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on Corporate Finance |
| By: | Hvide, Hans K; Møen, Jarle |
| Abstract: | If entrepreneurs are liquidity constrained and cannot borrow to operate on an efficient scale, those with more personal wealth should do better than those with less wealth. We investigate this hypothesis using a unique datset from Norway. Consistent with liquidity constraints being present, we find a strong positive relationship between founder prior wealth and start-up size. The relationship between prior wealth and start-up performance, as measured by profitability on assets, increases for the main bulk of the wealth distribution and decreases sharply at the top. We estimate that profitability on assets increases by about 8 percentage points from the 10th to the 75th percentile of the wealth distribution. This suggests an entrepreneurial production function with a region of increasing returns. Liquidity constraints may then stop entrepreneurs from being able to exploit a "hump" in marginal productivity. From the 75th to the 99th percentile returns drops by about 10 percentage points. This suggests that an abundance of liquidity may to do more harm than good. |
| Keywords: | Entrepreneurship; Household Finance; Private benefits; Start-ups; Wealth |
| JEL: | E44 G14 L26 M13 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6495&r=cfn |
| By: | Fratzscher, Marcel; Imbs, Jean |
| Abstract: | We show that international consumption risk sharing is significantly improved by capital flows, especially portfolio investment. Concomitantly, we show that poor institutions hamper risk sharing, but to an extent that decreases with openness. In particular, risk sharing is prevalent even among economies with poor institutions, provided they are open to international markets. This is consistent with the view that the prospect of retaliation may deter expropriation of foreign capital, even in institutional environments where it is possible. This deterrent is anticipated by investors, who act to diversify risk. By contrast, capital flows headed for closed economies with poor institutions are designed and constrained so as to limit the cost incurred in case of expropriation, and thus achieve little risk sharing. We show this non-linearity continues to be present in the determinants of international capital flows themselves. Institutions are crucial in attracting capital for closed economies, but are barely relevant in open ones, with corresponding consequences on the extent of international risk insurance. |
| Keywords: | Cross-Border Investment; Diversification; Financial Integration; Portfolio Choice; Risk sharing |
| JEL: | F21 F30 G15 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6496&r=cfn |
| By: | Axelson, Ulf (Swedish Institute for Financial Research); Baliga, Sandeep (Northwestern University) |
| Abstract: | Several standard components of managerial compensation contracts have been criticized for encouraging managers to manipulate short-term information about the firm, thereby reducing transparency. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the firm is overvalued. We show in an optimal contracting framework that these components are critical for giving long-term incentives to managers. The lack of transparency induced by the features of the contract makes it harder for the principal to engage in ex post optimal but ex ante inefficient liquidity provision to the manager. |
| Keywords: | Executive compensation; earnings management; transparency |
| JEL: | G34 J33 |
| Date: | 2007–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0054&r=cfn |
| By: | Buti, Sabrina (University of Toronto - Joseph L. Rotman School of Management) |
| Abstract: | This paper gives a new answer to the challenging question raised by Glosten (1994): "Is the electronic order book inevitable?". While the order book enables traders to compete to supply anonymous liquidity, the specialist system enables one to reap the benefits from repeated interaction. We compare a competitive limit order book and a limit order book with a specialist, like the NYSE. Thanks to non-anonymous interaction, mediated by brokers, uninformed investors can obtain good liquidity from the specialist. This, however, creates an adverse selection problem on the limit order book. Market liquidity and social welfare are improved by the specialist if adverse selection is severe and if brokers have long horizon, so that reputation becomes a matter of concern for them. In contrast, if asymmetric information is limited, spreads are wider and utilitarian welfare is lower when the specialist competes with the limit order book than in a pure limit order book market. |
| Keywords: | Limit order book; specialist; hybrid market |
| JEL: | D82 G10 G24 |
| Date: | 2007–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0055&r=cfn |
| By: | Burkart, Mike (Stockholm School of Economics); Lee, Samuel (Stockholm School of Economics) |
