nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒09‒26
six papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Financial Innovation and Endogenous Growth By Stelios Michalopoulos; Luc Laeven; Ross Levine
  2. Credit Default Swaps and the Credit Crisis By René M. Stulz
  3. Incomplete Contracts, Irreversible Investments and Entry Deterrence By Antonio Nicita; Massimiliano Vatiero
  4. First We Try, Then We Trust! Real Options and the Cooperation-Competition Tension in Strategic Alliance Social Dilemmas By McCarter, Matthew W.; Mahoney, Joseph T.; Northcraft, Gregory B.
  5. Hybrid or Electric Vehicles? A Real Options Perspective By Michi NISHIHARA
  6. Real Options with Priced Regime-Switching Risk By John Driffill; Martin Sola; Turalay Kenc

  1. By: Stelios Michalopoulos; Luc Laeven; Ross Levine
    Abstract: We model technological and financial innovation as reflecting the decisions of profit maximizing agents and explore the implications for economic growth. We start with a Schumpeterian endogenous growth model where entrepreneurs earn monopoly profits by inventing better goods and financiers arise to screen entrepreneurs. A novel feature of the model is that financiers also engage in the costly, risky, and potentially profitable process of innovation: Financiers can invent more effective processes for screening entrepreneurs. Every existing screening process, however, becomes less effective as technology advances. Consequently, technological innovation and, thus, economic growth stop unless financiers continually innovate. Historical observations and empirical evidence are more consistent with this dynamic model of financial innovation and endogenous growth than with existing models of financial development and growth.
    JEL: G0 G3 O1 O31 O4
    Date: 2009–09
  2. By: René M. Stulz
    Abstract: Many observers have argued that credit default swaps contributed significantly to the credit crisis. Of particular concern to these observers are that credit default swaps trade in the largely unregulated over-the-counter market as bilateral contracts involving counterparty risk and that they facilitate speculation involving negative views of a firm’s financial strength. Some observers have suggested that credit default swaps would not have made the crisis worse had they been traded on exchanges. I conclude that credit default swaps did not cause the dramatic events of the credit crisis, that the over-the-counter credit default swaps market worked well during much of the first year of the credit crisis, and that exchange trading has both advantages and costs compared to over-the-counter trading. Though I argue that eliminating over-the-counter trading of credit default swaps could reduce social welfare, I also recognize that much research is needed to understand better and quantify the social gains and costs of derivatives in general and credit default swaps in particular.
    JEL: G13 G14 G18 G21 G24 G28
    Date: 2009–09
  3. By: Antonio Nicita; Massimiliano Vatiero
    Abstract: When renegotiation under incomplete contracts follows the outside option principle, hold-up may occur as the ex-post degree of competition increases on investor’s side. However, under this framework, asset specificity may play the counterintuitive role of an entry deterrence device, thus decreasing the probability of hold-up. Our result contrasts with standard literature in three respects: i) an equilibrium with overinvestment may emerge; ii) the 'intimidating effect' of overinvestment acts as an endogenous enforcement device; iii) a pervasive trade-off may emerge between ex-post efficient entry and ex-ante efficient specific investments
    Keywords: strategic and specific investments, hold-up, outside options, entry deterrence
    JEL: D23 D85 L14
    Date: 2009–08
  4. By: McCarter, Matthew W. (University of Illinois at Urbana-Champaign); Mahoney, Joseph T. (University of Illinois at Urbana-Champaign); Northcraft, Gregory B. (University of Illinois at Urbana-Champaign)
    Abstract: The cooperation-competition tension in strategic alliances creates a social dilemma where
    Abstract: member and alliance interests are in conflict. Because social dilemmas have significant
    Abstract: negative implications for strategic alliance and member success, understanding the
    Abstract: psychological mechanisms underpinning the cooperation-competition tension and ways to
    Abstract: navigate this tension holds important theoretical implications for strategic alliance research.
    Abstract: This paper proposes a real options approach to navigating strategic alliance social dilemmas.
    Abstract: Acquiring a real option at the alliance level provides alliance members access to achieving a
    Abstract: small win of mutual cooperation, and, when the small win is realized, members are more
    Abstract: likely to cooperate in the larger strategic alliance. The increase of cooperation is because
    Abstract: alliance member's perceived vulnerability is reduced. The level of exposure when acquiring
    Abstract: the real option may influence the effect of a small win on perceived vulnerability through the
    Abstract: development of trust.
    Date: 2009–01
  5. By: Michi NISHIHARA (Graduate School of Economics, Osaka University)
    Abstract: This paper investigates the decision of an automaker concerning the alternative promotion of a hybrid vehicle (HV) and a full electric vehicle (EV). We evaluate the HV project by considering the option to change promotion from the HV to the EV in the future. The results not only extend previous findings concerning American options on multiple assets, but also include several new implications. One notable observation is that the increased market demand for EVs can accelerate the promotion of the HV because of the embedded option.
    Keywords: real options, American options on multiple assets, exercise region, alternative projects, hybrid and electric vehicles.
    JEL: C61 G13 G31 O32
    Date: 2009–09
  6. By: John Driffill; Martin Sola; Turalay Kenc
    Abstract: e develop a model of regime-switching risk premia as well as regimedependent factor risk premia to price real options. The model incorporates the observation that the underlying risky income streams of real options are subject to discrete shifts over time as well as random changes. The presence of discrete shifts is due to systematic and unsystematic risk associated with changes in business cycles or in economic policy regimes or events such as takeovers, major changes in business plans. We analyze the impact of regimeswitching behavior on the valuation of projects and investment opportunities. We find that accounting for Markov switching risk results in a delay in the expected timing of the investment while the regime-specific factor risk premia make the possibility of a regime shift more pronounced.
    Keywords: Regime-Switching Risk Premia; Regime-Dependent Risk Premia, Real Options.
    JEL: G12 G31
    Date: 2009–09

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