nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒12‒19
thirteen papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. What factors affect the Oslo Stock Exchange? By Randi Næs; Johannes A. Skjeltorp; Bernt Arne Ødegaard
  2. A Decomposition Formula for Option Prices in the Heston Model and Applications to Option Pricing Approximation By Elisa Alòs
  3. Financial Market Regulation in the Wake of Financial Crises: The Historical Experience By Alfredo Gigliobianco (editor); Gianni Toniolo (editor)
  4. Returns to private equity: idiosyncratic risk does matter! By Müller, Elisabeth
  5. The dependency of the banks' assets and liabilities: evidence from Germany By Memmel, Christoph; Schertler, Andrea
  6. Disclosure requirements, the release of new information and market efficiency: new insights from agent-based models By Hermsen, Oliver; Witte, Björn-Christopher; Westerhoff, Frank
  7. Entrepreneurial Human Capital, Complementary Assets, and Takeover Probability By Thorsten V. Braun; Sebastian Krispin; Erik E. Lehmann
  8. Flying the nest - an analysis of Kiwi firms delisting from the NZX By Lawrence, Gillian; Sharman, Amelia; Chapple, Bryan
  9. Quantifying High-Frequency Market Reactions to Real-Time News Sentiment Announcements By Axel Groß-Klußmann; Nikolaus Hautsch
  10. The Role of Financial Variables in Predicting Economic Activity. By Raphael Espinoza; Fabio Fornari; Marco J. Lombardi
  11. Optimal option pricing and trading: a new theory By Moawia, Alghalith
  12. Does Firm Ownership Differentiate Environmental Compliance? Evidence from Indian Chromite Mining Industry By Das, Amarendra
  13. What Do Financial Markets Reveal about Global Warming? By Ron Balvers; Ding Du; Xiaobing Zhao

  1. By: Randi Næs (Norges Bank); Johannes A. Skjeltorp (Norges Bank); Bernt Arne Ødegaard (University of Stavanger and Norges Bank)
    Abstract: This paper analyzes return patterns and determinants at the Oslo Stock Exchange (OSE) in the period 1980-2006. We find that a three-factor model containing the market, a size factor and a liquidity factor provides a reasonable fit for the cross-section of Norwegian stock returns. As expected, oil prices significantly affect cash flows of most industry sectors at the OSE. Oil is, however, not a priced risk factor in the Norwegian stock market. As the case in many other countries, we find that macroeconomic variables affect stock prices, but since we find only weak evidence of these variables being priced in the market, the most reasonable channel for these effects is through company cash flows.
    Keywords: Stock Market Valuation, Asset Pricing, Factor Models, Generalized, Method of Moments
    JEL: G12 E44
    Date: 2009–11–05
  2. By: Elisa Alòs
    Abstract: By means of classical Itô's calculus we decompose option prices as the sum of the classical Black-Scholes formula with volatility parameter equal to the root-mean-square future average volatility plus a term due by correlation and a term due to the volatility of the volatility. This decomposition allows us to develop first and second-order approximation formulas for option prices and implied volatilities in the Heston volatility framework, as well as to study their accuracy. Numerical examples are given.
    Keywords: Stochastic Volatility, Heston Model, Itô's Calculus.
    JEL: G13
    Date: 2009–12
  3. By: Alfredo Gigliobianco (editor) (Bank of Italy, Structural Economic Analysis Department); Gianni Toniolo (editor) (Duke University)
    Abstract: The focus of the present volume - which originates from a workshop held at the Bank of Italy on 16 and 17 April 2009 - is the regulatory response given to financial crises in the past, across countries. Alongside the scholarly interest of such a review its aim is also to offer some insights that may be useful in re-designing regulation in the present time of distress.Financial crises have been examined under many perspectives, including that of regulatory failures. The studies assembled in this volume, which touch on a significant array of countries, can be viewed as part of a historical survey on this issue. The basic question is whether regulatory responses form a pattern, and more specifically, whether they tend to be biased with respect to an optimum, however defined. In the end, rather than finding one pattern of response, we were able to identify the "disturbances" which most often enter the post-crisis decisional process. The awareness of such factors, and some knowledge of their functioning, are instrumental in understanding (for academics) and in governing (for policy makers) the response to major financial crises.
