nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒07‒18
fifteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Development of Corporate Governance in Toulouse: 1372-1946 By David Le Bris; William N. Goetzmann; Sébastien Pouget
  2. Estimating the Competitive Storage Model with Trending Commodity Prices By Fredj Jawadi; Georges Prat
  3. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Morais, Bernardo; Peydro, Jose Luis; Ruiz, Claudia
  4. Collateral and Local Lending: Testing the Lender-Based Theory By Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro
  5. Failed bank auctions and externalities By Zhou, Tim
  6. All Good Things Come to an End: CEO Tenure and Firm Value By Limbach, Peter; Schmid, Markus; Scholz, Meik
  7. Government Bond Liquidity and Sovereign-Bank Interlinkages By Sören Radde; Cristina Checherita-Westphal; Wei Cui;
  8. Enhancing the financing of the real economy and financial stability in the United Kingdom By Olena Havrylchyk; Rafal Kierzenkowski
  9. Relationships between the finance system and housing markets By Piotr Lis
  10. The Fees of Mutual Funds and Real Estate Funds: Their Determinants in a Small Market By Alves, Paulo
  11. Financial institutions and supply of financial services in the European microcredit market: a survey of selected countries’ experiences By Sergio Lagoa
  12. Corporate Fraction and the Equilibrium Term-Structure of Equity Risk By Roberto Marfè
  13. The Influence of Risk-Taking on Bank Efficiency: Evidence from Colombia By Miguel Sarmiento; Jorge E. Galán
  14. Experiencing financialisation in small open economies: An empirical investigation of Ireland and Iceland By Hamid Raza; Bjorn Gudmundsson; Stephen Kinsella; Gylfi Zoega
  15. Loan Originations and Defaults in the Mortgage Crisis: Further Evidence By Manuel Adelino; Antoinette Schoar; Felipe Severino

  1. By: David Le Bris; William N. Goetzmann; Sébastien Pouget
    Abstract: We document a sequence of institutional innovations associated with the corporate form over the course of several centuries in Toulouse. Shareholding companies that began in the 11th century formally incorporated themselves into two large-scale, widely held firms by 1373. In the years that followed they experienced the economic challenges and conflicts we now recognize as inherent in the separation of ownership and control. Using new and existing archival research, we show how the Toulouse firms developed institutional solutions including tradable shares, limited liability, governing boards, cash payout policies, external audits, shareholder meetings and mechanisms for re-capitalization. We examine these developments in the context of institutional economic theory and the received history of the corporation. The Toulouse companies preceded the birth of the Dutch and English East India companies by centuries. The Toulouse firms shed light on the necessary and sufficient conditions for the development of the corporate form. We show that the constellation of features associated with the corporation can appear in situations of relative economic certainty and in the context of Medieval legal code that did not require the granting of governmental approval or patent. The Toulouse firms are a unique case in which the corporation appears as a nexus of private contracts.
    JEL: G30 G34 G35 N0 N2 N8 N83 O16 P1
    Date: 2015–07
  2. By: Fredj Jawadi; Georges Prat
    Abstract: This paper focuses on the linkages between equity prices and fundamentals for 27 individual shares from the French stock price index (CAC40). To assess fundamental value, the traditional Dividend Discount Model (DDM) equities’ valuation principle is coupled with the Portfolio Choice Theory based on the Arbitrage Pricing Theory (APT). This yields a general equity valuation relationship for which the APT determines the long-term risk premium included in the DDM. Interestingly, restrictions are less significant than in the usual approaches since the number of risk premium factors is not limited a priori by the theory. Accordingly, our empirical results point to two major findings. On the one hand, while results in the literature based on the DDM showed that fundamental value dynamics are very smooth with respect to stock price indices, our DDM-APT model reproduces both trends and major share price fluctuations. On the other hand, a simple linear Error Correction Model (ECM) highlighted a mean-reversion process of equity prices towards their fundamental values. .
    Keywords: stock valuation, equity risk premium, stock price adjustment.
    JEL: G11 G12 C58 C22
    Date: 2015
  3. By: Morais, Bernardo (Board of Governors of the Federal Reserve System (U.S.)); Peydro, Jose Luis (Universitat Pompeu Fabra); Ruiz, Claudia (World Bank)
    Abstract: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico, matched with firm and bank balance-sheet data, and by exploiting foreign monetary policy shocks, given the large presence of European and U.S. banks in Mexico. We find that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock affects supply via their respective banks (for example, U.K. monetary policy affects credit supply in Mexico via U.K. banks), in turn implying strong real effects, with substantially larger elasticities from monetary rates than QE. Moreover, low foreign monetary policy rates and expansive QE increase disproportionally more the supply of credit to borrowers with higher ex ante loan rates--reach-for-yield--and with substantially higher ex post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest that foreign QE increases risk-taking in emerging markets more than it improves the real outcomes of firms.
