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on Corporate Finance |
| By: | Carlo Alberto Magni |
| Abstract: | Literature and textbooks on capital budgeting endorse Net Present Value (NPV) and generally treat accounting rates of return as not being reliable tools. This paper shows that accounting numbers can be reconciled with NPV and fruitfully employed in real-life applications. Focusing on project finance transactions, an Average Return On Investment (AROI) is drawn from the pro forma financial statements, obtained as the ratio of aggregate income to aggregate book value. It is shown that such a metric correctly captures a project’s economic profitability, as long as it is compared with a comprehensive Weighted Average Cost of Capital that includes a correction factor which takes account of the capital foregone by the investors. Contrary to the Internal Rate of Return, AROI is unique and we provide an explicit functional relation which links it to the NPV. The approach holds for levered and unlevered projects, constant and non-constant leverage ratios, constant and non-constant WACCs. |
| Keywords: | Return On Investment, capital budgeting, lost capital, average, financial accounting, project finance |
| JEL: | M4 G31 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:14109&r=cfn |
| By: | Rafał Kierzenkowski; Jochebed Kastaneer |
| Abstract: | Entrepreneurship is an important driver of economic growth, job creation and competitiveness. However, the small and medium-sized enterprises (SME) sector has been severely affected by the crisis, with access to bank finance being particularly difficult. Various government-sponsored schemes have been introduced to ease credit conditions. Developing alternatives to bank lending options for SME finance is important but will take time. Restructuring banks’ balance sheets is essential to step up bank lending to SMEs in the medium term. Beyond financing issues, boosting innovation would support productivity gains, and SME competitiveness and growth. Also, easing labour market regulation would further support SME development. A large share of small businesses consists of self-employed with no employees. The tax system should minimise distortions for the creation and expansion of businesses. Despite significant progress made in lowering barriers to entrepreneurship, there is scope to further reduce administrative burdens. This Working Paper relates to the 2014 OECD Economic Survey of the Netherlands (www.oecd.org/eco/surveys/economic-survey-netherlands.htm). Favoriser le développement de PME efficaces aux Pays-Bas L'entrepreneuriat est un vecteur important de croissance économique, de création d'emplois et de compétitivité. Néanmoins, le secteur des petites et moyennes entreprises (PME) a été durement touché par la crise, l'accès aux financements bancaires étant particulièrement difficile. Divers dispositifs ont été mis en place par les pouvoirs publics pour assouplir les conditions de crédit. Il est important que se développe une offre de financements alternatifs au crédit bancaire pour les PME, mais cela prendra du temps. La restructuration des bilans des banques est une condition essentielle de l'augmentation des crédits bancaires aux PME à moyen terme. Au-delà des problèmes de financement, des mesures favorisant l'innovation renforceraient les gains de productivité, ainsi que la croissance et la compétitivité des PME. Par ailleurs, un assouplissement de la réglementation du marché du travail contribuerait également au développement des PME. Une forte proportion des petites entreprises est constituée de travailleurs indépendants sans salariés. Il faudrait que le système d'imposition atténue les distorsions relatives à la création et au développement des entreprises. Malgré les progrès sensibles accomplis en termes de réduction des obstacles à l'entrepreneuriat, il est possible d'alléger encore les charges administratives. Ce Document de travail se rapporte à l’Étude économique de l’OCDE des Pays Bas, 2014 (www.oecd.org/fr/eco/etudes/pays-bas.htm ). |
| Keywords: | finance, Netherlands, entrepreneurship, administrative burdens, taxation, self-employment, bank lending, banks, EPL, PMR, innovation, SMEs, travailleurs indépendants, EPL, innovation, Pays-Bas, entrepreneuriat, PME, PMR, finance, crédit bancaire, fiscalité, charges administratives |
| JEL: | G01 G21 G23 J08 |
| Date: | 2014–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1157-en&r=cfn |
| By: | Marc K Chan (Economics Discipline Group, University of Technology, Sydney); Simon Kwok (University of Sydney) |
| Abstract: | We analyze the effects of a recent financial reform that enables cross-market investment between Hong Kong and Shanghai stock exchanges. Using a vector error-correction model, we nd that the reform announcement considerably narrows the equilibrium level of price disparity and strengthens the price comovement of shares that are cross-listed in both markets. First, there is a substantial increase in the number of cross-listed firms with cointegrated share prices, and the estimated equilibrium relationship is in support of the relative law of one price. Second, our model predicts that the price disparity narrows by as much as 40 percent in equilibrium. Third, we nd that both markets adjust in response to a disequilibrium in price disparity, leading to a sizable error-correction activity. The Shanghai market contributes to approximately two-thirds of the price discovery process. Competition and informativeness of trading affect the relative role of price discovery in each market. |
| Keywords: | Capital account liberalization; co-integration; vector error-correction model; cross-listing; Chinese A-H shares |
| JEL: | F36 G18 C32 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:24&r=cfn |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Vaibhav Anand (IFMR Capital) |
