nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒11‒27
eight papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. How Did Financial-Crisis-Based Criticisms of Market Efficiency Get It So Wrong? By Ariane Szafarz
  2. The Effect of Financial Structure on Crises: Universal Banking in Interwar Europe By Muge Adalet
  3. CEO Power and Compensation in Financially Distressed Firms By Qiang Kang; Oscar A. Mitnik
  4. The Stock of Intangible Capital in Canada: Evidence from the Aggregate Value of Securities By Nazim Belhocine
  5. Basel core principles and bank soundness : does compliance matter ? By Demirguc-Kunt, Asli; Detragiache, Enrica
  6. Trust in Banks? Evidence from normal times and from times of crises By Markus Knell; Helmut Stix
  7. Polar sets of anisotropic Gaussian random fields By Jakob Söhl
  8. Financial Innovation and Endogenous Growth By Laeven, Luc; Levine, Ross; Michalopoulos, Stelios

  1. By: Ariane Szafarz (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.)
    Abstract: In the aftermath of the financial crisis, market efficiency is being heavily criticized. However, the volatility-based criticisms rely on false grounds as efficiency and speculative bubbles are compatible. Indeed, the efficient market model is about rationality and information, not about stability. This model admits multiple solutions, as do most rational expectations models. One solution is the so-called fundamental one while the others are referred to as rational bubbles. Still, many practitioners, and even some financial academics, keep denying that speculative bubbles are compatible with efficient markets. This paper argues that not only would the recognition of efficient market multiplicity thwart irrationality-based theories, but it would also allow for further empirical developments taking full advantage of the power of diversity. The multiple price dynamics compatible with market efficiency represent a valuable asset largely underestimated by the profession.
    Keywords: Efficient Markets, Multiple Solutions, Rational Expectations, Speculative Bubbles, Volatility.
    JEL: G14 G12 B41
    Date: 2009–11
  2. By: Muge Adalet (Koc University)
    Abstract: This paper examines the link between banking structure and financial fragility across Europe during the 1920s and 1930s using a new database. Monthly and annual data are analyzed to show that countries with universal banking were more likely to experience crises. Furthermore, those countries with universal banking, which have a crisis, are shown to experience a slowdown in their economic growth.
    Keywords: Great Depression, Banking Crisis, Real Effects of Crises, Universal Banking
    JEL: N24 E44
    Date: 2009–10
  3. By: Qiang Kang (Department of Finance, University of Miami); Oscar A. Mitnik (Department of Economics, University of Miami)
    Abstract: We study the changes in CEO power and compensation that arise when firms go through financial distress. We use a matching estimator to identify suitable controls and estimate the causal effects of financial distress for a sample of U.S. public companies from 1992 to 2005. We document that, relative to those in control firms, the CEOs of distressed firms experience significant reductions in total compensation; the bulk of this reduction derives from the decline in value of new grants of stock options. These results hold not only for incumbent CEOs but also, surprisingly, for newly hired CEOs. Financial distress has important consequences on corporate governance, decreasing managerial influence over the board. We find that, among distressed firms, there is a significant decrease in the proportion of CEOs holding board chairmanship, and in the fractions of executives serving as directors or in the compensation committee of the board. We also show that periods of financial distress are associated with a decrease in opportunistic timing behavior of stock option awards. The results are suggestive of a link between managerial power and executive compensation.
    Keywords: CEO compensation, financial distress, lucky grants, managerial influence, bias-corrected matching estimators
    JEL: G30 J33 M52
    Date: 2009–11
  4. By: Nazim Belhocine
    Abstract: This paper measures the size of the stock of intangible capital in Canada using newly released data on the market value of all securities in the economy. The approach taken relies on a quantitative application of the q-theory of investment to generate the quantity of capital owned by firms. I find that the intangible capital stock accounted for approximately 30% of overall capital since 1994. Of this intangible capital stock, the R&D reported by national accounts makes up only 23%. In addition, the finding on the magnitude of the intangible capital stock is comparable to that reported using a cost approach, confirming the size and the relevance of intangibles to macroeconomic models.
    Keywords: Accounting , Canada , Capital , Capital goods , Corporate sector , Economic models , Investment , National income accounts , Stock markets , Stock prices ,
    Date: 2009–09–18
  5. By: Demirguc-Kunt, Asli; Detragiache, Enrica
    Abstract: This paper studies whether compliance with the Basel Core Principles for effective banking supervision is associated with bank soundness. Using data for more than 3,000 banks in 86 countries, the authors find that neither the overall index of compliance with the Basel Core Principles nor the individual components of the index are robustly associated with bank risk measured by Z-scores. The results of the analysis cast doubt on the usefulness of the Basel Core Principles in ensuring bank soundness.
    Keywords: Banks&Banking Reform,Public Sector Corruption&Anticorruption Measures,Financial Intermediation,Debt Markets,Hazard Risk Management
    Date: 2009–11–01
  6. By: Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna); Helmut Stix (Oesterreichische Nationalbank)
    Abstract: Trust in financial institutions is of great importance for financial intermediation. Against this background, we study two questions: Has trust in banks declined during the global financial crisis and what factors determine the level of trust in banks? Employing survey evidence from Austrian households, we show that trust in banks is mainly affected by "subjective" variables like the individuals' assessment of the current economic and financial situation and by their future outlooks. After controlling for these variables we show that the financial crisis has caused a reduction in trust (around -7.5pp) which is sizable but not dramatic. Even at its lowest point (in the first quarter of 2009) 65% still report to have trust in the banking system, which is a higher percentage than for many other institutions. Furthermore, the drop is only slightly larger than the drop observed after a small, non-systemic crisis that occurred in 2006. Thus, the much-stressed notion of a genuine "trust crisis" is not reflected in our data. Finally, we provide evidence that the degree of individual information does not influence trust, that banking trust is contagious and that the extension of deposit insurance coverage in October 2008 had a positive effect on trust.
    Keywords: Trust, Banking Sector, Financial Crisis
    JEL: G21 Z13 O16
    Date: 2009–11–10
  7. By: Jakob Söhl
    Abstract: This paper studies polar sets of anisotropic Gaussian random fields, i.e. sets which a Gaussian random field does not hit almost surely. The main assumptions are that the eigenvalues of the covariance matrix are bounded from below and that the canonical metric associated with the Gaussian random field is dominated by an anisotropic metric. We deduce an upper bound for the hitting probabilities and conclude that sets with small Hausdorff dimension are polar. Moreover, the results allow for a translation of the Gaussian random field by a random field, that is independent of the Gaussian random field and whose sample functions are of bounded Hölder norm.
    Keywords: Anisotropic Gaussian fields, Hitting probabilities, Polar sets, Hausdorff dimension, European option, Jump diffusion, Calibration
    JEL: G13 C14
    Date: 2009–11
  8. By: Laeven, Luc; Levine, Ross; Michalopoulos, Stelios
    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.
    Keywords: Corporate Finance; Economic Growth; Entrepreneurship; Financial Institutions; Invention; Technological change
    JEL: G0 O31 O4
    Date: 2009–09

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.