| Abstract: | The impact of separating cash flow and votes depends on the ownership structure. In widely held firms, one share - one vote is in general not optimal. While it ensures an efficient outcome in bidding contests, dual-class shares mitigate the free-rider problem, thereby promoting takeovers. In the presence of a controlling shareholder, one share - one vote promotes value-increasing control transfers and deters value-decreasing control transfers more effectively than any other vote allocation. Moreover, leveraging the insider's voting power aggravates agency conflicts because it protects her from the takeover threat and provides less alignment with other shareholders. Even so, minority shareholder protection is not a compelling argument for regulatory intervention, as rational investors anticipate the insider's opportunism. Rather, the rationale for mandating one share – one vote must be to disempower controlling minority shareholders in order to promote value-increasing takeovers. As this policy tends to empower managers vis-a-vis shareholders, it is an open question whether it would improve the quality of corporate governance, notably in systems built around large active owners. The verdict in the case of depositary certificates, priority shares, voting and ownership ceilings is less I ambiguous, since they insulate managers from both takeovers and effective shareholder monitoring. |
| Keywords: | Security-voting structure; market for corporate control; controlling minority shareholders |
| JEL: | G32 |
| Date: | 2007–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0057&r=cfn |
| By: | Cronqvist, Henrik (The Ohio State University); Fahlenbrach, Rüdiger (The Ohio State Unversity) |
| Abstract: | We develop an empirical framework that allows us to analyze the effects of heterogeneity across large shareholders, using a new blockholder-firm panel data set in which we can track all unique blockholders among large public U.S. firms. We find statistically significant and economically important blockholder fixed effects in investment, financial, and executive compensation policies. This evidence suggests that blockholders vary in their beliefs, skills, or preferences. Different large shareholders have distinct investment and governance styles: they differ in their approaches to corporate investment and growth, their appetite for financial leverage, and their attitudes towards CEO pay. We also find blockholder fixed effects in firm performance measures, and differences in style are systematically related to firm performance differences. Our results are consistent with influence for activist, pension fund, corporate, individual, and private equity blockholders, hut consistent with systematic selection for mutual funds. Finally, we analyze sources of the heterogeneity, and find that blockholders with larger block size, board membership, or direct management involvement as officers are associated with larger effects on corporate policies and firm performance. |
| Keywords: | Large shareholders; blockholders; corporate policies; firm performance |
| JEL: | G31 G32 G34 G35 |
| Date: | 2007–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0060&r=cfn |
| By: | Solomon Tadesse; ; |
| Abstract: | Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector. |
| Keywords: | Financial Development, Productivity Growth, Technological Progress, Innovation |
| JEL: | G1 G21 G32 E44 O14 O31 O34 O4 |
| Date: | 2007–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2007-879&r=cfn |
| By: | Ilya, Gikhman |
| Abstract: | In this article we discuss fundamentals of the debt securities pricing. We begin with a generalization of the present value concept. Though the present value is the base valuation method in the modern finance we will illustrate that this concept does not sufficiently accurate in producing instrument pricing. The incompleteness of the unique present value approach stems from variability of the interest rates. Admitting variability of the interest rates we define two present values one for buyer other for seller. Therefore future buyer and seller cash payments can be described by the correspondent present values. Usually used assumption that future interest on investment over a specified time period would be the same as before specified period is a theoretical simplification that might be admitted or not. Admitting such assumption leads to eliminating an important component of the market risk. Recall that the assumption that a future payment can be invested with the same constant interest rate equal to the one used in the past is a component of the group conditions that specify frictionless of the market. We use this new concept that splits present value within two counterparties to outline details of the new valuation method of the fixed income securities. The primary goal of this paper is a credit derivative pricing method of the risky debt instruments. First we introduce a formal definition of the default. It somewhat close but does not coincide with the reduced form of the default setting. |
| Keywords: | default; risky bond; reduced form model; credit risk; |
| JEL: | G13 G12 |
| Date: | 2007–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1450&r=cfn |