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on Corporate Finance |
| By: | David Bruner; Michael McKee; Rudy Santore |
| Abstract: | The use of equity-based compensation is an increasingly popular means by which to align the incentives of top management with that of the shareholders. However, recent theoretical and empirical research suggests that the use of equity-based compensation has the unintended consequence of creating the incentive to commit managerial fraud of the type being reported in the press. This paper reports experimental evidence showing that the amount of fraud committed by subjects is positively correlated with the level of equity, as is the level of effort. As well, the amount of fraud that is committed is negatively correlated with the probability of detection and subjects’ risk aversion. The experimental design permits the identification of causal relations in the directions just noted. Key Words: |
| JEL: | G34 C91 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:08-05&r=cfn |
| By: | Ian Babetskii; Lubos Komarek; Zlatuse Komarkova |
| Abstract: | The paper considers the empirical dimension of financial integration among stock markets in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock exchange indices) and at the sectoral level (considering banking, chemical, electricity and telecommunication indices). Our empirical evaluation consists of (1) an analysis of alignment (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of stock market integration on both the national and sectoral levels between the Czech Republic, Hungary, Poland and the euro area. |
| Keywords: | Beta convergence, new EU member states, sigma convergence, stock markets. |
| JEL: | C23 G15 G12 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/7&r=cfn |
| By: | Acharya, Viral V; Volpin, Paolo |
| Abstract: | We argue that the choice of corporate governance by a firm affects and is affected by the choice of governance by other firms. Firms with weaker governance give higher payoffs to their management to incentivize them. This forces firms with good governance to also pay their management more than they would otherwise, due to competition in the managerial labour market. This externality reduces the value to firms of investing in corporate governance and produces weaker overall governance in the economy. The effect is stronger the greater the competition for managers and the stronger the managerial bargaining power. While standards can help raise governance towards efficient levels, market-based mechanisms such as (i) the acquisition of large equity stakes by raiders and (ii) the need to raise external capital by firms can help too, and we characterize conditions under which this happens. |
| Keywords: | corporate governance; executive compensation; externality; governance standards; ownership structure; regulation |
| JEL: | G34 J63 K22 K42 L14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6627&r=cfn |
| By: | Acharya, Viral V; Viswanathan, S |
| Abstract: | We consider a moral hazard setup wherein leveraged firms have incentives to take on excessive risks and are thus rationed when they attempt to borrow in order to meet liquidity shocks. The rationed firms can optimally pledge cash as collateral to borrow more, but in the process must liquidate some of their assets. Liquidated assets are purchased by non-rationed firms but their borrowing capacity is also limited by the moral hazard. The market-clearing price exhibits cash-in-the-market pricing and depends on the entire distribution of liquidity shocks in the economy. As moral hazard intensity varies, equilibrium price and level of collateral requirements are negatively related. However, compared to models where collateral requirements are exogenously specified, the endogenously designed collateral in our model has a stabilizing role on prices: For any given intensity of moral hazard problem, asset sales are smaller in quantity, and, in turn, equilibrium price is higher, when collateral requirements are optimally designed. This price-stabilizing role implies that the ex-ante debt capacity of firms is higher with collateral and thereby ex-post liability shocks are smaller. This stabilizes prices further, resulting in an important feedback: Collateral reduces the proportion of ex-ante rationed firms and thus leads to greater market participation. Our model provides an agency-theoretic explanation for some features of financial crises such as the linkage between market and funding liquidity and deep discounts observed in prices during crises that follow good times. |
| Keywords: | credit rationing; financial crises; fire sales; funding liquidity; market liquidity; risk-shifting |
| JEL: | D45 D52 D53 G12 G20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6630&r=cfn |
| By: | Bovenberg, A Lans; Teulings, Coen N |
