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on Corporate Finance |
| By: | Francis Covas; Wouter J. Den Haan |
| Abstract: | We document the cyclical behavior of debt, equity, and retained earnings for different firm categories using firm-level Canadian data. There is evidence of both procyclical equity and debt issuance for all firm categories but the timing differs. In particular, there is strong evidence that equity issuance increases in anticipation of an expansion. During this phase, some substitution between debt and equity takes place. After the expansion has reached its peak, equity issuance starts to decrease and during this phase there is strong evidence of procyclical debt issuance and some substitution out of equity seems to take place. Retained earnings is procyclical except for small firms. |
| Keywords: | Business fluctuations and cycles |
| JEL: | E32 G32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-44&r=cfn |
| By: | Sergey Stepanov (New Economic School and CEFIR) |
| Abstract: | Adequate access to courts by minority shareholders is commonly viewed as an important element of a good corporate governance system. Should shareholders be provided with easy access to courts when judges are unlikely to punish opportunistic managers? It might seem that having an extra instrument of protection is always better as long as it provides some protection against managerial self-dealing. We present a model, which shows that facilitating shareholder litigation in a system where courts are biased towards managers can actually lower efficiency, as it can lead to either excessive litigation or excessive monitoring of managers by shareholders. The latter effect arises when litigation is very costly for the firm, but cheap for an individual shareholder. In this case, easy litigation does not lead to a greater reliance on the judiciary and results in more, rather than less, concentrated ownership. This is the effect of the optimal adjustment of the ownership structure to an increase in shareholders’ willingness to bring suits when courts are manager-biased. Our model implies that removing impediments to shareholder litigation in countries where courts are reluctant to protect shareholders may increase the cost of corporate governance there. |
| Keywords: | corporate governance, shareholder protection, shareholder litigation, monitoring, biased courts |
| JEL: | G32 G34 K41 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0106&r=cfn |
| By: | David R. Skeie |
| Abstract: | Vesting of equity payments to an entrepreneur, which is a form of time-contingent compensation, is very common in venture capital contracts. Empirical research suggests that vesting is used to help overcome asymmetric information and agency problems. We show in a theoretical model that vesting equity to an entrepreneur over a long period of time acts as a screening device against a bad entrepreneur type. But incomplete contracts due to hold-up by the venture capitalist imply that equity compensation, in the form of either short-term or long-term vesting, cannot provide standard contractible equity incentives for the entrepreneur to take an unobservable action involving effort. We introduce a new model of effort based on a verifiable choice of an effort-intensive project, for which the short-term vesting of equity can provide incentives, but which results in a trade-off between incentives and screening. Contingent control rights are a substitute for short-term vesting and provide the largest incentives for effort by fully protecting the entrepreneur from hold-up. We also show that a new link between equity cash flow claims and control rights is that residual equity control rights over the firm are necessary to protect residual equity claims from hold-up. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:297&r=cfn |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - [CNRS : UMR7534] - [Université Paris Dauphine - Paris IX]) |
| Abstract: | The theory of asset pricing takes its roots in the Arrow-Debreu model (see,for instance, Debreu 1959, Chap. 7), the Black and Scholes (1973) formula,and the Cox and Ross (1976) linear pricing model. This theory and its link to arbitrage has been formalized in a general framework by Harrison and Kreps (1979), Harrison and Pliska (1981, 1983), and Du¢e and Huang (1986). In these models, security markets are assumed to be frictionless: securities can be sold short in unlimited amounts, the borrowing and lending rates are equal, and there is no transaction cost. The main result is that the price process of traded securities is arbitrage free if and only if there exists some equivalent probability measure that transforms it into a martingale, when normalized by the numeraire. Contingent claims can then be priced by taking the expected value of their (normalized) payo§ with respect to any equivalent martingale measure. If this value is unique, the claim is said to be priced by arbitrage and it can be perfectly hedged (i.e. duplicated) by dynamic trading. When the markets are dynamically complete, there is only one such a and any contingent claim is priced by arbitrage. The of each state of the world for this probability measure can be interpreted as the state price of the economy (the prices of $1 tomorrow in that state of the world) as well as the marginal utilities (for consumption in that state of the world) of rational agents maximizing their expected utility. |
| Keywords: | arbitrage, control problem |
| Date: | 2007–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00167152_v1&r=cfn |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - [CNRS : UMR7534] - [Université Paris Dauphine - Paris IX], DRM - Dauphine Recherches en Management - [CNRS : UMR7088] - [Université Paris Dauphine - Paris IX]); Clotilde Napp (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - [CNRS : UMR7534] - [Université Paris Dauphine - Paris IX], DRM - Dauphine Recherches en Management - [CNRS : UMR7088] - [Université Paris Dauphine - Paris IX]) |
| Abstract: | Under a comonotonicity assumption between aggregate dividends and the market portfolio, the CCAPM formula becomes more tractable and more easily testable. In this paper, we provide theoretical justifications for such an assumption. |
| Keywords: | CAPM, CCAPM, market beta, equilibrium, financial markets |
| Date: | 2007–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00167159_v1&r=cfn |
| By: | Niinimäki , Juha-Pekka (Bank of Finland Research) |
