nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒10‒07
nine papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Nonlinear Modeling of Target Leverage with Latent Determinant Variables – New Evidence on the Trade-off Theory By Ralf Sabiwalsky
  2. Neural Networks and their application in the fields of corporate finance By Eric Severin
  3. Asymmetric Information and the Signaling Role of Prices By Wassim Daher; Leonard J. Mirman; Marc Santugini
  4. The Role of Bank Capital in the Propagation of Shocks By Césaire Meh; Kevin Moran
  5. How does Entrepreneurial Activity Affect the Supply of Business Angels? By André van Stel; Kashifa Suddle; Andrew Burke; Chantal Hartog
  6. Measuring bank capital requirements through Dynamic Factor analysis By Andrea Cipollini; Giuseppe Missaglia
  7. The Reflexive Properties of Corporate Governance Codes: The Reception of the 'Comply or Explain' Approach in Slovenia By Nina Cankar; Simon Deakin; Marko Simoneti
  8. The financial leverage of Insurers subject to price regulation: evidence from Canada By Strauss, Jason David
  9. Splitting Up Value: A Critical Review of Residual Income Theories By Carlo Alberto, Magni

  1. By: Ralf Sabiwalsky
    Abstract: The trade-off theory on capital structure is tested by modelling the capital structure target as the solution to a maximization problem. This solution maps asset volatility and loss given default to optimal leverage. By applying nonlinear structural equation modelling, these unobservable variables are estimated based on observable indicator variables, and simultaneously, the speed of adjustment towards this leverage target is estimated. Linear specifications of the leverage target suffer from overlap between the predictions of various theories on capital structure about the sign and significance of determinants. In contrast, the framework applied here allows for a direct test: results confirm the trade-off theory for small and medium-sized firms, but not for large firms.
    Keywords: Capital Structure, Nonlinear, Latent Variables, Trade-off Theory
    JEL: G32 G33 C61
    Date: 2008–08
  2. By: Eric Severin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, SAMOS - Statistique Appliquée et MOdélisation Stochastique - Université Panthéon-Sorbonne - Paris I, CIS - Lab of Computer and Information Science - Helsinki University of Technology)
    Abstract: This article deals with the usefulness of neuronal networks in the area of corporate finance. Firstly, we highlight the initial applications of neural networks. One can distinguish two main types: layer networks and self organizing maps. As Altman al. (1994) underlined, the use of layer networks has improved the reclassifying rate in models of bankruptcy forecasting. These first applications improved bankruptcy forecasting by showing a relationship between capital structure and corporate performance. The results highlighted in our second part, show the pertinence of the use of the algorithm of Kohonen applied to qualitative variables (KACM). More particularly, in line with Altman (1968, 1984), one can suggest the coexistence of negative and positive effects of financial structure on performance. This result allows us to question scoring models and to conclude as to a non-linear relationship. In a larger framework, the methodology of Kohonen has allowed a better perception of the factors able to explain the leasing financing (Cottrell et al., 1996). The objective is here to explain the factors of the choice between leasing and banking loans. By using different variables, we highlight the characteristics of firms which most often use leasing. The corporate financing policy could be explained by: the cost of the financing, advantages of leasing or by the minimization of agency costs in leasing, we highlight a relationship between resorting to leasing and credit rationing.
    Keywords: neural netwoks, SOM, corporate finance
    Date: 2008
  3. By: Wassim Daher; Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal)
    Abstract: We study asymmetric information and the signaling role of prices in a noiseless and imperfectly competitive environment. Here, the price is determined by market forces. After describing the general model, we study information flows in applications of industrial organization and finance: a quantity-setting monopoly, Cournot oligopoly, and a model of choice and allocation of a risky asset. For each application, there is a unique signaling equilibrium in which the price conveys all the information. Moreover, the signaling equilibrium differs from the full information equilibrium..
    Date: 2008–09
  4. By: Césaire Meh; Kevin Moran
    Abstract: Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation.
    Keywords: Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models
    JEL: E44 E52 G21
    Date: 2008
  5. By: André van Stel; Kashifa Suddle; Andrew Burke; Chantal Hartog
    Abstract: This paper examines the prevalence and the determinants of informal entrepreneurial investment activity (i.e. the 3 FFFs –friends, fools and family– and business angels), using a data set of more than 175,000 individuals – including some 4000 informal investors – in a large number of highly developed countries over the period 2002-2004. We distinguish between micro-level and macro-level determinants. The results uncover a positive virtuous circle where the demand for business angel finance tends to generate its own supply as a result of micro and macro factors. Our results also suggest that higher levels of entrepreneurial activity at the country level increase the probability that venture capital and business angel finance work in tandem with one another as complements rather than substitutes. Overall, the results uncover some important new relationships that perhaps provide some good news that market forces to some extent appear to naturally ameliorate equity gaps faced by entrepreneurs.