    Keywords: Credit channel of monetary policy; financial globalization; quantitative easing (QE); credit supply; risk-taking; foreign banks.
    JEL: E44 E52 E58 G01 G21 G28
    Date: 2015–07–02
  4. By: Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro
    Abstract: In this paper we empirically test the recent lender-based theory for the use of collateral in bank lending. Based on a proprietary dataset of loan contracts written by a local bank in competitive credit markets, we use the physical proximity between borrowers and the lending branch of the bank to capture its information advantage and the magnitude of collateral-related transaction costs. Overall, our results seem more consistent with several classic borrower-based explanations rather than with the lender-based view. We show that, conditional on obtaining credit from the local bank, more distant borrowers experience higher collateral requirements and lower interest rates. Moreover, competitive pressure from transaction lenders does not magnify the importance of lender-to-borrower distance. Our findings are also obtained with estimation techniques that allow for endogenous loan contract terms and joint determination of collateral and interest rates.
    Keywords: Distance, Collateral, Interest Rate, Bank lending
    JEL: G21 G32 L11
    Date: 2015–04
  5. By: Zhou, Tim
    Abstract: We measure the negative externalities experienced by non-winning bidders and examine the determinants of these externalities in the Federal Deposit Insurance Corporation (FDIC) failed bank auctions. We show that unsuccessful bidders experience significantly negative cumulative abnormal returns when winning bidders enter non-winning bidders’ key markets as a new entrant by acquiring relatively larger targets and when infrequent bidders are involved.
    Keywords: FDIC, Banks, Auction, Externality
    JEL: D44 D62 G14 G21 G28
    Date: 2015–07–14
  6. By: Limbach, Peter; Schmid, Markus; Scholz, Meik
    Abstract: This paper studies the trade-off between the benefits (e.g., experience, learning) and costs (e.g., CEO-firm mismatch, entrenchment) that arise over a CEO’s time in office. We find that CEO tenure exhibits an inverted U-shaped relation with firm value, profitability, and M&A announcement returns. Results stand various robustness tests including alternative explanations and CEO-firm fixed effects. For the average S&P 1500 firm the costs of tenure start to outweigh the benefits after about 12 years. Optimal CEO tenure, however, varies significantly depending on a firm’s economic environment that determines the cost-benefit relation of tenure. Results from sudden deaths, used to address endogeneity, confirm that high-tenure CEOs reduce shareholder value. While this study suggests that frequent CEO turnover can be valuable, it does not support a one-size-fits-all policy of CEO term limits.
    Keywords: CEO term limits, economic environment, firm value, mergers and acquisitions
    JEL: G30 G34 J24
    Date: 2015–07
  7. By: Sören Radde; Cristina Checherita-Westphal; Wei Cui;
    Abstract: Banks in the euro area typically hold a large amount of government debt in their bond portfolios, which are valued both for their low credit risk and high liquidity. During the sovereign debt crisis, these characteristics of government debt were severely impaired in stressed euro area countries. In order to understand the transmission channels of stress from government debt markets to the real economy, we augment a standard dynamic macroeconomic model with a banking sector and a market for government debt characterized by search frictions. A sovereign solvency shock modelled as a haircut on government bonds is introduced to study the interaction of sovereign credit and liquidity risk. As banks react to this shock by rebalancing towards highly liquid short-run assets, such as central bank deposits, demand for government bonds collapses, which endogenously worsens their market liquidity. Thus, a sovereign liquidity risk channel from government bond markets to the real sector emerges. Endogenous government bond liquidity negatively affects the funding conditions of the fiscal sector, tightens financing constraints in the banking sector and lowers investment and output. The model is able to match a number of stylised facts regarding the behaviour of sovereign debt markets during the euro area sovereign debt crisis, such as depressed turnover rates and rising bid-ask spreads.