| Abstract: | There is substantial evidence that new banks and rapidly growing banks are risk prone. We study this problem by designing a relationship-lending model in which a bank operates as a financial intermediary and centralised monitor. In the absence of deposit insurance, the bank’s limited liability option creates an incentive problem between the bank and its depositors, the likely outcome of which is a reduction in the amounts of resources allocated to monitoring its borrowers. Hence, the bank must signal its safety to depositors by maintaining the equity ratio held. The optimal equity ratio is dynamic, ie new banks need relatively more equity than established banks, which enjoy profitable old lending relationships – charter value – that reduce the incentive problem. However, if an established bank grows rapidly, its share of old relationships also decreases and the bank will have to raise its equity ratio. With deposit insurance, regulators should set higher equity requirements for new banks and rapidly growing banks than for those in a more established position. The results of the model can be extended to more general inter-firm control of credit institutions. |
| Keywords: | financial intermediation; relationship banking; financial fragility; bank regulation; deposit insurance; moral hazard; product quality |
| JEL: | G11 G21 G28 |
| Date: | 2007–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2001_016&r=cfn |
| By: | IVALDI, Marc; MOTIS, Jrissy |
| JEL: | C14 G14 G34 L10 L20 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:7217&r=cfn |
| By: | Marcelo Fernandes (Queen Mary, University of London); Marcelo Cunha Medeiros (Department of Economics, PUC-Rio); MArcelo Scharth |
| Abstract: | This paper performs a thorough statistical examination of the time-series properties of the market volatility index (VIX) from the Chicago Board Options Exchange (CBOE). The motivation lies on the widespread consensus that the VIX is a barometer to the overall market sentiment as to what concerns risk appetite. To assess the statistical behavior of the time series, we run a series of preliminary analyses whose results suggest there is some long-range dependence in the VIX index. This is consistent with the strong empirical evidence in the literature supporting long memory in both options-implied and realized volatilities. We thus resort to linear and nonlinear heterogeneous autoregressive (HAR) processes, including smooth transition and threshold HAR-type models, as well as to smooth transition autoregressive trees (START) for modeling and forecasting purposes. The in-sample results for the HAR-type indicate that they cope with the long-range dependence in the VIX time series as well as the more popular ARFIMA model. In addition, the highly nonlinear START specification also does a god job in controlling for the long memory. The out-of-sample analysis evince that the linear ARMA and ARFIMA models perform very well in the short run and very poorly in the long-run, whereas the START model entails by far the best results for the longer horizon despite of failing at shorter horizons. In contrast, the HAR-type models entail reasonable relative performances in most horizons. Finally, we also show how a simple forecast combination brings about great improvements in terms of predictive ability for most horizons. |
| Keywords: | heterogeneous autoregression, implied volatility, smooth transition, VIX. |
| JEL: | G12 C22 C53 E44 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:548&r=cfn |
| By: | Schmukler, Sergio L.; Gozzi, Juan Carlos; de la Torre, Augusto |
| Abstract: | Interest in access to finance has increased significantly in recent years, as growing evidence suggests that lack of access to credit prevents lower-income households and small firms from financing high return investment projects, having an adverse effect on growth and poverty alleviation. This study describes some recent innovative experiences to broaden access to credit. These experiences are consistent with an emerging new view that recognizes a limited role for the public sector in financial markets, but contends that there might be room for well-designed, restricted interventions in collaboration with the private sector to foster financial development and broaden access. The authors illustrate this view with several recent experiences in Latin America and then discuss some open policy questions about the role of the public and private sectors in driving these financial innovations. |
| Keywords: | Debt Markets,Banks & Banking Reform,,Emerging Markets,Bankruptcy and Resolution of Financial Distress |
| Date: | 2007–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4326&r=cfn |
| By: | Michalski, Grzegorz |
| Abstract: | Firms hold cash for a variety of different reasons. Generally, cash balances held in a firm can be called considered, precautionary, speculative, transactional and intentional. The first are the result of management anxieties. Managers fear the negative part of the risk and hold cash to hedge against it. Second, cash balances are held to use chances that are created by the positive part of the risk equation. Next, cash balances are the result of the operating needs of the firm. In this article, we analyze the relation between these types of cash balances and risk. This article also contains propositions for marking levels of precautionary cash balances and speculative cash balances. Current models for determining cash management, assign no minimal cash level, or their minimal cash level is based on the manager's intuition. Presented in this article model avoid intuition and is based on calculation. Application of this proposition should help managers to make better decisions to maximize the value of a firm. |
| Keywords: | Demand for Cash; Cash balances; Risk; Uncertainty; Real Options; Option Value of Money; Short-Term Financial Management; Working Capital Management |
| JEL: | G39 G32 |
| Date: | 2006–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4541&r=cfn |
| By: | Pendleton, Andrew |
| Abstract: | Using data from a survey of employee stock-owners in seven UK companies, the author examines the determinants of excessive ownership of company stock in savings portfolios. The paper draws on the insights from the recent 401 (k) literature and examines the role of attitudes as well as demographic characteristics. By using a survey of employees it is possible to investigate the role of these factors more precisely than in much of the 401 (k) literature. The results indicate that loyalty and familiarity are important determinants of concentration in employer stock. Income is important too: the results imply that as savings rise with income, familiarity especially leads employees to channel much of this into employer stock. |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:wrc:ymswp1:24&r=cfn |