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on Corporate Finance |
| By: | Ung, Lik-Jing; Brahmana, Rayenda; Puah, Chin-Hong |
| Abstract: | During the past three decades, many firms in developing market have embarked retrenchment strategy in order to defend firm going concern from economy turbulence. Yet, this strategy is rarely investigated compared to another strategy like diversification. This is not to mention limited research investigating whether companies might manipulate their earnings through the retrenchment costs across ownership expropriation. As Malaysia offers unique background earnings management, corporate strategy and ownership structure, this study aims to answer intriguing yet interesting question: Do Malaysia’s listed companies consider retrenchment costs when they manipulate earning across its ownership expropriation? Using 237 Malaysian listed companies over the period 2008-2013, this study found that retrenchment costs are used to manipulate earnings in companies. In addition, we find that ownership concentration do not significantly affects the earnings management of the firms. |
| Keywords: | Retrenchment; Ownership Expropriation; Earnings Management; Corporate Governance |
| JEL: | G30 G32 G34 |
| Date: | 2014–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63426&r=cfn |
| By: | Ung, Lik-Jing; Brahmana, Rayenda; Puah, Chin Hong |
| Abstract: | Real estate values in Malaysia have climbed steadily over the years due to a combination of reasons giving companies a higher brokerage fee. In corporate governance literature, ownership expropriation is crucial in the relationship between income (brokerage fee) and earnings management. However, research investigating whether real estate companies might manipulate their earnings through the brokerage fee across ownership expropriation is limited. Therefore, this study uses real estate firms listed on the Kuala Lumpur Stock Exchange (KLSE) to investigate how the brokerage fee in the real estate industry might affect the earnings management of firms across its ownership expropriation. Using annual report data, we investigate the associations over a panel for the period 2008-2012. Robust panel regression is used to divulge the probability values with reference to robust White standard errors that regulate heteroscedasticity errors. Overall, our results show that high brokerage fees would drive more events of earnings management and that, generally, the ownership concentration among Malaysian real estate firms significantly affects the earnings management of the firms. |
| Keywords: | Brokerage Fee; Ownership Expropriation; Earnings Management; Corporate Governance |
| JEL: | G30 G32 G34 |
| Date: | 2014–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63427&r=cfn |
| By: | Barbara Fidanza (University of Macerata); Ottorino Morresi (Roma Tre University) |
| Abstract: | The Fama-French three-factor model (Fama and French, 1993) has been subject to extensive testing on samples of US and European non-financial firms over several time windows. The most accepted evidence is that size premium and value premium as well as market risk premium help explain time-series changes in stock returns. However, scholars have always paid little attention to the financial industry because of the intrinsic differences between financial and non-financial firms. The few studies that have tested the model on financial firms have found mixed evidence regarding the role of size and the book-to-market ratio in explaining stock returns. We find, on a sample of European banks, that size and book-to-market (B/M) ratio seem to be sources of undiversifiable risks and should therefore be included as risk premiums for estimating the expected returns of financial firms. Small and high-B/M banks seem to be more risky. Smaller banks are not systemically important financial institutions and therefore do not benefit from government protection. High-B/M banks are likely to be unprofitable, without growth opportunities, and close to financial distress. |
| Keywords: | Book-to-market ratio,Financial firm,Firm size,Asset pricing |
| JEL: | G12 G21 G3 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcr:wpaper:wpaper00047&r=cfn |
| By: | Stefano Puddu (Institute of economic research IRENE, Faculty of Economics, University of Neuchâtel, Switzerland); Andreas Waelchli (Studienzentrum Gerzensee (Study Center Gerzensee), Schweizerische Nationalbank (SNB) (Swiss National Bank); Department of Econometrics and Political Economy DEEP, Faculty of Economics, University of Lausanne, Switzerland) |
| Abstract: | Using a unique bank-level dataset, we assess the impact of the Term Auction Facility program on bank liquidity risk. The change in the US housing price index at state levels between 2002:Q1 and 2006:Q3 is the exclusion restriction to control for potential selection bias. On average, TAF banks exhibit higher ex ante levels of liquidity risk and they drastically reduce funding liquidity risk in the periods after the rst time they received TAF funds. TAF banks show larger reductions in liquidity and they are more likely to be headquartered in US states that experienced sharper housing price appreciation before 2007. |
| Keywords: | Term Auction Facility, Liquidity Risk, Financial Crisis, Unconventional Monetary Policies |
| JEL: | G21 G28 G32 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:15-07&r=cfn |
| By: | Miguel Faria-e-Castro; Joseba Martinez; Thomas Philippon |
| Abstract: | We characterize the optimal use of information disclosure and fiscal backstops during financial crises. In our model, financial crises force governments to choose between runs and lemons. Revealing information about banks' assets reduces adverse selection in credit markets, but it can also create inefficient runs on weak banks. A fiscal backstop mitigates this risk and allows the government to pursue a high disclosure strategy. A government with a strong fiscal position is more likely to run informative stress tests than a government with a weak fiscal position. As a result, such a government is also less likely to rely on outright bailouts. |
