nep-cfn New Economics Papers
on Corporate Finance
Issue of 2011‒02‒19
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. The Cost of Equity of Network Operators - Empirical Evidence and Regulatory Practice By Stephan Schaeffler; Christoph Weber
  2. Auditor and audit committee independence in India By Jayati Sarkar; Subrata Sarkar
  3. Investment in Relationship-Specific Assets: Does Finance Matter ? By Strieborny Martin; Kukenova Madina
  4. The implications of European retail banking integration on small and medium-sized enterprises financing. An overview By Anton, Sorin Gabriel; Avadanei, Andreea
  5. Approximating European Options by Rebate Barrier Options By Qingshuo Song

  1. By: Stephan Schaeffler; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)
    Abstract: Since the events of liberalization of energy markets leading to the introduction of unbundling and incentive regulation for electricity and gas network operators in many countries, the long-lasting discussion between regulation authorities and regulated firms about adequate equity costs has gained in intensity. Heavy criticism has been formulated by the affected network operators, suggesting that the methodology is not adequate, that data sets of companies used for computation of equity returns are not comparable or that other parameters of the formula, such as the market risk premium and the risk-free interest rate, are not appropriate. One aim of this paper consequently is to give an overview of results obtained in the field of empirical research, the focus lying on utilities, network operators and specific industry betas. As such, this paper may serve as a hub to research papers and give numerous sources for practitioners and researchers. Secondly, this paper presents and discusses the most important drivers of systematic risk which is an indispensable groundwork for determining adequate betas. Thirdly, an overview of the handling of equity return by regulation authorities will be provided. Fourthly, a recent data set with more than 20 network operators will be used to compute the required equity return with different methodologies (CAPM, Fama-French-TFM, Ross-APT). This provides evidence that regulatory practice ignores the Fama-French-TFM or the APT, even though these approaches prove to be valid to improve estimation quality. Consequently, this paper supports regulators and practitioners in search for the right approach to use concerning investment decisions and regulatory rule setting.
    Keywords: Network operator, cost of capital, asset pricing models, regulation, cost of equity
    JEL: G31 G38 L9
    Date: 2011–01
  2. By: Jayati Sarkar (Indira Gandhi Institute of Development Research); Subrata Sarkar (Indira Gandhi Institute of Development Research)
    Abstract: This article reviews the regulations and governance reforms carried out in India with respect to auditor and audit committee independence. In doing so it critically compares them with the regulations existing in the US. This is followed by a discussion of the existing research on the effectiveness of audit committees and audit independence in corporate governance. Recent trends in audit committee and auditor characteristics for a sample of large listed companies in the Indian corporate sector are then discussed. The article concludes by suggesting some governance reforms that may be considered to further strengthen auditor independence and the functioning of audit committees in India.
    Keywords: Corporate governance, India, auditor independence, audit committee independence
    JEL: G34 G38
    Date: 2010–10
  3. By: Strieborny Martin; Kukenova Madina
    Abstract: Existing literature sees opportunistic behaviour of contractual partners as the main reason why rational agents underinvest in relationship-specific assets. We look beyond this well-know holdup problem and argue that financial vulnerability and short-term planning horizon can also lead to such underinvestment. Subsequently, banks can stimulate growth-enhancing investment in relationship-specific assets by signalling creditworthiness and long-term planning horizon of their borrowers. We empirically confum this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector. Our work establishes a novel channel through which finance affects the real economy. It also complements the literature that has stressed legally binding contracts as a standard way to promote investment in relationship-specific assets.
    Keywords: financial development; relationship-specific investment; growth
    JEL: G21 O16 O40
    Date: 2011–01
  4. By: Anton, Sorin Gabriel; Avadanei, Andreea
    Abstract: Considering the last few years, the European Union (EU) has became one of the most competitive and integrated economic regions of the world, following a rapid pace of change as a result of an inspired series of initiatives. The harmonization of the banking and other financial services legislation as component of the EU’ Single Market, the creation of the European Economic and Monetary Union (EMU), alongside the ongoing implementation of the Financial Services Action Plan (FSAP) represent the central drivers of financial integration and the set of elements that have helped reducing the barriers to cross-border trade in banking services. The process of deregulation is another element that facilitated the environment in which technology and other bank strategic determinants have become increasingly important. The scope of the present paper is to analyze the implications of a higher degree of banking integration on firms financing options and choices. This paper is composed of two main parts. The first part focuses to the determinants of European banking integration, analyzing this process since the banking system represents the main financial channel for both the small and medium-sized enterprises and households. The second part concentrates on the effects of banking integration on considered entities’ financial constraints. The concluding remarks outline that retail bank integration has an ambiguous implication on SMEs’ access to credit.
    Keywords: retail banking integration; SMEs; firms’ financing; financial constraints; deregulation
    JEL: G32 G21
    Date: 2010–04–09
  5. By: Qingshuo Song
    Abstract: When the underlying stock price is a strict local martingale process under an equivalent local martingale measure, Black-Scholes PDE associated with an European option may have multiple solutions. In this paper, we study an approximation for the smallest hedging price of such an European option. Our results show that a class of rebate barrier options can be used for this approximation, when its rebate and barrier are chosen appropriately. An asymptotic convergence rate is also achieved when the knocked-out barrier moves to infinity under suitable conditions.
    Date: 2011–02

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