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ACRN Journal of Finance and Risk Perspectives
Vol. 4, Issue 2, March 2015, ISSN 2305-7394
TABLE OF CONTENTS
EDITORIAL BOARD
FINANCING CONSTRAINTS: THE INFLUENCE OF POLITICAL AND LEGAL INSTITUTIONS
Ahmed Marhfor 1, Bouchra M’Zali 2, and Jean-Claude Cosset 3
1 Department of administrative studies, UQAT, Rouyn-Noranda, Canada
2 Department of Finance, UQAM, Montréal, Canada
3 HEC, Montréal, Canada
Abstract. In this paper, we assess which approach -legal or political- better explains differences in firms’ financing constraints. While many scholars recognize the importance of country institutions in shaping efficient capital markets, there is considerable disagreement on which institutional factors are most important. We find evidence that both political and legal factors are relevant in explaining financing constraints. We also provide evidence on channels through which specific institutions may affect capital allocation. Our results indicate that common law origin and strong public enforcement improve access to finance. Furthermore, we show that high levels of press freedom, less restrictions on investment and low levels of corruption help alleviate firm’s financing constraints. Our findings are robust to many aspects of our methodology and to self-selection bias related to the choice of covering a firm (analyst coverage) and cross-listing on US markets.
Keywords: Financing constraints; financial hierarchy; legal system; political institutions; investment-cash flow sensitivity; capital allocation
ECONOMIC SIZE AND DEBT SUSTAINABILITY AGAINST PIKETTY’S “CAPITAL INEQUALITY”
Hye-jin Cho 1
1 Department of Economics, University of Paris 1, Pantheon-Sorbonne, PARIS, FRANCE
Abstract: This article presents a methodology designed to facilitate alternative variables measuring economic growth. A capital-labor split of Cobb-Douglas function is adapted for use in the context of economic growth. A capital/income ratio and two fundamental laws of capitalism originated by Thomas Piketty illustrate capital inequality undervalued with respect to labor inequality. In addition, the article includes export and external debt as strong alternatives. Empirical data of the World Bank are analyzed to demonstrate broad differences in economic sizes. The case analysis on Latin America as an example of different sized economy is also discussed.
Keywords: capital-labor split, factors of production, capital/income ratio, Thomas Piketty, capitalism, economic size, debt sustainability, Latin America, import substitution industrialization (ISI) model, insolvent external debt, openness, external debt to exports ratio
JEL Classifications: E01; E22; G00; G01; H63
THE DEVELOPMENT OF OTHER COMPREHENSIVE INCOME 2008-2013
Natascha Jarolim 1
1 Kepler University of Linz, Austria
Abstract: This study is based on the revised (2007) version of IAS 1, which changes the reporting practice of OCI components. The purpose of this study is to examine the extent of OCI and its components. The results are aimed to shed light on the significance of OCI and CI as an additional reporting instrument besides net income.
It is based on descriptive data from 2008 to 2013, which covers data during the financial meltdown in 2008 and sheds light on impacts of the amendment of IAS 1 (2007). The data was gathered from the annual financial report of the EuroStoxx50 companies. On basis of this extensive empirical evidence the author tries to provide additional theoretical background to point out the importance of OCI and CI as additional earning measures.
The empirical data suggests a high relevance of OCI and consequently CI for financial statements users. Although OCI and its components vary considerably between different firms in the same business year as well as between the same firms in different business years, generally the study shows that the items “FX” and “AfS” are decisive for the extent of OCI. Furthermore the study reveals an especially high impact of the subprime crisis on OCI.
High values of overall OCI compared to net income are evidence for the importance of OCI and suggest that investors should reflect these earnings in their decision making process. Further analysis therefore may investigate how OCI should be presented. Moreover capital markets research should investigate if the extreme impact of the financial crisis on overall OCI was reflected in investor’s decision making.
Keywords: IFRS, Comprehensive Income, IAS 1, OCI components
A PRACTICAL APPROACH TO BUSINESS UNIT HURDLE RATES, PORTFOLIO ANALYSIS AND STRATEGIC PLANNING
Joseph Calandro, Jr., 1 David Gates, 2 Anup Madampath, 2 and Francois Ramette 2
1 PwC and the Gabelli Center for Global Security Analysis at Fordham University
2 PwC
Abstract: During the course and scope of our work as corporate finance advisors and researchers we have encountered a number of executives who struggle with their current methods of estimating business unit hurdle rates, and their methods of evaluating business unit portfolios. A number of these executives subjectively picked a hurdle rate--many times between 10 to 15%--without engaging in any form of analysis. Worse, some employed formal analysis merely to "back into" a desired hurdle rate. To address situations like these, we adopt a well-known financial model and modify it for use in a business unit context through the use of a strategic accounting beta. Significantly, we also recast and simplify the mathematical expression of the model, which provides a level of transparency to the model that makes it easier for corporate finance and strategy executives to understand and therefore use. It also facilitates a practical form of portfolio analysis, which can be used in conjunction with various capital budgeting methods to question certain strategically significant assumptions, as well as to inform and direct more mathematically rigorous forms of analyses. The linkage between the two approaches--hurdle rate estimation and portfolio analysis--was found to be very useful in strategic planning processes where, in order to secure the requisite funds to execute a business strategy, the objective is to show how a business unit can meet (and hopefully exceed) a given hurdle rate.
