Market Expectations And Probability Distributions Implicit In Option Prices

This paper investigates whether specific characteristics of the returns distributions implied by options prices constitute useful information for the purpose of predicting changes in market direction. The key distributional characteristics we focus on are skewness, kurtosis, and the probability weight in the extreme tails of the implied distributions. We present a new methodology for extracting the returns distributions and apply it to S&P 500 index futures-options prices for twenty days surrounding the four largest market reversals in calendar 2001

Borrower discouragement: the role of informal turndowns

This research seeks to add to our understanding about discouraged borrowers by examining the roots of discouragement. It examines the role of informal turndowns in which a commercial lender verbally informs a SME owner that if a formal loan application were to be advanced, it would likely be denied. This aspect of demand-side constraints to accessing finance has received scant attention in research. The presence of discouraged borrowers could be evidence of a market imperfection; however, informal turndowns represent an efficient mechanism in SME debt markets providing an explanation for a type of borrower discouragement. This research finds more established firms are more likely to suspend formal loan applications through informal talks with their banks rather than being discouraged by their own judgement. In addition, those small business owners who have a satisfactory relationship with their banks are more likely to self-ration themselves rather than conduct an informal inquiry with their banks before deciding not to apply

Self-employment, financial knowledge, and retirement planning

The level of self-employed individuals’ financial knowledge holds implications with respect to financial stability, economic welfare, and growth of young enterprises. This study found that self-employed individuals did not differ significantly from employed workers in terms of their financial knowledge. Self-employed workers were less likely than employed workers to be engaged in financial practices that improved their long-term financial health. However, there was no difference in the level of confidence in future retirement prospects between self-employed individuals and their employed counterparts. With the ongoing erosion of social protection systems, this research provides a basis for addressing the issue of relatively poor retirement planning among self-employed workers

Fund size and the syndication of venture capital investments

This article argues that the structure of a country's venture capital (VC) sector is a critical factor in the effectiveness of the sector. In particular, it is argued that the balance between small funds and large funds is important: that a preponderance of small VC funds leads to excessive syndication which compromises firm and fund performance, reduces the ability to raise additional capital and leads to a reliance on foreign investors. This implies that public policies that seek to stimulate early-stage VC can lead to a VC sector that is bottlenecked in the sense that the successful portfolio firms may be unable to obtain late-stage investment capital and may be forced to rely on foreign investors. This work tests this premise empirically using data for the Canadian setting and finds results consistent with these expectations

Corporate governance and informed trading

Purpose – The purpose of this paper is to empirically study the relationship between informed trading and overall corporate governance mechanisms. Design/methodology/approach – A broad range of governance characteristics are used to measure the governance structure of firms in the Toronto Stock Exchange. The risk of informed trading is estimated using a PIN measure that avoids biases induced by trade classification errors. Our proxies for informed trading are regressed on measures of corporate governance. Findings – Our most important result is that the observed trade-off between CEO compensation and informed trading holds only for large firms. There is no correlation between CEO cash compensation and the risk of informed trading in small and medium sized firms. We find evidence that cross-sectional differences in the risk of informed trading are explained by a firm's governance structure. Research limitations/implications – Research finding a trade-off between CEO compensation and informed trading merits closer examination. Practical implications – Limitations on insider trading, and more broadly on informed trading, may involve different costs and benefits for large firms than for medium and small firms. Originality/value – This paper expands the set of governance characteristics shown to interact with informed trading activity. The Toronto market is well suited to focusing on relations between informed trading and firm-level governance characteristics.Chief executives, Compensation, Corporate governance, Information strategy, Insider trading

Risk factors and the Canada Small Business Financing Program

As a means of mitigating perceived financial constraints governments in many nations have adopted credit guarantee schemes: programs through which guarantors–often governments, that is, tax payers–share with lenders some of the default risk posed by small- and medium-sized enterprise (SME) borrowers. The Canada Small Business Financing Program has provided government guarantees of bank loans to SMEs since 1961. With current lending volumes of approximately $1 billion annually, the federal government faces a significant contingent liability at a time when it is attempting to reduce deficits. This work identifies the factors that most expose the government guarantor to risk of default, finding that age of firm is a key determinant of risk. The work also finds that the costs to taxpayers of honoring defaults is more than compensated from incremental tax revenues and the fees paid by borrowers. The program also supports substantial job creation

Growth, R&D intensity and commercial lender relationships

By examining access to, and terms of, different types of business loans, this empirical study adds to our understanding of the value of relationships between commerciallenders and business borrowers. Access to operating loans is lower for R&D-intensive firms but it does not depend on growth or duration of lender relationship. For term loans, access to capital is easier for firms which have established lender relationships and are unaffected by growth or R&D intensity. The cost of borrowing is found to be higher for R&D-intensive and growing entrepreneurial firms in the case of term loans, but not for operating loans. The duration of borrower–lender relationship does not impact interest rates for either loan type - a finding that supports the “bank capture” hypothesis: that is, banks internalize benefits from relationship lending

Promoting enterprise development or subsidizing tradition? The Japan credit supplementation system

Governments and trade associations have often intervened in credit markets to guarantee loans made by financial institutions to small and medium-sized enterprises (SMEs). The most active loan guarantee program in the world is the Japanese Credit Supplementation System yet the level of entrepreneurial activity in Japan is extremely low. This paradox suggests that lack of available capital may not be the only constraint on entrepreneurial activity. This empirical article examines the Japanese loan guarantee system. It reports on its strengths and weakness, finding that the Japanese Credit S