Is bank lending special?

Bank loans ; Financial institutions ; Commercial loans

Do Stock Price Bubbles Influence Corporate Investment?

Building on recent developments in behavioral asset pricing, we develop a model in which dispersion of investor beliefs under short-selling constraints drives a firm's stock price above its fundamental value. Managers optimally respond to the stock market bubble by issuing new equity. The bubble reduces the user-cost of capital and increase real investment. Using the variance of analysts' earnings forecasts as a proxy for the dispersion of investor beliefs, we find strong empirical support for the model's key prediction that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment.

Investment, protection, ownership, and the cost of capital

We investigate the cost of capital in a model with an agency conflict between inside managers and outside shareholders. Inside ownership reflects the classic tradeoff between incentives and risk diversification, and the severity of agency costs depends on a parameter representing investor protection. In equilibrium, the marginal cost of capital is a weighted average of terms reflecting both idiosyncratic and systematic risk, and weaker investor protection increases the weight on idiosyncratic risk. Using firm-level data from 38 countries, we estimate the predicted relationships among investor protection, inside ownership, and the marginal cost of capital. We discuss implications for the determinants of firm size, the relationship between Tobin's Q and ownership, and the effect of financial liberalizations.Investor protection, ownership, investment, cost of capital, agency costs

Recent revisions to corporate profits: what we know and when we knew it

Initial estimates in the National Income and Product Accounts significantly overstated U.S. corporate profits for the 1998-2000 period. Subsequent revisions reveal that the profitability of the nation's corporate sector in the late 1990s was substantially weaker than "real-time" data indicated. An unexpected surge in employee stock options exercised-and perhaps, in some sectors, firms' inflated statements of profit-may help explain the large downward revisions.Corporate profits ; Stock options ; Statistics ; Economic indicators

No arbitrage and closure results for trading cones with transaction costs

In this paper, we consider trading with proportional transaction costs as in Schachermayer’s paper (Schachermayer in Math. Finance 14:19–48, 2004). We give a necessary and sufficient condition for ${\mathcal{A}}$ , the cone of claims attainable from zero endowment, to be closed. Then we show how to define a revised set of trading prices in such a way that, firstly, the corresponding cone of claims attainable for zero endowment, ${\tilde{ {\mathcal{A}}}}$ , does obey the fundamental theorem of asset pricing and, secondly, if ${\tilde{ {\mathcal{A}}}}$ is arbitrage-free then it is the closure of ${\mathcal{A}}$ . We then conclude by showing how to represent claims

Commercial Paper, Corporate Finance, and the Business Cycle: A Microeconomic Perspective

Little is known about the characteristics of individual commercial paper issuers, or about the reasons for the countercyclical issuance of commercial paper in the aggregate. To address these issues we construct a new panel dataset linking Moody's data on commercial paper issues with Standard and Poor's Compustat. High credit quality is a requirement for entry into the commercial paper market, but long-term credit quality (bond rating) is not a sufficient statistic for short-term quality. These characteristics allow firms to issuenear-riskless short-term debt and supply a near-money asset to themarket, thereby reducing their interest costs by the amount of the" commercial paper liquidity premium. We find that low-credit-quality firms have higher stocks of inventories and financial assets. In contrast to the countercyclicality of aggregate commercial paper, we find that firm-level commercial paper is procyclical. Our data support three explanations for this apparent contradiction, all of which recognize that commercial paper issuers are atypical. First, firms of high credit quality can use commercial paper to finance inventory accumulation during downturns. Second, they also can use commercial paper to finance countercyclical increases in accounts receivable. This suggests that commercial paper issuers serve as intermediaries for other firms during downturns. Third, it may be that portfolio demand for commercial paper -- a highly liquid, safe asset -- increases during downturns.

An examination of the relationship of governance structure and performance: Evidence from banking companies in Bangladesh

Corporate governance has become increasingly important in developed and developing countries just after a series of corporate scandals and failures in a number of countries. Corporate governance structure is often viewed as a means of corporate success despite prior studies reveal mixed, somewhere conflicting and ambiguous, and somewhere no relationship between governance structure and performance. This study empirically investigates the relationship between corporate governance mechanisms and financial performance of listed banking companies in Bangladesh by using two multiple regression models. The study reveals that a good number of companies do not comply with the regulatory requirements indicating remarkable shortfall in corporate governance practice. The companies are run by the professional managers having no duality and no ownership interest for which they are compensated by high remuneration to curb agency conflict. Apart from some inconsistent relationship between some corporate variables, the corporate governance mechanisms do not appear to have significant relationship with financial performances. The findings reveal an insignificant negative impact or somewhere no impact of independent directors and non-independent non-executive directors on the level of performance that strongly support the concept that the managers are essentially worthy of trust and earn returns for the owners as claimed by stewardship theory. The study provides support for the view that while much emphasis on corporate governance mechanisms is necessary to safeguard the interest of stakeholders; corporate governance on its own, as a set of codes or standards for corporate conformance, cannot make a company successful. Companies need to balance corporate governance mechanisms with performance by adopting strategic decision and risk management with the efficient utilization of the organization’s resources