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on Corporate Finance |
| By: | Klaus Adam; Johannes Beutel; Albert Marcet |
| Abstract: | The booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by fluctuations in investors' subjective capital gains expectations. Survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market throughs. Formally incorporating subjective price beliefs into an otherwise standard asset pricing model with utility maximizing investors, we show how subjective belief dynamics can temporarily delink stock prices from their fundamental value and give rise to asset price booms that ultimately result in a price bust. The model successfully replicates (1) the volatility of stock prices and (2) the positive correlation between the price dividend ratio and expected returns observed in survey data. We show that models imposing objective or 'rational' price expectations cannot simultaneously account for both facts. Our findings imply that large part of U.S. stock price fluctuations are not due to standard fundamental forces, instead result from self-reinforcing belief dynamics triggered by these fundamentals. |
| JEL: | G12 D84 |
| Date: | 2014–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:948.14&r=cfn |
| By: | Labonne, C.; Lamé, G. |
| Abstract: | This paper examines the sensitivity of NFC lending to banks' capital ratios and their supervisory capital requirements. We use a unique database for the French banking sector between 2003 and 2011 combining confidential bank-level Bank Lending Survey answers with the discretionary capital requirements set by the supervisory authority. We find that on average, more capital means more credit. But the elasticity of lending to capital depends on the intensity of the supervisory capital constraint. More supervisory capital constrained banks tend to have a slower credit growth than unconstrained banks. We also find that the ratio of non-performing loans to total loans granted may be considered a transmission channel for supervisory requirements. More supervisory capital constrained banks tend to be more reactive to this ratio than unconstrained banks. The former are more prone to reduce credit allocation after a rise in non-performing loans than the latter. |
| Keywords: | Lending, Bank Regulation, Capital. |
| JEL: | G21 G28 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:481&r=cfn |
| By: | Davide Pettenuzzo (International Business School, Brandeis University) |
| Abstract: | Despite more than half a century of research on forecasting stock market returns, most predictive models perform quite poorly when they are put to the test of actually predicting equity returns. In fact, many authors, including Bossaerts and Hillion (1999), Brennan and Xia (2005), and Welch and Goyal (2008) suggest that equity returns cannot be predicted at all. This brief proposes a simple yet very effective solution to improve the quality of stock return predictions by taking economic theory into account. |
| Keywords: | Economic constraints; Sharpe ratio, Equity premium predictions; Bayesian analysis |
| JEL: | C11 C22 G11 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bui:rosgfb:08&r=cfn |
| By: | Ferrando, Annalisa; Marchica, Maria-Teresa; Mura, Roberto |
| Abstract: | We use a large database of more than 685,000 European firms to show that financial flexibility attained through conservative leverage policies is more important for private, small, medium-sized and young firms and for firms in countries with lower access to credit and weaker investor protection. Further, using the recent financial crisis as a natural experiment, we show that financial flexibility status allows companies to reduce the negative impact of liquidity shocks on their investment decisions. Our findings support the hypothesis that financial flexibility relates to companies’ ability to undertake future investment, despite market frictions hampering possible profitable growth opportunities. JEL Classification: G31, G32, D92 |
| Keywords: | cross-country analysis, financial flexibility, investment, low leverage |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141630&r=cfn |
| By: | Anna Castañer (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)); M.Mercè Claramunt (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)); Maite Mármol (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)) |
| Abstract: | Reinsurance is one of the tools that an insurer can use to mitigate the underwriting risk and then to control its solvency. In this paper, we focus on the proportional reinsurance arrangements and we examine several optimization and decision problems of the insurer with respect to the reinsurance strategy. To this end, we use as decision tools not only the probability of ruin but also the random variable deficit at ruin if ruin occurs. The discounted penalty function (Gerber & Shiu, 1998) is employed to calculate as particular cases the probability of ruin and the moments and the distribution function of the deficit at ruin if ruin occurs. We consider the classical risk theory model assuming a Poisson process and an individual claim amount phase-type distributed, modified with a proportional reinsurance with a retention level that is not constant and depends on the level of the surplus. Depending on whether the initial surplus is below or above a threshold level, the discounted penalty function behaves differently. General expressions for this discounted penalty function are obtained, as well as interesting theoretical results and explicit expressions for phase-type 2 distribution. These results are applied in numerical examples of decision problems based on the probability of ruin and on different risk measures of the deficit at ruin if ruin occurs (the expectation, the Value at Risk and the Tail Value at Risk). |
