European Financial Management 2011 Archive
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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-Jnsen (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
J. Ari Pandes and ELIZABETH MAYNES
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
Abstract:
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
Abstract:
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
Abstract:
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.
Keywords:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
Abstract:
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
