Contributions published at Corporate Finance Theory (Michel Habib)

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We tend to view the world we live in today as 'globalized'. Although the spread of Internet and the tendency of some industries to concentrate seem to prove that the globalizing process has in fact happened, it is worth asking whether this is an accurate description. Can we properly call our world globalised? Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at the IESE Business School, has conducted various surveys on this topic. In his book Redefining global strategy, he came to the conclusion that the current state of the world is still a transitory phase towards full globalization. In contrast with the conventional wisdom of a globalized economy, Ghemawat (2007) argues that the world is 'semi-globalized'. In other words, what this management guru is suggesting is that differences still matter and that in order to be successful, multinational corporations have to take into account supplementary aspects, beside the usual ones that could emerge from a Porter 5+1 forces analysis1 or a SWOT analysis for instance. Based on that, businesses that still suppose the whole world as a flat marketplace, ignoring specific political, cultural, and economic differences are set up to fail (Ghemawat, 2001, 2007). The general idea is that analyzing the level of competition within an industry or trying to gain a better understanding of the competitive advantage of a company and its potential is often not enough. It is necessary to consider an additional framework, especially if we plan to cross borders. Ghemawat (2007) devised a new framework, namely the CAGE distance framework, which aims to provide a better understanding of the differences between countries along cultural, administrative, geographic and economic lines. With this new tool it should be easier for a decision-maker to choose correctly, since in theory it enables him to identify the underlying risks, in terms of distance, of any decisions envisaged. In other words, the CAGE framework considers distances between home and target country as risk factors. 1 See Rugman and Verbeke (2000) Notice that this framework takes into account not only the unilateral effects of a specific country but also the bilateral ones, which can arise from the comparison of two distinct nations. This feature is one of the novelties of this tool. In the past, the illusion of a flat marketplace led many international businesses to overlook specific cultural, economic and political differences when making their decisions. The consequences were significant, for the companies themselves as well as for their CEOs. One of the most striking events in this sense is what happened to Coca Cola in the nineties. The Chairman and Chief Executive M. Douglas Ivester of then, because of its decisions but mainly because of its one size fits all strategy2, was held responsible for the stock valuation declination suffered by Coca Cola in the same period. In 1999, when the equity losses amounted to approximately $70 billion, Ivester was fired as a result (Ghemawat 2001, 2007). History teaches us that often valuation errors are mainly the result of overestimating the market potential of the target country, which ideally overshadows almost any type of risk. The goal of this master's thesis was therefore twofold: first, we wanted to measure the empirical impact of the different distance factors of the CAGE framework on a sample of cross-border acquisitions. Secondly, we wanted to verify the influence of an additional variable, namely the market potential of the target country, in order to measure the interaction impact affecting each single variable. This helped us, in broad terms, to understand: which risks/distance factors carry more weight; which risks/distance factors are compensated by the market potential of the target country; and which risks/distance factors are even overshadowed by the market potential of the target country in our sample. In other words, looking at a market entry decision as a trade-off between risks and returns, where the differences or the distance degree between nations are seen as risks and the market potential of the target country as the underlying opportunities or returns, with this analysis we tried to show, if and to what extent the latter could effectively overshadow the risks. 2 See Ghemawat (2007), p. 21. Let it be clear that the author of this thesis agrees with Ghemawat on the definition of distance, defined as "[…] not only geographic separation, though that is important. Distance also has cultural, administrative or political, and economic dimensions that can make foreign markets considerably more or less attractive."3 In an earlier study, using observations of cross-border acquisitions from 18 emerging countries around the world for the years 1990–2006, Malhotra, Sivakumar, and Zhu (2009) highlighted the following observations: (a) cultural and geographic distance factors have a significant negative impact on the number of cross-border acquisitions; (b) administrative and economic distances have a significant positive effect; and (c) the market potential of target countries significantly moderates the relation between the distance factors and the number of cross-border acquisitions. This thesis differs from previous research in that it analyzes observations of cross-border acquisitions from 20 developed countries around the world, covering the period 2000–2013. The information was sourced from the SDC Platinum database of Thomson Reuters. Although consequential findings obtained ought to be seen as complementary, a number of criticisms made to the methodology adopted by the former researchers, have obviated the possibility of a reliably confrontation between developed and developing realities. The main criticism that the author of this paper makes to Malhora et al. (2009) is to not have considered the 0 observations in computing the dependent variable. The basic reasoning is that leaving aside the 0 cases (0 cross-border acquisitions between country i and j in year t for instance) would significantly reduce the representativeness of reality, and as consequence could lead to misleading conclusions. It is for this reason that we abstained from making cross considerations. Because the acquiring nations, in which to gather the observations, were selected in such a way as to ensure a common basis for a crucial aspect such as taxation, we picked the original member states (20) of the Organization for Economic Co-operation and Development (OECD). Indeed, the OECD can pride itself on over 3 See Ghemawat (2001), p. 3. 