nep-cfn New Economics Papers
on Corporate Finance
Issue of 2010‒05‒15
six papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. DO LOCAL FINANCIAL AND LEGAL SYSTEMS AFFECT SMES CAPITAL STRUCTURE? By Mariarosaria Agostino; Maurizio La Rocca; Tiziana La Rocca; Francesco Trivieri
  2. Drivers of Private Equity Investment in CEE and Western European Countries By Kerstin Bernoth; Roberta Colavecchio; Magdolna Sass
  3. A structural model of contingent bank capital By George Pennacchi
  4. Systemic risk analysis using forward-looking distance-to-default series By Martin Saldías Zambrana
  5. Bank liability insurance schemes before 1865 By Warren E. Weber
  6. Entrepreneurship, Windfall Gains and Financial Constraints: Evidence from Germany By Dorothea Schäfer; Oleksandr Talavera; Charlie Weir

  1. By: Mariarosaria Agostino; Maurizio La Rocca; Tiziana La Rocca; Francesco Trivieri (Dipartimento di Economia e Statistica, Università della Calabria)
    Abstract: This paper investigates the role of institutional differences at the local level as determinants of firms’ capital structure. Specifically, its aim is to empirically assess whether and to what extent SMEs’ financial decisions are affected by local financial development – evaluating this influence both ceteris paribus, and by allowing it to be conditional on different levels of legal enforcement inefficiency. Controlling for debt inertia, firms’ heterogeneity and endogeneity problems, we find that local financial development may be an important determinant of SMEs’ capital structure, and that firms appear to have better access to financial debt in areas characterized by a higher quality of the legal system. Thus, despite the international process of capital markets integration, local financial institutions do not seem to become irrelevant for SMEs, which are in need of well developed institutions at local level to gain easier access to external financial resources.
    Keywords: Firms’ capital structure, Bank debt, Local financial development, Local enforcement system, SMEs
    JEL: G21 G32
    Date: 2010–05
  2. By: Kerstin Bernoth; Roberta Colavecchio; Magdolna Sass
    Abstract: A strong private equity market is a cornerstone for commercialization and innovation in modern economies. However, substantial differences exist in the relative amounts raised and invested in private equity across European countries. We investigate the macro-determinants of private equity investment in Europe, focusing on the comparison between CEE and Western European countries. Our estimations are based on a data set running from 2001 to 2008 and covers 14 Western European and three CEE countries. Applying robust estimation techniques we identify a 'robust' set of determinants of private equity activity in both regions. We find similarities as well as differences in the driving forces of private equity investments in Western European and CEE countries. Our results suggest that commercial bank lending, equity market capitalization, unit labour costs and corporate tax rates are significant determinants of private equity activity.
    Keywords: Private Equity, Extreme Bounds Analysis, Central and Eastern European Countries
    JEL: C23 C52 E22 G24
    Date: 2010
  3. By: George Pennacchi
    Abstract: This paper develops a structural credit risk model of a bank that issues deposits, shareholders' equity, and fixed or floating coupon bonds in the form of contingent capital or subordinated debt. The return on the bank's assets follows a jump-diffusion process, and default-free interest rates are stochastic. The equilibrium pricing of the bank's deposits, contingent capital, and shareholders' equity is studied for various parameter values haracterizing the bank's risk and the contractual terms of its contingent capital. Allowing for the possibility of jumps in the bank's asset value, as might occur during a financial crisis, has distinctive implications for valuing contingent capital. Credit spreads on contingent capital are higher the lower is the value of shareholders' equity at which conversion occurs and the larger is the conversion discount from the bond's par value. The effect of requiring a decline in a financial stock price index for conversion (dual price trigger) is to make contingent capital more similar to non-convertible subordinated debt. The paper also examines the bank's incentive to increase risk when it issues different forms of contingent capital as well as subordinated debt. In general, a bank that issues contingent capital has a moral hazard incentive to raise its assets' risk of jumps, particularly when the value of equity at the conversion threshold is low. However, moral hazard when issuing contingent capital tends to be less than when issuing subordinated debt. Because it reduces effective leverage and the pressure for government bailouts, contingent capital deserves serious consideration as part of a package of reforms that stabilize the financial system and eliminate "Too-Big-to-Fail."
    Keywords: Bank capital ; Risk ; Bank failures
    Date: 2010
  4. By: Martin Saldías Zambrana
    Abstract: Based on contingent claims theory, this paper develops a method to monitor systemic risk in the European banking system. Aggregated Distance-to-Default series are generated using option prices information from systemically important banks and the DJ STOXX Banks Index. These indicators provide methodological advantages in monitoring vulnerabilities in the banking system over time: 1) they capture interdependences and joint risk of distress in systemically important banks; 2) their forward-looking feature endow them with early signaling properties compared to traditional approaches in the literature and other market-based indicators; and 3) they produce simultaneously both smooth and informative long-term signals and quick and clear reaction to market distress.
    Keywords: Systemic risk ; Banks and banking - Europe
    Date: 2010
  5. By: Warren E. Weber
    Abstract: Prior to the Civil War several states established bank liability insurance schemes of two basic types. One was an insurance fund, in which member banks paid into a state-run fund that would pay losses of bank creditors. The other was a mutual guarantee system, in which survivor banks were legally responsible the liabilities of any bank that became insolvent. Both schemes did well at insuring bank creditors, but neither prevented bank panics. Bank failure rates were somewhat higher for banks that were part of these schemes. The experience with these schemes shows that regulatory incentives matter for controlling moral hazard. The schemes that provided the most control of moral hazard were those that had a high degree of mutuality of losses borne by all banks participating in the scheme.
    Keywords: Deposit insurance ; Moral hazard ; Bank notes
    Date: 2010
  6. By: Dorothea Schäfer (DIW Berlin); Oleksandr Talavera (School of Economics, University of East Anglia); Charlie Weir (Aberdeen Business School)
    Abstract: We investigate the link between the propensity to become an entrepreneur and exogenous release from financial constraints in Germany. This is defined in terms of the movement from employment to self-employment on receipt of a financial windfall. A theoretical framework developing Evans and Jovanovic (1989) is set up and tested with panel data from German households. The results show that financial constraints do exist given that individuals are more likely to start a personal business after receiving a windfall gain. The value of windfall gains has a significant but non linear effect on the decision to become self employed. The data reveal that differences in ability and income affect the change in employment status. We also report that there is no evidence that becoming self employed involves the anticipation of windfall gains.
    Keywords: Entrepreneurship, windfall gains, financial constraints
    JEL: G20 M13
    Date: 2010–05–03

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