nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒05‒31
thirteen papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. La recherche en finance d’entreprise:quel positionnement méthodologique? By Gérard Charreaux
  2. Do financial conglomerates create or destroy value? Evidence for the EU By Iman van Lelyveld en Klaas Knot
  3. Liquidity Stress-Tester: A macro model for stress-testing banks' liquidity risk By Jan Willem van den End
  4. Financial Analysts impact on Stock Volatility. A Study on the Pharmaceutical Sector By Clara I. Gonzalez; Ricardo Gimeno
  5. Does hedging tell the full story? Reconciling differences in US aggregate and industry-level exchange rate risk premia By Francis , Bill B; Hasan, Iftekhar; Hunter, Delroy M
  6. The Risk Components of Liquidity By Chollete, Lorán; Næs, Randi; Skjeltorp, Johannes A.
  7. Credit Spreads and Incomplete Information By Lindset, Snorre; Lund, Arne-Christian; Persson, Svein-Arne
  8. Liquidity and Market Crashes By Jennifer Huang; Jiang Wang
  9. Government Sponsored versus Private Venture Capital: Canadian Evidence By James A. Brander; Edward J. Egan; Thomas F. Hellmann
  10. Evaluating the Impact of Risk Based Funding Requirements on Pension Funds By Jordy Peek; Andreas Reuss; Gerhard Scheuenstuhl
  11. The Effect of CSR on Stock Performance: New Evidence for the USA and Europe By Urs von Arx; Andreas Ziegler
  12. Business Constraints and Growth Potential of Micro and Small Manufacturing Enterprises in Uganda By Esther K. Ishengoma; Robert Kappel
  13. Investment Model Uncertainty and Fair Pricing By Los, Cornelis A.; Tungsong, Satjaporn

  1. By: Gérard Charreaux (Université de Bourgogne)
    Abstract: (VF)Après avoir effectué, dans une première partie, un état des lieux permettant de préciser notamment la nature des questions que se posent les chercheurs en finance d’entreprise et les méthodes qu’ils emploient, la seconde partie est consacrée au positionnement de la recherche en finance d’entreprise et gouvernance sur le plan méthodologique. L’analyse fait ressortir tant l’importance de la modélisation sous ses différentes formes, qu’elle se rattache à la tradition de l’économie néoclassique ou à celle de l’économie néo-institutionnelle, que des travaux empiriques s’inscrivant dans le prolongement de cette modélisation. Sur le plan épistémologique, la recherche en finance d’entreprise semble se rattacher davantage à la tradition Millienne plutôt qu’à l’instrumentalisme ou à l’infirmationnisme.(VA)After examining, in a first part, the nature of the questions posed by researchers in corporate finance and of the methods they use, the second part is devoted to the methodological positioning of research in corporate finance and governance. The analysis emphasizes both the importance of modeling in its various forms, related to the neo-classical or neo-institutional economics traditions, and of the empirical work associated with the models. On the epistemological level, research in corporate finance and governance seems to be attached more to the Millian tradition rather than to instrumentalism or refutationism.
    Keywords: finance d’entreprise;modèles;instrumentalisme;infirmationnisme;corporate finance;models;instrumentalism; refutationism.
    JEL: B41 G30
    Date: 2008–05
  2. By: Iman van Lelyveld en Klaas Knot
    Abstract: There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlierliterature has shown significant diversification discounts: firms that engage in multiple activitiesare valued less. Various factors are important in the size of the discount, for example crosssubsidizationand agency problems. The extant literature, however, generally focuses on nonfinancialfirms or traditional banking (cf Laeven and Levine (2007) and Schmid and Walter(2006)). Our paper focuses specifically on the valuation of bank-insurance conglomerates. We findno universal diversification discount but significant variability. Size, complexity and risk seem tobe important determinants.