50 years of activity in the interest of its members. Offering a standard for bilateral double-tax agreement negotiations between states, for example, the OECD model was able to reduce, albeit marginally, the administrative distance between them4. After having defined and computed all different variables of interest, we proceeded with modeling, where diverse estimators (Ordinary Least Squares and several General Linear Models) and a moderated regression analysis have been used. In line with our expectations, we found that each distance dimension exercised a significant negative influence on the number of cross-border acquisitions. That is to say that with increasing differences between two countries, regardless of whether on a cultural, administrative, geographic or economic base, the number of economic interactions, designed in this case as acquisitions, has dropped. The introduction in our model of the market potential of the target country showed a significant positive effect of this variable on the entry mode analyzed. A moderated regression analysis and a graphical inspection helped us then to ascertain the influence of the target country's market potential on the relationship between the distance dimensions and the number of cross-border acquisitions. In the end, none of the analysis carried out showed support for a moderating role of the market potential of the target country. Having covered a wide variety of countries5 as well as a large number of industries, we were able to provide not only more generalizable findings, but also an empirical validation for a more comprehensive measure of distance. This more general character of our results proved to be one of the strengths of our theoretical contribution; and yet it failed to highlight possible nuances between different industries, or to show us any connections existing between the parameters analyzed and the business performances. It is therefore mainly in these research directions that we would recommend it to any researchers interested in pursuing this line of inquiry. Taking into account industry-specific factors and/or performance indicators would definitely contribute to expanding the findings related to market entry strategies even further. 4 See Haverals (2014, October), pp. 40-42. 5 With the data of the final dataset we examined cross-border acquisitions from 19 developed countries across 70 target countries. Finally, not only did we expand the findings related to market entry strategies, but we also provided, to the best of our knowledge, the second empirical validation of Ghemawat's (2001, 2007) distance framework; not to mention the first with regard to developed countries. And this is, we believe, where the strength – and the originality – of our contribution lies.

Over the past decades, the economy has grown exponentially in step with the globalisation (OECD, 2015b, p. 9). The growth of domestic and international trading, led to a change in companies from a country-specific model to a global model (OECD, 2013a, p.7). The shift in operating models challenges the domestic taxations and the underlying definitions of tax basis. Additionally, the international taxation and the domestic taxation are challenged through the digital economy (OECD, 2013a, p.10) According to various authors (Lee-Makiyama and Verschelde, OECD, and Owen), the internet trade and e-commerce has pushed base erosion and profit shifting, because the place in which the service or trade is performed is not identical with the jurisdiction of physical presence. Based on this background, the Organisation for Economic Co-operation and Development (OECD) originated a new nexus to implement a suitable taxation on digital business income (Lee-Makiyama and Verschelde, 2014, p. 8). The Master thesis shows how the new nexus impacts Multinational enterprises in digital economy. First, a short introduction on the international taxation in accordance with the OECD Model is given. Afterwards, an artificial corporation is created based on the model of Apple and Google. To create a corporation, certain things have to be considered as for example the structure of the corporation or the place of residence. Only countries which are directly linked to the comparison in the last part of the thesis are presented and are not considered as tax havens. For the selected countries like the United States, the United Kingdom, Switzerland, or Luxembourg the most important taxes are presented. These listing of taxes helps to develop an artificial corporation with optimally planned taxation. Afterwards, the structure of Apple’s and Google’s tax constructs were investigated. Based on the given model, the structure of the ‘Novy’ Company was chosen. In the last part of the thesis, the comparison of the overall taxation at the actual taxation and after the implementation of BEPS. Due to the fact, that in the second part two tax structures were chosen, the comparison of the BEPS impact is performed on both constructs. The first construct is a complex structure with entities all over the world, called “Double Irish with a Dutch Sandwich”. In this corporation structure, taxes on income may be avoided because in an optimal case a tax rate of 0% is applicable. The IP-Holding company is the other way of avoiding taxes on an optimal level. The holding company has to be located in a country with an intellectual property regime like Luxembourg. Within the structure of the IP-Holding company, digital income is taxed at an acceptably low rate of 8%. A hypothetical world is created in regard with the suggestions on the BEPS actions of the OECD (2015) to perform the comparison. It is assumed that the OECD found a way to correctly attribute the income to its source and that any royalties are paid at arm’s length ruling. Due to these restrictions, the overall tax rates increase exponentially. The first difference appears already on the operating company, which is now liable to tax on the income generated abroad but attributable to its source country. The income generated in Switzerland, without having a permanent establishment, is liable to Swiss income tax or withholding tax. Furthermore, the royalties paid to the parent companies must be calculated on arm’s length rule. Consequentially, the shifting of profits without economic base is forbidden. All these changes lead to a tax rate increase of 15% on the “Double Irish with a Dutch Sandwich” and 20% on the IP-Holding company. In summary, the action plan on base erosion and profit shift might have a large impact on the taxation structure of the multinational companies. Although, the effect is only given if the new nexus rulings of the OECD is applied on a worldwide basis.