| Abstract: | We argue in favour of the shareholder model of the firm for three main reasons. First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle about the ultimate goal of the company. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs. Third, making shareholders the ultimate owner of the firm provides the best possible diversification of firm-specific risks. Diversification of firm-specific risk on capital markets is an efficient form of social insurance. Hence, firms should bear the full cost of specific investment, while workers should be paid only their outside option. Empirical results for Denmark, Portugal and the United States show that Denmark is closest to the first-best outcome, while Portugal and the United States deviate in different ways. Coordination in wage bargaining and collective norms help reduce the claim of workers on the firm’s surplus. Collective action, however, is a mixed blessing because politicians also face the temptation to please incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. The transition from the Rhineland towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights. |
| Keywords: | Corporate Governance; Employment Protection; Optimal Risk Sharing; Wage setting |
| JEL: | E24 G32 G34 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6645&r=cfn |
| By: | Cooper, Ian; Nyborg, Kjell G |
| Abstract: | This paper derives a tax-adjusted discount rate formula with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of tax losses in default. We identify the assumption that justifies the textbook approach of discounting interest tax shields at the cost of debt. We contrast this with an alternative assumption that leads to the Sick (1990) result that these should be discounted at the riskless rate. These two approaches represent polar cases. Each generates its results by using a different simplifying assumption, and we explain what determines the correct treatment in practice. We also discuss implementation of the valuation procedure using the CAPM. |
| Keywords: | tax adjusted discount rate; WACC |
| JEL: | G12 G31 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6646&r=cfn |
| By: | Bacchetta, Philippe; van Wincoop, Eric |
| Abstract: | We examine formally Keynes' idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs. Higher order expectations add an additional term to a standard asset pricing equation. We call this the higher order wedge, which depends on the difference between higher and first order expectations of future payoffs. We analyze the determinants of this wedge and its impact on the equilibrium price. In the context of a dynamic noisy rational expectations model, we show that the higher order wedge depends on first order expectational errors about the mean set of private signals. This in turn depends on expectational errors about future asset payoffs based on errors in public signals. We show that the higher order wedge reduces asset price volatility and disconnects the price from the present value of future payoffs. The impact of the higher order wedge on the equilibrium price can be quantitatively large. |
| Keywords: | Asset pricing; Beauty contest; Higher order beliefs |
| JEL: | D8 G0 G1 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6648&r=cfn |
| By: | Hale, Galina B; Razin, Assaf; Tong, Hui |
| Abstract: | We study a mechanism through which strong creditor protection affect positively the level, and negatively the volatility, of the aggregate stock market price. In a Tobin-q model with liquidity and productivity shocks, two channels are at work: (1) Creditor protection raises the stock value in a credit-constraint regime; (2) Creditor protection lowers the probability of the credit crunch. We confront the key predictions of the model to a panel of 40 countries over the period from 1984 to 2004. We find support to the hypothesis that creditor protection have a positive effect on the level, and a negative effect of the volatility, of stock prices, via the negative effect of the creditor protection on the probability of credit crunch. |
| Keywords: | credit crunch; Probit estimation; Tobin q |
| JEL: | E1 G2 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6658&r=cfn |
| By: | Gatti, Roberta; Love, Inessa |
| Abstract: | Although it is widely accepted that financial development is associated with higher growth, the evidence on the channels through which credit affects growth at the microeconomic level is scant. Using data from a cross section of Bulgarian firms, we estimate the impact of access to credit, as proxied by indicators of whether firms have access to a credit line or overdraft facility on productivity. To overcome potential omitted variable bias of OLS estimates, we use information on firms’ past growth to instrument for access to credit. We find credit to be positively and strongly associated with TFP. These results are robust to a wide range of robustness checks. |
| Keywords: | access to credit; productivity; transition |
| JEL: | D24 G21 G32 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6676&r=cfn |
| By: | Hau, Harald; Rey, Hélène |
| Abstract: | This paper presents new stylized facts on the distribution of the home bias at the fund level. We find (i) a large heterogeneity in the degree of home bias across mutual funds; (ii) a positive correlation between the size of funds and home bias; and (iii) a positive correlation between the size of funds, the number of foreign countries and the number of sectors in which they invest. These facts constitute a challenge for existing theories. |
| Keywords: | asset allocation; diversification; investment behaviour |
| JEL: | F37 G11 G15 G23 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6721&r=cfn |