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In April 2002 the European Central Bank (ECB) and the Center for Financial Studies (CFS) launched the ECB-CFS Research Network to promote research on “Capital Markets and Financial Integration in Europe”. The ECB-CFS research network aims at stimulating top-level and policy-relevant research, significantly contributing to the understanding of the current and future structure and integration of the financial system in Europe and its international linkages with the United States and Japan. This report summarises the work done under the network after two years. Over time the network formed a coherent and growing group of researchers interested in the integration of European financial markets, while using light organisational structures and budgets. The members of this evolving group met repeatedly at the events organised by the network to present the latest results of their research and to share views on policy options. In this sense, the “network of people” intended at the start was created. Overall, the network aroused great interest, as leading academic researchers, researchers from the main policy institutions and high-level policy makers participated actively in it by presenting research results, through speeches and in policy panels. It also stimulated a new research field on securities settlement systems, an area of high policy relevance and interest to the ECB that had not attracted much interest in the research community beforehand. Also, the network seems to have triggered several related outside initiatives by international institutions, such as the IMF or the OECD. During its first two years the network was organised around three workshops and a final symposium on 10-11 May 2004. To focus research resources and to ensure medium-term policy relevance, a limited number of areas have been given top priority: bank competition and the geographical scope of banking; international portfolio choices and asset market linkages between Europe, the United States and Japan; European bond markets; European securities settlement systems; and the emergence and evolution of new markets in Europe (in particular start-up financing markets). In order to stimulate further research focused on the priority fields of the network, the ECB Lamfalussy research fellowships were established. These fellowships sponsor projects proposed by young researchers, both a dvanced doctoral students and younger professors. Five Lamfalussy fellowships were granted in 2003 and five more in 2004. The first papers from this program have already been issued in the ECB working paper series or are forthcoming. One of them won the prize for the best paper written by a Ph.D. student at the 2004 European Finance Association Meetings in Maastricht. Results of the network in the five top priority areas can be summarised as follows: Bank competition and the geographical scope of banking. First, integration does not appear to be very advanced in many retail banking markets. Second, some of the inherent characteristics of traditional loan and deposit business constrain the cross-border expansion of commercial banking, even in a common currency area. Hence, the implementation of some policies to foster cross-border integration in retail banking may be ineffective. Third, theoretical research suggests that supervisory structures may not be neutral towards further European banking integration. Finally, a stronger role of area-wide competition policies could be beneficial for further banking integration. This would also stimulate economic growth, as more competition in the banking sector induces financially dependent firms to grow more. European bond markets. While the government bond market has integrated rapidly with the EMU convergence process, its full integration has not yet been achieved. The introduction of a common electronic trading platform reduced transaction costs substantially, but yield spreads of long-term sovereign bonds of the euro area are still heterogeneous. This is largely explained by different sensitivities to an international risk factor, whereas liquidity differentials only play a role in conjunction with this latter factor. Somewhat surprisingly in this context, the dynamically developing corporate bond market exhibits a relatively high level of integration. There is also increasing evidence that the introduction of the euro has contributed to a reduction in the cost of capital in the euro area, in particular through the reduction of corporate bond underwriting fees. As a result, firms may wish to increase bond financing relative to equity financing. The development of a larger corporate bond market is also important for monetary policy. For example, US evidence suggests that the rating of corporate bonds may contribute to the persistence of recessions, as rating agencies´ policies affect firms asymmetrically in their access to the bond market over the business cycle. US evidence also suggests that liquidity conditions in stock and bond markets tend to be positively correlated. European securities settlement systems. European securities settlement infrastructures are highly fragmented and further integration and/or consolidation would exploit economies of scale that could greatly benefit investors. It is not clear, however, whether direct public intervention in favour of consolidation would lead to the highest level of efficiency, for example because of the existence of strong vertical integration between trading and securities platforms (“silos”). In contrast, promoting open access to clearing and settlement systems could lead to consolidation and the highest level of efficiency. Finally, regarding concerns about unfair practices by Central Securities Depositories (CSDs) toward custodian banks, regulatory