nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒11‒21
nine papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. The equity premium in 150 textbooks By Fernandez, Pablo
  2. Shareholder value creators in the Dow Jones: Year 2008 By Fernandez, Pablo; Bermejo, Vicente J.
  3. The Effects of Uncertainty and Corporate Governance on Firms' Demand for Liquidity By Christopher F. Baum; Atreya Chakraborty; Boyan Liu; Boyan Liu
  4. Law and Economic Change in Traditional China: A Comparative Perspective By Ma, Debin
  5. Creditor-Focused Corporate Governance: Evidence from Mergers and Acquisitions in Japan By Mehrotra, Vikas; Schaik, Dimitri van; Spronk, Jaap; Steenbeek, Onno
  6. Does State Street lead to Europe? The case of financial exchange innovations By Komulainen, Mari; Takalo, Tuomas
  7. Creditor control of free cash flow By Rocco Huang
  8. CSR, rationality and the ethical preferences of investors in a laboratory experiment By Costanza Consolandi; Alessandro Innocenti; Alessandro Vercelli
  9. What determines IPO underpricing ? Evidence from a frontier market By Boudriga, Abdelkader; Ben Slama, Sarra; Boulila, Neila

  1. By: Fernandez, Pablo (IESE Business School)
    Abstract: I review 150 textbooks on corporate finance and valuation published between 1979 and 2009 by authors such as Brealey, Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, Arzac¿ and find that their recommendations regarding the equity premium range from 3% to 10%, and that 51 books use different equity premia in various pages. The 5-year moving average has declined from 8.4% in 1990 to 5.7% in 2008 and 2009. Some confusion arises from not distinguishing among the four concepts that the phrase equity premium designates: the Historical, the Expected, the Required and the Implied equity premium. 129 of the books identify Expected and Required equity premium and 82 identify Expected and Historical equity premium. Finance textbooks should clarify the equity premium by incorporating distinguishing definitions of the four different concepts and conveying a clearer message about their sensible magnitudes.
    Keywords: equity premium puzzle; required equity premium; expected equity premium;
    JEL: G12 G31 M21
    Date: 2009–10–11
  2. By: Fernandez, Pablo (IESE Business School); Bermejo, Vicente J. (IESE Business School)
    Abstract: During 2008, only 2 of the companies included in the Dow Jones (Wall Mart and McDonalds) created value, while in 2007 16 of these companies did it. The market value of the 300 companies was $2.9 trillion in 2008 and $4.4 trillion in 2007. The top shareholder value creators in 2004 were Exxon, General Electric, Ebay, Johnson & Johnson and Qualcomm. We define created shareholder value and provide the ranking of created shareholder value for the 500 companies. We also calculate the created shareholder value of the 500 companies during the twelve-year period 1993-2004. General Electric was the top shareholder value creator and AT&T was the top shareholder value destroyer during the twelve-year period. On average, the small market capitalization companies of the S&P were more profitable. The volatility of the S&P fell since 1998 to 2004, but the volatility of his components increased on average.
    Keywords: shareholder value creation; created shareholder value; shareholder value added; shareholder return:
    JEL: G12 G31 M21
    Date: 2009–09–03
  3. By: Christopher F. Baum (Boston College; DIW Berlin); Atreya Chakraborty (University of Massachusetts-Boston); Boyan Liu (Beihang University); Boyan Liu (Beihang University)
    Abstract: We find that U.S. corporations' demand for liquidity is sensitive to two important factors: uncertainty facing the firm and the quality of corporate governance. Following prior research, we find that both factors have important influences on firms' cash holdings. Our results also indicate that the interactions between uncertainty and governance measures are significant. From a policy perspective, these new findings indicate both governance and the nature of uncertainty may play an important role in managing liquidity risks. Policy recommendations may not only be limited to changes in financial policy but may also include changes in corporate governance.
    Keywords: liquidity, demand for cash, uncertainty, governance, Gindex
    JEL: G32 G34 E32
    Date: 2009–11–11
  4. By: Ma, Debin
    Abstract: This article offers a critical review of recent literature on Chinese legal tradition and argues that some subtle but fundamental differences between the Western and Chinese legal traditions are highly relevant to our explanation of the economic divergence in the modern era. By elucidating the fundamental feature of traditional Chinese legal system within the framework of a disciplinary mode of administrative justice, this article highlights the contrasting growth patterns of legal professions and legal knowledge in China and Western Europe that would ultimately affect property rights, contract enforcement and ultimately long-term growth trajectories. The paper concludes with some preliminary analysis on the inter-linkages between the historical evolution of political institution and legal regimes.
