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on Corporate Finance |
| By: | Gong, Di (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research); Laeven, L.A.H. (Tilburg University, Center For Economic Research) |
| Abstract: | This paper is the first to show that financial institutions may be effectively undercapitalized as a result of incomplete consolidation of minority ownership. Using two approaches – consolidating the minority-owned affiliates with the parent or deducting equity investments in minority ownership from the parent’s capital – we find that the effective capitalization ratios of small US bank holding companies (BHCs) are substantially lower than the reported ratios. Empirical evidence suggests that the effectively lower capitalization ratios are associated with higher riskiness at the BHC level. Capital adjustments following pro forma consolidation better capture the additional risks than capital adjustments in the form of equity deductions for investments in minority-owned affiliates. These findings have important implications for the regulation of bank capital. |
| Keywords: | capital regulation; organizational structure; undercapitalization; bank leverage; risk taking |
| JEL: | G21 G32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:b9f9357a-fbce-4fc4-a487-206e1be13110&r=cfn |
| By: | Leonardo Gambacorta; Sudipto Karmakar |
| Abstract: | The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a bank's Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with difering degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios. |
| JEL: | G21 G28 G32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201616&r=cfn |
| By: | Iwasaki, Ichiro; Mizobata, Satoshi; Muravyev, Alexander A. |
| Abstract: | This paper provides a meta-analysis of studies on the effect of ownership on the performance of Russian firms over 20 years of rapid institutional and economic changes. We review 29 studies extracted from the EconLit and Web of Science databases with a total of 877 relevant estimates. We find that the government negatively affects company management regardless of its administrative level. In contrast, private ownership is positively associated with firm performance. The effect size and statistical significance are notably varied among different types of private ownership. While the effect of insider (employee and management) ownership is comparable to that of foreign investors, the effect of domestic outsider investors is considerably smaller. Our assessment of publication selection bias reveals that the existing literature does not contain genuine evidence for a series of ownership types and, therefore, some of the findings have certain limitations. |
| Keywords: | Privatization, Corporate Ownership, Firm Performance, Meta-analysis, Publication Selection Bias, Russia |
| JEL: | D22 G32 H32 P26 P31 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rrcwps:65&r=cfn |
| By: | Franke, Günter; Krahnen, Jan Pieter |
| Abstract: | The Capital Markets Union-project of the European Commission aims for an increase of market-based debt financing of small and medium-sized enterprises (SMEs), complementing bank lending. In this essay we argue that rather than focussing on pure non-bank lending, a reasonable mix of bank- and market-based financing should be considered. Banks are said to have a comparative advantage in critical lending functions such as credit screening, debtor monitoring and debt renegotiation. All forms of lending require a persistent skin-in-the-game of critical players in order to be effective. The regulator should insist on full disclosure of skin-in-the-game, thereby improving capital allocation and reducing systemic risks. |
| Keywords: | SME,funding,capital markets,lending instruments,banks |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:44&r=cfn |
| By: | Albertazzi, Ugo; Bottero, Margherita; Gambacorta, Leonardo; Ongena, Steven |
| Abstract: | Using credit register data for loans to Italian firms we test for the presence of asymmetric information in the securitization market by looking at the correlation between the securitization (risk-transfer) and the default (accident) probability. We can disentangle the adverse selection from the moral hazard component for the many firms with multiple bank relationships. We find that adverse selection is widespread but that moral hazard is confined to weak relationships, indicating that a strong relationship is a credible enough commitment to monitor after securitization. Importantly, the selection of which loans to securitize based on observables is such that it largely offsets the (negative) effects of asymmetric information, rendering the overall unconditional quality of securitized loans significantly better than that of non-securitized ones. Thus, despite the presence of asymmetric information, our results do not accord with the view that credit-risk transfer leads to lax credit standards. |
| Keywords: | Adverse Selection; moral hazard; Securitization; SME loans |
| JEL: | D82 G21 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11785&r=cfn |
| By: | B. Zorina Khan |
| Abstract: | Scholars engage in extensive debate about the role of families and corporations in economic growth. Some propose that personal ties provide a mechanism for overcoming such transactions costs as asymmetrical information, while others regard familial connections as conduits for inefficiency, with the potential for nepotism, corruption and exploitation of other stakeholders. This empirical study is based on a unique panel dataset comprising all of the shareholders in a sample of early corporations, including information on such characteristics as gender, age, occupation, household composition, real estate holdings and personal wealth. Related investing was widespread among directors and elite shareholders, but was also pervasive among women and small shareholders. Personal ties were especially evident among ordinary investors in the newer, riskier ventures, and helped to ensure persistence in shareholding. “Outsider investors” were able to overcome a lack of experience and information by taking advantage of their own networks. The link between related investing and the concentration of ownership in these corporations suggests that this phenomenon was likely associated with a reduction in perceptions of risk, especially beneficial for capital mobilization in emerging ventures. These patterns are consistent with a more productive interpretation of related investing and its function in newly developing societies. |