interventions favouring custodian banks should be discouraged, as long as CSDs are not allowed to price discriminate between custodian banks and investor banks. The emergence and evolution of new markets in Europe (in particular start-up financing markets). While fairly well integrated, “new markets” and start-up financing are less developed and integrated in Europe than in the United States. However, new markets and venture capitalists are the most important intermediaries for the financing of projects with high risk but with potentially very high return. The analysis carried out within the network reveals that European start-up financiers are mostly institutional investors, while US venture capitalists are mostly rich individuals. Also, new markets are essential for the development of start-up finance in Europe, as they provide an exit strategy for start-up financiers who can then sell new successful projects using initial public offerings. Finally, the legal framework affects the development of venture capital firms. For example, very strict personal bankruptcy laws constrain early stage entrepreneurs, reducing demand for venture capital finance. International portfolio choices and asset market linkages between Europe, the United States and Japan. At a global scale, asset market linkages have increased recently. For example, major economies such as the United States and the euro area have become more financially interdependent. This phenomenon can be observed in stock and bond markets as well as in money markets, where the main direction of spillovers has recently been from the US to the euro area. Country-specific shocks now play a smaller role in explaining stock return variations of firms whose sales are internationally diversified. Increases in firmby-firm market linkages are a global phenomenon, but they are stronger within the euro area than in the rest of the world. Various other phenomena also increase market linkages and therefore the likelihood that financial shocks spread across countries. One example is the use of global bonds. Finally, the nowadays more direct access of unsophisticated investors to financial markets may increase volatility. Other areas. Financial integration affects financial structures, but it does not need to lead to their convergence across countries. Financial structures matter for growth, as market-oriented financial systems benefit all sectors and firms, whereas bank-based systems primarily benefit younger firms that depend on external finance. Moreover, good corporate governance increases firms’ value. In particular, the dual board system, where the monitoring and advising roles of the board of directors are separated, is found to dominate the single board structure. Therefore, the further development of the European single market should strongly require good corporate governance. In general, well designed institutions foster entrepreneurial activity, partly by relaxing capital constraints. The results of the network clearly illustrated the substantial effects the introduction of the euro had on euro area financial markets. In addition to the effects on bond markets, stock markets and the cost of capital summarised above, research produced showed that the single currency had its strongest effects on money markets, whose unsecured segment is now completely integrated. Without any doubt the euro generally enhanced the liquidity and efficiency of euro area financial markets, and ongoing initiatives such as the European Union’s Financial Services Action Plan will help to continue this process. In sum, in the first two years the network has established itself as the hub for the research debate on European financial integration. Some of the best papers produced by the network, leading to the conclusions mentioned above, are currently being considered for publication in two special issues of academic journals. An issue of the Oxford Review of Economic Policy on “European financial integration” is published contemporaneously with this report, and an issue of the Review of Finance is planned for next year. The current policy context, the gradual progress of integration as well as the creation of other related non-ECB or non-CFS initiatives on financial integration suggest that this topic will remain high on the agendas of policy makers and academics for the years to come. Therefore, the ECB Executive Board and the CFS decided to continue the network, refocusing its priorities. Three priority areas have been added: 1) The relationship between financial integration and financial stability, 2) EU accession, financial development and financial integration, and 3) financial system modernisation and economic growth in Europe. These three areas have become particularly important at the current juncture, but have not received particularly strong attention in the first two years of the network. For example, the area of financial stability research was highlighted by the ECB research evaluators as an area deserving further development. Moreover, despite the results found in the first two years of the network, new developments remain to be further explored in the earlier priority areas. A three-year extension is envisaged, running from after the May 2004 symposium until 2007, with two events to be held per year. The threeyear period is long enough to consider the first effects of the Financial Services Action Plan. It also constitutes a realistic horizon for the ambitious agenda implied by the three new priorities. The generally light organisational structure and working of the network will not be changed. In addition, given the value of the Lamfalussy fellowship research program in inducing further research in the areas of the network, the program has also been extended for all the research topics in the area of the network.
