European Financial Management 2011 Archive

January 2011, VOL 17:1 March 2011, VOL 17:2 June 2011, VOL 17:3 September 2011, VOL 17:4 November 2011, VOL 17:5

European Financial Management, VOL 17:1 January 2011

Can Stock Markets Predict M&A Failure? A Study on European Transactions in the Fifth Takeover Wave

Katrien Craninckx and Nancy Huyghebaert

In this paper we develop various measures of M&A failure for an intra-European sample during the fifth takeover wave: inferior long-term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short-term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately-held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long-term losses. In contrast, when targets are privately held, we find no evidence of such an association.

Keywords:Mergers and acquisitions, Europe, fifth wave, announcement effect, failure

JEL Classification: G34

ԈotԠDebt Markets and Capital Structure

John A. Doukas, Michael Guo and Bilei Zhou

This paper examines the motives of debt issuance in hot-debt market periods and its impact on capital structure over the period 1970ֲ006. We find that perceived capital market conditions as favorable, an indication of market timing, and adverse selection costs of equity (i.e., information asymmetry) are important frictions that lead certain firms to issue more debt in hot- than cold-debt market periods. Using alternative hot-debt market issuance measures and controlling for other effects, such as structural shifts in the debt market, industry, book-to-market, price-to-earnings, size, tax rates, debt market conditions and adjustment costs based on debt credit ratings, we find that firms with high adverse selection costs issue substantially more (less) debt when market conditions are perceived as hot (cold). Moreover, the results indicate that there is a persistent hot-debt market effect on the capital structure of debt issuers; hot-debt market issuing firms do not actively rebalance their leverage to stay within an optimal capital structure range.

Keywords:Hot Debt Markets, Information Asymmetry, Capital Structure, Market Timing

JEL Classification: G12, G14, G31, G32.

The Impact of Corporate Governance Press News on Stock Market Returns

Alessandro Carretta, Vincenzo Farina, Franco Fiordelisi, Duccio Martelli and Paola Schwizer

Stock market prices reflect information regarding firmsҠbusiness environments, operations and, in general, their fundamentals. Recently, various studies have analysed the link between news coverage and stock prices but no evidence exists on how channels and ways of communication of information affect investorsҠbehaviour. We analyses these aspects focussing on a large sample of corporate governance news published between 2003 and 2007 in ԉl Sole 24 OreԬ Italyӳ major financial newspaper. We show that before news is made public investors are only able to assess the type of corporate governance event underlying it. After publication, investors are influenced by the content (positive or negative) and the tone of communication (strong or weak) of the news.

Keywords:corporate governance, shareholder value, event study, text analysis

JEL Classification: G14, G34

Default and Recovery Risk Dependencies in a Simple Credit Risk Model

Harald Scheule, Benjamin Bade and Daniel Roesch

This paper provides evidence for the relationship between credit quality, recovery rate, and correlation. The paper finds that rating grade, rating shift, and macroeco- nomic factors provide a highly significant explanation for default risk and recovery risk of US bond issues. The empirical data suggest that default and recovery pro- cesses are highly correlated. Therefore, a joint approach is required for estimating time-varying default probabilities and recovery rates that are conditional on default. This paper develops and applies such a model.

Keywords:Asset Value, Correlation, Credit Portfolio, Loss Given Default, Merton Model, Probability of Default, Recovery, Volatility

JEL Classification: G20, G28, C51

The Return of the Size Anomaly: Evidence from the German Stock Market

Amir Amel-Zadeh

This paper examines the size-effect in the German stock market and intends to address several unanswered issues on this widely known anomaly. Unlike recent evidence of a reversal of the size anomaly we document a conditional relation between size and returns. We also detect strong momentum across size portfolios. Our results indicate that the marginal effect of firm size on stock returns is conditional on the firmӳ past performance. We use an instrumental variable estimation to address Berkӳ critique of a simultaneity bias in prior studies on the small firm effect and to investigate the economic rationale behind firm size as an explanatory variable for the variation in stock returns. The analysis in this paper indicates that firm size captures firm characteristic components in stock returns and that this regularity cannot be explained by differences in systematic risk.

