nep-fmk New Economics Papers
on Financial Markets
Issue of 2019‒10‒14
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Deregulation of the Private Equity Markets and the Decline in IPOs By Michael Ewens; Joan Farre-Mensa
  2. Fintech and Financial Inclusion By Baptiste Venet
  3. Modern Portfolio Theory and the Efficient Markets Hypothesis: How well did they serve Canada?s baby-boom generation? By Jim Fischer
  4. Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect By Gürkaynak, Refet S.; Karasoy Can, Gokce; Lee, Sang Seok
  5. Borrowing Costs for Government of Canada Treasury Bills By Jessica Lee; Jabir Sandhu; Adrian Walton
  6. Private benefits from control block trades in the Spanish stock exchange By Inés Pérez-Soba Aguilar; Ana Rosa Martínez Cañete; Elena Márquez De la Cruz

  1. By: Michael Ewens; Joan Farre-Mensa
    Abstract: The deregulation of securities laws—in particular the National Securities Markets Improvement Act (NSMIA) of 1996—has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an IPO market failure. Rather, founders are using their increased bargaining power vis-a-vis investors to stay private longer.
    JEL: G24 G28 G32
    Date: 2019–09
  2. By: Baptiste Venet (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Keywords: Finance inclusive,Financial Technology,finance,innovation
    Date: 2019
  3. By: Jim Fischer (Mount Royal University)
    Abstract: Modern Portfolio Theory (MPT) and the Efficient Markets Hypothesis (EMH) have had considerable influence over portfolio management strategies for the last forty years. This is also the time that the bulk of the baby boom generation entered and started to retire from the work force. Taking the example of an average Canadian family from 1977 to 2016, this paper examines how well the tenets of MPT and EMH served this generation of investors. A model investing strategy was constructed based on the principles of MPT and EMH. The results of this strategy were evaluated for the portfolio?s ability to adequately provide for the subject couple?s financial needs in retirement. Results of the model portfolio were compared to other popular investment alternatives. Using generally-accepted rules-of-thumb in financial planning, the model portfolio was found to have provided an adequate retirement income for the subject couple. Some of the other strategies moderately exceeded the returns of the model portfolio, while others underperformed this benchmark. Analysis of these discrepancies reinforced the significance of diversifying among and within asset classes, and of rebalancing portfolios through dynamic asset allocation.
    Keywords: Modern Portfolio Theory (MPT), Efficient Markets Hypothesis (EMH), baby-boom generation, indexing, portfolio management
    JEL: G11
    Date: 2019–10
  4. By: Gürkaynak, Refet S.; Karasoy Can, Gokce; Lee, Sang Seok
    Abstract: We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms' real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.
    Keywords: Cash flow effect of monetary policy; Financial Frictions; Investor sophistication; stock pricing
    JEL: E43 E44 E52 E58 G14
    Date: 2019–09
  5. By: Jessica Lee; Jabir Sandhu; Adrian Walton
    Abstract: The cost of borrowing Government of Canada treasury bills (t-bills) in the repurchase (repo) market is mainly explained by the relationship between the parties involved. Some pairs of parties conduct most of their repos for t-bills rather than bonds, and at relatively high borrowing costs. We speculate that these pairs have formed a mutually beneficial service relationship in which one party consistently receives t-bills, while the other receives cash at a relatively cheap rate.
    Keywords: Financial markets
    JEL: G10 G11 G12 G20 G21 G23 G32
    Date: 2019–10
  6. By: Inés Pérez-Soba Aguilar (Dpto. Economía Aplicada III); Ana Rosa Martínez Cañete (Dpto. Economía Aplicada III); Elena Márquez De la Cruz (Dpto. Economía Aplicada III)
    Abstract: A control block trade can be explained by the expectation of financial gains, shared by all shareholders, or by the expectation of private benefits (PB), exclusive for the buyer and possibly at the expense of other shareholders’ rents. The market for corporate control contributes to social welfare when it improves the efficiency in the allocation of resources. When the purpose of block transaction is PB, social welfare could be damaged as minority shareholders could withdraw from the stock market. So the evaluation of PB will allow to assess the efficiency of the stock market. Using a sample of partial control transactions in the Spanish market over the period 1990-2016, we find that, in median, PB are null. Their variability is explained in a significant way by the controlling position of the buyers in the target firm after the transaction, the size of control of the “rival” insider and to the size of the firm. La compra de un bloque de control puede explicarse por los beneficios financieros esperados, compartidos por todos los accionistas, o por la expectativa de beneficios privados (BP), exclusivos para el comprador y obtenidos posiblemente a expensas de las rentas de los demás accionistas. El mercado de control societario contribuye al bienestar social cuando mejorar la eficiencia en la asignación de recursos. Cuando el objetivo de la compra del bloque son los BP, el bienestar social podría verse perjudicado ya que los accionistas minoritarios podrían retirarse del mercado de valores. Por lo tanto, la medición de los BP permitirá evaluar la eficiencia de la bolsa. Utilizando una muestra de transacciones de control parcial en el mercado español durante el período 1990-2016, encontramos que, en mediana, el BP es nulo. Su variabilidad se explica de forma significativa por la posición de control que alcanza el comprador tras la operación, el tamaño del control que posee el accionista “rival” y el tamaño de la empresa.
    Keywords: beneficios privados, operaciones en el mercado de bloques, estructura accionarial, adquisiciones de control parcial, prima del bloque de control. private benefits, block trades, ownership structure, partial control acquisitions, control block premium.
    JEL: G12 G34 G38
    Date: 2019–10

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