Quarterly publication of the Multinational Finance Society, a non-profit corporation     ISSN 1096-1879

Corporate Finance Practices in Canada: Where Do We Stand?
(Multinational Finance Journal, 2011, vol. 15, no. 3/4, pp. 157-192)

H. Kent Baker
American University, USA
Shantanu Dutta
University of Ontario Institute of Technology, Canada
Samir Saadi
Queen's University, Canada

This study investigates the financial practices of Canadian firms involving capital budgeting, cost of capital estimation, capital structure, and real options. Survey respondents express a strong preference for net present value followed by internal rate of return and payback methods. The least popular capital budgeting technique is real options. Unlike their U.S. and European counterparts, Canadian firms rely more on subjective risk assessments in adjusting their discount rate. The use of subjective judgment by Canadian managers also applies to risk analysis, forecasting project cash flows, and estimating the cost of equity capital. This finding differs markedly from the widespread use of the capital asset pricing model by U.S. and European firms. In examining capital structure choice, the results show support for trade-off theory relative to pecking order theory. Finally, firm size and the education of the chief executive officer influence corporate finance decisions. (JEL: G35)

Keywords: Capital budgeting, cost of capital, risk analysis, real options.

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Determinants of Bank Long-term Lending Behavior: Evidence from Russia
(Multinational Finance Journal, 2011, vol. 15, no. 3/4, pp. 193-216)

Lucy Chernykh
Bowling Green State University, USA
Alexandra K. Theodossiou
Texas A&M University, Corpus Christi, USA

We investigate the determinants of the banks' propensity to make long-term business loans in an emerging market context. Using a large sample of Russian banks, we find that the median bank allocates only 0.5% of its assets in long-term business loans and that there is wide cross-sectional variation in this ratio among banks. A bank's ability to extend long-term business loans depends on its size, capitalization, and the availability of long-term liabilities rather than its type of ownership. These results highlight the importance of bank-level (supply side) constraints in extending vital long-term credit to firms. (JEL: G21, O16)

Keywords: emerging market banking, long-term business loans, Russia

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Safer Margins for Option Trading: How Accuracy Promotes Efficiency
(Multinational Finance Journal, 2011, vol. 15, no. 3/4, pp. 217-234)

Rafi Eldor
Interdisciplinary Center, Israel
Shmuel Hauser
Ono Acdemic College and Ben-Gurion University, Israel
Uzi Yaari
Rutgers University, USA

Margin requirements are designed to control the default risk inherent to commitments undertaken by traders writing options. Much like similar institutions, the Tel Aviv Stock Exchange first adopted a system based on the Standard Portfolio Analysis of Risk (SPAN), which sets required levels of options margin according to the most pessimistic of 16 possible outcomes. Seeking to lower the probability of default without adversely affecting liquidity, the Exchange switched in 2001 to a more detailed margin system based on the most pessimistic of 44 scenarios. This unique change provides an ideal laboratory for testing the impact of increased margining precision on the efficiency of option trading. Based on a sample of over 3 million transactions, this study demonstrates that the more accurate pricing of default risk over the studied range increases efficiency by a number of measures, including a smaller implied standard deviation and deviations from put-call parity. (JEL: G11, G13, G14, G20)

Keywords: option margins, option default risk, market efficiency, SPAN system

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Associations Between Management Forecast Accuracy and Pricing of IPOs in Athens Stock Exchange
(Multinational Finance Journal, 2011, vol. 15, no. 3/4, pp. 235-272)

Dimitrios Gounopoulos
University of Surrey, U.K.

This study examines the earnings forecast accuracy of newly listed companies on the Athens Stock Exchange and further investigates the relationship between earnings forecast and pricing of IPOs. It uses a unique data set of 208 IPOs, which were floated during the period of January 1994 to December 2001 in the Athens Stock Exchange. The results suggest that investors are able to anticipate forecast errors at the time of listing. Pricing of IPOs indicate that firms with negative earnings forecast (pessimistic) are associated with low level of underpricing while optimistic management earning forecast can be a signal for high initial returns. Three variables - age of the IPOs, ownership by insiders and industry classification significantly contribute towards accuracy of earnings forecast.

Keywords: earnings forecast, IPO, accuracy of earnings, forecast error

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Appraisal of Mutual Equity Fund Performance Using Data Envelopment Analysis
(Multinational Finance Journal, 2011, vol. 15, no. 3/4, pp. 273-296)

Panayotis Alexakis
University of Athens, Greece
Ioannis Tsolas
National Technical University of Athens, Greece

This paper employs Data Envelopment Analysis to measure for the first time the performance of Greek domestic equity mutual funds over four different one-year horizons and for the whole four-year period. In particular, the model used examines whether fund managers employ inputs (i.e. assets, loads, and risk) efficiently to produce output (returns). The results demonstrate that the efficient funds form the smaller part of the examined sample of funds, the average efficiency rises over time, and that the mean-variance efficiency hypothesis holds for the inefficient funds over the whole period. Moreover, the evidence from the identified sources of inefficiency suggests that fund managers should put more emphasis on the management of assets and the specification of front-end and back-end loads. (JEL: G20, G23)

Keywords: Mutual funds, equity funds, efficiency, data envelopment analysis

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