nep-cfn New Economics Papers
on Corporate Finance
Issue of 2011‒04‒09
ten papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. WACC: Definition, misconceptions and errors By Fernandez, Pablo
  2. Shareholder value creators in the S&P 500: 1991-2010 By Fernandez, Pablo; Aguirreamalloa, Javier; Corres, Luis
  3. A reduced basis for option pricing By Rama Cont; Nicolas Lantos; Olivier Pironneau
  4. Corporate Risk-Taking in Privatized Firms: International Evidence on the Role of State and Foreign Owners By Narjess Boubakri; Jean-Claude Cosset; Walid Saffar
  5. Determinants of Stock Market Prices in Namibia By Joel Hinaunye Eita
  6. Main bank power, switching costs, and firm performance. Evidence from Ukraine, By Andreas Stephan; Oleksandr Talavera; Andriy Tsapin
  7. Systemic risk across sectors; Are banks different? By Michiel Bijlsma; Sander Muns
  8. An Empirical Investigation of Liquidity and Stock Returns Relationship in Vietnam Stock Markets during Financial Crisis By Vo, Xuan Vinh; Batten, Jonathan
  9. Timeliness of financial reporting in emerging capital markets:Evidence from Turkey By Turel, Asli
  10. The Short of It: Investor Sentiment and Anomalies By Robert F. Stambaugh; Jianfeng Yu; Yu Yuan

  1. By: Fernandez, Pablo (IESE Business School)
    Abstract: The WACC is just the rate at which the Free Cash Flows must be discounted to obtain the same result as in the valuation using Equity Cash Flows discounted at the required return to equity (Ke) The WACC is neither a cost nor a required return: it is a weighted average of a cost and a required return. To refer to the WACC as the "cost of capital" may be misleading because it is not a cost. The paper includes 7 errors due to not remembering the definition of WACC and shows the relationship between the WACC and the value of the tax shields (VTS).
    Keywords: required return to equity; value of tax shields; company valuation; cost of debt;
    JEL: G12 G31 M21
    Date: 2011–03–01
  2. By: Fernandez, Pablo (IESE Business School); Aguirreamalloa, Javier (IESE Business School); Corres, Luis (IESE Business School)
    Abstract: shareholders ($4.5 trillion). In 1991-1999 it created value ($5.1 trillion), but in 2000-2010 it destroyed $9.6 trillion. The market value of the S&P 500 was $2.8 trillion in 1991 and $11.4 trillion in 2010. We also calculate the created shareholder value of the 500 companies during the 18-year period 1993-2010. The top shareholder value creators in that period were Apple ($212bn), Exxon Mobil (86), IBM (78), Altria Group (70) and Chevron (67). The top shareholder value destroyers in that period were American Intl Group ($-217), Pfizer (-188), General Electric (-183), Bank of America (-170), Citigroup (-169) and Time Warner (-130). 41% of the companies included in the S&P 500 in 2004 or 2010 created value in 1993-2010 for their shareholders, while 59% destroyed value. We define created shareholder value and provide the created shareholder value of the 633 companies that were in the S&P 500 in December 2004 or in December 2010.
    Keywords: shareholder value creation; created shareholder value; equity market value; shareholder value added; shareholder return; required return to equity;
    JEL: G12 G31 G32
    Date: 2011–02–11
  3. By: Rama Cont (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII); Nicolas Lantos (LJLL - Laboratoire Jacques-Louis Lions - CNRS : UMR7598 - Université Pierre et Marie Curie - Paris VI); Olivier Pironneau (LJLL - Laboratoire Jacques-Louis Lions - CNRS : UMR7598 - Université Pierre et Marie Curie - Paris VI)
    Abstract: We introduce a reduced basis method for the efficient numerical solution of partial integro-differential equations which arise in option pricing theory. Our method uses a basis of functions constructed from a sequence of Black-Scholes solutions with different volatilities. We show that this choice of basis leads to a sparse representation of option pricing functions, yielding an approximation whose precision is exponential in the number of basis functions. A Galerkin method using this basis for solving the pricing PDE is presented. Numerical tests based on the CEV diffusion model and the Merton jump diffusion model show that the method has better numerical performance relative to commonly used finite-difference and finite-element methods. We also compare our method with a numerical Proper Orthogonal Decomposition (POD). Finally, we show that this approach may be used advantageously for the calibration of local volatility functions.
