nep-cfn New Economics Papers
on Corporate Finance
Issue of 2014‒04‒29
fourteen papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Debt Use By U.S Farm Businesses, 1992-2011 By Ifft, Jennifer; Patrick, Kevin; Novini, Amirdara
  2. Access to Banking Finance and Exporting By Roberto Alvarez; Ricardo A. Lopez
  3. Capital Buffers Based on Banks' Domestic Systemic Importance: Selected Issues By Michal Skorepa; Jakub Seidler
  4. Are Employee Stock Option Exercise Decisions Better Explained through the Prospect Theory? By Bahaji, Hamza
  5. The Differential Effects of Law, Culture and Political Risk on Fees, Performance and Risk-Taking Behavior of Islamic and Conventional Funds By Mehri, Meryem
  6. Banking stress test effects on returns and risks By Ekaterina Neretina; Cenkhan Sahin; Jakob de Haan
  7. Does Finance Really Matter for the Participation of SMEs in International Trade? Evidence from 8,080 East Asian Firms By Yothin Jinjarak; Paulo Jose Mutuc; Ganeshan Wignaraja
  8. Bank Leverage, Financial Fragility and Prudential Regulation By Olivier Bruno; André Cartapanis; Eric Nasica
  9. Equity risk versus retirement adequacy: Asset allocation solutions for KiwiSaver By Kirsten L MacDonald; Robert J Bianchi; Michael E Drew
  10. Levers of Corporate Governance in India: Critical Analysis through Prism of Legal Framework By Sapovadia, Vrajlal; Patel, Akash
  11. Analysis of Herd Behavior Using Quantile Regression: Evidence from Karachi Stock Exchange (KSE) By Malik, Saif Ullah; Elahi, Muhammad Ather
  12. Is There a Cooperative Bank Difference? By Leonardo Becchetti; Rocco Ciciretti; Adriana Paolantonio
  13. The impact of R&D subsidies during the crisis By Hud, Martin; Hussinger, Katrin
  14. In search of economic reality under the veil of financial markets By Josef Falkinger

  1. By: Ifft, Jennifer; Patrick, Kevin; Novini, Amirdara
    Abstract: This report is a primer on the use of debt by U.S. farm businesses for policymakers, researchers, and others interested in the financial well-being of U.S. agriculture. It presents data on basic debt-use patterns by farm businesses (in 2011, over 900,000 farms operated as farm businesses based on their size, organizational structure, or the occupation of their principal operator) and explores key trends over 20 years. U.S. farm debt use varies widely by farm size, specialization, operator age, and other farm characteristics. Largescale farm businesses, farm businesses with younger operators, and dairy and poultry farm businesses all have higher levels of debt use. Both average debt-to-asset ratios and the share of farm businesses with high debt-to-asset ratios have declined over time.
    Keywords: Farms, debt, debt-to-asset ratios, commodities, Agricultural Resource Management Survey, Agricultural Finance, Farm Management,
    Date: 2014–04
  2. By: Roberto Alvarez (University of Chile); Ricardo A. Lopez (International Business School, Brandeis University)
    Abstract: This paper uses firm-level data for the period 1995-2002 to examine whether access to finance increases the probability of exporting of Chilean manufacturing plants. We exploit information on firms´ access to banking debt and changes in the real exchange rate ??RER?? to identify the causal effect of finance on exporting. This is an interesting case to study. The Chilean economy experienced a sustained RER depreciation since 1999, which increased export profitability. We use these changes in RER as a quasi-experiment to study the impact of access to banking finance. Our results show that RER depreciations increase the probability of exporting for firms with access to banking finance and especially for firms in industries with higher financial needs. These results are robust to controlling for other firm characteristics affecting the probability of exporting and also for time varying industry-specific shocks that may affect export performance and banking finance.
    Keywords: Exporting, Banking Finance, Credit Constraints, Firm-Level Data, Chile
    JEL: F14 O16 O54
    Date: 2014–03
  3. By: Michal Skorepa; Jakub Seidler
    Abstract: Regulators in many countries are currently considering ways to impose domestic systemic importance-based capital requirements on banks. Aiming to assist these considerations, this article discusses a number of issues concerning the calculation of a bank's systemic importance to the domestic banking sector, such as the choice of indicators used and the pros and cons of focusing on an individual or consolidated level. Also, the 'equal expected impact' procedure for determining adequate additional capital requirements is presented in detail and some of its properties are discussed. As an illustrative example of the practical use of the procedures presented, systemic importance scores and implied capital buffers are calculated for banks in the Czech Republic. The article also stresses the crucial role of public communication of the motivation for the buffers: regulators should make every effort to explain that the imposition of a non-zero systemic importance-based capital buffer on a bank is not to be interpreted by the markets as a signal that the bank is too big to fail and would therefore be guaranteed a public bail-out if it got into difficulties.
