Supply Of Equity Research Articles

Exploring a low SME equity equilibrium in Wales

ABSTRACT Previous research has examined geographical variations in SME access to external finance, especially bank loans. Rather less attention has been paid to how far SME equity access difficulties in more peripheral regions, and cities within these regions, is a demand or supply side issue, and how far equity investments are concentrated in specific urban areas in peripheral regions. This paper examines these topics through an analysis of small firm equity deals across the UK regions, before focusing on the case of the Welsh economy. In the case analysis a low equilibrium for small business equity investment in Wales is identified, with low demand and poor supply of equity, but with a relatively high concentration of equity deals in the Cardiff urban area. The paper examines the potential implications of a low equity equilibrium and provides a challenge for further research in the area.

Estimating the Financing Gap of Small and Medium-Sized Enterprises

Using a novel methodology, we estimate the gap between supply and demand financing of small and medium-sized enterprise (SME) financing in several European countries. We find the largest loan gap spreads are in Poland and the Netherlands. Specifically, our results show the upper boundary of the loan gap is the lowest in Romania and the highest in the Netherlands. Moreover, the lowest lower boundary of the equity gap is in the Netherlands, while the highest lower boundary is in Romania. Overall, our results suggest that there is a significant difference between the estimated demand and supply of equity, which is on average 3% of GDP.

Dynamic Q-Theory: The Rationale of Rate Shifts

This article will argue the following key points: (1) Equity market prices are in equilibrium when they equal net worth (or Tobin’s q reaches unity). (2) Prices can temporarily digress from Tobin’s equilibrium by cyclical mismatches between equity supply and demand. (3) Markets have been out of equilibrium for much longer periods (1916-1995) because certain q-balancing mechanisms have been blocked and/or underutilized. For this reason, q’s historical average has been substantially below 1. (4) Since Tobin’s q is an accurate predictor of long-term total market equity return rates, the first three points also describe the equilibrium conditions and dynamics of equity rates.

Equity Supply and Equity Market Timing on Capital Structure

We find that the changes to individual securities accounts, which denote an equity supply condition variable, is a new and effective equity market timing measure in China. This timing measure can avoid previous criticisms of timing measure for not being independent of firm characteristics of capital structure. Regarding the debate about whether equity market timing has a persistent effect on capital structure, our empirical results show that there are more than 7 years of a persistent effect of equity market timing on firm leverage, thus supporting the equity market timing theory. Moreover, we offer evidence that the persistent timing effect on capital structure is driven by the market conditions of equity supply and equity supply conditions play an important role in corporate financial decisions.

Does bank loan supply affect the supply of equity capital? Evidence from new share issuance and withdrawal

Abstract We examine the hypothesis that fluctuations in the aggregate supply of bank loans influence the supply of new equity capital. Using residual lending standards as a clean measure of aggregate loan supply and a VAR framework to aid identification, we find that a one-standard-deviation shock to lending standards results in 15% fewer IPOs. Shocks elicit strong responses from IPO-firms that are highly dependent on external capital and increase the number of withdrawals, strengthening the interpretation that the above is driven by changes in the supply of equity. Our results suggest that credit conditions are important to a well-functioning IPO market.

The effect of tax and nontax country characteristics on the global equity supply chains of U.S. multinationals

We examine the global equity supply chains of U.S. multinationals to explore how tax and nontax country characteristics affect whether firms use foreign holding companies and where they locate them. We find that U.S. multinationals supply equity from headquarters to their foreign operating companies through foreign holding companies located in countries that lightly tax equity distributions. We also find that foreign holding companies tend to be located in countries with less corruption and investment risk than the countries in which the operating companies they own are located. In addition, we provide empirical evidence that the Netherlands, a well-known location for international tax planning, is a particularly popular site for foreign equity holding companies. Our findings contribute to a nascent literature that examines ownership chains in multinational companies and a larger literature on subsidiary location decisions for multinationals. The findings also provide empirical evidence that could be useful to governments in developed countries as they attempt to reform international tax policy.

The Effect of Tax and Nontax Country Characteristics on the Global Equity Supply Chains of U.S. Multinationals

The Effect of Tax and Nontax Country Characteristics on the Global Equity Supply Chains of U.S. Multinationals

The Risk of Ruin Explains the Equity Premium Puzzle

The risk of financial ruin during retirement plays a critical role in the formation of equity premiums. Retirees provide supply of equities which is balanced by the demand created by younger people who work and save for retirement. On the supply side, for retirees who seek to reduce the risk to outlive their money, the average asset-weighted risk-neutral equity premium, proved to be around 8%. On the demand side, risk adjustments may be done using the traditional utility-based and behavioral models of consumption. The combined supply-demand model explains the historically observed equity premiums of 3%-7%.

