nep-cfn New Economics Papers
on Corporate Finance
Issue of 2011‒09‒05
four papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. An analysis of firm and market volatility By Susan Sunila Sharma; Paresh Kumar Narayan; Xinwei Zheng
  2. The Determinants of trade credit: Evidence from Indian manufacturing firms By Rajendra R. Vaidya
  3. The Economic Perspective of Bank Bankruptcy Law By Matej Marinc; Razvan Vlahu
  4. Empirical estimation of default and asset correlation of large corporates and banks in India By Bandyopadhyay, Arindam; Ganguly, Sonali

  1. By: Susan Sunila Sharma; Paresh Kumar Narayan; Xinwei Zheng
    Abstract: In this paper, using time series data for the period 2 January 1998 to 31 December 2008, for 560 firms listed on the NYSE, we examine whether firm volatility is related to market volatility. The main contribution of this paper is that we develop the analytical framework motivating the firm-market volatility relationship. We unravel three new findings on volatility. First, we discover significant evidence of common volatility; for 12 out of 14 sectors, market volatility has a statistically significant effect on firm volatility for at least 50 percent of firms. Second, we discover significant evidence of size effects: for small sized firms, there is weak evidence of commonality in volatility, while for large sized firms there is high evidence (as much as 75 percent of firms) of commonality in volatility. Third, we find that market volatility predicts firm volatility for firms belonging to five of the 14 sectors.
    Keywords: Volatility; Size Effects; Firms; Market
    JEL: G15
    Date: 2011–08–29
  2. By: Rajendra R. Vaidya (Indira Gandhi Institute of Development Research)
    Abstract: Trade credit (accounts receivable and accounts payable) is both an important source and use of funds for manufacturing firms in India. This paper empirically investigates the determinants of trade credit in the Indian context. The empirical evidence presented suggests that strong evidence exists in support of an inventory management motive for the existence of trade credit. Highly profitable firms are found to both give and receive less trade credit. Firms with greater access to bank credit offer less trade credit to their customers. On the other hand, firms with higher bank loans receive more trade credit. Holdings of liquid assets have a positive influence on both accounts receivable and accounts payable.
    Keywords: Trade Credit
    JEL: G31 G32
    Date: 2011–07
  3. By: Matej Marinc; Razvan Vlahu
    Abstract: This paper argues that a special bank bankruptcy regime is desirable for the efficient restructuring and/or liquidation of distressed banks. We first explore the principal features of corporate bankruptcy law. Next, we examine the specific characteristics that distinguish banks from other corporations, and argue that these features are largely neglected in corporate bankruptcy law. Finally, we make recommendations for optimal closure and reorganization policies, which should allow regulators to better mitigate disruptions in the financial system and minimize the social costs of bank distress. We compare the U.S., UK, and German bank bankruptcy frameworks and describe the EU framework for cross-border bank bankruptcy. We support our recommendations with a discussion of the Lehman Brothers and Fortis bank failures.
    Keywords: bank bankruptcy law; corporate bankruptcy law; bankruptcy regimes; bank failures; optimal resolution
    JEL: G21 G28 G33
    Date: 2011–08
  4. By: Bandyopadhyay, Arindam; Ganguly, Sonali
    Abstract: Estimation of default and asset correlation is crucial for banks to manage and measure portfolio credit risk. This would require studying the risk profile of the banks’ entire credit portfolio and developing the appropriate methodology for the estimation of default dependence. Measurement and management of correlation risk in the credit portfolio of banks has also become an important area of concern for bank regulators worldwide. The BCBS (2006) has specifically included an asset correlation factor in the computation of credit risk capital requirement by banks adopting the Internal Ratings Based Approach. We estimate default correlation in the credit portfolio of banks. These correlation estimates will help the regulator in India to understand the linkage between bank’s portfolio default risks with the systematic factors. We also derive default and asset correlations of Indian corporate and compare it with global scenario. The work tries to find the relationship of the correlation to the default probability as specified by the Basel committee. The findings of this paper could be used further in estimating portfolio credit risk, economic capital and risk adjusted returns on economic capital for large corporate exposures of banks.
    Keywords: Default Correlation; Asset Correlation; Credit Portfolio Risk
    JEL: G32 C15 G21
    Date: 2011–08–16

This nep-cfn issue is ©2011 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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