Keywords:Size effect, small firm effect, capital market anomaly, capital asset pricing, CAPM, efficient markets

JEL Classification: G11, G12, G15, C31

Information Transmission in the World Money Markets

Bruce G. Resnick and Gary L. Shoesmith

Using 1,966 daily observations since the introduction of the euro, we apply cointegration and error correction tests to examine information transmission in the major world money markets as represented by the domestic CD markets and the Eurocurrency market for the U.S. dollar, euro, Japanese yen, and British pound sterling. Our inter-market tests show a high degree of integration and interdependency among inter-market interest rates. Our intra-market results show that $ LIBOR and ŠLIBOR rates drive LIBOR and àLIBOR. Application of Johansenӳ (1988) multivariate test procedure and Gonzalo and Grangerӳ (1995) long-memory components technique confirms and reinforces our intra-market findings that the system of four LIBOR rates is fully integrated (i.e., three cointegrating vectors), with the single common trend driven by $ LIBOR and ŠLIBOR. These results are consistent with the strength of the dollar and yen relative to the pound sterling and the euro during the developing world financial crisis in late 2008.

Keywords: Eurocurrency, money market, information transmission, cointegration, error correction

JEL Classification: C32, F36, G12, G15

European Financial Management, VOL 17:2 March 2011

The Performance of the European Market for Corporate Control: Evidence from the 5th Takeover Wave

Marina Martynova and Luc Renneboog

This paper presents an in-depth analysis of the performance of large, medium-sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistical significant abnormal returns of 9.13% for the targets and of 0.53% for bidding firms. The characteristics of the targets and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the targetӳ but decreases bidderӳ returns; (ii) the private status of the target is associated with higher bidderӳ returns; and (iii) an equity payment leads to a decrease in both bidderӳ and targetӳ returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre-announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidderӳ and targetӳ share prices. Bidders that accumulate a toehold stake in the target experience higher post-announcement returns. A comparison of the UK and Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the targetӳ incumbent shareholders.

Keywords: takeovers, mergers and acquisitions, diversification, hostile takeovers, means of payment, cross-border acquisitions, private target, partial acquisitions, blockholder, toehold, investor protection, UK, Continental Europe

JEL Classification:G34

CEO Compensation and Firm Performance: An Empirical Investigation of UK Panel Data

Neslihan Ozkan

Abstract: This paper examines the link between CEO pay and performance employing a unique, hand-collected panel data set of 390 UK non-financial firms from the FTSE All Share Index for the period 1999-2005. We include both cash (salary and bonus) and equity-based (stock options and long-term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay-performance elasticity for UK CEOs seems to be lower; pay-performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75 % (0.95 %) in cash (total direct) compensation. We also find that both the median share holdings and stock-based pay-performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay-performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay-performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.

Keywords: CEO compensation; corporate governance

JEL Classification: G3

Collateral in Monetary Policy Operations

Francisco Jose Callado Munoz and Fernando Restoy Lozano

Abstract: We present a portfolio decision model for banks that permits us to estimate the costs associated with the need to collateralize loans from the central bank. This allows us to calibrate the difference between a restrictive collateral eligibility framework for open market operations, such as that applied by the FED, with a more flexible approach such as that of Eurosystem. We also document that there could potentially appear relevant cost differences between the various collateral mobilization procedures (pooling and earmarking) that currently coexist in the eurozone.

Keywords:collateral, monetary policy, cost

JEL Classification: E52, E58

Optimal Investment Decisions for Two Positioned Firms Competing in a Duopoly Market With Hidden Competitors

Manuel Rocha Armada,Lawrence Kryzanowski and Paulo Jorge Pereira

Abstract: This paper extends the literature dealing with the option to invest in a duopoly market for a leader-follower setting. A restrictive assumption embodied in the models in the current literature is that investment opportunities are semi-proprietary in that the two identified or positioned firms are guaranteed to hold at least the followerӳ position. More competition is realistically captured in our model by introducing the concept of hidden rivals so that the places in the market can be taken not only by positioned firm but also by these hidden competitors. The value functions and the optimal triggers for the positioned firms differ materially in settings with(out) the presence of hidden rivals. Unlike existing models, our model allows for (a)symmetric market shares and investment costs for the leader and the follower. Cooperative entrance by the two positioned firms is also modeled.

