nep-cfn New Economics Papers
on Corporate Finance
Issue of 2014‒04‒18
twenty-two papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Smile from the Past: A general option pricing framework with multiple volatility and leverage components By Adam Aleksander Majewski; Giacomo Bormetti; Fulvio Corsi
  2. Expectations, risk premia and information spanning in dynamic term structure model estimation By Guimarães, Rodrigo
  3. Estimating the impact of changes in aggregate bank capital requirements during an upswing By Noss, Joseph; Toffano, Priscilla
  4. Wholesale Funding, Coordination, and Credit Risk By Zhang, Lei; Zhang, Lin; Zheng, Yong
  5. The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More By Miller, Marcus; Zhang, lei
  6. Asymmetric Information and Imperfect Competition in the Loan Market By Crawfordy, Gregory S; Pavaniniz, Nicola; Schivardi, Fabiano
  7. The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  8. Business Angels’ Perspectives on Exit by Ipo By Cécile Carpentier; Jean-Marc Suret
  9. Bankruptcy, Investment, and Financial Constraints: Evidence from a Post-Transition Economy By Martin Pospisil; Jiri Schwarz
  10. Dynamic visualization of large transaction networks: the daily Dutch overnight money market By Ronald Heijmans; Richard Heuver; Clement Levallois; Iman van Lelyveld
  11. Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data By Georges Prat; Remzi Uctum
  12. Housing Provision, Finance, and Well-Being in Europe. By Mary Robertson
  13. Bank-based versus market-based financial systems: a critique of the dichotomy By Malcolm Sawyer
  14. Financial development, financialisation and economic growth By Malcolm Sawyer
  15. Financial Market Regulation in Germany - Capital Requirements of Financial Institutions By Daniel Detzer
  16. Bank holding company dividends and repurchases during the financial crisis By Hirtle, Beverly
  17. Margin Requirements and Portfolio Optimization: A Geometric Approach By Sheng Guo
  18. Optimism, pessimism and financial bubbles By Bertrand Wigniolle
  19. What is Wrong with Moral Hazard and Adverse Selection Problems in the Conventional Economic Theory By Bertrand Lemennicier
  20. ESG Impact on Market Performance of Firms: International Evidence By Hélène Pasquini-Descomps; Jean-Michel Sahut
  21. R&D investments and high-tech firms' stock return volatility By Sami Gharbi; Jean-Michel Sahut; Frédéric Teulon
  22. Corporate Ownership and Control in Victorian Britain By Acheson, Graeme; Campbell, Gareth; Turner, John D.; Vanteeva, Nadia

  1. By: Adam Aleksander Majewski; Giacomo Bormetti; Fulvio Corsi
    Abstract: In the current literature, the analytical tractability of discrete time option pricing models is guaranteed only for rather specific types of models and pricing kernels. We propose a very general and fully analytical option pricing framework, encompassing a wide class of discrete time models featuring multiple-component structure in both volatility and leverage, and a flexible pricing kernel with multiple risk premia. Although the proposed framework is general enough to include either GARCH-type volatility, Realized Volatility or a combination of the two, in this paper we focus on realized volatility option pricing models by extending the Heterogeneous Autoregressive Gamma (HARG) model of Corsi, Fusari, La Vecchia (2012) to incorporate heterogeneous leverage structures with multiple components, while preserving closed-form solutions for option prices. Applying our analytically tractable asymmetric HARG model to a large sample of S&P 500 index options, we demonstrate its superior ability to price out-of-the-money options compared to existing benchmarks.
    Date: 2014–04
  2. By: Guimarães, Rodrigo (Bank of England)
    Abstract: This article examines the nature of the empirical instability in dynamic term structure models. I show that using survey forecasts is an effective solution because it directly addresses the information imbalance at the heart of the instability: it increases the (cross-section) information on actual dynamics, bridging the gap with the large (cross-section) information on the risk-adjusted dynamics. I relate this to other information spanning problems, particularly spanning of macro factors, and discuss the desirability of anchoring models to surveys. I also show that restricting prices of risk is not effective in ensuring stable and sensible implied expectations.
