Corporate Finance

Two leading scholars of business and finance introduce a bold idea for the world's poorest countries. Over the past twenty years, more citizens in China and India have raised themselves out of poverty than anywhere else at any time in history. They accomplished this through the local business sector—the leading source of prosperity for all rich countries. In most of Africa and other poor regions, the business sector is weak, but foreign aid continues to fund government and NGOs.

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth.

This paper studies the joint impact of corruption on the entry mode and volume of inward foreign direct investment (FDI) using a unique firm-level data set. We find that corruption not only reduces inward FDI, but also shifts the ownership structure towards joint ventures. The latter finding supports the view that corruption increases the value of using a local partner to cut through the bureaucratic maze. However, R&D intensive firms are found to favor sole ownership.

Stocks with recent past high idiosyncratic volatility have low future average returns around the world. Across 23 developed markets, the difference in average returns between the extreme quintile portfolios sorted on idiosyncratic volatility is -1:31% per month, after controlling for world market, size, and value factors. The effect is individually significant in each G7 country. In the United States, we rule out explanations based on trading frictions, information dissemination, and higher moments.

Entrepreneurs face significant nondiversifiable business risks. We build a dynamic incomplete markets model of entrepreneurial firms to demonstrate the important implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit (cash-out and default) decisions. The optimal capital structure is determined by a generalized tradeoff model where risky debt provides significant diversification benefits.

The first hints of trouble in the mortgage market surfaced in mid-2005, and conditions subsequently began to deteriorate rapidly. Mortgage defaults and delinquencies are particularly concentrated among borrowers whose mortgages are classified as "subprime" or "near-prime." The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income.

It was Thursday August 19, 2004, and after months of anticipation, trading of Google stock would finally begin this morning on the NASDAQ. Google offered a total of 19,605,052 Class A shares using a "modified" Dutch auction initial public offering (IPO), including 14,142,135 floated by Google and 5,462,917 from existing stockholders, at a price range of $85-$95 per share. You have been charged with advising ReidCourt LLC as to whether it should bid to purchase Google shares in the IPO, and if so, at what price(s).

This book describes valuation as an exercise in financial statement analysis. Students learn to view a firm through its financial statements and to carry out the appropriate financial statement analysis to value the firm's debt and equity. The book takes an activist approach to investing, showing how the analyst challenges the current market price of a share by analyzing the fundamentals. With a careful assessment of accounting quality, accounting comes to life as it is integrated with the modern theory of finance to develop practical analysis and valuation tools for active investing.

Previous research concludes that options are mispriced based on the high average returns, CAPM alphas, and Sharpe ratios of various put selling strategies. One criticism of these conclusions is that these benchmarks are ill suited to handle the extreme statistical nature of option returns generated by nonlinear payoffs. We propose an alternative way to evaluate the statistical significance of option returns by comparing historical statistics to those generated by option pricing models.