Keywords:real options, hidden competition, duopoly, investment costs.

JEL Classification: C73, D81, G31, L13

Product Market Competition, Managerial Incentives, and Firm Valuation

Gabrielle Wanzenried,Markus Schmid and Stefan Beiner,

Abstract: This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic in-teraction between firms and a principal agent relationship, we analyze the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonli-near relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected dataset comprising over 600 observations on 200 Swiss firms over the 2002 to 2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.

Keywords:product market competition,strategic interaction, principal agent relationship, managerial incentives, firm valuation

JEL Classification: G30, J33, L1

Intraday Seasonalities and Macroeconomic News Announcements

Kari Harju and Syed Mujahid Hussain

Abstract: Using a data set consisting of more than five years of 5-minute intraday stock index returns for major European stock indices and US macroeconomic surprises, conditional means and volatility behavior in European markets were investigated. The findings suggest that the opening of the US stock market significantly raises the level of volatility in Europe, all markets responding in an identical fashion. Furthermore, US macroeconomic surprises exert an immediate and major impact on both the European stock marketsҠintraday returns and volatilities. Thus, high frequency data appear to be critical for the identification of news impacting the markets.

Keywords:conditional mean, conditional volatility, information spillover, intraday seasonality, Flexible Fourier Form, macroeconomic surprises

JEL Classification: G14, G15

Financial Research in the European Region: A Long-Term Assessment (1990ֲ008)

Kam C. Chan, Chih-Hsiang Chang and Carl R. Chen

We provide a long-term comprehensive assessment of financial research in the European region. As with earlier findings in Chan, Chen, and Steiner (2004), the European academic institutions, as a group, perform very well during the 1990ֲ008 period. Specifically, European institutions exhibit a steady increase in the share of global financial research. During the sample period, the top five institutions were London Business School, INSEAD, Sir John Cass Business School, London School of Economics, and Erasmus University Rotterdam. Subperiod analysis shows that some universities, such as Oxford University, increased their research output substantially. Many of the leading European scholars received their training and had prior experience in North American institutions. We find that a high ranking of the scholarsҠaffiliated and doctoral granting institutions is correlated with finance research productivity.

Keywords:financial research, assessment

JEL Classification: G0

European Financial Management, VOL 17:3 June 2011

The Future of Private Equity

Josh Lerner

After a period of robust growth, the private equity industry has experienced a marked decline. In the wake of the 2007 economic crisis, the future of the venture and buyout industries seems unclear. This speech discusses four possible scenarios for the future of the private equity industry by examining the short- and long-run determinants of private equity supply and demand. Possible scenarios include Recovery, Back to the Future, The Limited Partnerӳ Desertion, and A Broken Industry. Although support is given for each of the scenarios, a clear prediction for the future remains difficult. The future of the private equity market is likely to be the subject of debate for some time to come.

Keywords:private equity, venture capital, buyout funds

JEL Classification: G1, G2

The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle

Meisner Nielsen

Abstract: This paper uses a novel dataset to analyze the return to direct investments in private firms by pension funds. We have two key findings. First, direct investments in private firms have underperformed public equity by 392 basis points per annum under conservative risk adjustments. Second, initial mispricing, due to over-optimism or misperceived risk, and subsequent low capital gains seem to explain the gap in returns to private firms. Overall, these findings complement the finding of Moskowitz and Vissing-J𲧥nsen (2002) of low returns on entrepreneurial investments and provide new insight into the existence of what they call the private equity premium puzzle: Even professional investors with well-diversified portfolios like pension funds seem to get a poor risk-return tradeoff from investing directly in private firms.

Keywords: private equity; pension funds; direct investments, private firms

JEL Classification: G23, G24

Adverse Selection, Investor Experience and Security Choice in Venture Capital Finance: Evidence from Germany

Thomas Hartmann-Wendels, Georg Keienburg and Soenke Sievers

Abstract: This article analyzes 336 German venture capital transactions from 1990 to 2005 and seeks to determine why selected financial securities differ across deals. We find that a broad array of financial instruments is used, covering straight equity, mezzanine and debt-like securities. Based on the chosen financial securitiesҍ upside potential and downside protection characteristics, we provide an explanation for the differing use of these securities. Our results show that investors' deal experience, adverse selection risks and economic prospects in the public equity market influence the selection of financial securities.