    Keywords: financial conglomerates; firm valuation
    JEL: G2 G3 L2
    Date: 2008–05
  3. By: Jan Willem van den End
    Abstract: This paper presents a macro stress-testing model for market and funding liquidity risks of banks, which have been main drivers of the recent financial crisis. The model takes into account the first and second round (feedback) effects of shocks, induced by behavioural reactions of heterogeneous banks, and idiosyncratic reputation effects. The impact on liquidity risk is simulated by a Monte Carlo approach. This generates distributions of liquidity buffers for each scenario round, including the probability of a liquidity shortfall. An application to Dutch banks illustrates that the second round effects have more impact than the first round effects and hit all types of banks, indicative of systemic risk. This lends support policy initiatives to enhance banks' liquidity buffers and liquidity risk management, which could also contribute to prevent financial stability risks.
    Keywords: banking; financial stability; stress-tests; liquidity risk
    JEL: C15 E44 G21 G32
    Date: 2008–05
  4. By: Clara I. Gonzalez; Ricardo Gimeno
    Abstract: The arrival of new information helps financial markets to value assets, but it may has the side-effect of increasing their volatilities. A better knowledge of the mechanism that links relevant news and stock prices would help both private and institutional agents to improve the calibration of the risks implies in a given asset. Financial analysts play a key role in distinguishing which news are relevant for the valuation of a particular asset, and the changes in their recommendations are signals of new information in the market. This paper studies the impact those buy or sell recommendations have on returns and also on volatility instead of the traditional literature that focuses only on prices. The pharmaceutical companies in the New York Stock Exchange are especially suited for this type of analysis given the frequent discontinuities in their expected profits derived from the success or failure in the development of new drugs. Twenty stocks are daily tracked for five years along with the recommendations given by financial analysts. We have modeled stock returns by a Markov Regime Switching model as in Schaller and van Norden (1997) and found two states of low and high volatilities. We have also found strong evidence that the probability of being in the estate of high volatility increases when a Financial Analyst changes his recommendation.
    Date: 2008–05
  5. By: Francis , Bill B (Lally School of Management, Rensselaer Polytechnic Institute); Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland Research); Hunter, Delroy M (College of Business, University of South Florida)
    Abstract: While the importance of currency movements to industry competitiveness is theoretically well established, there is little evidence that currency risk impacts US industries. Applying a conditional asset-pricing model to 36 US industries, we find that all industries have a significant currency premium that adds about 2.47 percentage points to the cost of equity and accounts for approximately 11.7% of the absolute value of total risk premia. Cross-industry variation in the currency premium is explained by foreign income, industry competitiveness, leverage, liquidity and other industry characteristics, while its time variation is explained by US aggregate foreign trade, monetary policy, growth opportunities and other macro variables. The results indicate that methodological weakness, not hedging, explains the insignificant industry currency risk premium found in previous work, thus resolving the conundrum that the currency risk premium is important at the aggregate stock market level, but not at industry level.
    Keywords: exposure; currency risk premium; cost of equity; industry competition; international asset pricing
    JEL: C30 F30 F40 G30
    Date: 2008–05–27
  6. By: Chollete, Lorán (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Næs, Randi (Norges Bank); Skjeltorp, Johannes A. (Norges Bank)
    Abstract: Does liquidity risk differ depending on our choice of liquidity proxy? Unlike literature that considers common liquidity variation, we focus on identifying different components of liquidity, statistically and economically, using more than a decade of US transaction data. We identify three main statistical liquidity factors which are utilized in a linear asset pricing framework. We motivate a correspondence of the statistical factors to traditional dimensions of liquidity as well as the notion of order and trade based liquidity measures. We find evidence of multiple liquidity risk premia, but only a subset of the financial liquidity factors are associated with significant risk premia. These are the factors that we relate to the dimensions of immediacy and resilliency, while the depth dimension does not command a risk premium in any of the models. Our results suggests caution when choosing liquidity variables in asset pricing applications, since liquidity premia may be reflected in only some dimensions of liquidity.
