nep-cfn New Economics Papers
on Corporate Finance
Issue of 2013‒11‒16
twelve papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis By Gwion Williams; Rasha Alsakka; Owain ap Gwilym
  2. Efficient versus inefficient hedging strategies in the presence of financial and longevity (value at) risk By Elisa Luciano; Luca Regis
  3. Banks’ Earnings: an empirical evidence of the influence of economic and financial markets factors By Albert, Stéphane; Alexandre, Hervé
  4. Share repurchase: Does it increase the informativeness of market prices? By de La Bruslerie, Hubert
  5. Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals? By Chaton, Corinne; Durand-Viel, Laure
  6. Skin in the Game and Moral Hazard By Chemla, Gilles; Hennessy, Christopher A.
  7. Working in family firms : less paid but more secure ? Evidence from French matched employer-employee data By Rebérioux, Antoine; Caroli, Eve; Breda, Thomas; Bassanini, Andrea
  8. Do Managers Manipulate Earnings Prior to Management Buyouts? By Mao, Y.; Renneboog, L.D.R.
  9. Director Networks and Takeovers By Renneboog, L.D.R.; Zhao, Y.
  10. Bankruptcy and the Per Capita Nucleolus By Huijink, S.; Borm, P.E.M.; Reijnierse, J.H.; Kleppe, J.
  11. Monetary policy, bank capital and credit supply: a role for discouraged and informally rejected firms By Popov, Alexander
  12. Asset Commonality, Debt Maturity and Systemic Risk By Allen, Franklin; Babus, Ana; Carletti, Elena

  1. By: Gwion Williams (Bangor University); Rasha Alsakka (Bangor Business School); Owain ap Gwilym (Bangor Business School)
    Abstract: The ongoing financial crisis has drawn attention to the role of credit rating agencies (CRAs). We investigate the relative impacts of sovereign actions by different CRAs on the share prices of major European banks during the financial crisis. We examine how bank abnormal returns are affected by sovereign rating changes, watch and outlook announcements, to capture how the crisis spills over across countries and from the sovereign to the financial sector. We find that CRAs’ signals affect share prices, although there is no evidence that CRA actions are the dominant force leading to falling share prices during the crisis.
    Keywords: European sovereign debt crisis; Credit signals; Spillover effect; Credit outlook/watch; Bank shares
    JEL: G15 G21 G24
    Date: 2013–10
  2. By: Elisa Luciano; Luca Regis
    Abstract: This paper provides a closed-form Value-at-Risk (VaR) for the net exposure of an annuity provider, taking into account both mortality and interest-rate risk, on both assets and liabilities. It builds a classical risk- return frontier and shows that hedging strategies - such as the transfer of longevity risk - may increase the overall risk while decreasing expected returns, thus resulting in inefficient outcomes. Once calibrated to the 2010 UK longevity and bond market, the model gives conditions under which hedging policies become inefficient.
    JEL: G22 G32
    Date: 2013
  3. By: Albert, Stéphane; Alexandre, Hervé
    Abstract: Since the 1990s’, a relatively ample research has been undertaken regarding the measurement of the volatility of bank earnings over time. The comparison between traditional deposits-loans banking and financial activities is a further specific theme in bank performance research. Few analyses have however directly addressed the explanation of the volatility of earnings. The present paper provides with an analysis of the influence of economic and financial factors through the sub-components of net earnings. Using a panel of European banks over 2005-2010, a period of marked changes in banks’ earnings, we identify significant influences and shed a light on the sensitivity of activity types. We find that net earnings are positively influenced by GDP growth, stock markets and, for most banks, negatively by interest rates. The influence of GDP is primarily located with loan impairments but also with commissions. Stock markets support both commissions and, in a greater extent, trading. We identify a negative effect of interest rates for both net interest income and trading. Earnings associated with financial activities appear slightly more sensitive, but the resilience of more traditional banking activities is also affected by economic and financial factors. Our results also head towards more exposure of banks running significant additional equities-related commission activities and equity trading. On the other hand, exposure to changes in interest rates may mitigate the sensitivity of earnings.