| JEL: | E44 E5 E6 G01 G21 G28 H12 H2 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21201&r=cfn |
| By: | Stefano Puddu (Institute of economic research IRENE, Faculty of Economics, University of Neuchâtel, Switzerland); Andreas Waelchli (Studienzentrum Gerzensee (Study Center Gerzensee), Schweizerische Nationalbank (SNB) (Swiss National Bank); Department of Econometrics and Political Economy DEEP, Faculty of Economics, University of Lausanne, Switzerland) |
| Abstract: | Using a unique data set based on US commercial banks and county level loan origination for the period 2005-2010, we measure whether banks that benefited from the Troubled Asset Relief Program (TARP) increase small business loan originations. We propose an identification strategy which exploits the ownership structureof bank holding companies. We find that TARP banks provide on average 19% higher small business loan originations than NO TARP banks. The disaggregated data allows us to control for the potential demand side effects. When considering poverty and unemployment rates at a county level we show that TARP is effective only in counties suffering from unemployment. Several robustness checks confirm the main result. |
| Keywords: | TARP, Financial Crisis, Loan provision |
| JEL: | C23 E58 G21 G28 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:15-06&r=cfn |
| By: | David Rodgers (Reserve Bank of Australia) |
| Abstract: | Credit risk – the risk that borrowers will not repay their loans – is one of the main risks that financial intermediaries face, and has been the underlying driver of most systemic banking crises in advanced economies over recent decades. This paper explores the <i>ex post</i> credit risk experience – the 'credit loss' experience – of the Australian banking system. It does so using a newly compiled dataset covering bank-level credit losses over 1980 to 2013. The Australian credit loss experience is dominated by two episodes: the very large losses around the early 1990s recession and the losses during and after the global financial crisis. The available data indicate the above-average losses during both periods were on lending to businesses. Credit losses on housing loans during and after the global financial crisis were minimal in Australia. Consistent with this, an econometric panel-data model that properly accounts for portfolio composition indicates that conditions in the business sector, rather than those in the household sector, drove credit losses in Australia during the period studied. The data also indicate that the very worst credit loss outcomes – including those that led to the failure of several state government-owned banks in the early 1990s – were driven by poor lending standards. |
| Keywords: | banking; credit losses; lending standards |
| JEL: | G01 G21 G33 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2015-06&r=cfn |
| By: | Sunil Kanwar; Bronwyn H. Hall |
| Abstract: | We revisit the relationship between market value and innovation in the context of manufacturing firms in a developing country, using Indian data from 2001 through 2010. Surprisingly, we find that financial markets value the R&D investment of Indian firms the same or higher than such investment is valued in developed economies like the US. Using a proxy for the option value of R&D, we find that this accounts for a very small part of the R&D valuation (5% at most). We also find that the market value-R&D relationship does not vary significantly across industry groups, although these results are imprecise. |
| JEL: | G12 O16 O30 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21196&r=cfn |
| By: | Peresetsky, Anatoly; Yakubov, Ruslan |
| Abstract: | In this paper a Kalman-filter type model is used to extract a global stochastic trend from discrete non-synchronous data on daily stock market index returns from different markets . The model allows for the autocorrelation in the global stochastic trend, which means that its increments are predictable. It does not necessarily mean the predictability of market returns, since the global trend is unobservable. The performance of the model for the forecast of market returns is explored for three markets: Japan, UK, US. |
| Keywords: | financial market integration; stock market returns; state space model; Kalman filter; non-synchronous data; market returns forecast |
| JEL: | C49 C58 F36 G10 G15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64579&r=cfn |
| By: | Nedelchev, Miroslav |
| Abstract: | The new institutional framework put on the agenda a review of established models and introducing new perspectives in economics. The role of banking groups for economic growth and competitiveness place corporate governance practices of critical analysis. The development of banking in the twentieth century brought to the fore the advantages of conducting activities cross-border. The global economic recession determines the corporate governance of international banking groups as a source of the financial crisis and as a means of reducing its effects. The present stage of development of society is characterized by actions to improve practices in corporate governance at the international, regional and national level. The monograph examines the dynamics of the corporate governance of international banking groups. The analysis of changes in corporate governance encompasses recommendations of international organizations, policies in the EU and practices in Bulgaria. The beginning of conglomerisation in the second half of the twentieth century it was laid by national policies on competitiveness. The deregulation and the related movement of capital identified cross-border activities of banks as a driving force for economic growth. The differences in the laws of individual countries led to organizational units, which began to offer