    Keywords: Interest rates; expectations; risk premium; dynamic term structure; robust; estimation
    JEL: C58 E43 G12
    Date: 2014–03–28
  3. By: Noss, Joseph (Bank of England); Toffano, Priscilla (International Monetary Fund)
    Abstract: This paper estimates the effect of changes in capital requirements applied to all UK-resident banks on lending by studying the joint dynamics of the aggregate capital ratio of the UK banking system and a set of macro-financial variables. This is achieved by means of sign restrictions that attempt to identify shocks in past data that match a set of assumed directional responses of other variables to future changes in capital requirements aimed at increasing the resilience of the banking system to losses during an upswing. This may provide policymakers with a plausible ‘upper bound’ on the short-term effects of future increases in macroprudential capital requirements in certain states of the economic cycle. An increase in the aggregate bank capital requirement during an economic upswing is associated with a reduction of lending, with the effect larger for lending to corporates than for that to households. The impact on GDP growth is statistically insignificant.
    Keywords: Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy
    JEL: G21 G28
    Date: 2014–03–28
  4. By: Zhang, Lei (University of Warwick); Zhang, Lin (Southwestern University of Finance and Economics); Zheng, Yong (Southwestern University of Finance and Economics)
    Abstract: We use the global games approach to study key factors a?ecting the credit risk associated with roll-over of bank debt. When creditors are heterogenous, these include the extent of short-term borrowing and capital market liquidity for repo ?nancing. Speci?cally, in a model with a large institutional creditor and a continuum of small creditors independently making their roll-over decisions based on private information, we ?nd that increasing the proportion of short-term debt and/or decreasing market liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium. The presence of a large creditor does not always reduce credit risk, however, unless it is better informed.
    Keywords: Credit Risk; Coordination; Debt Crisis; Private information; Global games
    Date: 2013
  5. By: Miller, Marcus (University of Warwick); Zhang, lei (University of Warwick)
    Abstract: The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues of moral hazard,hardly appropriate when considering modern UK banking.We therefore modify the classic model to ncorporate franchise values due to market power; and risk-taking by banks with limited liability.We go further to show how the capacity of franchis evalues to mitigate risk taking maybe undermined by the bailout option; with explicit analytical results provided for the case of extreme risk-aversion.After a brief discussion of how this may impact on the distribution of income, we outline the ways in which the Vickers Report seeks to remedy these problems.
    Keywords: Money and banking,Seigniorage,Risk-taking,Bailouts,Regulation
    Date: 2013
  6. By: Crawfordy, Gregory S (University of Zurich, CEPR and CAGE); Pavaniniz, Nicola (zUniversity of Zurich); Schivardi, Fabiano (xLUISS, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects.
    Keywords: Italian, asymmetric information
    Date: 2013
  7. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
    Keywords: Connection, financial sector, real economy, monetary policy transmission mechanism,
    JEL: G20 E44 E52
    Date: 2013–08–01
  8. By: Cécile Carpentier; Jean-Marc Suret
    Abstract: We analyze exit-related perceptions of the members of a large, well-structured Canadian angel group. Because they invest in high tech deals larger than CAN$1.2 million, together with venture capitalists and a matching fund, these angels should consider the initial public offering (IPO) as a possible exit mode. However, they show a strong preference for the trade sale. This preference is consistent with the economies of scope hypothesis: getting big fast has become more important because large firms can fully and rapidly exploit innovations, resulting in more small firm acquisitions. Securities regulation is also perceived as a major impediment to exiting onto the stock market. Both reasons explain why IPOs are not considered an exit mode. Reluctance to exit through an IPO increases with angels’ experience. Our observations have implications for entrepreneurs, business angels and policy makers Nous analysons les perspectives selon lesquelles des anges membres d’un groupe structurés d’anges canadiens envisagent la disposition de leurs placements. Ces anges investissent des montants de l’ordre de 1,2 millions de dollar dans des entreprises technologiques et l’émission initiale est, de ce fait, une option de sortie envisageable. Toutefois, les anges énoncent une préférence marquée pour la cession en bloc de leurs actions à des acquéreurs stratégiques. Cette préférence est cohérente avec l’hypothèse des économies d’échelles : pour les entreprises innovantes, il est essentiel d’acquérir rapidement une taille suffisante à l’exploitation rapide des innovations, et l’acquisition par un joueur important du domaine est un moyen plus efficace d’acquérir cette taille que l’émission initiale. Toutefois, la réglementation des valeurs mobilières est également perçue comme un obstacle majeur aux émissions initiales
    Keywords: business angel, exit, entrepreneurial venture, securities regulation,
    JEL: L26 M13 D81 G24
    Date: 2014–02–01
  9. By: Martin Pospisil; Jiri Schwarz
    Abstract: In this paper we use balance-sheet data and information on bankruptcy to study the relationship between investment, financial constraints, and bankruptcy in a post-transition country. Our data constitute a dynamic panel and cover the period 2006–2011, which also allows us to study the impact of the 2008 crisis on Czech companies. Using investment–cash flow sensitivity to analyze financial constraints we find there is robust evidence that cash flow and the level of debt have a positive and significant impact on the investment rate. By taking a closer look at individual subsamples we reveal that the existence of financial constraints, proxied by investment–cash flow sensitivity, is evident mainly after 2008 and in small and medium-sized enterprises. At the same time, we do not uncover any evidence that firms going bankrupt during our observed period faced more severe financial constraints. Moreover, companies going bankrupt had significantly higher levels of external debt and bank loans, which indicates that they may have been, in fact, less constrained than others.