One of the main topics discussed on the international stage today is the issue of tax avoidance, often referred to as Base Erosion and Profit Shifting (BEPS). Starting from the mutual agreements between states on double taxation, this paper outlines the development of legal and economic conditions that led to the current problem of double non-taxation, analysing the present situation more closely. Furthermore, motivated by the attempt to reform the international system of taxation, this paper tries to quantify the magnitude of tax avoidance. By constructing a new research strategy based on a recently developed approach, this work provides robust direct evidence for the presence of BEPS in the current economy. Moreover, it also outlines the important changes that took place on the international stage and tries to incorporate them into the study. Founding on empirical evidence, it confirms the necessity for a new international tax regime and tries to understand the future challenges the latter will have to face.

EMPIRICAL QUESTION M&A activity has been rallying in the last years, reaching levels never seen since the financial crisis that hit the world in 2007. From the lowest annual value recorded in 2009, $1,711.5bn, the total transaction volume grew at 13.5% CAGR, reaching $3,230bn in 2014. Goldman Sachs alone advised 378 deals in 2014, for a total deal value of $939,899m. The European M&A market has followed an analogous path, with the transaction value increasing at 14.1% CAGR (from $467bn in 2009 to $901bn in 2014) and with Goldman Sachs still playing the lead role (MergerMarket, 2014). Subsequently, fees demanded and earned by investment banks for the services rendered have increased as well, amounting to $90 billion in 2014 (+ 7% compared to 2013). The lion’s share of this amount goes to top-tier investment banks, leaded by the American financial institution JP Morgan, which earned $6.3 billion in fees in 2014. In Europe, the surge in fees has been even of a larger magnitude: +15% (Thomson Reuters, 2014). Figure I summarises these facts showing the evolution of total deal value (in $ billion, left scale) and investment banking fees (in $ million, right scale). As a consequence, the importance of financial advisors has been raising, due also to a generalized lack of confidence and trust. Companies and shareholders are willing to hire the best players in the market, hoping they will extract the best out of the deals they are involved in. Moreover, the right choice of financial intermediary has important implications on mergers and acquisitions performance. It is thus important to analyse the repercussions of this major decision in order to appropriately assess whether the high fees charged for the services offered by top-tier investment banks are justified and whether a so-called quality premium exists in M&A advisory. The aim of this master thesis is to deeply investigate the ramifications of this important decision and to compare the results with those found in previous empirical works, in order to evaluate in which situation the type of advisor has a major impact and whether hiring top-tier institutions creates wealth for shareholders or not. In comparison to previous academic researches, this paper will focus on European markets, more precisely on markets of the DACH region.

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This thesis investigates the price disparity phenomenon of Chinese companies that issue both A and H shares. A shares are listed in mainland China stock exchanges and are only available to mainland investors, while H shares are listed in the Stock Exchange of Hong Kong and are available to Hong Kong and foreign investors. The preliminary examination of the A and H share returns shows that A shares have only exposure to the domestic mainland market, while H shares are sensitive to both mainland and Hong Kong markets. Specific factors that are proposed by existing literature for dual-listing price disparity issues in other markets (especially for Chinese A and B shares) are further applied to the A and H share case. By constructing time series and panel data models, it is found that the price differences of A, H shares are significantly correlated with market sentiment, information asymmetry, relative liquidity, diversification effect, company specific sentiment effect and change of exchange rates. Testing results from different proxies for each variable and different model specifications illustrate the relations between variables and how they influence the A and H share price disparities. The empirical examination of the policy effect of the newly launched Shanghai - Hong Kong Stock Connect program shows that the policy effects have not yet been fully embodied in the stock prices.

This thesis investigates the online social network market and its underlying value generation mechanisms. The fundamental research question it tries to answer is whether such networks are currently being assessed at a fair value or not. To do so, the analysis focuses on established Western-listed online social networks. By valuing these networks, as well as identifying their sustainable competitive advantages, this study seeks to set their fair trading price through a DCF approach. The first part links the description of the eco-system as a whole to the analysis of Facebook, Inc., the world’s largest broad-audience network. Important drivers such as network effects, lock-in effects, switching costs, and the ability to imitate complete the analysis. The fundamental value of the leading online social network is found to be slightly undervalued. As of July 10, 2015, I assess a target value of USD 111.00 per share, representing an upside potential of 26% compared to its USD 87.95 closing price. Next, the business world is considered by way of the leading professional online network; LinkedIn Corp. Important current issues regarding the online job market as well as forward-looking dynamics are examined. Its successful “freemium” system may suggest Customer Equity as a suitable valuation method. Having unfortunately not produced satisfying results, a discussion about its challenges and reasons why it does not fit the networking platform is provided. Turning to a classic DCF framework, the fundamental value of LinkedIn is found to be overvalued. As of July 10, 2015, I assess a target value of USD 182.00 per share, representing a downside of 13% compared to its USD 209.95 closing price. An analysis of Twitter, Inc. constitutes the last part of this study. Being one of the leading microblogging platforms, especially active in the news area, the question is asked whether such a company can be considered one of the true online social networks, which are more profile-centered. Key findings suggest that Twitter should rather be seen as a broadcast and live-commentary platform, centered on news. Its fundamental value is then assessed, and found to be well in line with its current trading price: for a closing price of USD 34.91 on July 10, 2015, its fair price is found to be neutrally targeted at USD 34.50 a share.