Conference Reader zur gemeinsam von Athansios Orphanides (Federal Reserve Board, Washington D.C.), John C. Williams (Federal Reserve Bank of San Francisco), Heinz Hermann (Deutsche Bundesbank), und Volker Wieland (Center for Financial Studies and Goethe University Frankfurt) organisierten Konferenz, die vom 30. - 31. August, 2003 in Eltville stattgefunden hat. Inhaltsverzeichnis: * Volker Wieland (Director Center for Financial Studies): Foreword * Hans Georg Fabritius (Member of the Executive Board of the Deutsche Bundesbank): Opening Remarks * Charles Goodhart (Norman Sosnow Professor of Banking and Finance at the London School of Economics and External Member of the Bank of England's Monetary Policy Commitee): After Dinner Speech * Paper Abstracts * List of Participants
This paper aims to analyze the impact of different types of venture capitalists on the performance of their portfolio firms around and after the IPO. We thereby investigate the hypothesis that different governance structures, objectives and track record of different types of VCs have a significant impact on their respective IPOs. We explore this hypothesis by using a data set embracing all IPOs which occurred on Germany's Neuer Markt. Our main finding is that significant differences among the different VCs exist. Firms backed by independent VCs perform significantly better two years after the IPO compared to all other IPOs and their share prices fluctuate less than those of their counterparts in this period of time. Obviously, independent VCs, which concentrated mainly on growth stocks (low book-to-market ratio) and large firms (high market value), were able to add value by leading to less post-IPO idiosyncratic risk and more return (after controlling for all other effects). On the contrary, firms backed by public VCs (being small and having a high book-to-market ratio) showed relative underperformance. Klassifikation: G10, G14, G24 . 29th January 2004 .
We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted heretofore quiescent in inflation expectations and destabilized the economy. Had monetary policy reacted less aggressively to perceived unemployment gaps, in inflation expectations would have remained anchored and the stag inflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both in inflation and unemployment. We argue that policymakers, learning from the experience of the 1970s, eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the U.S. economy.
The paper provides a comprehensive overview of the gradual evolution of the supervisory policy adopted by the Basle Committee for the regulatory treatment of asset securitisation. We carefully highlight the pathology of the new “securitisation framework” to facilitate a general understanding of what constitutes the current state of computing adequate capital requirements for securitised credit exposures. Although we incorporate a simplified sensitivity analysis of the varying levels of capital charges depending on the security design of asset securitisation transactions, we do not engage in a profound analysis of the benefits and drawbacks implicated in the new securitisation framework. JEL Klassifikation: E58, G21, G24, K23, L51. Forthcoming in Journal of Financial Regulation and Compliance, Vol. 13, No. 1 .
This paper analyzes banks' choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication. JEL Klassifikation: D82; G21; G32.
We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing "cash flow" and "discount rate" effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects. JEL Klassifikation: F3, F4, G1, C5
We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not require targeting a positive average rate of inflation. Interestingly, the presence of binding real rate shocks alters the policy response to (non-binding) mark-up shocks. JEL Klassifikation: C63, E31, E52 .
In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable. Klassifikation: E31, E52, E58, E61
Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under adaptive learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the high-inflation steady state. The hyperinflationary paths are stable under learning if agents can utilize contemporaneous data. However, in an economy populated by a mixture of agents, some of whom only have access to lagged data, stable inflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high. JEL Klassifikation: C62, D83, D84, E31
A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management. JEL Klassifikation: C1, G1
We take a simple time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. Time-series modeling reveals conditional mean dynamics, and crucially, strong conditional variance dynamics, in daily average temperature, and it reveals sharp differences between the distribution of temperature and the distribution of temperature surprises. As we argue, it also holds promise for producing the long-horizon predictive densities crucial for pricing weather derivatives, so that additional inquiry into time-series weather forecasting methods will likely prove useful in weather derivatives contexts.
In this article, we investigate risk return characteristics and diversification benefits when private equity is used as a portfolio component. We use a unique dataset describing 642 US-American portfolio companies with 3620 private equity investments. Information about precisely dated cash flows at the company level enables for the first time a cash flow equivalent and simultaneous investment simulation in stocks, as well as the construction of stock portfolios for benchmarking purposes. With respect to the methodology involved, we construct private equity, stock-benchmark and mixed-asset portfolios using bootstrap simulations. For the late 1990s we find a dramatic increase in the extent to which private equity outperforms stock investment. In earlier years private equity was underperforming its stock benchmarks. Within the overall class of private equity, returns on earlier private equity investment categories, like venture capital, show on average higher variations and even higher rates of failure. It is in this category in particular that high average portfolio returns are generated solely by the ability to select a few extremely well performing companies, thus compensating for lost investments. There is a high marginal diversifiable risk reduction of about 80% when the portfolio size is increased to include 15 investments. When the portfolio size is increased from 15 to 200 there are few marginal risk diversification effects on the one hand, but a large increase in managing expenditure on the other, so that an actual average portfolio size between 20 and 28 investments seems to be well balanced. We provide empirical evidence that the non-diversifiable risk that a constrained investor, who is exclusively investing in private equity, has to hold exceeds that of constrained stock investors and also the market risk. From the viewpoint of unconstrained investors with complete investment freedom, risk can be optimally reduced by constructing mixed asset portfolios. According to the various private equity subcategories analyzed, there are big differences in optimal allocations to this asset class for minimizing mixed-asset portfolio variance or maximizing performance ratios. We observe optimal portfolio weightings to be between 3% and 65%.
