nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒01‒03
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Future of Large, Internationally Active Banks: Does Scale Define the Winners? By Joseph P. Hughes; Loretta J. Mester
  2. Nonconsolidated subsidiaries, bank capitalization and risk taking By Gong, Di; Huizinga, Harry; Laeven, Luc
  3. Assessing Mandated Credit Programs: Case Study of the Magna Carta in the Philippines By Khor, Niny; Jacildo, Ryan; Tacneng, Ruth
  4. Salience of debt and homebuyers' credit decisions By Sumit Agarwal; Artashes Karapetyan
  5. The relation between sovereign credit default swap premium and banking sector risk in Poland By Åukasz GÄ…tarek; Marcin Wojtowicz
  6. Pay Schemes, Bargaining, and Competition for Talent By Lindbeck, Assar; Weibull, Jörgen
  7. Anchoring and Adjustment Heuristic in Option Pricing By Siddiqi, Hammad
  8. The Competitive Effects of a Bank Megamerger on Access to Credit By H. Fraisse; J. Hombert; M. Le
  9. Insurance activities and systemic risk By Berdin, Elia; Sottocornolay, Matteo
  10. Capital Supply Channel through Venture Capitals: Evidence from matched data By MIYAKAWA Daisuke; TAKIZAWA Miho
  11. The Impact of Board Internationalization on Earnings Management By Hooghiemstra, Reggy; Hermes, Niels; Oxelheim, Lars; Randøy, Trond

  1. By: Joseph P. Hughes (Rutgers University); Loretta J. Mester (Federal Reserve Bank of Cleveland and The Wharton School, University of Pennsylvania)
    Abstract: Our research as well as that by other authors has found scale economies at all sizes of banks and the largest scale economies at the largest banks – that is, larger banks are able to provide products at lower average cost than smaller banks. While the earlier literature found that scale economies are exhausted beyond a modest size – no larger than $100 billion and usually much smaller – a number of recent studies have found scale economies beyond this point, in fact, economies that increase with size. Based on a model that appropriately accounts for endogenous risk-taking and controls for any cost-of-funding advantages conferred on large banks, we find that technological factors, not advantages in funding costs, account for their scale economies. The literature does not indicate whether these benefits of larger size outweigh the potential costs in terms of systemic risk that large scale may impose on the financial system. However, if public policy considerations imply that society would be better off with smaller financial institutions, restrictions that limit the size of financial institutions, if effective, may put large banks at a competitive disadvantage in global markets where competitors are not similarly constrained. Moreover, size restrictions may not be effective since they work against market forces and create incentives for firms to avoid them. Avoiding the restrictions could thereby push risk-taking outside of the more regulated financial sector without necessarily reducing systemic risk. If such limits were imposed, intensive monitoring for such risks would be required. These factors need to be considered when evaluating policies concerning financial institution scale.
    Keywords: banking, efficiency, scale economies, regulation
    JEL: G21 G28
    Date: 2015–12–14
  2. By: Gong, Di; Huizinga, Harry; Laeven, Luc
    Abstract: Bank holding companies may be effectively undercapitalized as a result of incomplete consolidation of minority ownership. Using two approaches -- consolidating the minority-owned subsidiaries into the parent or deducting equity investments in minority ownership from the parent’s capital -- we find that the effective capital ratios of US bank holding companies are substantially lower than the reported ratios. Empirical evidence suggests that the undercapitalization is associated with higher risk taking at the bank holding company level. These findings indicate that incomplete consolidation of minority-owned financial institutions constitutes a loophole in capital regulation.