At a US Congressional Hearing on July 13th 2011, the question "Is Gold money?" has been asked to the, at that time, Federal Reserve Chairman Ben Bernanke. His answer was direct: "No it is a precious metal". However, the justification to this statement may not be straightforward. Does gold still retain a fundamental role for monetary policy makers in the 21st century? What is its impact on nowadays economy and financial markets? How did this influence change in the past century? Indeed, it has been only recently, on August 15th 1971 that the US dollar gold standard ceased to exist. The United States unilaterally terminated the convertibility of the US dollar to gold, bringing the Bretton Woods system to an end. Before that day gold was still a synonym of money. Today most countries still hold gold reserves even though, after the abandon of the gold parity, they seem to be considered nothing more than the legacy of the past. After the 1971 many countries reconsidered the amount of gold reserves to hold, and lately the lack of trust in foreign authorities led some countries to plan a gold repatriation. This legacy though, gave this precious metal a privileged role. We often hear about gold as safe haven, inflation hedge, currency hedge or its diversification properties in portfolio management. Hence, how should we consider it? Why is this commodity set apart from all other (precious) metals and commodities? Indeed, the aim of this research was investigate the changing role of gold in international monetary system. Particularly I examined the persistence of gold holdings from the breakdown of the Bretton Woods Agreement up to now, looking into the reasons for central banks to hold or sell gold, asking what presence this precious metal still retain nowadays. Moreover I proposed the concepts of gold as safe heaven during the economic crises, as hedging instrument or its use as collateral to sovereign bond. In order to answer those questions I started by explained what role gold played historically in the economies and how monetary policy makers were fond of it. In the third chapter I proposed an economical prospective on the topic, using the fundamental concepts of the Quantum Economic Theory to shed light on the macroeconomics inconsistency of the economic system. During this analysis I was able to reveal the perverse mechanism that were hiding behind the Gold Standard and why those reasons led this system to fail. After being sure that gold is no more related with monetary issue, I went a step forward, trying to understand how exactly gold is linked with the financial market. Interpretations are different, however at the close of this analysis, the answer to the questions raised at the beginning seems to be clear. The role of gold has changed in the last fifty years and today it has no longer any connection with the currency in the western world. Gold's role as money has faded over time while its image and status as a commodity has grown. “Gold’s quantity cannot increase at the same rate as you can print money, which will eventually weaken the US dollar” (Marc Faber on CNBC, March4, 2010). I chose to end by quoting this statement because it manages to gather in itself all the main characteristic of the topic I have studied: gold is a limited resource that cannot cover the requirements of a monetary policy, secondly gold is linked with other market forces and variables, from which it absorbs specific properties. 3 Reviewing in detail all the findings of this research would be redundant. Writing this work has given me a better understanding of how gold has been and still is regarded by investors, monetary policymakers, and governments. It has enabled me to gather a vast amount of information, studies and interpretations, sometimes conflicting, but in general with a common background. In the second chapter, we explored the evolution of the role of gold through the centuries, from bimetallism, to the gold standard, up to the present day. I started by proposing a historical point of view of the role of gold, pointing out that the gold-exchange standard was born in response to historical and social factors. However, the fragility of a system that had to face an increasing demand for reserves worldwide, in circumstances characterized by inelastic supply of gold and elastic supply of foreign exchange, along with the Great Depression and two World Wars, pushed the gold standard into a tight corner. Furthermore, policy mistakes were made. Confidence and credibility problems, not to say ‘crises’, made it difficult for central banks to balance liquidity supplies by gold price adjustments. As a result the system was doomed to certain death. We have seen, especially in Chapter two, that the economic system harbours some perverse mechanisms, and that some misconceptions have led to the failure of the gold standard. Based on the relevant tenets of the Quantum Theory we analysed concepts such as currency, income, capital, and time. We discovered the complications related to the lack of a vehicular international currency. At the same time, we found that the gold standard had failed to attribute intrinsic value to money through the monetary convertibility of gold. Having established the inaccuracy, or flaws, of the gold standard, in the last chapter we examined what role gold can still play nowadays. What we gathered from empirical studies has enabled us to highlight the fundamental characteristics of this metal, which today plays a dual role: gold is as much a commodity as a financial asset. It is a commodity that is used in diverse ways within the industry: it is extracted, stored and sold on the market where supply and demand decide its price. Similarly, the price of gold reflects features that go beyond the simple balance between supply and demand. Gold still has roots and memories from the past; it has physical characteristics that make it a prime commodity, and is of particular interest to people to find safety and security. We know that the market is made of men and directed by emotional men who react as much with their hearts and sensibilities as with their heads. It therefore becomes difficult to explain quantitatively the behaviour of an asset which is particularly prone to the irrational and emotional reactions of man. Empirical studies however seem to regard gold as a means of hedging but there is a flaw in this. The flight to safety has raised interest in gold as a form of financial asset other than simple commodity. The analyses proposed suggest that gold also has important properties for risk diversification when applied within a welldiversified portfolio, and is thus useful to investors, portfolio managers and reserve managers. But what are our expectations in terms of future evolution? As Bordo and Eichengreen recognize, gold holding persisted because of three main reasons: network externalities, statutory restrictions, habits. However the effectiveness of these reasons weakened after Bretton Woods, and will keep on decreasing in the future, leading central banks to divert from holding gold reserves. Nowadays, improved technology, international mobility of goods, people and capital and inter-connectivity of capital markets, enable agents to access liquidity and other forms of borrowed or unborrowed reserves. Along with flexible exchange rates, all these factors contributed to