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on Corporate Finance |
| By: | Xavier Freixas; Kebin Ma |
| Abstract: | This paper re-examines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. We show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on a bank’s type of funding (retail deposits vs. wholesale debts) and whether leverage is exogenous or endogenous. In particular, we argue that while competition might increase financial stability in a classical originate-to-hold banking industry, the opposite can be true for an originate-to-distribute banking industry with a large fraction of market short-term funding. |
| Keywords: | banking competition, financial stability, leverage |
| JEL: | G21 G28 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:874&r=cfn |
| By: | Demirgüç-Kunt, A.; Horváth, Bálint (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research) |
| Abstract: | In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. |
| Keywords: | debt maturity; finanical dependence; firm volatiliy; financial development |
| JEL: | G20 G32 O16 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:59312b2d-3418-4a1c-be24-49f1825cc552&r=cfn |
| By: | Stephanie Chan (University of Amsterdam, the Netherlands); Sweder van Wijnbergen (University of Amsterdam, the Netherlands) |
| Abstract: | We highlight the ex ante risk-shifting incentives faced by a bank's shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo's conversion under CoCo designs widely used in practice. Specifically we show that for principal writedown and nondilutive equity-converting CoCos, shareholders/managers have an incentive to take on more risk to make conversion more likely because of those wealth transfers. As a consequence, wide spread use of CoCos will increase systemic fragility. We show that such improperly designed CoCos should not be allowed to fill in loss absorption capacity requirements unless accompanied by higher required equity ratios to mitigate the increased risk taking incentives they lead to. Sufficiently dilutive CoCos do not lead to undesired risk taking behavior. |
| Keywords: | Contingent Convertible Capital, Systemic Risk, Risk Shifting Incentives, Capital Requirements |
| JEL: | G01 G13 G21 G28 G32 |
| Date: | 2016–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160007&r=cfn |
| By: | Dessaint, Olivier; Foucault, Thierry; Frésard, Laurent; Matray, Adrien |
| Abstract: | Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers, as predicted by a model in which managers rely on stock prices as a source of information but cannot perfectly filter out noise in prices. The model also implies the response of investment to noise in peers' stock prices should be stronger when these prices are more informative, and weaker when managers are better informed. We find support for these predictions. Overall, our results highlight a new channel through which non-fundamental shocks to the stock prices of some firms influence real decisions of other firms. |
| Keywords: | informational efficiency; investment; learning; noise |
| JEL: | G14 G31 G32 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11081&r=cfn |
| By: | Adrian, Tobias; Friedman, Evan; Muir, Tyler |
| Abstract: | Standard factor pricing models do not capture the common time series or cross sectional variation in average returns of financial stocks well. We propose a five factor asset pricing model that complements the standard Fama-French (1993) three factor model with a financial sector ROE factor (FROE) and the spread between the financial sector and the market return (SPREAD). This five factor model helps to alleviate the pricing anomalies for financial sector stocks and also performs well for nonfinancial sector stocks when compared to the Fama-French (2014) five factor or the Hou, Xue, Zhang (2014) four factor models. We find the aggregate expected return to financial sector equities to correlate negatively with aggregate financial sector ROE, which is puzzling, as ROE is commonly used as a measure of the cost of capital in the financial sector. |
| Keywords: | asset pricing; cost of capital; financial intermediation |
| JEL: | G12 G21 G24 G31 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11031&r=cfn |
| By: | Foucault, Thierry; Frésard, Laurent |
| Abstract: | We show that managers can raise firm value by imitating other public firms' strategies because imitation enhances their ability to obtain information from their own stock price or their peers' stock prices, which improves the efficiency of their investment decisions. This conformity effect is stronger for private firms' managers because they can learn information from stock prices only if they imitate public firms' strategies. In line with this prediction, we observe empirically that firms differentiate more after going public and that this pattern is stronger for firms with better informed managers or whose peers have less informative stock prices. |
| Keywords: | Managerial Learning; Peers; Product Differentiation; Stock price Informativeness |
| JEL: | D21 D83 G31 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11073&r=cfn |
| By: | Dicks, David; Fulghieri, Paolo |
| Abstract: | We develop a theory of innovation waves, investor sentiment, and merger activity based on uncertainty aversion. Investors must typically decide whether or not to fund an innovative project with very limited knowledge of the odds of success, a situation that is best described as "Knightian uncertainty." We show that uncertainty-averse investors are more optimistic on an innovation if they can also make contemporaneous investments in other innovative ventures. This means that uncertainty aversion makes investment in innovative projects strategic complements, which results in innovation waves. We also show that innovation waves may be sparked by favorable technological shocks in one sector, and then spill over to other contiguous sectors. Thus, innovation waves ripple through the economy amid strong investor sentiment. Finally, we argue that an active M&A market promotes innovative activity and leads to greater innovation rates and firm valuations. |
| Keywords: | ambiguity aversion; hot IPO markets; innovation |
| JEL: | G31 G32 G34 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11082&r=cfn |
| By: | Ahn, Jung-Hyun (NEOMA Business School); Bignon, Vincent (Banque de France); Breton, Régis (Banque de France); Martin, Antoine (Federal Reserve Bank of New York) |
