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on Corporate Finance |
| By: | Corduneanu, Carmen; Iovu , Laura Raisa |
| Abstract: | Considerable evidence shows that countries with the most developed financial sectors and capital markets enjoy the strongest economic growth over the long run. The non-financial sector, small and medium sized entities can access a wider availability of more innovative and lower cost finance to aid their growth, while larger companies profit from an overall reduction in the cost of capital and a wider range of financial products. These economical agents in search of alternatives for financing their projects demand the greatest level of flexibility regarding the use of the financing instruments available and this flexibility can determine the success or failure of such a project. Capital markets also facilitate the efficient allocation of savings to where it is most productive. They allow large numbers of investors to reduce their financial risks through diversification. By spreading risk widely, they also cushion the economy against economic and financial shocks. |
| Keywords: | capital market; financial innovation; flexible financing decisions |
| JEL: | G32 G20 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12572&r=cfn |
| By: | Patrick Bajari; Chenghuan Sean Chu; Minjung Park |
| Abstract: | The turmoil that started with increased defaults in the subprime mortgage market has generated instability in the financial system around the world. To better understand the root causes of this financial instability, we quantify the relative importance of various drivers behind subprime borrowers' decision to default. In our econometric model, we allow borrowers to default either because doing so increases their lifetime wealth or because of short-term budget constraints, treating the decision as the outcome of a bivariate probit model with partial observability. We estimate our model using detailed loan-level data from LoanPerformance and the Case-Shiller home price index. According to our results, one main driver of default is the nationwide decrease in home prices. The decline in home prices caused many borrowers' outstanding mortgage liability to exceed their home value, and for these borrowers default can increase their wealth. Another important driver is deteriorating loan quality: The increase of borrowers with poor credit and high payment to income ratios elevates default rates in the subprime market. We discuss policy implications of our results. Our findings point to flaws in the securitization process that led to the current wave of defaults. Also, we use our model to evaluate alternative policies aimed at reducing the rate of default. |
| JEL: | G18 G2 G33 R51 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14625&r=cfn |
| By: | Josh Lerner; Morten Sørensen; Per Strömberg |
| Abstract: | A long-standing controversy is whether LBOs relieve managers from short-term pressures from public shareholders, or whether LBO funds themselves are driven by short-term profit motives and sacrifice long-term growth to boost short-term performance. We investigate 495 transactions with a focus on one form of long-term activities, namely investments in innovation as measured by patenting activity. We find no evidence that LBOs are associated with a decrease in these activities. Relying on standard measures of patent quality, we find that patents granted to firms involved in private equity transactions are more cited (a proxy for economic importance), show no significant shifts in the fundamental nature of the research, and are more concentrated in the most important and prominent areas of companies' innovative portfolios. |
| JEL: | G24 G32 O31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14623&r=cfn |