nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒06‒13
seven papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Privatising national oil companies: Assessing the impact on firm performance By Wolf, C.; Pollitt, M.G.
  2. The zero growth model with expected inflation: further insights. A consistent and inflation neutral formulation for the cost of equity By Ignacio Velez-Pareja
  3. A step by step guide to construct a finacial model without plugs and circularity for valuation purposes By Ignacio Velez-Pareja
  4. Corporate Governance and the Value of Excess Cash Holdings of Large European Firms By Schauten, M.B.J.; Dijk, D.J.C. van; Waal, J-P. van der
  5. Private Equity and Regulatory Capital By Bongaerts, D.; Charlier, E.
  6. Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines By Efraim Benmelech; Nittai K. Bergman
  7. Impact of M&A on firm performance in India: Implications for concentration of ownership and insider entrenchment By Sumon Kumar Bhaumik; Ekta Selarka

  1. By: Wolf, C.; Pollitt, M.G.
    Abstract: This study empirically investigates the impact of privatisation on firm performance in the global oil and gas industry, where questions of resource control have regained widespread attention. Using a dataset of 60 public share offerings by 28 National Oil Companies it is shown that privatisation is associated with comprehensive and sustained improvements in performance and efficiency. Over the seven-year period around the initial privatisation offering, return on sales increases by 3.6 percentage points, total output by 40%, capital expenditure by 47%, and employment intensity drops by 35%. Many of our observed performance improvements are already realised in anticipation of the initial privatisation date, accrue over time, and level off after the initial ownership change rather than accelerate. Details of residual government ownership, control transfer, and size and timing of follow-on offerings provide limited incremental explanatory power for firm performance, except for employment intensity. Based on these results partial privatisations in the oil sector might be seen to capture a significant part of the performance improvement associated with private capital markets without the selling government having to cede majority control.
    Keywords: Privatisation, ownership, corporate performance, anticipation, oil and gas industry
    JEL: C23 G32 L33 L71 M20 Q40
    Date: 2008–02
  2. By: Ignacio Velez-Pareja
    Abstract: The Constant Growth Model attributed to Gordon (the Gordon Model) is one of the most known and popular models in Corporate Finance. In this work we show that even with adjustments in the calculation of the proper Weighted Average Cost of Capital, WACC, in order to grant that the model with zero real growth and inflation is inflation neutral it has some inconsistencies. We develop a formulation for Ke, the cost of levered equity that is consistent and is inflation neutral. We identify problems of consistency and non inflation neutrality when using the Weighted Average Cost of Capital, WACC.
    Date: 2008–06–04
  3. By: Ignacio Velez-Pareja
    Abstract: In this teaching note the reader finds a simplified financial model. In reality, financial models are huge and cumbersome. What we present is very simplified model in comparison to what is found in practice. We indicate the formulas that have to be utilized in the construction of the financial model. We have constructed the formulas in such a way that they can be used to construct part of or the complete model. In the first line and in the first column the reader finds the letters and numbers corresponding to the Excel® spreadsheet in order to make it easier the localization and the construction of the different formulas. In the last two columns we have written those formulas. Usually the formulas correspond to the year 0 and/or year 1. When necessary, we show the formulas for other years and we indicate it. Shaded cells are for the input data. The contribution of this work is double: one is to show that we can construct financial statements without the use of plugs and circularity and the second is that we can use a very simple approach to construct cash flows and to value them. The model shown has two parts. One is the proper financial statements forecast. The second one is a simple cash flow calculation and valuation exercise using the Capital Cash Flow and assuming the risk of the tax savings equal to Ku, the cost of unlevered equity.
    Date: 2008–06–04
  4. By: Schauten, M.B.J.; Dijk, D.J.C. van; Waal, J-P. van der (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We examine the relation between the quality of corporate governance and the value of excess cash for large European firms (FTSEurofirst 300 Index). We use Deminor ratings for Shareholder rights, Takeover defences, Disclosure and Board as proxies for the quality of corporate governance. We find that the value of excess cash is positively related to the Takeover defences score only. It seems that governance mechanisms—except the market for corporate control—are not strong enough to prevent managers from wasting excess cash. For non-UK firms we find that the value of €1 of excess cash in a poorly governed firm is valued at only €0.89 while the value is €1.45 for a good governed firm. We show that poorly governed firms dissipate excess cash relatively quickly with a negative impact on their operating performance as a result.
    Keywords: corporate governance;excess cash;take-over defences
    Date: 2008–05–20
  5. By: Bongaerts, D.; Charlier, E. (Tilburg University, Center for Economic Research)
    Abstract: Regulatory Capital requirements for European banks have been put forward in the Basel II Capital Framework and subsequently in the Capital Requirements Directive (CRD) of the EU. We provide a detailed discussion of the capital requirements for private equity investments under the simple risk weight approach, the PD/LGD approach and the internal model approach. For the latter we present a structural model for which we calibrate the parameters from a proprietary dataset. We modify the standard Merton structural model to make it applicable in practice and to capture stylized facts of these investments. We also show how to implement the early default features of our model in a simulation algorithm with very low computational costs. Our results support capital requirements lower than in Basel II, but not as low as in CRD. A sensitivity analysis shows that this finding is robust to parameter uncertainty and stress scenarios. This is likely to give adverse incentives to banks for using advanced risk models.
    Keywords: Private Equity;Regulatory Capital;Risk Management
    JEL: G21 G28 G32
    Date: 2008
  6. By: Efraim Benmelech; Nittai K. Bergman
    Abstract: How do liquidation values affect financial contract renegotiation? While the 'incomplete contracting' theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downwards when their financial position is sufficiently poor and when the liquidation value of their fleet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation.
    JEL: G33 G34 K12 L93
    Date: 2008–06
  7. By: Sumon Kumar Bhaumik; Ekta Selarka
    Abstract: performance. On the one hand, concentration of ownership that, in turn, concentrates management control in the hands of a strategic investor, eliminates agency problems associated with dispersed ownership. On the other hand, it may lead to entrenchment of upper management which may be inconsistent with the objective of profit (or value) maximisation. This paper examines the impact of M&A on profitability of firms in India, where the corporate landscape is dominated by family-owned and group-affiliated businesses, such that alignment of management and ownership coexists with management entrenchment, and draws conclusions about the impact of concentrated ownership and entrenchment of ownermanagers on firm performance. Our results indicate that, during the 1995-2002 period, M&A in India led to deterioration in firm performance. We also find that neither the investors in the equity market nor the debt holders can be relied upon to discipline errant (and entrenched) management. In other words, on balance, negative effects of entrenchment of ownermanagers trumps the positive effects of reduction in owner-vs.-manager agency problems. Our findings are consistent with bulk of the existing literature on family-owned and group affiliated firms in India.
    Keywords: mergers and acquisitions, corporate governance, manager entrenchment, firm performance, India
    JEL: G34
    Date: 2008–02–01

This nep-cfn issue is ©2008 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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