    Keywords: Financial crises, financial regulation, economic history
    JEL: G28 N20
    Date: 2009–11
  4. By: Müller, Elisabeth
    Abstract: Owners of private companies often invest a substantial share of their net worth in one company, which exposes them to idiosyncratic risk. For US companies we investigate whether owners require compensation for lack of diversification in the form of higher returns to equity. Exposure to idiosyncratic risk is measured as the share of the owner's net worth invested in the company. Equity returns are measured as the earnings rate and as capital gains. For both returns measures we find a positive and significant influence of exposure to idiosyncratic risk. This paper improves our understanding of returns to private equity. --
    Keywords: returns to private equity,exposure to idiosyncratic risk,private companies
    JEL: G32 G11 L26
    Date: 2009
  5. By: Memmel, Christoph; Schertler, Andrea
    Abstract: Developments in risk-transfer instruments and risk management techniques in the last two decades have fundamentally changed how banks manage their assets and liabilities. In this document we show that, for all three sectors of German universal banks (private commercial banks, savings banks, and cooperative banks), asset-liability dependency declined over the period 1994-2007, the decline was strongest for those banks that use more than sector-average amounts of derivatives. Only in the case of private commercial banks, we do find that lower regulatory capital has coincided with higher asset-liability dependencies. Over our sample period, the difference has diminished since poorly-capitalized private commercial banks have reduced their asset-liability dependencies more intensively than their well-capitalized counterparts. Moreover, we find that profitability matters for the asset-liability dependency but not in the same way for all three sectors. Asset-liability dependency is lower for private commercial banks with higher provision income, savings banks with lower ROE volatilities and cooperative banks with higher ROEs. --
    Keywords: Asset-liability dependency,maturity,correlation analysis
    JEL: G21 G32
    Date: 2009
  6. By: Hermsen, Oliver; Witte, Björn-Christopher; Westerhoff, Frank
    Abstract: We explore how disclosure requirements that regulate the release of new information may affect the dynamics of financial markets. Our analysis is based on three agentbased financial market models that are able to produce realistic financial market dynamics. We discover that the average deviation between market prices and fundamental values increases if new information is released with a delay, while the average price volatility is virtually unaffected by such regulations. Interestingly, the tails of the distribution of returns become fatter if fundamental data is released less continuously, indicating an increase in financial market risk. --
    Keywords: Agent-based financial market models,market efficiency,release of new information,disclosure requirements,regulation of financial markets,Monte Carlo analysis
    JEL: G14 G18
    Date: 2009
  7. By: Thorsten V. Braun (University of Augsburg, Department of Economics); Sebastian Krispin (University of Augsburg, Department of Economics); Erik E. Lehmann (University of Augsburg, Department of Economics)
    Abstract: Gaining access to technologies, competencies, and knowledge is observed as one of the major motives for corporate mergers and acquisitions. In this paper we show that a knowledge-based firm’s probability of being a takeover target is influenced by whether relevant specific human capital aimed for in acquisitions is directly accumulated within a specific firm or is bound to its founder or manager owner. We analyze the incentive effects of different arrangements of ownership in a firm’s assets in the spirit of the Grossman-Hart-Moore incomplete contracts theory of the firm. This approach highlights the organizational significance of ownership of complementary assets. In a small theoretical model we assume that the entrepreneur’s specific human capital, as measured by the patents they own, and the physical assets of their firm are productive only when used together. Our results show that it is not worthwhile for an acquirer to purchase the alienable assets of this firm due to weakened incentives for the initial owner. Regression analysis using a hand collected dataset of all German IPOs in the period from 1997 to 2006 subsequently provides empirical support for this prediction. This paper adds to previous research in that it puts empirical evidence to the Grossman-Hart-Moore framework of incomplete contracts or property rights respectively. Secondly, we show that relevant specific human capital that is accumulated by a firm’s founder or manager owner significantly decreases that firm’s probability of being a takeover target.
    Keywords: ownership structure, property rights, mergers & acquisitions
    JEL: G32 D23 G34
    Date: 2009–12
  8. By: Lawrence, Gillian (Ministry of Economic Development, New Zealand); Sharman, Amelia (Ministry of Economic Development, New Zealand); Chapple, Bryan (Ministry of Economic Development, New Zealand)
    Abstract: Recent commentary has suggested an increasing trend in delistings from the NZX, driven by offshore takeovers. However, some of that commentary has been driven by anecdotal evidence. In order to shed light on this discussion, we examine the extent and nature of delisting activity over the past 15 years. Our results indicate no increase in offshore takeovers, with well under half of the delistings in the sample period the result of foreign takeovers.
