nep-cfn New Economics Papers
on Corporate Finance
Issue of 2011‒12‒19
eight papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Illiquidity Premia in the Equity Options Market By Peter Christoffersen; Ruslan Goyenko; Kris Jacobs; Mehdi Karoui
  2. Do Realized Skewness and Kurtosis Predict the Cross-Section of Equity Returns? By Diego Amaya; Peter Christoffersen; Kris Jacobs; Aurelio Vasquez
  3. JAPANESE FIRMS’ DEBT POLICY AND TAX POLICY By Kunieda, Shigeki; Takahata, Junichiro; Yada, Haruna
  4. Systemically Important Banks and Capital Regulation Challenges By Patrick Slovik
  5. Issues in Private-Sector Finance in Israel By Philip Hemmings
  6. Lending relationships and credit rationing: the impact of securitization By Carbo Valverde, S.; Degryse, H.A.; Rodriguez-Fernandez, F.
  7. On the Non-Exclusivity of Loan Contracts: An Empirical Investigation By Degryse, H.A.; Ioannidou, V.; Schedvin, E.L. von
  8. Competing on Speed By Emiliano Pagnotta; Thomas Philippon

  1. By: Peter Christoffersen (University of Toronto - Rotman School of Management and CREATES); Ruslan Goyenko (McGill University - Faculty of Management); Kris Jacobs (University of Houston - C.T. Bauer College of Business); Mehdi Karoui (McGill University)
    Abstract: Illiquidity is well-known to be a signi?cant determinant of stock and bond returns. We report on illiquidity premia in equity option markets. An increase in option illiquidity decreases the current option price and predicts higher expected option returns. This effect is statistically and economically signi?cant. It is robust across different empirical approaches and when including various control variables. The illiquidity of the underlying stock affects the option return negatively, consistent with a hedging argument: When stock market illiquidity increases, the cost of replicating the option goes up, which increases the option price and reduces its expected return.
    Keywords: illiquidity; equity options; cross-section; option returns; option smile.
    JEL: G12
    Date: 2011–04–19
  2. By: Diego Amaya (HEC Montreal - Department of Management Sciences); Peter Christoffersen (University of Toronto - Rotman School of Management and CREATES); Kris Jacobs (University of Houston - C.T. Bauer College of Business); Aurelio Vasquez (Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration)
    Abstract: Yes. We use intraday data to compute weekly realized variance, skewness and kurtosis for individual equities and assess whether this week?s realized moments predict next week?s stock returns in the cross-section. We sort stocks each week according to their past realized moments, form decile portfolios and analyze subsequent weekly returns. We ?nd a very strong negative relationship between realized skewness and next week?s stock returns, and a positive relationship between realized kurtosis and next week?s stock returns. We do not ?nd a strong relationship between realized volatility and stock returns. A trading strategy that buys stocks in the lowest realized skewness decile and sells stocks in the highest realized skewness decile generates an average weekly return of 43 basis points with a t-statistic of 8:91. A similar strategy that buys stocks with high realized kurtosis and sells stocks with low realized kurtosis produces a weekly return of 16 basis points with a t-statistic of 2:98. Our results are robust across sample periods, portfolio weightings, and proxies for ?rm characteristics, and they are not captured by the Fama-French and Carhart factors.
    Keywords: Realized volatility, skewness, kurtosis, equity markets, return prediction.
    JEL: G11 G12 G17
    Date: 2011–07–29
  3. By: Kunieda, Shigeki; Takahata, Junichiro; Yada, Haruna
    Abstract: Understanding the effects of marginal tax rate on debt policy is crucial not only for considering various capital structure theories of firms but also for evaluating corporate tax reform proposals. In this empirical study, we have found a positive relation in most cases between the firm-specific marginal tax rates (simulated using the method of Shevlin (1990) and Graham (1996)) and the debt ratio increase of Japanese firms. This result shows that the marginal tax rates significantly affect the debt policies of Japanese firms. Corporate tax reform to produce equal treatment of equity and debt is desirable in Japan.
    Keywords: debt, capital structure, marginal tax rate, corporate tax
    JEL: G32 H25
    Date: 2011–12
  4. By: Patrick Slovik
    Abstract: Bank regulation might have contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. Capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks’ focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets may further contribute to these skewed incentives. The estimated macroeconomic costs of redirecting banks’ attention away from such unconventional business practices are low. During a medium-term adjustment period, for each percentage point of bank equity, regulation that is not based on risk-weighted assets would affect annual GDP growth by -0.02 percentage point more than under the risk-weighted assets framework. Refocusing banks’ attention toward their main economic functions is a core requirement for durable financial stability and sustainable economic growth.<P>Banques d'importance systémique: défis pour la réglementation du capital<BR>La réglementation bancaire pourrait avoir contribué, voire renforcé, des chocs systémiques qui se sont matérialisés lors de la crise financière. La réglementation des fonds propres fondée sur des actifs pondérés par les risques encourage l'innovation conçue pour contourner les exigences réglementaires et éloigne les préoccupations des banques de leurs principales fonctions économiques. Le resserrement des exigences en capital fondées sur les actifs pondérés du risque peut exacerber ce biais d’incitation. Des estimations suggèrent que rediriger l’activité des banques hors de telles pratiques commerciales nonconventionnelles ne serait guère coûteux. Pendant une période d'ajustement de moyen terme, pour chaque point de pourcentage du ratio de capitaux propres bancaires, une réglementation qui ne s’appuie pas sur les actifs pondérés du risque réduirait la croissance annuelle du PIB de seulement 0,02 point de pourcentage de plus qu’une réglementation fondée sur les actifs pondérés par les risques. Un recentrage de l’attention des banques vers leurs principales fonctions économiques est une exigence fondamentale pour garantir la stabilité financière et une croissance économique durables.
