nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒05‒09
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Was the Crisis due to a shift from stakeholder to shareholder finance? Surveying the debate By Giovanni Ferri; Angelo Leogrande
  2. Loan Sales and Bank Liquidity Risk Management: Evidence from a U.S. Credit Register By Irani, Rustom M.; Meisenzahl, Ralf R.
  3. The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures? By Hryckiewicz, Aneta
  4. Analysts' forecast revisions and informativeness of the acquirer's stock after M&A transactions By de La Bruslerie, Hubert
  5. Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms By Cull, Robert; Li, Wei; Sun, Bo; Xu, Lixin Colin
  6. Asymmetric information and imperfect competition in lending markets By Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
  7. The impact of private equity on firms' innovation activity By Amess, Kevin; Stiebale, Joel; Wright, Mike
  8. Mergers and the Dynamics of Innovation By Xavier Boutin
  9. Challenges for Systemic Risk Assessment in Low-Income Countries By Catalan, Mario; Demekas, Dimitri
  10. Returns to tail hedging By Bell, Peter N
  11. Clearinghouse Loan Certificates as a Lender of Last Resort By Christopher Hoag
  12. Are the Borrowing Costs of Large Financial Firms Unusual? By Ahmed, Javed I.; Anderson, Christopher W.; Zarutskie, Rebecca
  13. Asymmetric Information and Imperfect Competition in Lending Markets By Crawford, Gregory S.; Pavanini, Nicola; Schivardi, Fabiano
  14. Banking business models and the nature of financial crises By Hryckiewicz, Aneta; Kozlowski, Lukasz
  15. Modelo estocástico para la valuación de una inversión nanomédica. By Garcia Fronti, Javier
  16. Microcredit and Price Competition: standardize to differentiate By Paolo Casini
  17. Executive Compensation: A Modern Primer By Edmans, Alex; Gabaix, Xavier
  18. Financial Risk and Foreign Direct Investment: Evidence from Pakistan Economy By Ali, Muhammad Ali; Asfand, Asfand Yar Khattak; Bakhtiyar, Bakhtiyar Khan; Hammad, Raja Hammad Amhed

  1. By: Giovanni Ferri (LUMSA, CERBE, MoFiR); Angelo Leogrande (Universit… di Bari)
    Abstract: We discuss the literature on the shift from stakeholder to shareholder finance behind the Great Financial Crisis (GFC). Traditional banks generally maximized stakeholder value (STV). But before the GFC also many of them started maximizing shareholder value (SHV). Moving from STV to SHV often meant shifting credit management from Originate-to-Hold (OTH) to Originate-to-Distribute (OTD). Moving from STV-OTH to SHV-OTD increased systemic risk damaging the common good of financial stability. STV-oriented banks seemed to weather the GFC relatively better with more heterogeneous systems proving more resilient. Heterogeneity in banking governanceorientations/ownership-structures seems to add value reducing the probability of financial crises.
    Keywords: Bank Governance, Financial Institutions and Organizations, Financial Regulation, Financial and Banking Crises
    JEL: G0 G01 G14 G15 G18 G20 G21 G24 G28 G30 G32
    Date: 2015–05
  2. By: Irani, Rustom M. (University of Illinois at Urbana-Champaign); Meisenzahl, Ralf R. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the impact of banks' liquidity risk management on secondary loan sales. We track the dynamics of bank loan share ownership in the secondary market using data from the Shared National Credit Program, a credit register of syndicated bank loans administered by U.S. regulators. We analyze the 2007-2009 financial crisis as a market-wide liquidity shock and control for loan demand using a loan-year fixed effects approach. We find that banks with greater reliance on wholesale funding at the onset of the crisis were more likely to exit loan syndicates during the crisis. Our analysis identifies the importance of bank liquidity risk management as a motivation for loan sales, in addition to the credit risk transfer motive emphasized in prior literature.
    Keywords: Bank risk management; financial crisis; loan sales; wholesale funding
    JEL: G01 G21 G23
    Date: 2015–01–01
  3. By: Hryckiewicz, Aneta
    Abstract: The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process.
    Keywords: Bank risk, business models, bank regulation, financial crisis, banking stability
    JEL: E58 G15 G21 G32
    Date: 2014–06–18
  4. By: de La Bruslerie, Hubert
    Abstract: Are mergers and acquisitions significant events that develop informativeness? Is the informativeness process the same in different countries? Looking only at cumulative abnormal returns (CARs) is insufficient and the results are sometimes contradictory. To answer to these questions we use the concept of informativeness to assess whether acquisitions improve the private information content of stock prices. We consider a sample of mergers and acquisitions in the US and Europe over the 2000–2013 period. We gauge informativeness by using different measures. First, we refer to the use of the synchronicity measure introduced by Roll (1988). We also refer to Amihud’s (2002) illiquidity ratio and the Llorente et al.’s (2002) measure of informed trading to proxy informativeness. We relate these three measures to the analysts’ activity to forecast EPS. We show that the disclosure process is partially linked to the sign and magnitude of the acquirer’s abnormal return (CARs) at the announcement date. Informativeness of the stock price does not improve systematically between before and after the acquisition. It changes asymmetrically depending on the upward or downward forecast revisions after the acquisition.
