nep-cfn New Economics Papers
on Corporate Finance
Issue of 2012‒05‒29
six papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. A Concave Security Market Line By Enrico G. De Giorgi; Thierry Post; Atakan Yalcin
  2. Asymmetric benchmarking in bank credit rating By Shen, Chung-Hua; Huang , Yu-Li; Hasan , Iftekhar
  3. Corporate boards and bank loan contracting By Francis, Bill; Hasan, Iftekhar; Koetter, Michael; Wu, Qiang
  4. Are firm- and country-specific governance substitutes? Evidence from financial contracts in emerging markets By Francis, Bill; Hasan, Iftekhar; Song, Liang
  5. Do Japanese Stock Prices Reflect Macro Fundamentals? By Wenjuan Chen; Anton Velinov;
  6. Does R&D intensity influence leverage? Evidence from Indian firm-level data By Ghosh, Saibal

  1. By: Enrico G. De Giorgi (School of Economics and Political Science, University of St. Gallen); Thierry Post (Koc University, Graduate School of Business); Atakan Yalcin (Koc University, Graduate School of Business)
    Abstract: We provide theoretical and empirical arguments in favor of a concave shape for the security market line, or a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, different investors generally hold different sets of risky securities. Despite the differences in composition, the optimal portfolios generally share a joint exposure to systematic risk. Equilibrium in this case can be approximated by a concave relation between expected return and market beta rather than the traditional linear relation. An empirical analysis of U.S. stock market data confirms the existence of a significant and robust, concave cross-sectional relation between average return and estimated past market beta. We estimate that the market-risk premium is at least five to six percent per annum for the average stock, substantially higher than conventional estimates.
    Keywords: capital market equilibrium, asset pricing, investment restrictions, portfolio theory.
    JEL: G12 C21
    Date: 2012–05
  2. By: Shen, Chung-Hua (Department of Finance, National Taiwan University); Huang , Yu-Li (Department of Insurance and Financial Management, Takming University of Science and Technology); Hasan , Iftekhar (Fordham University & Bank of Finland)
    Abstract: This study proposes an information asymmetry hypothesis to examine why bank credit ratings vary among countries even when bank financial ratios remain constant. Countries are divided among those with low and high information asymmetry. The former include high-income countries, those in North America and West Europe regions, and those with strong institutional environment quality, whereas the latter group possess the opposite characteristics. This study hypothesizes that the influences of financial ratios on ratings are enhanced in low information asymmetry countries but reduced in countries with high information asymmetry. The sample includes the long-term credit ratings issued by Standard and Poor’s from 86 countries during 2002–2008. The estimated results show that the effects of financial ratios on ratings are significantly affected by information asymmetries. Countries wishing to improve the credit ratings of their banks thus should reduce information asymmetry.
    Keywords: bank rating; financial ratio; information asymmetry; institutional quality
    JEL: G21 G32 G38
    Date: 2012–04–12
  3. By: Francis, Bill (Rensselaer Polytechnic Institute); Hasan, Iftekhar (Fordham University and Bank of Finland); Koetter, Michael (University of Groningen); Wu, Qiang (Rensselaer Polytechnic Institute)
    Abstract: We investigate the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and nonprice loan terms (e.g., interest rates, collateral, covenants, and performance-pricing provisions) are more favorable, and syndicated loans comprise more lenders. In addition, board size, audit committee structure, and other board characteristics influence bank loan prices. However, they do not consistently affect all nonprice loan terms except for audit committee independence. Our study provides strong evidence that banks tend to recognize the benefits of board monitoring in mitigating information risk ex ante and controlling agency risk ex post, and they reward higher quality boards with more favorable loan contract terms.
    Keywords: corporate governance; corporate boards; loan contract terms
    JEL: G21 G34
    Date: 2012–04–12
  4. By: Francis, Bill (Lally School of Management and Technology, Rensselaer Polytechnic Institute); Hasan, Iftekhar (Schools of Business, Fordham University, New York, NY 10019, USA and Bank of Finland,); Song, Liang (School of Business and Economics, Michigan Technological University, Houghton, MI 49931)
    Abstract: We investigate how borrowers’ corporate governance influences bank loan contracting terms in emerging markets and how this relation varies across countries with different country-level governance. We find that borrowers with stronger corporate governance obtain favorable contracting terms with respect to loan amount, maturity, collateral requirements, and spread. Firm-level and country-level corporate governance are substitutes in writing and enforcing financial contracts. We also find that the distinctiveness of borrowers’ characteristics affect the relation between firm-level corporate governance and loan contracting terms. Our findings are robust, irrespective of types of regression methods and specifications.
    Keywords: corporate governance; financial contracts; emerging markets
    JEL: G20 G30 G31 G34 G38
    Date: 2012–04–12
  5. By: Wenjuan Chen; Anton Velinov;
    Abstract: This paper investigates to what extent the fundamentals of the real economy are re ected in the stock prices of Japan. A Markov switching VAR model with switching variances is used to test the structural identi cation scheme. Identification of fundamental and nonfundamental shocks is shown to be supported by the data. Based on the appropriate structural restriction, the historical stock prices are decomposed into fundamental components and nonfundamental components. The decomposition shows that the linkage between Japanese stock prices and real activity shocks became strengthened since the bubble collapsed in the beginning of 1990s.
    Keywords: Stock price, real activity, financial crisis, structural restrictions
    JEL: G12 E23
    Date: 2012–05
  6. By: Ghosh, Saibal
    Abstract: The paper examines the association between corporate leverage and their investment in R&D. Towards this end, it develops certain testable propositions. These propositions are tested using a dataset of manufacturing firms in India covering the period 1995-2005. The estimates support the fact that firms which make high efforts on R&D investments exhibit lower leverage ratios. Additionally, the estimates reveal that the dampening effect of R&D-intensity on leverage is the highest for foreign private firms. For state-owned firms however, R&D activity appears to be positively associated with leverage.
    Keywords: R&D intensity; leverage; Tobit model; India
    JEL: O32
    Date: 2012–03–17

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