nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒06‒05
twenty papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Debt Bias in Corporate Income Taxation and the Costs of Banking Crises By Langedijk, Sven; Nicodème, Gaëtan; Pagano, Andrea; Rossi, Alessandro
  2. Runs versus Lemons: Information Disclosure and Fiscal Capacity By Faria-e-Castro, Miguel; Martinez, Joseba; Philippon, Thomas
  3. Systemic Risk in Conventional vs Islamic Equity Markets By Ahmet Sensoy
  4. The role of investment banking in systemic risk profiles. Evidence from a panel of EU banking sectors By Renata Karkowska
  5. Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods By Balla, Eliana; Prescott, Edward Simpson; Walter, John R.
  6. Tribalism and Financial Development By Simplice Asongu; Oasis Kodila-Tedika
  7. Bank and sovereign risk feedback loops By Erce, Aitor
  8. INSURANCE DISTRIBUTION CHANNELS IN SERBIA By Jelena Bozovic, Andriana Milosevic
  9. Organizing the Global Value Chain: a firm-level test By Davide Del Prete; Armando Rungi
  10. Financial Markets where Traders Neglect the Informational Content of Prices By Eyster, Erik; Rabin, Matthew; Vayanos, Dimitri
  11. The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs? By Carolina Laureti
  12. Financial Contributions and Bank Fees in the Banking Union By Orszaghova, Lucia; Miskova, Martina
  13. Banks are not intermediaries of loanable funds – and why this matters By Jakab, Zoltan; Kumhof, Michael
  14. Comments on the EU Commission's capital markets union project By Brühl, Volker; Gründl, Helmut; Hackethal, Andreas; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Tröger, Tobias
  17. Dividend Taxes and Stock Volatility By Ferris, Erin E. Syron
  18. Corporate tax incentives and capital structure: empirical evidence from UK tax returns By Michael P Devereux; Giorgia Maffini; Jing Xing
  19. Repaying Microcredit Loans: A Natural Experiment on Liability Structure By Mahreen Mahmud
  20. The financing and management of Euro 2012 arenas By Bornah, Mathew

  1. By: Langedijk, Sven; Nicodème, Gaëtan; Pagano, Andrea; Rossi, Alessandro
    Abstract: Corporate income taxation (CIT) in most countries favors debt over equity financing, leading to over-indebtedness. This problem is particularly acute for the financial sector. We estimate financial-stability benefits of eliminating this debt bias. We estimate the long-run effects of CIT on bank leverage and, using a Vasicek-based model of banking crisis losses, we find that eliminating this debt bias could reduce public finance losses in the range of 30 to 70%. These results hold even for conservative estimates of bank-leverage and portfolio-risk effects of CIT changes.
    Keywords: capital structure; debt bias; public finance; systemic risk; taxation
    JEL: G01 G28 G32 H25
    Date: 2015–05
  2. By: Faria-e-Castro, Miguel; Martinez, Joseba; Philippon, Thomas
    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.
    Keywords: bailouts; credit guarantees; deposit insurance; fiscal backstop; stress tests
    JEL: E5 E6 G1 G2
    Date: 2015–05
  3. By: Ahmet Sensoy
    Abstract: We aim to compare the aggregate systemic risk in Islamic and conventional equity markets by introducing two dynamic risk measures. Accordingly, the level of the systemic risk in conventional markets is slightly higher than the risk in Islamic markets for most of the time. However, this diference is significant in less than 3% of the sample period. More importantly, there is no significant difeerence in the levels of systemic risk during the global financial crisis of 2008, suggesting that Islamic equity markets are not able to provide a lower market risk compared to their conventional counterparts in financial turbulent times.
    Keywords: Systemic risk, Islamic finance, Conventional finance, Equity sectors, Dynamic Conditional Beta, Non-parametric tests
    JEL: C14 C58 G01 G15 G32
    Date: 2015–06
  4. By: Renata Karkowska (University of Warsaw, Faculty of Management)
    Abstract: The goal of this study is to identify empirically how non-traditional activities affect directly the risk profiles and profitability of the banking sector. Through a dataset that covers 2678 European banks spanning the period 1996–2011 and the methodology of panel regression, the empirical findings document that investment banks have a negative effect on systemic risk in the banking sector. To show the heterogeneity of systemic risk determinants, the study sample was divided according to the economic development of a country into two groups: advanced and developing countries. We examine the implications of banks’ activity and risk-taking that manifest themselves as spreading and growing instability in the banking system. Then we explore the implications of the interaction between banking risk and structural, macroeconomic and financial market determinants. The findings have implications for both bank risk management and regulators. This paper advances the agenda of making macroprudential policy operational.