    Keywords: Bankruptcy, cash flow, credit rationing, financial constraints, investment, post-transition economy
    JEL: D22 D92 E22 G32
    Date: 2014–01
  10. By: Ronald Heijmans; Richard Heuver; Clement Levallois; Iman van Lelyveld
    Abstract: This paper shows how large data sets can be visualized in a dynamic way to support exploratory research, highlight econometric results or provide early warning information. The case studies included in this paper case are based on the payments and unsecured money market transaction data of the Dutch part of the Eurosystem's large value payment system, TARGET2. We show how animation facilitates analysis at three different levels. First, animation shows how the market macrostructure develops. Second, it enables individual banks that are of interest to be followed. Finally, it facilitates a comparison of the same market at different moments in time and of different markets (such as countries) at the same moment in time.
    Keywords: interbank network; visualization
    JEL: G01 G2 G21
    Date: 2014–03
  11. By: Georges Prat; Remzi Uctum
    Abstract: Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989 – December 2012 we first show that expectations fail to unbiasedness tests and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents’ aversion of misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time-variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman Filter estimation results for the two currencies and the two horizons considered. Although the chartist behavior, gathering the extrapolative and adaptive components, appears to dominate the fundamentalist behavior, described by the regressive and forward market components, the relative importance of the fundamentalists (chartists) is found to increase (decrease) with the time-horizon.
    Keywords: expectation formation, exchange rates, dynamic heterogeneity, survey data.
    JEL: D84 F31 G14
    Date: 2014
  12. By: Mary Robertson (School of Oriental and African Studies, University of London)
    Abstract: This paper explores the role of housing in households’ increasing financial activities. First, I build on quantitative work on the growth of housing related debt across Europe carried out under WP5 by presenting data on rates of homeownership, levels and types of mortgage debt, and house prices (and, by implication, housing wealth). I find that, although there is a general tendency for all to increase, differences in the structures of housing provision across countries lead to significant variation in both the data, and what can be drawn from it, across countries. Second, I consider accounts of households’ growing financial activities that attribute a central role to housing, including Lapavitsas and Dos Santos’s ‘financial expropriation’ thesis, and a growing body of literature that sees Europe as moving towards a housing asset-based welfare model. I argue that both, in different ways, are insufficiently attentive to the way in which housing provision, the role of finance within it, and the relationship of both to the reproduction of labour power more generally, are all uniquely and distinctly structured in different countries. I also show that even in the UK, where the role of finance in housing and welfare provision is thought to be most advanced, the restructuring of housing and welfare in favour of finance remains limited and contradictory. Finally, I outline some preliminary findings on the impact that a growing tendency to treat one’s home as an asset has had on well-being.
    Keywords: financialisation, housing, house prices, mortgage markets, systems of provision, well-being, asset-based welfare, financial expropriation, mortgage equity withdrawal.
