nep-cfn New Economics Papers
on Corporate Finance
Issue of 2010‒01‒10
ten papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Creditworthiness as a signal of trustworthiness: field experiment in microfinance and consequences on causality in impact studies. By Leonardo Becchetti; Pierluigi Conzo
  2. Optimal investment and financial strategies under tax rate uncertainty By Alessandro Fedele; Paolo Panteghini; Sergio Vergalli
  3. The Governance and disclosure of the Firm as an Enterprise Entity By Yuri Biondi
  4. Credit risk analysis in microcredit: How does gender matter? By Helena Marrez; Mathias Schmit
  5. Credit availability in the crisis: the European investment bank group By Alessandro Fedele; Francesco Liucci; Andrea Mantovani
  6. Repayment versus Investment Conditions and Exclusivity in Lending Contracts By Bougheas, Spiros; Dasgupta, Indraneel; Morrissey, Oliver
  7. Optimal Lending Contracts with Asymmetric Information and Two-sided Limited Commitment or Impatient Entrepreneur By Shuyun May Li
  8. Entrepreneurial Finance in France: The Persistent Role of Banks By Cieply, S.; Dejardin, M.A.F.G.
  9. International Financial competition and bank risk-taking in emerging economies By Arnaud Bourgain; Patrice Pieretti; Skerdilajda Zanaj
  10. Empirical Risk Factors in Realized Stock Returns By Jiri Novak; Dalibor Petr

  1. By: Leonardo Becchetti (University of Rome Tor Vergata); Pierluigi Conzo (University of Rome Tor Vergata)
    Abstract: Creditworthiness and trustworthiness are almost synonyms since the act of conferring a loan has the indirect effect of signaling the trustworthiness of the borrower. We test the creditworthiness-trustworthiness nexus in an investment game experiment on a sample of participants/non participants to a microfinance program in Argentina and find that trustors give significantly more to (and believe they will receive more from) microfinance borrowers. Trustees’ first and second order beliefs are also consistent with this picture. Our findings identify a “horizontal trustworthiness externality” which creates a direct (loan-performance) causality nexus since the mere loan provision increases the borrower’s attractiveness as a business partner.
    Keywords: field experiment, microfinance, investment game, trust, trustworthiness
    JEL: O16 C93
    Date: 2009–12
  2. By: Alessandro Fedele; Paolo Panteghini; Sergio Vergalli
    Abstract: In this paper we apply a real-option model to study how tax rate uncertainty affects a firm's decisions about both the timing and the source of finance of an investment project. We show that debt finance (i) encourages entry and (ii) mitigates the e¤ect of tax rate uncertainty on entry timing.
    Date: 2009
  3. By: Yuri Biondi (CERAG - Centre d'études et de recherches appliquées a la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II, PREG - Pole de recherche en économie et gestion - CNRS : UMR7176 - Polytechnique - X)
    Abstract: Recent financial crises and scandals have focused attention on the system of governance and disclosure in a way many may never have imagined and few welcomed. Not only do reforms appear to be necessary to protect shareholders as well as other stakeholders, but also to develop a different understanding of the relationship between the financial markets and the business firm. This paper criticises two daydreams concerning the firm - as a 'black-box' or an 'owner-entrepreneur' - and contrasts them to the idea of the firm as an enterprise entity. The latter implies a comprehensive approach that integrates economics, accounting, and law. The firm is then understood as a managed dynamic system, characterized by different structures of production: institutional, organizational or epistemic (related to the place and role of institutions, internal organization, and knowledge within the firm). Accordingly, the accounting system is an integral part of this framework, one that demonstrates the joint implications of economic, accounting, and legal matters within the firm. In a business affair fraught with unfolding changes coupled with asymmetries of resources, access, control and information, the accounting system copes with the economic and monetary processes generated by the whole enterprise, by representing the enterprise capital (assets and liabilities) and income (revenues and costs). In this way, the accounting system allows this special process to exist and function autonomously from (and interactively with) financial holding of shareholders' claims traded on the Share Exchange.
    Keywords: corporate governance; financial reporting and disclosure; accounting; theory of the firm; performance measurement; shareholders' equity interest
    Date: 2009–09–18
  4. By: Helena Marrez (Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels); Mathias Schmit (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels)
    Abstract: This paper is the first to analyze the credit risk of a microfinance institution based on the loan portfolio of a leading Maghrebian microfinance institution, both in terms of number of clients served and of portfolio size. This allows us to work with a proprietary data set of 1,144,770 contracts issued between 1997 and 2007. Using a resampling technique, we estimate the probability density function of losses and value-at-risk measures for a portfolio of loans granted to female and male microfinance clients separately. Results show that loss rates are higher for a male client population than for a female client population, both on average as for percentiles 95 to 99.99. We find that this difference is due to lower default probabilities for female clients, while recovery rates for male and female clients are similar. We also analyze diversification effects, where we find that the proportion of diversifiable risk in total risk is bigger for portfolios of loans granted to female clients than for portfolios of loans granted to male clients. Finally we show that capital requirements determined by the 99.9 percentile remain below those required by the Basel 2 Accords, which opens perspectives for a specific treatment of microfinance if financial regulation becomes applicable to the sector.
