nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒02‒23
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Fishing the Corporate Social Responsibility Risk Factors By Leonardo Becchetti; Rocco Ciciretti; Ambrogio D'Alò
  2. Equity premium prediction: Are economic and technical indicators instable? By Baetje, Fabian; Menkhoff, Lukas
  3. Can we prove a bank guilty of creating systemic risk?: a minority report By Jon Danielsson; Kevin R. James; Marcela Valenzuela; Ilknur Zer
  4. Risk attitudes in company boardrooms in a developing country By Bodeutsch, D.S.; Franses, Ph.H.B.F.
  5. Governance and Short Sales By Daniel Dupuis; Lawrence Kryzanowski
  6. Evaluating Minimum-Traffic Guarantees for PPPs in Turkey by Real-Option Pricing By Ilker Ersegun Kayhan; Glenn P. Jenkins
  7. Does Insurance Development Affect the Financial Markets in developing countries? By Samuel GUERINEAU; Relwende SAWADOGO
  8. Do initial financial conditions determine the fate of start-up firms? By Yuji Honjo; Masatoshi Kato
  9. Venture Capital and Knowledge Transfer By Dessí, Roberta; Yin, Nina
  10. The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement By Christian M. McNamara; Andrew Metrick
  11. Optimal Leverage and Strategic Disclosure By Trigilia , Giulio

  1. By: Leonardo Becchetti (DEF & CEIS,University of Rome "Tor Vergata"); Rocco Ciciretti (DEF & CEIS, University of Rome "Tor Vergata"); Ambrogio D'Alò (University of Rome "Tor Vergata")
    Abstract: Corporate Social Responsibility (CSR) is an increasingly relevant aspect in the current economic and financial scenario. A typical argument in the literature is that CSR reduces the risk of conflicts with stakeholders. In this paper we test whether: i) CSR risk factors are uncorrelated with those traditionally considered, ii) exist a pricing anomaly related to a social responsible behavior that could be captured by CSR risk factors, and iii) a multifactor model that includes a CSR risk factor performs better in explaining the cross section of expected returns. Our finding documents that CSR risk factors are uncorrelated with those traditionally used by asset pricing literature. We find that large stocks are more exposed than small stocks to this source of risk and that, even if the pricing anomaly is still significant, an asset pricing model augmented with a CSR risk factor performs better than standard models in explaining the cross section of stock returns.
    Keywords: corporate social responsibility, risk factor, multi factor model.
    JEL: G12 C51
    Date: 2016–02–10
  2. By: Baetje, Fabian; Menkhoff, Lukas
    Abstract: We show that technical indicators deliver economic value in predicting the U.S. equity premium. A crucial element of this value stems from the stability of return predictability over the full sample period from 1950 to 2013. Results tentatively improve over time and beat alternatives over sub-periods. By contrast, economic indicators work well only until the 1970s, thereafter they lose predictive power, even when the last crisis is considered. Translating the predictive power of technical indicators into a standard investment strategy delivers an average Sharpe Ratio of 0.6 p.a. for investors who had entered the market at any point in time.
    Keywords: equity premium predictability,economic indicators,technical indicators,break tests
    JEL: G17 G12
    Date: 2015
  3. By: Jon Danielsson; Kevin R. James; Marcela Valenzuela; Ilknur Zer
    Abstract: Since increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.
    Keywords: Systemic risk; macroprudential policy; financial stability; risk management
    JEL: G32 F3 G3
    Date: 2015–09
  4. By: Bodeutsch, D.S.; Franses, Ph.H.B.F.
    Abstract: __Abstract__ We test risk attitude and risk propensity of executive and non-executive directors of almost all (read: 10) companies listed at the Suriname Stock Exchange. This stock exchange associates with an emerging market, which currently seems to be at its initial stage. With a personalized survey we collect data for 13 members in the board room. The sample size is small as the population is small, but still we can test various hypotheses that are put forward in the literature. Our main finding is that the differences between risk attitudes of board members of companies in a developing country do not differ tremendously from those of board members in developed countries.
    Keywords: Risk, Risk attitude, Top executives, Developing country
    JEL: G11 G32 O16
    Date: 2015–01–01
  5. By: Daniel Dupuis; Lawrence Kryzanowski
    Abstract: This paper investigates the relationship between short sales and governance. We argue that short sales are reversely linked to the overall level of corporate governance of a firm and that sellers react contemporaneously to changes in such governance. Our results show that short traders may also be able to forecast or influence changes in corporate governance and adjust their portfolios accordingly prior to the said changes. This reaction is asymmetric, with a pronounced increase in short positions for actual and anticipated negative changes in governance and a more subdued repurchase of shorted stock for positive expectations. We provide empirical evidence consistent with the notion that short sellers are informed investors and can generate a profit from corporate events by using analytical prowess or manipulative practices such as the record-date capture technique.
