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on Corporate Finance |
| By: | Curti, Filippo (Federal Reserve Bank of Richmond); Migueis, Marco (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Operational risk models, such as the loss distribution approach, frequently use past internal losses to forecast operational loss exposure. However, the ability of past losses to predict exposure, particularly tail exposure, has not been thoroughly examined in the literature. In this paper, we test whether simple metrics derived from past loss experience are predictive of future tail operational loss exposure using quantile regression. We find evidence that past losses are predictive of future exposure, particularly metrics related to loss frequency. |
| Keywords: | Operational risk; quantile regression; tail risk |
| JEL: | G21 G28 G32 |
| Date: | 2016–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-02&r=cfn |
| By: | Chang, C-L.; Jiménez-Martín, J.A.; McAleer, M.J.; Pérez-Amaral, T. |
| Abstract: | __Abstract__ The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee. |
| Keywords: | Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2015–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:78155&r=cfn |
| By: | Bellucci, Andrea; Borisov, Alexander; Giombini, Germana; Zazzaro, Alberto |
| 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: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:hit:remfce:21&r=cfn |
| By: | Sengupta, Rajeswari; Sharma, Anjali |
| Abstract: | In this paper we analyse the corporate insolvency resolution procedures of India, UK and Singapore within a common framework of well-specified principles. India at present lacks a single, comprehensive law that addresses all aspects of insolvency of a firm. It has a multiple laws, regulations and adjudication fora, each of which have created opportunities for debtor firms to exploit the arbitrage between these to frustrate recovery efforts of creditors. This adversely affets the resolution process, the time to recovery and the value recovered. The importance of a comprehensive, well-functioning insolvency resolution framework has been documented in literature. In India, the Bankruptcy Law Reforms Committee (BLRC) was constituted in 2014 with the objective of proposing a comprehensive framework for resolving the insolvency of firms and individuals. We undertake a comparison of the corporate insolvency resolution framework in UK, Singapore and India, with the underlying motivation to highlight the similarities and differences across the laws, procedures and institutional context of the three countries. The objective of this comparison is to draw lessons for the Indian reform process, in context of the formation of the BLRC. The BLRC has recently proposed an Insolvency and Bankruptcy Bill (IBB) which has been presented in Parliament and is currently being deliberated upon by a Joint Parliamentary Committee. |
| Keywords: | Resolving insolvency, Liquidation, Reorganisation, Adjudicator, Loss given default, Recovery rate, Timeliness, Insolvency professional, Information system |
| JEL: | G1 G2 G3 G33 |
| Date: | 2016–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69130&r=cfn |
| By: | Stefania Cosci (LUMSA University); Valentina Meliciani (University of Teramo); Valentina Sabato (LUMSA University) |
| Abstract: | We model the effect of cross-selling on the quality of banks’ loans and interest rates under alternative lending technologies when banks produce both hard and soft information. The main theoretical findings are: i) when banks adopt transaction lending technologies, where loan officers have only the task of screening loan applicants, cross-selling lowers banks incentives of producing soft information and loans’ quality, ii) when banks adopt relationship lending technologies, where loan officers have the task of both screening and cross-selling services, cross-selling may improve banks’ incentives of producing soft information and loans quality, iii) under relatively competitive market conditions, cross-selling reduces lending interest rates for both transaction- and relationship-lending banks. The econometric analysis, carried on a sample of European banks over the period 2001-2006, support these findings. The results suggest regulators should address cross-selling strategies to control for bank risk in different ways depending on the lending technology adopted by banks. |
| Keywords: | Cross-selling; Hard and soft information; Relationship lending; Loans’ quality; Interest margin |
| JEL: | G21 D82 C23 L15 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:lsa:wpaper:wpc02&r=cfn |
| By: | Feng, Xunan (Southwestern University of Finance and Economics); Hu, Na (Shanghai International Studies University); Johansson, Anders C. (Stockholm China Economic Research Institute) |
| Abstract: | This study examines how ownership structure affects the information environment of publicly traded firms in China. We hypothesize that concentrated ownership and the associated separation of ultimate control and ownership rights create agency conflicts between controlling shareholders and minority investors leading controlling owners to withhold firm-specific information from the market. We test this hypothesis by analyzing the effect of ultimate ownership structure and analyst coverage on stock return synchronicity. We find that a greater separation of control and ownership rights increases the response coefficient of stock return synchronicity to analyst coverage. This result is robust to endogeneity, a series of robustness checks, and an alternative hypothesis based on noise trading. The incentive of controlling owners to limit firm transparency thus leads analysts to disseminate more market-wide information. |
| Keywords: | Analyst coverage; Ownership structure; Control rights; Stock synchronicity; China |
| JEL: | G14 G15 G30 G32 |
| Date: | 2015–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hascer:2015-036&r=cfn |
| By: | Márcio Telles Portal; Luís Laureano |
