nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒12‒11
ten papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Equity and debt in a financialised economy: the French case By Mickaël Clévenot; Yann Guy; Jacques Mazier
  2. Individual and Corporate Social Responsibility By Benabou, Roland; Tirole, Jean
  3. Public Infrastructure, Location of Private Schools and Primary School Attainment in an Emerging Economy By Pal, Sarmistha
  4. Shareholder Influence on CSR: A Study of the Swedish Corporate Sector By Sjöström, Emma
  5. Stock Return Seasonalities and Investor Structure: Evidence from China’s B-Share Markets By Martin T. Bohl; Michael Schuppli; Pierre L. Siklos
  6. The Other January Effect: International Evidence By Martin T. Bohl; Christian A. Salm
  7. The Evolution of Aggregate Stock Ownership - A Unified Explanation By Rydqvist, Kristian; Spizman, Joshua; Strebulaev, Ilya
  8. What Does CEOs’ Personal Leverage Tell Us About Corporate Leverage? By Cronqvist, Henrik; Makhija, Anil K.; Yonker, Scott E.
  9. Risk-adjusted measures of value creation in financial institutions By Milne, Alistair; Onorato, Mario
  10. Accounting and economic measures:An integrated theory of capital budgeting By Carlo Alberto Magni

  1. By: Mickaël Clévenot (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Yann Guy (GERME - Groupe d'Etudes sur la Régulation et les Mutations des Economies - Université Paris-Diderot - Paris VII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: While many studies have been devoted to capital accumulation and rate of profit, the article empirically characterises the financialization at the level of firms' liability, i.e. at the level of debt and equity. In particular, the determinants of non financial firms' indebtedness and equity issuing will be analysed econometrically. The theoretical framework is mainly Post-Keynesian, with the founding role played by Minsky (1986) and with Stock Flow Consistent models proposed by Lavoie and Godley (2001), Godley and Lavoie (2007), Taylor (2004) and Dos Santos and Zezza (2008 )with their analysis of interactions between financial variables and investment. The article is based on the flow of funds accounts of INSEE which provide coherent data in flows and stocks over the period 1978-2007. Thanks to a precise account of financial assets and liabilities and capital gains, these data allow to implement a rigorous analysis of firms' financial behaviour at the macroeconomic level.
    Keywords: finance; investment; portfolio behaviour; growth regime
    Date: 2009–11–15
  2. By: Benabou, Roland (Princeton University); Tirole, Jean (IDEI)
    Abstract: Society's demands for individual and corporate social responsibility as an alternative response to market and distributive failures are becoming increasingly prominent. We first draw on recent developments in the "psychology and economics" of prosocial behavior to shed light on this trend, which reflects a complex interplay of genuine altruism, social or self image concerns, and material incentives. We then link individual concerns to corporate social responsibility, contrasting three possible understandings of the term: the adoption of a more long-term perspective by firms, the delegated exercise of prosocial behavior on behalf of stakeholders, and insider-initiated corporate philanthropy. For both individuals and firms we discuss the benefits, costs and limits of socially responsible behavior as a means to further societal goals.
    Keywords: corporate social responsibility, socially responsible investment, image concerns, shareholder value
    JEL: D64 D78 H41 L31
    Date: 2009–11
  3. By: Pal, Sarmistha (Brunel University)
    Abstract: The paper argues that access to public infrastructure plays a crucial role on the presence of private schools in a community, as it could not only minimise the cost of production, but also ensure a high return to private investment. Results using community, school and child/household-level PROBE survey data from five north Indian states provide some support to this central hypothesis: even after controlling for all other factors, access to village infrastructural facilities is associated with a higher likelihood of having a private school in the community. This is also corroborated by an analysis of household demand for private schools. The paper concludes by examining the effect of private school presence on year 5 pass rates: while all-school pass rates are significantly higher in villages with a private school, private school presence fails to have significant effect on local state school pass rates.
    Keywords: school privatisation, school choice, school attainment, local public infrastructure, failing state schools, simultaneity bias, instrumental variable
    JEL: I20 I30 O15 P36
    Date: 2009–11
  4. By: Sjöström, Emma (Department of Marketing & Strategy)
    Abstract: There is a growing expectation that shareholders can foster corporate social responsibility (CSR) through engagement activities. The aim of this study is therefore to explore the influence that shareholders have on corporations in terms of CSR. The study, which is set in Sweden, finds that corporations themselves do not perceive shareholders to have a significant direct influence on how they address CSR. At the same time, corporations find socially minded shareholders to be legitimate and important stakeholders. Corporations find that shareholders amplify general stakeholder pressure in the area of CSR, and that they can function as a catalyst for CSR by adding legitimacy to the work of CSR professionals. The one area where shareholders stand out as having a direct influence on CSR is with regard to corporate transparency and CSR reporting.
    Keywords: corporate social responsibility; CSR; socially responsible investment; shareholder activism; shareholder influence
    Date: 2009–06–05
  5. By: Martin T. Bohl; Michael Schuppli; Pierre L. Siklos
    Abstract: This paper investigates whether seasonalities in daily stock returns are related to the trading behavior of individual and institutional investors. The change in the investor structure of B-share markets in Shanghai and Shenzhen after the abolition of ownership restrictions in 2001 provides a unique testing environ- ment. We show that day-of-the-week eects are attenuated after the market entrance of Chinese individual investors who had previously not been allowed to trade in B-shares. Our empirical results suggest that institutional rather than individual investors are a main driving force behind such anomalies. In addi- tion, we nd evidence of reduced index return autocorrelation and US spillover eects in the post-liberalization period.
