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on Corporate Finance |
| By: | Gyöngyi Lóránth; Emanuela Sciubba (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | This paper analyses the impact of the emergence of new funds on the portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance within a dynamic model. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the on-going process of the creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterises the mutual fund industry could explain why relative performance evaluation is widely in use. |
| Keywords: | Relative performance evaluation, fund management industry, ranking objectives, family of funds. |
| JEL: | L10 G11 G24 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0612&r=cfn |
| By: | Tarek Coury; Emanuela Sciubba (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | In complete markets economies (Sandroni [15]), or in economies with Pareto optimal outcomes (Blume and Easley [9]), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth. |
| Keywords: | Incomplete markets, market selection hypothesis, belief selection |
| JEL: | D51 D52 D80 G10 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0613&r=cfn |
| By: | Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser |
| Abstract: | This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted. |
| Keywords: | corporate income tax, multinationals, leverage, Thin-Capitalization rules, firm-level data |
| JEL: | G32 H25 H26 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1817&r=cfn |
| By: | Lars Peter Hansen; Jose Scheinkman |
| Abstract: | We create an analytical structure that reveals the long run risk-return relationship for nonlinear continuous time Markov environments. We do so by studying an eigenvalue problem associated with a positive eigenfunction for a conveniently chosen family of valuation operators. This family forms a semigroup whose members are indexed by the elapsed time between payoff and valuation dates. We represent the semigroup using a positive process with three components: an exponential term constructed from the eigenvalue, a martingale and a transient eigenfunction term. The eigenvalue encodes the risk adjustment, the martingale alters the probability measure to capture long run approximation, and the eigenfunction gives the long run dependence on the Markov state. We establish existence and uniqueness of the relevant eigenvalue and eigenfunction. By showing how changes in the stochastic growth components of cash flows induce changes in the corresponding eigenvalues and eigenfunctions, we reveal a long-run risk return tradeoff. |
| JEL: | G12 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12650&r=cfn |
| By: | Timothy J. Kehoe; David K. Levine |
| Abstract: | Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud's "corridor of stability," however: If the environment changes, the equilibrium allocation is no longer constrained efficient. |
| JEL: | D50 D52 D61 G13 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12656&r=cfn |
| By: | Wayne E. Ferson; Sergei Sarkissian; Timothy Simin |
| Abstract: | This paper studies the estimation of asset pricing model regressions with conditional alphas and betas, focusing on the joint effects of data snooping and spurious regression. We find that the regressions are reasonably well specified for conditional betas, even in settings where simple predictive regressions are severely biased. However, there are biases in estimates of the conditional alphas. When time-varying alphas are suppressed and only time-varying betas are considered, the betas become baised. Previous studies overstate the significance of time-varying alphas. |
| JEL: | C5 G1 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12658&r=cfn |
| By: | Luc Laeven; Ross Levine |
| Abstract: | The bulk of corporate governance theory examines the agency problems that arise from two extreme ownership structures: 100 percent small shareholders or one large, controlling owner combined with small shareholders. In this paper, we question the empirical validity of this dichotomy. In fact, one-third of publicly listed firms in Europe have multiple large owners, and the market value of firms with multiple blockholders differs from firms with a single large owner and from widely-held firms. Moreover, the relationship between corporate valuations and the distribution of cash-flow rights across multiple large owners is consistent with the predictions of recent theoretical models. |
| JEL: | G3 G32 G34 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12675&r=cfn |
| By: | Thanasis N. Christodoulopoulos (Bank of Greece, Financial Operations Department); Ioulia Grigoratou (Bank of Greece, Financial Operations Department) |
