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Estimating standard errors in finance panel data sets: comparing approaches.
- Review of Financial Studies
, 2009
"... Abstract In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solut ..."
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Cited by 890 (7 self)
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Abstract In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solutions to this problem. Corporate finance has relied on clustered standard errors, while asset pricing has used the Fama-MacBeth procedure to estimate standard errors. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.
The value of corporate risk management
- Journal of Finance
, 2007
"... We model and estimate the value of corporate risk management. We show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices. For a sam ..."
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Cited by 22 (1 self)
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We model and estimate the value of corporate risk management. We show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices. For a sample of 34 oil refiners, we find that hedging concave revenues and leaving concave costs exposed each represent between 2 % and 3 % of firm value. We validate our approach by regressing Tobin’s q on the estimated value and level of risk management and find results consistent with the model. SMITH AND STULZ (1985) SHOW how corporate hedging can add value when firms face convex costs such as progressive taxation and bankruptcy costs. Their cen-tral idea—that nonlinearities justify hedging—has since been applied to other financial factors such as costly external finance, information asymmetry, and managerial risk aversion.1 However, empirical support for these theories is limited and mixed.2 Theorists have ignored real-side factors behind risk man-agement and empiricists have relied on CAPM extensions that might interest diversified investors but subsume the information relevant to corporate risk
2001) “Is There an Optimal Industry Financial Structure?” Working Paper
"... We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financia ..."
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Cited by 13 (1 self)
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We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financial structure. Firm financial leverage, capital intensity, and cash-flow risk are interdependent decisions that depend on the firm’s proximity to the median industry capital-labor ratio, the actions of firms within its industry quintile, and its status as entrant, incumbent, or exiting firm. Our results support competitive industry equilibrium models of financial structure in which debt, technology, and risk are simultaneous decisions.
Asset salability and debt maturity: evidence from nineteenth-century American railroads. Review of Financial Studies, forthcoming
, 2009
"... I investigate the effect of assets ’ liquidation values on capital structure by exploiting the diversity of track gauges in nineteenth-century American railroads. The abundance of track gauges limited the redeployability of rolling stock and tracks to potential users with similar track gauge. Moreov ..."
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Cited by 8 (1 self)
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I investigate the effect of assets ’ liquidation values on capital structure by exploiting the diversity of track gauges in nineteenth-century American railroads. The abundance of track gauges limited the redeployability of rolling stock and tracks to potential users with similar track gauge. Moreover, potential demand for both rolling stock and tracks was further diminished when many railroads went under equity receiverships. I find that the potential demand for a railroad’s rolling stock and tracks were significant determinants of debt maturity and the amount of debt that was issued by railroads. The results are consistent with liquidation values models of financial contracting and capital structure. (JEL G32, G33, L92, N21, N71) An extensive theoretical literature analyzes financial decisions from an “incomplete contracting ” perspective. The driving force in this approach is the right to foreclose on the debtor’s assets in the case of default, and the theory predicts that optimal debt structure depends on how costly it is for creditors to liquidate assets. Despite the abundant theory, there is relatively little empirical evidence on the relation between liquidation value and debt structure. Testing
Dynamics of productive efficiency of Indian banks
- International Journal of Operations Research
, 2008
"... AbstractThe Indian banking sector, which was predominantly controlled by the government, was liberalized in early 1990s. The resultant competitive forces, coupled with more stringent regulatory framework, have created pressure on the banks to perform. Efficiency has become critical for banks ’ survi ..."
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Cited by 2 (0 self)
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AbstractThe Indian banking sector, which was predominantly controlled by the government, was liberalized in early 1990s. The resultant competitive forces, coupled with more stringent regulatory framework, have created pressure on the banks to perform. Efficiency has become critical for banks ’ survival and growth. This paper analyzes the performance of the Indian banking sector, measured and compared in two stages: Through the construct of productive efficiency using the non-parametric frontier methodology, DEA and finding the determinants of productive efficiency through TOBIT model. Inputs and outputs are measured in monetary value and efficiency scores determined for the period 1999-2003. The study shows that SBI and its group have the highest efficiency, followed by private banks, and the other nationalized banks. The results are consistent over the period, but efficiency differences diminish over period of time. The capital adequacy ratio is found to have a significantly positive impact on the productive efficiency.
