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on Corporate Finance |
| By: | Ulf von Kalckreuth; Emma Murphy |
| Abstract: | The interrelationship between financial constraints and firm activity is a hotly debated issue. The way firms cope with financial constraints is fundamental to the analysis of monetary transmission, of financial stability and of economic growth and development. The CBI Industrial Trends Survey contains detailed information on the financial constraints faced by a large sample of UK manufacturers. This paper uses the quarterly CBI Industrial Trends Survey firm-level data between January 1989 and October 1999. The cleaned sample contains 49,244 quarterly observations on 5,196 firms. The data set is presented and a new method of checking the informational content of the data is developed. The relationship between investment activity and financial constraints is ambivalent because both can affect each other and they are affected by the same kind of economic developments, so it is not clear which is driving the other. But the link between financial constraints faced by the firm and the prevalence and duration of capacity restrictions should be unambiguously positive. Looking at that relationship, two important results emerge. First, financially constrained firms take longer to close capacity gaps. This indicates that financial constraints do indeed play a part in the investment process. Second, small firms close their capacity gaps faster than large firms do, but financial constraints seem to be of higher relevance to their adjustment. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:260&r=cfn |
| By: | Charlotta Groth |
| Abstract: | This paper estimates UK capital adjustment costs, using a data set for 34 industries spanning the whole UK economy for the period 1970-2000. The results show that it is costly to install new capital, and that it has been more costly to adjust the level of non-ICT capital (plant, machinery, buildings and vehicles) compared to the level of ICT capital (computers, software and telecommunications). The results are applied to an analysis of total factor productivity (TFP) growth. That analysis is focused on the 1990s - a period when the growth rate of the standard measure of TFP fell in the United Kingdom, while rising sharply in the United States. The estimates suggest that capital adjustment costs accounted for around two thirds of the observed slowdown in UK TFP growth. However, the adjustment is not large enough to reverse the finding that UK TFP growth declines in the second half of the 1990s, unlike the US experience of rising TFP growth. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:258&r=cfn |
| By: | Ana Del-Ro; Garry Young |
| Abstract: | This paper uses evidence from the British Household Panel Survey (BHPS) to examine how attitudes towards unsecured debt are related to household finances and other characteristics. An ordered-logit model is estimated for 1995 and 2000 using a self-reported indicator of financial distress as the dependent variable. This analysis suggests that the main factors causing debt problems are the unsecured debt-income ratio, the level of mortgage income gearing, the level of financial wealth of households, their health, ethnicity and marital status. While the proportion of households reporting debt problems did not change between 1995 and 2000, there were important shifts among different groups. In particular, more households in the youngest age group reported debt repayments were a heavy burden in 2000, while the opposite applies to the oldest age group where a smaller proportion of households than in 1995 reported debt was a heavy burden. These changes can largely be accounted for by the changing economic circumstances of these groups rather than an unrelated shift in attitudes. In particular, the increase in indebtedness of the young was the main factor accounting for their greater tendency to report debt problems. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:262&r=cfn |
| By: | Liz Dixon-Smith; Roman Goossens; Simon Hayes |
| Abstract: | We develop a simple bond pricing model to map the prices of individual EME sovereign bonds into term structures of implied (risk-neutral) default probabilities and expected recovery rates. Simple indices of bond spreads are found to be closely correlated with long-term risk neutral default probabilities, so may provide a straightforward way of monitoring shifts in investors' perceptions. But short-term risk neutral default probabilities behave quite differently, implying that there are periods of market-wide changes in volatility that do not show in measures of average spreads. Estimation of time-varying recovery rates appears to work best for countries in crisis, and suggests that expected recovery falls as the prospect of default becomes imminent. Movements in the median time to default generally appear plausible, both across time and across countries. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:261&r=cfn |
| By: | Ana Del-Ro; Garry Young |
| Abstract: | Household indebtedness has risen sharply in recent years, with large increases in both secured and unsecured borrowing. In this paper, waves 5 and 10 of the British Household Panel Survey (BHPS) for 1995 and 2000 are used to examine the determinants of participation in the unsecured debt market and the amount borrowed. Probit models for participation are estimated and age, income, positive financial prospects and housing tenure are found to be very significant and have the expected sign according to a life-cycle model for consumption. Regressions to explain the level of borrowing by individuals suggest that income is the main variable explaining crosssectional differences in unsecured debts. The increase in aggregate unsecured debt between 1995 and 2000 does not seem to be closely linked to changes in the determinants of debt market participation and has been mainly associated with the larger amounts borrowed by those with debts. Increases in income, better educational qualifications and improved prospects regarding the financial situation contributed to this result. The major part of the overall increase in unsecured debt is not explained by variables at the individual level, but is accounted for by common, unmodelled macroeconomic factors. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:263&r=cfn |
