nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒04‒04
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Asset Bubbles without Dividends - An Experiment By Oechssler, Jörg; Schmidt, Carsten; Schnedler, Wendelin
  2. Executive Stock Options when Managers are Loss-Averse By Dittmann, Ingolf; Maug, Ernst; Spalt, Oliver
  3. The impact of thin-capitalization rules on multinationals' financing and investment decisions By Büttner, Thiess; Overesch, Michael; Schreiber, Ulrich; Wamser, Georg
  4. Analyzing the interest rate risk of banks using time series of accounting-based data: evidence from Germany By Entrop, Oliver; Memmel, Christoph; Wilkens, Marco; Zeisler, Alexander
  5. Strategic Debt: Evidence from Bertrand and Cournot Competition By Abe de Jong; Thuy Thu Nguyen; Mathijs A. van Dijk

  1. By: Oechssler, Jörg (Department of Economics, University of Heidelberg); Schmidt, Carsten (Sonderforschungsbereich 504, University of Mannheim); Schnedler, Wendelin (Department of Economics, University of Heidelberg)
    Abstract: Bubbles in asset markets have been documented in numerous experimental studies. However, all experiments in which bubbles occur pay dividends after each trading day. In this paper we study whether bubbles can occur in markets without dividends. We investigate the role of two features that are present in real markets. (1) The mere possibility that some traders may have inside information, and (2) the option to communicate with other traders. We find that bubbles can indeed occur without dividends. Surprisingly, communication turns out to be counterproductive for bubble formation, whereas the possibility of inside information is, as expected, crucial.
    Keywords: asset markets, bubbles, experiment, mirages, dividends
    JEL: C92 G12 D8
    Date: 2007–04–04
  2. By: Dittmann, Ingolf (Erasmus School of Economics Rotterdam); Maug, Ernst (Chair for Corporate Finance, University of Mannheim and Sonderforschungsbereich 504); Spalt, Oliver (Chair for Corporate Finance, University of Mannheim and Sonderforschungsbereich 504)
    Abstract: This paper analyzes optimal executive compensation contracts when managers are loss averse. We establish the general optimal contract analytically and parameterize the model using data on compensation contracts for 595 CEOs. Parameters for preferences are based on the experimental literature. Overall, the Loss Aversion-model dominates an equivalent Risk Aversion-model, especially with respect to its ability to predict options as part of the optimal contract. The Loss Aversion-model performs well in terms of predicting observed compensation contracts if the reference wage is assumed to lie not too far above previous year’s fixed wage. Our results suggest that loss aversion is a better paradigm for analyzing design features of stock options and for developing preference-based valuation models than the conventional model used in the literature.
    Date: 2007–06–26
  3. By: Büttner, Thiess; Overesch, Michael; Schreiber, Ulrich; Wamser, Georg
    Abstract: This paper analyzes the e®ectiveness of thin-capitalization rules in preventing debt finance by intercompany loans and explores their consequences for corporate decisions. A theoretical discussion emphasizes that limitations of the deduction of interest owed to foreign affiliates would not only affect multinationals' capital structure choice but also investment. An empirical investigation exploits a large firm-level panel dataset of multinationals in order to analyze the impact of thin-capitalization rules on capital structure choice and investment in the OECD and some further European countries in the time period between 1996 and 2004. The results indicate that thin-capitalization rules are effective in curbing tax planning via intercompany loans. However, investment is found to be adversely affected.
    Keywords: Corporate Income Tax, Multinationals, Leverage, Thin-Capitalization Rules, Firm-Level Data
    JEL: G32 H25 H26
    Date: 2008
  4. By: Entrop, Oliver; Memmel, Christoph; Wilkens, Marco; Zeisler, Alexander
    Abstract: This paper describes the first thorough analysis of the interest risk of German banks on an individual bank level. We develop a new method that is based on time series of accountingbased data to quantify the interest risk of banks and apply it to analyze the German banking system. We find evidence that our model yields a significantly better fit of banks' internally quantified interest rate risk than a standard approach that relies on one-point-in-time data, and that the interest rate risk differs between banks of different size and banking group. Additionally, we find structural differences between trading book and non-trading book institutions.
    Keywords: German financial institutions, interest rate risk, accounting-based approach, maturity transformation, banking supervision, model evaluation
    JEL: G18 G21
    Date: 2008
  5. By: Abe de Jong (RSM Erasmus University); Thuy Thu Nguyen (RSM Erasmus University); Mathijs A. van Dijk (RSM Erasmus University)
    Abstract: We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm's leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms' competitive behavior in the product market in their capital structure decisions.
    Keywords: Strategic debt, Cournot competition, Bertrand competition, demand and cost uncertainty, leverage
    JEL: G32 L10 L60
    Date: 2008

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