    JEL: B59 D69 G10 G20 H31 H39 I31 I38 P16 P52 R21
    Date: 2014–03–06
  13. By: Malcolm Sawyer (University of Leeds)
    Abstract: The paper sets out different perspectives on the bank-based vs market-based typology of financial systems. It presents a general critique of the typology, paying particular attention to the ways in which the typology reflects a loanable funds approach, ignoring the roles of banks in the credit money creation process, and the neglect of different types of banks. It is argued that banks should be viewed as institutions engaged in market transactions and the equity markets as also institutions involved in markets.
    Keywords: bank-based financial system, market-based financial system
    JEL: G19 G20
    Date: 2014–01–20
  14. By: Malcolm Sawyer (University of Leeds)
    Abstract: The paper reviews the theoretical arguments which have been advanced on the relationships between economic growth and growth of the financial sector. This is followed by a similar discussion on financial repression and financial liberalisation. Growth of the financial sector and de-regulation are considered as two important features of financialisation. The differences between bank-based and market based financial systems are briefly explored as is the question of whether the financial sector is now too large. The paper is completed by overviews of the empirical results on the relationship between growth of the financial sector and economic growth and on financial liberalisation.
    Keywords: financial development, financial liberalisation, financial repression, financialisation
    JEL: G01 G18 G20
    Date: 2014–01–20
  15. By: Daniel Detzer (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))
    Abstract: This paper examines capital adequacy regulation in Germany. After a general overview of financial regulation in Germany, the paper focuses on the most important development in the area of capital adequacy regulation from the 1930s up to the financial crisis. Two main trends are identified: a gradual softening of the eligibility criteria for regulatory equity and the increasing reliance on banks’ internal risk models for the determination of risk weights. The first trend has been reversed with the regulatory reforms following the financial crisis. Internal risk models still play a central role. The rest of the paper focuses on the problems with the use of internal risk models for regulatory purposes. The discussion includes the moral hazard problem, the technical problems with the models, the difference between economically and socially optimal capital requirements, the procyclicality of the models and the problem occurring due to the existence of fundamental uncertainty. The regulatory reforms due to Basel 2.5 and Basel III and their potential to alleviate the identified problems are then examined. It is concluded that those cannot solve the most relevant problems and that currently the use of models for financial regulation is problematic. Finally, some suggestions of how the problems could be addressed are given.
    Keywords: Banking Regulation, Financial Regulation, Capital Requirements, Capital Adequacy, Bank Capital, Basel Accord, Risk Management, Risk Models, Germany
    JEL: G18 G28 N24 N44
    Date: 2014–02–15
  16. By: Hirtle, Beverly (Federal Reserve Bank of New York)
    Abstract: Many large U.S. bank holding companies (BHCs) continued to pay dividends during the recent financial crisis, even as financial market conditions deteriorated, large losses accumulated, and emergency capital and liquidity were being provided by the official sector. In contrast, share repurchases by these BHCs dropped sharply in the early part of the crisis. Documenting this divergent behavior is one of the key contributions of this paper, as previous analysis has tended to focus on dividend payments alone. The paper also examines the role that repurchases played in large BHCs' decisions to reduce or eliminate dividends. Did BHCs with a high level of repurchases prior to the financial crisis cut dividends later, or by less, than BHCs with lower levels of pre-crisis repurchases? The key findings are that the smaller BHCs in the sample (those with assets between $5 billion and $25 billion) with higher levels of repurchases before the financial crisis reduced dividends later and by less than BHCs with lower pre-crisis repurchases. In contrast, larger BHCs with higher pre-crisis repurchases tended to reduce their dividends earlier in the financial crisis, though there is no relationship between pre-crisis repurchases and the size of dividend reductions for these institutions.
    Keywords: bank capital; stock repurchases; bank dividends; financial crisis
    JEL: G01 G21 G28 G35
    Date: 2014–03–01
  17. By: Sheng Guo (Department of Economics, Florida International University)
    Abstract: Using geometric illustrations, we investigate what implications of portfolio optimization in equilibrium can be generated by the simple mean-variance framework, under margin borrowing restrictions. First, we investigate the case of uniform marginability on all risky assets. It is shown that changing from unlimited borrowing to margin borrowing shifts the market portfolio to a riskier combination, accompanied by a higher risk premium and a lower price of risk. With the linear risk-return preference, more stringent margin requirements lead to a riskier market portfolio, contrary to the conventional belief. Second, we investigate the effects of differential marginability on portfolio optimization by allowing only one of the risky assets to be pledged as collateral. It is shown that the resulting optimal portfolio is not always tilted towards holding more of the marginable asset, when the margin requirement is loosened.