Financial theory creates a puzzle. Some authors argue that high-risk entrepreneurs choose debt contracts instead of equity contracts since risky but high returns are of relatively more value for a loan-financed firm. On the contrary, authors who focus explicitly on start-up finance predict that entrepreneurs are the more likely to seek equity-like venture capital contracts, the more risky their projects are. Our paper makes a first step to resolve this puzzle empirically. We present microeconometric evidence on the determinants of debt and equity financing in young and innovative SMEs. We pay special attention to the role of risk for the choice of the financing method. Since risk is not directly observable we use different indicators for financial and project risk. It turns out that our data generally confirms the hypothesis that the probability that a young high-tech firm receives equity financing is an increasing function of the financial risk. With regard to the intrinsic project risk, our results are less conclusive, as some of our indicators of a risky project are found to have a negative effect on the likelihood to be financed by private equity.
We extend the important idea of range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator that is motivated by financial economic considerations (the absence of arbitrage), in addition to statistical considerations. We show that, unlike other univariate and multivariate volatility estimators, the range-based estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading. Finally, we provide an empirical example illustrating the value of the high-frequency sample path information contained in the range-based estimates in a multivariate GARCH framework.
We consider three sets of phenomena that feature prominently - and separately - in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that: (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis.
Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield curve. In this paper we do so. We use neither the no-arbitrage approach, which focuses on accurately fitting the cross section of interest rates at any given time but neglects time-series dynamics, nor the equilibrium approach, which focuses on time-series dynamics (primarily those of the instantaneous rate) but pays comparatively little attention to fitting the entire cross section at any given time and has been shown to forecast poorly. Instead, we use variations on the Nelson-Siegel exponential components framework to model the entire yield curve, period-by-period, as a three-dimensional parameter evolving dynamically. We show that the three time-varying parameters may be interpreted as factors corresponding to level, slope and curvature, and that they may be estimated with high efficiency. We propose and estimate autoregressive models for the factors, and we show that our models are consistent with a variety of stylized facts regarding the yield curve. We use our models to produce term-structure forecasts at both short and long horizons, with encouraging results. In particular, our forecasts appear much more accurate at long horizons than various standard benchmark forecasts. JEL Code: G1, E4, C5
This paper considers a theoretical model of n asymmetric firms that reduce their initial unit costs by spending on R&D activities. In accordance with Schumpeterian hypotheses we obtain that more efficient (bigger) firms spend more in R&D and this leads to a more concentrated market structure. We also find a positive relationship between innovation and market concentration. This calls for a corrective tax on R&D activities to curtail strategic incentives to over-invest in R&D trying to achieve a higher market share. Klassifikation: L11, L52, O31 . February, 2004.
We analyze welfare maximizing monetary policy in a dynamic two-country model with price stickiness and imperfect competition. In this context, a typical terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing literature, we remain consistent to a public finance approach by an explicit consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails two main advantages. First, it allows an accurate characterization of optimal policy in an economy that evolves around a steady-state which is not necessarily efficient. Second, it allows to describe a full range of alternative dynamic equilibria when price setters in both countries are completely forward-looking and households' preferences are not restricted. In this context, we study optimal policy both in the long-run and along a dynamic path, and we compare optimal commitment policy under Nash competition and under cooperation. By deriving a second order accurate solution to the policy functions, we also characterize the welfare gains from international policy cooperation. Klassifikation: E52, F41 . This version: January, 2004. First draft: October 2003 .
This paper analyzes the empirical relationship between credit default swap, bond and stock markets during the period 2000-2002. Focusing on the intertemporal comovement, we examine weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market. JEL Klassifikation: G10, G14, C32.
