Small and medium sized enterprises (SMEs) and their cost of capital

Existing finance literature is inadequate with respect to its coverage of the capital structure of small and medium sized enterprises (SMEs). This lack of coverage means that SMEs are provided with little or no guidance for optimising their cost of capital. This paper is an attempt to provide such guidance. For unlisted SMEs the cost of equity cannot be derived from the capital market, nor can it be ascertained by asking the entrepreneurs, since their decision to invest is usually driven by many other factors, over and above the simple (financial) return on investment requirement. A further problem in quantifying cost of equity results from the fact that entrepreneurs can be asked to provide additional (informal) investment in the form of personal guarantees. We put forward a model that attempts to solve these problems. Firstly, our model determines a 'legitimate' expected return for the entrepreneur, by considering the probability of liquidation of the venture and the loss incurred by the entrepreneur in this event. The former can be derived by looking at the specific survival rate of firms; the latter, is based on how much the potential bankruptcy affects the wealth of the entrepreneur. Secondly, we suggest taking into consideration the personal collateral provided by the entrepreneur, as if it were additional equity invested in the venture. To calculate such an amount, we suggest taking into account only the amount of collateralised debt that cannot be covered by the revenue from the sales of the firm's assets in case of liquidation

Pseudo Market Timing: Fact or Fiction?

The average firm going public or issuing new equity has underperformed the market in the long run. Endogeneity of the number of new issues has been proposed as a potential explanation of this long-run underperformance. Under pseudo market timing of new issues, ex post measures of average abnormal returns may be negative on average despite zero ex ante abnormal returns. We show that, under reasonable stationarity assumptions on the process generating events, traditional measures of average abnormal returns are consistent, and the pseudo market timing effect is a small sample problem. In simulations of an empirical model we demonstrate that the bias is small even in moderate sample sizes. An abnormal return measure capturing a feasible investment strategy is not biased. We argue that it is unlikely that pseudo market timing is the explanation for the long-run underperformance in equity issuances.Abnormal return measures; Endogenous events; Event studies; Initial public offerings; Long-run underperformance

ANALISIS PENGARUH CASH POSITION, CURRENT RATIO, DEBT TO EQUITY RATIO, DAN RETURN ON INVESTMENT TERHADAP RETURN SAHAM PADA PERUSAHAAN FOOD AND BEVERAGE YANG TERDAFTAR DI BURSA EFEK INDONESIA

Investing in stocks has a high degree of risk, because it is very sensitive to changes of the stock exchange, nor the distribution of share return in form of dividends can have problem if done incorrectly. This research was conducted to examine the effect of Cash Position (CP), Current Ratio (CR), Debt to Equity Ratio (DER), and Return On Investment (ROI) to Share return of Food and Beverage company’s listed in Indonesia Stock Exchange during the period 2008-2012. The population in this study is a Food and Beverage company listed on the Indonesia Stock Exchange (IDX) in 2010 -2012. Total sample data in this study were 30 data determined by purposive sampling method.Data analysis was performed using multiple regression analysis with SPSS for Windows 16. The results of this study indicate that Cash Position (CP), Current Ratio (CR), Debt to Equity Ratio (DER) has no effect to share return of Food and Beverage company’s, while Return On Investment (ROI) have significantly positive influence on the share return of Food and Beverage company’s. Keywords: Cash Position (CP), Current Ratio (CR), Debt to Equity Ratio (DER),and Return On Investment (ROI), Share return

An Evolutionary Approach to Multistage Portfolio Optimization

Portfolio optimization is an important problem in quantitative finance due to its application in asset management and corporate financial decision making. This involves quantitatively selecting the optimal portfolio for an investor given their asset return distribution assumptions, investment objectives and constraints. Analytical portfolio optimization methods suffer from limitations in terms of the problem specification and modelling assumptions that can be used. Therefore, a heuristic approach is taken where Monte Carlo simulations generate the investment scenarios and' a problem specific evolutionary algorithm is used to find the optimal portfolio asset allocations. Asset allocation is known to be the most important determinant of a portfolio's investment performance and also affects its risk/return characteristics. The inclusion of equity options in an equity portfolio should enable an investor to improve their efficient frontier due to options having a nonlinear payoff. Therefore, a research area of significant importance to equity investors, in which little research has been carried out, is the optimal asset allocation in equity options for an equity investor. A purpose of my thesis is to carry out an original analysis of the impact of allowing the purchase of put options and/or sale of call options for an equity investor. An investigation is also carried out into the effect ofchanging the investor's risk measure on the optimal asset allocation. A dynamic investment strategy obtained through multistage portfolio optimization has the potential to result in a superior investment strategy to that obtained from a single period portfolio optimization. Therefore, a novel analysis of the degree of the benefits of a dynamic investment strategy for an equity portfolio is performed. In particular, the ability of a dynamic investment strategy to mimic the effects ofthe inclusion ofequity options in an equity portfolio is investigated. The portfolio optimization problem is solved using evolutionary algorithms, due to their ability incorporate methods from a wide range of heuristic algorithms. Initially, it is shown how the problem specific parts ofmy evolutionary algorithm have been designed to solve my original portfolio optimization problem. Due to developments in evolutionary algorithms and the variety of design structures possible, a purpose of my thesis is to investigate the suitability of alternative algorithm design structures. A comparison is made of the performance of two existing algorithms, firstly the single objective stepping stone island model, where each island represents a different risk aversion parameter, and secondly the multi-objective Non-Dominated Sorting Genetic Algorithm2. Innovative hybrids of these algorithms which also incorporate features from multi-objective evolutionary algorithms, multiple population models and local search heuristics are then proposed. . A novel way is developed for solving the portfolio optimization by dividing my problem solution into two parts and then applying a multi-objective cooperative coevolution evolutionary algorithm. The first solution part consists of the asset allocation weights within the equity portfolio while the second solution part consists 'ofthe asset allocation weights within the equity options and the asset allocation weights between the different asset classes. An original portfolio optimization multiobjective evolutionary algorithm that uses an island model to represent different risk measures is also proposed.Imperial Users onl