    Keywords: Bank failure, Basel III, capital adequacy, consolidation, systemic importance, public support
    JEL: G21 G28
    Date: 2014–03
  4. By: Bahaji, Hamza
    Abstract: This research provides an alternative framework for the analysis of employee stock option exercise patterns. It develops a binomial model where the exercise decision obeys to a policy that maximizes the expected utility to a representative employee exhibiting preferences as described by the Cumulative Prospect Theory (CPT). Using a large database on exercise transactions in 12 US public corporations, I examined the performance of the model in predicting actual exercise patterns. Interestingly, the probability weighting coefficients yielded by the model calibration are consistent with those from the experimental literature. Further, the results suggest that the model outperforms the Expected Utility Theory-based model in predicting actual exercise decisions in the sample. These findings convey the main contribution of this paper: the strong ability of the CPT framework to explain employees exercise behavior. It therefore provides rationale for using this framework in order to get more relevant fair value estimates of stock options.
    Keywords: Stock options; Exercise behavior; Cumulative Prospect Theory; Fair value; Option valuation;
    JEL: G13 G30 J33 M41
    Date: 2014–03
  5. By: Mehri, Meryem
    Abstract: This paper considers an international sample of conventional and Islamic mutual funds to assess whether law, culture, and political risk affect the performance, risk-taking behavior and compensation fees of mutual funds. Overall, the results show strongly that legal conditions, culture, and political risk have robust differential effects on fees, performance and risk-taking behavior of Islamic funds and conventional funds. We find that Islamic mutual funds in countries with higher legal conditions receive lower fees, whereas conventional funds receive higher carried interest, lower fixed management fees and weaker expense ratio. In such conditions, conventional and Islamic fund managers have lower performance and take higher specific and systematic risk. Overall, Hoefsted culture’s measures affect significantly the fees structure, performance and risk-taking behavior with robust differential effects on Islamic and conventional funds. Focusing on political risk effects, we show that, in countries with higher political risk, carried interest and performance will be higher, whereas the specific and systematic risk will be stronger for Islamic and conventional funds. The components of country legality and political risk Index have significant differential effects on Islamic and conventional funds’ characteristics.
    Keywords: Performance; Risk; Managerial Compensation; Incentive Contracts; Mutual funds; Law and finance; Political risk;
    JEL: K29 G23 G24
    Date: 2014–03
  6. By: Ekaterina Neretina; Cenkhan Sahin; Jakob de Haan
    Abstract: We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks' equity prices, credit risk, systematic risk, and systemic risk during the 2009-13 period. We find only weak evidence that stress tests after 2009 affected equity returns of large US banks. In contrast, CDS spreads declined in response to the disclosure of stress test results. We also find that bank systematic risk, as measured by betas, declined in some years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk.
    Keywords: stress tests; bank equity returns; CDS spreads; bank betas; systemic risk
    JEL: G21 G28
    Date: 2014–04
  7. By: Yothin Jinjarak (Asian Development Bank Institute (ADBI)); Paulo Jose Mutuc; Ganeshan Wignaraja
    Abstract: This paper studies factors associated with firm participation in export markets, focusing primarily on firm size and access to credit, based on a survey sample comprising observations of 8,080 small and medium enterprises (SMEs) (with fewer than 100 employees) and non-SME firms in developing East Asian countries across sectors. The main findings suggest the interdependent relationships between export participation, firm size, and access to credit. SMEs participating in export markets tend to gain more access to credit, while potential scale economies (firm sizes) of SMEs are positively associated with participation in export markets. The estimation results also point to the supportive influences of foreign ownership, worker education, and production certification on export participation, and the positive effects of financial certification, managerial experience, and collateral/loan value on access to credit for SMEs.
    Keywords: SMEs, East Asian firms, export markets, export participation, firm size, access to credit
    JEL: D22 E44 F14 L16 O14
    Date: 2014–03
  8. By: Olivier Bruno (GREDEG CNRS; University of Nice Sophia Antipolis, France; SKEMA Business School; OFCE-DRIC); André Cartapanis (Sciences Po Aix-en-Provence; GREDEG CNRS; CHERPA-Sciences Po Aix-en-Provence); Eric Nasica (GREDEG CNRS; University of Nice Sophia Antipolis, France)
    Abstract: We analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
    Keywords: Bank leverage, Leverage ratio, Financial instability, Prudential regulation
    JEL: E44 G28
    Date: 2014–04
  9. By: Kirsten L MacDonald; Robert J Bianchi; Michael E Drew
    Keywords: KiwiSaver, retirement outcomes, asset allocation
    JEL: G11 G18 J32 D14
    Date: 2014–02
  10. By: Sapovadia, Vrajlal; Patel, Akash
    Abstract: Corporate Governance is the relationship between corporate managers, directors and the capital providers, who save and invest their capital to earn money in form of dividend, interest or gain. Shareholders of the company appoint Board of Directors to fulfill their objectives aligned with the corporate objectives. Board of Directors appoints key managers for implementing corporate strategies. Corporate objectives are attained with the series of actions of the directors & managers. Capital & other necessary resources are provided by shareholders and other stakeholders to the company to fulfill the common objectives. It entails responsibility of corporate managers towards investors, society & environment that provides valuable resources to the corporation in achieving their objectives. Good corporate governance practices ensure that the board of directors is accountable for the pursuit of corporate objectives to enhance wealth of corporation and that the corporation itself conforms to the law and regulations in form & spirit. This paper identifies who are the levers of corporate governance and then investigates the powers of those levers, which influences the quality of corporate governance in corporate India. We critically analyze the effectiveness of Indian legal framework to ensure good corporate governance practices. The actors who can influence the quality of corporate governance are depicted in Chart-1 classified into (i) Internal: including shareholders, independent directors, audit & nomination committee and (ii) External: including auditors, Registrar of Companies, stock exchanges, Security Exchange Board of India and the Competition Commission of India.
