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on Corporate Finance |
| By: | Hitoshi Matsushima (Faculty of Economics, University of Tokyo) |
| Abstract: | We model the stock market as a timing game, in which arbitrageurs who are not expected to be certainly rational compete over profit by bursting the bubble caused by investors’ euphoria. The manager raises money by issuing shares and the arbitrageurs use leverage. If leverage is weakly regulated, it is the unique Nash equilibrium that the bubble persists for a long time. This holds even if the euphoria is negligible and all arbitrageurs are expected to be almost certainly rational. This bubble causes serious harm to the society, because the manager uses the money raised for his personal benefit. |
| Keywords: | Euphoria, Leverage, Rational and Behavioral Arbitrageurs, Harmful Bubble, Unique Nash Equilibrium |
| JEL: | C72 C73 D82 G14 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:711&r=cfn |
| By: | Byström, Hans (Department of Economics, Lund University) |
| Abstract: | This paper describes how credit default swaps could be employed to create performance based executive compensation portfolios that reflect the value of a firm’s debt as well as equity; i.e. the total value of all a firm’s assets. So-called Asset Value Unit (AVU) compensation portfolios are defined and compared to ordinary (long-term incentive) stock compensation portfolios for a range of banks from the recent EU-wide stress testing exercise conducted by the Committee of European Banking Supervisors (CEBS). While our study is limited to bank executives, the suggested method of paying executives using credit default swaps in addition to stocks also works for non-financial firms as well as for non-executives. The empirical results suggest that executive/CEO compensation plans based on asset values behave more reasonably than traditional equity based plans. |
| Keywords: | executive pay; executive compensation; stock; credit default swap; bank; stress test |
| JEL: | G10 G21 G34 G38 |
| Date: | 2010–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2010_009&r=cfn |
| By: | Gropp, R.; Grundl, C.; Guttler, A. (Tilburg University, Center for Economic Research) |
| Abstract: | In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7% and the average loan size declined by 13%. Remaining borrowers paid 57 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefitted more from the guarantee. We show that both the credit quality of new customers improved (screening) and that the loans of existing riskier borrowers were less likely to be renewed (monitoring), after the removal of public guarantees. Public guarantees seem to be associated with substantial moral hazard effects. |
| Keywords: | banking;public guarantees;credit risk;moral hazard |
| JEL: | G21 G28 G32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201069s&r=cfn |
| By: | Schaeck, K.; Cihák, M. (Tilburg University, Center for Economic Research) |
| Abstract: | How can competition enhance bank soundness? Does competition improve soundness via the efficiency channel? Do banks heterogeneously respond to competition? To answer these questions, we exploit an innovative measure of competition [Boone, J., A new way to measure competition, EconJnl, Vol. 118, pp. 1245-1261] that captures the reallocation of profits from inefficient banks to their efficient counterparts. Based on two complementary datasets for Europe and the U.S., we first establish that the new competition indicator captures a broad variety of other characteristics of competition in a consistent manner. Second, we verify that competition increases efficiency. Third, we present novel evidence that efficiency is the conduit through which competition contributes to bank soundness. In a final examination of banks’ heterogeneous responses to competition, we find that smaller banks’ soundness measures respond more strongly to competition than larger banks’ soundness measures, and two-stage quantile regressions indicate that the soundness-enhancing effect of competition is larger in magnitude for sound banks than for fragile banks. |
| Keywords: | bank competition;efficiency;soundness;Boone indicator;quantile regression |
| JEL: | G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201068s&r=cfn |
| By: | Meg Sato |
| Abstract: | This paper analyses two pronounced features of Japanese corporate governance--large corporate boards almost entirely composed of insiders and the tendency to appoint CEOs through internal promotions. It is often argued that Japanese boards are less effective in monitoring CEOs than U.S. boards which tends to be composed of a small number of directors, majority of which are outsiders. I show that Japanese corporate governance exhibits less inefficiencies than U.S. corporate governance. I further discuss the recent changes in Japanese corporate governance and provide theoretical explanation that they do not necessarily enhance board monitoring. |
| JEL: | G30 K22 P51 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:csg:ajrcau:387&r=cfn |
| By: | Itai Agur |
| Abstract: | This paper analyzes the trade-off between financial stability and credit rationing that arises when increasing capital requirements. It extends the Stiglitz-Weiss model of credit rationing to allow for bank default. Bank capital structure then matters for lending incentives. With default and rationing endogenous, optimal capital requirements can be analyzed. Introducing bank financiers, the paper also shows that uninsured funding raises the sensitivity of rationing to capital requirements. In a world with much wholesale finance, capital requirements have a stronger impact on the real economy. But wholesale finance also amplifies capital requirements’ effect on default rates. |
| Keywords: | Rationing; Capital requirements; Regulation; Wholesale finance; Deposit Insurance |
| JEL: | G21 G28 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:257&r=cfn |