Keywords:venture capital, capital structure, contract theory, deal experience

JEL Classification: G24, G32

The Wealth Effects of Reducing Private Placement Resale Restrictions


Abstract: Recently, the U.S. Securities and Exchange Commission reduced resale restrictions on Rule 144 private placements from 12 months to 6 months with the intention of lowering the cost of equity capital for issuing firms. In Canada, similar regulatory changes were adopted several years ago, providing a unique opportunity to test the wealth effects of reducing private placement resale restrictions. We find that shortening resale restrictions reduces the liquidity portion of offer price discounts, and thus lowers the cost of equity capital for issuing firms, but has no significant effect on announcement-period abnormal returns after controlling for issuer type. However, there is a fundamental shift in the types of firms making private placements of common stock after the legislation-induced easing of resale restrictions. Specifically, we find that smaller firms and firms with greater information asymmetry are less likely to issue privately placed common stock after the legislative change, suggesting that the easing of resale restrictions reduces the costly signal that helps to overcome the Myers and Majluf (1984) underinvestment problem.

Keywords:private placements, special warrants, offer price discount, announcement effects

JEL Classification: G32, G28, G14

The First Step of the Capital Flow from Institutions to Entrepreneurs: The Criteria for Sorting Venture Capital Funds

Alexander Groh and Heinrich Liechtenstein

Abstract: We contribute to the knowledge about the capital flow from institutional investors via venture capital (VC) funds as intermediaries to their final destination, entrepreneurial ventures. Therefore, we run a world-wide survey among limited partners to determine the importance of several criteria when they select VC funds. The expected deal flow and access to transactions, a VC fundӳ historic track record, his local market experience, the match of the experience of team members with the proposed investment strategy, the teamӳ reputation, and the mechanisms proposed to align interest between the investors and the VC funds are the top criteria. A principal component analysis reveals three latent drivers in the selection process: Ԍocal Expertise and Incentive StructureԬ ԉnvestment Strategy and Expected ImplementationԬ and Ԑrestige/Standing vs. CostԮ It becomes evident that limited partners search for teams which are able to implement a certain strategy at given cost. Thereby, they focus on an incentive structure that mitigates agency costs.

Keywords:Asset Allocation, Institutional Investor, Entrepreneurial Finance, Venture Capital

JEL Classification: G23, G24

Exits, Performance, and Late Stage Private Equity: The Case of UK Management Buy-outs

Ranko Jelic and Mike Wright

Using a hand-collected dataset of 1,225 buy-outs, we examine post buy-out and post exit long term abnormal o perating performance of UK management buy-outs, during the period 1980-2009. Our univariate and panel data analysis of post buy-out performance conclusively show positive changes in output. We also find strong evidence for improvements in employment and output and a lack of significant changes in efficiency and profitability following IPO exits. IPOs from the main London Stock Exchange (LSE) market outperform their counterparts from the Alternative Investment Market (AIM) only in terms of changes in output. For SMBOs, performance declines during the first buy-out but in the second buy-out performance stabilizes until year three, after which profitability and efficiency fall while employment increases. Although PE backed buy-outs do not exhibit either post buy-out or post exit underperformance, they fail to over-perform their non-PE backed counterparts. In the subsample of buy-outs exiting via IPOs on the AIM, PE firms do not outperform non-PE buy-outs. Our findings highlight the importance of tracing the overall performance of buy-outs over a longer period and controlling for sample selection bias related to the provision of PE backing.

Keywords:MBO, Operating Performance, Private Equity, IPO, SMBOs

JEL Classification: G24, G32, G34

Institutional Investment in Listed Private Equity

Douglas Cumming, Grant Fleming and Sofia Johan

We provide a long-term comprehensive assessment of financial research in the European region. As with earlier findings in Chan, Chen, and Steiner (2004), the European academic institutions, as a group, perform very well during the 1990ֲ008 period. Specifically, European institutions exhibit a steady increase in the share of global financial research. During the sample period, the top five institutions were London Business School, INSEAD, Sir John Cass Business School, London School of Economics, and Erasmus University Rotterdam. Subperiod analysis shows that some universities, such as Oxford University, increased their research output substantially. Many of the leading European scholars received their training and had prior experience in North American institutions. We find that a high ranking of the scholarsҠaffiliated and doctoral granting institutions is correlated with finance research productivity.

