nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒11‒11
ten papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Institutions Matter: Financial Supervision Architecture, Central Bank and Path Dependence. General Trends and the South Eastern European Countries By Donato Masciandaro; Marc Quintyn
  2. Banking and Finance in South - Eastern Europe: The Albanian Case By Kliti Ceca; Kelmend Rexha; Elsida Orhan
  3. On companies' microeconomic behavior : profit rate versus economic profit. By MESNARD, Louis de
  4. To acquire, or to compete? An entry dilemna By GABSZEWICZ, Jean; LAUSSEL, Didier; TAROLA, Ornella
  5. Underinvestment vs. Overinvestment: Evidence from Price Reactions to Pension Contributions By Francesco A. Franzoni
  6. Impact of IPO Activities on the Hong Kong Dollar Interbank Market By Frank Leung; Philip Ng
  7. Changes in Investors' Risk Appetite ¡V An Assessment of Financial Integration and Interdependence By Laurence Fung; Chi-sang Tam; Ip-wing Yu
  8. Financial Constraints and the Cash-Holding Behaviour of Canadian Firms By Darcey McVanel; Nikita Perevalov
  9. Modelling Bank Loan LGD of Corporate and SME Segments: A Case Study By Radovan Chalupka; Juraj Kopecsni
  10. Pay me Right: Reference Values and Executive Compensation By Aleksandra Gregoric; Sašo Polanec; Sergeja Slapnicar

  1. By: Donato Masciandaro (Paolo Baffi Centre, Bocconi University); Marc Quintyn (IMF Institute, International Monetary Fund)
    Abstract: We propose a path dependence approach to analyze the evolution of the financial supervisory architecture, focusing on the institutional role of the central bank, and then apply our framework to describe the institutional settings in a selected sample of countries. The policymaker who decides to maintain or reform the supervisory architecture is influenced by the existing institutional setting in a systematic way: the more the central bank is actually involved in supervision, the less likely a more concentrated supervisory regime will emerge, and vice versa (path dependence effect). We test the path dependence effect describing and evaluating the evolution and the present state of the architecture of six national supervisory regimes in South Eastern Europe (SEE): Albania, Bulgaria, Greece, Romania, Serbia and Turkey. The study of the SEE countries confirms the postulated role of the central bank in the institutional setting. In five cases the high involvement of the central bank in supervision is correlated with a multi–authority regime, while in one case a high degree of financial supervision unification is related with low central bank involvement.
    Keywords: Financial Supervision; Central Banks; Path Dependence; Political Economy; South Eastern Europe.
    JEL: G18 G28 E58
    Date: 2008–09
  2. By: Kliti Ceca (Bank of Albania); Kelmend Rexha (Bank of Albania); Elsida Orhan (Bank of Albania)
    Abstract: This paper aims to present the main developments of banking and finance in Albania in a historical perspective. This historical overview might help to better understand not only the great difficulties and obstacles the country faced in the past but also the successes it achieved. It is widely known that the financial system, especially the banking sector, is considered as very important as it serves as a catalyst for the economic development of the country. And this is because financial depth determines economic growth. The paper also highlights the future challenges that the Albanian financial system will face within the context of the country’s European integration and the EU harmonization of the financial policies.
    Keywords: Historical perspectives; Financial system; Bank-dominated system; Panics; EU integration
    JEL: G21 G22 N24
    Date: 2008–07
  3. By: MESNARD, Louis de (LATEC - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: Profit-rate maximization leads to use fewer factors —including labor— even if profits are high and it corresponds to shareholders’ financial behavior, by contrast to economic-profit maximization which corresponds to shareholders’ strategic behavior. This is shown in two steps. In part 1, two types of firms are considered: those which maximize their net profit, as assumed classically in the microeconomic theory, and those which maximize their profit rate. We compare the behavior of both types of firms by respect to output and price. If the firm is producing, the output (and the input consumption) of a profit-rate-maximizing firm is lower than (or equal to) those of a pure-profit-maximizing firm; the price of output evolves in the opposite way. The demonstration is valid for monopoly (higher price, lower input) and for perfect competition (lower input); in perfect competition with fixed coefficient of capital, the output price loses any role in the equilibrium what implies no coordination. It is also applied to the case where the capital is the total capital engaged (EVA versus ROCE) or where it is the equity (EVA versus ROE) as in part 2. Part 2 explores how shareholders’ behavior may influence companies’ objective. Two main cases are examined (leaving aside the questions of corporate governance or agency theory). (i) The “strategic behavior”. Strategic or controlling shareholders try to maintain fixed their control rate on firms: they maximize their own net income which includes companies' distributed profit. Hence companies maximize their economic profit. (ii) The “financial behavior”. Financial shareholders control the composition of their portfolio, allocating freely their equity capital between firms: they maximize the return on their equity capital. Hence companies are encouraged to maximize their profit rate: they employ less factors, as labor. (iii) The “sleepingpartner” behavior; sleeping shareholders let their equity invested in the firm for a long time, without subscribing to any new issue of shares: they maximize the return on their equity but because of their inertia, they have a small influence on the firm. The combination of these behaviors is considered. As a result, profit-sharing leads to profit-rate maximization and natural selection is in favor of profit-rate-maximizing firms.
    Keywords: Profit rate ; Pure profit ; EVA ; ROE ; Shareholder.
    JEL: L21 D21 D24 D41 D42 G11 M2
    Date: 2008–10
  4. By: GABSZEWICZ, Jean (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LAUSSEL, Didier; TAROLA, Ornella
    Abstract: In this paper we address the following question: is it more profitable, for an entrant in a differentiated market, to acquire an existing firm than to compete? We illustrate the answer by considering competition in the banking sector.
