nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒06‒10
three papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. The use of Npv and CAPM for capital budgeting is not a good idea. A reply to De Reyck (2005) By Carlo Alberto Magni
  2. The Importance of Trust for Investment: Evidence from Venture Capital By Bottazzi, L.; Da Rin, M.; Hellmann, T.
  3. What explains the low profitability of Chinese banks? By Alicia García-Herrero; Sergio Gavilá; Daniel Santabárbara

  1. By: Carlo Alberto Magni
    Abstract: In Magni [Eur. J. Operat. Res. 137 (2002) 206] I present some inconsistencies implicit in the net-present-value criterion, as currently used in finance. This paper shows that the standard use of CAPM for capital budgeting, based on disequilibrium values, is at odds with arbitrage theory, and that the corresponding CAPM-based NPV rule is meaningless even in the simplest case, because net present value is any number one wants it to be. Cognitively, this amounts to saying that the NPV procedure leaves decision makers subject to a framing bias; financially, this amounts to saying that additivity does not hold. De Reyck's [Eur. J. Operat. Res. 161 (2005) 499] objection to my thesis is invalid because he mistakes a project's expected rate of return for a project's cost of capital. De Reyck's Proposition, on the basis of which my thesis is criticized, leaves decision makers open to arbitrage losses, because it is an (admittedly interesting) reframing of the security market line and (as surprising as it might be) the use of the SML for project valuation is incompatible with the no-arbitrage principle. To use NPV and CAPM for capital budgeting is not a good idea.
    Date: 2009–05–27
  2. By: Bottazzi, L.; Da Rin, M.; Hellmann, T. (Tilburg University, Center for Economic Research)
    Abstract: We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms’ individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.
    Keywords: Venture Capital;Social Capital;Trust;Financial Contracts;Corporate Governance.
    JEL: G24 G34 K22 M13
    Date: 2009
  3. By: Alicia García-Herrero (Banco Bilbao Vizcaya Argentaria); Sergio Gavilá (Banco de España); Daniel Santabárbara (Banco de España)
    Abstract: This paper analyzes empirically what explains the low profitability of Chinese banks for the period 1997-2004. We find that better capitalized banks tend to be more profitable. The same is true for banks with a relatively larger share of deposits and for more X-efficient banks. In addition, a less concentrated banking system increases bank profitability, which basically reflects that the four state-owned commercial banks -China’s largest banks- have been the main drag for system’s profitability. We find the same negative influence for China’s development banks (so called Policy Banks), which are fully state-owned. Instead, more market oriented banks, such as joint-stock commercial banks, tend to be more profitable, which again points to the influence of government intervention in explaining bank performance in China. These findings should not come as a surprise for a banking system which has long been functioning as a mechanism for transferring huge savings to meet public policy goals.
    Keywords: China, Bank profitability, Bank reform
    JEL: G21 G28
    Date: 2009–06

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