    Date: 2008–09–30
  6. By: Andrea Cipollini; Giuseppe Missaglia
    Abstract: In this paper, using industry sector stock returns as proxies of firm asset values, we obtain bank capital requirements (through the cycle). This is achieved by Montecarlo simulation of a bank loan portfolio loss density. We depart from the Basel 2 analytical formula developed by Gordy (2003) for the computation of the economic capital by, first, allowing dynamic heterogeneity in the factor loadings, and, also, by accounting for stochastic dependent recoveries. Dynamic heterogeneity in the factor loadings is introduced by using dynamic forecast of a Dynamic Factor model fitted to a large dataset of macroeconomic credit drivers. The empirical findings show that there is a decrease in the degree of Portfolio Credit Risk, once we move from the Basel 2 analytic formula to the Dynamic Factor model specification.
    Keywords: Dynamic Factor Model, Forecasting, Stochastic Simulation, Risk Management, Banking
    JEL: C32 C53 E17 G21 G33
    Date: 2008–02
  7. By: Nina Cankar; Simon Deakin; Marko Simoneti
    Abstract: The Slovenian Corporate Governance Code for Public Joint-Stock Companies was adopted in March 2004. Using a systems-theoretical approach, we examine the extent to which the implementation of the Code has resulted in the kinds of 'reflexive' learning processes which the 'comply or explain' approach aims to bring about. The adoption of the Code has already had an impact on the wider legal system, triggering certain changes in the body of core company law, and assisting the process of adjustment to EU-level norms. On the whole, companies' implementation strategies are strikingly similar both in terms of the contents of deviations as well as in the type of disclosure and explanations for deviations. At the same time, the quality of disclosures is low, with effective comply-or-explain declarations representing only a small minority of disclosures. On this basis, the Code has been more effective, to date, in legitimating Slovenia's adjustment to transnational norms and standards, than in stimulating institutional learning.
    Keywords: corporate governance, comply or explain, disclosure, reflexive law, EU law, transplants, Slovenia
    JEL: G34 G38 K22
    Date: 2008–09
  8. By: Strauss, Jason David
    Abstract: The variation in the degree of price regulation in the property-liability insurance market in Canada varies across time and space, creating an opportunity to test a recurring theory in regulatory economics: that price regulated firms have higher levels of financial leverage. Using an instrumental variable for the stringency of price-regulation, this paper utilizes a panel data set of Canadian property-liability insurers over ten years of time, 1997-2006. The results support the theory but do not conclude on whether the increase in financial leverage is a strategic decision or a natural reaction to worsening business conditions brought-on by price-regulation.
    Keywords: Price Regulation; Insurance; Financial Leverage; Capital Structure; Bankruptcy
    JEL: G22 G32 G28 G33
    Date: 2008–09–30
  9. By: Carlo Alberto, Magni
    Abstract: This paper deals with the notion of residual income, which may be defined as the surplus profit that residues after a capital charge (opportunity cost) has been covered. While the origins of the notion trace back to the 19th century, in-depth theoretical investigations and widespread real-life applications are relatively recent and concern an interdisciplinary field connecting management accounting, corporate finance and financial mathematics (Peasnell, 1981, 1982; Peccati, 1987, 1989, 1991; Stewart, 1991; Ohlson, 1995; Arnold and Davies, 2000; Young and O'Byrne, 2001; Martin, Petty and Rich, 2003). This paper presents both a historical outline of its birth and development and an overview of the main recent contributions regarding capital budgeting decisions, production and sales decisions, implementation of optimal portfolios, forecasts of asset prices and calculation of intrinsic values. A most recent theory, the systemic-value-added approach (also named lost-capital paradigm), provides a dierent denition of residual income, consistent with arbitrage theory. En- folded in Keynes's (1936) notion of user cost and forerun by Pressacco and Stucchi (1997), the theory has been formally introduced in Magni (2000a,b,c; 2001a,b; 2003), where its properties are thoroughly investigated as well as its relations with the standard theory; two different lost-capital metrics have been considered, for value-based management purposes, by Drukarczyk and Schueler (2000) and Young and O'Byrne (2001). This work illustrates the main properties of the two theories and their relations, and provides a minimal guide to construction of performance metrics in the two approaches.
    Keywords: Finance, accounting, residual income, excess profit, net present value, opportunity cost, counterfactual, performance measurement, management
    JEL: D46 G11 G12 M41 G31 G3 M21
    Date: 2008–09–11

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