MANUEL ILLUECA MUÑOZ, Universitat Jaume I
Email: illueca@cofin.uji.es
LARS NORDEN, University of Mannheim - Department of Banking and Finance
Email: norden@bank.bwl.uni-mannheim.de
GREGORY F. UDELL, Indiana University Bloomington - Department of Finance
Email: gudell@indiana.edu

We study the effects of the interplay between banking deregulation and corporate governance on the lending behavior of savings banks in Spain. The removal of branching barriers that constrained these banks has led to a nationwide expansion, increasing the number of their branches and their commercial lending volume dramatically. Analyzing a unique data set combining information on the geographic distribution of bank branches and matched lender-borrower financial statements during 1996-2004, we provide evidence that suggests that the governance of those banks affects the way in which they expand their lending activities. In particular, political influence affects where they expand and their ex ante risk taking behavior. Because most countries have a portion of their banking system that is not privately owned, the behavior of these Spanish savings banks may have broader implications about the impact of global banking deregulation and industry consolidation and their interaction with bank governance.

MARTIN VLCEK, University of Zurich - Swiss Banking Institute (ISB)
Email: vlcek@isb.uzh.ch
MEI WANG, University of Zurich - Swiss Banking Institute (ISB), Swiss Finance Institute
Email: wang@isb.uzh.ch

We conducted laboratory experiments to investigate alternative explanations for the disposition effect. Our results suggest that asset allocation decisions depend on the current performance together with the stock price movement. The participants tended to stick to their last period allocation if their investment was at loss, whereas they were more active and adopted contrarian strategies if they gained from previous investment. Our findings confirm the existence of the disposition effect even in a simple asset-allocation setting, but the behavior of our participants cannot be explained by constant rebalancing, Prospect Theory with a fixed reference point, nor self-justification. The decisions of some participants seemed to be driven by wishful thinking and misperception of the price process.

THORSTEN HENS, Swiss Banking Institute, Norwegian School of Economics and Business Administration (NHH), Swiss Finance Institute (Zurich Center)
Email: thens@isb.unizh.ch

This paper studies how the investors' attitude towards earnings surprises affects the managers' incentives to manipulate earnings in an intertemporal context, where the consensus forecast of the analysts is not exogenously given but determined by the strategic interaction between the analysts and the managers. Our analysis shows that given the asymmetric investors' reaction to earnings surprises, managers have strong incentives to manipulate earnings. In dependence on their time preferences, managers may choose to manipulate the earnings in order to match the consensus forecasts. In this equilibrium, rational investors are systematically fooled. Assuming that managers' preferences are equally distributed in the economy, we also derive conclusions on how the absolute level of manipulation in the economy changes with the investors' preferences, the managers' compensation package and the earnings guidance they may provide to analysts.

FREDERIEK SCHOUBBEN, Catholic University of Leuven (KUL), Lessius University College
Email: frederiek.schoubben@econ.kuleuven.be
CYNTHIA VAN HULLE, Catholic University of Leuven (KUL) - Department of Applied Economics
Email: Cynthia.VanHulle@econ.kuleuven.ac.be

This paper investigates the relevance of growth opportunities for the interpretation of investment-cash flow sensitivity of large Belgian companies. We use data on both listed and large unlisted firms to better distinguish between issues of overinvestment due to agency problems and underinvestment due to capital constraints. Simultaneously this data set offers opportunities to incorporate a wide variation in levels of asymmetric information. We show that, contrary to what is generally accepted, decreasing cash flow sensitivity as growth prospects improve need not indicate overinvestment. Rather it may indicate that capital constrained firms increase the use of external financing in high growth periods as these financing sources then tend to become more appealing. As a result the dependence of investment decisions on internal financing is diminished, thereby reducing measured cash flow sensitivity below the level of low growth years.

VLADIMIR N. VLADIMIROV, Goethe University Frankfurt
Email: vladimirov@finance.uni-frankfurt.de

The bankruptcy announcement is a critical moment in the history of a firm. The value destruction connected with it is however greater for some firms than for others. In this empirical analysis of 1160 US and 116 German firms, having filed for bankruptcy between 1999 and 2007, an economic explanation is given for this phenomenon. Taking the perspective of the equity holders, different market and balance sheet based data are used to explain the wild stock reaction around the bankruptcy announcement. Using a matched sample of US and German firms, the paper further makes a comparison between the two bankruptcy codes. It shows that equity holders do not necessarily fare better under a debtor friendly procedure. Not only do they suffer more often from bankruptcy announcements, but they also lose more and accumulate these losses faster than their German counterparts. The results further suggest larger value destruction in the USA due to agency and bankruptcy costs, thereby giving support to current findings in the literature that debtor friendly codes trigger mechanisms making shareholders eventually worse off.

