nep-cfn New Economics Papers
on Corporate Finance
Issue of 2010‒09‒25
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Pay for Performance from Future Fund Flows: The Case of Private Equity By Chung, Ji-Woong; Sensoy, Berk A.; Stern, Lea H.; Weisbach, Michael S.
  2. The effects of bank capital on lending: what do we know, and what does it mean? By Jose M. Berrospide; Rochelle M. Edge
  3. Testing for rational bubbles in a co-explosive vector autoregression By Tom Engsted; Bent Nielsen
  4. Corporate Governance in Pakistan: Corporate Valuation, Ownership and Financing By Attiya Y. Javid; Robina Iqbal
  5. Four Futures for Finance: a scenario study By Michiel Bijlsma; Wouter Elsenburg; Michiel van Leuvensteijn

  1. By: Chung, Ji-Woong (The Chinese University of Hong Kong); Sensoy, Berk A. (Ohio State University); Stern, Lea H. (Ohio State University); Weisbach, Michael S. (Ohio State University)
    Abstract: Lifetime incomes of private equity general partners are affected by their current funds’ performance through both carried interest profit sharing provisions, and also by the effect of the current fund’s performance on general partners’ abilities to raise capital for future funds. We present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, we estimate that implicit pay for performance from expected future fundraising is approximately the same order of magnitude as the explicit pay for performance general partners receive from carried interest in their current fund, implying that the performance-sensitive component of general partner revenue is about twice as large as commonly discussed. Consistent with the learning framework, we find that implicit pay for performance is stronger when managerial abilities are more scalable and weaker when current performance contains less new information about ability. Specifically, implicit pay for performance is stronger for buyout funds compared to venture capital funds, and declines in the sequence of a partnership’s funds. Our framework can be adapted to estimate implicit pay for performance in other asset management settings in which future fund flows and compensation depend on current performance.
    Keywords: Private equity; Venture capital; Fundraising; Compensation; Incentives
    JEL: G23 G24
    Date: 2010–09–22
  2. By: Jose M. Berrospide; Rochelle M. Edge
    Abstract: The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel-regression techniques--following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)--to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan's (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial-bank assets and leverage growth, which have recently been very influential in shaping forecasters' and policymakers' views regarding the effects of bank capital on loan growth. Our estimated models are then used to understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.
    Date: 2010
  3. By: Tom Engsted (CREATES, School of Economics and Management, Aarhus University, DK-8000 Aarhus C); Bent Nielsen (Nuffield College, Oxford OX1 1NF, U.K.)
    Abstract: We derive the parameter restrictions that a standard equity market model implies for a bivariate vector autoregression for stock prices and dividends, and we show how to test these restrictions using likelihood ratio tests. The restrictions, which imply that stock returns are unpredictable, are derived both for a model without bubbles and for a model with a rational bubble. In both cases we show how the restrictions can be tested through standard chi-squared inference. The analysis for the no-bubble case is done within the traditional Johansen model for I(1) variables, while the bubble model is analysed using a co-explosive framework. The methodology is illustrated using US stock prices and dividends for the period 1872-2000.
    Keywords: Rational bubbles, Explosiveness and co-explosiveness, Cointegration, Vector autoregression, Likelihood ratio tests.
    Date: 2010–06–24
  4. By: Attiya Y. Javid; Robina Iqbal (Pakistan Institute of Development Economics)
    Abstract: In this study the relationship between corporate governance and corporate valuation, ownership structure and need of external financing for the Karachi Stock Market is examined for the period 2003 to 2008. To measure the firm- level governance a rating system is used to evaluate the stringency of a set of governance practices and cover various governance categories: such as board composition, ownership and shareholdings and transparency, disclosure and auditing. The sample consists of 60 non-financial firms listed on Karachi Stock Exchange and comprises more than 80 percent of market capitalization at Karachi Stock Market in 2007. The results confirms the theoretical notion that firms with better investment opportunities and larger in size adopt better corporate governance practice. The proposition that ownership concentration is a response to poor legal protection is also validated by the results. The more investment opportunities lead to more concentration of ownership and the ownership concentration is significantly diluted as the firm size expands. The findings are consistent with theoretical argument claiming that family owners, foreign owners and bring better governance and monitoring practices which is consistent with agency theory. The results suggest that firms which need more equity financing practice good governance. The results show that firms with high growth and large in size are in more need of external finance. The relationship between external financing and ownership concentration is negative. The results reveal that the firms which practice good governance, with concentrated ownership, need more external finance which have more profitable investment opportunities and are larger in size are valued higher. The interaction term of any variable with law enforcement term are not significant in any model suggesting that firm performance is not affected by rule of law in countries where legal environment is weak. These results adds an important link to the explanation of the consequences weak legal environment for external financing, corporate valuation and corporate governance. The results show that Corporate Governance Code 2002 potentially improves the governance and decision making process of firms listed at KSE.
    Keywords: Ownership Concentration, Corporate Governance, Firm Performance, External Financing, Panel Data
    JEL: G3 F3
    Date: 2010
  5. By: Michiel Bijlsma; Wouter Elsenburg; Michiel van Leuvensteijn
    Abstract: We develop four scenarios for the future of finance. Our scenarios differ in two dimensions. First, to what extent soft information lies at the core of banks' business. Second, to what extent scope economies exist between different banking activities. By combining these two dimensions, we obtain four scenarios: Isolated Islands, Big Banks, Competing Conglomerates, and Flat Finance. Market structure, market failures, and government failures vary between scenarios. These differences then translate into differences in the complexity of balance sheets, the ability to coordinate policy internationally, the information gap faced by regulators, the size of banks' balance sheets, the tradability of banks' assets, the level of interconnectedness, the potential for market discipline, and the threat of regulatory capture. As a result, each scenario calls for a different set of policies to combat systemic risk.
    Keywords: Financial sector
    JEL: G28
    Date: 2010–09

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