financial services with increased risk. Owing to the new services, the competent authorities have taken several measures to address the transfer of risk across national borders. The international activities of banking groups highlighted the need for international recommendations for coordination of actions at the regional level to improve practices in corporate governance. Banking groups play a key role for development and function of the economy. Their practices of corporate governance have an effect on rest players in market economy. National legislations in some countries have allowed the creation of complex banking structures and financial services that lead to emergent and distribution of financial crisis. To decrease the negative effects by crisis, international organizations initiate a series of measures for improvement of corporate governance practices and prevention of future crises. The changes in corporate governance of transnational banking groups are in following order: recommendation by international organizations -> policies of parent banks in European Union -> practices in subsidiary banks in Eastern Europe. The dynamics of good practices in corporate governance is depended on the role of players. Shareholders have interest to increase their wealth by company deals. Parallel with property rights, shareholders have non-property rights that must exercise advisable. Strict attendances and exercise rights at general meeting of shareholders will contribute to control over managers. Main contribution for bank stability plays the institutional investors which role was decreased because of missing information for their voting policy. Managers have financial incentives to increase shareholders’ wealth by risk undertaking. The board must reconsider the remuneration policy for managers. This recommendation will bring to control over the risk management. Auditors have a double status – to decrease information asymmetry between principal and agent, and to confirm to stakeholders, incl. regulators, for correct preparation of reports. The changes regard audit as a part of regulation policy at national and international levels. Auditors are in charge of assessment of remuneration policy which target is decrease of practices for taking of excessive risk. Regulators of some countries allow the creation of complex organization structures and financial services that are difficult for control and assessment. Decisive factor for stability of economy is concluding and keeping of memorandums among national regulators. The institutional framework has not a target to create a memorandums by „one-size-fits-all“ approach. The modern regulation of banking groups is based on „comply-or-explain“ approach. Tools in corporate governance of banking groups include traditional and non-traditional techniques. Using of rating agencies by institutional investors is put on control by national regulators. The requirement for information disclosure is realize at quality new stage: the information user pays for preparation of an investment plan. A part of attempts for convergence of policies in corporate governance is separation of risk businesses in particular entities and decrease of complexity for corporate structures. The consequences for corporate governance of banking groups in Bulgaria are indirect. The presence of subsidiaries from EU banking groups and their big market share define the subordination of corporate governance practices. The process of cash privatization and sale of profit banks define the majority and privately-owned ownership of Bulgarian banks therefore their practices are not covered by the new EU policies for corporate governance. In contrast to public status of parent banks in Western Europe, most of Bulgarian subsidiaries have not obligations to comply international principles for corporate governance. |
| Keywords: | corporate governance, banking groups |
| JEL: | G3 G34 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64586&r=cfn |
| By: | Rui Albuquerque (Catolica-Lisbon School of Business and Economics, Boston University); Tarun Ramadorai (SaId Business School, Oxford University); Sumudu W. Watugala (Office of Financial Research) |
| Abstract: | We investigate the role of trade credit links in generating cross-border return predictability between international firms. Using data from 43 countries from 1993 to 2009, we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable based on the returns of their associated customer countries. This behavior is especially prevalent among firms with high levels of foreign sales. To better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links. The model offers further predictions about this phenomenon, including stronger predictability during periods of high credit constraints and low uninformed trading volume. We find supportive empirical evidence for these predictions. |
| Keywords: | international equity markets, trade credit, information asymmetry, customer-supplier relations, predictability |
| JEL: | G12 G14 G15 |
| Date: | 2014–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:discus:14-04&r=cfn |
| By: | Ali, Madiha; Ali, Syed Babar |
| Abstract: | The research is done with a purpose of increasing knowledge about the importance of working capital management. The research investigates impact of working capital management on the profitability of the firms along with the impact of the same on the fixed capital investment of the firm. The research also finds out the interrelationship of fixed capital investment and the profitability because the ultimate goal of the firms is to achieve maximum profitability at the lowest level of risk. The research has thoroughly examined impact of variables involved through ratio analysis and tools like regression and correlation. The data was gathered from Karachi Stock Exchange. The data gathering was archival and panel data was used as a method to extract the needed information. The 20 companies are selected from KSE-30 index because they were considered the best performing stocks in the market. The remaining 10 companies fall in the Banking sector which has a totally different perspective of debt and equity situation, thus, commercial banks are eliminated from the KSE-30 companies in this research. The results of the study shows that the working capital management does not affect the profitability of the firms in isolation, but there is a slight impact of managing the current assets and current liabilities. These should be accompanied by other variables as well to ensure profitability. The fixed capital investment has an extremely low, in fact negligible impact on profitability. The effect of working capital management varies among industries. |