    Date: 2011–03–21
  4. By: Narjess Boubakri; Jean-Claude Cosset; Walid Saffar
    Abstract: Using a unique database of 190 newly privatized firms from 36 countries, we investigate the impact of shareholders’ identify on corporate risk-taking behavior. We find strong and robust evidence that state (foreign) ownership is negatively (positively) related to corporate risk-taking. Moreover, we find that these relations depend on the level of government extraction. Our results suggest that relinquishment of government control, openness to foreign investment, and improvement of country-level governance institutions are key factors in the success of privatization reform.
    Keywords: Privatization, risk-taking, corporate governance
    JEL: G31 G34 L33
    Date: 2011
  5. By: Joel Hinaunye Eita
    Abstract: This paper investigates the macroeconomic determinants of stock market prices in Namibia. The investigation was conducted using a VECM econometric methodology and revealed that Namibian stock market prices are chiefly determined by economic activity, interest rates, inflation,money supply and exchange rates. An increase in economic activity and the money supply increases stock market prices, while increases in inflation and interest rates decrease stock prices. The results suggest that equities are not a hedge against inflation in Namibia, and contractionary monetary policy generally depresses stock prices. Increasing economic activity promotes stock market price development
    Keywords: stock market prices; arbitrage pricing theory; cointegration; impulse reponses; Namibia
    JEL: G10 G11 C23 C32
    Date: 2011
  6. By: Andreas Stephan (Jonkoping International Business School); Oleksandr Talavera (School of Economics, University of East Anglia); Andriy Tsapin (Ostroh Academy)
    Abstract: We examine firms’ motivation to change their main bank and how this switch affects loans, interest payments and firm performance after switching. Applying treatment effect analysis on unique firm-bank matched Ukrainian data, we find that larger and highly leveraged companies are more likely to switch their main bank. Importantly, firms tend to switch to a new main bank which holds a higher share of equity in the firm and thereby has stronger power. The results also suggest that firms after switching obtain additional access to bank loans but have on average lower profits due to increased interest payments.
    Keywords: switching, main bank power, firm performance, Ukraine
    JEL: G21 G30 G32
    Date: 2011–03–28
  7. By: Michiel Bijlsma; Sander Muns
    Abstract: This research compares systemic risk in the banking sector, the insurance sector, the construction sector, and the food sector. To measure systemic risk, we use extreme negative returns in stock market data for a time-varying panel of the 20 largest U.S. firms in each sector.
    JEL: G11 G21
    Date: 2011–04
  8. By: Vo, Xuan Vinh; Batten, Jonathan
    Abstract: This paper investigates the relationship between liquidity and stock returns in the Vietnam stock market during financial crisis using a data set ranging from 2006 to 2010. Employing a rich and detailed dataset of characteristics of firm listed in Ho Chi Minh City Stock Exchange, the results from the analysis indicate that liquidity positively affects stock returns. Our results contradict previous results that liquidity is negatively correlated with stock returns as investors required a premium to compensate for illiquid stocks in developed markets
    Keywords: Liquidity; stock returns; Vietnam
    JEL: G12 G10
    Date: 2010–01–01
  9. By: Turel, Asli
    Abstract: Timely financial reporting is an essential ingredient for a well-functioning capital market. This study has two objectives. The first one is to measure the extend of timeliness of financial reporting in a developing country, Turkey. The second one is to establish the impact of both company specific and audit related factors on timeliness of financial reporting in Turkey. This study reports on the results of an empirical investigation of the timeliness of financial reports by 211 non-financial companies listed on the Istanbul Stock Exchange. The descriptive analysis indicates that 59% of the companies that prepares separate financial statements and 66% of the companies that prepares consolidated financial statements release their financial statements less than the maximum time allowed after the financial year-end. 28% of the companies that prepares separate financial statements and 16% of the companies that prepares consolidated financial statements exceeded the regulatory deadline. The multivariate regression analysis indicates that both sign of income, audit opinion, auditor firm and industry affect timeliness. The findings indicate that the companies, which report net income, have standard audit opinion, and operate in manufacturing industry release their financial statements earlier while the companies are audited by the big four audit firms report their financial statements later.
    Keywords: Timeliness; financial reporting; accounting; Turkey
    JEL: M41 M4
    Date: 2010–11
  10. By: Robert F. Stambaugh; Jianfeng Yu; Yu Yuan
    Abstract: This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting where the presence of market-wide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger—its long-short strategy is more profitable—following high levels of sentiment. Second, the short leg of each strategy is more profitable following high sentiment. Finally, sentiment exhibits no relation to returns on the long legs of the strategies.
    JEL: G0 G12 G14
    Date: 2011–03

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