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This paper aims to explore a common practice in which a bank designs an optimal double-layered debt contract through the means of controlling a lending rate and a deposit rate. For this study, I modify a monopolistic version of the Monti-Kelin model interpreted by Freixas and Rochet (2008). Positioned between depositors and borrowers, the bank takes into account the likelihood of a borrower exercising his or her limited liability in case of a negative income shock. On the other hand, the bank could also exercise its own limited liability against depositors if necessary. Thus, anticipating the consequences of dually limited liability, the bank specifies the conditions of loan and deposit contracts. In this regard, this paper contributes to the existing literature in that it explains endogenous determinations of credit ceiling and capital buffer of the two debt contracts a bank is involved in. It examines how the contracts can vary (asymmetrically) throughout a business cycle jointly with the deposit and the lending rates. A major result from the model is that a lending rate for a fully collateralized loan as well as a deposit rate for an unsecured loan may exhibit asymmetric and even adverse responses to the counter-cyclical policy rate adjustments. Furthermore, in the presence of capital regulation, it is deduced that the countercyclical interest rate policy may amplify the pro-cyclicality of bank lending.
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본 연구는 정보비대칭 정도가 상이한 시간외대량매매 및 유상증자라는 두 가지 거래상황하에서 기업과 투자은행간의 주간사 계약에 미치는 요인들을 분석하고, 계약의 이행시 투자은행이 보여주는 기회주의적 행태에 초점을 두어, 이들이 주식의 발행(매각) 가격에 어떠한 영향을 미치는가를 분석한다. 실증분석 결과 첫째, 유상증자시 총액/잔액 인수 계약을 체결할 경우 모집주선 계약에 비하여 가격할인 정도와 저가발행 정도가 증가한 반면, 시간외대량매매 거래에서 계약의 형태는 가격할인과 저가발행에 별다른 영향을 주지 않았다. 유상증자에 비해 정보비대칭 정도가 높은 시간외대량매매시 투자은행은 수수료는 많이 받으면서 계약의 형태와 관계없이 체결 가능한 가격으로 매각을 하는 기회주의적 행태를 보여 양 계약간의 저평가 정도는 유사하게 나타난 것으로 보인다. 둘째, 시간외대량매매시 주간사가 많을수록 가격할인 정도가 감소하였다. 이는 주간사가 많을수록 이들 간의 치열한 경쟁으로 인해 매도가격이 상향조정 되기 때문인 것으로 해석된다. 셋째, 시간외대량매매의 경우 주식매도 기업 주가의 불확실성이 클수록 총액/잔액인수 계약을 체결하는 경향이 있는 반면, 유상증자의 경우 발행사는 협상력을 바탕으로 거래의 확실성을 위해 총액/잔액인수 계약을 선호하게 되는 것으로 나타났다.
This study analyzes the factors which affect the underwriting contracts between firms and investment banks under two situations with different levels of information asymmetry, overnight block trades and new equity issues. This study focuses on the opportunistic behavior investment banks show while executing these contracts to analyze how the firm and investment bank affect the offer (sale) price. Previous studies conducted on opportunistic behavior of investment banks in possession of superior information on capital markets have focused mostly on its effects on pricing of initial or new equity issues, while not enough analysis has been conducted on investment banks’ opportunistic behavior and their respective effects on pricing which differ by type of underwriting contracts. Therefore, we have chosen to look into overnight block trades and new equity issues to differentiate the information asymmetry in which investment banks pursue their opportunistic behavior. In cases with high information asymmetry, that is overnight block trade, investment banks do not necessarily behave in line with sellers’ expectations. Rather, they are much more inclined to take advantage of the situation to maximize their share of the profits even by placing the sellers’ best interests at stake. When information asymmetry is low, that is the case with new equity issues, however, investment banks more readily act in line with the sellers’ expectations, regardless to the type of underwriting contract. In selection of investment banks, firms need to first decide whether to deal with one or multiple underwriting investment banks and whether they should sign a contract based on best efforts or firm commitment. From the perspective of investment banks, as part of their effort to maximize profits, they must also take into consideration their relationships with the sellers as well as the investors. In the case of