    Keywords: Short sales, corporate governance
    JEL: D53 G11 G14 G30 G34
  6. By: Ilker Ersegun Kayhan (Chevening/Abdullah Gül Research Fellow, Oxford Center for Islamic Studies, University of Oxford); Glenn P. Jenkins (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus)
    Abstract: Minimum-traffic guarantees for build-operate-transfer toll-road projects are contingent liabilities that expose government to fiscal risk. Therefore, public authorities must value guarantees, thereby enabling informed decision-making about the level and type of guarantee provision. This study demonstrates the use of financial modeling and risk analysis in a toll-road project in Turkey, contributing to the narrowing of a capacity gap in the field. We present three types of guarantee, modeled as real options and evaluated by Monte Carlo simulation. We identify one criterion to determine the optimum level of guarantee for a given project, and one criterion to measure the extent to which a guarantee will reduce risk. Based on these and other complementary criteria, it is proposed that the guarantee with income ceiling is the most appropriate for the project considered here. The paper concludes with a discussion of the policy implications of the findings.
    Keywords: Contingent liabilities, government guarantees, real options, cost-benefit analysis, public-private partnerships, infrastructure, Turkey.
    JEL: G13 D61 H54 L33
    Date: 2016–02
  7. By: Samuel GUERINEAU (Centre d'Etudes et de Recherches sur le Développement International(CERDI)); Relwende SAWADOGO
    Abstract: This paper investigates the impact of insurance premiums on stock market development in 37 developing countries over the period 1987-2011. By controlling for the potential endogeneity bias, using the System GMM estimator, we show that the insurance premiums significantly increase the stock market total value traded. This result is robust to the use of alternative measure of stock market development and control of the political and legal system quality. In addition, the results highlight that an improvement in property rights promotes the deepening of the financial market. Thus, the results argue for insurance policies promoting and an improvement of the legal environment to benefit from the financial market development.
    Keywords: Stock market, Insurance Premiums, developing countries
    JEL: G22 G10
    Date: 2015–06
  8. By: Yuji Honjo (Faculty of Commerce, Chuo University); Masatoshi Kato (School of Economics, Kwansei Gakuin University)
    Abstract: Using a survival analysis approach, this paper investigates the impact of initial financial conditions on the post-entry performance of firms. We examine whether initial financial conditions affect the duration of survival among start-up firms in Japan, distinguishing between failure and merger. We provide evidence that start-up firms that rely more on equity than debt financing are less likely to fail within a shorter period, but we find little evidence that initial equity size has a significant effect on the likelihood of failure. Moreover, we find the negative effect of equity financing on the likelihood of failure to be greater for start-up firms founded following the abolition of regulations governing a minimum paid-in capital requirement. Furthermore, the results reveal that start-up firms with larger initial equity are more likely to exit through merger. Overall, the findings suggest that initial capital structure is a critical determinant of exit route.
    Keywords: Business failure, Competing risk, Equity financing, Initial financial conditions, Merger
    JEL: C24 G32 M13
    Date: 2016–01
  9. By: Dessí, Roberta; Yin, Nina
    Abstract: This paper explores a new role for venture capitalists, as knowledge intermediaries. A venture capital investor can communicate valuable knowledge to an entrepreneur, facilitating innovation. The venture capitalist can also communicate the entrepreneur's innovative knowledge to other portfolio companies. We study the costs and benefits of these two forms of knowledge transfer, and their implications for investment, innovation, and product market competition. The model also sheds light on the choice between venture capital and other forms of finance, and the determinants of the decision to seek patent protection for innovations. Our analysis provides a rationale for the use of contingencies (specifically, patent approval) in VC contracts documented by Kaplan and Stromberg (2003), and for recent evidence on patterns of syndication among venture capitalists.
    Keywords: competition; contracts; innovation; knowledge intermediaries; patents; venture capital
    JEL: D82 D86 G24 L22
    Date: 2015–02
  10. By: Christian M. McNamara; Andrew Metrick
    Abstract: When Lehman Brothers Holdings, Inc. (LBHI) sought Chapter 11 protection, the more than 6,000 counterparties with which its subsidiaries had entered into over 900,000 over-the-counter (OTC) derivatives transactions faced the question of how best to respond to protect their interests. The existence of standardized documentation developed by the International Swaps and Derivatives Association (ISDA) for entering into such transactions meant that the counterparties likely thought that they were dealing with a well defined and robust set of options in answering this question.  Yet, in practice, the resolution of Lehman’s OTC derivatives portfolio ended up being less orderly than the existence of standardized documentation might have suggested it would be. This case explores: (1) whether the default provisions contained in the Master Agreement played any meaningful role in Lehman Brothers’ bankruptcy and its outcome, (2) whether changes should be made to the Master Agreement to reduce the systemic risk associated with derivatives transactions, and (3) how attempts to create global certainty through the use of standardized agreements can be thwarted by the operation of local laws.
    Keywords: Systemic Risk, Financial Crises, Financial Regulation
    JEL: G01 G28
    Date: 2014–11
  11. By: Trigilia , Giulio (Department of Economics, University of Warwick)
    Abstract: Firms seeking external financing jointly choose what securities to issue, and the extent of their disclosure commitments. The literature shows that enhanced disclosure reduces the cost of financing. This paper analyses how disclosure affects the optimal composition of financing means. It considers a market where firms compete for external financing under costly-state-verification, but, in contrast to the standard model: (i) the degree of asymmetric information between firms and outside investors is variable, and (ii) firms can affect it through a disclosure policy, modeled as a verifiable signal with a cost decreasing in its noise component. Two central predictions emerge.
    Keywords: leverage, costly-state-verification, disclosure, asymmetric information, capital requirements, financial regulation, optimal contracting
    JEL: D82 G21 G32 G38
    Date: 2016

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