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on Corporate Finance |
| By: | João Adelino Ribeiro (Faculdade de Economia, Universidade do Porto, Portugal); Paulo Jorge Pereira (cef.up, Faculdade de Economia, Universidade do Porto, Portugal); Elísio Brandão (Faculdade de Economia, Universidade do Porto, Portugal) |
| Abstract: | Public-Private Partnerships (PPP) became one of the most common types of public procurement arrangements and Build-Own-Transfer (BOT) projects, awarded through adequate bidding competitions, have been increasingly promoted by governments. The theoretical model herein proposed is based on a contractual framework where the government grants leeway to the private entity regarding the timing for project implementation. However, the government is aware that delaying the beginning of operations will lead to the emergence of social costs, i.e., the costs that result from the corresponding loss of social welfare. This fact should motivate the government to include a contractual penalty in case the private firm does not implement the project immediately. The government also recognizes that the private entity is more efficient in constructing the project facility. Considering both the existence of social costs and the private firm’s greater efficiency, the model’s outcome is the optimal value for the legal penalty the government should include in the contract form. A two-factor uncertainty approach is adopted, where the facility construction costs and the cash-flows to be generated by running the subsequent activities follow geometric Brownian motions that are possibly correlated. Adkins and Paxson (2011) quasianalytical solution is followed since homogeneity of degree one can not be invoked in all of the model’s boundary conditions. Sensitivity analysis reveals that variations both in the correlation coefficients and in the standard deviations have a strong impact on the optimal contractual penalty. Sensitivity analysis also demonstrates that there is a level of social costs above which the inclusion of a legal penalty is necessary and, similarly, that there is a level for the comparative efficiency above which the inclusion of a legal penalty is not justifiable. The analytical solution to determine each of these values is presented. Finally, the effects of including a non-optimal penalty value in the contract form, which result from overestimating or underestimating the selected bidder’s real comparative efficiency are examined, using a numerical example. Results demonstrate that overestimating (underestimating) the selected bidder’s real comparative efficiency leads to the inclusion of a below-optimal (above-optimal) value for the legal penalty in the contract and produces effects that the government would prefer to prevent. |
| Keywords: | real options; two-factor uncertainty models; public-private partnerships; optimal contractual penalty. |
| JEL: | G31 D81 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:por:cetedp:1308&r=cfn |
| By: | Sinha, Pankaj; Sharma, Sakshi; Sondhi, Kriti |
| Abstract: | The most pernicious effect of the global financial crisis is that it triggers a sequence of unpleasant consequences for the banking sector and for the entire economy as a whole. The recent financial crisis has compelled regulators to focus on the necessity of resilience of banks towards risks and sudden financial shocks. The riskiness of banks assets and its equity are two important factors for valuation of banks. These risks can be incorporated in market valuation only through Black-Scholes-Merton Model. This paper uses Black-Scholes-Merton option valuation approach for calculation of the market value and volatility of bank’s assets for a random sample of 13 Public and 8 Private sector banks in India over the period from March 2003 to March 2012. Further, it calculates yearly Z-score for each bank, allowing for capital adequacy as per the Basel II and III norms, for the periods before and after 2008 financial crisis. The obtained Z-scores suggest that the Indian banks are far from default and the impact of global recession of 2008 on the banks solvency was insignificant. All the Indian banks have market value to enterprise value ratio typically in the range of 93 to 99 per cent, suggesting that market value of bank’s assets obtained from Black-Scholes-Merton is characteristically below its enterprise value since market value considers the riskiness of the equity and assets both. It is found that the volatility of banks assets is significantly different for public and private sector banks over the period of study. Investigation of NPA to Total Assets reveals that presently NPA levels of the public sector banks are increasing whereas it is declining for the private sector banks. |
| Keywords: | Black-Scholes -Merton, Market value, Volatility, Z-score, Non-Performing Assets |
| JEL: | G01 G21 G28 G33 G38 |
| Date: | 2013–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47442&r=cfn |
| By: | Heitor Almeida (University of Illinois); Filippo Ippolito (Universitat Pompeu Fabra); Ander Perez (Universitat Pompeu Fabra); Viral Acharya (New York University) |
| Abstract: | Recent empirical and survey evidence on corporate liquidity management suggests that bank credit lines do not offer fully committed liquidity insurance, and that they are frequently used to finance future growth opportunities rather than for precautionary motives. In this paper, we propose and test a theory of corporate liquidity management that is consistent with these findings. We argue that a corporate credit line can be understood as a form of monitored liquidity insurance, which controls illiquidity-seeking behavior by firms through bank monitoring and credit line revocation. In addition, we allow firms to demand liquidity not to hedge against negative liquidity shocks, but to help finance future growth opportunities. We show that bank monitoring and credit line revocation play less of a role for such firms, because the nature of their liquidity demand reduces their incentives to engage in illiquidity-seeking behavior. Thus, firms that have low hedging-needs (e.g., high correlation between cash flows and investment opportunities) can access fully committed credit lines that dominate cash holdings as an optimal liquidity management tool. We use a novel dataset on corporate credit lines to provide empirical evidence that is consistent with the predictions of the model. The evidence suggests that credit line users have lower liquidity risk than firms that use cash for liquidity management. In addition, firms with low hedging-needs are more likely to use credit lines for liquidity management. Credit line covenants and covenant violations are less common when the credit line user has low hedging needs. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:823&r=cfn |