    Keywords: bank leverage; capital regulation; organizational structure; risk taking; undercapitalization
    JEL: G21 G32
    Date: 2015–12
  3. By: Khor, Niny (Asian Development Bank); Jacildo, Ryan (Consultant at the Economic Research and Regional Cooperation Department, ADB); Tacneng, Ruth (Universidade Catolica Portuguesa)
    Abstract: We examine the effects of a mandated credit program to small and medium enterprises in the Philippines (Magna Carta Law) using a panel dataset compiled from official data published by the Bangko Sentral ng Pilipinas. The final sample of 109 financial institutions represented over 90% of total finance sector assets in the Philippines. We highlight three important findings. First, although the total lending levels to micro, small, and medium enterprises (MSMEs) grew slightly, the percentage shares of loans allocated to MSMEs declined drastically from a peak of 30% of total loans in 2002 to 16.4% in 2010. Second, following the upwards revision of the loan target (from 6% to 8%) for smaller firms in 2008, there was a sharp increase in noncompliance especially amongst universal and commercial banks. Kernel density estimates suggest that the revision of the Magna Carta in 2008 was binding for small firm lending particularly for the universal and commercial banks. On the other hand, total loans to medium enterprises were still more than threefold larger than the targeted 2%. Third, there is an increased heterogeneity in optimal loan portfolio across banks. Most surprisingly, the absolute level of MSME lending by rural and cooperative banks declined since 2008. Direct compliance amongst universal and commercial banks decreased beginning in the late 2007, while that of thrift banks increased to almost 100%. Abolishing the Magna Carta targets for medium-sized enterprise loans would most likely yield little adverse effects. Meanwhile, efforts to improve financial access to MSMEs should focus on alternative nondistortionary ways to increase financing supply, such as improving institutional framework for informational availability and development of equity and bond markets for MSMEs.
    Keywords: financial inclusion; financial markets; financial policy; Philippines; SME; targeted lending
    JEL: G21 G28 O16
    Date: 2015–11–25
  4. By: Sumit Agarwal (National University of Singapore); Artashes Karapetyan (The Central Bank of Norway)
    Abstract: We show that salience of debt has a significant effect on homebuyers' borrowing outcome. In a setting where homebuyers need to combine several sources of debt, we show that they are biased towards less salient loans. The bias brings about a large mispricing in equilibrium: dwellings that are financed with a greater amount of salient debt are cheaper to buy. Matching the transaction data to individual-level administrative data, we show that young homebuyers, first-time homebuyers, and homebuyers with no investments in the financial markets are more likely to overpay for dwellings with hidden debt. We first quantify the effect of the bias on equilibrium prices. We then analyze a regulatory change that made hidden debt more salient and reduced the mispricing considerably, confirming that the lack of salience resulted in biased prices.
    Keywords: Salience, Housing, Cooperatives, Mortgage, Household Finance, Mispricing
    JEL: D12 G14 G21 G32
    Date: 2015–12–24
  5. By: Åukasz GÄ…tarek; Marcin Wojtowicz
    Abstract: We investigate causality between returns on sovereign CDSs and bank equities for Poland between 2004 and 2014 to provide evidence on contagion between sovereign and banking sector risk pricing. We find some evidence of contagion from Polish sovereign CDS returns to bank equity returns during the crisis period. We benchmark the results for Poland against a sample ofWestern European countries. We document strong negative correlation between sovereign CDS and bank equity returns for individual countries as well as strong commonality of both sovereign and banking sector risks across different countries. We do not however find a clear pattern of contagion between these two markets across European countries. To further investigate drivers of CDS and bank equity returns, we conduct principal component analysis and we find that first three principal components explain as much as 97% of variation with the third principal component mostly associated with Polandspecific risk.
    Keywords: Contagion, sovereign CDS, bank equity returns, financial crisis.
    JEL: G01 G12 G14 G19 G21
    Date: 2015
  6. By: Lindbeck, Assar (Research Institute of Industrial Economics (IFN)); Weibull, Jörgen (Department of Economics)
    Abstract: The paper provides a framework for analysis of remuneration to agents whose task is to make well-informed decisions on behalf of a principal, with managers in large corporations as the most prominent example. The principal and agent initially bargain over the pay scheme to the latter. The bargaining outcome depends both on competition for agents and on the relative bargaining power of the two parties, given their outside options, thus allowing for the possibility that the agent may be the current CEO who may have considerable power. Having signed a contract, the agent chooses how much effort to make to acquire information about the project at hand. This information is private and the agent uses it in his subsequent decision whether or not to invest in a given project. In model A the agent’s effort to acquire information is exogenous, whereas in model E it is endogenous. Model A lends no support for other payment schemes than flat salaries is weak. Model E contains a double moral hazard problem; how much information to acquire and what investment decision to make. As a consequence, the equilibrium contracts in model E involve both bonuses and penalties. We identify lower and upper bounds on these, and study how the bonus and bonus rate depend on competition and bargaining power. We also analyze the nature of contracts when the agent is overconfident.