    Keywords: liquidity frictions; search; sovereign risk channel; sovereign-bank nexus
    JEL: G12 E41 E44 E63
    Date: 2015–07
  8. By: Olena Havrylchyk; Rafal Kierzenkowski
    Abstract: The banking sector in the United Kingdom (UK) was deeply affected by the crisis. Bank credit has collapsed reflecting both weak demand and tighter supply. New prudential requirements have improved the resilience of the banking sector and a number of measures were taken to support credit supply. These included conventional and unconventional monetary policies, policies to address credit constraints with Help to Buy and Funding for Lending programmes, and a number of public programmes to improve access to finance united under the roof of the British Business Bank. Further structural reforms are needed to improve competition in the SME credit market and to boost credit provision to SMEs in the medium term. Sustainable financing of the economy and greater financial stability should be achieved by sound regulation, ensuring high capital requirements for systemically important banks, improving banks’ resolvability and fine-tuning the use of countercyclical measures. Data should be collected on a wider set of financial institutions than currently done and macroprudential regulation should be gradually extended beyond the banking sector to prevent the migration of systemic risks. This Working Paper relates to the 2015 OECD Economic Survey of the United Kingdom (<P>Renforcer le financement de l'économie réelle et la stabilité financière au Royaume-Uni<BR>Le secteur bancaire du Royaume-Uni a été profondément touché par la crise. Les concours bancaires ont chuté, sous l’effet de la faiblesse de la demande aussi bien que des restrictions de l’offre. Les nouvelles obligations prudentielles ont cependant amélioré la résilience du secteur bancaire, et les pouvoirs publics ont pris un certain nombre de mesures pour soutenir l’offre de crédit, parmi lesquelles des mesures de politique monétaire conventionnelles et non conventionnelles, des mesures visant à alléger les contraintes pesant sur l’accès au crédit grâce aux programmes Help to Buy et Funding for Lending, ainsi que plusieurs programmes publics destinés à assouplir le crédit aux entreprises, regroupés sous l’égide de la British Business Bank. D’autres réformes structurelles sont nécessaires pour améliorer la concurrence sur le marché du crédit aux PME et stimuler les concours aux petites et moyennes entreprises à moyen terme. Il faudrait parvenir à assurer un financement durable de l’économie et une plus grande stabilité financière par l’adoption d’une réglementation solide, l’imposition de normes d’adéquation des fonds propres aux banques d’importance systémique, l’amélioration des possibilités résolution en cas de difficultés et d’affiner le recours aux mesures contra-cycliques. Il conviendrait aussi de recueillir des données portant sur un nombre d’institutions financières plus grand que ce qui est actuellement fait, et la réglementation macroprudentielle devrait être progressivement élargie au-delà du secteur bancaire afin de prévenir la diffusion des risques systémiques. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Royaume-Uni, 2015 ( JEL classification: G21, G28, D14, D24
    Keywords: house prices, banks, capital, household, mortgages, deleveraging, financial stability, SMEs
    JEL: D14 D24 G21 G28
    Date: 2015–07–09
  9. By: Piotr Lis (Department of Economic and Local Government Policy, Poznan University of Economics)
    Abstract: This study identifies the channels of impulse transmission from housing markets to the economy. Particular attention is paid to house prices, housing investments, the wealth effect and the financial accelerator. Furthermore, the author proves that the interior changes on the housing market occur earlier than the changes in the transactional prices of dwellings. This phenomenon results among all from the downward rigidity of prices. That is why, housing cycles should be identified as quantitative cycles rather than price cycles. In this approach, the author highlights the extended ascending phases of housing markets as particularly hazardous for the economy. Such extended ascending phases lead to abrupt and deep descending phases which, in turn, cause an economic slowdown and serious problems of the financial sector. Furthermore, the author of the study proves that financial markets cause the ascending phases of a housing cycle to extend. For that reason, this work offers an analysis of the development of the financial system in Europe conducted in comparison with global conditions, indication of the key determinants of this development, identification of housing investment finance mechanisms together with the assessment of the impact of these mechanisms on housing cycles. The sources of refinancing housing loans (mortgages) have been considered to be the main criterion differentiating the influence of the financial system on the housing sphere.
    Keywords: housing, housing finance, housing policy, housing cycles, housing boom
    JEL: R21 R28 R31 R38 G12 G21
    Date: 2015–02–01
  10. By: Alves, Paulo
    Abstract: This paper analyses the determinants of expenses from 2007 to 2012 in the Portuguese funds industry. The main contribution is to consider mutual funds and real estate funds simultaneously, particularly the latter, generally created according to customer’s needs, usually for tax reasons. The results confirm the specificity of mutual funds and real estate funds. In the first, expenses are higher on funds composed by shares, derivatives and a large number of assets. In the second, expenses are lower on closed-end funds. In this case, it seems that customers are willing to pay a small fee for tax reasons once their management does not require a special skill. We did not find an evident relationship between expenses and the fund net asset value for both categories of collective schemes. The same occurs between expenses and fund´s performance.