Keywords:Institutional investment, pension funds, listed private equity

JEL Classification: G23, G24

European Financial Management, VOL 17:4 September 2011

Venture Capital and Other Private Equity: A Survey

Andrew Metrick and Ayako Yasuda

We review the theory and evidence on venture capital (VC) and other private equity: why professional private equity exists, what private equity managers do with their portfolio companies, what returns they earn, who earns more and why, what determines the design of contracts signed between (i) private equity managers and their portfolio companies and (ii) private equity managers and their investors (limited partners), and how/whether these contractual designs affect outcomes. Findings highlight the importance of private ownership, and information asymmetry and illiquidity associated with it, as a key explanatory factor of what makes private equity different from other asset classes.

Keywords:Institutional investment, pension funds, listed private equity

JEL Classification: G23, G24

Market and Model Credit Default Swap Spreads: Mind the Gap!

Mascia Bedendo, Lara Cathcart and Lina El-Jahel

Abstract: Structural models of default establish a relation across the fair values of various as- set classes (equity, bonds, credit derivatives) referring to the same company. In most circumstances such relation is veriХd in practice, as diϥrent Юancial assets tend to move in the same direction at similar speed. However, occasional deviations from the theoretical fair values occur, especially in times of Юancial turmoil. Understand- ing how the dynamics of the theoretical fair values of various assets compares to that of their market values is crucial to a number of market participants. This paper in- vestigates whether a popular structural model, the CreditGrades approach proposed by Finger (2002), Stamicar and Finger (2005), succeeds in explaining the dynamic relation between equity / option variables and Credit Default Swap (CDS) premia at individual company level. We Юd that CDS model spreads display a signiУant correlation with CDS market spreads. However, the gap between the two is time varying and widens substantially in times of Юancial turbulence. The analysis of the gap dynamics reveals that this is partly due to episodes of decoupling between equity and credit markets, and partly due to shortcomings of the model. Finally, we observe that model spreads tend to predict market spreads.

Keywords:equity volatility, credit spreads, structural models

JEL Classification: G21, C22, G10

The Economic Value of Corporate Eco-Efficiency

Nadja Guenster, Jeroen Derwall, Rob Bauer and Kees Koedijk

Abstract: This study adds new insights to the long-running corporate environmental financial performance debate by focusing on the concept of eco-efficiency. Usinga new database of eco-efficiency scores, we analyse the relation between ecoefficiency and financial performance from 1997 to 2004. We report that ecoefficiency relates positively to operating performance and market value. Moreover, our results suggest that the marketӳ valuation of environmental performance has been time variant, which may indicate that the market incorporates environmental information with a drift. Although environmental leaders initially did not sell at a premium relative to laggards, the valuation differential increased significantly over time. Our results have implications for company managers, who evidently do not have to overcome a tradeoff between eco-efficiency and financial performance, and for investors, who can exploit environmental information for investment decisions.


JEL Classification:

Habit Formation in an Overlapping Generations Model with Borrowing Constraints

Amadeu DaSilva, Mira Farka and Christos Giannikos

Abstract: We introduce habit-formation in the three-period OLG borrowing-constraint framework of Constantinides, Donaldson, and Mehra (2002) by allowing the utility of the middle-aged (old) to depend on consumption when young (middle-aged). This specification enables us to separate the effect of the two habit parameters (middle-aged and old) since each representative age-group can face different levels of habit persistence. The two-habit setup underlines some important issues with regards to savings and security returns which do not always conform to the standard findings in the literature. In addition,the model produces equity premium consistent with U.S. data for relatively small levels of risk aversion.

Keywords:Equity premium puzzle, Overlapping generations model, Habit formation, Risk aversion.