overnight block trades, in which information asymmetry is high, investment banks show ample opportunistic behavior because it is relatively difficult for the firms to monitor investment banks’ activities. It is likely that investment banks, even when they receive a higher fee for additional risk taken in firm commitment contracts, will sell the shares at whichever price they can get from the market. In other words, the level of discount and underpricing is similar for each type of contract, which is against the anticipation of sellers who expect higher deal certainty and low discount level from firm commitment contracts than best efforts ones. However, from investment banks’ perspective, their main interest is to raise fees and reap the best economic benefits they can while lowering their underwriting risk, which inhibit them from putting in much effort to lower discount rates. Thus, for the best interest of the sellers, if the pricing is similar between the two types of contracts, it would prove to be more economic for them to pursue a best efforts contract. In the case of new equity issues with relatively low information asymmetry, investment banks are much more constrained from pursuing opportunistic behavior. Consequently, they prone to act less opportunistically by focusing more on meeting the expectations of the principal, regardless to whether the contract is best efforts or firm commitment. For example, for shareholder placement new equity issues, the majority of shareholders prefer firm commitment contracts as a way to maximize deal certainty and low pricing to minimize acquisition cost. For investment banks, a firm commitment contract is also a suitable as a way to secure their relationships with the sellers for future business opportunities while pursuing to lower pricing to minimize their underwriting risk. In such cases, the optimal alignment of interest between the principal and the investment bank takes place. Our findings from this study are as follows. Firstly, in the case of new equity issues, the level of discount and underpricing tends to increase for firm commitment contracts compared to that of best efforts contracts. This is due to the low level of information asymmetry in new equity issues, allowing investment banks to focus more on minimizing their underwriting risks rather than on showing opportunistic behavior to maximize profit. In the case of overnight block trades, however, the level of discount and underpricing is not dependent on the form of contract. This is due to the high level of information asymmetry involved in the course of overnight block trades, enticing investment banks to commit opportunistic behavior by executing transactions at any possible price even when it is against the interest of the sellers. Secondly, we find that in the case of overnight block trades, the level of discount tends to decrease as more investment banks are involved as bookrunners. This is due to the competition amongst investment banks in their common interest to maintain a positive business relationship with the sellers in the future. Thirdly, we find that in the case of overnight block trades, firms prefer firm commitment contracts with investment banks when the volatility of the firm’s stock price is high. On the other hand, in the case of new equity issues, firms prefer firm commitment contracts with investment banks when they have a stronger bargaining power over investment banks.
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본 연구는 한국의 비금융기업 표본을 대상으로 손해보험 구매를 통한 헤지활동이 기업가치에 미치는 영향을 검증하였다. 본 연구는 Pooled OLS, Fama and MacBeth (1973)의 횡단면회귀분석, 패널고정효과모형(Fixed Effects Panel Regression)으로 추정한 모든 모형에서 일관되게 손해보험 이용 수준과 기업가치의 대용변수인 Tobin’s Q 사이에 통계적으로 유의한 양(+)의 상관관계가 존재하는 것으로 나타났다. 특히, 추정계수의 편의(bias)를 제거하기 위하여 도구변수를 이용한 2단계 최소자승법 (2SLS)으로 추정한 결과에서도 동일한 결과를 확인하였다. Pooled OlS로 추정한 결과를 바탕으로 할 때 기업가치로 표현한 손해보험 이용의 헤지프리미엄은 평균 약 2.68%로 나타났다. 이는 중국 기업을 대상으로 손해보험 이용의 헤지프리미엄이 평균 약 1.48%인 것으로 보고한 Zou(2010)의 경우보다 상당히 높은 수준이다. 추가적으로 본 연구는 재무적제약이 큰 기업과 투자지출이 큰 기업에서 손해보험을 이용한 헤지의 기업가치 프리미엄이 보다 현저하다는 것을 보임으로써 기존 이론 연구를 검증하였다.