ABSTRACT Separating Information About Cash Flows From Information About
, 2012
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NBER WORKING PAPER SERIES IS THERE AN OPTIMAL INDUSTRY FINANCIAL STRUCTURE?
, 2002
"... Columbia for helpful comments. MacKay can be reached by ..."
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Capital Structure and Competition in the Banking Industry: Theory and Empirics
, 2009
"... This paper incorporates the observation that in banking industries, debts are usually affected by current return and cannot be predetermined before competition. In a portfolio choice model, we have analyzed how two banks sequentially decide their capital structures through choosing equity levels, an ..."
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This paper incorporates the observation that in banking industries, debts are usually affected by current return and cannot be predetermined before competition. In a portfolio choice model, we have analyzed how two banks sequentially decide their capital structures through choosing equity levels, and then the levels of risky investment which is subject to the rival’s competition. Taking equity as control variable gives us a different aspect to examine the impact of banks ’ financial decisions; In addition to the impact on the critical value of shock from uncertain demand, the banks ’ financial decisions also affect banks ’ cash flow reserve, as well as the costs paid to equityholders and debtholders. Our main result agrees with Brander and Lewis ’ point that leverage is positively related to a 1 bank’s profit, however, we have shown that when the CAR requirement is binding, this result will be overturned. This gives us a convenient approach to check if the bank’s risk management is restricted by the CAR requirement, by testing the relationship between banks ’ capital structure and risky investment level. We tested our theoretical results using 1996-2006 data from Taiwan’s banking industry. · JEL classification: G32;L13
Fixed Life Projects: Agency conflicts and optimal leverage
, 2007
"... * Corresponding author. Financial support by Fundação para a Ciência e a Tecnologia (FCT) is gratefully acknowledged. Fixed Life Projects: Agency conflicts and optimal leverage In this paper we analyse a model of the conflicts between equityholders and debtholders regarding the optimal exercise mome ..."
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* Corresponding author. Financial support by Fundação para a Ciência e a Tecnologia (FCT) is gratefully acknowledged. Fixed Life Projects: Agency conflicts and optimal leverage In this paper we analyse a model of the conflicts between equityholders and debtholders regarding the optimal exercise moment for investment in a firm whose only asset is a concession contract. This setting reflects the reality of, not only traditional concessions, but also image rights and audiovisual contracts. Our results support the coexistence of two different incentives (overinvestment and underinvestment) in one single type of real flexibility (option to invest). We show how overinvestment incentives clearly dominate underinvestment incentives, in terms of their impact in the option value, and show how they tend to occur at or close to maturity of the investment option. We present competing predictions for the size of the agency costs and optimal debt levels, under different market conditions and for different asset characteristics, and reiterate the impact of the agency conflicts in lowering optimal debt levels. Our results also show how different debt repayment schedules optimize the value of the firm operating the concession, even if in some cases the optimal schedule represents the one more sensitive to agency costs. 2 Fixed Life Projects: Agency conflicts and optimal leverage 1.
INTERACTION OF REAL AND FINANCIAL FLEXIBILITY: AN EMPIRICAL ANALYSIS
, 2004
"... This paper studies the interaction of real and financial flexibility and their effects on firm’s investment and financing decisions. We use a system of interdependent dynamic partial adjustment models to capture the effects of flexibility and feedback from firm-specific adjustments towards the optim ..."
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This paper studies the interaction of real and financial flexibility and their effects on firm’s investment and financing decisions. We use a system of interdependent dynamic partial adjustment models to capture the effects of flexibility and feedback from firm-specific adjustments towards the optimal levels of investment and debt. The empirical analysis is based on a large panel of multinational paper and pulp companies observed between 1992 and 2002. The results suggest that the decisions and flexibilities are related, interdependent and interacting, although financial adjustment costs are likely to dominate decision-making. Profitability is found to have strongest impact on the adjustment costs, which seem to be convex and non-constant over time and across firms.
