Expected default occurs as a latent diffusion process first hits the default barrier, but the diffusion process is not the value of the firm's assets. Default can be "expected" or "unexpected". Liquidity risk is correlated with credit risk. It is not necessary to disentangle the risk of unexpected default from liquidity risk. A tractable and accurate recovery assumption is proposed. |
| Keywords: | structural credit risk model, Vasicek model, Gaussian term structure model, bond pricing, credit default swap pricing, unexpected default, liquidity risk. |
| JEL: | G13 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:07/26&r=cfn |
| By: | Marco Realdon |
| Abstract: | This paper presents three factor "Extended Gaussian" term struc- ture models (EGM) to price default-free and defaultable bonds. To price default-free bonds EGM assume that the instantaneous interest rate is a possibly non-linear but monotonic function of three latent factors that follow correlated Gaussian processes. The bond pricing equation can be solved conveniently through separation of variables and finite difference methods. The merits of EGM are hetero-schedastic yields, unrestricted correlation between factors and the absence of the admissibility restric- tions that affect canonical affine models. Unlike quadratic term structure models, EGM are amenable to maximum likelihood estimation, since ob- served yields are sufficient statistics to infer the latent factors. Empirical evidence from US Treasury yields shows that EGM fit observed yields quite well and are estimable. EGM are of even greater interest to price fixed and floating rate defaultable bonds. A reduced form, a credit rating based and a structural credit risk valuation model are presented: these credit risk models are EGM and their common merit is that bond pricing remains tractable through separation of variables even if interest rate risk and credit risk are arbitrarily correlated |
| Keywords: | bond pricing, Gaussian term structure models, Vasicek model, separation of variables, finite difference method, reduced form, credit risk model, credit ratings model, structural model. |
| JEL: | G13 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:07/27&r=cfn |
| By: | Plantinga, Auke |
| Abstract: | This chapter discusses methods and techniques for measuring and evaluating performance for the purpose of controlling the investment process. However, many of the methods discussed in this chapter are also used in communicating investment performance between the investment management company and it’s (potential) customers. Therefore, performance measurements also play an important role in the competition between investments management companies. Substantial evidence from the net sales of mutual funds shows that investors buy mutual funds with good past performance records although they fail to sell funds with bad past performance. |
| Keywords: | Performance measurement; risk-adjusted performance |
| JEL: | G11 |
| Date: | 2007–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5048&r=cfn |