nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒03‒17
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Equity Premium Prediction: Are Economic and Technical Indicators Unstable? By Fabian Baetje; Lukas Menkhoff
  2. Barriers of FDI inflow in venture capital and private equity in the Czech Republic By Božena KadeÅ™ábková; OndÅ™ej PtáÄ ek
  3. Cash Windfalls and Acquisitions By von Beschwitz, Bastian
  4. Option-implied objective measures of market risk By Matthias Leiss; Heinrich H. Nax
  5. Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal? By Zaghini, Andrea
  6. Public development banks and credit market imperfections By Marcela Eslava; Xavier Freixas
  7. Equal Opportunity? Gender Gaps in CEO Appointments and Executive Pay By Keluoharju, Matti; Knüpfer, Samuli; Tåg, Joacim
  8. Dynamic Inefficiency in Decentralized Capital Markets By Kurmann, André; Rabinovich, Stanislav
  9. Consumer risk appetite, the credit cycle, and the housing bubble By Breeden, Joseph L.; Canals-Cerda, Jose J.
  10. Financial Constraints, Firms' Supply Chains and Internationalization By Raoul Minetti; Pierluigi Murro; Zeno Rotondi; Susan Chun Zhu
  11. Women’s Leadership and Corporate Performance By Qian, Meijun

  1. By: Fabian Baetje; Lukas Menkhoff
    Abstract: We show that technical indicators deliver stable economic value in predicting the U.S. equity premium over the out-of-sample period from 1966 to 2014. Results tentatively improve over time and beat alternatives over a large continuum of sub-periods. By contrast, economic indicators work well only until the 1970s, but 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 annualized average Sharpe ratio of 0.55 p.a. (after transaction costs) 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: 2016
  2. By: Božena KadeÅ™ábková (Faculty of Civil Engineering, Czech Technical University); OndÅ™ej PtáÄ ek (Faculty of Economics, University of Economics in Prague)
    Abstract: The barriers that negatively affect the PE and VC investment activity in the Czech Republic include the following aspects. Few sources for funds from traditional fund raisers such as pension funds or insurance companies, which is caused mainly by legislative restrictions. Insufficient project quality causes high proportion of transaction cost to investment amount ratio. Insufficient project quality, lack of projects due to little interest from the potential investee companies caused by imperfect information all mean higher risk for investors causing their risk aversion to concentrate mainly on larger projects. Insufficient fundraising conditions lead also to few opportunities for exits. These are the main reasons of the Czech Republic’s little PE and VC market activity, which is limited to 10-20 investments per year in total.
    Keywords: venture capital, asset management, private equity, financial markets, market failure, government failure
    JEL: G24
  3. By: von Beschwitz, Bastian (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This article studies the effect of cash windfalls on the acquisition policy of companies. As identification I use a German tax reform that permitted firms to sell their equity stakes tax-free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 19 percent. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are consistent with the free cash flow theory.
    Keywords: acquisitions; free cash flow theory; overinvestment
    JEL: G30 G31 G34
    Date: 2016–03–02
  4. By: Matthias Leiss; Heinrich H. Nax
    Abstract: Foster and Hart (2009) introduce an objective measure of the riskiness of an asset that implies a bound on how much of one’s wealth is ‘safe’ to invest in the asset while (a.s.) guaranteeing no-bankruptcy in the long run. In this study, we translate the Foster-Hart measure from static and abstract gambles to dynamic and applied finance using nonparametric estimation of risk-neutral densities from S&P 500 call and put option prices covering 2003 to 2013. This exercise results in an option-implied market view of objective riskiness. The dynamics of the resulting ‘option-implied Foster-Hart bound’ are analyzed and assessed in light of well-known risk measures including value at risk, expected shortfall and risk-neutral volatility. The new measure is shown to be a significant predictor of ahead-return downturns. Furthermore, it is able to grasp more characteristics of the risk-neutral probability distributions than other measures, furthermore exhibiting predictive consistency. The robustness of the risk-neutral density estimation method is analyzed via a bootstrap.
    Keywords: risk measure; risk dynamics; risk-neutral densities; vaue at risk; expected shortfall
    JEL: D81 D84 G32
    Date: 2015–11–12
  5. By: Zaghini, Andrea
    Abstract: We assess the degree of market fragmentation in the euro-area corporate bond market by disentangling the determinants of the risk premium paid on bonds at origination. By looking at over 2,400 bonds we are able to isolate the country-specific effects which are a suitable indicator of the market fragmentation. We find that, after peaking during the sovereign debt crisis, fragmentation shrank in 2013 and receded to pre-crisis levels only in 2014. However, the low level of estimated market fragmentation is coupled with a still high heterogeneity in actual bond yields, challenging the consistency of the new equilibrium.
    Keywords: corporate bond market,Sovereign debt crisis,financial fragmentation
    JEL: G32 G38
    Date: 2016
  6. By: Marcela Eslava; Xavier Freixas
    Abstract: This paper is devoted to understanding the role of public development banks in alleviating financial market imperfections. We explore two issues: 1) which types of firms should be optimally targeted by public financial support; and 2) what type of mechanism should be implemented in order to efficiently support the targeted firms’ access to credit. We model firms that face moral hazard and banks that have a costly screening technology, which results in a limited access to credit for some firms. We show that a public development bank may alleviate the inefficiencies by lending to commercial banks at subsidized rates, targeting the firms that generate high added value. This may be implemented through subsidized ear-marked lending to the banks or through credit guarantees which we show to be equivalent in "normal times". Still, when banks are facing a liquidity shortage, lending is preferred, while when banks are undercapitalized, a credit guarantees program is best suited. This will imply that 1) there is no "one size fits all" intervention program and 2) that any intervention program should be fine-tuned to accommodate the characteristics of competition, collateral, liquidity and banks capitalization of each industry.