reducing the need for gold reserves 4 and gold demand. Finally, “network externalities, in conjunction with central bankers’ collective sense of responsibility for the stability of the price of what remains an important reserve asset, suggest that the same factors which have long held in place the practice of holding gold reserves, when they come unstuck, may become unstuck all at once” (Bordo and Eichengreen, 1998, p. 43). However the last financial crisis bears witness to the fact that gold still has not lost its peculiar characteristics. In fact, its prices soared to record highs. The new trend sees the price of gold dramatically dropping. Is that because the interest for it has faded? If so, is that going to turn how the way Bordo and Eichengreen forecasted? Will the role of gold as financial asset become less and less important? According to what I was able to find in the literature, I would tend to conclude that gold is following its natural path, and the drop in price that it is facing now, perfectly mirrors what has happened at other times in the past. Looking at the US we notice that the market has been bullish since 2010: the S&P reached a record high on May 21, 2015 closing above 2130 points, the Dow Jones Industrial Average had its historical highest peak on February 1, 2015 above 18132 points. The US unemployment rate touched the 5.3% in July 2015, a record low after April 2008, a number that is in line with the period previous financial crisis (during which unemployment rates hit a the record high of 10% in October 2010)3. The US economy is growing, as borne out by the strong likelihood of an interest rate rise in the next months. Roache and Rossi (2010) confirm that announcements which reflect unexpected market improvements have a negative impact on gold. When the equity market conditions are favourable, the attention of investors moves from assets that are known to provide risk protection to the stock market. On the prospects of an interest rate increase by the Fed in September 2015, gold tumbled to a five-year low on July 27, reaching 1073.70 US$. Higher rates mean less interest for the bullion as it does not provide returns or interests. Looking back over the past decades, the 2011 price spike looks very similar to the 1980 spike. However, at the end of the 1980s price volatility decreased and kept a relatively calm pace until the last financial crisis. If the same type of behaviour reoccurs, the gold price might settle for a period of subdued price movements for the next 20 years. According to Bloomberg banks like Goldman Sachs are predicting a further decrease in the gold price until 2018, below US$1,000. Investors are losing interest in the metal, George Gero said4: “Gold is becoming more and more distasteful as an asset for people to own (…) Better U.S. growth is going to reaffirm an interest rate hike in September, and that’s what is damaging gold.” At the same time, the Dollar Spot Index reached the highest levels in the last fourth months, confirming how gold and the US dollar are negatively correlated. High rates weaken the appeal of gold, which normally gives return under the form of price gains and analyst Robert P. Ryan (Bank Credit Analyst of Montreal) reported: “We believe gold has lost its safe haven bid. It has instead become primarily a source of cash in hard time (…) gold price is much more responsive to expectations for the Federal Reserve’s interest – rate lift-off, and the broad trade-weighted USD”5. The market sentiment is that gold is becoming less and less attractive, and that volumes of gold trading are getting ever lower. In August, volumes dropped by 8% compared to 2014 and 40% below the 100-day average and the expected tighter monetary policy will bring those numbers even lower. Forecasting gold price movements is extremely difficult: “Gold prices going down is not 3 Source: Bureau of Labour Statistic, http://data.bls.gov/timeseries/LNS14000000 4 Bloomberg. Joe Deaux and Tatiana Darie. Gold Bears Returns as Traders Look to September for Rate Increase, August 5, 2015 5 Source: Tom Keene. July 21, 2015. Gold has plunged and dollar has surged. Which is leading which?. Bloomberg 5 necessarily a bad thing, from that perspective it just suggests people having more confidence and less concerned about bad outcomes. But let me end by saying: no one really understands gold prices and I don’t pretend to understand them neither” (Ben Bernanke6). The improving US economy led to a shift in sentiment, bringing the bullion market to be bearish since April 2013. Bloomberg News reports a survey of 27 traders and analysts: 60% of them said that gold will go through a third consecutive negative year. This would be the worst result since 1998, when gold weakened to a 19-year low. According to the survey, prices will drop to US$984. “Gold is out of fashion like flared trousers: no one wants it,” said Robin Bhar, an analyst at Société Générale SA in London. “It’s not going to collapse, but we think it is going to be at a lower level in the not-too-distant future.” He added: “If anyone can show me the bullish case for gold, I’d like to see it (…) I doubt this is the final nail in gold’s coffin. I think we can add a few more.” Even Gerhard Schubert, founder of Schubert Commodities Consultancy DMCC said on Bloomberg News that: “I have to think really hard at the moment to come up with good reasons why anyone would want to invest in gold.” Not everyone seems to be so pessimistic, however: “Not everyone is heading for the exit. Bullion still has a place in portfolios as “insurance” (…) As an investor, you should have gold (…) There are lots of systemic risks out there”, said Frank Holmes, a San Antonio-based money manager at U.S. Global Investors. Investors do not seem convinced, though. The US Commodity Futures Trading Commission estimated that on July 21, speculators were holding a net-short position of 11,345 future contracts on gold, the first net bearish outlook since 2006. The Chinese Banking Corp.’s Barnabas Gan, (according to Bloomberg the most accurate forecaster of precious metals over the past two years) is expecting a price drop to 1050 US$ by December. “Gold is a weird relic of antiquity (…) It’s not a commodity that has much fundamental demand. It’s pretty, so people use it for jewelry. But it’s unlike iron ore or oil, or copper, or corn. There’s not a specific end-use for it. People just like it, so it becomes a discussion about fervor.” said Brian Barish, of Denver Cambiar Investors LLC7. Opinions on gold very much vary according to people’s tastes. Gold can be loved or hated. Its future remains to be seen. Of much interest will be the study of gold’s behaviour after the last financial crisis and particularly in the current bearish trend of the market. A look at new researches taking into account new data could improve the empirical results of gold price modelling, in order to understand better and actually prove the properties of gold that we have highlighted in this research. Moreover, to the best of my knowledge, not many studies have as yet been published on gold behaviour according to behavioural economic factors. Studying how the markets react to news and how this reflects on gold prices could be an interesting behavioural finance argument related to gold, which may be useful to understand better the movements of this precious metal.

