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on Corporate Finance |
| By: | Acharya, Viral V; Subramanian, Krishnamurthy |
| Abstract: | Do legal institutions governing financial contracts affect the nature of real investments in the economy? We develop a simple model and provide evidence that the answer to this question is yes. We consider a levered firm's choice of investment between innovative and conservative technologies, on the one hand, and of financing between debt and equity, on the other. Bankruptcy code plays a central role in these choices by determining whether the firm is continued or liquidated in case of financial distress. When the code is creditor-friendly, excessive liquidations cause the firm to shy away from innovation. In contrast, by promoting continuation upon failure, a debtor-friendly code induces greater innovation. This effect remains robust when the firm attempts to sustain innovation by reducing its debt under creditor-friendly codes. Employing patents as a proxy for innovation, we find support for the real as well as the financial implications of the model: (1) In countries with weaker creditor rights, technologically innovative industries create disproportionately more patents and generate disproportionately more citations to these patents relative to other industries; (2) This difference of difference result is further confirmed by within-country analysis that exploits time-series changes in creditor rights, suggesting a causal effect of bankruptcy codes on innovation; (3) When creditor rights are stronger, innovative industries employ relatively less leverage compared to other industries; and (4) In countries with weaker creditor rights, technologically innovative industries grow disproportionately faster compared to other industries. Finally, while overall financial development fosters innovation, stronger creditor rights weaken this effect, especially for highly innovative industries. |
| Keywords: | creditor rights; entrepreneurship; financial development; growth; law and finance; R&D; technological change |
| JEL: | G3 K2 O3 O4 O5 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6307&r=cfn |
| By: | Maria Rosa Borges |
| Abstract: | This paper reports the results of tests on the weak-form market efficiency applied to the PSI-20 index prices of the Lisbon Stock Market from January 1993 to December 2006. As an emerging stock market, it is unlikely that it is fully information-efficient, but we show that the level of weak-form efficiency has increased in recent years. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. Non-trading or infrequent trading is not an issue because the PSI-20 only includes the 20 most traded shares. The tests are performed using daily, weekly and monthly returns for the whole period and for five sub-periods which reflect different trends in the market. We find mixed evidence, but on the whole, our results show that the Portuguese stock market index has been approaching a random walk behavior since year 2000, with a decrease in the serial dependence of returns. |
| JEL: | G14 G15 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp142007&r=cfn |
| By: | Maria Rosa Borges |
| Abstract: | Following a dividend distribution, investors expect the stock price to decrease on the ex-dividend day. With no market imperfections, the price decrease should exactly match the amount of the dividend, thus eliminating all opportunities for profitable arbitrage. Allowing for different taxes on dividends and on capital gains results in a stock price adjustment ratio different from one, but there is still a unique equilibrium. With a simple model, considering four types of investors, we show that the consideration of transaction costs results in multiple possible equilibria (equilibrium zone), defined by the arbitrage boundaries of each type of investors. We also show that trading activity by the different types of investors is reflected in abnormal trading volume. |
| Keywords: | Dividend; Arbitrage; Market equilibrium; Transactions costs; Taxes |
| JEL: | G12 G14 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp92007&r=cfn |
| By: | V. COLLEWAERT; S. MANIGART; R. AERNOUDT |
| Abstract: | In this paper we evaluate whether government intervention through the public funding of business angel networks is warranted. Based on a regional study of four BANs, we find that these subsidies reach their goals in terms of contribution to economic development and reducing financing and information problems entrepreneurial companies face. However, they are partly based on the wrong assumptions as these companies are not (yet) value creating. Therefore, we advise caution in using the market failure argument as grounds for government intervention in the informal risk capital market. |
| Keywords: | risk capital; business angels; policy; economic development; market failure |
| JEL: | G24 H71 M13 R58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/455&r=cfn |
| By: | Olga Bourachnikova (LaRGE (Laboratoire de Recherche en Gestion et en Economie),FSEG, ULP, Université de Strasbourg I, Pôle Européen de Gestion et d’Economie.) |
| Abstract: | The Behavioral Portfolio Theory (BTP) developed by Shefrin and Statman (2000) considers a probability weighting function rather than the real probability distribution used in Markowitz’s Portfolio Theory (1952). The optimal portfolio of a BTP investor, which consists in a combination of bonds and lottery ticket, can differ from the perfectly diversified portfolio of Markowitz. We found that this particular form of portfolio is not due to the weighting function. In this article we explore the implication of weighting function in the portfolio construction. We prove that the expected wealth criteria (used by Shefrin and Statman), even if the objective probabilities were deformed, is not a sufficient condition for obtaining significantly different forms of portfolio. Not only probabilities but also future outcomes have to be transformed. |
| JEL: | G11 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:07-011&r=cfn |
| By: | Régis Blazy (CREFI-LSF, Luxembourg University, Luxembourg School of Finance, Luxembourg.); Laurent Weill (LARGE, Université Robert Schuman, Institut d'Etudes Politiques, France) |
| Abstract: | This research investigates how bankruptcy law influences the design of debt contracts and the investment choice through the sanction of faulty managers. We model a lending relationship between a small firm and a monopolistic bank which decides the loan rate. The firm may perform asset substitution, which is punished by the Law through legal sanctions. These sanctions are implemented in case of costly bankruptcy only. This way of resolving financial distress can be avoided yet, if a private agreement is achieved. First, – when sanctions are high – we show that costly bankruptcy may be preferred by honest firms over private negotiation. Thus costly bankruptcy cannot be avoided under a severe legal environment. However, as the bank internalizes the rules of default, debt contracts are designed so that this situation never happens at equilibrium (“legal efficiency”).Second, a peculiar legislation may incite banks to accept generalized moral hazard (“economic inefficiency”). Then, the legislator can indectly enforce economic efficiency. However he must consider effects beyond the simple comparison between legal sanctions and bankruptcy costs, and focus on the impact of such legal sanctions on the design of the debt contract. Simulated results show that even small changes of legal sanctions may have drastic effects on the firm’s investment policy. Besides, it appears that extreme severity (i.e. 100% of the manager’s wealth is subject to legal sanctions) is not needed to ensure economic efficiency. Last, in some cases, the legislator may have the choice between several levels of legal sanctions all leading to economic efficiency: when choosing between them, the legislator affects the profit sharing only. |
