nep-cfn New Economics Papers
on Corporate Finance
Issue of 2007‒10‒13
twelve papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Nascent Entrepreneurs, Innovation and Financing Constraints By David B. Audretsch; Werner Bönte; Prashanth Mahagaonkar
  2. Stock-Based Compensation and CEO (Dis)Incentives By Benmelech, Effi; Kandel, Eugene; Veronesi, Pietro
  3. Financial structure, Managerial Compensation and Monitoring By Cerasi, Vittoria; Daltung, Sonja
  4. Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates By Claeys, Sophie; Hainz, Christa
  5. What Determines Top Income Shares? Evidence from the Twentieth Century By Roine, Jesper; Vlachos, Jonas; Waldenström, Daniel
  6. Public-Private-Partnerships By Klimaszewski-Blettner, Barbara; Richter, Andreas
  7. Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs By Maurice J. Roche; Michael J. Moore
  8. A market microstructure explanation of IPOs underpricing By Patarick Leoni
  9. Reforming the Valuation and Funding of Pension Promises: are Occupational pension Plans Safer? By Juan Yermo
  10. Accruals and Aggregate Stock Market Returns By Hirshleifer, David; Hou, Kewei; Teoh, Siew Hong
  12. The transmission of emerging market shocks to global equity markets By Lucía Cuadro Sáez; Marcel Fratzscher; Christian Thimann

  1. By: David B. Audretsch; Werner Bönte; Prashanth Mahagaonkar
    Abstract: Innovative nascent entrepreneurs face the problem of obtaining finance, mainly due to information problems. We use new data on capital seeking start-ups allowing distinction between planning stage and early stage. Being innovative does not affect the probability of having external finance in the planning stage but has a positive effect in the early stage. Early start-ups with patents have a significantly higher probability of having equity whereas debt is not affected. Patents, coupled with prototypes have a higher probability for external finance which may be due to reduced uncertainties and learning. The most important determinant of debt is house ownership.
    Keywords: Innovation; Entrepreneurship; Finance; Information Asymmetries
    JEL: M13 G32 O32 O47
    Date: 2007
  2. By: Benmelech, Effi; Kandel, Eugene; Veronesi, Pietro
    Abstract: Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm’s investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become overvalued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.
    Keywords: CEO compensation; Sub-optimal investments
    JEL: G31 G34 G35
    Date: 2007–10
  3. By: Cerasi, Vittoria (Statistics Department, Università degli Studi di Milano); Daltung, Sonja (Financial Institutions and Markets, Ministry of Finance, Financial Law and Economics Division)
    Abstract: When a firm has external debt and monitoring by shareholders is essential, managerial bonuses are shown to be an optimal solution. A small managerial bonus linked to firm's performance not only reduces moral hazard between managers and shareholders, but also between creditors and monitoring shareholders. A negative relation between corporate bond yields and managerial bonuses can be predicted. Furthermore, the model shows how higher managerial pay-performance sensitivity goes hand in hand with greater company leverage and lower company diversification. These predictions find some support in the empirical literature.
    Keywords: Keywords: Managerial Compensation; Financial Structure; Monitoring; Diversification.
    JEL: G32 M12
    Date: 2007–06–01
  4. By: Claeys, Sophie (Research Department, Central Bank of Sweden); Hainz, Christa (Department of Economics, University of Munich)
    Abstract: Policy makers often decide to liberalize foreign bank entry but put limitations on the mode of entry. We study how different entry modes affect the lending rate set by foreign and domestic banks. Our model captures two essential features of banking competition in emerging markets: Domestic banks possess private information about their incumbent clients and foreign banks have better screening skills. Our model predicts that competition is stronger if foreign entry occurs through a greenfield investment and domestic banks' interest rates are thus lower. We find empirical support for this differential competition effect for a sample of banks from ten Eastern European countries for the period 1995-2003.
    Keywords: Banking; Foreign Entry; Mode of Entry; Interest Rate; Asymmetric Information
    JEL: D40 G21 L31
    Date: 2007–06–01
  5. By: Roine, Jesper (Stockholm School of Economics); Vlachos, Jonas (Dept. of Economics, Stockholm University); Waldenström, Daniel (IFN)
    Abstract: This paper examines the long-run determinants of the evolution of top income shares. Using a newly assembled panel of 16 developed countries over the entire twentieth century, we find that financial development disproportionately boosts top incomes. This effect appears to be particularly strong during the early stages of a country’s development. Economic growth is strongly pro-rich which is inconsistent with globalized labor markets determining the incomes of elites. Furthermore, international trade is not associated with increases in top incomes on average, but is so in Anglo-Saxon countries. Finally, tax progressivity has a significant negative effect on top income shares whereas government spending has no such clear impact on inequality.