    Keywords: Net interest income; bank commissions; trading; loan impairments; bank earnings; earnings volatility; risk factors; diversification; sustainability;
    JEL: G21 G28 L25
    Date: 2013–05
  4. By: de La Bruslerie, Hubert
    Abstract: Share repurchases are transactions which are supposed to cause a market reaction through a signaling approach. However looking only at cumulated abnormal returns (CARs)is insufficient and the results are sometimes contradictory. We introduce the concept of informativeness to assess if repurchases improve the private information content of stock prices. Our empirical test comprises American and European buybacks in the period 1990 – 2011. We use the synchronicity measure introduced by Roll (1988) to follow the change in informativeness before and after the announcement of a transaction. The determinants of informativeness and CARs are also investigated. Our results are negative : Informativeness does not systematically improve, but may sometimes if a change of dividend policy jointly occurs.
    Keywords: Share repurchase; buybacks; market efficiency; informativeness;
    JEL: G14 G30 G35
    Date: 2013–05
  5. By: Chaton, Corinne; Durand-Viel, Laure
    Abstract: Real assets are usually valued by computing the stream of profits they can bring to a price-taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two-period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price-taking valuation reveals a systematic bias that tends to induce underinvestment.
    Keywords: Assets (accounting); profit; gas industry; spot prices; suppliers; natural gas;
    JEL: L16 G14 G12
    Date: 2013
  6. By: Chemla, Gilles; Hennessy, Christopher A.
    Abstract: What determines equilibrium securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase asset quality, subsequently having private information regarding quality when selling ABS to rational investors. In equilibrium, all originators have low/zero retentions if they are financially constrained and/or prices are su¢ ciently informative. Asymmetric information lowers effort incentives in all equilibria. Effort is promoted by junior retentions, investor sophistication, and informative prices. Optimal regulation promotes effort while accounting for investor-level externalities. It entails either a menu of junior retentions or a single junior retention with size decreasing in price informativeness. Mandated market opacity is only optimal amongst regulations failing to induce originator effort.
    Keywords: Securitization; skin in the game; risk-sharing; moral hazard;
    JEL: D61 D8 K22 G32 G28
    Date: 2013–01
  7. By: Rebérioux, Antoine; Caroli, Eve; Breda, Thomas; Bassanini, Andrea
    Abstract: We study the compensation package offered by family firms. Using matched employer-employee data for a sample of French establishments in the 2000s, we first show that family firms pay on average lower wages to their workers. This family/non-family wage gap is robust to controlling for several establishment and individual characteristics and does not appear to be due either to the differential of productivity between family and non-family firms or to unobserved establishment and individual heterogeneity. Moreover, it is relatively homogeneous across workers with different gender, educational attainment and age. By contrast, the family/non-family wage gap is found to be larger for clerks and blue-collar workers than for managers, supervisors and technicians, for whom we find no significant wage gap. As a second step, we investigate why workers stay in family firms while being paid less. We show that these firms offer greater job security. We find evidence that the rate of dismissal is lower in family than in non-family firms. We also show that family firms rely less on dismissals and more on hiring reductions when they downsize. These results are confirmed by subjective data : the perceived risk of dismissal is significantly lower in family firms than in non-family ones. We speculate that our results can be explained either by a compensating wage differential story or by a model in which workers sort in different firms according to their preferences.
