nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒02‒17
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Equity premium: Historical, expected, required and implied By Fernandez, Pablo
  2. Evidence on the arbitrage efficiency of SPI index futures and options markets By Steven Li; Elia Alfay
  3. Corporate Governance and Corporate Performance: Some Evidence from Newly Listed Firms on Chinese Stock Markets By Langnan Chen; Steven Li; Yijia Chen
  4. The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and OldCompanies? By Mueller, Elisabeth; Zimmermann, Volker

  1. By: Fernandez, Pablo (IESE Business School)
    Abstract: Equity premium designates four different concepts: Historical Equity Premium (HEP); Expected Equity Premium (EEP);Required Equity Premium (REP); and Implied Equity Premium (IEP). We highlight the confusing message conveyed in the literature regarding equity premium and its evolution. The confusion arises from not distinguishing among the four concepts and from not recognizing that although the HEP is equal for all investors, the REP, the EEP and the IEP differ for different investors. A unique IEP requires assuming homogeneous expectations for expected growth (g), but we show that there are several pairs (IEP, g) that satisfy current prices. We claim that different investors have different REPs and that it is impossible to determine the REP for the market as a whole, because it does not exist. We also investigate the relationship between (IEP - g) and the risk-free rate. There is a kind of schizophrenic approach to valuation: while all authors admit different expectations of equity cash flows, most authors look for a single discount rate. It seems as if the expectations of equity cash flows are formed in a democratic regime, while the discount rate is determined in a dictatorship.
    Keywords: equity premium; equity premium puzzle; required market risk premium; historical market risk premium; expected market risk premium; risk premium; market risk premium; market premium;
    Date: 2006–12–13
  2. By: Steven Li; Elia Alfay (School of Economics and Finance, Queensland University of Technology)
    Abstract: This paper investigates arbitrage opportunities from the Australian market using the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. A thorough ex post analysis is first carried out. Tick-by-tick transaction price data allow the futures contracts, the call futures options and the put futures options to be matched within a one minute interval. This paper take into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. The results reveal a significant number of violations with 25.40% of the sample breaching the PCFP equation with an average profit of 6.733 index points for SFE member firms. Ex ante tests are also conducted whereby the trios that signified an ex post profit for members were lagged up to 3 minutes before being executed. The results were similar to the ex post results casting doubt on the efficiency and integration between these two derivative markets in Australia.
  3. By: Langnan Chen; Steven Li; Yijia Chen (School of Economics and Finance, Queensland University of Technology)
    Abstract: This paper is concerned with some corporate governance issues related to newly listed firms in China based on a sample of 329 firms commencing listing on Shanghai Stock Exchange (SHSE) and Shenzhen Stock exchange (SZSE) during the period from 1998 to 2000. We first investigate the impact of ownership change due to stock market listing on corporate performance. We consider four aspects of corporate performance: profitability, sales, leverage and employee productivity. Our research results indicate that, on average, profitability, sales and employee productivity have improved from pre-listing to post-listing. We further investigate the impacts of state majority control, foreign ownership and regulation effects on corporate performance. Overall, this paper provides some new evidence on the listing effect, ownership structure and regulation effect on Chinese firms which will be valuable to the future reform of state owned enterprises in China.
    Keywords: State owned enterprise, corporate governance, and corporate performance
  4. By: Mueller, Elisabeth; Zimmermann, Volker
    Abstract: This paper analyzes the importance of equity finance for the R&D activity of small and medium-sized enterprises. We use information on almost 6000 German SMEs from a company survey. Using the intensity of banking competition at the district level as instrument to control for endogeneity, we find that a higher equity ratio is conducive to more R&D for young but not for old companies. Equity may be a constraining factor for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can relay less on outside financing. The positive influence is found for R&D intensity but not for the decision whether to perform R&D. Equity financing is therefore especially important for the most innovative, young companies.
    Keywords: activity, equity finance, small and medium-sized enterprises
    JEL: G32 O32
    Date: 2006

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