    Keywords: Top incomes; income inequality; financial development; trade openness; government spending; economic development
    JEL: D31 F10 G10 N30
    Date: 2007–09–29
  6. By: Klimaszewski-Blettner, Barbara; Richter, Andreas
    Abstract: The continuing trend of increasing frequency and severity of losses from natural and man-made-catastrophes during the last decades has drawn attention to catastrophe risk management. Considering the loss potential of catastrophic events, the private insurance markets' capacity does not seem to be suffi-cient. Problems concerning the supply of adequate catastrophe insurance coverage resulting mainly from insurability constraints are aggravated by difficulties of lacking insurance demand. This paper addresses aspects of efficient solutions to increase the supply of and demand for insurance coverage against catastrophic threats. In this context, the government`s role as a risk bearer becomes an increasingly important issue. In particular, we will demonstrate that "pure private" and "pure public" strategies are dominated by "mixed" strategies involving a cooperation of the private and the public sec-tor. Based on an adequate design of a Public-Private Partnership, advantages of the private insurance market can be combined with the states capacity reserves and power to set a general (legal) framework for improving a societys risk sharing and risk management. Strategies with public involvement are more or less severe interventions in the market system which re-quires them to be well-motivated and makes them applicable under certain conditions only. Supplying public capacity for losses from catastrophe events may be favoured from an economic point of view to expand the limits of insurability, but only by using risk-adequate pricing strategies and not for permanent subsidisation of certain business sectors. The states role consists not only in supplying coverage capac-ity, but also in setting an adequate general framework (building regulations, land use planning, etc.) to assure necessary claim prevention. On the other hand, in order to increase the demand for catastrophe insurance, establishing mandatory insurance for fundamental risks can be considered as a useful tool for internalizing externalities caused by lacking insurance demand. Besides the introduction of a compulsory insurance system, general conditions must be set by the state in order to assure the acceptance of manda-tory insurance (tax-privileged provisions, public capacity support for "uninsurable" individual risks, etc.).
    Keywords: Katastrophenrisiken; Versicherungspflicht; Public-Private-Partnership
    JEL: G22 G32
    Date: 2007–09
  7. By: Maurice J. Roche (Economics, National University of Ireland, Maynooth); Michael J. Moore (Queen's University Belfast, Northern Ireland)
    Abstract: We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with 'deep' habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression.
    Keywords: Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence
    JEL: F31 F41 G12
    Date: 2007
  8. By: Patarick Leoni (Economics Department, National University of Ireland, Maynooth)
    Abstract: In a typical IPO game with first-price auctions, we argue that risk-averse investors always underbid in equilibrium because of subjective interpretations of the firm' communication about its actual value and resulting risk aversion about the likelihood of facing investors with higher valuations. We show that the noisier the investors' inferences of the firm' value (in the sense of first-order stochastic dominance) the higher the underbidding level. Our finding is independent of winner's curse effects and possible irrationality, and allows for a testable theory.
    Keywords: IPO underpricing; first-price auction; risk aversion; firm' communication
    JEL: C7 D81 G12 G32
    Date: 2007
  9. By: Juan Yermo
    Abstract: This paper assesses current regulatory and accounting developments in the OECD area against their purported goals. It specifically considers the different approaches to valuing pension liabilities and questions the possibility of convergence between funding and business accountants' valuation standards for pension liabilities. It concludes that the trend towards market-based valuation methods in business accounting is not entirely consistent with the parallel exercise undertaken by many pension regulators. Since valuation methods for funding purposes are likely to continue moving towards a market-based model, policymakers should be all the more cautious in setting funding regulations so as to provide sufficient flexibility to pension funds in covering funding deficits while providing incentives to establish funding buffers in good economic times. We also argue that accounting rules and regulatory changes are driving plan design in some OECD countries such as Japan, the Netherlands and the United Kingdom and can lead to procyclical investment behaviour by pension funds. <P>Réformer l'estimation et le financement des promesses sur les retraites : les plans de retraite professionnels sont-ils plus sûrs ? <BR>L‘auteur évalue dans ce document les évolutions actuelles des dispositions réglementaires et comptables dans la zone OCDE au regard de leurs objectifs supposés. Il examine plus précisément les différentes méthodes d'évaluation des engagements au titre des retraites, et s'interroge sur la possibilité d'une convergence entre les méthodes d'évaluation de ces engagements utilisées aux fins de financement, d'une part, et celles employées par les comptables d'entreprises, d'autre part. L'auteur parvient à la conclusion que l'évolution de la comptabilité d'entreprise vers des méthodes d'évaluation fondées sur les mécanismes de marché ne concorde par tout à fait avec l'exercice parallèle entrepris par de nombreuses instances de réglementation des retraites. Selon l'auteur, il est probable que les méthodes d'évaluation utilisées aux fins de financement continueront à évoluer vers un modèle fondé sur les mécanismes de marché. Compte tenu de cette tendance, les responsables de l'action publique devraient se montrer extrêmement prudents dans l'élaboration des règles de financement, de manière à laisser aux organismes de retraite des marges de manoeuvre suffisantes pour couvrir leurs déficits de financement, tout en les incitant à constituer des fonds de réserve en période de conjoncture économique favorable. Toujours selon l'auteur, les modifications des dispositions comptables et réglementaires influent sur la conception des plans de retraite dans certains pays de l'OCDE, comme le Japon, les Pays-Bas et le Royaume-Uni, et elles peuvent déboucher sur des comportements d'investissement procycliques de la part des organismes de retraite.