| Abstract: | Development of long-term debt markets is critical for the mobilization of the huge magnitude of funding required to finance potential businesses as well as infrastructure expansion. India has been distinctly lagging behind other emerging economies in developing its long-term corporate debt market. Traditionally, bank finance, coupled with equity markets and external borrowings have been the preferred funding sources. The domestic corporate debt market suffers from deficiencies in products, participants and institutional framework. Large fiscal deficit, high interest rates, inadequate market infrastructure, lack of transparency, excessive regulatory restrictions on the investment mandate of financial institutions, and distortionary tax and stamp duty regime are some of the key issues that may potentially hamper the development of a well-functioning corporate debt market in an emerging economy. Several of these issues need the political will to bring about legislative, regulatory and fiscal reforms. In order to gain insight into the required reforms, it may be useful to look at an economy that implemented not only the regulatory but also the policy level reforms in debt markets. South Africa is one such economy where the long term debt market reforms lasted nearly two decades starting from early 1980s. In this paper, we study the development of the South African corporate debt market, which underwent a significant transformation from being moribund into one that is vibrant and large. We also draw lessons for the Indian corporate debt market from the South African experiences. |
| Keywords: | Corporate bond market, Government Securities, Secondary market, Hedging instruments, Private placement |
| JEL: | G1 G2 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2014-029&r=cfn |
| By: | Karl Finger (Institute for Quantitative Business and Economic Research); Thomas Lux (Department of Economics, University Jaume I) |
| Abstract: | This paper investigates the driving forces behind banks’ link formation in the interbank market by applying the stochastic actor oriented model (SAOM) developed in sociology. Our data consists of quarterly networks constructed from the transactions on an electronic platform (e-MID) over the period from 2001 to2010. Estimating the model for the time before and after the global financial crisis (GFC), shows relatively similar behavior over the complete period. We find that past trades are a significant predictor of future credit relations which indicates a strong role for the formation of lasting relationships between banks. We also find strong importance of size-related characteristics, but little influence of past interest rates. The major changes found for the period after the onset of the financial crisis are that: (1) large banks and those identified as `core ´ intermediaries became even more popular and (2) indirect counterparty risk appears to be more of a concern as indicated by a higher tendency to avoid indirect exposure via clustering effects. |
| Keywords: | interbank market, network formation, financial crisis |
| JEL: | G21 G1 C35 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:kme:wpaper:01&r=cfn |
| By: | Minamihashi, Naoaki; Wakamori, Naoki |
| Abstract: | We estimate an investors’ demand model for hedge funds to analyze the potential impact of leverage limits in the industry. Our estimation results highlight the importance of heterogeneous investor preference for the use of leverage, i.e., 20% of investors prefer leverage usage while others do not. We then conduct a policy simulation in which regulators put a cap on allowable leverage, as proposed by the Financial Stability Board in 2012. Simulation results suggest that the 200% leverage limit would lower the total demand (assets under management) for hedge funds by 10%. In particular, the regulation would lead to lower investments in highly leveraged funds and to lower investments in risky strategies, which, in turn, would reduce systemic risk. |
| Keywords: | hedge funds; demand estimation; leverage; regulation; systemic risk |
| JEL: | G38 G23 L52 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:473&r=cfn |
| By: | Jana Lastuvkova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno) |
| Abstract: | This paper focuses on the evaluation of the liquidity development in the banking sector of the Czech Republic. The evaluation is carried out using specific method of measurement - gross liquidity flows and their overall reallocation. This method allows determining liquidity for the banking sector as well as for the individual groups. The method is also based on liquidity flows, in addition in two forms - positive and negative, is thus the dynamic assessment of the liquidity in a perspective of its creation and outflow. This takes into account current trends in requirements for measuring and monitoring liquidity risk. Evaluation of the flows is supplemented by a correlation analysis to determine the main factors of the liquidity development. The results suggest that the studied groups of banks have different characteristics and are influenced by different factors. Medium-sized group of banks, standing between the two other groups, does not show a clear strategy of its own, but takes elements from the other two groups of banks. |
| Keywords: | Czech banking sector, measurement of the bank liquidity, liquidity flows, liquidity strategies |
| JEL: | G21 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:men:wpaper:47_2014&r=cfn |
| By: | Adam, Tim R.; Burg, Valentin; Scheinert, Tobias; Streitz, Daniel |
| Abstract: | We examine the impact of managerial optimism on the inclusion of performance-pricing provisions in syndicated loan contracts (PSD). Optimistic managers may view PSD as a relatively cheap form of financing given their upwardly biased expectations about the firm’s future cash flow. Indeed, we find that optimistic managers are more likely to issue PSD, and choose contracts with greater performance-pricing sensitivity than rational managers. Consistent with their biased expectations, firms with optimistic managers perform worse than firms with rational managers after issuing PSD. Our results indicate that behavioral aspects can affect contract design in the market for syndicated loans. |
| Keywords: | Optimism Bias; Performance-Sensitive Debt; Debt Contracting; Syndicated Loans |
| JEL: | G02 G30 G31 G32 |
| Date: | 2014–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:475&r=cfn |