| Keywords: | Working Capital Management. Profitability. Fixed Investment. Capital Investment |
| JEL: | G0 G3 G30 G31 G39 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64520&r=cfn |
| By: | Chauvet, Lisa; Jacolin, Luc |
| Abstract: | This study focuses on the impact financial development on the performance of firms in countries with low financial development. Previous studies focusing on financial depth alone find that financial development does not affect, or has a negative effect on, economic growth in developing countries with undersized financial systems. Using firm-level data in panel for a sample of 26 countries, we find that this hypothesis is invalidated if one takes into account not only financial depth but also financial inclusion, i.e. the distribution of access to financial services. Contrary to developed countries where financial inclusion is nearly universal, differences in access to credit among firms help explaining differences in firms perfor- mance. We measure financial inclusion as the share of firms who have access to bank overdraft facilities, or, alternatively, to any external source of financing, at the sectoral level. We find that whereas financial devel- opment does not affect firm performance on average, financial inclusion has a positive effect on firms growth. Where financial inclusion is low, financial development may create crowding out effects in favor of a minority of firms or government that phase out or reverse its expected positive effects of financial development on growth. Additional testing show that these effects affect all firms, irrespective of size, or whether they have access to bank credit or not. We interpret these results as showing that financial deepening increases firms growth only if it widely distributed among firms, i. e. financial inclusion is high. |
| Keywords: | Financial development; Financial inclusion; Firms peformance; |
| JEL: | G10 O16 O50 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/15070&r=cfn |
| By: | Chia-Lin Chang (National Chung Hsing University, Taichung, Taiwan); Juan-Ángel Jiménez-Martín (Complutense University of Madrid, Spain); Esfandiar Maasoumi (Emory University, United States); Michael McAleer (National Tsing Hua University, Taiwan, Erasmus School of Economics, Erasmus University Rotterdam,Tinbergen Institute, The Netherlands, Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain) |
| Abstract: | The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee. |
| Keywords: | Stochastic dominance; Value-at-Risk; Expected Shortfall; Optimizing strategy; Basel III Accord |
| JEL: | C53 C22 G32 G11 G17 |
| Date: | 2015–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150056&r=cfn |
| By: | Nedelchev, Miroslav |
| Abstract: | Most of analyses for corporate governance have a company with dispersed ownership as a research object. Relevant to this type of company classical conflict „principal-agent“ is decide by traditional mechanisms of corporate governance and mainly by internal mechanisms. A significant number of companies from developing countries have concentrated ownership. Their typical conflicts are between controlling shareholder and minority shareholders (principal-principal), which are reduce by external and internal mechanisms. For the countries of East Europe, incl. Bulgaria, adaptation of market principles is related to entering of foreign capitals and change of shareholders structure. Arise a necessity of researches for corporate governance of companies with concentrated ownership. Traditional issue of corporate governance about protection of rights of minority shareholders has a new dimension – decrease of deviation between right of ownership and right of control |
| Keywords: | corporate governance, principal-principal |
| JEL: | G34 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64541&r=cfn |
| By: | Eduardo Astorino; Fernando Chague, Bruno Cara Giovannetti, Marcos Eugênio da Silva |
| Abstract: | We propose an implied volatility index for Brazil that we name "IVol-BR". The index is based on daily market prices of options over IBOVESPA -- an option market with relatively low liquidity and few option strikes. Our methodology combines standard international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option markets. We then do a number of empirical tests to validate the IVol-BR. First, we show that the IVol-BR has significant predictive power over future volatility of equity returns not contained in traditional volatility forecasting variables. Second, we decompose the squared IVol-BR into (i) the expected variance of stock returns and (ii) the equity variance premium. This decomposition is of interest since the equity variance premium directly relates to the representative investor risk aversion. Finally, assuming Bollerslev et al. (2009) functional form, we produce a time-varying risk aversion measure for the Brazilian investor. We empirically show that risk aversion is positively related to expected returns, as theory suggests. |
| Keywords: | IVol-BR; Variance Risk Premium; Risk-aversion |
| JEL: | G12 G13 G17 |
| Date: | 2015–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2015wpecon8&r=cfn |
| By: | Nedelchev, Miroslav |