In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy respond. JEL Klassifikation: E5, E61, D78
Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending. JEL Klassifikation: E32, E62.
The Basel Committee plans to differentiate risk-adjusted capital requirements between banks regulated under the internal ratings based (IRB) approach and banks under the standard approach. We investigate the consequences for the lending capacity and the failure risk of banks in a model with endogenous interest rates. The optimal regulatory response depends on the banks' inclination to increase their portfolio risk. If IRB-banks are well-capitalized or gain little from taking risks, then they will increase their market share and hold safe portfolios. As risk-taking incentives become more important, the optimal portfolio size of banks adopting intern rating systems will be increasingly constrained, and ultimately they may lose market share relative to banks using the standard approach. The regulator has only limited options to avoid the excessive adoption of internal rating systems. JEL Klassifikation: K13, H41.
We study the returns the venture capital and private equity investment from 221 venture capital and private equity funds that are part of 72 venture capital and private equity firms, 5040 entrepreneurial firms (3826 venture capital and 1214 private equity), and spanning 32 years (1971 - 2003) and 39 countries from North and South America, Europe and Asia. We make use of four main categories of variables to proxy for value-added activities and risks that explain venture capital and private equity returns: market and legal environment, VC characteristics, entrepreneurial firm characteristics, and the characteristics and structure of the investment. We show Heckman sample selection issues in regards to both unrealized and partially realized investments are important to consider for analysing the determinants of realized returns. We further compare the actual unrealized returns, as reported to investment managers, to the predicted unrealized returns based on the estimates of realized returns from the sample selection models. We show there exists significant systematic biases in the reporting of unrealized investments to institutional investors depending on the level of the earnings aggressiveness and disclosure indices in a country, as well as proxies for the degree of information asymmetry between investment managers and venture capital and private equity fund managers. Klassifikation: G24, G28, G31, G32, G35
We analyze governance with a dataset on investments of venture capitalists in 3848 portfolio firms in 39 countries from North and South America, Europe and Asia spanning 1971-2003. We find that cross-country differences in Legality have a significant impact on the governance structure of investments in the VC industry: better laws facilitate faster deal screening and deal origination, a higher probability of syndication and a lower probability of potentially harmful co-investment, and facilitate board representation of the investor. We also show better laws reduce the probability that the investor requires periodic cash flows prior to exit, which is in conjunction with an increased probability of investment in high-tech companies. Klassifikation: G24, G31, G32.
This paper sets out to analyze the influence of different types of venture capitalists on the performance of their portfolio firms around and after IPO. We investigate the hypothesis that different governance structures, objectives, and track records of different types of VCs have a significant impact on their respective IPOs. We explore this hypothesis using a data set embracing all IPOs that have occurred on Germany's Neuer Markt. Our main finding is that significant differences among the different VCs exist. Firms backed by independent VCs perform significantly better two years after IPO as compared to all other IPOs, and their share prices fluctuate less than those of their counterparts in this period of time. On the contrary, firms backed by public VCs show relative underperformance. The fact that this could occur implies that market participants did not correctly assess the role played by different types of VCs.
How might retirees consider deploying the retirement assets accumulated in a defined contribution pension plan? One possibility would be to purchase an immediate annuity. Another approach, called the "phased withdrawal" strategy in the literature, would have the retiree invest his funds and then withdraw some portion of the account annually. Using this second tactic, the withdrawal rate might be determined according to a fixed benefit level payable until the retiree dies or the funds run out, or it could be set using a variable formula, where the retiree withdraws funds according to a rule linked to life expectancy. Using a range of data consistent with the German experience, we evaluate several alternative designs for phased withdrawal strategies, allowing for endogenous asset allocation patterns, and also allowing the worker to make decisions both about when to retire and when to switch to an annuity. We show that one particular phased withdrawal rule is appealing since it offers relatively low expected shortfall risk, good expected payouts for the retiree during his life, and some bequest potential for the heirs. We also find that unisex mortality tables if used for annuity pricing can make women's expected shortfalls higher, expected benefits higher, and bequests lower under a phased withdrawal program. Finally, we show that delayed annuitization can be appealing since it provides higher expected benefits with lower expected shortfalls, at the cost of somewhat lower anticipated bequests. Klassifikation: G22, G23, J26, J32, H55 . January 2004.