nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒04‒02
five papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. When Do Firms Invest in Corporate Social Responsibility? : A Real Option Framework By D. Cassimon; P.J. Engelen; L. Liedekerke
  2. Corporate Governance, Bank Mergers and Executive Compensation By Yan Liu; Carol Padgett; Simone Varotto
  3. Systemic Risk and Bank Size By Simone Varotto; Lei Zhao
  4. Cross-border interbank contagion in the European banking sector. By S. Gabrieli; D. Salakhova; G. Vuillemey
  5. Uncertainty Aversion and Systemic Risk By Dicks, David L.; Fulghieri, Paolo

  1. By: D. Cassimon; P.J. Engelen; L. Liedekerke
    Abstract: In this paper, the process for firms to decide whether or not to invest in corporate social responsibility is treated from a real option perspective. We extend the Husted (2005) framework with an important extra parameter that allows us to understand the timing of CSR investment and explain why some companies drag their feet over CSR investments. Our model explicitly allows for the impact of the opportunity cost of delaying the CSR investment decision, providing firms with tools to determine the optimal moment of exercising the CSR investment option. We illustrate our timing model through a case study and analyze governmental support strategies for CSR from a real options perspective.
    Keywords: Real options, CSR, stakeholder management, reputational risk, optimal timing
    Date: 2014
  2. By: Yan Liu (ICMA Centre, Henley Business School, University of Reading); Carol Padgett (ICMA Centre, Henley Business School, University of Reading); Simone Varotto (ICMA Centre, Henley Business School, University of Reading)
    Abstract: Using a sample of US bank mergers from 1995 to 2012, we observe that the pre-post merger changes in CEO bonus are significantly negatively related to the strength of corporate governance within the bidding bank. This suggests that bonus compensation is not consistent with the “optimal contracting hypothesis”. Salary changes, on the other hand, are not affected by corporate governance but are positively correlated with pre-post merger changes in the M/B ratio of the bidding banks, in line with “optimal contracting”. We also find that good governance is associated with more accretive deals for the bidder. Overall, our results are consistent with the notion that, unlike salary and long-term compensation, bonus compensation is not aligned with value creation and is more vulnerable to CEO manipulation in banks with poor corporate governance.
    Keywords: corporate governance, bank mergers, executive compensation, bonus
    JEL: G21 G28 G34
    Date: 2014–12
  3. By: Simone Varotto (ICMA Centre, Henley Business School, University of Reading); Lei Zhao
    Abstract: In this paper we analyse aggregate and firm level systemic risk for US and European banks from 2004 to 2012. We observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for “too-big-to-fail” institutions. However, smaller banks may still pose considerable systemic threats, as exemplified by the Northern Rock debacle in 2007. By introducing a simple standardisation, we obtain a new risk measure that identifies Northern Rock as a top ranking systemic institution up to 4 quarters before its bailout. The new indicator also appears to have a superior ability to predict which banks would be affected by the most severe stock price contractions during the 2007-2009 sub-prime crisis. In addition we find that a bank’s balance sheet characteristics can help to forecast its systemic importance and, as a result, may be useful early warning indicators. Interestingly, the systemic risk of US and European banks appears to be driven by different factors.
    Keywords: systemic risk, financial crisis, bank regulation, contingent claim analysis
    JEL: G01 G21 G28
    Date: 2014–12
  4. By: S. Gabrieli; D. Salakhova; G. Vuillemey
    Abstract: This paper studies the scope for cross-border contagion in the European banking sector using true bilateral exposure data. Using a model of sequential solvency and liquidity cascades in networks, we analyze geographical patterns of loss propagation from 2008 to 2012. We study the distribution of contagion outcomes after a common shock and an exogenous bank default over simulated networks of actual long- and short-term claims. We exploit a novel and unique dataset of money market transactions estimated from TARGET2 payments data. Our results show the critical impact of the underlying network structure on the propagation of losses. An econometric analysis of the determinants of contagion shows that the position of a bank in the network and its exposure to the riskiest counterparties are significantly correlated with default outcomes, behind its own financial ratios.
    Keywords: Contagion, Interbank market, Stress Testing, Liquidity Hoarding, Counterparty Risk.
    JEL: G01 G21 G28 F36
    Date: 2015
  5. By: Dicks, David L.; Fulghieri, Paolo
    Abstract: We propose a new theory of systemic risk based on Knightian uncertainty (or "ambiguity"). We show that, due to uncertainty aversion, beliefs on future asset returns are endogenous, and bad news on one asset class induces investors to be more pessimistic about other asset classes as well. This means that idiosyncratic risk can create contagion and snowball into systemic risk. Furthermore, in a Diamond and Dybvig (1983) setting, we show that, surprisingly, uncertainty aversion causes investors to be less prone to run individual banks, but runs will be systemic. In addition, we show that bank runs are associated with stock market crashes and flight to quality. Finally, we argue that increasing uncertainty makes the financial system more fragile and more prone to crises. We conclude with implications for the current public policy debate on the management of financial crisis
    Keywords: Ambiguity Aversion; Bank Runs; Financial Crises; Systemic Risk
    JEL: G01 G21 G28
    Date: 2015–03

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