The OECD project "BEPS" leads to a development within the international trading system, which should not be underestimated. This master thesis outlines the purpose of action item 9 within the OECD BEPS action plan, which has been designed to develop new rules preventing base erosion and profit shifting through the transfer of risk among - or the excessive capital allocation to - other group members. Furthermore it analyses the impact of action item 9 on the insurance industry. Assuming and managing risk is the insurance industry's stock in trade. By introducing new requirements and regulations regarding capital and risk allocation the industry could be affected in different ways that can lead to market inefficiences through overcapitalization. Within this context, a specific reinsurance company headquartered in Switzerland is selected to examine in more detail the challenges arising through the implication of action item 9 within the intra entity transactions called retrocessions. The research activities revealed that for the selected reinsurance company, the implementation of action item 9 of the BEPS action plan, probably has two major different outcomes. Firstly, the company gains a competitive advantage over its competitors, and secondly its overall intra group retrocession business will be criticized/questioned. However, presumably both will likely result in the introduction of a process of business changes in the insurance business sector to accomodate with the potential outcomes, which in turn are unlikely to be beneficial for the whole industry.

On September 6, 2011 the Swiss National Bank (SNB) adopted a minimum exchange rate of 1.20 Swiss francs per euro. This unconventional measure was aimed to ease a massive overvaluation of the Swiss franc caused at that time by an intensifying debt crisis in the euro area. The SNB set this exchange rate peg as an additional operational target of its monetary policy and promised to do ”whatever it takes” to ensure that the euro Swiss franc exchange rate would not fall below this level. During the next three years the SNB pursued this policy with a high credibility. However, on January 15, 2015 the SNB stunned the markets by its decision to discontinue the minimum exchange rate policy. This U-turn in the SNB’s policy raised a lot of debates among economists and politicians. However, the number of research, investigating the consequences of the SNB’s actions to introduce and to drop the peg is very limited. The novelty of this topic makes the analysis of the stock markets’ reaction on the respective SNB’s announcements of high importance. The purpose of this paper is to investigate the reaction of the stock markets on the SNB’s announcements to adopt and abandon the euro Swiss franc minimum exchange rate in 2011 and 2015 respectively. Under assumptions of rationality and the informative market efficiency of the capital markets the current paper uses a well established event study approach, which is based on the concept of abnormal returns. First, the reaction of the Swiss and European stock markets is analyzed. Here, the analysis is conducted at the aggregate level. The study records an instant negative reaction on the peg’s introduction from almost all European stock markets, whereas the impact of the respective SNB’s announcement on the markets from the euro area is much stronger then the e↵ect produced on the countries from the non-euro area. The SNB’s decision to lift the minimum exchange rate results in significant positive abnormal returns for all European markets. In both cases the strongest impact is recorded for the main trading partners of Switzerland: France, Germany, Italy, Spain. The Swiss market shows similar reaction on the introduction of the exchange rate peg to the European markets. The SNB’s announcement to abandon the minimum exchange rate has a significant negative e↵ect on the Swiss market as aggregate. Interesting results are The reaction of stock markets to the Swiss National Bank communication on the euro Swiss franc peg obtained for the Danish equity market. Being the only country in the sample except Switzerland that pegs its local currency to the euro, its reaction to the SNB’s announcements replicates the one of the Swiss market. For the Swiss stock market the analysis is additionally extended to the sector and company level. Hereby, all Swiss companies traded at the SIX Swiss Exchange are grouped in industrial sectors based on the ICB classification system. Further classification of the Swiss firms is also done based on their export involvement as well as share of the revenues generated in Switzerland. The study detects clear impact of the introduction and discontinuation of the euro Swiss franc peg on a broad array of Swiss industries. In most cases the SNB’s announcement to introduce the minimum exchange rate have a negative e↵ect on the event day and positive on the day thereafter. The SNB’s decision to abandon the peg produces a significant negative reaction from the majority of the Swiss industrial sectors. The study records that the export-oriented Swiss industries are mostly a↵ected. These findings are consistent with the results obtained from the analysis based on the companies’ revenues share generated in Switzerland. Thus, the companies that generate up to 50% of their revenues abroad report the largest significant negative reaction on the SNB’s move to scrap the peg. The strongest impact in relative terms is recorded not only on the export-oriented companies, but also on the companies with lower profit margins, high costs base in Switzerland, bulk share of products invoiced in foreign currency and price sensitive customers. Thus, due to these factors such industries as chemical, machinery & electronics, metal, pharmaceutical, watch and tourism industries show strong negative reaction on the abandonment of the euro Swiss franc peg. Financial services sector is also significantly a↵ected by the SNB’s announcements on the euro