| Abstract: | Liquidity in government securities markets, despite their importance to both private and public agents, has received much attention in the literature only recently due to the fact that high-frequency data from trading in those markets were previously unavailable. This paper attempts to measure liquidity in the Electronic Secondary Market for Securities, where Greek government securities are traded, by estimating six different liquidity measures from high-frequency data. The most appropriate measures for this specific market are derived from the analysis and comparison of the obtained estimates. By any of the measures examined, the ten-year benchmark bond is the most liquid security. The bid-ask spread emerges as a good measure of liquidity for the pre euro area entry period, but looses part of its importance in the post euro area entry period of our sample. An interesting finding is that, in the Electronic Secondary Market for Securities, liquidity is only weakly related to price volatility, probably due to the specific structure of the government securities market in Greece. Therefore, trading activity is also found to be a good proxy of liquidity in this specific market. |
| Keywords: | Money demand; Greek bond market, market microstructure, liquidity, order flow. |
| JEL: | G10 D40 C40 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:23&r=cfn |
| By: | Yanagawa, Noriyuki; Ito, Seiro; Watanabe, Mariko |
| Abstract: | It is widely recognized that trade credit is an important financial mechanism, particularly in developing economies and transition economies where institutions are weak. This paper documents theoretical analysis and empirical accounts on what facilitates an effective supply of trade credit based on original surveys conducted in P.R. of China. Our theory predicts that trade volume and trade credit are increasing function of cash held by the buyer and enforcement technology of the seller. Furthermore, if the state sector’s enforcement technology is high, it has positive external effect to expand the volumes of trade credit and trades in the whole economy. From the data, we found that government made active commitment in enforcement of trade credit contract and the government owned firms are main supplier and receivers of trade credit, which suggest that enforcement by government and state sector were effective against presumptions in the previous literatures. |
| Keywords: | Law and finance, Economic growth, Incomplete contract, Enforcement, Trade policy, Credit, China |
| JEL: | G2 K0 O5 P31 Q5 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper58&r=cfn |
| By: | Pablo de Andres Alonso (Department of Financial Economics and Accounting, University of Valladolid); Eleuterio Vallelado Gonzalez (Department of Financial Economics and Accounting, University of Valladolid) |
| Abstract: | We test hypotheses on the dual role of boards of directors for a sample of large international commercial banks. We find an inverted U shaped relation between bank performance and board size that justifies a large board and imposes an efficient limit to the board’s size; a positive relation between the proportion of non-executive directors and performance; and a proactive role in board meetings. Our results show that bank boards’ composition and functioning are related to directors’ incentives to monitor and advise management. All these relations hold after we control for bank business, institutional differences, size, market power in the banking industry, bank ownership and investors’ legal protection. |
| Keywords: | Corporate Governance, Board of Directors, Commercial Banks |
| JEL: | G32 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbe:wpaper:200604&r=cfn |
| By: | Judit Montoriol (Department of Business Economics, Universitat Autonoma de Barcelona) |
| Abstract: | We examine how relationship lending affects firm performance using a panel dataset of about 70,000 small and medium Spanish firms in the period 1993-2004. We model firm performance jointly with the firm's choice of the number of bank relationships. Controlling for firm fixed effects and using instrumental variables for the decision on the number of bank relationships, we found that firms maintaining exclusive bank relationships have lower profitability. The result is consistent with the view that banks appropriate most of the value generated through close relationships with its borrowers as long as they do not face competition from other lenders |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbe:wpaper:200605&r=cfn |
| By: | Raquel Fonseca; Natalia Utrero-González (Department of Business Economics, Universitat Autonoma de Barcelona) |
| Abstract: | This paper investigates the importance that market regulation and financial imperfections have on firm growth. We analyse institutions affecting labor market as Employment Protection Laws (EP) and Product Market Regulation (PM). We show that together with the beneficial effects of financial development, a firm will get less financing, and thus investless, in a weak financial market (finance effect), the strictness of product and labor market regulations also affect firm growth (labor effect). In particular, we show that the stricter the rules the more detrimental the influence on growth in sectoral value added for a large number of coun-tries. We also show that the labor effect overcomes the positive finance effect. |
| Keywords: | Financial development, labor and product market institutions, growth |
| JEL: | G2 G32 J32 L10 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:bbe:wpaper:200503&r=cfn |