nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒01‒17
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Financial Development and Openness: Evidence from Panel Data By Badi H. Baltagi; Panicos O. Demetriades; Siong Hook Law
  2. Basel II Capital Requirements, Firms' Heterogeneity, and the Business Cycle By Ines Drumond; José Jorge
  3. Measuring Public Announcements’ Disclosure Quality on Tallinn, Riga and Vilnius Stock Exchanges By Laivi Laidroo
  4. On the stability of domestic financial market linkages in the presence of time-varying volatility By Thomas J. Flavin; Ekaterini Panopoulou; Deren Unalmis
  5. Information, Liquidity, and the (Ongoing) Panic of 2007 By Gary B. Gorton

  1. By: Badi H. Baltagi (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020); Panicos O. Demetriades; Siong Hook Law
    Abstract: This paper addresses the empirical question of whether trade and financial openness can help explain the recent pace in financial development, as well as its variation across countries in recent years. Utilizing annual data from developing and industrialized countries and dynamic panel estimation techniques, we provide evidence which suggests that both types of openness are statistically significant determinants of banking sector development. Our findings reveal that the marginal effects of trade (financial) openness are negatively related to the degree of financial (trade) openness, indicating that relatively closed economies stand to benefit most from opening up their trade and/or capital accounts. Although these economies may be able to accomplish more by taking steps to open both their trade and capital accounts, opening up one without the other could still generate gains in terms of banking sector development. Thus, our findings provide only partial support to the well known Rajan and Zingales hypothesis, which stipulates that both types of openness are necessary for financial development to take place.
    Keywords: Financial development, trade openness, financial openness, financial liberalization, dynamic panel data analysis
    JEL: F19 G29
    Date: 2008–06
  2. By: Ines Drumond (CEMPRE and Faculdade de Economia, Universidade do Porto); José Jorge (CEMPRE and Faculdade de Economia, Universidade do Porto)
    Abstract: This paper assesses the potential procyclical effects of Basel II capital requirements by evaluating to what extent those effects depend on the composition of banks' asset portfolios and on how borrowers' credit risk evolves over the business cycle. By developing a heterogeneous-agent general equilibrium model, in which firms' access to credit depends on their financial position, we find that regulatory capital requirements, by forcing banks to finance a fraction of loans with costly bank capital, have a negative effect on firms' capital accumulation and output in steady state. This effect is amplified with the changeover from Basel I to Basel II, in a stationary equilibrium characterized by a significant fraction of small and highly leveraged firms. In addition, to the extent that it is more costly to raise bank capital in bad times, the introduction of an aggregate technology shock into a partial equilibrium version of the model supports the Basel II procyclicality hypothesis: Basel II capital requirements accentuate the bank loan supply effect underlying the bank capital channel of propagation of exogenous shocks.
    Keywords: Business Cycles, Procyclicality, Financial Constraints, Bank Capital Channel, Basel II, Heterogeneity
    JEL: E44 E32 G28 E10
    Date: 2009–01
  3. By: Laivi Laidroo (Department of Economics at Tallinn University of Technology)
    Abstract: Previous literature has been occupied with measuring disclosure quality in financial reports and no indication has been provided on how the quality of public announcements could be measured. The purpose of this paper is to introduce a methodological approach to its measurement and to illustrate its implementation possibilities in the context of Tallinn, Riga and Vilnius Stock Exchanges. The disclosure quality measure proposed was based on six quality attributes (informativeness, relevance, precision, rarity, frequency, and unexpectedness) defined in the context of information theory and operationalised through finance/accounting and cognitive psychology theories. Implementation in the context of three capital markets confirmed that there has been an increase in disclosure quality over time. Company size and stock exchange where the company was listed affected its disclosure quality level. Main areas for disclosure quality improvement were identified and the results also indicated that small firms and companies with low quality disclosures tended to be less prone to disclosure quality improvement.
    Keywords: Disclosure, public announcements, emerging markets
    JEL: G1 G3
    Date: 2008
  4. By: Thomas J. Flavin (Economics, National University of Ireland, Maynooth); Ekaterini Panopoulou; Deren Unalmis (Economics, National University of Ireland, Maynooth)
    Abstract: We analyze the stability of domestic financial linkages between periods of calm and turbulent market conditions. Our model develops a simultaneous test of shift contagion and bi-directional pure contagion, which is applied to the equity and currency markets of a group of East Asian emerging economies. Our results show a great deal of instability in these markets with widespread evidence of pure contagion in both directions. There is less evidence of shift contagion with the transmission of common shocks unchanged between regimes for the majority of countries.
    Keywords: Shift contagion; Pure contagion; Financial market crises; Regime switching
    JEL: F42 G15 C32
    Date: 2008
  5. By: Gary B. Gorton
    Abstract: The credit crisis was sparked by a shock to fundamentals, housing prices failed to rise, which led to a collapse of trust in credit markets. In particular, the repurchase agreement market in the U.S., estimated to be about $12 trillion, larger than the total assets in the U.S. banking system ($10 trillion), became very illiquid during the crisis due to the fear of counterparty default, leaving lenders with illiquid bonds that they did not want, believing that they could not be sold. As a result, there was an increase in repo haircuts (the initial margin), causing massive deleveraging. I investigate this indirectly, by looking at the breakdown in the arbitrage foundation of the ABX.HE indices during the panic. The ABX.HE indices of subprime mortgage-backed securities are derivatives linked to the underlying subprime bonds. Introduced in 2006, the indices aggregated and revealed information about the value of the subprime mortgage-backed securities and allowed parties to buy protection against declines in subprime value via credit derivatives written on the index or tranches of the index. When the ABX prices plummeted, the arbitrage relationships linking the credit derivatives linked to the index and the underlying bonds broke down because liquidity evaporated in the repo market. This breakdown allows a glimpse of the information problems that led to illiquidity in the repo markets, and the extent of the demand for protection against subprime risk.
    JEL: G1 G13 G21
    Date: 2009–01

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