| Abstract: | We analyse if the Brazilian Allowance for Corporate Equity (ACE-type system) reduces the debt tax bias. Specifically, we study if the continuous treatment effect of interest on equity negatively affects the level of financial leverage. We find that the tax policy implemented is similar to the deductible cash dividends and not to an ACE. The empirical implication is that the interest on equity treatment increases the debt tax bias, producing a rebound effect to what is expected for this policy on the risk-taking behaviour and corporate capital structure. This rebound effect is homogeneous in firms with different financial constraints status. There are evidences that shareholders influence the cash distribution policy, adjusting the later to their own tax preferences. |
| Keywords: | capital structure; debt bias; dividend; dose-response function; financial constraints; taxation |
| JEL: | G32 G35 H20 H25 |
| Date: | 2015–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:isc:iscwp2:bruwp1506&r=cfn |
| By: | Lin, Tse-chun (University of Hong Kong); Liu, Qi (Peking University); Sun, Bo (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We study the effect of financial market conditions on managerial compensation structure. First, we analyze the optimal pay-for-performance in a model in which corporate decisions and firm value are both endogenous to trading due to feedback from information contained in stock prices. In a less frictional financial market, the improved information content of stock prices helps guide managerial decisions, and this information substitutes out part of the direct incentive provision from compensation contracts. Thus, the optimal pay-for-performance is lowered in response to reductions in market frictions. Second, we test our theory using two quasi-natural experiments and find evidence that is consistent with the theory. Our results indicate that the financial market environment plays an important role in shaping CEO compensation structure. |
| Keywords: | Feedback effect; CEO compensation; Transaction costs; Reg-SHO Pilot program; Decimalization |
| JEL: | G30 J33 |
| Date: | 2015–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1143&r=cfn |
| By: | Albina Danilova; Christian Julliard |
| Abstract: | We develop a tractable model in which trade is generated by asymmetry in agents' information sets. We show that, even if news are not generated by a stochastic volatility process, in the presence of information treatment and/or order processing costs, the (unique) equilibrium price process is characterised by stochastic volatility. The intuition behind this result is simple. In the presence of trading costs and dynamic information, agents strategically choose their trading times. Since new (constant volatility) information is released to the market at trading times, the price process sampled at trading times is not characterised by stochastic volatility. But since trading and calendar times differ, the price process at calendar times is the time change of the price process at trading times – i.e. price movements on the calendar time scale are characterised by stochastic volatility. Our closed form solutions show that: i) volatility is autocorrelated and is a non-linear function of both number and volume of trades; ii) the relative informativeness of numbers and volume of trades depends on the sampling frequency of the data; iii) volatility, the limit order book, and liquidity, in terms of tightness, depth, and resilience, are jointly determined by information asymmetries and trading costs. The model is able to rationalise a large set of empirical evidence about stock market volatility, liquidity, limit order books, and market frictions, and provides a natural laboratory for analysing the equilibrium effects of a financial transaction tax. |
| Keywords: | Information Based Trading; Asymmetric Informations; Time Varying Volatility; Liquidity; Trade Volume; Number of Trades; Stochastic Volatility; Tobin Tax. |
| JEL: | D82 G12 |
| Date: | 2014–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:60957&r=cfn |
| By: | Shreya Biswas (Indira Gandhi Institute of Development Research) |
| Abstract: | This study finds that the inter-firm network in India on account of director interlocks is a small world and the network has become more integrated since the introduction of corporate governance regulations in the country. Using a sample of National Stock Exchange listed firms in India the study finds a negative relation between average path length and probability of acquiring indicating the importance of faster reach of information among the firms within the network. The paper also finds a non-linear relation given by inverted U-shaped curve between firm level clustering and probability of acquiring. Initially, increase in clustering has a positive effect through the informational quality effect; however at higher levels the negative informational redundancy effect dominates leading to a curvilinear relation. |
| Keywords: | Corporate governance, Small-world, Director interlocks, Inter-firm network |
| JEL: | G32 G34 G38 M21 Z13 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2016-003&r=cfn |
| By: | Bodeutsch, D.S.; Franses, Ph.H.B.F. |
| Abstract: | __Abstract__ We personally interview thirteen board members of seven (out of the ten) companies listed at the Suriname Stock Exchange and ask questions about their past and current decisions and on their risk attitudes. Next, we correlate the answers to company performance in between 2003-2011, like earnings per share, stock returns, book value and market value. Recent literature on risk attitudes in the board, which usually draws on western economies, guides our formulation of hypotheses. At the same time we also perform some exploratory analyses. Our main result is that, for this emerging economy, more risk adversity leads to better firm performance. |
| Keywords: | Executives characteristics, Company performance, Risk attitudes, Emerging economy |
| JEL: | G32 G00 O16 |
| Date: | 2015–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:78127&r=cfn |
| By: | Spiros Bougheas (School of Economics, University of Nottingham); Alan Kirman (Faculte de Droit et de Sciences Politiques, Aix-Marseille Université) |