    Keywords: Principal-agent; Investment; Endogenous uncertainty; Contract; Bonus; Penalty
    JEL: D01 D82 D86 G11 G23 G30
    Date: 2015–12–21
  7. By: Siddiqi, Hammad
    Abstract: Based on experimental and anecdotal evidence, an anchoring-adjusted option pricing model is developed in which the volatility of the underlying stock return is used as a starting point that gets adjusted upwards to form expectations about call option volatility. I show that the anchoring price lies within the bounds implied by risk-averse expected utility maximization when there are proportional transaction costs. The anchoring model provides a unified explanation for key option pricing puzzles. Two predictions of the anchoring model are empirically tested and found to be strongly supported with nearly 26 years of options data.
    Keywords: Anchoring, Implied Volatility Skew, Covered Call Writing, Zero-Beta Straddle, Leverage Adjusted Option Returns
    JEL: G02 G12 G13
    Date: 2015–12–30
  8. By: H. Fraisse; J. Hombert; M. Le
    Abstract: This paper examines how the merger between two megabanks affects bank concentration and firms' access to credit. We find that in local markets in which the merger leads to a large increase in bank concentration, the merged bank decreases the supply of credit both to existing firms and to new firms. This reduction in credit supply is offset by non-merging banks which expand lending in markets in which the merging banks reduce lending. In some specifications, the substitution effect is strong enough to make the overall effect on credit supply statistically insignificant. Moreover, the substitution effect is at work even for small borrowers, risky borrowers, and new entrants.
    Keywords: Competition, Bank Lending.
    JEL: L40 G21
    Date: 2015
  9. By: Berdin, Elia; Sottocornolay, Matteo
    Abstract: This paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-a-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
    Keywords: Systemic Risk,Insurance Activities,Systemically Important Financial Institutions
    JEL: G01 G22 G28 G32
    Date: 2015
  10. By: MIYAKAWA Daisuke; TAKIZAWA Miho
    Abstract: This paper examines the impact of venture capital firms' (VCs) characteristics on their capital (i.e., fund) supply and how such an impact interacts with the dynamics of public equity markets. To this end, we use a unique dataset consisting of around 6,000 pairs of venture companies and VCs match-level dataset in Japan, which covers around 2,600 unlisted companies and 600 VCs. This match-level panel dataset allows us to control for companies' time-varying unobservable capital demand, so that we can identify the effects of VCs' characteristics on their capital supply and how such effects vary as public equity markets fluctuate. The estimation results indicate that VCs with larger past investment experiences tend to supply more capital to their portfolio companies. Furthermore, such positive impact of VCs' experience on the capital supply became larger (smaller) when public equity markets were in their downturn (upturn). We also confirm that omitting firms' fund demand leads to substantial overestimation of these impacts.
    Date: 2015–12
  11. By: Hooghiemstra, Reggy (Faculty of Economics and Business); Hermes, Niels (Faculty of Economics and Business); Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Randøy, Trond (School of Law and Business)
    Abstract: Prior literature shows that choices regarding board composition are associated with earnings management. We add to this literature by examining the effects of the presence of a foreign board member on earnings management. Using a sample of 3,249 firm-year observations representing 586 non-financial listed Nordic firms during 2001–2008, we find that the presence of a non-Nordic, foreign director is associated with significantly higher levels of earnings management. Moreover, we provide preliminary evidence that differences in accounting knowledge drive this effect. Our results suggest that it may not necessarily be beneficial to appoint a foreign director to the board.
    Keywords: Earnings management; Board composition; Internationalization; Foreign board member; Accounting knowledge
    JEL: G34 M16 M41 M52
    Date: 2015–12–03

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