| Keywords: | Bankruptcy, Credit Lending, Moral Hazard, Sanctions |
| JEL: | G33 D82 D21 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:07-012&r=cfn |
| By: | Ozun, Alper; Cifter, Atilla; Yilmazer, Sait |
| Abstract: | Extreme returns in stock returns need to be captured for a successful risk management function to estimate unexpected loss in portfolio. Traditional value-at-risk models based on parametric models are not able to capture the extremes in emerging markets where high volatility and nonlinear behaviors in returns are observed. The Extreme Value Theory (EVT) with conditional quantile proposed by McNeil and Frey (2000) is based on the central limit theorem applied to the extremes rater than mean of the return distribution. It limits the distribution of extreme returns always has the same form without relying on the distribution of the parent variable. This paper uses 8 filtered EVT models created with conditional quantile to estimate value-at-risk for the Istanbul Stock Exchange (ISE). The performances of the filtered expected shortfall models are compared to those of GARCH, GARCH with student-t distribution, GARCH with skewed student-t distribution and FIGARCH by using alternative back-testing algorithms, namely, Kupiec test (1995), Christoffersen test (1998), Lopez test (1999), RMSE (70 days) h-step ahead forecasting RMSE (70 days), number of exception and h-step ahead number of exception. The test results show that the filtered expected shortfall has better performance on capturing fat-tails in the stock returns than parametric value-at-risk models do. Besides increase in conditional quantile decreases h-step ahead number of exceptions and this shows that filtered expected shortfall with higher conditional quantile such as 40 days should be used for forward looking forecasting. |
| Keywords: | Value at-Risk; Filtered Expected shortfall; Extreme value theory; emerging markets |
| JEL: | C32 G0 C52 |
| Date: | 2007–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3302&r=cfn |
| By: | Basu, Anup; Drew, Michael |
| Abstract: | For participants in defined contribution (DC) plans who refrain from exercising investment choice, plan contributions are invested following the default investment option of their respective plans. Since default investment options of different plans vary widely in terms of their benchmark asset allocation, the most important determinant of investment performance, participants enrolled in these options face significantly different wealth outcomes at retirement. This paper simulates the terminal wealth outcomes under different static asset allocation strategies to evaluate their relative appeal as default investment choice in DC plans. We find that strategies with moderate allocation to stocks are consistently outperformed in terms of upside potential of exceeding the participant’s wealth accumulation target at retirement as well as downside risk of falling below that target outcome by very aggressive strategies whose allocation to stocks approach 100%. The risk of extremely adverse wealth outcomes for plan participants also does not appear to be very sensitive to asset allocation. Our evidence strongly suggests the appropriateness of strategies heavily tilted towards stocks to be nominated as default investment options in DC plans unless plan providers emphasize predictability of wealth outcomes over adequacy of retirement wealth. |
| Keywords: | defined contribution; default option; asset allocation; retirement wealth; downside risk |
| JEL: | G23 G18 G11 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3314&r=cfn |
| By: | Idrees Khawaja (Pakistan Institute of Development Economics, Islamabad.); Musleh-ud Din (Pakistan Institute of Development Economics, Islamabad.) |
| Abstract: | Interest spread of the Pakistan’s banking industry has been on the rise for the last two years. The increase in interest spread discourages savings and investments on the one hand, and raises concerns on the effectiveness of bank lending channel of monetary policy on the other. This study examines the determinants of interest spread in Pakistan using panel data of 29 banks. The results show that inelasticity of deposit supply is a major determinant of interest spread whereas industry concentration has no significant influence on interest spread. One reason for inelasticity of deposits supply to the banks is the absence of alternate options for the savers. The on-going merger wave in the banking industry will further limit the options for the savers. Given the adverse implications of banking mergers for a competitive environment, we argue that to maintain a reasonably competitive environment, merger proposals may be subjected to review by an antitrust authority with the central bank retaining the veto over merger approval. |
| Keywords: | Banks, Determination of Interest Rates, Mergers, Acquisitions |
| JEL: | G21 E43 G34 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2007:22&r=cfn |
| By: | Idrees Abdul Qayyum (Pakistan Institute of Development Economics, Islamabad.); Sajawal Khan (Pakistan Institute of Development Economics, Islamabad.) |
| Abstract: | This study aims at empirical investigation of the x-efficiency, scale economies, and technological progress of commercial banks operating in Pakistan using balance panel data for 29 banks. As banking sector efficiency is considered as a precondition for macroeconomic stability, monetary policy execution, and economic growth. We also make efficiency comparisons between the domestic and foreign banks and big banks. Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts for the period 2000-05. The scale economies for small banks, especially foreign banks are higher. Our results suggest the existence of technological progress for all groups of banks for the year 2000 and onward. It was lowest for big banks in 2000 and highest for foreign banks in 2005. Again, technological progress is lower for domestic banks relative to foreign banks. The results show also that the market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce without conferring any monopolistic power to these banks. This will also help in stability of the financial sector, which is an important concern of the State Bank of Pakistan (SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due to mergers are passed on to depositors and borrowers. |
| Keywords: | X-efficiency, Scale Economies, Technological Progress, Competition, Spread |
| JEL: | G14 G18 G21 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2007:23&r=cfn |