nep-cfn New Economics Papers
on Corporate Finance
Issue of 2010‒02‒13
four papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. An exact pricing formula for European call options on zero-coupon bonds in the run-up to a currency union By Gerrit Reher; Bernd Wilfling
  2. Corporate Risk Taking and Ownership Structure By Teodora Paligorova
  3. Competitive IPOs.. By Jenkinson, Tim; Jones, Howard
  4. Containing systemic risk. By Whelan, Karl

  1. By: Gerrit Reher; Bernd Wilfling
    Abstract: In this paper we analyze the dynamics of zero-coupon bond options in a situation in which two open economies plan to enter a currency union in the future. More precisely, we make use of recent theoretical work on the continuous-time dynamics of interest-rate differentials between the economies involved and derive a closed-form pricing formula for a European call option on zero-coupon bonds. In a Monte-Carlo simulation study we show that significant option-pricing errors can occur when the key features of interest-rate dynamics during the run-up to the currency union are ignored.
    Keywords: Interest-rate dynamics; valuation of interest-rate options; currency union
    JEL: G12 G13 G15 E42 F37
    Date: 2010–01
  2. By: Teodora Paligorova
    Abstract: This paper investigates the determinants of corporate risk taking. Shareholders with substantial equity ownership in a single company may advocate conservative investment policies due to greater exposure to firm risk. Using a large cross-country sample, I find a positive relationship between corporate risk taking and equity ownership of the largest shareholder. This result is entirely driven by investors holding the largest equity stakes in more than one company. Family shareholders avoid corporate risk taking as their ownership increases unlike mutual funds, banks, financial and industrial companies. Stronger legal protection of shareholder rights is associated with more risk taking, while stronger legal protection of creditor rights reduces risk taking.
    Keywords: Financial markets; International topics
    JEL: G34 G31
    Date: 2010
  3. By: Jenkinson, Tim; Jones, Howard
    Abstract: Competition between investment banks for lead underwriter mandates in IPOs is fierce, but having committed to a particular bank, the power of the issuer is greatly reduced. Although information revelation theories justify giving the underwriters influence over pricing and allocation, this creates the potential for conflicts of interest. In this clinical paper we analyse an interesting innovation that has been used in recent European IPOs whereby issuers separate the preparation and distribution roles of investment banks, and keep competitive pressure on the banks throughout the issue process. These ‘competitive IPOs’ allow the issuer greater control and facilitate more contingent fee structures that help to mitigate against ‘bait and switch’. But unlike more radical departures from traditional bookbuilding - such as auctions - the competitive IPO is an incremental market-based response to potential conflicts of interest that retains many of the advantages of investment banks’ active involvement in issues.
    JEL: G3 G24
    Date: 2009–09
  4. By: Whelan, Karl
    Abstract: Systemic risk refers to the risk of financial system breakdown due to linkages between institutions. This risk cannot be assessed by looking at how individual institutions manage risks but instead requires a full understanding of how the system as a whole operates. At present, the data available to central banks and financial regulators are not at all adequate for the task of assessing systemic risk and the new European Systemic Risk Board needs to address this issue. There is a lot of exciting ongoing research devoted to measuring systemic risk and providing signals to regulators as to when and where they should intervene. However, the tools being developed are still limited in their usefulness. Perhaps more pressing than the development of these tools is the implementation of policy measures to make the financial system more robust. These measures should include higher capital ratios, limits on non-core funding and redesigning financial systems to be less complex.
    Keywords: Financial institutions--Management; Risk--Europe; Financial institutions--Law and legislation--Europe; Financial crises--Prevention;
    Date: 2009–11

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