nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒05‒17
six papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Investment, Resolution of Risk, and the Role of Affect By Hopfensitz, Astrid; Krawczyk, Michal; van Winden, Frans A.A.M.
  2. A Methodological Note on Measuring the Functional Efficiency of Capital Markets By Eklund, Johan E.; Desai, Sameeksha
  3. The signalling hypothesis revisited: Evidence from foreign IPOs By Francis , Bill B; Hasan , Iftekhar; Lothian , James R; Sun, Xian
  4. The Effect of Corruption on Investment Growth: Evidence from Firms in Latin America, Sub-Saharan Africa and Transition Countries. By Elizabeth Asiedu; James Freeman
  5. Measuring and Analyzing the Liquidity of the Italian Treasury Security Wholesale Secondary Market By Coluzzi, Chiara; Ginebri, Sergio; Turco, Manuel
  6. When Is Quality of Financial System a Source of Comparative Advantage? By Jiandong Ju; Shang-Jin Wei

  1. By: Hopfensitz, Astrid; Krawczyk, Michal; van Winden, Frans A.A.M.
    Abstract: This experimental study is concerned with the impact of the timing of the resolution of risk on people’s willingness to take risks, with a special focus on the role of affect. While the importance of anticipatory emotions has so far been only inferred from decisions regarding hypothetical choice problems, we had participants put their own money at risk in a real investment task. Moreover, emotions were explicitly measured, including anticipatory emotions experienced during the waiting period under delayed resolution (which involved two days). Affective traits and risk attitudes were measured through a web-based questionnaire before the experiment and participants’ preferences for resolution timing, risk, and time were incentive compatibly measured during the experiment. Main findings are that delayed resolution can affect investment, that the effect depends on the risk involved, and that (among all the measures considered) only emotions can explain our results, albeit in ways that are not captured by existing models.
    Keywords: delayed resolution of risk; emotions; experiment; Investment decision
    JEL: C91 D81 G11
    Date: 2008–05
  2. By: Eklund, Johan E. (Jönköping International Business School and The Royal Institute of Technology); Desai, Sameeksha (Max Planck Institute of Economics)
    Abstract: We apply the accelerator principle to measure the functional efficiency of capital markets. We estimate the elasticity of capital with respect to output using a panel of firms across 44 countries, and compare the results with existing approaches. Furthermore, we correlate our measure with corporate governance institutions.
    Keywords: Allocation of capital; accelerator principle; functional efficiency:
    JEL: C00 G32 P00
    Date: 2008–05–12
  3. By: Francis , Bill B (Lally School of Management and Technology); Hasan , Iftekhar (Rensselaer Polytechnic Institute, USA and Bank of Finland Research); Lothian , James R (Graduate School of Business, Fordham University); Sun, Xian (Office of the Comptroller of the Currency, USA)
    Abstract: While the signalling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch, 1989), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein and Welch, 1993; Michaely and Shaw, 1994). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs – firms from both financially integrated and segmented markets – in US markets. The evidence indicates that signalling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering activities. For firms from integrated markets, in contrast, the analyst-coverage-purchase hypothesis appears to matter more in explaining IPO underpricing and the aftermarket price appreciation explains these firms’ seasoned equity offering activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signalling hypothesis.
    Keywords: IPO underpricing; seasoned equity offering; cross-listing; signalling hypothesis; financial market integration; market-feedback hypothesis
    JEL: G14 G15 G30 G32
    Date: 2008–05–06
  4. By: Elizabeth Asiedu (Department of Economics, The University of Kansas); James Freeman (Department of Economics, Wheaton College)
    Abstract: Many of the empirical studies that analyze the impact of corruption on investment have three common features: they employ aggregate (country-level) data on investment, corruption is measured at the country-level, and data for countries from several regions are pooled together. This paper uses firm-level data on investment and measures corruption at the firm and country-level, and allows the effect of corruption to vary by region. Our dependent variable is firms’ investment growth and we employ six measures of corruption from four different sources: two firm-level measures and four country-level measures. We find that the effect of corruption on investments varies significantly across regions: corruption has a negative and significant effect on investment growth for firms in Transition countries but has no significant impact for firms in Latin America and Sub-Saharan Africa. Furthermore, among the variables included in the regressions (firm size, firm ownership, trade orientation, industry, GDP growth, inflation and openness to trade) corruption is the most important determinant of investment growth for Transition countries.
    Keywords: Bribery, Corruption, Firm, Investment, Latin America and Caribbean, Sub-Saharan Africa, Transition Countries.
    JEL: G31 O16
    Date: 2008–05
  5. By: Coluzzi, Chiara; Ginebri, Sergio; Turco, Manuel
    Abstract: Although its importance, only recently the issue of liquidity in Treasury markets has received greater attention. We survey the literature about market liquidity and liquidity measures, and we put forward new measures. The aim is to provide a description of the liquidity of the Italian wholesale secondary market, which we describe thoroughly. We apply a large set of measures on a unique dataset, which gives us a complete view of the market. Even though the market provides an amount of liquidity that fits the market needs, the quality of the order book is low, and despite the presence of a large number of market makers, the degree of competition among them is not very high. Moreover, no clear and general relationship emerges between trading and order book measures. Indeed, even though trading activity is higher for on-the-run securities with respect to the off-the-run securities, there is not a sharp difference in terms of liquidity of the order book between them. In this case market regulation plays an important role. Finally, we investigate how long it takes for a new issue to become the benchmark for its segment. Our evidence shows that some modifications of the issuance policy in order to have a larger outstanding since the first auction could help securities in gaining earlier their benchmark status, especially in case of 10-year BTPs.
    Keywords: Liquidity, liquidity measures, Government securities, market microstructure, benchmark status.
    JEL: D49 G12 H63
    Date: 2008–05–11
  6. By: Jiandong Ju; Shang-Jin Wei
    Abstract: Does finance follow the real economy, or the other way around? This paper unites the two competing schools of thought in a general equilibrium framework. Our key result is that there are threshold effects defined by a set of deep institutional parameters (cost of financial intermediation, quality of corporate governance, and level of property rights protection) which can be used to separate economies of high-quality institutions from those of low-quality institutions. On one hand, for economies with high-quality institutions, the view that finance follows the real economy is essentially correct. Equilibrium output and prices are determined by factor endowment. Further improvement in the institutions does not affect patterns of output. On the other hand, for economies with low-quality institutions, the view that finance is a key driver of the real economy is essentially correct. Not only is finance a source of comparative advantage, but an increase in capital endowment has no effect on outputs and prices. Our model extends a standard one-sector, partial equilibrium model of corporate finance to a multi-sector, general equilibrium analysis. Surprisingly, but consistent with data, we show that the size of financial markets (relative to GDP) does not change monotonically with either the quality of institutions or with the factor endowment. Free trade may reduce the aggregate income of an economy with low-quality institutions. Financial capital tends to flow from economies with low-quality institutions to those with high-quality institutions.
    JEL: F1 F3 G3
    Date: 2008–05

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