Share Valuation and Corporate Equity Policy

In recent years many contributions have appeared which examine the effects of corporate and personal taxation on firm financial policy. However, there has yet to appear an adequate explanation of why corporations continue to distribute dividends despite their disadvantageous tax treatment. We study this problem anew, in the context of an overlapping generations growth model with corporations financed by equity. Among our findings are: (1) capital owned by corporations may well be undervalued, even in the long run; (2) as a result of such undervaluation, firms may find it in the best interest of their stockholders to distribute dividends; and (3) an increase in the tax on distributions, while depressing the return to personal saving, may lead to an increase in the capital intensity of the economy. We also consider the criterion firms will use in evaluating new investment projects.

The impact of accounting-based information on the financial beta: Case for cement industry in Turkey

In financial theory, the cost of equity is defined as a return that stockholders require for a company. It has a vital importance for corporations in evaluation of investment opportunities. There are several methods to calculate the cost of equity including Capital Asset Pricing Model (CAPM). The CAPM is a commonly used method but it has a major restriction. It can be used only for publicly traded corporations not for non-public corporations because it requires stock return data to estimate Financial Beta. When the stock price is not available for a firm, finance literature suggests that Accounting Beta can be used as a proxy of financial beta to estimate the cost of equity. Most of researchers have aimed to find a relationship between financial beta and accounting variables. However, they used correlation or regression based approaches. The purpose of this study is to evaluate the impact of accounting-based information on the financial Beta through a non-linear approach, namely Support Vector Machines (SVM). Most of the studies in finance literature focus on the linear relationship between Betas and accounting variables and the results reveal that the explanatory powers of linear models are limited. To avoid this problem, this study applies SVM as an alternative method to analyze the size of impact of accounting variables on the financial Betas rather than estimating a linear model. Based on Statistical Learning Theory and Structural Risk Minimization Principle, the SVM algorithms are able to solve regression problems without getting stuck in local minima. They achieve the global solution by transforming the regression problem into a quadratic programming (QP) problem and then solving it by any QP solver. Recently, SVM-based algorithms have been developed very rapidly and have been applied to many areas. Finding global solution and having higher generalization potential constitute the major advantages of the SVM algorithms over other regression techniques.In this study, the accounting information is represented by current ratio, quick ratio, net profit margin, assent turnover, return on assets, return on equity, financial leverage and logarithmic total assets over 2005-2014 period. In addition to that, financial betas of cement firms traded in Borsa Istanbul (BIST) are calculated for each year. The result of the study illustrates that financial leverage, the size and asset turnover have the highest impact on financial beta, respectively

Pengaruh Keputusan Investasi dan Keputusan Deviden terhadap External Financing Needs dengan Variabel Moderating Profitability pada Perusahaan Manufaktur yang Go Public di Bursa Efek Jakarta

Manufacturing industry in doing the business operation is determined by the factors, i.e. investment work, dividend work, profitability, and external financing, so it can be known the operational work from the companies. Problem formulas in this research are: (1) whatever the investment decisions and dividend decisions influence significantly towards profitability, (2) whatever the investment decisions and dividend decisions influence significantly towards External Financing Needs and (3) whatever the profitability influences significantly towards External Financing Needs. This research design uses descriptive methods which will observe the company external fund needs, if it happens the value variations in investment decisions and dividend decisions with the profitability moderating variables in an empiric-linear relationship pattern. The research object is the company in manufacturing industry fields for the periods of 2002-2004 by the data in financing report forms from the prepared company by Jakarta Stock Exchange (Bursa Efek Jakarta). The used variables consist of 3, i.e. bound variables (Y) which contain Debt to Total Assets (Y1) and Debt To Equity (Y2), free variables (X) which contain Investment Decisions (X1) and Dividend Policy (X2), and also moderating variables (Z) are Profitability that consists of Margin Profit Net indicator (on Sales) (Z1), Return on Equity (Z2), and Return on Investment (Z3). The empirical test which is used in this research isPartial Least Square (PLS). The data results empirically show that: (1) investment decision variables and dividend decisions do not influence significantly towards profitability in go- public company in Jakarta Stock Exchange (Bursa Efek Jakarta), with t-calculation is smaller than t table = 1.99. (2) investment decision variables influence significantly towards External Financing with the value of t-calculation is 8.460 is bigger than t table = 1.99. (3) dividend decisions do not influence significantly towards External Financing in go-public company in Jakarta Stock Exchange (Bursa Efek Jakarta), and (4) profitability variables influence significantly towards External Financing in go-public company in Jakarta Stock Exchange (Bursa Efek Jakarta), with the value of t statistic of profitability direction towards External Fianancing in the value of 3.058 > t table = 1.99