Rationality of Survival, Market Segmentation and Equity Premium Puzzle

The model proposed in this paper explains the equity premium puzzle using a simple survival-based principle of rationality. Different groups of rational market participants may have different goals and constraints. These groups create supply and demand for equities. When the equity premium increases, the supply of equities goes down and the demand for equities goes up. The equilibrium equity premium, for which supply matches demand, is in the range of 3%-7%, consistent with the empirical observations.The success of the model in the explanation of the equity market premiums suggests that the survival principle may be used in the economic and financial modeling in parallel with and sometimes instead of the traditional expected utility maximization paradigm. The equity premium diagrams, introduced in this paper, explain the formation of market equity premiums in a clear and simple graphical form.Retirement spending is the main driver of the equity premiums. In 2012, the total US retirement assets of $19.5T exceeded the total equity market capitalization of $18.7T. Retirees are forced to keep assets in low-yield bonds because markets are incomplete: fairly priced truly-inflation-protected annuities are not available for individuals. The ongoing shift to defined contributions will create more demand for bonds and may cause a prolonged financial crisis. Financial institutions and insurance companies can avert it by creating an efficient market of inflation-protected annuities. This may solve the puzzle practically: the equity premiums will shrink together with the puzzle.

Asset Pricing with Fixed Asset Supply

We analyze how corporate financing decisions affect stock returns in a stochastic Ramsey model. Motivated by stylized facts, we incorporate two distinct features in the model. First, the supply of equity (the number of outstanding shares) is fixed. Second, firms pursue a target leverage ratio, and balance retained earnings against new debt issuance when financing real investments accordingly. We characterize both the time-series and cross-sectional properties of equity returns implied by the model and confront these with historical data. The model contains only a few time-invariant parameters, but is able to match many dynamic properties of returns (e.g., fat tails, variation in mean and volatility, mean reversion, time-varying betas, return predictability). Our findings suggest that the leverage effect needs to play a more prominent role in pricing equity.

The Future of Private Equity

Abstract After a period of robust growth, the private equity industry has experienced a marked decline. In the wake of the 2008 economic crisis, the future of the venture and buyout industries seems unclear. This speech discusses four possible scenarios for the future of the private equity industry by examining the short‐ and long‐run determinants of private equity supply and demand. Possible scenarios include Recovery, Back to the Future, The Limited Partners' Desertion, and A Broken Industry. Although support is given for each of the scenarios, a clear prediction for the future remains difficult. The future of the private equity market is likely to be the subject of debate for some time to come.

The equity funding of smaller growing companies and regional stock exchanges

The credit crisis has led to tightened bank so lending to smaller firms it is no surprise that the debate concerning the re-introduction of regional stock exchanges into the UK has received fresh impetus. This article analyses all UK based Initial Public Offerings (IPOs) on the Alternative Investment Market (AIM) to contribute to this debate and the small firm funding literature. The results indicate that London has dominated IPO activity on the AIM; this reflects the dynamism of this local economy rather than differential funding across the regions. A more fruitful approach than developing regional stock exchanges might be for the current stock exchange to develop stronger links with small business advice and networking organizations working with these existing mechanism/structures to enhance the supply of equity and debt finance to suitable firms much earlier in their life-cycles.

Equity financing and innovation: Is Europe different from the United States?

During the mid and late 1990s young, high-tech firms in the US experienced a supply shift in both internal and external equity fueling a finance-driven boom in corporate R&D. This paper examines whether R&D spending in Europe in a similar way was sensitive to fluctuations in the supply of internal and external equity during the late 1990s and early 2000s. I conjecture that UK and Continental Europe, due to their different financial systems, differ in terms of equity supply. I estimate dynamic R&D regression models for UK and Continental European high-tech firms separately and find significant joint cash-flow effects for newly listed firms in both samples. However, only new firms in the UK experienced a joint external equity effect as well. The findings of this paper suggest a channel through which market-based financial systems outperform the bank-based economies of Continental Europe.

Tax-Induced Trading around the Taxpayer Relief Act of 1997

ABSTRACT: We examine investor trading around the passage of the Taxpayer Relief Act of 1997 (TRA97), which reduced the capital gains tax rate from 28 percent to 20 percent. We provide evidence that individual investors increase their demand for equity shares on the announcement day of TRA97, consistent with the capitalization of capital gains taxes. On the effective day of TRA97, we find that individual investors increase the supply of equity shares with accrued gains, consistent with the lock-in effect of capital gains taxes. Regression results suggest that the demand-side effect associated with tax capitalization is a more powerful effect on abnormal trading than the supply-side effect associated with lock-in for the median stock trading around TRA97. Overall, our results suggest that capital gains taxes influence both the demand and supply for equity by tax-sensitive investors and that the effect on demand is more pronounced than the effect on supply.

