nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒09‒11
seven papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Stress Testing Credit Risk: Is the Czech Republic Different from Germany? By Petr Jakubik; Christian Schmieder
  2. Bank Ownership, Firm Value and Firm Capital Structure in Europe By Lieven Baert; Rudi Vander Vennet
  3. Is Corporate Social Responsibility viewed as a risk factor? Evidence from an asset pricing analysis By Manescu, Cristiana
  4. Marginal versus Average Beta of Equity under Corporate Taxation By Lund, Diderik
  5. How Important Are Risk-Taking Incentives in Executive Compensation? By Ingolf Dittmann; Ko-Chia Yu
  6. Financial professionals' overconfidence: Is it experience, job, or attitude? By Gloede, Oliver; Menkhoff, Lukas
  7. Alternative Tilts for Nonparametric Option Pricing By Walker, Todd B; Haley, M. Ryan

  1. By: Petr Jakubik; Christian Schmieder
    Abstract: This study deals with credit risk modelling and stress testing within the context of a Merton-type one-factor model. We analyse the corporate and household sectors of the Czech Republic and Germany to find determining variables of credit risk in both countries. We find that a set of similar variables explains corporate credit risk in both countries despite substantial differences in the default rate pattern. This does not apply to households, where further research seems to be necessary. Next, we establish a framework for the stress testing of credit risk. We use a country specific stress scenario that shocks macroeconomic variables with medium severity. The test results in credit risk increasing by more than 100% in the Czech Republic and by roughly 40% in Germany. The two outcomes are not fully comparable since the shocks are calibrated according to the historical development of the time series considered and the size of the shocks for the Czech Republic was driven by the transformation period.
    Keywords: Credit risk, credit risk modelling, stress testing.
    JEL: G21 G28 G33
    Date: 2008–12
  2. By: Lieven Baert; Rudi Vander Vennet
    Abstract: We investigate whether or not banks play a positive role in the ownership structure of European listed firms. We distinguish between banks and other institutional investors as shareholders and examine empirically the relationship between financial institution ownership and the performance of the firms in which they hold equity. Our main finding is that after controlling for the capital structure decision of the firms and the ownership decision of financial institutions in a simultaneous equations model, we find that there is a negative relationship between financial institution ownership and the market value of firms, measured as the Tobin's Q. This is in contradiction with the monitoring hypothesis.
    Keywords: Financial institution ownership, Firm value, Capital structure
    JEL: G32 G20
    Date: 2009
  3. By: Manescu, Cristiana (Center for Finance, School of Business, Economics and Law, University of Gothenburg)
    Abstract: Using detailed data on corporate social responsibility (CSR) for a long panel of large publicly traded U.S. firms during July 1992-June 2008, this study investigates whether an overall measure of CSR, aggregated over seven dimensions (community, corporate governance, diversity, employee relations, environment, human rights, and product safety), can explain variation in stock returns, using Fama and MacBeth (1973) month-by-month cross-sectional regressions approach. Risk- factor analysis indicates a shift in the effect of CSR, with a positive effect on stock returns during July 1992 - June 2003, and a negative effect during July 2003 - June 2008. These results are robust even after controlling for ten industry-specific effects. Analysis on the disaggregated CSR measures reveals that it is only the Community and Employee Relations dimensions generating the positive e ect of CSR on stock returns during 1992-2003. The negative effect during 2003-2008 was mainly generated by the Human Rights, Product Safety, and Employee Relations dimensions. This constitutes evidence that these three CSR dimensions function as risk factors.<p>
    Keywords: responsible investments; market efficiency; three factor model; risk premium
    JEL: G12 G14 M14
    Date: 2009–09–01
  4. By: Lund, Diderik (Dept. of Economics, University of Oslo)
    Abstract: Even for fully equity-financed firms there may be substantial effects of taxation on the after-tax cost of capital. Among the few studies of these effects, even fewer identify all effects correctly. When marginal investment is taxed together with inframarginal, marginal beta differs from average if there are investmentrelated deductions like depreciation. To calculate asset betas, one should not only "unlever" observed equity betas, but "untax" and "unaverage" them. Risky tax claims are valued as call options, with closed-form solutions for the exercise probability. Results have practical relevance for multinationals operating under different tax systems.
    Keywords: Cost of capital; WACC; loss offset; tax shields; options
    JEL: F23 G31 H25
    Date: 2009–06–09
  5. By: Ingolf Dittmann (Erasmus University Rotterdam); Ko-Chia Yu (Erasmus University Rotterdam)
    Abstract: This paper investigates whether observed executive compensation contracts are designed to provide risk-taking incentives in addition to effort incentives. We develop a stylized principal-agent model that captures the interdependence between firm risk and managerial incentives. We calibrate the model to individual CEO data and show that it can explain observed compensation practice surprisingly well. In particular, it justifies large option holdings and high base salaries. Our analysis suggests that options should be issued in the money. If tax effects are taken into account, the model is consistent with the almost uniform use of at-the-money stock options. We conclude that the provision of risk-taking incentives is a major objective in executive compensation practice.
    Keywords: Stock Options; Executive Compensation; Effort Aversion; Risk-Taking Incentives; Optimal Strike Price
    JEL: G30 M52
    Date: 2009–08–25
  6. By: Gloede, Oliver; Menkhoff, Lukas
    Abstract: This paper examines financial professionals' overconfidence in their forecasting performance. We are the first to compare individual financial professionals' self-ratings with their true forecasting performance. Data spans several years at monthly frequency. The forecasters in our sample do not provide feasible self-ratings compared to their true performance but show overconfidence on average. In analyzing this, we find an easing relation to experience. Job characteristics are also related to less overconfidence, such as being a fund manager and using fundamental analysis. The same effect is found for the attitude to herd, whereas recent forecasting success comes along with more overconfidence.
    Keywords: overconfidence, self-rating, forecasting, foreign exchange, better-than-average, experience, performance
    JEL: G1 D84 F31
    Date: 2009–08
  7. By: Walker, Todd B; Haley, M. Ryan
    Abstract: This paper generalizes the nonparametric approach to option pricing of Stutzer (1996) by demonstrating that the canonical valuation methodology in- troduced therein is one member of the Cressie-Read family of divergence mea- sures. While the limiting distribution of the alternative measures is identical to the canonical measure, the finite sample properties are quite different. We assess the ability of the alternative divergence measures to price European call options by approximating the risk-neutral, equivalent martingale measure from an empirical distribution of the underlying asset. A simulation study of the finite sample properties of the alternative measure changes reveals that the optimal divergence measure depends upon how accurately the empirical distri- bution of the underlying asset is estimated. In a simple Black-Scholes model, the optimal measure change is contingent upon the number of outliers observed, whereas the optimal measure change is a function of time to expiration in the stochastic volatility model of Heston (1993). Our extension of Stutzer’s tech- nique preserves the clean analytic structure of imposing moment restrictions to price options, yet demonstrates that the nonparametric approach is even more general in pricing options than originally believed.
    Keywords: Option Pricing; Nonparametric; Entropy
    JEL: C14 G13
    Date: 2009–09–06

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