    Keywords: Fees; Real Estate Funds; Mutual Funds
    JEL: G23
    Date: 2015–07–10
  11. By: Sergio Lagoa (Instituto Universitário de Lisboa – ISCTE and Dinamia’CET-IUL)
    Abstract: In this paper we review the country experiences of eight national European microfinance markets in order to study the impact of different types of financial institutions in the supply of financial services. Our study shows that national differences are large and the most important institutions are distinct in each country. The general economic environment affects the development of microfinance, and there is some substitutability between the formal banking sector and the microcredit sector. Nevertheless, the collaboration of Microfinance Institutions (MFIs) with banks (commercial banks and savings banks) and the participation of banks in the microcredit sector is a factor that enhances the growth of the market. The public sector, the non-for-profit MFIs, savings banks, cooperative banks, and CUs are one of the main drivers of growth in the microcredit sector. However, there is a large dependence of institutions on public funds, and they may not be able to sustain their activities if these funds cease. An increase of institutions’ specialisation and dimension are important steps to improve their financial sustainability. Local presence through a network of branches seems to be important for MFIs success. Local knowledge can also be achieved by collaborating with social support institutions that help to reduce operational costs and screen and support clients.
    Keywords: microfinance, financial institutions
    JEL: G21
    Date: 2014–11–01
  12. By: Roberto Marfè
    Abstract: The recent empirical evidence of a downward sloping term structure of equity risk is viewed as a challenge to many leading asset pricing models. This paper analytically characterizes conditions under which a continuous-time long-run risk model can accommodate the stylized facts about dividend and equity risk, when dividends are a stationary stochastic fraction of aggregate consumption. Such a cointegrating relation makes dividends riskier in the short-run than at medium horizons but also preserves the role of long-run risk: consequently, the model captures both the traditional puzzles, like the high equity premium, as well as the new evidence about the term structure of equity risk.
    JEL: C62 D51 D53 G12 G13
    Date: 2015
  13. By: Miguel Sarmiento; Jorge E. Galán
    Abstract: We present a stochastic frontier model with random inefficiency parameters which is able to capture the influence of risk-taking on bank efficiency and that distingues those effects among banks with different characteristics. Cost and profit efficiency are found to be over- and underestimated when risk measures are not accurately modeled. We find that more capitalized banks are more cost and profit efficient, while banks assuming more credit risk are less cost efficient but more profit efficient. The magnitude of these effects vary with bank’s size and affiliation. Liquidity is found to affect cost efficiency only for domestic banks. Large and foreign banks benefit more from higher credit and market risk exposures, while small and domestic banks find more advantageous to be more capitalized. We identify some channels that explain these differences and provide insights for macroprudential regulation.
    Keywords: Bank Efficiency, Bayesian Inference, Heterogeneity, Random Parameters, Risk-Taking, Stochastic Frontier Models.
    JEL: C11 C23 C51 D24 G21 G32
    Date: 2015–07–09
  14. By: Hamid Raza (University of Limerick); Bjorn Gudmundsson (University of Iceland); Stephen Kinsella (University of Limerick); Gylfi Zoega (University of Iceland)
    Abstract: We examine the macroeconomic factors associated with financialisation in Ireland and Iceland from the perspective of international capital flows. To understand financialisation in the two countries we construct three ARDL models using three aspects of financialisation: financial depth, credit growth and deposit liabilities of the financial sector. Focusing on the current account, we find that financialisation is associated with an increase in foreign rentiers’ profit due to excessive international borrowing. Our measures of financialisation indicate that trade openness, also a measure of globalisation, has a negative relationship with financialisation in Iceland, while in Ireland the relationship is positive. Our results also suggest that both countries experienced an increase in the wage share along with rapidly increasing household debt in Ireland and increasing non financial corporate debt in Iceland. We conclude that institutional differences played a vital role in the solutions to the crises which destabilised the economies of Ireland and Iceland. We use the institutional differences between the two economies and suggest policy prescriptions to limit the scale and scope of similar crises in small open economies.
    Keywords: Ireland, Iceland, Financialisation.
    JEL: G32
    Date: 2015–01–01
  15. By: Manuel Adelino; Antoinette Schoar; Felipe Severino
    Abstract: This paper addresses two critiques by Mian and Sufi (2015a, 2015b) that were released in response to the results documented in Adelino, Schoar and Severino (2015). We confirm that none of the results in our previous paper are affected by the issues put forward in these critiques; in particular income overstatement does not drive any of our results. Our analysis shows that the origination of purchase mortgages increased across the whole income distribution during the 2002-2006 housing boom, and did not flow disproportionately to low-income borrowers. In addition, middle- and high-income, as well as middle- and high-credit-score borrowers (not the poor), represent a larger fraction of delinquencies in the crisis relative to earlier periods. The results are inconsistent with the idea that distortions in the origination of credit caused the housing boom and the crisis and are more consistent with an expectations-based view where both home buyers and lenders were buying into increasing housing values and defaulted once prices dropped.
    JEL: D30 G21 R30
    Date: 2015–07

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