Review of Finance - recent issues

Editorial Statistics

Pagano, M., Zechner, J. — Sun, 11 Oct 2009 22:58:50 PDT

Winners of the Best Paper Competition in Corporate Governance

Sun, 11 Oct 2009 22:58:50 PDT

When No Law is Better Than a Good Law

Bhattacharya, U., Daouk, H. — Sun, 11 Oct 2009 22:58:50 PDT

This paper argues, both theoretically and empirically, that sometimes no securities law may be better than a good securities law that is not enforced. The first part of the paper formalizes the sufficient conditions under which this happens for any law. The second part of the paper shows that a specific securities law – the law prohibiting insider trading – may satisfy these conditions. The third part of the paper takes this prediction to the data. We find that the cost of equity actually rises when some countries enact an insider trading law, but do not enforce it.

Proximity Always Matters: Local Bias When the Set of Local Companies Changes

Bodnaruk, A. — Sun, 11 Oct 2009 22:58:50 PDT

I analyze the portfolios of individual investors who have changed their place of residence. As distance from a company they invest in changes, investors adjust their portfolio composition. The farther investors move away from the closest establishment of a company in their portfolio, the more of its shares they sell compared to investors who do not move. Among the companies that investors held before the move, after moving, investors abnormally increase their ownership in companies closer to their new location; these companies provide them with higher risk-adjusted returns than companies in which they kept holdings unchanged or abnormally reduced holdings.

Credit Card Debt Puzzles and Debt Revolvers for Self Control

Bertaut, C. C., Haliassos, M., Reiter, M. — Sun, 11 Oct 2009 22:58:50 PDT

Most US credit card holders revolve high-interest debt, often with substantial liquid and retirement assets. We model separation of accounting from shopping allowed by credit cards, in a rational, dynamic game. When the shopper is more impatient than the accountant, selling assets to repay debt is not necessarily optimal, as the shopper can restore debt. Modest relative impatience generates asset-debt co-existence and target utilization rates, matching incidence and median assets of debt revolvers with substantial assets. Empirical evidence is consistent with a role for spending control considerations, after allowing for standard determinants of credit card debt.

Bounded Rationality and Asset Pricing with Intermediate Consumption

Berrada, T. — Sun, 11 Oct 2009 22:58:50 PDT

We consider a pure exchange economy with incomplete information. Some agents display learning bias and over- or under-react to the arrival of new information. We show under which conditions biased agents survive over a finite horizon. We also study the distribution of irrational agents consumption shares. Irrational agents have a signiÞcant consumption share in the economy when (i) shocks are less persistent (ii) risk aversion is high (iii) volatility of aggregate consumption is high. We also show that agents impact on prices is increasing in their consumption share and conclude that biased agents can signiÞcantly influence equilibrium quantities.

Convertibles in Sequential Financing

Wang, S. — Sun, 11 Oct 2009 22:58:50 PDT

Sequential financing is a popular strategy in corporate finance. However, depending on the type of financial instrument used to carry out the strategy, sequential financing can have many potential problems. This paper shows that certain types of convertibles can be deployed to resolve the problems completely. This may explain why convertibles are widely adopted to implement sequential financing in reality, especially among companies with many real options. We find that the call feature and some popular call restrictions are necessary for an efficient convertible. Indeed, almost all real-world convertibles have a call feature and call restrictions.

Change of guard among coeditors

Pagano, M., Zechner, J. — Mon, 20 Jul 2009 05:23:17 PDT

Editorial Statistics

Pagano, M., Zechner, J. — Mon, 20 Jul 2009 05:23:17 PDT

Economic News and International Stock Market Co-movement

Albuquerque, R., Vega, C. — Mon, 20 Jul 2009 05:23:17 PDT

We analyze the effects that real-time domestic and foreign news about fundamentals have on the co-movement between stock returns of a small, open economy, Portugal, and a large economy, the United States. Consistent with our theoretical model, we find that US macroeconomic news and Portuguese earnings news do not affect stock market co-movement, whereas Portuguese macroeconomic news lowers stock market co-movement. We find that US news affects Portuguese stock market returns, though less so when US stock market returns are included in the regression. We provide evidence, contrary to common wisdom, that this last result does not derive from contagion.

Target-firm information asymmetry and acquirer returns

Officer, M. S., Poulsen, A. B., Stegemoller, M. — Mon, 20 Jul 2009 05:23:18 PDT

We show that acquirer returns are significantly higher in stock-swap acquisitions of difficult-to-value targets, as measured by R&D intensity and idiosyncratic return volatility. This finding contributes to an explanation of the determinants of, and value gains from, using stock as a method of payment. The effects of target-valuation uncertainty on both the method of payment and the market reaction to acquisitions are more likely to be apparent in samples of private acquisitions, as these effects can be masked in samples of acquisitions of publicly held targets. Nevertheless, our results hold for publicly traded targets in multivariate analysis.

The Risk and Return of Arbitrage in Dual-Listed Companies

De Jong, A., Rosenthal, L., Van Dijk, M. A. — Mon, 20 Jul 2009 05:23:18 PDT

This paper evaluates investment strategies that exploit the deviations from theoretical price parity in a sample of 12 dual-listed companies (DLCs) in the period 1980–2002. We show that simple trading rules produce abnormal returns of up to almost 10% per annum adjusted for systematic risk, transaction costs, and margin requirements. However, arbitrageurs face uncertainty about the horizon at which prices will converge and deviations from parity are very volatile. As a result, DLC arbitrage is characterized by substantial idiosyncratic return volatility and a high incidence of large negative returns, which are likely to impede arbitrage.