    Date: 2009–09
  5. By: Mehrotra, Vikas; Schaik, Dimitri van; Spronk, Jaap; Steenbeek, Onno
    Abstract: Mergers in Japan have the dubious distinction of not creating wealth for shareholders of target firms, in sharp contrast to much of the rest of the world. Using a sample of 91 mergers from 1982 through 2003 we document several distinctive features of the merger market in Japan: mergers tend to be countercyclical and often orchestrated by a common main bank. Overall our results point to a market for corporate control that is distinctly less shareholder-focused than that in the U.S., and one where creditors play an important, perhaps dominant, role in corporate governance.
    Keywords: Japanese mergers, Japanese corporate governance
    JEL: G30 G34
    Date: 2009–08
  6. By: Komulainen, Mari (National Board of Patents and Registration of Finland); Takalo, Tuomas (Bank of Finland and University of Jyväskylä)
    Abstract: We study whether and to what extent financial exchange innovations are in practice patentable in Europe. We find that exchange-related applications initially increased significantly after the State Street decision but subsequently decreased. The clear majority (65%) of applications come from the U.S. investment banks and exchanges themselves being among the most active innovators. But patents were not easly granted in response to these applications (only 3% of them led to valid patent). The high post-grant opposition rate (41%) for granted patents indicated that competitors tightly monitored each other’s patents. The evidence, as augmented with clinical case studies, supports the notion that, for an invention to pass the inventive step requirement for obtaining a European patent, it should have technical features for solving a sufficiently challenging technical problem. Our evidence suggests that patentability standards for financial methods have not weakened in Europe in the aftermath of the State Street decision and that the inventive step requirement constitutes a major obstacle for applicants to overcome in order to obtain a financial exchange patent in Europe.
    Keywords: finance patents; financial innovation; business method patents; patent policy; management of intellectual property in financial services
    JEL: G24 G28 K29 O32 O34
    Date: 2009–09–22
  7. By: Rocco Huang
    Abstract: With free cash flows, borrowers can accumulate cash or voluntarily pay down debts. However, sometimes creditors impose a mandatory repayment covenant called "excess cash flow sweep" in loan contracts to force borrowers to repay debts ahead of schedule. About 17 percent of borrowers in the authors' sample (1995-2006) have this covenant attached to at least one of their loans. The author finds that the sweep covenant is more likely to be imposed on borrowers with higher leverage (i.e., where risk shifting by equity holders is more likely). The results are robust to including borrower fixed effects or using industry median leverage as a proxy. The covenant is more common also in borrowers where equity holders appear to have firmer control, e.g., when more shares are controlled by institutional block holders, when firms are incorporated in states with laws more favorable to hostile takeovers, or when equity holders place higher valuation on excess cash holdings. These determinants suggest that the sweep covenant may be motivated by creditor-shareholder conflicts. Finally, the author shows that the covenant has real effects: borrowers affected by the sweep covenant indeed repay more debts using excess cash flows, and they spend less in capital investment and pay out fewer dividends to shareholders.
    Keywords: Loans ; Debt
    Date: 2009
  8. By: Costanza Consolandi; Alessandro Innocenti; Alessandro Vercelli
    Abstract: This experimental study aims to clarify to what extent and in which direction investors react to CSR (Corporate Social Responsibility) initiatives meant to upgrade the ethical standards of firms beyond the minimal requirements of law. Subjects in the laboratory were invited to invest their endowment in a portfolio of financial assets. We provided information on the expected returns of each stock and on its inclusion in an ethical index, or exclusion from it. Our findings show that subjects’ behavior appears to be a function not only of their individual pay-offs but also of the information on the ethical standards of the firms issuing stocks. Most of them, however, did not show a fully irrational behavior as they consistently correlated the share of stocks with their expected returns. We may conclude that the sizeable reaction of our sample’s investors to the inclusion of a stock in the ethical index, or its exclusion from it, is the fruit of a deliberate choice.
    Keywords: ethical stock indexes, Corporate Social Responsibility, investors, experiment.
    JEL: G30 M14 Q56
    Date: 2009–08
  9. By: Boudriga, Abdelkader; Ben Slama, Sarra; Boulila, Neila
    Abstract: This paper empirically analyzes the short run performance of Tunisian initial public offerings (IPO). It sheds light on the determinants of IPO’s in a context of a frontier market characterized by high information asymmetry, low information efficiency, thin trading and the presence of “noise” traders. Using a sample of 34 Tunisian IPO’s from the period 1992-2008, we find that the average market adjusted initial return for the first three trading days is about 17.8 percent. The level of underpricing is related to retained capital, underwriter’s price support, oversubscription, listing delay and the offer price. Age of the firm, its size and the size of the offer do not seem to reduce the amount of money left on the table by issuers. It appears also that underpricing is driven by irrational investors (ipoers) seeking for short-run capital gains. These results remain unchanged after controlling for the presence of institutional investors and the existence of liquidity contract.
    Keywords: Initial public offerings; Short-run underpricing; Underwriter’s price support.
    JEL: G14 G11
    Date: 2009

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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