nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒12‒06
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Equity market misvaluation, financing, and investment By Missaka Warusawitharana; Toni M. Whited
  2. Profit Persistence and Stock Returns By Adelina Gschwandtner; Michael Hauser
  3. Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects By Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
  4. Repo collateral fire sales: the effects of exemption from automatic stay By Sebastian Infante

  1. By: Missaka Warusawitharana; Toni M. Whited
    Abstract: We quantify how much nonfundamental movements in stock prices affect firm decisions. We estimate a dynamic investment model in which firms can finance with equity or cash (net of debt). Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds owing to and from these activities come from either investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Firms respond to misvaluation by adjusting financing more than by adjusting investment. Managers' rational responses to misvaluation increase shareholder value by up to 8%.
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-78&r=fmk
  2. By: Adelina Gschwandtner; Michael Hauser
    Abstract: This paper attempts to assemble evidence for the relationship between the product and the financial market. Drawing back on work in industrial organization, we analyze the relationship between profit persistence and expected stock returns. We show that long-run profit persistence together with other additional economic firm fundamentals have a significant impact on stock returns and on their volatility even after adjusting for risk. At the same time we bring evidence for a 'low volatility anomaly'.
    Keywords: Profit Persistence; Competition; Stock Return; Heteroscedasticity; Low-Volatility Anomaly; Dividend Discount Model
    JEL: L10 G11 L25
    Date: 2013–11
    URL: http://d.repec.org/n?u=RePEc:ukc:ukcedp:1320&r=fmk
  3. By: Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
    Abstract: In 2007, countries in the euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the euro zone, and how they may be addressed by policies at the European level.
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–11
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:19676&r=fmk
  4. By: Sebastian Infante
    Abstract: What are the consequences of a potential fire sale stemming from the exemption of repurchase agreements (repos) from automatic stay? This paper shows that repo's exemption from stay alters firms' financing and investment decisions ex ante. Specifically, a stay exemption changes firms' investment opportunity set, enabling them to purchase assets of defaulted firms at fire sale prices. Fire sales arise endogenously because of limited capital available to purchase collateral posted by insolvent firms, i.e., cash-in-the-market pricing. A fire sale effectively creates a premium for holding on to dry powder and concentrates asset ownership with firms that have preferences to hold highly leveraged positions and risk default. The premium reduces the initial asset price, potentially inducing more firms to take on risky positions, increasing the fraction of defaulting firms in the economy. In contrast, when repo is subject to automatic stay secured lenders do not receive their collateral immediately, reducing the severity of a fire sale and ex ante price distortions.
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-83&r=fmk

This nep-fmk issue is ©2013 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.