    Keywords: investment, investissement, accounting, comptabilité, pension fund, règle de financement, funding rule, defined benefit, prestation définie, discount rate, valuation method, méthode d'évaluation, méthode actuarielle, actuarial method, fair value, juste valeur, organisme de retraite, taux d'actualisation
    JEL: G18 G23 J32
    Date: 2007–07
  10. By: Hirshleifer, David; Hou, Kewei; Teoh, Siew Hong
    Abstract: Past research has shown that the level of operating accruals is a negative cross-sectional predictor of stock returns. This paper examines whether the accrual anomaly extends to the aggregate stock market. In contrast with cross-sectional findings, there is no indication that aggregate operating accruals is a negative time series predictor of stock market returns; the relation is strongly positive for the market portfolio and also for several sector and industry portfolios. In addition, innovations in accruals are negatively contemporaneously associated with market returns, suggesting that changes in accruals contain information about changes in discount rates, or that firms manage earnings in response to market-wide undervaluation.
    Keywords: accruals; return predictability; stock market returns; market efficiency; asset pricing; anomalies; accounting; earnings fixation
    JEL: M41 G12 G14
    Date: 2007–09–23
  11. By: Albanese, Claudio; Vidler, Alicia
    Abstract: We present a new structural model for single name equity and credit derivatives which we also correlate across reference names to produce a model for bespoke synthetic CDOs. The model captures volatility and outlook risk along with correlation risk for small and for large moves separately. We show that the model calibrates well to both equity structured products and credit derivatives. As examples, we discuss a number of single name derivatives on IBM spanning the credit-equity spectrum and ranging from volatility swaps, to cliquets, CDS options and CDSs on leveraged loans with pre-payment risk. We also use the model to price tranches on the investment grade DJ.CDX.IG index along with tranches on the high yield index DJ.CDX.HY. We show that the model gives consistent and high precision pricing across all these derivative asset classes. We show that this can be achieved consistently, with the very same parameter choices across these diverse derivative assets and making use of only minor explicit time dependencies.
    Keywords: Credit derivatives; equity derivatives; long dated derivatives; CDOs; structural model
    JEL: G13
    Date: 2007–01–26
  12. By: Lucía Cuadro Sáez (Banco de España); Marcel Fratzscher (European Central Bank); Christian Thimann (European Central Bank)
    Abstract: The paper analyses whether, and to what extent, emerging market economies (EMEs) have systemic importance for global financial markets, above and beyond their influence during crises episodes. Using a novel database of exogenous economic and political shocks for 14 EMEs, we find that EME shocks not only have a statistically but also economically significant impact on global equity markets. The economic significance of EME shocks is in particular underlined by their remarkably persistent effects over time. Importantly, EMEs are found to influence global equity markets about just as much in "good" times as in "bad" times, i.e. during crises or periods of financial turbulence. Finally, we detect a large degree of heterogeneity in the transmission of EME shocks to individual countries’ equity markets, stressing the different degrees of financial exposure, which is relatively higher for European equity markets.
    Keywords: global financial markets, equity markets, transmission, financial integration, shocks, news, emerging market economies, mature economics, euro area, United States
    JEL: F36 F30 G15
    Date: 2007–09

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