Previous studies on risk management, particularly on the relationship between hedging activity and firm value, have used derivatives tradings as a proxy variable for hedging. Yet, the results from theses tudies have shown some inconsistency, weakening the argument that such type of activity as a form of risk management can actually boost firm value. To the best of our knowledge, Zou (2010) is the first paper of such kind that examines the impact of hedging activity on firm value; in particular, it analyses a property-liability insurance as a firm’s hedging activity in light of risk management. Using a unique set of property-liability insurance data from China, Zou (2010) examines whether propertyliability insurance can enhance firm value. Zou is one of very few in this line of research thus far. Such lack of research on the effect of hedging, especially using property-liability insurance, on firm value can be best explained by the limitation of data availability on firms’insurance in the U.S. and Europe. In China, on the other hand, for the past decade, one of the interesting developments in the global economy is the liberalization of China’s insurance market. Despite much change in the industry, many Chinese insurance companies still do not take fully into account the level of risk exposure in setting insurance prices (Zou, Adams, and Buckle, 2003). In other words, insurance premiums paid by firms in China don’t reflect the level of hedged risk. Evidently, this calls for more compilation of different sets of data from global firms to further reinforce the hedging effect of insurance on firm value. Therefore, this paper applies Zou (2010)’s model to a sample of Korea’s publicly listed non-financial firms. Unlike the case in China, Korean insurance companies determine the insurance prices mainly based on the firms’ level of risk exposure, there by fully reflecting the level of hedged risk of each firm they insure. It is reasonable to expect that, therefore, using a sample of property-liability insurance from Korea will provide accurate and reliable results in examining the hedging effect on firm value. In measuring the effects of hedging activity on firm value, this study uses Pooled OLS, Fama and MacBeth (1973) cross-sectional regression, and fixed effects panel regression. In all three regression models, Tobin’s Q as a proxy variable for firm value has a positive and statistically significant relationship with the level of property-liability insurance use. This result indicates that firms with more insurance use for hedging activity have higher firm value. This study also adopts the instrumental variable approach to address the endogeneity of insurance purchase. This result is consistent with the findings of three previous estimation methods. Based on the pooled OLS result, the average hedging premium is estimated at about 2.68%. This average hedging premium is much higher than the one reported in Zou (2010), which is about 1.47%. This study also runs regression models, considering the lag effects since the insurance use in current year as well as in previous year can affect firm value. As expected, firm value in current year has a positive and statistically significant relationship with the level of insurance use in previous year. This paper also tests whether financially constrained firms have a higher average hedging premium. Several studies (e.g., Froot, Scharfstein, and Stein, 1993; Smith and Stulz, 1985; Stulz, 1996; Ross, 1997; Leland, 1998) have argued that as firms reduce the variability of future cash flow through their risk management strategy, they can overcome their financial constraints and consequently enhance their firm value. Assuming the validity of these arguments, we can expect that financially constrained firms have higher value premiums associated with hedging than financially unconstrained ones do. In our paper, as a proxy variable for internal financial constraints, we use a dividend dummy variable (e.g., 1=if a firm pays dividends less than median firm does; 0=otherwise) and a firm size dummy variable (e.g., 1=if a firm size is less than median one; 0 =otherwise) for external financial constraints. We then run regression models with these dummy variables. As expected, we find that financially restricted firms have a higher value premium associated with hedging than financially unrestricted ones. Therefore, our finding contributes to the risk management literature in providing clear-cut direct evidence that hedging activity via property-liability insurance can enhance firm value. In addition, this study tests whether firms with large investment expenditures have higher average hedging premium than ones with small investment expenditures. According to several studies (e.g., Froot, Scharfstein, and Stein, 1993; Stulz, 1996; Ross, 1997), firms can reduce their taxes and overcome an under investment problem through the hedging activities. In this paper, we use a capital expenditure dummy (e.g., 1=if a firm’s capital expenditures are more than median firm does; 0=otherwise) as a proxyvariable for firms with large capital expenditures and a R&D and advertising spending dummy variable(e.g.,1=if a firm’s R&D and advertising spending are more than median firm does; 0=otherwise) for firms with large R&D and advertising spending and then run regression models with these dummy variables. According to the results, a firm with large expenditures has a higher value premium associated with hedging than one with small expenditures. Our paper contributes to research in risk management by providing richer empirical evidence and practical application of risk management theories. This paper ultimately aims to narrow the gap in findings between theoretical and empirical researches.
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The effects of corporate diversification on firm value have been extensively investigated in the field of finance. The conventional wisdom is that a diversification discount results from inefficient internal capital allocation. This paper suggests that it does not necessarily hold in a signaling game model in which the types of the firm can have a significant impact on the bankruptcy risk. Under information asymmetry, single firms invest only in projects with high net present values (NPVs) or fall into bankruptcy. By contrast, diversified firms with efficient internal capital markets invest in a broader set of projects with positive NPV. Consequently, this indicates that the average values of surviving single firms can be higher than that of a diversified firm. This study contributes to the literature in three ways. First, we show that under viable conditions, a diversification discount can occur even with efficient internal capital. Second, our study suggests a theoretical basis which takes into account survivor bias in gaining a better understanding of a diversification discount. Third, this study provides a means through which both diversification discount and premium can be explained within one framework.
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