JEL Classification: G0, G12, D10, E21

Demographic Change and PharmaceuticalsҠStock Returns

Manuel Ammann, Rachel Berchtold and Ralf Seiz

Abstract: We analyze how demographic change affected pro fits and returns across pharmaceutical industries over the last twenty years. Fluctuations in different age group sizes influence the estimated demand changes for age-sensitive drugs, such as antibacterials for young, antidepressants for middle-aged, and antithrombotics for old people. These demand changes are predictable as soon as a speci fic age group is born. We use consumption and demographic data to forecast future consumption demand growth for drugs caused by demographic changes in the age structure. We find that long-term forecasted demand changes predict abnormal annual pharmaceutical stock returns for more than 60 firms over the time period from 1986 to 2008. An increase by one percentage point of annual demand growth due to demographic changes predicts an increase in abnormal yearly stock returns in the size of 3-5 percentage points. Short-term forecasted demand change does predict negative abnormal stock returns for a time horizon below 5 years. A trading strategy taking advantage of the demographic information earns a signi cant abnormal return between 6 and 8 percentage points per year. Our results are consistent with the model by DellaVigna and Pollet (2007), where investors are inattentive with extrapolation in the distant future and overreact to information in the near future.

Keywords:Demographic Change, Demand Growth, Abnormal Stock Returns, Pharmaceutical Companies, Panel Regression, Investor Attention, Trading Strategies

JEL Classification: C23, J10, J11

Does it Pay to be Socially Responsible? Evidence from Spanish Retail Banking Sector

Francisco Jose Callado Munoz and Natalia Utrero Gonzalez

Abstract: This paper extends the research on the relation between financial performance and corporate social responsibility in two respects. First, it develops a model of strategic competition that includes consumer perceptions with respect to firm social performance. It is shown that in the presence of a positive valuation of social responsibility practices by consumers, a firm that endorses this responsible behavior may obtain a better strategic position in the market, along with higher margin, demand, and profit. Second, the model's predictions are tested with a sample of Spanish banking firms. The empirical analysis confirms that consumers significantly value other features apart from price in making deposit and mortgage decisions, particularly a financial institution's social responsibility. A more disaggregated analysis shows first, that not every CSR dimension has relevance for consumers and second, that customers equally value activities that can have a direct impact on their well-being (e.g., culture and leisure), as well as other activities that can be viewed more generally as public goods (e.g., heritage and the environment). These conclusions are of interest in the debate about a firmӳ social or ethical activities. It is shown that, provided that consumers value corporate social responsibility activities, firms can improve both their competitive position in the market and their profits by behaving in a socially responsible manner. Therefore, the design and implementation of corporate social responsibility practices could confer upon firms an initial competitive advantage over their competitors.

Keywords:strategic competition, Hotellingճ model, Spanish banking, corporate social responsibility.

JEL Classification: D83, G21, D21.

Bank Relationships and Firms' Financial Performance: The Italian Experience

Analisa Castelli, Gerald Dwyer and Iftekhar Hasan

Abstract: We examine the relationship between the number of bank relationships and firmsҍ performance, evaluating possible differential effects related to firmsҠsize. Using an unique data set of Italian small firms for which bank debt is a major source of financing, we find that return on equity and return on assets decrease as the number of bank relationship increases, with a stronger relationship for small firms than for large firms. We also find that interest expense over assets increases as the number of relationships increases. Particularly for small firms, our results are consistent with analyses indicating that fewer bank relationships reduce information asymmetries and agency problems which outweigh negative effects connected to hold-up problems.

Keywords:bank relationships, small business lending, firmsҠperformance

JEL Classification: D21, G21, G32

European Financial Management, VOL 17:5 November 2011

Stock Volatility during the Recent Financial Crisis

G. William Schwert

This paper uses monthly returns from 1802-2010, daily returns from 1885-2010, and intraday returns from 1982-2010 in the United States to show how stock volatility has changed over time. It also uses various measures of volatility implied by option prices to infer what the market was expecting to happen in the months following the financial crisis in late 2008. This episode was associated with historically high levels of stock market volatility, particularly among financial sector stocks, but the market did not expect volatility to remain high for long and it did not. This is in sharp contrast to the prolonged periods of high volatility during the Great Depression. Similar analysis of stock volatility in the United Kingdom and Japan reinforces the notion that the volatility seen in the 2008 crisis was relatively short-lived. While there is a link between stock volatility and real economic activity, such as unemployment rates, it can be misleading.

