nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒11‒20
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Does the Fed's unconventional monetary policy weaken the link between the financial and the real sector? By Yimin Xu; Jakob de Haan
  2. Competition and bank stability By Goetz, Martin
  3. A positive analysis of bank behaviour under capital requirements By Bahaj, Saleem; Malherbe, Frédéric
  4. It’s a Sweetheart of a Deal: Political Connections and Federal Contracting By Stephen P. Ferris; Reza Houston
  5. Selling out or going public? A real options signaling approach By Michi Nishihara
  6. Takeover Rules: In Support of the Longer Minimum Bid Period By Sharon Geraghty
  7. Broker Routing Decisions in Limit Order Markets By David A. Cimon
  8. Nascent markets: Understanding the success and failure of new stock markets By Albuquerque de Sousa, Jose; Beck, Thorsten; van Bergeijk, Peter; Van Dijk, Mathijs A
  9. Financial Intermediation Chains in an OTC Market By Shen, Ji; Wei, Bin; Yan, Hongjun

  1. By: Yimin Xu; Jakob de Haan
    Abstract: After the global financial crisis, several central banks introduced unconventional monetary policies, such as QE. If QE increases asset prices, but does not boost the real economy to the same extent, the relationship between the financial and the real sector will weaken. This study investigates this issue for the US using the predictive power of the credit spread for future employment growth as measure for the strength of the real-financial link in a moving-window framework. Our results suggest that the real-financial link is lower during bubbles and recessions. We also find that the relationship weakened after the Fed introduced QE.
    Keywords: Financial-real Linkages; unconventional monetary policies; QE; Federal Reserve
    JEL: E22 G31 G32 D92
    Date: 2016–11
  2. By: Goetz, Martin
    Abstract: Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
    Keywords: Risk,Stability,Competition,Contestability,Entry,Bank Deregulation,Lending
    JEL: G21 G28 G32
    Date: 2016
  3. By: Bahaj, Saleem; Malherbe, Frédéric
    Abstract: We propose a theory of bank behaviour under capital requirements. The sign of the lending response to a change in capital requirement is ambiguous due to the interplay between risk-taking incentives and debt overhang considerations. Optimal lending is typically U-shaped in the capital requirement. Changes in expected returns on loans shift this relationship. The lower expected returns the lower its slope. Using UK regulatory data (1989-2007), we find support for this prediction. It follows that a bank mainly adjusts to a higher capital requirement through cutting lending when expected returns are low, and by raising capital when they are high.
    JEL: G21 G28
    Date: 2016–11
  4. By: Stephen P. Ferris; Reza Houston
    Abstract: We examine whether political connections measured by political contributions influences the choice of terms included in government contracts awarded to firms. We construct an index of four “sweetheart” contract terms that are highly favorable to the firm, but not obviously advantageous to the government. We find that firms making larger political contributions more frequently have these terms included in their contracts. We then examine how changes in a firm’s political contributions influence the terms of subsequent contracts. We find that firms which increase their contributions are more likely to have these terms as part of their contract. We conclude that there is a political effect on the choice of terms included in federal contracts awarded to firms.
    Keywords: contracting; political connections
    JEL: G32 G38
    Date: 2016–09
  5. By: Michi Nishihara (Graduate School of Economics, Osaka University)
    Abstract: We examine a dynamic model in which a firm chooses between selling out and going public under asymmetric information. We show that information asymmetry tends to change the firm fs policy from selling out to IPO. More precisely, a separating equilibrium can arise in which the good firm goes public while the bad firm follows the first-best sales policy because the good firm signals to market investors by doing an IPO. In order to separate itself from the bad firm, the good firm can choose an IPO timing that is earlier than the first-best IPO timing. This result is consistent with the empirical evidence that less profitable firms tend to sell out to a large firm rather than going public.
    Keywords: IPO; signaling; real options; asymmetric information; acquisition; earnout
    JEL: G31 G34 D82
    Date: 2016–11
  6. By: Sharon Geraghty
    Keywords: Innovation and Business Growth
    JEL: G34 K22
    Date: 2016–11
  7. By: David A. Cimon
    Abstract: The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues. I construct a model of limit order trading in which brokers serve as agents for investors who wish to access equity markets. I find that brokers preferentially route marketable orders to venues with lower liquidity demand fees, driving up the execution probability at these venues and lowering adverse selection costs. When fees for liquidity supply and demand are sufficiently different, brokers route liquidity supplying orders to separate venues, where investors suffer from lower execution probability and higher costs of adverse selection.
    Keywords: Financial markets, Market structure and pricing
    JEL: G24 G28
    Date: 2016
  8. By: Albuquerque de Sousa, Jose; Beck, Thorsten; van Bergeijk, Peter; Van Dijk, Mathijs A
    Abstract: We study the success and failure of 59 newly established ("nascent") stock markets since 1975 in their first 40 years of activity. Nascent markets differ markedly in their success, as measured by number of listings, market capitalisation, and trading activity. Long-term success is in part determined by early success: a high initial number of listings and trading activity are necessary, though not sufficient, conditions for long-term success. Banking sector development at the time of establishment and development of national savings over the life of the stock market are the other two most reliable predictors of success. We find little evidence that structural factors such as country size or legal and political institutions matter. Rather, our results point to an important role of banks, demand factors, and initial success in fostering long-term stock market development.
    Keywords: stock exchanges; financial development
    JEL: G10 G18 O16
    Date: 2016–11
  9. By: Shen, Ji; Wei, Bin; Yan, Hongjun
    Abstract: This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among inter-dealer trades are decreasing in search cost, search speed, and market size, but increasing in investors’ trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume may not. Finally, the multiplicity and stability of the equilibrium is analyzed.
    Keywords: Search, Chain, Financial Intermediation, Multiplicity, Stability
    JEL: G10
    Date: 2016–10

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