    Keywords: NZX; New Zealand stock market; delistings; listings
    JEL: G30 G32
    Date: 2009–07
  9. By: Axel Groß-Klußmann; Nikolaus Hautsch
    Abstract: We examine intra-day market reactions to news in stock-specific sentiment disclosures. Using pre-processed data from an automated news analytics tool based on linguistic pattern recognition we extract information on the relevance as well as the direction of company-specific news. Information-implied reactions in returns, volatility as well as liquidity demand and supply are quantified by a high-frequency VAR model using 20 second intervals. Analyzing a cross-section of stocks traded at the London Stock Exchange (LSE), we find market-wide robust news-dependent responses in volatility and trading volume. However, this is only true if news items are classified as highly relevant. Liquidity supply reacts less distinctly due to a stronger influence of idiosyncratic noise. Furthermore, evidence for abnormal highfrequency returns after news in sentiments is shown.
    Keywords: firm-specific news, news sentiment, high-frequency data, volatility, liquidity, abnormal returns
    JEL: G14 C32
    Date: 2009–12
  10. By: Raphael Espinoza (International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, USA.); Fabio Fornari (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Previous research has shown that the US business cycle leads the European cycle by a few quarters, and can therefore help predicting euro area GDP. We investigate whether financial variables provide additional predictive power. We use a VAR model of the US and the euro area GDPs and extend it to take into account common global shocks and information provided by selected combinations of financial variables. In-sample analysis shows that shocks to financial variables influence real activity with a peak around 4 to 6 quarters after the shock. Out-of-sample Root-Mean- Squared Forecast Error (RMFE) shows that adding financial variables yields smaller errors in forecasting US economic activity, especially at a five-quarter horizon, but the gain is overall tiny in economic terms. This link is even less prominent in the euro area, where financial indicators do not improve short and medium term GDP forecasts even when their timely availability, relative to a given GDP release, is exploited. The same conclusion is reached with a dataset of quarterly industrial production indices, although financial variables marginally improve forecasts of monthly industrial production. We argue that the findings that financial variables have no predictive power for future activity in the euro area relate to the unconditional nature of the RMFE metric. When forecasting ability is assessed as if in real time (i.e. conditionally on the information available at the time when forecasts are made), we find that models using financial variables would have been preferred in many episodes, and in particular between 1999 and 2002. Results from the historical decomposition of a VAR model indeed suggest that in that period shocks were predominantly of financial nature. JEL Classification: F30, F42, F47.
    Keywords: VAR, Financial Variables, International Linkages, Conditional Forecast.
    Date: 2009–11
  11. By: Moawia, Alghalith
    Abstract: We introduce a new utility-based approach to pricing European and American options. In so doing, we overcome some of the limitations of the existing models.
    Keywords: option; derivative; asset; stochastic
    JEL: G12 G11
    Date: 2009–12–14
  12. By: Das, Amarendra
    Abstract: This paper compares the environmental performance of public and private firms in the context of Indian chromite mining industry. It proposes a new methodology to measure firms’ environmental performance in a multidimensional framework. Comparison of unidimensional and multidimensional environmental defiance indices reveal no significant difference between the public and private firms.
    Keywords: Firm ownership; Multi Dimensional Environmental Compliance
    JEL: G38 Q53 L72
    Date: 2009–08–15
  13. By: Ron Balvers (Department of Economics, West Virginia University); Ding Du (Northern Arizona University); Xiaobing Zhao (Northern Arizona University)
    Abstract: Financial market information can provide an objective assessment of expected losses due to global warming. In a Merton-type asset pricing model, with asset prices affected by changes in investment opportunities caused by global warming, the risk premium is significantly negative and growing over time, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on the global warming factor. Required returns are 0.11 percent higher due to global warming, implying a present value loss of 4.18 percent of wealth. These costs complement and exceed previous estimates of the cost of global warming.
    Keywords: Asset Pricing, Global Warming, Cost of Capital, Tracking Portfolios.
    JEL: G12 Q54
    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.
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.