Frictional “costs” are nonlinear and dynaic摩擦是非线性的动态的“成本”.pptVIP

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2018-06-19 发布于福建
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Frictional “costs” are nonlinear and dynaic摩擦是非线性的动态的“成本”.ppt

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Frictional “costs” are nonlinear and dynaic摩擦是非线性的动态的“成本”

Financial Frictions: No Country for Old Cost Accountants John A. Major, ASA Modigliani Miller (1958) If: taxes are neutral capital markets are efficient borrowing and lending are fair financing decisions are uninformative no bankruptcy cost Then: Leverage (gearing) doesn’t matter Dividend policy doesn’t matter Risk management doesn’t matter But: they do! What is a financial friction? Something that violates MM assumptions. Explains why leverage, dividend policy, and r.m. do matter. Examples: taxes transaction costs capital market restrictions agency problems bankruptcy costs customer credit sensitivity information asymmetry Why care about financial frictions? Fair value of liabilities Fair value accounting Economic balance sheet Market Consistent Embedded Value Convergence: securitization / insuratization CFO as risk manager Modeling frictions is not just about estimating costs Typical approach pick a friction (e.g. agency cost of holding capital) relate it to an underlying quantity (e.g., amount of surplus) find or guess a cost rate or spread (e.g., 2%) multiply Voilà! We have our frictional cost. Insert as a line item into valuation. As you will see in the following example (working paper available) this makes no sense at all (possible exception: double taxation) 1930 Cramér-Lundberg model 1957 de Finetti model Optimal dividends Typical solution is a “dividend barrier” Model insurance company But wait! Let’s make it more interesting… Available XOL program modifies net cat losses Attachment = $3 (41-yr RetPer), limit = $1 (110-yr RetPer). Full cover Expected Loss = $0.016, r/i premium = $0.070 Purchase any fraction of cover U, 0-100%, paying prorata premium. Applies to all cats, no reinstatement premium required. What is optimal utilization U? What value does it add to the firm? Shareholder value added by XOL If recapitalization is available If costly, depends on cost As cost is lowered from “infinite” to zero… optimal capital level (div barrier) steadi