    Keywords: Vertical differentiation, entry, banking competition
    JEL: G34 L13 L22
    Date: 2008–05
  5. By: Francesco A. Franzoni (University of Lugano and Swiss Finance Institute)
    Abstract: Mandatory contributions to defined benefit pension plans provide a unique identification strategy to estimate the market's assessment of the value of internal resources controlling for investment opportunities. The drop in prices following these cash outflows is magnified for firms that appear a priori more financially constrained, consistent with a negative effect of financing frictions on investment. In contrast, price reactions to pension contributions are positive for poorly governed firms, suggesting that the managers of these companies engage in value-destroying projects. While under- and overinvestment have similar weight in a panel of large firms, the first distortion prevails in a sample that is more representative of the cross-section of listed companies.
    Keywords: underinvestment, overinvestment, financial constraints, corporate governance
    JEL: G12 G32
    Date: 2006–11
  6. By: Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority)
    Abstract: Hong Kong has witnessed an equity initial public offering (IPO) boom since 2005. As the interbank payments involved in an IPO can be hundreds of times larger than the Aggregate Balance, increased funding needs and heightened demand for interbank liquidity may drive interbank interest rates up. Empirical estimates from error-correction models and GARCH models for HIBORs show that funding needs on the closing date of an IPO increase the level and conditional volatility of the overnight and one-week HIBORs (but not those of the one-month and longer-term HIBORs). On the other hand, estimated models for HIBORs with different maturities do not detect any statistically significant effect of the IPO variable on the refund date of an IPO.
    Keywords: IPO, interbank liquidity, interest rate volatility, event studies
    JEL: E4 E43 E50 G14
    Date: 2008–07
  7. By: Laurence Fung (Research Department, Hong Kong Monetary Authority); Chi-sang Tam (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority)
    Abstract: Investors' attitude towards risk is a key factor driving the movement in asset prices. Global reduction in investors' risk appetite has coincided with episodes of global financial market correction. In this paper, we derive a measure for risk appetite based on the methodology of Gai and Vause (2006) for investors in the US, the UK, Germany, Japan, and Hong Kong, and use them to help assess the issues of financial integration and financial market interdependence. Indicators are constructed to gauge the relationship between the risk appetite and the extent of financial integration between these stock markets. The results from the indicators point to very limited financial integration between these five financial markets. Furthermore, the degree of co-movement between risk appetite measures and the stock and bond market performance is examined using the dynamic conditional correlation. The empirical results reveal that there exists interdependence between the changes in the risk appetite and the stock market returns in the US, Japan and Hong Kong, while the "flight-to-quality" phenomenon is apparent in the bond market of the five economies.
    Keywords: Risk appetite; Financial integration; Market interdependence
    JEL: C13 C22 F36 G15
    Date: 2008–08
  8. By: Darcey McVanel; Nikita Perevalov
    Abstract: The proportion of assets held by the average Canadian firm in the form of cash has increased steadily since the early 1990s, and is now roughly twice as large as in 1990. The literature has established that the cash-holding behaviour of firms is highly correlated with financial constraints and firm characteristics. The authors use a firm-level data set covering Canadian firms from 1980 to 2006 to understand which firm characteristics are associated with higher cash holdings. They find that financial constraints are likely important for explaining firms' higher cash holdings, and that the recent increase in the cash holdings of Canadian firms can be almost entirely explained by changes in firm characteristics. Specifically, higher recent cash holdings are correlated with the average Canadian firm having become smaller, having more variable cash flow, holding lower levels of cash substitutes, having higher expenditure on research and development, and being more likely to be financially distressed. The authors also find that the average Canadian firm has a cash ratio that is only slightly higher than would be predicted by out-of-sample forecasts over the 1990s and 2000s, though the divergence between the actual and predicted values has been increasing in recent years.
    Keywords: Sectoral balance sheet
    JEL: G11 G32
    Date: 2008
  9. By: Radovan Chalupka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Juraj Kopecsni (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The aim of this paper is to propose a methodology to estimate loss given default (LGD) and apply it to a set of micro-data of loans to SME and corporations of an anonymous commercial bank from Central Europe. LGD estimates are important inputs in the pricing of credit risk and the measurement of bank profitability and solvency. Basel II Advance IRB Approach requires internally estimates of LGD to calculate risk-weighted assets and to estimate expected loss. We analyse the recovery rate dynamically over time and identify the efficient recovery period of a workout department. Moreover, we focus on the appropriate choice of a discount factor by introducing risk premium based on a risk level of collaterals. We apply statistical methods to estimate LGD and test empirically its determinants. Particularly, we analyse generalised linear models using symmetric logit and asymmetric log-log link functions for ordinal responses as well as for fractional responses. For fractional responses we employ two alternatives, a beta inflated distribution and a quasi-maximum likelihood estimator. We find out that the main drivers of LGD are a relative value of collateral, a loan size as well as a year of the loan origination. Different models provided similar results. As for the different links in more complex models, log-log models in some cases perform better, implying an asymmetric response of the dependent variable.
    Keywords: credit risk, bank loan, loss given default, LGD, recovery rate, fractional responses, ordinal regression, quasi-maximum likelihood estimator
    JEL: G21 G28
    Date: 2008–11
  10. By: Aleksandra Gregoric; Sašo Polanec; Sergeja Slapnicar
    Keywords: executive compensation, bargaining, reference values, ownership structure
    JEL: G30 G34
    Date: 2008

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