Swiss franc peg. Despite high costs base denominated in Swiss francs the impact from the SNB’s actions is partially o↵set because of the multinational large financial institutions and corporations that are internationally diversified and therefore enjoy some natural hedge against exchange rate risks. Worth mentioning is the reaction of the Swiss real estate sector. Significantly positive impact of the peg’s introduction and quite immune industry’s reaction on its abandonment, which given the current immigration growth and low interest rates corroborate the attractiveness of the Swiss real estate as asset class. The reaction of stock markets to the Swiss National Bank communication on the euro Swiss franc peg A comparative analysis of two di↵erent events (introduction and discontinuation of the minimum exchange rate) indicates a much stronger and vivid market reaction on the abandonment of the euro Swiss franc peg then on its adoption. This outcome is observed both at the aggregate and sector level of research. As no studies investigating the impact of the SNB’s decisions to introduce and lift the euro Swiss franc peg on the Swiss and European stock markets have so far been identified, this paper is going to fill the gap in the existing literature, additionally also investigating the reaction of the Swiss equity market at sector and company level.

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When not every facet of a transaction can be contracted upon and transacting parties' payoffs are asymmetric, low-powered incentives for those facets of the transaction that can be contracted upon may be necessary to avoid too large a distortion in those facets that cannot be contracted upon (Barzel, 1982, 1997; Hansmann, 1996; Holmstrom and Milgrom, 1991). Distinguishing between different types of capital (financial, physical, intangible), different forms of incentives (performance pay, organizational form, ownership), and different transacting pairs (manager/shareholder, supplier/buyer, customer/firm), and using a model of investment developed by Falkinger (2014), we extend the preceding insight to explain partnerships, mutuals, cooperatives, government ownership, and vertical integration. Distinguishing between resource allocation and resource creation, we show that resource creation calls for higher powered incentives than does resource allocation. Allowing for diversification-induced economies of scale in the use of capital, we establish the result that larger, more diversified firms offer higher-powered incentives. Finally, allowing for the partial contractibility of investment and the use of capital, we show that the former decreases the power of incentives whereas the latter increases that power, thereby providing a combined explanation for the Nineteenth- and Twentieth-Century rise of large military and civilian bureaucracies and the more recent outsourcing of products and services previously sourced internally. Our results suggest that the recognition of the multiple facets of most transactions can help explain numerous institutional arrangements, as well as the apparent lack of disadvantage of low-powered-incentives organizations competing with their high-powered-incentives counterparts (Bohren and Josefsen, 2013; Hansmann and Thomsen, 2012).

Executive Summary Within the last decade, governments as well as (inter)national organisations increased their eorts to regulate the global nancial markets. This trend did not stop at the European insurance markets where the sector saw two fundamental new regulations: The so-called solvency directives. The European Parliament implemented revised solvency directives for European insurers back in 2002, called Solvency I Directives. By imposing minimum capital requirements Solvency I should ensure the market stability of the European insurance sector, but since the Solvency I Directives were implemented in dierent ways across Europe, and since they did not suciently re ect the complexity of the modern insurance business with its inherent risk factors, it was the EU Commission that agreed to fundamentally reform the Solvency I Directives. The outcome were the so-called Solvency II Directives with their risk-based three-pillar approach, which has its roots in the Basel II Directives for banking supervision. Similar to Solvency I, Solvency II obliges insurers with domiciles in the European Union and in the United Kingdom to hold a certain minimum capital in order to mitigate the risk of bankruptcy. Once implemented in 2016, the Solvency II Directives should result in a more harmonised and securer European insurance market. As regulations do intervene in nancial markets, they can also have negative or unwanted eects. Hence, the thesis investigates these specic regulations, the Solvency II Directives, and their impact on the choice of the debt-to-equity-ratio of the ten largest European insurance companies. The aim of this thesis therefore is to examine whether the debt-to-equity-ratio has deteriorated from one regime (that is before Solvency II has been approved by the European Parliament in April 2009) to another (i.e. after Solvency II has passed the European Parliament). In order to do so the author estimates a theoretical model, with empirical risk factors as input parameters, and compares the calculated optimal debt-to-equity ratios with those observed in the market and nally concludes whether the observed leverage on the market has deteriorated over time and across the dierent regimes. A sub-optimal debt-to-equity-ratio could, to provide an example, lead to higher capital costs since an insurer could hold a to high portion of equity which would have an impact on the tax shield and II therefore rise capital costs. The theoretical model, that serves to estimate the optimal debt-to-equity ratio, is the so-called Double Exponential Jump Diusion Model (DEJD) introduced by Kou and Chen (2009). It is an endogenous default model, based on Geometric Brownian Motion (GBM) that allows