Keywords:Volatility, crisis, unemployment, recession, depression

JEL Classification: G11, G12

Hedging with Two Futures Contracts: Simplicity Pays

Van Thi Tuong Nguyen, Katelijne A.E. Carbonez and Piet Sercu

We propose to use two futures contracts in hedging an agricultural commodity commitment to solve either the standard delta hedge or the roll-over issue. Most current literature on dual-hedge strategies is based on a structured model to reduce roll-over risk and is somehow difficult to apply for agricultural futures contracts. Instead, we propose to apply a regression based model and a naive rules of thumb for dual-hedges which are applicable for agricultural commodities. The naive dual strategy stems from the fact that in a large sample of agricultural commodities, De Ville, Dhaene and Sercu (2008) find that garch-based hedges do not perform as well as ols-based ones and that we can avoid estimation error with such a simple rule. Our semi naive hedge ratios are driven from two conditions: omitting exposure to spot price and minimizing the variance of the unexpected basis effects on the portfolio values. We find that, generally, (i) rebalancing helps; (ii) the two-contract hedging rules do better than the one-contract counterparts, even for standard delta hedges without rolling-over; (iii) simplicity pays: the naive rules are the best one{for corn and wheat within the twocontract group, the semi-naive rule systematically beats the others and garch performs worse than ols for either one-contract or two-contract hedges and for soybeans the traditional naive rule perform nearly as good as ols. These conclusions are based on the tests on unconditional variance (Diebold and Mariano (1995)) and those on conditional risk (Giacomini and White (2006)).

Keywords:hedging strategy, hedge ratio, convenience yield

JEL Classification: G11, Q11, Q14

Accelerated Equity Offers and Firm Quality

Don M Autore, Irena Hutton and Tunde Kovacs

A series of deregulatory reforms have promoted accelerated equity issuance at the expense of adequate time for underwriter and market scrutiny. Today the majority of publicly listed companies can raise equity on a momentӳ notice, but many eligible issuers choose to allow additional time for scrutiny. We hypothesize that issuers with less favorable inside information (i.e. lower quality issuers) prefer to avoid the pre-issue scrutiny that could reveal their inside information and are therefore more likely to accelerate their offer. We find supportive evidence using measures of stock valuation and earnings quality as proxies for firm quality. The results suggest that investors are slow

Keywords:Seasoned equity offer; underwriter certification; firm quality; shelf registration; due diligence

JEL Classification: G14, G24, G32, G38

Family Control and Financing Decisions

Ettore Croci, John A. Doukas and Halit Gonenc

This study uses a comprehensive European dataset to investigate the role of family control in corporate financing decisions during the period 1998ֲ008. We find that family firms have a preference for debt financing, a non-control-diluting security, and are more reluctant than non-family firms to raise capital through equity offerings. We also find that credit markets are prone to provide long-term debt to family firms, indicating that they view their investment decisions as less risky. In fact, our empirical results demonstrate that family firms invest less than non-family firms in high-risk, research and development (R&D) projects, but not in low-risk, fixed-asset capital expenditure (CAPEX) projects, suggesting that fear of control loss in family firms deters risk-taking. Overall, our findings reveal that the external financing (and investment) decisions of family firms are in greater (lesser) conflict with the interests of minority shareholders (bondholders).

Keywords:Family firms, financing decisions, equity issues, debt issues, capital structure

JEL Classification: G32

Financing Decisions Along a Firm's Life-cycle: Debt as a Commitment Device

Uwe Waltz and Julia Hirsch

We analyze the life-cycle patterns of a firm's financing decisions and their interaction with future growth and development decisions. We derive different financing sequences which we link to existing empirical research as well as derive new testable hypotheses regarding differences in firms' financing decisions to project, firm, market and country characteristics. We provide a rationale for the importance of (external) start-up debt financing as observed in recent empirical studies. Furthermore, we argue that equity financing at both development stages is more likely for closely-held firms and in countries in which entrepreneurs face high stigmatization costs.

Keywords:financing decisions, life-cycle, firm growth, path dependencies

JEL Classification: D92, G32