| JEL: | D22 G32 L2 N21 N81 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23052&r=cfn |
| By: | Peter Reichling (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Anastasiia Zbandut (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | Credit risk analysis represents a growing field in financial research since decades. However, in company valuation – to be more precise, in cost of capital computations – credit risk is merely taken into consideration at the level of the debt beta approach. Our paper proves that applications of the debt beta approach suffer from unrealistic assumptions. As an advantageous approach, we develop an alternative framework to determine costs of capital based on Merton’s model. We present (quasi-) analytic formulas for costs of equity and debt which are consistent with Modigliani-Miller theory in continuous-time and discrete-time settings without taxes. Our framework is superior to the debt beta approach regarding the quantity and quality of required data in peer group analysis. Since equity and debt are represented by options in Merton’s model, we compute expected option rates of return without resorting to betas. Thereby, our paper also contributes to the option pricing literature. |
| Keywords: | Company valuation, debt beta, expected option return, Merton’s model, WACC |
| JEL: | G13 G32 G33 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:170003&r=cfn |
| By: | David E. Allen (Centre for Applied Financial Studies, University of South Australia, School of Mathematics and Statistics,); Michael McAleer (Department of Quantitative Finance, College of Technology Management, National Tsing Hua University,); Abhay K. Singh (School of Business and Law, Edith Cowan University) |
| Abstract: | This paper features a tri-criteria analysis of Eurekahedge fund data strategy index data. We use nine Eurekahedge equally weighted main strategy indices for the portfolio analysis. The tri-criteria analysis features three objectives: return, risk and dispersion of risk objectives in a Multi-Criteria Optimisation (MCO) portfolio analysis. We vary the MCO return and risk targets and contrast the results with four more standard portfolio optimisation criteria, namely the tangency portfolio(MSR), the most diversied portfolio (MDP), the global minimum variance portfolio (GMW), and portfolios based on minimising expected shortfall (ERC). Backtests of the chosen portfolios for this hedge fund data set indicate that the use of MCO is accompanied by uncertainty about the a priori choice of optimal parameter settings for the decision criteria. The empirical results do not appear to outperform more standard bi-criteria portfolio analyses in the backtests undertaken on our hedge fund index data. |
| Keywords: | MCO; Portfolio Analysis; Hedge Fund Strategies; Multi-Criteria Optimisation, |
| JEL: | G15 G17 G32 C58 D53 |
| Date: | 2017–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170013&r=cfn |
| By: | Gianni La Cava (Reserve Bank of Australia); Callan Windsor (Reserve Bank of Australia) |
| Abstract: | Over the past quarter century, Australian companies have been increasingly holding assets in the form of currency and deposits, or 'cash', rather than investing in other productive assets. This reflects a global trend and raises the question of whether Australian companies now hold 'too much' cash. Despite Australian non-financial companies holding high levels of cash by international standards, we find little evidence that the increase has been 'excessive'. Instead, we find that the rise in corporate cash is mostly due to changes over time in observable company characteristics, including an apparent increase in the growth opportunities of publicly listed companies (as proxied by Tobin's Q). We also find some evidence of 'cohort effects' as Australian companies are more likely to be 'born', or come into existence, today in industries that have relatively high levels of cash, such as information technology, pharmaceuticals and biotechnology. We also find evidence that public companies hold more cash than private companies, on average. This is consistent with agency conflicts between owners and managers playing a role in corporate decisions to hold cash. Overall, we find that, in the face of financing frictions, some Australian companies have speculative and precautionary motives for holding cash. It follows that high levels of corporate cash do not necessarily indicate a weak outlook for corporate investment but might, in some cases, actually imply more investment opportunities. |
| Keywords: | cash; private companies; financing frictions; agency costs |
| JEL: | G30 G32 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2016-03&r=cfn |
| By: | Rose Kenney (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia); David Rodgers (Reserve Bank of Australia) |
| Abstract: | We explore the determinants of corporate failure in Australia using a large panel of public and private non-financial companies. A novel finding of our research is that corporate failure depends on 'structural' company-level characteristics. For instance, public companies are more likely to fail than comparable private companies; perhaps because the greater separation of ownership and control within public companies allows their managers to take greater risks. Consistent with overseas research, we find that cyclical company-specific factors are important determinants of failure; a corporation is more likely to fail if it has low liquidity, low profitability or high leverage. Cyclical and structural company-level characteristics are the key determinants of the relative risk of a company failing, while aggregate (macroeconomic) conditions appear to be an important determinant of annual changes in the rate of corporate failure. We quantify the potential contribution of corporate failure to financial stability risks using a 'debt-at-risk' framework. By our estimates, less than 1 per cent of aggregate corporate debt is currently at risk, with debt at risk concentrated in some very large companies. Our estimates suggest that trade credit (or business-to-business lending) is an important component of the relationship between corporate failure and financial stability. |
| Keywords: | failure; bankruptcy; business cycle; financial stability; leverage |
| JEL: | D22 E32 G33 L25 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2016-09&r=cfn |