    Keywords: Analysts; Earning forecasts; Forecast revision; Price informativeness; Synchronicity; Cumulative Abnormal Returns (CARs); Acquisitions;
    JEL: G14 G34
    Date: 2015–06
  5. By: Cull, Robert; Li, Wei; Sun, Bo (Board of Governors of the Federal Reserve System (U.S.)); Xu, Lixin Colin (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the 'grabbing-the-big-and-letting-go-the-small' privatization program in China. Our empirical results suggest that government connections play an important role in explaining Chinese firms' financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.
    Keywords: Financial constraints; investment; political connections; firm size; China; capital allocation; invest cash flow sensitivity
    JEL: G18 G21 G28 G38 O16
    Date: 2015–01–21
  6. By: Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.
    Keywords: Asymmetric information, imperfect competition, lending markets, Italian banking, adverse selection
    JEL: D82 G21 L13
    Date: 2015–04
  7. By: Amess, Kevin; Stiebale, Joel; Wright, Mike
    Abstract: The paper analyses the impact of private equity (PE) backed leveraged buyouts (LBOs) on innovation output (patenting). Using a sample of 407 UK deals we find that LBOs have a positive causal effect on patent stock and quality-adjusted patent stock. Our results imply a 6% increase in quality-adjusted patent stock three years after the deal. The increase in innovation activity is concentrated among private-to-private transactions with a 14% increase in the quality-adjusted patent stock. Further analysis supports the argument that PE firms facilitate the relaxation of financial constraints. We also rule out alternative explanations for portfolio firms' higher patenting activity. Our findings suggest that PE firms do not promote short-term cost-cutting at the expense of entrepreneurial investment opportunities with a long-term payoff.
    Keywords: private equity,leveraged buyout,entrepreneurial buyouts,innovation
    JEL: D22 G32 G34 L26
    Date: 2015
  8. By: Xavier Boutin
    Keywords: mergers; innovation; dynamics models; consumer welfare
    JEL: C61 G34 O31
    Date: 2015–05
  9. By: Catalan, Mario; Demekas, Dimitri
    Abstract: Assessing and monitoring systemic risk is a challenge for policy makers and supervisors in all countries. It is particularly challenging in low-income countries (LICs), owing to a number of characteristics shared to a greater or lesser extent by most of them. This paper discusses these common characteristics and how they shape the nature of systemic risk in LICs, and concludes with some practical lessons for policy makers and financial supervisors that can help improve the effectiveness of systemic risk assessment and mitigation in these countries.
    Keywords: financial stability, stress testing, systemic risk, low-income countries, macroprudential policy, IMF
    JEL: G01 G28 G32 O16
    Date: 2015
  10. By: Bell, Peter N
    Abstract: Tail hedging is a portfolio management strategy meant to reduce the risk of large losses. For an investor who holds a stock market index fund, the strategy entails buying out of the money put options on the index. Research suggests the strategy works well in practice and I explore the returns to tail hedging in a simple theoretical model. I calculate descriptive statistics for the returns to tail hedging when the stock price has either a normal or fat tailed distribution. I find that tail hedging is rewarding when stock prices have fat tails.
    Keywords: Portfolio management, tail option, fat tail, simulation.
    JEL: B50 C63 G11 G32
    Date: 2015–02–13
  11. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: Which banks borrow from a lender of last resort? Looking across multiple panics of the nineteenth century, this paper treats borrowing of clearinghouse loan certificates as borrowing from a lender of last resort. We evaluate individual bank use of clearinghouse loan certificates in New York City using bank balance sheet data. Bank capital ratios do not predict borrowing. Lower pre-panic reserve ratios and greater reserve losses during the crisis increased the probability of positive net borrowing from a lender of last resort.