    Keywords: Institutional Investors, Individual Investors, Stock Return Seasonalities, Chinese Stock Markets, GARCH Model
    JEL: G12 G14 G18
    Date: 2009–10
  6. By: Martin T. Bohl; Christian A. Salm
    Abstract: This paper investigates the predictive power of stock market returns in January for the subsequent eleven months' returns across 19 countries, thereby contributing to the literature on stock market seasonalities. Only two out of 19 countries' stock markets exhibit a robust Other January Eect. In light of this evidence, we conclude that the Other January Eect is not an international phenomenon.
    Keywords: Stock market eciency, Other January Eect, Stock market anomalies
    JEL: G10 G11 G12 G14
    Date: 2009–04
  7. By: Rydqvist, Kristian (Binghamton University); Spizman, Joshua (Binghamton University); Strebulaev, Ilya (Stanford University)
    Abstract: Since World War II, direct stock ownership by households has largely been replaced by indirect stock ownership by financial institutions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside a pension plan. This finding is important for policy considerations on effctive taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices.
    Keywords: Capital gains tax; income tax; stock ownership; inflation; bracket creep; pension funds
    JEL: G10 G20 H22 H30
    Date: 2009–09–15
  8. By: Cronqvist, Henrik (Claremont McKenna College); Makhija, Anil K. (The Ohio State University); Yonker, Scott E. (The Ohio State University)
    Abstract: We find that firms behave remarkably similarly to how their CEOs behave personally when it comes to leverage choices. We start our analysis by compiling a comprehensive sample of home purchases and financings among S&P 1,500 CEOs. Debt financing in a CEO’s most recent home purchase is used as a revealed preference of the CEO’s personal attitude towards debt. We find a robust positive relation between personal and corporate leverage. We also find that firms tend to hire CEOs with a similar personal attitude towards debt as the previous CEO. When the new and previous CEOs have different personal preferences, corporate leverage changes in the direction of the new CEO’s personal leverage. These results support a model with endogenous matching of CEOs to firms. We also find that the positive relation between CEOs’ personal leverage and corporate leverage is stronger in firms with poor governance, suggesting that CEOs imprint their personal preferences on the firms they manage when they are able to do so. These results suggest that heterogeneity in CEOs’ personal attitudes towards debt partly explains differences in corporate capital structures, and suggest more generally that an analysis of CEOs’ personalities and personal traits may provide important information about the financial policies of the firms they manage.
    Keywords: Corporate leverage; personal leverage; CEO characteristics
    JEL: G32
    Date: 2009–08–15
  9. By: Milne, Alistair (Faculty of Finance, Cass Business School, City University, London and Bank of Finland Research); Onorato, Mario (Algorithmics Inc & Faculty of Finance, Cass Business School, City University, London)
    Abstract: Measuring value creation by comparing the RAROC of an exposure (the return on risk capital) with a single institution-wide hurdle rate is inconsistent with the standard theory of financial valuation. We use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. We find that this hurdle rate varies with the skewness of asset returns. Thus the RAROC hurdle rate should differ substantially between equity which has a right skew and debt which has a pronounced left skew and also between different qualities of debt exposure. We discuss implications for financial institution risk management and supervision.
    Keywords: asset pricing; banking; capital allocation; capital budgeting; capital management; corporate finance; downside risk; economic capital; performance measurement; RAROC; risk management; value creation; hurdle rate; value at risk
    JEL: G22 G31
    Date: 2009–11–02
  10. By: Carlo Alberto Magni
    Abstract: Accounting measures are traditionally considered not significant from an economic point of view. In particular, accounting rates of return are often regarded economically meaningless or, at the very best, poor surrogates for the IRR, which is held to be “the” economic yield. Likewise, residual income does not enjoy, in general, periodic consistency with the project NPV, so residual income maximization is not equivalent to NPV maximization. This paper shows that the opposition accounting/economic is artificial and, taking a capital budgeting perspective, illustrates the strong (formal and conceptual) connections existing between economic measures and accounting measures. In particular, the average accounting rate of return is the correct economic yield of a project; the traditional IRR is (whenever it exists) only a particular case of it. The average accounting rate generates a decision rule which is logically equivalent to the NPV rule for both accept/reject decisions and project ranking. The paper also shows that maximization of the simple arithmetic mean of residual incomes is equivalent to NPV maximization, owing to its periodic consistency in the sense of Egginton (1995). Such an index may then be used for incentive compensation as well. Moreover, asset pricing may be interpreted in accounting terms as the process whereby the market determines the income impact on the assets’ value. As a result, the paper harmonizes the notions of accounting rate of return, internal rate of return, residual income, net present value: they are just different ways of cognizing the same notion. This conciliation stems in a rather natural way from three sources: (i) a fundamental accounting identity, which links income and cash flow in a comprehensive way, (ii) the definition of Chisini mean, (iii) a notion of residual income which takes account of the “real” (comprehensive) cost of capital.
    Keywords: Capital budgeting; accounting rate of return; economic yield; internal rate of return; residual income; net present value; average; Chisini mean; cost of capital
    JEL: M41 G11 G12 G31 D81 M52
    Date: 2009–12

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