Anything is Possible: On the Existence and Uniqueness of Equilibria in the Shleifer-Vishny Model of Limits of Arbitrage

Arnold, L. G. — Mon, 20 Jul 2009 05:23:18 PDT

This paper characterizes equilibria in the Shleifer-Vishny model of limits of arbitrage. To prove existence, one has to consider types of equilibria ignored by Shleifer and Vishny, even if one adopts their parameter restrictions. For example, the only equilibrium may be one in which maximization of expected wealth requires an "all-or-nothing" investment strategy, with intermediate investment levels being strictly unprofitable. If one goes beyond Shleifer and Vishny's parameter restrictions, multiple equilibria may arise, and equilibrium selection may be governed by sunspots. Moreover, there may exist an equilibrium in which the asset price returns to fundamentals despite worsening noise trader sentiment.

An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity

Deaves, R., Luders, E., Luo, G. Y. — Mon, 20 Jul 2009 05:23:18 PDT

We perform an asset market experiment in order to investigate whether overconfidence induces trading. We investigate three manifestations of overconfidence: calibration-based overconfidence, the better-than-average effect and illusion of control. Novelly, the measure employed for calibration-based overconfidence is task-specific in that it is designed to influence behavior. We find that calibration-based overconfidence does engender additional trade, though the better-than-average also appears to play a role. This is true both at the level of the individual and also at the level of the market. There is little evidence that gender influences trading activity.

Editorial Statistics

Pagano, M., Zechner, J. — Tue, 14 Apr 2009 09:56:40 PDT

Special issue on banking Preface

Allen, F., Boot, A., Pagano, M., Udell, G. — Tue, 14 Apr 2009 09:56:40 PDT

Financial Integration and Firm Performance: Evidence from Foreign Bank Entry in Emerging Markets

Giannetti, M., Ongena, S. — Tue, 14 Apr 2009 09:56:40 PDT

While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of 60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and use of financial debt even though the effect is dampened for small firms. More strikingly, young firms benefit most from foreign bank presence, while businesses connected to domestic banks or to the government suffer. Overall, our findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.

The Impact of Organizational Structure and Lending Technology on Banking Competition

Degryse, H., Laeven, L., Ongena, S. — Tue, 14 Apr 2009 09:56:40 PDT

We investigate how bank organization shapes banking competition. We show that a bank's geographical lending reach and loan pricing strategy is determined by its own and its rivals’ organizational structure. We estimate the impact of organization on the geographical reach and loan pricing of a large bank. We find that the reach of the bank is smaller when rival banks are large and hierarchically organized, have superior communication technology, have a narrower span of organization, and are closer to a decision unit with lending authority. Rival banks’ size and the number of layers to a decision unit soften spatial pricing.

Banks, Distances and Firms' Financing Constraints

Alessandrini, P., Presbitero, A. F., Zazzaro, A. — Tue, 14 Apr 2009 09:56:40 PDT

Bank deregulation and progress in information technology altered the geographical diffusion of banking structures and instruments, and reduced operational distance between banks and local economies. Although, the consolidation of the banking industry promoted the geographical concentration of banking decision-making centres and increased functional distance between local banking systems and local borrowers. This paper focuses on the impact that these spatial diffusion-concentration phenomena had on the financing constraints of Italian firms over the period 1996–2003. Our findings show that greater functional distance stiffened financing constraints, especially for small firms, while smaller operational distance did not always enhance credit availability.

Bank Market Power and SME Financing Constraints

Carbo-Valverde, S., Rodriguez-Fernandez, F., Udell, G. F. — Tue, 14 Apr 2009 09:56:40 PDT

Some studies find that market power is associated with credit availability (information hypothesis); others find that less competitive banking markets lead to more credit rationing (market power hypothesis). Empirical research has relied solely on concentration as a measure of market power. The industrial organization literature, however, argues that a structural competition indicator such as the Lerner index is a superior measure. We test the information hypothesis and the market power hypothesis using these two alternative measures of market power and find that they generally give conflicting results. However, we also offer evidence suggesting that both views can be reconciled.

Cross-Selling Lending and Underwriting: Scope Economies and Incentives

Laux, C., Walz, U. — Tue, 14 Apr 2009 09:56:40 PDT

We highlight the implications of combining underwriting services and lending for the choice of underwriters and for competition in the underwriting business. We show that cross-selling can increase underwriters' incentives, and we explain three phenomena: first, that cross-selling is important for universal banks to enter the investment banking business; second, that cross-selling is particularly attractive for highly leveraged borrowers; third, that less-than-market rates are no prerequisite for cross-selling to benefit a bank's clients. In our model, cross-selling reduces rents in the underwriting business.

A Welfare Analysis of Regulation in Relationship Banking Markets

Carlin, B. I., Rob, R. — Tue, 14 Apr 2009 09:56:40 PDT

The increasing dependence of individuals on debt financing raises several welfare considerations that we analyze in this paper. We develop a dynamic, competitive model of relationship banking to determine how regulation influences borrowing and lending behavior, and analyze how it affects welfare in the market. We characterize the lending regimes that arise based on public policy, and evaluate the optimal choice by the government to induce particular lending practices to arise. Finally, we consider the effect that a credit reporting agency has on the market. In the paper, we highlight the new empirical implications that the model generates.