    Keywords: systemic risk, investment banking, emerging markets, credit risk, liquidity, bank solvency, instability
    JEL: F36 G21 G32 G33
    Date: 2015–05
  5. By: Balla, Eliana (Federal Reserve Bank of Richmond); Prescott, Edward Simpson (Federal Reserve Bank of Richmond); Walter, John R. (Federal Reserve Bank of Richmond)
    Abstract: Two of the most significant banking reforms to come out of the banking problems in the late 1980s and early 1990s were the increase in capital requirements from Basel 1 and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The PCA provisions require regulators to shut down banks before book capital becomes negative. We compare failures and FDIC losses on commercial banks in the pre-FDICIA commercial bank crisis of the mid-1980s to early 1990s with that in the recent financial crisis. Using a sample of community and mid-sized banks, we find that almost all the same bank characteristics predict failure and high losses in the two crises. Our results imply that for these classes of banks, the two crises were very similar. We find that the failure rate in the recent period was driven more by severe economic conditions than by the increased concentrations in real estate lending. The analysis suggests that the combination of PCA with higher capital levels helped reduce failure rates in the recent period. In contrast, the analysis suggests that the reforms did not help with FDIC losses. FDIC losses on failed commercial banks were approximately 14% of failed bank assets over the 1986-92 period but increased to approximately 24% over the 2007-13 period. We find that the increased losses are not explained by variations in bank balance sheets or local economic conditions. Finally, we find that a discretionary accounting variable, interest accrued but not yet received, is predictive of both failure and higher FDIC losses.
    JEL: G21 G28
    Date: 2015–05–15
  6. By: Simplice Asongu (Yaoundé/Cameroun); Oasis Kodila-Tedika (Kinshasa, Democratic Republic of Congo)
    Abstract: We assess the correlations between tribalism and financial development in 123 countries using data averages from 2000-2010. The tribalism index is used to measure tribalism whereas financial development is measured from perspectives of financial intermediary and stock market developments. The long-term variable is stock market capitalisation while short-run indicators include: private and domestic credits. We find that tribalism is negatively correlated with financial development and the magnitude of negativity is higher for financial intermediary development relative to stock market development. The findings are particularly relevant to African and Middle Eastern countries where the scourge is most pronounced.
    Keywords: Tribalism; Financial Development
    JEL: E62 H11 H20 G20 O43
    Date: 2015–05
  7. By: Erce, Aitor (European Stability Mechanism)
    Abstract: Measures of Sovereign and Bank Risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro-area countries. The results show that Sovereign Risk feeds back into Bank Risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from Sovereign Risk into Bank Risk. In the opposite direction, in countries where banks fund their activities with more foreign credit and support larger levels of non-performing loans, the feedback from Bank Risk into Sovereign Risk is stronger. According to model estimates, financial rescue operations can increase feedback effects from bank risk into sovereign risk. These results can be useful for the official sector when deciding on the form of financial rescues.
    JEL: E58 G21 G28 H63
    Date: 2015–02–01
  8. By: Jelena Bozovic, Andriana Milosevic (University of Priština, Faculty of Economics,Kosovska Mitrovica)
    Abstract: Starting from 90s of the last century there are changes in the insurance industry. The manner of delivery of insurance products is changed by the development of technology and in accordance with clients' needs and wishes, which means sales of insurance with complete financial service. Insured, i.e. contractor of insurance services must be in the center of all activities of insurer. Fast and fair discharge claim or amount insured is the main factor which creates trust, certainty and satisfaction of the insured. In the conditions of numerous competitions in the insurance market, changed attitude of consumers and development of technology, distribution channels of insurance products are of extraordinary significance for successful business of insurance companies. Sales are one of basic functions in an insurance company. Adapting to the market conditions, insurance companies change the traditional manner of operation by accepting new sales channels. Specifically, this means innovation of insurance product distribution network in compliance with the legislation, in terms of different forms of cooperation of insurance companies with financial institutions. Primarily, the insurer must direct sales of services to those areas and sales channels which will be optimal for the company. In the present paper, we analyze institutional regulations of insurance in Serbia, distribution network of insurance sales and value of insurance service.
    Keywords: insurance companies, distribution channels in insurance, insurance regulations, insurance premium, insurance brokers, insurance agents.
