The role of equities in corporate finance in Belgium

Share issues are a significant source of finance for non-financial corporations in Belgium. Between 1995 and 2005, they represented around 32 p.c. of the cumulative new liabilities of non-financial corporations. Share issues are therefore the second most important source of finance, the first being non-bank credit, which accounts for 51 p.c. of the total. Share issues are a much more important source of funding than bank credit and issues of fixed-income securities. Unquoted shares represent the major part of this, namely 27 p.c., mainly because of the high level of foreign direct investment. Quoted shares represented only 5 p.c. of the cumulative new liabilities of non-financial corporations during the period 1995-2005. An empirical analysis of the determinants of the capital structure highlights the fact that quoted companies having more intangible fixed assets are more inclined to opt for equity financing. Conversely, other factors, such as the company’s debt level, size and internal resources have a negative influence on equity financing. The timing of the use of this type of financing depends partly on macroeconomic factors such as real and financial investments of the corporations. The cost of capital may also be regarded as a key determinant of the use of equity financing over time. Substantial issues were recorded during the period 1999-2001 and from mid 2005 onwards. These developments coincided with either a cost of capital well below its long-run average or a movement in the cost of capital which was more favourable than the price of alternative sources of finance. The recent government measure aimed at allowing the deduction of notional interest charges could also give a substantial boost to new share issues.capital structure, corporate finance, equities

Internalization, Clearing and Settlement, and Liquidity

Abstract: We study the relation between liquidity in financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The first is a uniform fee on all trades (internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case, traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders'strategies and thus liquidity. Furthermore, across the two fee structures, we find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-specific fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size.transaction fees;internalization;clearing and settlement;liquidity;anonymity

Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving agents with different valuations for an asset maximize their profits either by trading at a DM or by submitting an order for (possibly) uncertain execution at a CN. We develop the analysis for three different informational settings: transparency, “complete” opaqueness of all order flow, and “partial” opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse in direction if the CN is opaque. Moreover, common to the three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders (“order creation”); in addition, it diverts trades from the DM (“trade diversion”). We find that the coexistence of a CN and DM produces greater trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare.Alternative Trading Systems;Crossing Network;Dealer Market;Order Flow;Transparency;Welfare

The determinants of savings in the third pension pillar

The paper analyses participation in and contributions to the third pillar of the pension system by Belgian households. This pillar represents individual saving for retirement and has been growing rapidly. A detailed dataset of tax declarations over the period from 1993 until 2003 was used to analyse the possible determinants of saving in the third pillar. Firstly, this dataset makes an analysis from a macroeconomic point of view possible, showing an apparent increase in total contributions to the third pillar by 39 p.c. in real terms between 1993 and 2003. This increase is mainly due to a rise in the participation rate (29 p.c. in 1993 and 40 p.c. in 2003). A detailed analysis is provided across the age groups, which further shows the influence of the demographic evolution, the average income of the participants in the third pillar and the contribution rate. The dataset also helps point up a wide number of possible microeconomic determinants of saving for retirement, such as age, income, professional status, civil status, region of residence, property ownership, employment situation, participation in second pillar pension schemes, number of dependents, etc. Moreover, the database allows a distinction to be made between the two forms in the third pillar : pension saving and life insurance. From such a microeconomic point of view, the analysis sheds some light on the major determinants of participation to the third pillar. The main findings show that older households are more likely to opt for a third pillar pension scheme. Furthermore, it appears that households consider the two forms of the third pillar as being complementary rather than substitutes for each other : households that participate in pension saving schemes are also more likely to take out life insurance and vice versa. Besides age, the other determinants that have a positive impact on participation in the third pillar of the pension system are : having higher income, being self-employed, getting an early retirement pension, being a home owner, being married and living in Flanders rather than Brussels or Wallonia.personal finance, pension fund, life insurance, private pensions

The stellar mass structure of massive galaxies from z=0 to z=2.5; surface density profiles and half-mass radii

We present stellar mass surface density profiles of a mass-selected sample of 177 galaxies at 0.5 < z < 2.5, obtained using very deep HST optical and near-infrared data over the GOODS-South field, including recent CANDELS data. Accurate stellar mass surface density profiles have been measured for the first time for a complete sample of high-redshift galaxies more massive than 10^10.7 M_sun. The key advantage of this study compared to previous work is that the surface brightness profiles are deconvolved for PSF smoothing, allowing accurate measurements of the structure of the galaxies. The surface brightness profiles account for contributions from complex galaxy structures such as rings and faint outer disks. Mass profiles are derived using radial rest-frame u-g color profiles and a well-established empirical relation between these colors and the stellar mass-to-light ratio. We derive stellar half-mass radii from the mass profiles, and find that these are on average ~25% smaller than rest-frame g band half-light radii. This average size difference of 25% is the same at all redshifts, and does not correlate with stellar mass, specific star formation rate, effective surface density, Sersic index, or galaxy size. Although on average the difference between half-mass size and half-light size is modest, for approximately 10% of massive galaxies this difference is more than a factor two. These extreme galaxies are mostly extended, disk-like systems with large central bulges. These results are robust, but could be impacted if the central dust extinction becomes high. ALMA observations can be used to explore this possibility. These results provide added support for galaxy growth scenarios wherein massive galaxies at these epochs grow by accretion onto their outer regions.Comment: 11 pages, 8 figures, 3 tables, accepted for publication in Ap

Internalization, Clearing and Settlement, and Liquidity

Abstract: We study the relation between liquidity in financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The first is a uniform fee on all trades (internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case, traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders'strategies and thus liquidity. Furthermore, across the two fee structures, we find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-specific fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size.

Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving agents with different valuations for an asset maximize their profits either by trading at a DM or by submitting an order for (possibly) uncertain execution at a CN. We develop the analysis for three different informational settings: transparency, “complete” opaqueness of all order flow, and “partial” opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse in direction if the CN is opaque. Moreover, common to the three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders (“order creation”); in addition, it diverts trades from the DM (“trade diversion”). We find that the coexistence of a CN and DM produces greater trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare.

The size-star formation relation of massive galaxies at 1.5<z<2.5

We study the relation between size and star formation activity in a complete sample of 225 massive (M > 5 x 10^10 Msun) galaxies at 1.5<z<2.5, selected from the FIREWORKS UV-IR catalog of the CDFS. Based on stellar population synthesis model fits to the observed restframe UV-NIR SEDs, and independent MIPS 24 micron observations, 65% of galaxies are actively forming stars, while 35% are quiescent. Using sizes derived from 2D surface brightness profile fits to high resolution (FWHM_{PSF}~0.45 arcsec) groundbased ISAAC data, we confirm and improve the significance of the relation between star formation activity and compactness found in previous studies, using a large, complete mass-limited sample. At z~2, massive quiescent galaxies are significantly smaller than massive star forming galaxies, and a median factor of 0.34+/-0.02 smaller than galaxies of similar mass in the local universe. 13% of the quiescent galaxies are unresolved in the ISAAC data, corresponding to sizes <1 kpc, more than 5 times smaller than galaxies of similar mass locally. The quiescent galaxies span a Kormendy relation which, compared to the relation for local early types, is shifted to smaller sizes and brighter surface brightnesses and is incompatible with passive evolution. The progenitors of the quiescent galaxies, were likely dominated by highly concentrated, intense nuclear star bursts at z~3-4, in contrast to star forming galaxies at z~2 which are extended and dominated by distributed star formation.Comment: 6 pages, 4 figures, accepted for publication in Ap