ROBERT SLEPACZUK, Warsaw University, Department of Economics
Email: rslepaczuk@wne.uw.edu.pl
GRZEGORZ ZAKRZEWSKI, Affiliation Unknown

Modeling of financial markets volatility is one of the most significant issues of contemporary finance, especially while analyzing high-frequency data. Accurate quantification and forecast of volatility are of immense importance in risk management (VaR models, stress testing and worst case scenario), models of capital market and options valuation techniques. What we show in this paper is the methodology for calculating volatility index for Polish capital market (VIW20 - index anticipating expected volatility of WIG20 Index). The methods presented are based on VIX Index (VIX White Paper, 2003) and enriched with necessary modifications corresponding with the character of Polish options market. Quoted on CBOE, VIX Index is currently known as the best measure of capital investment risk perfectly illustrating the level of fear and emotions of market participants. The conception of volatility index is based on combination of realized volatility and implied volatility which, using methodology of Derman et al. (1999) and reconstructing volatility surface, reflects both volatility smile as well as its term structure. The research is carried out using high-frequency data (i.e. tick data) for index options on WIG20 Index for the period November 2003 - May 2007, in other words, starting with the introduction of options by Warsaw Stock Exchange. All additional simulations are carried out using data comprising 1998-2008. Having analyzed in detail VIW20 Index, we observed its characteristic behavior during the periods of strong market turmoils. What we also present is the analysis of the influence of VIW20 and VIX index-based instruments both on construction of minimum risk portfolio and the quality of derivatives portfolio management where volatility risk and liquidity risk play a key role. The main objective of this paper is to provide foundations for introducing appropriate volatility indices and volatility-based derivatives. All that paying attention to crucial methodology changes, necessary if one considers strong markets inefficiencies in emerging countries. As the introduction of appropriate instruments will enable active management of risks that are unhedgable nowadays it will significantly contribute to the development of the given markets in the course of time. In summary we additionally point to benefits Warsaw Stock Exchange might get, being one of few emerging markets possessing appropriately quantified investment risk as well as derivatives to manage it.

ROBERT CLIVE CRESSY, Birmingham Business School
Email: r.cressy@bham.ac.uk
FEDERICO MUNARI, University of Bologna - Department of Management
Email: munari@dea.unibo.it
ALESSANDRO MALIPIERO, University of Bologna - Department of Management
Email: malipier@economia.unibo.it

Building on previous work (Cressy et al, 2007) showing that buyouts have higher operating profitability in the post-buyout period the paper examines contradictory popular claims that Private Equity (PE)-backed LBOs generate or destroy jobs as a result of the process of 'rationalization'. Using a sample of 48 UK buyouts and a matched sample of 84 non-PE-backed UK companies over the period 1995-2000 we run log linear employment regressions for 1-5 years after the buyout. A PE dummy represents companies that have PE backing whilst other variables control for initial employment, gearing, investee size and profitability together with industry and macro effects. Heckman sample selection regressions deal with the problem of missing employment data. We find that there is no 'choice' effect: in the buyout year there are no significant differences between buyout companies and controls. Furthermore, in the post-buyout regressions the PE dummy is highly significant and quantitatively important so that buyout organizations involve job losses. Over the first post-buyout year for example PE companies' employment falls relative to controls by 7% rising to 23% over the first 4 years. In the last year of the study (year 5) employment increases. Leveraged buyouts thus bring about quick and substantial reductions in employment in target companies during the period of 'rationalization'. However, both initial profitability, 3-year average post-buyout profitability and 3 year sales growth have positive elasticities with respect to future employment. Therefore, buyouts generating higher operating profits from job cuts are associated with compensating job creation as profitability increases and sales expand, thereby helping to offset job losses arising from initial rationalization of the business.

FABIO BERTONI, Politecnico di Milano - Dipartimento di Economia e Produzione
Email: FABIO.BERTONI@POLIMI.IT
MASSIMO G. COLOMBO, Politecnico di Milano
Email: massimo.colombo@polimi.it
ANNALISA CROCE, Politecnico di Milano
Email: annalisacroce@virgilio.it

This work studies the effect of venture capital (VC) financing on firms' investments in a longitudinal sample composed of 379 Italian unlisted new technology-based firms (NTBFs) observed in the 10-year period from 1994 to 2003. We also distinguish the effects of VC financing according to the type of investor: independent VC funds (IVC) and corporate VC investors (CVC). Previous studies argue that NTBFs are the firms most likely to be financially constrained. In accordance with this view, we show that the investment rate of NTBFs is strongly correlated with their current cash flows. We also find that after receiving VC financing, NTBFs increase their investment rate independently from the source of financing. However, the investments of CVC-backed firms remain sensitive to shocks in cash flows. Conversely, IVC-backed firms exhibit a low and statistically not significant investment-cash flow sensitivity that we interpret as a signal of the removal of financial constraints.