    Keywords: Microfinance; Credit risk; Gender study; Bank regulation; Capital requirement
    JEL: G21 G28 O16
    Date: 2009–04
  5. By: Alessandro Fedele; Francesco Liucci; Andrea Mantovani
    Abstract: In this paper we propose a moral hazard model to illustrate a credit crunch scenario. A firm is denied the access to bank funding due to high informational or monitoring costs that the bank must pay to induce the firm to behave. This is likely to happen in periods of recession, when trust between economic actors is limited. We then examine the activity carried out by the European Investment Bank Group (EIBG), with special attention to the provision of (1) credit lines to banks to help them to finance small and medium-sized enterprises (SMEs) and (2) guarantees for portfolios of SMEs' loans. We show that such services are extremely helpful to overcome the credit crunch as they mitigate the moral hazard problem without resorting to informational or monitoring expenses.
    Date: 2009
  6. By: Bougheas, Spiros (University of Nottingham); Dasgupta, Indraneel (University of Durham); Morrissey, Oliver (University of Nottingham)
    Abstract: Lenders condition future loans on some index of past performance. Typically, banks condition future loans on repayments of earlier obligations whilst international organizations (official lenders) condition future loans on the implementation of some policy action (‘investment’). We build an agency model that accounts for these tendencies. The optimal conditionality contract depends on exclusivity – the likelihood that a borrower who has been denied funds from the original lenders can access funds from other lenders.
    Keywords: repayment conditions, investment conditions, long-term loans, exclusivity
    JEL: G21 F34
    Date: 2009–11
  7. By: Shuyun May Li
    Abstract: This paper discusses two ways to amend the optimal lending contract under asymmetric information studied in Clementi and Hopenhayn (2006) to change its long-run implications so that firm growth and exit driven by borrowing constraints exist in the long run. One way assumes that the entrepreneur has a lower discount factor than the bank, and the other assumes the bank has limited commitment. The optimal lending contracts under each variation closely resemble each other.
    Keywords: Optimal lending contract; Borrowing constraints; Asymmetric information; Limited commitment; Impatient entrepreneur
    JEL: G3 L2 D21
    Date: 2009
  8. By: Cieply, S.; Dejardin, M.A.F.G. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We study financial constraints new firms suffer from in France during the mid-nineties. Three types of constraints are distinguished: the classic and well-known weak and strong credit rationing and the new concept of self-rationing bound to the theory of discouraged borrowers. We look for these constraints on a sample of new firms which survived at least 3 years during the mid-nineties. Empirical findings show credit constraints as a whole concern 41.96% of the sample and a very low proportion of new firms suffer from credit rationing “à la Stiglitz-Weissâ€. Weak credit rationing and self-rationing, caused by discouragement, are more widespread among French new firms. We highlight moreover the role of banks during the post-start up stage even if firms have suffered from credit rationing at the beginning of their life. Results not only suggest the absence of firms’ path of exclusion on the credit market but the rent expropriation by banks.
    Keywords: credit rationing;self-rationing;discouragement;banks
    Date: 2009–12–01
  9. By: Arnaud Bourgain; Patrice Pieretti; Skerdilajda Zanaj (CREA, University of Luxembourg)
    Abstract: In this paper, we analyze the risk taking behavior of banks in emerging economies, in a context of international bank competition. In the spirit of Vives (2002 and 2006) who has developed the notion of "external market discipline", our paper introduces a new channel through which depositors can exercise pressure to control risk taking. They can reallocate their savings away from their home country to a more protective system of a developed economy. In such a frame- work, we show that there is no univoque relationship between the information disclosure of risk management and excessive risk taking. This relationship depends on the degree of financial openness of the emergent country, which ultimately defines how e¤ective the market discipline is. Furthermore, we analyze the risk taking choice of banks in emergent economies in presence of deposit insurance. We find no monotone relationship between the likeliness of excessive risk taking of banks in the emerging country and the level of deposit insurance.
    JEL: G21 G28 F39 L60
    Date: 2009
  10. By: Jiri Novak (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Dalibor Petr (Palacky University, Olomouc)
    Abstract: Measuring risk in the stock market context is one of the key challenges of modern finance. Despite of the substantial significance of the topic to investors and market regulators, there is a controversy over what risk factors should be used to price the assets or to determine the cost of capital. We empirically investigate the ability of several commonly proposed risk factors to predict Swedish stock returns. We consider the sensitivity of an asset returns to the variation in market returns, the market value of equity, the ratio of market value of equity to book value of equity and the short-term historical stock returns. We conclude that none of these factors is clearly significant for explaining stock returns at the Stockholm Stock Exchange, which casts doubt on their use as universal risk factors in various corporate governance contexts. It seems that the previously documented relationship is contingent on the data sample used and on the time period.
    Keywords: stock returns, asset pricing, risk, multifactor models, CAPM, size, book-to-market, momentum, Sweden
    JEL: G12 C21
    Date: 2009–12

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