| Abstract: | The paper argues that systemic risk must be taken into account when designing optimal bankruptcy procedures in general, and priority rules in particular. Allowing for endogenous formation of links in the interbank market we show that the optimal policy depends on the distribution of shocks and the severity of fire sales. |
| Keywords: | Banks; Priority rules; Systemic Risk |
| JEL: | G21 G28 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cst:wpaper:201602&r=cfn |
| By: | Mahinda Wijesiri (Indira Gandhi Institute of Development Research; Institute of Economic Growth) |
| Abstract: | This study investigates the effects of the 2008 global financial crisis on the performance of different microfinance ownership types. The analysis in this study relies on a novel methodological framework that provides consistent productivity measures in the presence of undesirable outputs, while taking into account the technological heterogeneity among different ownership types. The results show that banks and non-bank financial institutions (NBFIs) that performed better immediately before the crisis, suffered more during the crisis and early post-crisis periods. Cooperatives and non-governmental organizations (NGOs), on the other hand, were less affected by the crisis. Moreover, results indicate that the pattern of productivity growth of all ownership forms three years after the eruption of the crisis was remarkably similar to their productivity growth pattern in the very early phase of the pre-crisis period. |
| Keywords: | Microfinance; Ownership; Metafrontier; Malmquist-Luenberger; Productivity change; Global Financial Crisis |
| JEL: | C61 D24 G01 G21 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2016-002&r=cfn |
| By: | Rosalind Z. Wiggins; Rosalind L. Bennett; Andrew Metrick |
| Abstract: | For many years prior to its demise, Lehman Brothers employed Ernst & Young (EY) as the firm’s independent auditors to review its financial statements and express an opinion as to whether they fairly represented the company’s financial position. EY was supposed to try to detect fraud, determine whether a matter should be publicly disclosed, and communicate certain issues to Lehman’s Board audit committee. After Lehman filed for bankruptcy, it was discovered that the firm had employed questionable accounting with regard to an unorthodox financing transaction, Repo 105, which it used to make its results appear better than they were. EY was aware of Lehman’s use of Repo 105, and its failure to disclose its use. EY also knew that Lehman included in its liquidity pool assets that were impaired. When questioned, EY insisted that it had done nothing wrong. However, Anton R. Valukas, the Lehman bankruptcy examiner, concluded that EY had not fulfilled its duties and that probable claims existed against EY for malpractice. In this case, participants will consider the role and effectiveness of independent auditors in ensuring complete and accurate financial statements and related public disclosure. |
| Keywords: | Systemic Risk, Financial Crises, Financial Regulation |
| JEL: | G01 G28 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:ysm:ypfswp:59183&r=cfn |
| By: | Yang Li (Department of Economics, Rutgers University) |
| Abstract: | What configuration of interest rates will make the banking system most susceptible to a self-fulfilling run? I study this question in a version of the model of Diamond and Dybvig (1983) with limited commitment and a non-trivial portfolio choice. I show that the relationship between the returns on banks' assets and financial fragility is often non-monotone: a higher interest rate may make banks either more or less susceptible to a run by depositors. The same is true for changes in the liquidation cost and the term premium. I derive precise conditions under which changes in each of these returns increase or decrease financial fragility. |
| Keywords: | Financial fragility, Bank runs, Excess liquidity |
| JEL: | G11 G21 |
| Date: | 2016–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201601&r=cfn |
| By: | Carolina Laureti; Ariane Szafarz |
| Abstract: | Using data from Bangladesh, this paper finds that the liquidity premium—the difference between the interest paid on illiquid and liquid savings accounts—is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves. |
| Keywords: | liquidity premium; present-bias; banks; microfinance; Bangladesh |
| JEL: | G21 D14 O16 |
| Date: | 2016–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/226270&r=cfn |
| By: | Gounopoulos, Dimitrios; Kallias, Konstantinos; Newton, David; Tzeremes, Nickolaos |
| Abstract: | We frame IPO pricing as an efficiency problem for prospective issuers and explore the effect of connections formed via lobbying and PAC (Political Action Committee) contributions. We develop an approach of general application in finance, where relationships of influence are suspected. Rather than imposing a regression-based framework, we allow relationships to manifest themselves in a data-driven manner. Our analysis reveals nonlinearities between IPO pricing efficiency and the two contribution avenues (justifying the fully nonparametric treatment). We are able to uncover relationships separately according to business sector, which we interpret in terms of varied competitive environments. |
| Keywords: | IPO underpricing, political connections, PAC and lobbying contributions, data envelopment analysis |
| JEL: | C6 G10 G14 G39 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69427&r=cfn |
| By: | Tutlani, Ankur |
| Abstract: | Borrowers’ participation in MFI group lending credit market is not insured because of the alternative sources of credit available. The question arises what is the ideal MFI interest rate to ensure borrowers’ participation which at the same time being financially viable for MFI. The paper attempts to answer this question and analyzes the borrowers’ trade-off of borrowing from MFI or from moneylender (ML). Results show that borrowers may find comparative advantage in borrowing individually from ML as compared to borrowing in a group from MFI if the transaction cost burden is high and their credit requirement is low |
| Keywords: | Microfinance, Group lending, Informal finance, Transaction cost, Effective cost |
| JEL: | G21 O17 |
| Date: | 2016–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69506&r=cfn |