| By: | Velamuri, Rama (IESE Business School); Venkataraman, Sankaran (Darden Graduate School of Business Administration) |
| Abstract: | The normative foundations of the investor centered model of corporate governance, represented in mainstream economics by the nexus-of-contracts view of the firm, have come under attack, mainly by proponents of normative stakeholder theory. We argue that the nexus-of-contracts view is static and limited due to its assumption of price-output certainty. We attempt a synthesis of the nexus-of-contracts and the Knightian views, which provides novel insights into the normative adequacy of the investor-centered firm. Implications for scholarship and management practice follow from our discussion. |
| Keywords: | Theory of the firm; corporate governance; entrepreneurship; business ethics; stakeholder theory; |
| Date: | 2005–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0591&r=cfn |
| By: | Javier Gil-Bazo; Pablo Ruiz-Verdu |
| Abstract: | In this paper, we develop a model of the market for equity mutual funds that captures three key characteristics of this market. First, there is competition among funds. Second, fund managers' ability is not observed by investors before making their investment decisions. And third, some investors do not make optimal use of all available information. The main results of the paper are that 1) price competition is compatible with positive mark-ups in equilibrium; and 2) worse-performing funds set fees that are greater or equal than those set by better-performing funds. These predictions are supported by available empirical evidence. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb054309&r=cfn |
| By: | Rodrigo Cifuentes; Gianluigi Ferrucci; Hyun Song Shin |
| Abstract: | This paper explores liquidity risk in a system of interconnected financial institutions when these institutions are subject to regulatory solvency constraints and mark their assets to market. When the market's demand for illiquid assets is less than perfectly elastic, sales by distressed institutions depress the market prices of such assets. Marking to market of the asset book can induce a further round of endogenously generated sales of assets, depressing prices further and inducing further sales. Contagious failures can result from small shocks. We investigate the theoretical basis for contagious failures and quantify them through simulation exercises. Liquidity requirements on institutions can be as effective as capital requirements in forestalling contagious failures. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:264&r=cfn |
| By: | Fred Ramb; Alfons J. Weichenrieder |
| Abstract: | The paper analyses the financial structure of German inward FDI. From a tax perspective, intra-company loans granted by the parent should be all the more strongly preferred over equity the lower the tax rate of the parent and the higher the tax rate of the German affiliate. From our study of a panel of more than 8,000 non-financial affiliates in Germany, we find only small effects of the tax rate of the foreign parent. However, our empirical results show that subsidiaries that on average are profitable react more strongly to changes in the German corporate tax rate than this is the case for less profitable firms. This gives support to the frequent concern that high German taxes are partly responsible for the high levels of intra-company loans. Taxation, however, does not fully explain the high levels of intra-company borrowing. Roughly 60% of the cross-border intra-company loans turn out to be held by firms that are running losses. |
| Keywords: | foreign direct investment, financial structure, taxation |
| JEL: | F23 H25 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1252&r=cfn |
| By: | David Wang (Hsuan Chuang University) |
| Abstract: | This paper presents a model for estimating the default risks implicit in the prices of callable corporate bonds. The model considers three essential ingredients in the pricing of callable corporate bonds: stochastic interest rate, default risk, and call provision. The stochastic interest rate is modeled as a square-root diffusion process. The default risk is modeled as a constant spread, with the magnitude of this spread impacting the probability of a Poisson process governing the arrival of the default event. The call provision is modeled as a constraint on the value of the bond in the finite difference scheme. The empirical results are encouraging. First, the estimated default probabilities are consistent with Moody¡¦s ratings. The estimated default probabilities rise with lower ratings and fall with higher ratings. Second, the relationship between the estimated default probabilities and other bond characteristics is consistent with the intuition. The estimated default probabilities are negatively correlated with maturity and positively correlated with coupon payment, age, and issue size. This paper can be used both as a benchmark for models for estimating the default risks associated with callable corporate bonds and as a direction for future research. |
| Keywords: | Default Risk; Callable Bond |
| JEL: | G |
| Date: | 2005–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506013&r=cfn |
| By: | David Wang (Hsuan Chuang University) |
| Abstract: | This paper presents a model for pricing puttable corporate bonds that are subject to default risk. The model incorporates three essential ingredients in the pricing of defaultable puttable bonds: stochastic interest rate, default risk, and put provision. The stochastic interest rate is modeled as a square-root diffusion process. The default risk is modeled as a constant spread, with the magnitude of this spread impacting the probability of a Poisson process governing the arrival of the default event. The put provision is modeled as a constraint on the value of the bond in the finite difference scheme. This paper can be used both as a benchmark for models for pricing puttable corporate bonds that are subject to default risk and as a direction for future research. |
| Keywords: | Default Risk; Puttable Bond |
| JEL: | G |
| Date: | 2005–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506014&r=cfn |