    Keywords: portfolio optimization; margin; collateral; borrowing constraint; mean-variance; efficient frontier; asset allocation
    JEL: G11
    Date: 2014–04
  18. By: Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Paretooptimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.
    Keywords: Rational bubbles; RDU preferences
    Date: 2014–04
  19. By: Bertrand Lemennicier
    Abstract: The purpose of this paper is to challenge the conventional theory of moral hazard and adverse selection. Moral hazard and adverse selection problems in contemporary economic theory are plagued with four major aws: 1) the alleged asymmetrical information between buyer and seller as a problem in the coordination process of the market; 2) the confusion between different concepts or denitions of probability: case or class probabilities, pure subjective beliefs on the occurrence of an event or relative prices on betting markets; 3) the presupposed inability of actors (sellers and buyers) to solve by themselves the problems they face, 4) the pretense of economists to be able to correct these so-called market failures with compulsory insurance without creating new moral hazard and/or adverse selection problems worse than the ones they want to cure. We center our paper mainly on the internal and theoretical inconsistency of the canonical model developed by Akerlof and Rothschild and Stiglitz's theory and their followers based on additive or non additive expected utility associated with the subjective versus frequency tradition in statistics. As an alternative, we propose to approach these phenomena through the eye glasses of betting markets an securitization of insurance contracts.
    Keywords: Moral hazard, adverse selection, uncertainty, risk, subjective probability, entrepreneurial judgment, asymmetrical information, contract incentives, compulsory insurance, betting market, free market competition as a discovery process
    JEL: B53 D23 D86 G22
    Date: 2014–04
  20. By: Hélène Pasquini-Descomps; Jean-Michel Sahut
    Abstract: This study investigates how news-based scores in Environmental, Social and Corporate governance (ESG)will influence the monthly market return in the Swiss, US and UK stock markets. We are using a four-factor based linear model following during the 2007-2011 period, as well as a non-parametric model for Switzerland only. For market returns, we find that the variation of the Global ESG score is a significant but slightly negative factor of a stock’s monthly performance in the UK, but not significant in the US and Switzerland. The changes in sub-categories ratings (for instance, Governance, Environment, Labor…) exhibit a small but significant influence over the stock’s performance only during limited periods or on limited sectors, which varies among the countries. The non-parametric kernel regression shows that the function linking a stock’s performance to its ESG news–based scores’ changes is probably not linear.
    Keywords: ESG; Rating; Governance, Performance; Return; Kernel Regression.
    Date: 2014–04–10
  21. By: Sami Gharbi; Jean-Michel Sahut; Frédéric Teulon
    Abstract: The empirical evidence suggests that firms in high-tech industries exhibit high stock return volatility. In this paper, we conceive of the R&D investment intensity as a possible explanation for the stock volatility behavior in these industries. We suggest that R&D activities generate information asymmetry about the prospects of the firm and make its stock riskier. Relying on Panel data models, we investigate this relationship for French high-tech firms. We find out a strong positive relationship between stock return volatility and R&D investment intensity. This finding suggests that R&D intensive firms should implement an efficient information disclosure policy to reduce information asymmetry and to avoid excessive stock return volatility.
    Keywords: R&D; Idiosyncratic idiosyncratic volatility; Riskrisk; Asymmetric asymmetric information; Stock stock return; Innovationinnovation; Highhigh-tech firms
    Date: 2014–04–10
  22. By: Acheson, Graeme; Campbell, Gareth; Turner, John D.; Vanteeva, Nadia
    Abstract: Using ownership and control data for 890 firm-years, this paper examines the concentration of capital and voting rights in British companies in the second half of the nineteenth century. We find that both capital and voting rights were diffuse by modern-day standards. This implies that ownership was separated from control in the UK much earlier than previously thought, and given that it occurred in an era with weak shareholder protection law, it undermines the influential law and finance hypothesis. We also find that diffuse ownership is correlated with large boards, a London head office, non-linear voting rights, and shares traded on multiple markets. --
    Keywords: Corporate ownership and control,Law and finance hypothesis,British financial history,Shareholder protection law
    JEL: G32 K22 N24
    Date: 2014

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