Keywords: Hurdle Rates, Portfolio Analysis, Strategic Planning, Capital Allocation
JEL classification: G30; G31; L10; L11
ACRN Journal of Finance and Risk Perspectives
Vol. 4, Issue 2, March 2015, ISSN 2305-7394
TABLE OF CONTENTS EDITORIAL BOARD FINANCING CONSTRAINTS: THE INFLUENCE OF POLITICAL AND LEGAL INSTITUTIONSAhmed Marhfor 1, Bouchra M’Zali 2, and Jean-Claude Cosset 3
1 Department of administrative studies, UQAT, Rouyn-Noranda, Canada
2 Department of Finance, UQAM, Montréal, Canada
3 HEC, Montréal, Canada
Abstract. In this paper, we assess which approach -legal or political- better explains differences in firms’ financing constraints. While many scholars recognize the importance of country institutions in shaping efficient capital markets, there is considerable disagreement on which institutional factors are most important. We find evidence that both political and legal factors are relevant in explaining financing constraints. We also provide evidence on channels through which specific institutions may affect capital allocation. Our results indicate that common law origin and strong public enforcement improve access to finance. Furthermore, we show that high levels of press freedom, less restrictions on investment and low levels of corruption help alleviate firm’s financing constraints. Our findings are robust to many aspects of our methodology and to self-selection bias related to the choice of covering a firm (analyst coverage) and cross-listing on US markets.
Keywords: Financing constraints; financial hierarchy; legal system; political institutions; investment-cash flow sensitivity; capital allocation
ECONOMIC SIZE AND DEBT SUSTAINABILITY AGAINST PIKETTY’S “CAPITAL INEQUALITY”Hye-jin Cho 1
1 Department of Economics, University of Paris 1, Pantheon-Sorbonne, PARIS, FRANCE
Abstract: This article presents a methodology designed to facilitate alternative variables measuring economic growth. A capital-labor split of Cobb-Douglas function is adapted for use in the context of economic growth. A capital/income ratio and two fundamental laws of capitalism originated by Thomas Piketty illustrate capital inequality undervalued with respect to labor inequality. In addition, the article includes export and external debt as strong alternatives. Empirical data of the World Bank are analyzed to demonstrate broad differences in economic sizes. The case analysis on Latin America as an example of different sized economy is also discussed.
Keywords: capital-labor split, factors of production, capital/income ratio, Thomas Piketty, capitalism, economic size, debt sustainability, Latin America, import substitution industrialization (ISI) model, insolvent external debt, openness, external debt to exports ratio
JEL Classifications: E01; E22; G00; G01; H63
THE DEVELOPMENT OF OTHER COMPREHENSIVE INCOME 2008-2013Natascha Jarolim 1
1 Kepler University of Linz, Austria
Abstract: This study is based on the revised (2007) version of IAS 1, which changes the reporting practice of OCI components. The purpose of this study is to examine the extent of OCI and its components. The results are aimed to shed light on the significance of OCI and CI as an additional reporting instrument besides net income.
It is based on descriptive data from 2008 to 2013, which covers data during the financial meltdown in 2008 and sheds light on impacts of the amendment of IAS 1 (2007). The data was gathered from the annual financial report of the EuroStoxx50 companies. On basis of this extensive empirical evidence the author tries to provide additional theoretical background to point out the importance of OCI and CI as additional earning measures.
The empirical data suggests a high relevance of OCI and consequently CI for financial statements users. Although OCI and its components vary considerably between different firms in the same business year as well as between the same firms in different business years, generally the study shows that the items “FX” and “AfS” are decisive for the extent of OCI. Furthermore the study reveals an especially high impact of the subprime crisis on OCI.
High values of overall OCI compared to net income are evidence for the importance of OCI and suggest that investors should reflect these earnings in their decision making process. Further analysis therefore may investigate how OCI should be presented. Moreover capital markets research should investigate if the extreme impact of the financial crisis on overall OCI was reflected in investor’s decision making.
Keywords: IFRS, Comprehensive Income, IAS 1, OCI components
A PRACTICAL APPROACH TO BUSINESS UNIT HURDLE RATES, PORTFOLIO ANALYSIS AND STRATEGIC PLANNINGJoseph Calandro, Jr., 1 David Gates, 2 Anup Madampath, 2 and Francois Ramette 2
1 PwC and the Gabelli Center for Global Security Analysis at Fordham University
2 PwC
Abstract: During the course and scope of our work as corporate finance advisors and researchers we have encountered a number of executives who struggle with their current methods of estimating business unit hurdle rates, and their methods of evaluating business unit portfolios. A number of these executives subjectively picked a hurdle rate--many times between 10 to 15%--without engaging in any form of analysis. Worse, some employed formal analysis merely to "back into" a desired hurdle rate. To address situations like these, we adopt a well-known financial model and modify it for use in a business unit context through the use of a strategic accounting beta. Significantly, we also recast and simplify the mathematical expression of the model, which provides a level of transparency to the model that makes it easier for corporate finance and strategy executives to understand and therefore use. It also facilitates a practical form of portfolio analysis, which can be used in conjunction with various capital budgeting methods to question certain strategically significant assumptions, as well as to inform and direct more mathematically rigorous forms of analyses. The linkage between the two approaches--hurdle rate estimation and portfolio analysis--was found to be very useful in strategic planning processes where, in order to secure the requisite funds to execute a business strategy, the objective is to show how a business unit can meet (and hopefully exceed) a given hurdle rate.
Keywords: Hurdle Rates, Portfolio Analysis, Strategic Planning, Capital Allocation
JEL classification: G30; G31; L10; L11