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on Corporate Finance |
| By: | Thorsten V. Koeppl (Queen's University); Cyril Monnet (Philadelphia) |
| Abstract: | We study the role of a central counterparty (CCP) in controlling counterparty risk. When trading is organized via a centralized exchange with fungible contracts – like in a futures market – we show that it is optimal to clear trades via a CCP that uses (i) novation to pool the risk of default and (ii) mutualization of losses to insure against the aggregate cost of default in the form of price risk. We then analyze the design of CCP clearing for over-the-counter (OTC) trades where contracts are customized and, hence, not fungible. A CCP can still offer gains from novation by pooling default risk across all customized contracts. Bargaining in OTC trades leads to an inefficient allocation of default risk across trades. A transfer scheme can alleviate this inefficiency, but necessitates novation being offered by a CCP. Hence, the benefit from CCP clearing for OTC markets goes beyond simple netting as it is a prerequisite for an efficient allocation of default risk in such markets. |
| Keywords: | Central Counterparty, Clearing, Over-the-counter Markets, Novation and Mutualization, Default Risk |
| JEL: | G20 G28 D82 H21 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1241&r=cfn |
| By: | Fabrizio Casalin; Enzo Dia |
| Abstract: | We find that both the aggregate issuance of bonds, and the volume of commercial and industrial loans outstanding in the US, respond to fluctuations in industrial production and interest rates, but in opposite directions. This empirical result suggests that universal banks can reduce the cyclical fluctuations of their income, by jointly providing direct lending and security underwriting services. |
| Keywords: | Universal Banking, Diversification |
| JEL: | G21 G24 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:192&r=cfn |
| By: | Glenn Boyle (University of Canterbury); Helen Roberts |
| Abstract: | New Zealand firms exhibit significant variation in the extent to which they formally involve CEOs in the executive pay-setting process: a considerable number sit on the compensation committee, while others are excluded from the board altogether. Using 1997-2005 data, we find that CEOs who sit on the compensation committee obtain generous annual pay rewards that have low sensitivity to poor performance shocks. By contrast, CEOs who are not board members receive pay increments that have low mean and high sensitivity to firm performance. Moreover, the greater the pay increment attributable to CEO involvement in the pay-setting process, the weaker is subsequent firm performance over one, three- and five-year periods. |
| Keywords: | pay-performance sensitivity; compensation committee; CEO influence |
| JEL: | G34 J33 |
| Date: | 2010–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/45&r=cfn |