| Abstract: | We develop a model in which financial intermediaries hold liquidity to protect themselves from shocks. Depending on parameter values, banks may choose to hold too much or too little liquidity on aggregate compared with the socially optimal amount. The model endogenously generates a situation of cash hoarding, leading to the associated market freezes or underinsurance against liquidity choice. The model therefore provides a unified framework for thinking, on the one hand, about policy measures that can reduce hoarding of cash by banks and, on the other hand, about liquidity requirements of the type imposed by the new Basel III regulation. In our model, banks hold tradable and nontradable assets. Nontradable assets are subject to a liquidity shock, and an injection of cash is required for the asset to mature if it is hit by the shock. Banks have access to an interbank market on which they obtain cash against their tradable securities. The quantity of cash obtained on this market is determined endogenously by the market value of the tradable assets and is subject to cash-in-the-market pricing. Banks holding an asset that turns out to be bad may be constrained on the interbank market and therefore may have to interrupt their nontradable project. |
| Keywords: | money market; liquidity regulation; nonconventional monetary policy; cash-in-the-market pricing |
| JEL: | E58 G21 G28 |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:763&r=cfn |
| By: | Nicolas Houy (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Frédéric Jouneau (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | In this paper, we use the axioms introduced in Eisenberg and Noe (2001) and Rogers and Veraart (2013) and study their consequences in terms of optimal sets of defaulting firms. We show that, from this point of view, the Absolute Priority axiom is not independent. We also show that the optimal sets of defaulting firms characterized in Eisenberg and Noe (2001) are still optimal when the Limited Payment axiom, implicit in Eisenberg and Noe (2001), is further removed. However, some other optimal sets of defaulting firms appear in this case. Finally, with the help of counterexamples, we show that no further weakening in the set of axioms considered can lead to positive results. |
| Keywords: | Credit Risks, Systemic Risks, Clearing Systems, Financial System |
| JEL: | G21 G32 G33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1606&r=cfn |
| By: | Ljungqvist, Alexander P.; Persson, Lars; Tåg, Joacim |
| Abstract: | Over the past two decades, private equity has contributed to a shrinking of the U.S. stock market. We develop a political economy model of private equity activity to study the wider economic consequences of this trend. We show that private and social incentives to delist firms from the stock market are not always aligned. Private equity firms could inadvertently impose an externality on the economy by reducing citizen-investors’ exposure to corporate profits and thus undermining popular support for business-friendly policies. This can lead to long-term reductions in aggregate investment, productivity, and employment. |
| Keywords: | delistings; investment; political economy; private equity; productivity; stock market |
| JEL: | G24 G34 P16 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11075&r=cfn |
| By: | Florian Léon (CERDI, Université de Clermont-Ferrand); Laurent Weill (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | The recent expansion of Islamic banks raises questions on its economic implications. The aim of this paper is to investigate the impact of Islamic banking development on access to credit. We combine data from a unique hand-collected database that covers Islamic banks over the period of 2000 to 2005 with firm-level data covering developing and emerging countries. We find that Islamic banking development has overall no impact on credit constraints, while banking development and conventional banking development alleviate obstacles to financing. However Islamic banking development exerts a positive impact on access to credit when conventional banking development is low. Hence we support the view that Islamic banking does not overall alleviate obstacles to financing, but it can act as substitute to conventional banking. |
| Keywords: | Islamic finance, access to credit, credit constraints. |
| JEL: | G21 O16 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2016-02&r=cfn |
| By: | Assienin Kouakou (LFC-R - Laboratoire des Fluides Complexes et leurs Réservoirs - UPPA - Université de Pau et des Pays de l'Adour - Total - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This research aims to analyze the impact of the operational risk management on the performance of the non-financial enterprises in Côte d’Ivoire. On a sample of 70 non-financial enterprises with a rate of answer 63%, we collected the information on the risk management of these enterprises from a questionnaire and completed these information by data descended of the financial data bank. The financial performance has been measured by ROE and the EBITDA. The analyses led on the introverted data drive to the following results: the risks culture and the endowments to the amortizations and stores have a positive impact on the ROE and the EBITDA, while the reserves and the protection contractual influence negatively the ROE and the EBITDA. |
| Abstract: | Cette étude vise à analyser l’impact de la gestion des risques opérationnels sur la performance des entreprises non financière en Côte d’Ivoire. Sur un échantillon de 70 entreprises non financières avec un taux de réponse de 63%, nous avons collecté les informations sur la gestion des risques de ces entreprises à partir d’un questionnaire et complété ces informations par des données issues de la banque des données financières. La performance financière a été mesurée par ROE et l’EBE. Les analyses menées sur les données recueillies conduisent aux résultats suivants : la culture risque et les dotations aux amortissements et provisions ont un impact positif sur le ROE et l’EBE, tandis que les réserves et la protection contractuelle impactent négativement le ROE et l’EBE. |
| Keywords: | Risk - Management of the risks - operational risk Management – Performance,Risque - Gestion des risques – Gestion des risques opérationnels-Performance |
| Date: | 2016–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01252493&r=cfn |
| By: | Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | I study the impact of bank loan renegotiation on the design of financial contracts. Debt renegotiation can be beneficial for borrowers and lenders but its impact on the design of financial contracts is less clear. However, contract design is crucial for borrower’s investment, operating and financing policies. I find that the design of renegotiated credit agreements is not homogenous. Main renegotiation packages contain amendments to loan amount and maturity. I show that secured loans with longer maturities experience broader amendments. Creditors’ friendly environment and the presence of reputable, sound, and profitable lenders have a similar effect. |
| Keywords: | financial contracts design, bank loans, debt renegotiation. |
| JEL: | G10 G21 G24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2016-03&r=cfn |