    Keywords: Family firms; wages; job security; linked employer-employee data;
    JEL: G34 J31 J33 J63 L26
    Date: 2013–04
  8. By: Mao, Y.; Renneboog, L.D.R. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: To address the question as to whether managers manipulate accounting numbers downwards prior to management buyouts (MBOs), we implement an industry-adjusted buyout-specific approach and receive an affirmative answer. In UK buyout companies, negative earnings manipulation (understating the earnings prior to the deal) often occurs, both by means of accrual management and real earnings management. We demonstrate that MBOs are significantly more frequently subject to negative manipulation than leveraged buyouts (LBOs). In non-buyout firms, positive earnings management frequently occurs because it affects managers’ bonuses and the likelihood of meeting or beating analysts’ expectations which may trigger a positive market reaction. By means of an instrumental variables approach, we examine competing incentives affecting the degree and size of earnings manipulation. Our evidence implies that the (ex ante) perceived likelihood that an MBO will be undertaken has a strong significant effect on negative earnings management, while the external borrowing capacity of the buyout company is not determined by standard capital structure factors, such as earnings numbers. The implementation of the revised UK Corporate Governance Code of 2003 has somewhat reduced the degree of both accrual earnings and real management in MBOs, but since then other manipulation techniques (related to production costs and asset revaluations) are more frequently used, which may be induced by the fact that these manipulation methods are more difficult to detect.
    Keywords: Accounting manipulation;earnings management;leveraged buyout;management buyout;LBO;MBO
    JEL: G30 G32 M41
    Date: 2013
  9. By: Renneboog, L.D.R.; Zhao, Y. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We study the impact of corporate networks on the takeover process. We find that better connected companies are more active bidders. When a bidder and a target have one or more directors in common, the probability that the takeover transaction will be successfully completed augments, and the duration of the negotiations is shorter. Connected targets more frequently accept offers that involve equity. Directors of the target firm (who are not interlocked) have a better chance to be invited to the board of the combined firm in connected M&As. While connections have a clear impact on the takeover strategy and process, we do not find evidence that the market acknowledges connections between bidders and targets as the announcement returns are not statistically different from those bidders and targets which are ex ante not connected.
    Keywords: Mergers and Acquisitions;Director Networks;Centrality;Connections
    JEL: D85 G14 G34
    Date: 2013
  10. By: Huijink, S.; Borm, P.E.M.; Reijnierse, J.H.; Kleppe, J. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This article characterizes the per capita nucleolus for bankruptcy games as a bankruptcy rule. This rule, called the cligths rule, is based on the wellknown constrained equal awards principle. The essential feature of the rule however is that, for each bankruptcy problem, it takes into account a vector of clights. These clights only depend on the vector of claims while the height of the estate determines whether the clights should be interpreted as modified claims or as rights. Finally, it is seen that both the clights rule and the Aumann-Maschler rule can be captured within the family of so-called claim and right rules.
    Keywords: Bankruptcy;(per capita) nucleolus
    JEL: C71 G33
    Date: 2013
  11. By: Popov, Alexander
    Abstract: This paper conducts the first empirical study of the bank balance sheet channel using data on discouraged and informally rejected firms in addition to information on the formal loan granting process. I take advantage of a unique survey data on the credit experience of firms in 8 economies that use the euro or are pegged to it over 2004-2007, and analyze the effect of monetary policy and the business cycle on bank lending and risk-taking. Identification rests on exploiting 1) the exogeneity of monetary policy to local business cycles, and 2) firm-level and bank-level data to separate the supply of credit from changes in the level and composition of credit demand. Consistent with previous studies, I find that lax monetary conditions increase bank credit in general and bank credit to ex-ante risky firms in particular, especially for banks with lower capital ratios. Importantly, I find that the results are considerably stronger when data on informal credit constraints are incorporated. JEL Classification: E32, E51, E52, F34, G21
    Keywords: bank capital, bank lending channel, business cycle, cross-border lending, monetary policy
    Date: 2013–09
  12. By: Allen, Franklin (University of PA); Babus, Ana (Princeton University); Carletti, Elena (European University Institute)
    Abstract: We develop a model where financial institutions swap projects in order to diversify their individual risk. This can lead to two different asset structures. In a clustered structure groups of financial institutions hold identical portfolios and default together. In an unclustered structure defaults are more dispersed. With long term finance welfare is the same in both structures. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks' future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and all institutions are early liquidated. We compare investors' rollover decisions and welfare in the two asset structures.
    JEL: D85 G01 G21
    Date: 2013–02

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