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on Corporate Finance |
| By: | James P. Gander |
| Abstract: | Micro industrial firm panel data on short-term and long-term borrowing (term debt structure) for annual and quarterly time periods over the years 1995-2008 are used to test an insulation hypothesis and a related volatility hypothesis. The former test uses a regression model relating the ratio of accounts payable in trade to long-term debt to firm size and other variables. The focus is on a micro perspective of the firm’s response to the FED’s monetary policy. If differs from an earlier macro perspective that focused on the existence of bank lending channels. The latter hypothesis uses the panel heteroscedastic variances recovered from the first testing procedure to test for a quadratic-form risk function (either U-shaped or inverted U-shaped) using sigma squared and the coefficient of variation as risk indexes and firm size as a determinant. The findings suggest that there is some evidence that firms do insulate themselves from the effects of monetary policy and that retained earnings have a significant role in the insulation effect. The evidence also suggests that the risk index, the variances, is related to firm size by a U-shaped quadratic function. As firm size increases, not only does the term-structure ratio fall, but the volatility falls and at a falling rate of change, approaching zero for a sufficiently large firm. |
| Keywords: | Firms, Debt-Structure, Monetary Policy |
| JEL: | C33 E44 E52 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2010_05&r=cfn |
| By: | Esteban Pérez Caldentey; Matías Vernengo |
| Abstract: | Modern finance has a conceptually unified theoretical core that includes the efficient market hypothesis (EMH), the relationship between risk and return based on the Capital Asset Pricing Model (CAPM), the Modigliani-Miller theorems (M&M) and the Black-Scholes-Merton approach to option pricing. The core has been instrumental to the growth of the financial services industry, financial innovation, globalization, and deregulation. The significant impact of the core is explained by their success in elevating finance to the category of a science by extracting the acquisitiveness associated with economic freedom from the workings of a free market society. This success was somewhat of a paradox. The core theories/theorems were based on wildly unrealistic assumptions and did not stand out for their empirical strength. Overcoming this paradox required a methodological twist whereby theories were devised to create rather than to interpret or predict reality. This view led to a series of financial practices that increased the fragility and vulnerability of financial institutions setting the context for the occurrence of financial crises including the current one. |
| Keywords: | History of Finance, Economic Methodology |
| JEL: | B23 B41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2010_04&r=cfn |