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on Corporate Finance |
| By: | Rodolfo Apreda |
| Abstract: | This paper sets forth another contribution to the long standing debate over cost of capital, firstly by introducing a multiplicative model that translates the inner structure of the weighted average cost of capital rate and, secondly, adjusting such rate for governance risk. The conventional wisdom states that the cost of capital may be figured out by means of a weighted average of debt and capital. But this is a linear approximation only, which may bring about miscalculations, whereas the multiplicative model not only takes account of that linear approximation but also the joint outcome of expected costs of debt and stock, and their proportions in the capital structure. And finally, we factor into the cost of capital expression a rate of governance risk. |
| Keywords: | cost of capital; governance risk; weighted average cost of capital; governance index; multiplicative model of returns |
| JEL: | G30 G32 G34 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:383&r=cfn |
| By: | Katja Rost; Soren Salomo; Margit Osterloh |
| Abstract: | A rarely studied trend in corporate governance is the increasing tendency to fill CEO openings through external hires rather than through internal promotions: Kevin J. Murphy and Ján Zábojník (2004) show that the proportion of outside hires has doubled and their pay premium almost quadrupled over the last thirty years. Assuming that general managerial skills are becoming more important relative to firm-specific skills, the authors conclude that competition in the managerial labor market establishes optimal contracts. In our model and our empirical analysis we question this explanation by assuming that over the past decades the dishonesty of the predecessor has become relatively more important for the appointment decisions of firms. We conclude that outside hires are a suboptimal trend because external candidates even step up the regression of integrity in firms: As nobody has an incentive to invest in firm-specific knowledge, not only the performance of firms drops, but also the remaining integrity. |
| Keywords: | CEO Appointments; external hires; suboptimal contracts |
| JEL: | G34 J23 J41 M52 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2008-27&r=cfn |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2008027&r=cfn |