nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒03‒13
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Impact of Credit Default Swap Trading on Loan Syndication By Daniel Streitz; ; ;
  2. Economic and legal advantages to business financing through the issuance of bonds By Sojeva, Diamanta
  3. Market reactions to the ECB's Comprehensive Assessment By Cenkhan Sahin; Jakob de Haan
  4. Implementing Basel III through the Capital Requirements Directive (CRD) IV: leverage ratios and capital adequacy requirements By Ojo, Marianne
  5. Asymmetric Information and Imperfect Competition in Lending Markets By Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano
  6. Investor Sentiment and Irrational Speculative Bubble Model By Hu, Zongyi; Li, Chao
  7. The relevance of the EU banking sector to economic growth and the recent financial crisis By Cândida Ferreira
  8. Corporate Taxation and Investment: Evidence from the Belgian ACE Reform By Nils aus dem Moore
  9. On a new class of barrier options By Hernández del Valle Gerardo
  10. Securities Trading by Banks and Credit Supply: Micro-Evidence By Abbassi, Puriya; Iyer, Rajkamal; Peydró, José Luis; Tous, Francesc R.

  1. By: Daniel Streitz; ; ;
    Abstract: We analyze the impact of CDS trading on bank syndication activity. Theoretically, the effect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower’s debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.
    Keywords: Loan Sales, Credit Default Swaps, Syndicate Structure, Syndicated Loans
    JEL: G21 G32
    Date: 2015–03
  2. By: Sojeva, Diamanta
    Abstract: In this paper we treat economic and legal advantages to firms in business financing through the issuance of bonds. Besides theoretical analysis paper includes the empirical analysis, a survey conducted in 50 businesses, including individual businesses and corporations, about the types of financing they use. The objective was to obtain necessary information regarding the form of business financing in our country. The research shows that the majority of businesses surveyed stated that they started businesses with the bank loans due to lack of own capital. Most of the businesses surveyed feel the need for new sources of funding. The majority of surveyed businesses have no knowledge on how capital markets work in practice. The use of alternative financing methods in Kosovo hinders the lack of adequate markets for the trading of financial instruments. There is not yet a legal infrastructure that regulates the functioning of the capital market, especially the issue of bonds as funding conduit of great importance for large companies. Through hypotheses testing is proved that the development of the capital market would give the firms the opportunity of issuance of bonds as a funding source.
    Keywords: Sources of funding; Bank loans; Bonds issuance; Capital market; Debt financing
    JEL: G20 G21 G22 G30 G31 G32 G33
    Date: 2015–01–20
  3. By: Cenkhan Sahin; Jakob de Haan
    Abstract: Using an event study approach, we examine financial markets' reactions to the publication of the ECB's Comprehensive Assessment of banks in the euro area. Our results suggest that banks' stock market prices and CDS spreads generally did not react to the publication of the results of the Comprehensive Assessment. This conclusion also holds for banks with a capital shortfall. Only for banks in some countries do we find weak evidence for (mixed) effects on stock prices, while CDS spreads for German banks declined.
    Keywords: ECB Comprehensive Assessment; stress tests; bank equity returns; CDS Spreads
    JEL: G21 G28
    Date: 2015–02
  4. By: Ojo, Marianne
    Abstract: The Capital Requirements Directive (CRD) IV, which constitutes the Capital Requirements Regulation (CRR), as well as the Capital Requirements Directive (CRD), is aimed at implementing Basel III in the European Union. Consequently, this CRD package, replaces Directives 2006/48 and 2006/49 with a Regulation and a Directive. The significance of such a move not only highlights the awareness of the importance of ensuring that Basel rules and regulations become more binding and enforceable, but also signals an era whereby the use of enforcement and supervisory tools such as Binding Technical Standards (BTS) are being introduced and generated by the European Banking Authority, as its plays a crucial role in the implementation of Basel III in the EU. Another significance of such a move towards Basel rules and regulations becoming more enforceable and binding lies in the facilitation of greater consistency, convergence and compliance, which the introduction of a Regulation, Binding Technical Standards, as well as other reporting requirements and provisions would generate in the implementation process. The increased relevance of Basel rules, and particularly Basel III rules, as well as their significance for the Eurozone, European Union institutions and European banks is hereby emphasised. This paper is also aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. As well as highlighting and addressing gaps which exist in the literature relating to liquidity risks, corporate governance and information asymmetries, by way of reference to pre-dominant based dispersed ownership systems and structures, as well as concentrated ownership systems and structures, this paper will also consider the consequences – as well as the impact - which Basel III, and in particular, the recent Basel Leverage ratios could have on the Eurozone, and European financial institutions. From this perspective, the rise of macro economics, micro economic inefficiency debates - as well as the validity of such debates will be considered.
    Keywords: Basel III; Capital Requirements Directive IV; European Banking Authority; enforcement; supervision; Binding Technical Standards; Keynesian revolution; macroeconomics; micro economic inefficiency
    JEL: D8 E3 E6 G2 G3 K2 M4
    Date: 2015–03–06
  5. By: Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian market for small business lines of credit. We provide evidence that a bank’s optimal price response to an increase in adverse selection varies depending on the degree of competition in its local market. More adverse selection causes prices to increase in competitive markets, but can have the opposite effect in more concentrated ones, where banks trade off higher markups and the desire to attract safer borrowers. This implies both that imperfect competition can moderate the welfare losses from an increase in adverse selection, and that an increase in adverse selection can moderate the welfare losses from market power. Exploiting detailed data on a representative sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk 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. We find evidence of adverse selection in the data, and increase it with a policy experiment to evaluate its importance. As predicted, in the counterfactual equilibrium prices rise in more competitive markets and decline in more concentrated ones, where we also observe an increase in access to credit and a reduction in default rates. Thus market power may serve as a shield against the negative effects of an increase in adverse selection.
