nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒07‒03
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Bad Bank(s) and Recapitalization of the Banking Sector By Dorothea Schäfer; Klaus F. Zimmermann
  2. Demand Side Analysis of Microlending Markets in Germany By Alexander S. Kritikos; Christoph Kneiding; Claas Christian Germelmann
  3. Determinants of Ownership Concentration and Tender Offer Law in the Chilean Stock Market By Marco Morales
  4. Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion By Henry Chen; Paul Gompers; Anna Kovner; Josh Lerner
  5. Cost of capital when dividens are deductible By Ignacio Velez-Pareja; Julian Benavides Franco

  1. By: Dorothea Schäfer; Klaus F. Zimmermann
    Abstract: With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets' current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank's losses, while profits would be distributed to the distressed bank's current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.
    Keywords: Financial crisis, financial regulation, toxic assets, Bad Bank
    JEL: G20 G24 G28
    Date: 2009
  2. By: Alexander S. Kritikos; Christoph Kneiding; Claas Christian Germelmann
    Abstract: In developing and transition economies, microlending has become an effective instrument for providing micro businesses with the necessary financial resources to launch operations. In the industrialized countries, with their highly developed banking systems, however, there has been ongoing debate on the question of whether an uncovered demand for microlending services exists. The present pilot study explores customer preferences for microlending products in Germany. Among the interviewed business owners, 15% reported revolving funding needs and an interest in microloans. We find that potential recipients of microloan products are retail business owners, foreign business owners, and persons who had previously received private loans. Furthermore, financial products should feature rapid access to short-term loans.
    Keywords: Entrepreneurship, Microlending, Market Research
    JEL: G21 D12 M31
    Date: 2009
  3. By: Marco Morales (Superintendencia de Valores y Seguros, División de Estudios y Desarrollo de Mercados)
    Abstract: This paper analyzes econometrically the determinants of ownership concentration in the Chilean stock market, with particular attention to the e¤ects of the Tender Offer Law (OPA law). Even though the central pourpose of OPAs Law is achieved, the tender offer mechanism increases the ownership concentration. The main reason for this effect has to do with the "residual OPA" obligation considered by the law.
    Keywords: Ownership Concentration, Payout Policy, Minority Shareholders, Tender Offer
    JEL: G32 G34 G35
    Date: 2009–05
  4. By: Henry Chen; Paul Gompers; Anna Kovner; Josh Lerner
    Abstract: We document geographic concentration by both venture capital firms and venture capital-financed companies in three cities – San Francisco, Boston, and New York. We find that firms open new satellite offices based on the success rate of venture capital-backed investments in an area. Geography is also significantly related to outcomes. Venture capital firms based in locales that are venture capital centers outperform, regardless of the stage of the investment. Ironically, this outperformance arises from outsized performance outside of the venture capital firms’ office locations, including in peripheral locations. If the goal of state and local policy makers is to encourage venture capital investment, outperformance of non-local investments suggests that policy makers might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms
    JEL: G24 R12
    Date: 2009–06
  5. By: Ignacio Velez-Pareja; Julian Benavides Franco
    Abstract: When calculating Tax Savings, TS, we are confronted with a strange mix of accounting accrual and market value when involving TS in the calculation of the Weighted Average Cost of Capital, WACC, or the Cost of Equity, Ke. Firms earn the right to TS once they accrue the interest expense and they actually earn the TS when taxes are paid. Tax savings and the discount rate (y) we use to calculate their value are involved in the calculation of WACC and Ke. Textbook WACC formulation is a very special and unique case that is not typical. Based on previous findings, we derive a general approach to those formulas that take into account any kind of TS related to the financing decision of a firm and any date when the TS is earned. These formulations can be used to introduce any type of externality that creates value through tax savings not captured by neither the cost of debt nor the cost of equity. In this paper we develop the formulations for Ke, the cost of levered equity and the average cost of capital when dividends or interest on dividends are deductible. We show that using the proper formulation the most known valuation methods, i) Firm value with Free Cash Flow and WACC for the FCF; ii) value with the Capital Cash Flow and WACC for the CCF; iii) equity value with the Cash Flow to Equity and Ke, the levered cost of equity plus debt; iv) Adjusted Present Value, APV are consistent and give identical results.
    Date: 2009–06–22

This nep-cfn issue is ©2009 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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