    Keywords: Public development banks; governmental loans and guarantees; costly screening; credit rationing.
    JEL: H81 G20 G21 G23
    Date: 2016–01
  7. By: Keluoharju, Matti (Aalto University School of Business); Knüpfer, Samuli (BI Norwegian Business School); Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: This paper uses exceptionally rich data on Swedish corporate executives and their personal characteristics to study gender gaps in CEO appointments and pay. Both gaps are sizeable: 18% for CEO appointments and 27% for pay. At most one-eight of the gaps can be attributed to observable gender differences in executives’ and their firms’ characteristics. Further tests suggest that unobservable gender differences in characteristics are unlikely to account for the remaining gaps. Instead, our results are consistent with the view that male and female executives sharing equal attributes neither have equal opportunities to reach the top, nor are they equally paid.
    Keywords: CEOs; Compensation; Discrimination; Executives; Gender differences
    JEL: G34 J16 J24 J31
    Date: 2016–02–18
  8. By: Kurmann, André (School of Economics); Rabinovich, Stanislav (Department of Economics Amherst College)
    Abstract: We study the efficiency implications of bargaining in frictional capital markets in which firms match bilaterally with dealers in order to buy or sell capital. We show how two of the distinguishing characteristics of capital – ownership and the intertemporal nature of investment – give rise to a dynamic inefficiency. Firms that anticipate buying capital in the future overinvest because this increases their outside option of no trade in negotiations with dealers in the future, thereby lowering the bargained purchase price. Vice versa, firms that anticipate selling capital in the future strategically underinvest because this increases the bargained sale price. If the only motive for trade is capital depreciation, there is overinvestment in capital. With stochastic productivity, there is insufficient dispersion of capital across firms and investment is insufficiently responsive to shocks. A regressive tax on capital can restore the efficient capital allocation.
    Keywords: Dynamic inefficiency; trading frictions; bargaining; over-the-counter markets.
    JEL: D83 G11 G12
    Date: 2016–02–17
  9. By: Breeden, Joseph L. (Prescient Models LLC); Canals-Cerda, Jose J. (Federal Reserve Bank of Philadelphia)
    Abstract: We explore the role of consumer risk appetite in the initiation of credit cycles and as an early trigger of the U.S. mortgage crisis. We analyze a panel data set of mortgages originated between the years 2000 and 2009 and follow their performance up to 2014. After controlling for all the usual observable effects, we show that a strong residual vintage effect remains. This vintage effect correlates well with consumer mortgage demand, as measured by the Federal Reserve Board’s Senior Loan Officer Opinion Survey, and correlates well to changes in mortgage pricing at the time the loan was originated. Our findings are consistent with an economic environment in which the incentives of low-risk consumers to obtain a mortgage decrease when the cost of obtaining a loan rises. As a result, mortgage originators generate mortgages from a pool of consumers with changing risk profiles over the credit cycle. The unobservable component of the shift in credit risk, relative to the usual underwriting criteria, may be thought of as macroeconomic adverse selection.
    Keywords: Credit risk; Credit cycle; Mortgages; Lending standards; Financial crisis
    JEL: G20 G21 G32
    Date: 2016–02–18
  10. By: Raoul Minetti (Michigan State University); Pierluigi Murro (LUMSA University); Zeno Rotondi (UniCredit Bank); Susan Chun Zhu (Michigan State University)
    Abstract: Using a unique sample of small and medium-sized Italian firms, we investigate the effect of financial constraints on firms' participation in domestic and international supply chains. We find that firms more exposed to credit rationing and with weaker relationships with banks are more likely to participate in supply chains to overcome liquidity shortages. This benefit of supply chains is especially strong when firms forge ties with international trading partners and when they establish long-term relationships with large suppliers. To control for possible endogeneity of firms' access to credit, we construct instruments capturing exogenous shocks to the structure of the Italian local banking markets.
    Keywords: Credit; Global Value Chains; Internationalization
    JEL: F10 G20 L23
    Date: 2016–02
  11. By: Qian, Meijun (Australian National University)
    Abstract: This paper examines the gender diversity in corporate boardrooms in Asia and the Pacific and how the diversity affects corporate performance. We find that boardroom gender diversity is low in Asia with 7.5% female representation on average in 2012, but showing a 1.8% improvement in 2013. The appointment of female directors and a gender-diverse boardroom are on average positively associated with a firm’s subsequent performance, but with large cross-country and cross-measurement differences. Firm performance is the highest when there are two females on the board. Using two-stage analyses, we find that (i) a firm’s past performance does not predict its choice to add female directors; (ii) cross-country differences in female corporate leadership respond to its economic demand and supply as measured by gender equality in college education, labor participation, wages, and infant survival; and (iii) female representation on the board, when determined by these economic factors, is a significant predictor of a firm’s future performance.
    Keywords: corporate performance; development equality; director choices; female leadership
    JEL: G38 J71 O16
    Date: 2016–01–26

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