| Keywords: | Deficit at ruin, Gerber-Shiu function, Risk measures. |
| JEL: | G22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ewp:wpaper:310web&r=cfn |
| By: | Canals-Cerda, Jose J. (Federal Reserve Bank of Philadelphia); Kerr, Sougata (Federal Reserve Bank of Philadelphia) |
| Abstract: | Credit card portfolios represent a significant component of the balance sheets of the largest US banks. The charge‐off rate in this asset class increased drastically during the Great Recession. The recent economic downturn offers a unique opportunity to analyze the performance of credit risk models applied to credit card portfolios under conditions of economic stress. Specifically, we evaluate three potential sources of model risk: model specification, sample selection, and stress scenario selection. Our analysis indicates that model specifications that incorporate interactions between policy variables and core account characteristics generate the most accurate loss projections across risk segments. Models estimated over a time frame that includes a significant economic downturn are able to project levels of credit loss consistent with those experienced during the Great Recession. Models estimated over a time frame that does not include a significant economic downturn can severely under-predict credit loss in some cases, and the level of forecast error can be significantly impacted by model specification assumptions. Higher credit-score segments of the portfolio are proportionally more severely impacted by downturn economic conditions and model specification assumptions. The selection of the stress scenario can have a dramatic impact on projected loss. |
| Keywords: | Credit cards; Credit risk; Stress test; Regulatory capital |
| JEL: | G20 G32 G33 |
| Date: | 2014–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-10&r=cfn |
| By: | Patrick Bolton; Hui Chen; Neng Wang |
| Abstract: | We analyze a model of optimal capital structure and liquidity choice based on a dynamic tradeoff theory for financially constrained firms. In addition to the classical tradeoff between the expected tax advantages of debt and bankruptcy costs, we introduce a cost of external financing for the firm, which generates a precautionary demand for liquidity and an optimal liquidity management policy for the firm. An important new cost of debt financing in this context is an endogenous debt servicing cost: debt payments drain the firm's valuable liquidity reserves and thus impose higher expected external financing costs on the firm. The precautionary demand for liquidity also means that realized earnings are separated in time from payouts to shareholders, implying that the classical Miller-formula for the net tax benefits of debt no longer holds. Our model offers a novel perspective for the "debt conservatism puzzle" by showing that financially constrained firms choose to limit debt usages in order to preserve their liquidity. In some cases, they may not even exhaust their risk-free debt capacity. |
| JEL: | E22 G32 G35 H24 H25 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20009&r=cfn |
| By: | Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Yan Zhang |
| Abstract: | Loss mitigation actions (e.g., liquidation or renegotiation) for delinquent mortgages might be hampered by the conflicting goals of claim holders with different levels of seniority. Although similar agency problems arise in corporate bankruptcies, the mortgage market is unique because in a large share of cases junior claimants, in their role as servicers, exercise operational control over loss mitigation actions on mortgages owned by senior claimants. We show that servicers are less likely to act on the first lien mortgage owned by investors when they themselves own the second lien claim secured by the same property. When they do act, such servicers’ choices are skewed towards actions that maximize the value of their junior claims, favoring modification over liquidation and short sales and deeds-in-lieu over foreclosures. We also show that such servicers find it more difficult to avoid taking actions on second lien loans when first liens are modified and that they do not modify their second lien loans on more concessionary terms. We show that these actions transfer wealth from first to second liens and moderately increase borrower welfare. |
| JEL: | G21 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20015&r=cfn |