    JEL: G22 I13 G18
    Date: 2015–01
  9. By: Davide Del Prete (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).); Armando Rungi (IMT Lucca (Italy).)
    Abstract: In the last two decades, technological progress and a decrease in trade barriers fostered the formation of global value chains, in which different sequences of production stages, previously performed in close proximity, can now be unbundled globally. In this contribution we test at the ?firm level the optimal allocation of ownership rights along a productive sequence, as in the framework set by Antras and Chor (2013). For this purpose we exploit an own-built dataset made of 4,214 parents which have acquired or established at least one affiliate in the period 2004-2012. Overall, they control 104,720 affiliates and operate in 185 countries. Assuming a technological orientation of the value chain from the fi?nal consumer upwards, we positively test that incentives to integrate suppliers vary systematically with: i) the relative upstream or downstream position of the affiliate with respect to the parent; ii) the elasticity of demand faced by the parent. Further, we ?find new insights for fi?rm-level heterogeneity along supply chains, as more productive and bigger parent companies are more likely to choose affiliates next to the fi?nal consumer. Once controlling for the complexity of the internal supply chain at the moment the investment decisions occur, we fi?nd that bigger internal chains show a lower propensity to integrate at the margin, probably discount increasing coordination costs. Results are robust after different speci?fications. However, we detect some non-linearities over ?firm-level distributions, when integrated affiliates approach the bottom of the supply chain, next to the ?final consumer, after the VIII decile of the affiliates' ?downstreamness. In this case we presume that a horizontal rather than a vertical integration strategy could prevail.
    Keywords: global value chains, vertical integration, property rights theory, multinational enterprises, downstreamness, business groups.
    JEL: F14 F23 D23 G34 L20
    Date: 2015–05
  10. By: Eyster, Erik; Rabin, Matthew; Vayanos, Dimitri
    Abstract: We present a model of a financial market where some traders are ``cursed'' when choosing how much to invest in a risky asset, failing to fully take into account what prices convey about others' private information. Cursed traders put more weight on their private signals than rational traders. But because they neglect that the price encodes other traders' information, prices depend less on private signals and more on public signals than rational-expectation-equilibrium (REE) prices. Markets comprised entirely of cursed traders generate more trade than those comprised entirely of rationals; mixed markets can generate even more trade, as rationals employ momentum-trading strategies to exploit cursed traders. We contrast our results to other models of departures from REE and show that per-trader volume with cursed traders increases when the market becomes large, while natural forms of overconfidence predict that volume should converge to zero.
    Keywords: behavioral finance; cursedness; financial markets; overconfidence; return predictability; trading volume
    JEL: D53 D84 G02 G11 G12 G14
    Date: 2015–05
  11. By: Carolina Laureti
    Abstract: We observe the usage of the flexible savings-and-loan accounts offered by SafeSave, a microfinance institution serving poor slum dwellers in Dhaka, Bangladesh. We find that 59% of the clients borrow at high interest rates and simultaneously hold low-yield liquid savings. Our main finding is that this apparent behavioural anomaly cannot be attributed to liquidity needs. In contrast, we show that co-holders are more likely to be workers subject to low-income risk. An alternative explanation is that co-holders take up costly loans they do not need to escape forced solidarity vis-à-vis family members and friends.
    Keywords: Liquidity; uncertainty; precautionary savings; microfinance; Bangladesh
    JEL: D14 G21 O12
    Date: 2015–05–26
  12. By: Orszaghova, Lucia; Miskova, Martina
    Abstract: The banking union has brought substantial changes to the functioning of the financial sector in the EU, including new bank fees and contributions. This article reviews the different fees and contributions introduced by the new framework, paying particular attention to those imposed at the EU level. The crisis marked a turning point, and the focus is now on breaking the vicious cycle between private banks and public finances by transferring the costs of any future failure to the credit institutions themselves.
    Keywords: banking union, financial contributions, bank fees
    JEL: G20
    Date: 2015–01
  13. By: Jakab, Zoltan (International Monetary Fund); Kumhof, Michael (Bank of England)
    Abstract: In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.
    Keywords: Banks; financial intermediation; loanable funds; money creation; loans; deposits; leverage; spreads
    JEL: E44 E52 G21
    Date: 2015–05–29
  14. By: Brühl, Volker; Gründl, Helmut; Hackethal, Andreas; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Tröger, Tobias
    Abstract: The European Commission has published a Green Paper outlining possible measures to create a single market for capital in Europe. Our comments on the Commission's capital markets union project use the functional finance approach as a starting point. Policy decisions, according to the functional finance perspective, should be essentially neutral (agnostic) in terms of institutions (level playing field). Our main angle, from which we assess proposals for the capital markets union agenda, are information asymmetries and the agency problems (screening, monitoring) which arise as a result. Within this perspective, we make a number of more specific proposals.