    Keywords: Liquidity Risk; Liquidity Factors; Asset Pricing; Market Microstructure
    JEL: G12 G14
    Date: 2008–03–12
  7. By: Lindset, Snorre (Trondheim Business School); Lund, Arne-Christian (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: A new model is presented which produces credit spreads that do not converge to zero for short maturities. Our set-up includes incomplete, i.e., delayed and asymmetric information. When the financial market observes the company's earnings with a delay, the effect on both default policy and credit spreads is negligible, compared to the Leland (1994) model. When information is asymmetrically distributed between the management of the company and the financial market, short credit spreads do not converge to zero. This is result is similar to the Duffie and Lando (2001) model, although our simpler model improves some limitations in their set-up. Short interest rates from our model are used to illustrate effects similar to the dry-up in the interbank market experienced after the summer of 2007.
    Keywords: Credit risk; credit spreads; delayed information; asymmetric information
    JEL: G12 G33
    Date: 2008–03–12
  8. By: Jennifer Huang; Jiang Wang
    Abstract: In this paper, we develop an equilibrium model for stock market liquidity and its impact on asset prices when constant market presence is costly. We show that even when agents' trading needs are perfectly matched, costly market presence prevents them from synchronizing their trades and hence gives rise to endogenous order imbalances and the need for liquidity. Moreover, the endogenous liquidity need, when it occurs, is characterized by excessive selling of significant magnitudes. Such liquidity-driven selling leads to market crashes in the absence of any aggregate shocks. Finally, we show that illiquidity in the market leads to high expected returns, negative and asymmetric return serial correlation, and a positive relation between trading volume and future returns. We also propose new measures of liquidity based on its asymmetric impact on prices and demonstrate a negative relation between these measures and expected stock returns.
    JEL: E43 E44 G11 G12
    Date: 2008–05
  9. By: James A. Brander; Edward J. Egan; Thomas F. Hellmann
    Abstract: This paper investigates the relative performance of enterprises backed by government-sponsored venture capitalists and private venture capitalists. While previous studies focus mainly on investor returns, this paper focuses on a broader set of public policy objectives, including value-creation, innovation, and competition. A number of novel data-collection methods, including web-crawlers, are used to assemble a near-comprehensive data set of Canadian venture-capital backed enterprises. The results indicate that enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation, as measured by the likelihood and size of IPOs and M&As, and innovation, as measured by patents. It is important to understand whether such underperformance arises from a selection effect in which private venture capitalists have a higher quality threshold for investment than subsidized venture capitalists, or whether it arises from a treatment effect in which subsidized venture capitalists crowd out private investment and, in addition, provide less effective mentoring and other value-added skills. We find suggestive evidence that crowding out and less effective treatment are problems associated with government-backed venture capital. While the data does not allow for a definitive welfare analysis, the results cast some doubt on the desirability of certain government interventions in the venture capital market.
    JEL: G24 H0 O3
    Date: 2008–05
  10. By: Jordy Peek; Andreas Reuss; Gerhard Scheuenstuhl
    Abstract: The objective of this study is to analyse what the quantitative funding requirements for pension funds with defined benefit plans would be, if Solvency II (based on the QIS 3 methodology) would be applied. Also possible extensions of the Solvency II methodology that seem necessary in order to reflect the specifics of pension funds will be discussed. <P>Evaluating the Impact of Risk Based Funding Requirements on Pension Funds <BR>L'objectif de cette étude est d'analyser ce que seraient les besoins quantitatifs de financement pour des fonds de pension à prestations définies, si "Solvabilité II" (basée sur la méthodologie de QIS 3) est appliquée. Les prolongements possibles de la méthodologie de "Solvabilité II" qui semblent nécessaires afin de refléter les spécificités des fonds de pension seront également discutés.