    Keywords: assymetric information; credit markets; imperfect competition; lending markets
    JEL: G14 G21 L13
    Date: 2015–03
  6. By: Hu, Zongyi; Li, Chao
    Abstract: This paper dynamically extends the noise trading model (DSSW model) via describing the limited rational investors’ sentiment more specifically, and using the bipolar sigmoid activation function in the neural network system to depict noise traders’ overreaction to the past changes of fundamental value. And then we construct an irrational speculative bubble model according to some relevant theoretical hypothesis, which can measure the scale of stock market bubbles precisely. Moreover, we also explore the plausible rang of speculative bubbles on the basis of the irrational bubble model. Finally, we can conclude from the results of corresponding simulations that the existence of irrational bubbles in the market is strongly linked to noise traders’ misperceptions and their inherent sentiments during the investment, as well as their overreaction to the historical impacts of fundamental value. Particularly, we find that, under the condition of given simulation parameters, the larger the proportion of noise traders exists in the market, the higher the degree of irrational speculative bubbles is included in the risky assets, and the more violent the fluctuations of stock market bubbles are.
    Keywords: Noise traders; Investor sentiment; Irrational speculative bubbles; Behavioral finance;
    JEL: C58 G17
    Date: 2015–02–13
  7. By: Cândida Ferreira
    Abstract: Using static and dynamic panel estimates in a sample including all 28 European Union countries during the last decade, this paper seeks to improve upon the existing literature with empirical evidence on the important role that well-functioning EU banking institutions can play in promoting economic growth. The banking sector performance is proxied by the evolution of some relevant financial ratios and economic growth is represented by the annual Gross Domestic Product growth rate. In order to analyse the possible differences arising after the outbreak of the recent international financial crisis, the estimations consider two panels: one for the time period 1998– 2012 and another for the subinterval 2007–2012. The results obtained allow us to draw conclusions not only on the importance of the variation of different operational, capital, liquidity and assets quality financial ratios to economic growth but also on some differences evidenced in the two considered panels, reflecting the consequences of the recent financial crisis and the correspondent reactions of the European banking institutions.
    Keywords: bank performance, economic growth, European Union, financial crisis, panel estimates
    JEL: G21 F43 F36 C23
    Date: 2015–02
  8. By: Nils aus dem Moore
    Abstract: We contribute to the empirical literature on the relationship between corporate taxes and investment. We exploit the introduction of the so-called ACE corporate tax reform in Belgium that came into effect in January 2006 to evaluate this relationship in a quasiexperimental setting based on firm-level accounting data. To identify the causal effect of the reform on capital spending of Belgian corporations, we focus on the indirect effect of taxes on investment via their impact on free cash-flow. We use the systematic variation of the cash-flow sensitivity of investment between small and medium versus large firms to form treatment and control groups for difference-in-differences (DiD) estimations. Our benchmark results provide highly significant and robust estimates that correspond to an increase in investment activity by small and medium-sized firms of about 3 percent in response to the ACE reform. We substantiate the robustness of our results by means of triple differences estimations (DDD) that use a matched sample of French companies as an additional dimension of contrast.
    Keywords: Corporate income taxation; investment; capital budgeting; allowance for corporate equity; difference-in-differences
    JEL: H25 H32 H22 G31
    Date: 2014–12
  9. By: Hernández del Valle Gerardo
    Abstract: A barrier option is a financial derivative which includes an activation (or deactivation) clause within a standard vanilla option. For instance, a copper mining company could secure to sell in at least K dollars each ton of copper during the next year, by buying M European put options. However, it could purchase a less expensive derivative (a barrier option) which includes a clause which deactives the contract if ever the price of copper is below B dollars (for B<K) during the life of the contract. In practice, such barrier does not have to remain constant during the life of the contract. However, pricing a barrier derivative is only known for barriers that are represented by linear, quadratic, and square root functions. In this work we propose a new methodology for pricing barrier options that include a larger family of barriers not previously studied in the literature.
    Keywords: Pearcey function, boundary crossing, heat equation, Rayleigh equation, option pricing, boundary options.
    JEL: G10 G12 G13
    Date: 2014–11
  10. By: Abbassi, Puriya; Iyer, Rajkamal; Peydró, José Luis; Tous, Francesc R.
    Abstract: We analyze securities trading by banks and the associated spillovers to the supply of credit. Empirical analysis has been elusive due to the lack of securities register for banks. We use a unique, proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. Analyzing data at the security level for each bank in each period, we find that during the crisis, banks with higher trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading-expertise banks with higher capital and in securities with lower rating and long-term maturity. In fact, there are no differential effects for triple-A rated securities. Moreover, banks with higher trading expertise reduce their overall supply of credit in crisis times – i.e., for the same borrower at the same time, trading-expertise banks reduce lending relative to other banks. This effect is more pronounced for trading-expertise banks with higher capital, and the credit reduction is binding at the firm level. Finally, these differential effects for trading-expertise banks are not present outside the crisis period
    Keywords: bank capital; banking; credit supply; investments; risk-taking
    JEL: G01 G21 G28
    Date: 2015–03

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