    Keywords: Capital Markets Union,functional finance approach,level playing field,financial services
    Date: 2015
  15. By: Danica Prosiæ (Master World ?.?.?. Belgrade, Serbia)
    Abstract: Understanding the assessment of solvency ability and its overall concept explains a whole range of financial and non-financial variables, which together make solvency analysis. Traditional approaches to the assessment of solvency are no longer adequate, because the new, additional criteria for the enhancement of the models and theories of modern analysis are being introduced. The aim of this paper is to research and present the key factors and criteria that should be taken into account when assessing the company credit solvency.
    Keywords: credit solvency, financial and nonfinancial variables, financial analisys, Balanced Scorecard
    JEL: G32 M41
    Date: 2014–10
  16. By: Ivanskyy Andrey Yosipovich (Honoured Lawyer of Ukraine)
    Abstract: The correlation of legal presumptions with such interconnecting categories as legal hypothesis, legal version, legal axiom and legal principles is analyzed. Certain features of practical application of presumption of guiltlessness and presumption of knowledge of financial legislation in financial law are determined. The functions of legal presumption in financial law are grounded.
    Keywords: legal presumption, financial legal responsibility, presumption of guiltlessness, presumption of knowledge of financial legislation.
    JEL: G3 G38
    Date: 2015–01
  17. By: Ferris, Erin E. Syron (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: How do dividend taxes affect stock volatility? In this paper, I use a decrease in dividend taxes as a natural experiment to identify their impact on firm's price volatility. If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. Stock volatility decreased after the tax cut for firms where an executive has large holdings of shares and options relative to firms where an executive has small holdings of shares and options. Therefore, with a risk-averse executive and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract.
    Keywords: Corporate finance and governance; taxation
    Date: 2015–05–26
  18. By: Michael P Devereux (Centre for Business Taxation, University of Oxford); Giorgia Maffini (Centre for Business Taxation, University of Oxford); Jing Xing (Shanghai Jiao Tong University)
    Abstract: This paper examines how companies' capital structure is affected by the corporate income tax system. Our analysis employs confidential company-level corporation tax return data in the UK. Our main identification strategy is based on variation in companies¡¯ marginal tax rates due to the existence of kinks in the corporate tax rate schedule. Using a dynamic adjustment model of capital structure, we find a positive and substantial long-run tax effect on companies' financial leverage. We show that there are considerable discrepancies between estimates of taxable profits reported in tax return data and in financial statements and that the estimated tax effect on capital structure using financial statements is likely to be biased downward. We find that companies adjust their capital structures gradually in response to changes in the marginal tax rate. Moreover, we find that the external leverage of domestic stand-alone companies and of multinational companies responds strongly to corporate tax incentives.
    Keywords: Corporate taxation, capital structure, tax returns
    JEL: G3 H2
    Date: 2015
  19. By: Mahreen Mahmud
    Abstract: Microcredit loans were traditionally extended to groups of people. However, there is no clear evidence that joint liability does lead to better borrower performance and recent years have seen a shift towards individual liability lending. Utilizing the exogenous shift from individual to joint liability lending by a microfinance organization in Pakistan, we find evidence of significant improvement in borrower discipline. Borrowers are about 0.6 times as likely to miss a payment in any given month under joint liability relative to individual liability. We also use the exogenous variation in number of months borrowers had till the expiry of their individual liability loans at the time of the shift to study the kind of groups they formed. More time that borrowers had, the more likely they were to form groups with people they knew from before and met weekly. The time that borrower had to form group also correlated positively with borrower discipline.
    Keywords: Microfinance; Group lending; Joint liability
    JEL: D71 D82 G21
    Date: 2015–05
  20. By: Bornah, Mathew
    Abstract: Until recently, most mega sports events were held by wealthy industrialised countries. Because of the high costs involved in the preparation of such projects, insufficiently developed sports and other infrastructure and the absence of appropriate legal basis, hosting such events was beyond the reach of developing countries. The beginning of the 21st century brought significant changes in this respect. On the one hand, countries with relatively weaker economies, aware of the benefits involved, submitted their bids more readily. On the other hand, institutions responsible for the selection of the host country began to promote less wealthy countries or those in the process of economic transformation, in order to provide a stimulus for development. Within less than a decade there have been a number of examples of sporting event hosts that confirmed the current trend, such as: Euro 2004 in Portugal, 2008 Olympic Games in Beijing, the decision concerning the staging of the FIFA World Cup in 2010 or, finally, Euro 2012 in Poland and Ukraine. The different approaches to stadium management adopted by the individual cities have been presented in this paper. In this respect particular importance was attached to the sources of income that will enable maintenance of these venues and pay off the enormous debt incurred by the cities in connection with their preparation.
    Keywords: Euro 2012, Football stadiums
    JEL: G38
    Date: 2015

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