| Abstract: | Practices of corporate boards are the focus of researchers in the last decade. The dynamics of external environment determined necessity of reforms in corporate governance. Institutional pressure and new requirements of stakeholders to practices of boards have changed traditions and evolution to convergence and revolution. |
| Keywords: | corporate governance, corporate boards |
| JEL: | G34 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64569&r=cfn |
| By: | Dirk Schoenmaker (Faculty of Economics and Business Administration, VU University Amsterdam, Duisenberg school of finance, the Netherlands); Peter Wierts (Duisenberg school of finance, the Netherlands) |
| Abstract: | We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A small stylised model illustrates the trade-off between static and time varying limits on leverage in dampening the financial cycle. The policy section proposes its application to highly leveraged entities and activities across the financial system. Whereas the traditional view on regulation focuses on capital as a buffer against exogenous risks, our approach focuses instead on debt financing, endogenous feedback mechanisms and resource allocation. It explicitly addresses the boundary problem in entity-based financial regulation and provides a motivation for substantially lower levels of leverage – and thereby higher capital buffers – than in the traditional approach. |
| Keywords: | Financial cycle; macroprudential regulation; financial supervision; (shadow) banking |
| JEL: | E58 G10 G18 G20 |
| Date: | 2015–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150057&r=cfn |
| By: | XU Peng |
| Abstract: | Using firm data from 2002-2012, we examine the relationship between capital structure and risk taking, and between risk taking and firm performance of small and medium-sized enterprises and large private firms. Domestically-owned entrepreneurial private firms are more risk averse than domestically-owned affiliated private firms. Foreign-owned affiliated private firms are much more risk taking than domestically-owned private firms. However, leverage is not strongly associated with less corporate risk taking, but it adversely influences corporate investment significantly. Risk taking has statistically and economically significant effects on corporate growth and corporate earnings. Furthermore, during the credit crisis, risk taking was positively related to corporate earnings, and thus higher risk-taking firms had smaller cash flow shortfalls. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15061&r=cfn |
| By: | Brahmana, Rayenda Khresna; Setiawan, Doddy; Hooy, Chee Wooi |
| Abstract: | There is a hot debate on whether internationally diversified and or industrially diversified strategy gains premium or discount on firm value. Most of the empirical studies on this topic were conducted in developed markets. However, Indonesia, as an emerging market, offers its unique characteristic in terms of ownership structure. For instance, Indonesia is dominated by family firms, but its SOEs perform better compared to family firms. This research aims to investigate the role of ownership concentration on the value of international and industrial diversification in Indonesia. We investigate how that relationship works in respect of different firm’s identity, such as different ownership level, or different owners (family, government, and foreign). We investigate the value of diversification and ownership structure of Indonesian listed firms over a panel of 2006-2010. We use robust panel regression where we report the probability values based on white robust standard errors that control for heteroscedasticity errors, as well as firm clustering, year clustering, period effect, and industry effect, which induce a within firm serial correlation error structure. To support the results, we also provide graphical evidence of the link between ownership structure, diversification strategy, and firm value. We find that ownership concentration has a prevalent and significant effect on the value of diversification. Further, we also find value discount in the industrial diversification of family firms, and value discount in the international diversification of foreign firms. Overall, our results are consistent with the conjecture that the value of diversification is adversely affected by the agency problem, suggesting that ownership concentration and firm identity play an important role in respect of the value of diversification. |
| Keywords: | diversification, ownership, firm value, family firms |
| JEL: | G15 G3 G32 |
| Date: | 2014–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64607&r=cfn |
| By: | Vladimir Asriyan; William Fuchs; Brett Green |
| Abstract: | We study the effect of information spillovers and transparency in a dynamic setting with adverse selection and correlated asset values. A trade (or lack thereof) by one seller can provide information about the quality of other assets in the market. In equilibrium, the information content of this trading behavior is endogenously determined. We show that this endogeneity of information leads to multiple equilibria when the correlation between asset values is sufficiently high. That is, if buyers expect "bad" assets to trade quickly, then a seller with a bad asset has reason to be concerned about negative information being revealed, which induces her to trade quickly. Conversely, if buyers do not expect bad assets to trade quickly, then the seller has less to be concerned about and is more willing to wait. We study the implications for policies that target market transparency. We show that total welfare is higher when markets are fully transparent than when the market is fully opaque. However, both welfare and trading activity can decrease in the degree of market transparency. |
| Keywords: | asymmetric information, information spillovers, market transparency, liquidity. |
| JEL: | G12 G14 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1482&r=cfn |