    Keywords: pension fund, organisme de retraite
    JEL: G18 G23 G32
    Date: 2008–03
  11. By: Urs von Arx (CER-ETH, Swiss Federal Institute of Technology (ETH) Zurich, Center of Economic Research); Andreas Ziegler (University of Zurich, Center for Corporate Responsibility and Sustainability)
    Abstract: This paper provides new empirical evidence for the effect of corporate social responsibility (CSR) on corporate financial performance. In contrast to former studies, we examine two different regions, namely the USA and Europe. Our econometric analysis shows that environmental and social activities of a firm compared with other firms within the industry are valued by financial markets in both regions. However, the respective positive effects on average monthly stock returns between 2003 and 2006 appear to be more robust in the USA and, in addition, to be nonlinear. Our analysis furthermore points to biased parameter estimations if incorrectly specified econometric models are applied: The seemingly significantly negative effect of environmental and social performance of the industry to which a firm belongs vanishes if the explanation of stock performance is based on the Fama-French threefactor or the Carhart four-factor models instead of the simple Capital Asset Pricing Model.
    Keywords: Corporate social responsibility, Environmental performance, Financial performance, Asset pricing models.
    JEL: Q56 M14 G12 Q01
    Date: 2008–05
  12. By: Esther K. Ishengoma (Faculty of Commerce and Management, University of Dar es Salaam, Tanzania); Robert Kappel (GIGA German Institute of Global and Area Studies)
    Abstract: Ugandan micro- and small enterprises (MSEs) still perform poorly. The paper utilizes data collected in Uganda in March and April 2003 to analyze the business constraints faced by these MSEs. Using a stratified random sampling, a sample of 265 MSEs were interviewed. The study focuses on the 105 manufacturing firms that responded to all questions. It examines the extent to which the growth of MSEs is associated with business constraints, while also controlling for owners’ attributes and firms’ characteristics. The results reveal that MSEs’ growth potential is negatively affected by limited access to productive resources (finance and business services), by high taxes, and by lack of market access.
    Keywords: small enterprises, informal sector, growth, manufacturing, Uganda, productivity, business services
    JEL: D21 E26 G38 H25 L25 L26 L6 O12 O14
    Date: 2008–05
  13. By: Los, Cornelis A.; Tungsong, Satjaporn
    Abstract: Modern investment theory takes it for granted that a Security Market Line (SML) is as certain as its "corresponding" Capital Market Line. (CML). However, it can be easily demonstrated that this is not the case. Knightian non-probabilistic, information gap uncertainty exists in the security markets, as the bivariate "Galton's Error" and its concomitant information gap proves (Journal of Banking & Finance, 23, 1999, 1793-1829). In fact, an SML graph needs (at least) two parallel horizontal beta axes, implying that a particular mean security return corresponds with a limited Knightian uncertainty range of betas, although it does correspond with only one market portfolio risk volatility. This implies that a security' risk premium is uncertain and that a Knightian uncertainty range of SMLs and of fair pricing exists. This paper both updates the empirical evidence and graphically traces the financial market consequences of this model uncertainty for modern investment theory. First, any investment knowledge about the securities risk remains uncertain. Investment valuations carry with them epistemological ("modeling") risk in addition to the Markowitz-Sharpe market risk. Second, since idiosyncratic, or firm-specific, risk is limited-uncertain, the real option value of a firm is also limited-uncertain This explains the simultaneous coexistence of different analyst valuations of investment projects, particular firms or industries, included a category "undecided." Third, we can now distinguish between "buy", "sell" and "hold" trading orders based on an empirically determined collection of SMLs, based this Knightian modeling risk. The coexistence of such simultaneous value signals for the same security is necessary for the existence of a market for that security! Without epistemological investment uncertainty, no ongoing markets for securities could exist. In the absence of transaction costs and other inefficiencies, Knightian uncertainty is the necessary energy for market trading, since it creates potential or perceived arbitrage (= trading) opportunities, but it is also necessary for investors to hold securities. Knightian uncertainty provides a possible reason why the SEC can't obtain consensus on what constitutes "fair pricing." The paper also shows that Malkiel's recommended CML-based investments are extremely conservative and non-robust.
    Keywords: capital market line; security market line; beta; investments; decision-making; Knightian uncertainty; robustness; information-gap; Galton's Error; real option value
    JEL: G12 G11 C20 G13
    Date: 2008–05–24

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