for two sided jumps. The DEJD model needs a variety of input parameters. Namely the volatility, the number of jumps, the magnitude of the jumps, the total payout ratio, the risk-free interest rate, the average coupon, the average maturity, taxes and the recovery rate in case of default. These input parameters have been estimated and collected for four dierent periods. That is, the DEJD model was applied on data estimated for January 2004 - March 2009 and April 2009 - June 2014, i.e. before and after the Solvency II directives passed the European Parliament. Furthermore, to account for the nancial crisis which may provide some risk factors that are biased and far from regular conditions, the model was estimated for two additional periods, i.e. January 2004 - December 2006 and July 2011 - June 2014. By applying the DEJD model on four dierent periods the author controls for market risk factors. As an example of such a market risk, one can think of rising stock price volatility. If volatility becomes larger insurers might increase their equity in order to account for the higher risk. To estimate some of the input parameters (volatility, number of jumps and jump magnitude) for the DEJD model, a Maximum Likelihood Estimation (MLE) on log-returns of the stock prices has been conducted. Since the Maximum Likelihood function contains double improper integrals as well as double innite summations, the MLE to estimate the input parameters for the DEJD model was the most challenging and computationally a very costly part of this thesis. The MLE, which was implemented in R with the maximization algorithm Bound Optimization BY Quadratic Appoximation (BOBYQA), showed to be not fully optimized since the results obtained by the BOBYQA algorithm where dierent for dierent start parameters. Hence, by assuming a correct implementation of the Maximum Likelihood function in R, the Maximum Likelihood function seems to have several local Maxima. Using not fully optimized values as input parameters for the DEJD model certainly yields in results that should be, if at all, interpreted very carefully. Furthermore, the assumption for taxes and the recovery rate, two main drivers of the model of Kou and Chen (2009), were very strong since the tax rate of the country of domicile was applied on the whole company or, in the case of the III recovery rate for large insurance companies, hard to obtain, since large insurance companies rarely default. The weak indicators that have been found, that the capital structure deteriorated when Solvency II has been approved, would not withstand a proper statistical examination. First, the average shift that has been found is very small with a large variance and second, the ten examined insurance companies are too few to get signicant results. However, the DEJD model showed to be useful to illustrate certain interdependencies and sensitivities to the debt-to-equity-ratio with respect the risk factors. In addition, it showed that further studies might use dierent algorithms to obtain fully optimized parameters from the MLE

Executive Summary This paper examines Porsches attempt to takeover Volkswagen and the impact on the stock prices of Porsche and VW over the course of it. After acquiring smaller shares between 2005 and mid-2008, Porsche announced on October 26 2008, despite previous repeated denial, their intents to fully takeover the Volkswagen Group. Following first successes Porsche had to drop their plan in early 2009, as they were not able to obtain further loans. They alternated their plans to create an integrated automotive group with VW. After some difficulties over legal issues regarding Porsche, the companies finalized the merger on August 1 2012. Over the course of the takeover battle, the stock prices of both companies, albeit especially Volkswagen’s, showed some extreme alternations. To have a better view of the actual impact of the events in this takeover battle on the stock prices, event studies for three key events, Porsches announcement of their takeover plans, VW’s approval of an integrated group and the finalization of the merger, are conducted. For comparison each event study is conducted with two different models, the Market Model and the Constant Mean Return Model. The first two events show for both models statistical significant impacts on the stock price on several days. For the third event no significant influence on the stock of Porsche can be proven, while VW’s stock prices show significant influence only on one day. Over the entire course of the takeover battle, VW’s stock was influenced stronger and achieved a much bigger return than Porsche’s, whose stock went almost even with the CDAX.

We develop a measure of maximum sustainable government debt for advanced economies. How much investors are willing to lend to a country's government depends on how high a primary surplus they expect that government to generate, how fast they expect the country to grow, how volatile they expect that growth to be, and how much debt they expect the government will be able to raise in the future for the purpose of servicing the debt it seeks to raise today. This last observation points to the presence of a borrowing multiplier, which raises a country's borrowing well above what it would be, absent the ability to service maturing debt out of new debt's proceeds. Present debt is sustainable when implied future debt remains bounded. A country's probability of default displays a marked asymmetry around that country's maximum sustainable debt (MSD): it increases slowly below and rapidly above. We calibrate our measure for 23 OECD countries: Korea has the highest MSD at 281% of GDP and Greece the lowest at 89%. The probabilities of default at MSD are very low, from Norway's 0.27% to Korea's 0.81%. Most countries' actual debt-to-GDP ratios in 2010 are below MSD; some countries are above; these are generally the countries that have received some form of financial support in the wake of the financial crisis.