Tax Induced Trading around the Taxpayer Relief Act of 1997

We examine investor trading around the passage of the Taxpayer Relief Act of 1997 (TRA97) that reduced the capital gains tax rate from 28% to 20%. We provide evidence that individual investors increase their demand for equity shares on the announcement day of TRA97, consistent with the capitalization of capital gains taxes. On the effective day of TRA97, we find that individual investors increase the supply of equity shares with accrued gains, consistent with the lock-in effect of capital gains taxes. Regression results suggest that tax capitalization is associated with a more powerful effect on abnormal trading than the lock-in effect for the median stock trading around TRA97. Overall, our results suggest that capital gains taxes influence both the demand and supply for equity by tax sensitive investors and that the effect on demand is more pronounced than the effect on supply.

Long-Term Predictability in Stock Returns: Past and Future Us Baby-Boom Effects, 1950-2050‎

Empirical studies demonstrated that US baby boomers consumption and savings ‎patterns have affected economic aggregates over the past decades, among them ‎equity returns. Boomers’ retirement is expected to generate an excess supply of ‎equities until 2050, but its impact varies with the specific population age structure ‎along decades. This paper estimates aging effects on S&P500 returns between ‎‎1950-2050. Calibration for demographic and economic data between 1950-2005 ‎yields model estimates that significantly explain the moving average of S&P500 ‎returns. The present value of expected demographic effects until 2050 suggests ‎that the S&P500 was rationally priced in early 2009, but its subsequent ‎appreciation represents overpricing.‎

Investor Protection and the Demand for Equity

Anecdotal evidence suggests that investor protection affects the demand for equity, but existing theories emphasize only the effect of investor protection on the supply of equity. We build a model showing that the demand for equity is important in explaining stock market development. If the level of investor protection is low, wealthy investors have an incentive to become controlling shareholders, because they can earn additional benefits by expropriating outside shareholders. In equilibrium, since the market price reflects the demand from both controlling and outside shareholders, the stock price of weak corporate governance stocks is not low enough to fully discount the extraction of private benefits. This generates the following empirical implications. First, stocks have lower expected return when investor protection is weak. Second, differences in stock market participation rates across countries, home equity bias and flow of foreign direct investment depend on investor protection. Finally, we uncover a good country bias in investment decisions as portfolio investors from countries with low level of investor protection hold relatively more foreign equity. We provide novel international evidence on stock market participation rates, and on holdings of domestic and foreign stocks consistent with the predictions of the model.

BRIDGING CAPITAL GAPS TO PROMOTE INNOVATION IN FRANCE

With the withdrawal of state ascendancy over the financial sector, the national system of financing has taken a new turn in France. This paper deals with the capacity of this new system to promote innovation and argues that the capacity of French banks to finance innovation is now limited. In this context the supply of equity to firms is a critical factor. For small firms, however, there was a critical shortage in equity supply right up to the mid-1990s. Since then new policies and institutional reforms have been launched to cope with French financial gaps and to financially promote innovation. Amongst these institutional innovations the paper mentions the Nouveau Marché; the Development Bank for SMEs; and the impetus given the venture capital industry by earmarking a proportion of funds from the privatization of France Telecom to support innovative small enterprises.

BRIDGING CAPITAL GAPS TO PROMOTE INNOVATION IN FRANCE

With the withdrawal of state ascendancy over the financial sector, the national system of financing has taken a new turn in France. This paper deals with the capacity of this new system to promote innovation and argues that the capacity of French banks to finance innovation is now limited. In this context the supply of equity to firms is a critical factor. For small firms, however, there was a critical shortage in equity supply right up to the mid-1990s. Since then new policies and institutional reforms have been launched to cope with French financial gaps and to financially promote innovation. Amongst these institutional innovations the paper mentions the Nouveau Marché; the Development Bank for SMEs; and the impetus given the venture capital industry by earmarking a proportion of funds from the privatization of France Telecom to support innovative small enterprises.

Is a Convertible Bond Call Really Bad News?

We test and reject the hypothesis that managers call in‐the‐money convertibles when they view a decline in the value of the firm as likely. Inconsistent with this view, we find that insiders generally buy equity before conversion‐forcing calls. Also, analysts tend to raise their earnings forecasts following a call. Thus, our evidence supports the alternative hypothesis that the price decline immediately following conversion‐forcing calls is a purely transitory decline caused by the anticipated increase in the supply of equity. Indeed, our evidence confirms that the initial price decline is reversed in the weeks following the announcement.