    Keywords: Corporate Governance, Corporate Law, Company Law, SEBI, Primary Market, Secondary Market, Legal Compliance
    JEL: G3 G38 K2
    Date: 2013–11–25
  11. By: Malik, Saif Ullah; Elahi, Muhammad Ather
    Abstract: The objectives of this paper are to explore the herd behavior in the Karachi Stock Exchange (KSE) by using Ordinary Least Square (OLS) and Quantile Regression analysis for normal as well as bullish (up) and bearish(down) market conditions. Greed stimulates people to make increasingly risky investments and therefore investors tend to follow one another blindly and ignore rational analysis. Herd behavior can be defined as when investor ignore available information and follow other investors during investment decision making. The results show the existence of herding in KSE during normal and both bullish and bearish markets. The analysis of herding is important because the mistakes of investors at the collective level may result in an inefficient pricing of assets. The results of this paper may help to avoid psychological traps linked with investing and are important for both investors and those regulatory institutions responsible for securing the strength of financial systems.
    Keywords: Herd Behavior, Greed, Quantile Regression, Karachi Stock Exchange (KSE)
    JEL: C21 G02
    Date: 2014–04–01
  12. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Rocco Ciciretti (University of Rome "Tor Vergata"); Adriana Paolantonio (Food and Agriculture Organization of the United Nations (FAO))
    Abstract: We compare characteristics of cooperative and non cooperative banks at world level in a time spell including the global financial crisis. Cooperative banks have higher net loans/total assets ratio, lower income from non traditional activites and lower shares of derivatives over total assets than non cooperative banks. From an econometric point of view, we find that the cooperative bank specialization has a positive and significant effect on the net loans/total assets ratio in the overall sample period and in the post financial crisis subperiod. Derivatives (both in terms of assets and revenues) have a quantitatively strong and significant negative effect on the same dependent variable during both time spells. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with the value added growth of the manufacturing sector with the exception of the two extremes of self-financing sectors and sectors in high need of external finance.
    Keywords: cooperative banking; finance and investment; global financial crisis.
    JEL: G21 O40 E44
    Date: 2014–04–17
  13. By: Hud, Martin; Hussinger, Katrin
    Abstract: This study investigates the impact of R&D subsidies on R&D investment during the past financial crisis. We conduct a treatment effects analysis and show that R&D subsidies increased R&D spending among subsidized small and medium sized firms in Germany during the crisis years. In the first crisis year, the additionality effect induced by public support was, however, smaller than in other years. This temporary decrease may be caused by an altered innovation subsidy scheme in crisis years or by a different innovation investment behavior of the subsidy recipients. We do not find support for the countercyclical innovation subsidy scheme having caused the smaller additionality effect and conclude that it is likely to be driven by subsidy recipient behavior. --
    Keywords: R&D,Subsidies,Policy Evaluation,Financial Crisis,Treatment Effects
    JEL: C14 C21 G01 H50 O38
    Date: 2014
  14. By: Josef Falkinger
    Abstract: This paper presents a general equilibrium model with technological uncertainty, financial markets and imperfect information. The future consists of uncertain environments that are more or less clearly distinguishable (measurable). This limits the possibilities of specialization and diversification. Households have no direct information about the productivity of risky technologies. They rely on the information conveyed by the set of financial products provided by the financial sector, the pay-off promises of the products and their prices. Unreliable information-processing by financial markets leads to deception of households. As a result, extending the space spanned by financial products is not unambiguously good. This suggests a policy rule which ties financial innovations to the experience base of the economy.
    Keywords: Real and financial economics, incomplete knowledge, risk and uncertainty, financial crisis, size of financial sector, responsible finance
    JEL: D53 D83 G01 G21 B41
    Date: 2014–04

This nep-cfn issue is ©2014 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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