nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒03‒15
six papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. There exists circularity between WACC and value? Another solution By Ignacio Velez-Pareja; Julian Benavides Franco
  2. Collateral, default penalties and almost finite-time solvency By V. Filipe Martins-da-Rocha; Yiannis Vailakis
  3. The Analysis of a Deviation of Investment and Corporate Governance By Shoichi Hisa
  4. The Politician and his Banker By Hendrik Hakanes; Christa Hainz
  5. Risks and Regulation of Insurance Companies. Is Solvency II the Right Answer? By Benjamin Lorent
  6. Borrowing Constraints, Entrepreneurial Risks, and the Wealth Distribution in a Heterogeneous Agent Model By Christiane Clemens; Maik Heinemann

  1. By: Ignacio Velez-Pareja; Julian Benavides Franco
    Abstract: Although we know there exists a simple approach to solve the circularity between value and the discount rate, known as the Adjusted Present Value proposed by Myers, 1974, it seems that practitioners still rely on the traditional Weighted Average Cost of Capital, WACC approach of weighting the cost of debt, Kd and the cost of equity, Ke and discounting the Free Cash Flow, FCF. We show how to solve circularity when calculating value with the free cash flow, FCF and the WACC. As a result of the solution we arrive at a known solution when we assume the discount rate of the tax savings as Ke, the cost of unlevered equity: the capital cash flow, CCF discounted at Ku. When assuming Kd as the discount rate for the tax savings, we find an expression for calculating value that does not implies circularity. We do this for a single period and for N periods.
    Date: 2008–03–06
  2. By: V. Filipe Martins-da-Rocha; Yiannis Vailakis
    Date: 2008–03
  3. By: Shoichi Hisa
    Abstract: Investment of firms is affected by not only fundamentals factors, but liquidity constraint, ownership or corporate structure. Information structure between manager and owner is a significant factor to decide the level of investment, and deviation of investment from optimal condition. The reputation model between manager and owner suggest that the separate of ownership and management may induce the deviation of investment, and indicate that governance structure is important to reduce it. In this paper we estimate the deviation of investment using investment function, and investigate the relation of the derivation and ownership structure or corporate finance using data of Japanese listed firms. In empirical test the following results is induced. (i) The concentration of ownership reduces the deviation of investment. (ii) The deviation becomes smaller when main shareholder is government or individual. (iii) On the contrary it becomes larger when main shareholder is bank or foreign institution. These results suggested that the asymmetry of information between owner and manager bring the instability of investment, and bank system is not well functioned to solve the principal-agent problem to reduce the instability.
    Keywords: Reputation, Startegic Communication, Investment
    JEL: D82 D83 E22 G32
    Date: 2008–03
  4. By: Hendrik Hakanes (Max Planck Institute for Research on Collective Goods, Bonn); Christa Hainz (University of Munich, CESifo, and WDI)
    Abstract: Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for grant-ing state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they econo-mize on screening costs. For similar reasons, they may increase social welfare rela-tive to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspec-tive, a politician uses public banks inefficiently often.
    Keywords: property right, non-linear pricing, pure bundling, club good, cross-subsidisation, packet switched telephony
    JEL: G21 G38 H25
    Date: 2008–01
  5. By: Benjamin Lorent (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: The role of insurance sector has grown in importance. While there is a plethora of academic literature on the needs for a banking regulation, literature on insurance regulation is scarce and mainly focused on asymmetry issues. In this paper, we describe the reasons for an insurance regulation. Recent developments faced by insurers modified the risks encountered by the sector, especially liquidity risk and systemic risk. The purpose of the discussion presented here is also to outline the specificities of the new framework for the regulation of European insurance undertakings, Solvency II, as it is currently discussed to provide an appropriate response to the changing needs of insurance regulation. Our analysis leads us to conclude that Solvency II answers well to the developing insurance sector. However, caution is warranted for some areas such as evaluation of embedded options and guarantees, risk transfer and financial conglomerates.
    Keywords: Insurance, Regulation, Solvency II, Liquidity risk, Systemic risk
    JEL: G20 G22 G28
    Date: 2008–02
  6. By: Christiane Clemens (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Maik Heinemann (University of Lüneburg)
    Abstract: This paper deals with credit market imperfections and idiosyncratic risks in a two–sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk–taking, and social mobility. Contrary to many models in the literature, our comparative static results cover the entire range of borrowing constraints, from complete markets to a perfectly constrained economy. In our baseline model, we find substantial gains in output, welfare, and wealth equality associated with relaxing the constraints, but argue that it might also prove worthwhile to examine the marginal gains from credit market improvements. Interestingly, the amount of entrepreneurial activity and social mobility increases if borrowing constraints become more tight. These results can be attributed to the general equilibrium nature of our approach, where optimal firm sizes and the demand for credit are determined endogenously. The comparative static results on the entrepreneurship rate and social mobility respond sensitively to a change in income persistence.
    Keywords: DSGE model, wealth distribution, occupational choice, borrowing constraints
    JEL: C68 D3 D8 D9 G0 J24
    Date: 2008–03

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