Pricing options and equity-indexed annuities in a regime-switching model by trinomial tree method

In this paper we summarize the main idea and results of Yuen and Yang (2009, 2010a, 2010b). The Markov regime-switching model (MRSM) has recently become a popular model. The MRSM allows the parameters of the market model depending on a Markovian process, and the model can reflect the information of the market environment which cannot be modeled solely by linear Gaussian process. The Markovian process can ensure that the parameters change according to the market environment and at the same time preserves the simplicity of the model. It is also consistent with the efficient market hypothesis that all the effects of the information about the stock price would reflect on the stock price. However, when the parameters of the stock price model are not constant but governed by a Markovian process, the pricing of the options becomes complex. We present a fast and simple trinomial tree model to price options in MRSM. In recent years, the pricing of modern insurance products, such as Equity-Indexed annuity (EIA) and variable annuities (VAs), has become a popular topic. These products can be considered investment plans with associated life insurance benefits, a specified benchmark return, a guarantee of an annual minimum rate of return and a specified rule of the distribution of annual excess investment return above the guaranteed return. EIA usually has a long maturity time, hence it is not appropriate to assume that the interest rate and the volatility of the equity index are constants. One way to deal with this problem is to apply the regime switching model. However, the valuation of derivatives in such model is challenging when the number of states are large, especially for the strong path dependent options such as Asian options. Our trinomial tree model provides an efficient way to solve this problem.postprintThe 5th Oxford-Princeton Workshop on Financial Mathematics & Stochastic Analysis, Princeton, N.J., 27-28 March 2009

Equity Style Investing

Despite the well documented benefits of equity style investing in today’s financial markets, the academic view of the underlying cause for such benefits remains an ongoing debate. A number of theories have been proposed to explain why some asset classes earn better returns than others do under the same economic regimes. Rational finance links the outperformance of some stock groups to the equity characteristics that proxy for the common risk factors, behavioural finance, however, argues that mispricing resulting from irrational investor’s sentiment to fundamentals plays a key role. Meanwhile, a variety of business cycle variables have also suggested to contain information useful in explaining the expected stock returns. The observed style returns change all the time with predictable time-varying components, reflecting the structural and cyclical shocks to the macroeconomy. Motivated by the current ongoing controversy of anomaly versus risk compensation over interpreting equity style premiums, this thesis investigates how firm characteristics and business cycle conditions function separately to affect the style return dynamics based on the size and value-growth categorisations. It adds to the extant literature by explicitly examining the relative importance of the common risk factors versus firm-specific information as driving sources in the divergent equity style returns in the U.K. market. By identifying the dominant driving force that determines the relative style performance, it provides a further dimension to the current debate regarding the sources of style premiums and offers the choice of corresponding style investing strategies. The divergent style returns and its time-varying nature offer astute investors the opportunity to implement active style management to enhance portfolio returns. Motivated by the benefits of capitalising on such style return cyclicality and in particular the availability and popularity of Exchange Traded Funds based on market segments in leading financial markets as investment vehicle that offers low cost and high liquidity, this thesis examines a dynamic long-short tactical trading strategy by applying a binomial approach to focus on the rotation between pairs of equity styles. By answering key questions of whether equity style cycles exist in the U.K. market and whether the return dynamics of such style momentum strategy is distinct from the price and industry momentum effects, it contributes to the literature by providing valuable empirical evidence to compare with other studies in different economic and institutional environments. In response to the increasing popularity of using macro information to aid optimal style selection for the quant circles in the investment community, building on the methodology of Brandt and Santa-Clara (2006), this thesis approximates a solution of a mean-variance multi-style investor’s optimal style investing problem incorporating the business cycle predictability. This approach is parsimonious as the optimal style weights are parameterised directly on a set of pervasive business cycle predictors. By exploring how the distributions of the expected style returns and the location or the shape of the optimal style allocations are affected by given shocks to the business cycles, this thesis contributes to the extant literature by demonstrating the transmission mechanism of how business cycle volatility affects equity style return volatility and in turn a mean-variance investor’s optimal style allocation