    Keywords: bank, lender of last resort, loan certificates
    JEL: G21 G28 N21
    Date: 2015–04
  12. By: Ahmed, Javed I. (Board of Governors of the Federal Reserve System (U.S.)); Anderson, Christopher W. (Harvard University); Zarutskie, Rebecca (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Estimates of investor expectations of government support of large financial firms are often based on large financial firms' lower borrowing costs relative to smaller financial firms. Using pricing data on credit default swaps (CDS) and corporate bonds over the period 2004 to 2013, however, we find that the CDS and bond spreads of financial firms are no more sensitive to borrower size than the spreads of non-financial firms. Outside of the financial crisis period, spreads are more sensitive to borrower size in several non-financial industries. We find that size-related differences in spreads are partially driven by higher liquidity and recovery rates of larger borrowers. Prior to the financial crisis, we also find that financial firms exhibited generally lower spreads that were less sensitive to size than spreads for several other industries. Our results suggest that estimates of implicit government guarantees to financial firms may overemphasize size-related borrowing cost differentials. However, our analysis also suggests that, prior to the financial crisis, investor expectations of government support, or generally reduced risk perceptions, may have reduced borrowing costs for the financial industry, as a whole.
    Keywords: Borrowing costs; credit default swaps; financial industry; implicit government guarantee; size effect; Too-Big-to-Fail
    JEL: G21 G22 G24 G28
    Date: 2015–03–12
  13. By: Crawford, Gregory S. (University of Zürich, CEPR and CAGE); Pavanini, Nicola (University of Zürich); Schivardi, Fabiano (Bocconi, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks’ optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.
    Date: 2015
  14. By: Hryckiewicz, Aneta; Kozlowski, Lukasz
    Abstract: In our paper we analyze the heterogeneity between various business models among systemically important banks in 65 countries over the period of 2000-2012. For the first time, we are able to identify true banking strategies consisting of different combinations of bank asset and funding sources and assess their impact on the mortgage crisis. We then estimate how distinct strategies have affected bank profitability and risk before the crisis, and what impact they have put on the mortgage crisis. Our results prove that the asset structure of banks was responsible for the systemic risk before the mortgage crisis, whereas the liability structure was responsible for the crisis itself. Finally, we show that countries with banks that rely on investment activities experienced a greater but more short-lived drop in GDP compared to countries that have a predominantly traditional banking sector.
    Keywords: Bank risk, business model, bank regulation, financial crisis, banking stability, systemic risk
    JEL: E58 G15 G2 G21 G28 G32
    Date: 2014–12–11
  15. By: Garcia Fronti, Javier
    Abstract: This paper develops a model of valuation of investment projects which includes nano-medical scientific and industrial dynamics, and its regulation. First critically analyzes the literature on valuation of investments, arguing that the methodology of real options is the most appropriate. It is a model that overcomes the major limitations of valuation tools of traditional investment projects and reflects the complexity of the economics involved.
    Keywords: nanomedical stochastic valuation real options
    JEL: G11 G3 G30
    Date: 2015–01–13
  16. By: Paolo Casini
    Abstract: Microfinance institutions, despite the presence of competition and informational asymmetries, typically offer a limited variety of contracts. Assuming price competition, we propose a simple theoretical explanation for this behavior and study its consequences in terms of strategic interaction and borrower welfare. We model an oligopolistic market in which Microfinance Institutions design their contracts and choose how many of them to offer. We find that when offering a menu is costly, MFIs always offer a single contract. Despite that, there exist equilibria in which MFIs coordinate and offer screening contracts, allowing them to extract a large fraction of the borrower welfare. We discuss the policy implications of our model in terms of price caps, market entry and outreach measurement.
    Keywords: Micronance, Competition, Altruism, Contract Menus, Credit Rationing
    JEL: G21 L13 L31 O16
    Date: 2014
  17. By: Edmans, Alex; Gabaix, Xavier
    Abstract: This article studies traditional and modern theories of executive compensation, bringing them together under a unifying framework. We analyze assignment models of the level of pay, and static and dynamic moral hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional optimal contracting theories find it difficult to explain the data, suggesting that compensation results from 'rent extraction' by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research.
    Keywords: contract theory; executive compensation; optimal contracting; principal-agent problem; rent extraction
    JEL: D84 G34
    Date: 2015–05
  18. By: Ali, Muhammad Ali; Asfand, Asfand Yar Khattak; Bakhtiyar, Bakhtiyar Khan; Hammad, Raja Hammad Amhed
    Abstract: The purpose of this paper is to inspect whether Financial risk influence FDI in Pakistan economy. In order to achieve the study objective and to answer the question, the Unit root test, Co integration test, OLS methodology and Granger causality test has been used. Time series data for the year 1982 to 2011 is used and this study measures the financial risk by considering foreign debt services, exchange rate, foreign debt and current account. The study results signify that efficient use of foreign debt can attract more foreign direct investment in the country. The paper shows that financial risk has significant impact on foreign direct investment.
    Keywords: Foreign direct investment, foreign debt, exchange rate, current account, financial risk.
    JEL: G01 G38
    Date: 2014–12–07

This nep-cfn issue is ©2015 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.