    Keywords: financial regulation, financial stability, Basel accord, Basel III, capital requirements, systemically important financial institutions, Too-big-to-fail, Bank Leverage, réglementation financière, crise financière, stabilité financière, Accord de Bâle, Bâle III, institutions financières d'importance systémique, levier bancaire
    JEL: G01 G21 G28
    Date: 2011–12–12
  5. By: Philip Hemmings
    Abstract: The 2008-09 global financial crisis did not result in the failure of any major financial institution in Israel, but it did reveal vulnerabilities in the non-banking sector . particularly in the corporate-bond market. Conservative regulation of the banking sector helped this segment avoid a financial meltdown, and low loan-to-value ratios in mortgage lending are undoubtedly helping limit the pace of house-price increases. Nevertheless, as elsewhere, capital requirements and stress tests for banks have been ramped up. Also the identification and monitoring of systemic risks and macro-prudential problems has intensified. In the Israeli context somewhat unusual issues arise from the control of most of Israel.s major financial institutions by family-based business groups that have significant interests in non-financial sectors of the economy. This close link between the financial and non-financial sectors generates potential risks to financial stability, and it is a key issue in a wider debate about the relative merits of the business groups in terms of competition and control in the economy. This Working Paper relates to the OECD 2011 Economic Survey of Israel (<P>Enjeux de la finance privée en Israël<BR>La crise financiere mondiale de 2008-09 n'a entraîné aucune banqueroute parmi les grands établissements financiers en Israël, mais elle a révèle les vulnérabilités du secteur non bancaire, en particulier sur le marche des obligations de sociétés. Une réglementation bancaire rigoureuse a notamment permis d'éviter l'effondrement du secteur financier, tandis que les quotités prudentes des prêts immobiliers contribuent indubitablement à limiter la hausse des prix résidentiels. Toutefois, les exigences de fonds de propres et les tests de résistance des banques ont été renforcés comme ailleurs. L'identification et le suivi des risques systémiques et des problèmes macroprudentiels ont aussi été intensifies. Dans le contexte israëlien, des questions quelque peu inhabituelles se posent du fait que la plupart des établissements financiers d'Israël sont controlés par des groupes familiaux qui détiennent des participations significatives dans les secteurs non financiers de l'économie. Le lien étroit entre les secteurs financier et non financier est susceptible d'engendrer des risques pour la stabilité financière et pourrait devenir un enjeu majeur dans le cadre du débat plus large sur les mérites relatifs des conglomérats du point de vue de la concurrence et du contrôle au sein de l'économie. Ce Document de travail se rapporte à l'Étude économique de l'OCDE d'Israël 2011 (
    Keywords: finance, pensions, corporate governance, bank, securitisation, Israel, Israeli banking, Israeli finance, corporate bonds, micro-prudential oversight, macro-prudential oversight, institutional funds, business groups, finance, retraites, banque, titrisation, Israël, système bancaire israélien, système financier israélien, surveillance microprudentielle, surveillance macroprudentielle, fonds institutionnels, groupes, gouvernement d'entreprise, obligations de sociétés
    JEL: G01 G21 G22 G23 G28 G38
    Date: 2011–12–06
  6. By: Carbo Valverde, S.; Degryse, H.A.; Rodriguez-Fernandez, F. (Tilburg University, Center for Economic Research)
    Abstract: Do lending relationships mitigate credit rationing? Does securitization influence the impact of lending relationships on credit rationing? If so, is its impact differently in normal periods versus crisis periods? This paper combines several unique data sets to address these questions. Employing a disequilibrium model to identify credit rationing, we find that more intense lending relationships, measured through their length and lower number, considerable improve credit supply and reduce the degree of credit rationing. In general, we find that a relationship with a bank that is more involved in securitization activities relaxes credit constraints in normal periods; however, it also increases credit rationing during crisis periods. Finally, we study the impact of different types of securitization – covered bonds and mortgage-backed securities (MBS) – on credit rationing. While both types of securitization reduce credit rationing in normal periods, the issuance of MBS by a firm’s main bank aggravates these firm’s credit rationing in crisis periods.
    Keywords: lending relationships;financial crisis;securitization.
    JEL: G21
    Date: 2011
  7. By: Degryse, H.A.; Ioannidou, V.; Schedvin, E.L. von (Tilburg University, Center for Economic Research)
    Abstract: Credit contracts are non-exclusive. A string of theoretical papers shows that nonexclusivity generates important negative contractual externalities. Employing a unique dataset, we identify how the contractual externality stemming from the non-exclusivity of credit contracts affects credit supply. In particular, using internal information on a creditor’s willingness to lend, we find that a creditor reduces its loan supply when a borrower initiates a loan at another creditor. Consistent with the theoretical literature on contractual externalities, the effect is more pronounced the larger the loans from the other creditor. We also find that the initial creditor’s willingness to lend does not change if its existing and future loans retain seniority over the other creditors’ loans and are secured with assets whose value is high and stable over time.
    Keywords: non-exclusivity;contractual externalities;credit supply;debt seniority.
    JEL: G21 G34 L13 L14
    Date: 2011
  8. By: Emiliano Pagnotta; Thomas Philippon
    Abstract: Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges' incentives to invest in faster trading technologies and (ii) investors' trading and participation decisions. Our model predicts that regulation that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of Reg. NMS, and provides some guidance for optimal regulations.
    JEL: G12 L13 L15
    Date: 2011–12

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.