Asset prices and business cycles with costly external finance

This paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data.     

Adoption of International Financial Reporting Standards Has Enhanced Chinese Company Transparency

The research reported here shows that China＇s recent adoption （ASBE） has increased the quality of Chinese financial reporting of Accounting Standards for Business Enterprises With China＇s decade of World Trade Organization （WTO） membership marked by dazzling economic growth, it is useful to reflect on how financial reporting itself can assist in the country＇s future progress. Critical to the success of ensuring strength for this burgeoning economy is attraction of foreign investment capital. As China＇s internal consumption grows,     

Fiscal discipline and exchange rates: Does politics matter?

We look at the effect of exchange rate regimes on fiscal discipline, taking into account the effect of underlying political conditions. We present a model where strong politics (defined as policymakers facing longer political horizon and higher cohesion) are associated with better fiscal performance, but fixed exchange rates may revert this result and lead to less fiscal discipline. We confirm these hypotheses through regression analysis performed on a panel sample covering 79 countries from 1975 to 2012. Our empirical results also show that the positive effect of strong politics on fiscal discipline is not enough to counter the negative impact of being at/moving to fixed exchange rates. Our results are robust to a number of sensitivity checks, including the use of different estimators, alternative proxies for fiscal discipline and sub-sample analysis.     

CAPE VERDE: THE CASE FOR EUROISATION

After a decade of a successful peg to the euro, the authorities of Cape Verde are considering the official euroisation of the country. For an ex ante economic evaluation of such a move, this paper assesses whether Cape Verde fulfills key economic criteria devised by the optimum currency areas literature, using as benchmark the comparable records of the 27 European Union (EU) countries. The answer is positive. Overall, we find that Cape Verde is not less suited for euroisation than some of the current euro area members and most of the remaining members of the EU.     

Optimal Diversification: Reconciling Theory and Evidence

In this paper we show that the main empirical findings about firm diversification and performance are consistent with the maximization of shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of synergies. By explicitly linking the diversification strategies of the firm to differences in size and productivity, our model provides a natural laboratory to investigate several aspects of the relationship between diversification and performance. Specifically, we show that our model can rationalize the evidence on the diversification discount ( Lang and Stulz (1994) ) and the documented relation between diversification and productivity ( Schoar (2002) ).     

Firm non‐market capabilities and the effect of supranational institutional safeguards on the location choice of international investments

Research Summary : We investigate the extent to which firms rely on supranational institutional safeguards versus their non‐market capabilities to offset the risks of investing abroad. We argue that firms with non‐market capabilities are insensitive to supranational institutional safeguards when choosing the location of their international investments. We show that supranational agreements between an investor's home and host nation, operationalized as bilateral investment treaties (BITs), increase the likelihood of investment, but there is substantial firm heterogeneity with respect to this relationship. Firms with various forms of non‐market capabilities are not sensitive to BITs, whereas other firms are more likely to invest under BITs. We advance the understanding of how firm non‐market capabilities can substitute for supranational institutional arrangements in addressing risks associated with host country institutional weaknesses. Managerial Summary : The risk of expropriation is one of the main concerns companies have when investing abroad. Because of this, many countries implement bilateral investment treaties (BITs) to safeguard foreign investments, alleviate foreign investor concerns, and promote investments. We show that only those companies without political competence or political connections favor countries with BITs when choosing where to invest. Companies with political competence or political connections, on the other hand, ignore BITs and apparently rely on their ability to influence governments whenever their foreign investments face expropriation threats. As a result, politically connected or competent companies can enter markets most of their competitors lacking these capabilities shy away from. They can, therefore, do business in environments in which they face less competition.     

Advantages of the social stamp for the biodiesel producer companies： The BSBIOS and OLEOPLAN cases

Biofuel has become an alternative source of energy in response to the change of the world＇s energy matrix. In Brazil, biodiesel has a highlighted status because it is obtained from different raw materials including animal or vegetable origins. In this context, trying to stimulate the social inclusion and the regional development, the federal government has been allowing some tax benefits through the Social Fuel Stamp （SCS） to the producer companies of biodiesel, since the purchasing of the raw material is from small farmers. Taking this into account, this article aims at the identification of the advantages perceived between the BSBIOS and the OLEOPLAN-two producer companies of biodiesel, located, respectively, in Rio Grande do Sul, in relation to the use of the social fuel stamp. In this case study, classified as a qualitative and of exploratory style, the data collection was done through the observation of informal conversations, visits in the companies named above, through interviews made with a pre-determined guide that allowed the application of the subject analysis technical. The analysis of the results is organized through the profile of these companies and by the identification of the advantages provided by the social fuel stamp. The results of this study show that the companies consider the social fuel stamp as fundamental and that it provides four advantages： the access to better financial conditions through the BNDES and other financial institutions; the right to compete in auctions for the biodiesel purchasing by the Petroleum National Agency, Natural Gas and Biofuel （ANP）; the exemption of taxes; and, the use of the logo of the stamp showing the social role of the company that does not represent a differentiated factor concerning the marketing strategy.     

Asset Pricing Implications of Firms' Financing Constraints

We use a production-based asset pricing model to investigatewhether financing constraints are quantitatively important forthe cross-section of returns. Specifically, we use GMM to explorethe stochastic Euler equation imposed on returns by optimalinvestment. Our methods can identify the impact of financialfrictions on the stochastic discount factor with cyclical variationsin cost of external funds. We find that financing frictionsprovide a common factor that improves the pricing of cross-sectionalreturns. Moreover, the shadow cost of external funds exhibitsstrong procyclical variation, so that financial frictions aremore important in relatively good economic conditions. (JELE22, E44, G12)     

Intellectual capital and value creation in the production and assembly of vehicles and auto-parts sector in Brazil： A panel data analysis

This work investigates the relationship between intellectual capital and value creation in the sector of production and assembly of vehicles and auto-parts in Brazil. Through the access of the database from the annual industrial research conducted by the Brazilian Institute of Geography and Statistics, we gathered 865 observations, from 2000 to 2006, of public and private Brazilian companies with more than 100 employees. The database allows the estimate of relevant aggregated variables such as national accounts, gross domestic product, intermediate consumption, as well as propitiates a sectorial study of business strategies and performance, including value added by individual companies. In particular, in this study we use data on variables associated to intellectual capital. To achieve the goal of the study, we consider intellectual capital as defined by Pulic （2000, 2002）, including human capital and structural capital. For the analysis of business performance, we used Pulic＇s VAIC （Value Added Intellectual Cofficient） index as a measure of efficiency of the employed financial and intellectual capital. Regression models were run to verify the relationship among the efficiency in the use of intellectual capital and the profitability of Brazilian companies. The gross income, calculated as before selling, general and administrative expenses, depreciation expenses, amortization and interest expenses, was used as measure of the flows of value creation and the profitability was measured by the gross income to the total assets of the companies. Considering the constructs defined by Pulic （2000, 2002）, we tested, for the Brazilian sector of Production and Assembly of Vehicles and Auto-parts, the following hypotheses： （l） there is a positive relationship between value creation and intellectual capital, （2） there is a positive relationship between value creation and stock of intellectual capital, （3） there is a positive relationship between value creation and efficiency of the employed capital, （4） there is a positive relationship between value creation and efficiency of the human capital, （5） there is a positive relationship between value creation and efficiency of the structural capital. The results of the study, obtained through panel data analysis and through the use static and dynamic models, support the hypotheses that the intellectual capital of the companies, in its flow and stock dimensions, is positively and significantly related to value creation.