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on Corporate Finance |
| By: | Cécile Carpentier; Jean-Marc Suret |
| Abstract: | Several governments have designed tax incentive programs to promote small business finance, yet evidence of their efficiency is very scarce. This article analyzes the QBIC program, introduced in Quebec to help capitalize SME. Individual investors in holding companies that finance one or more small corporations receive substantial tax credits. First, the functioning of the program is analyzed in light of the fundamentals of the small business finance paradigm, in particular the adverse selection, agency cost and control aversion problems. Because the program design does not consider these dimensions, it putatively cannot fulfill its primary objective of attracting angels. Rather, it should mainly serve mediocre quality firms, whose subsequent performance should be weak. We analyze the ownership of all the QBICs accredited between 1998 and 2003, and the operating performance of the 83 financed companies for which accounting data were available. Our tests confirm each of our hypotheses. The program can hardly be considered as a success. In terms of public policy, the study concludes that poorly designed programs cannot attain the objective of promoting small business capitalization. <P>De nombreux gouvernements ont instauré des programmes fiscaux destinés à promouvoir le financement des petites et moyennes entreprises. Il existe toutefois très peu d’études de l’efficacité de ces initiatives. Nous analysons le programme de Société de placements dans l’entreprise québécoise (SPEQ), instauré au Québec pour améliorer la capitalisation des petites et moyennes entreprises. Les actionnaires de sociétés de portefeuille obtiennent d’importants crédits d’impôt lorsque ces sociétés financent des entreprises admissibles. Nous analysons en premier lieu le programme à la lumière des principes de base du financement des entreprises : l’asymétrie informationnelle, les problèmes d’anti-sélection et d’agence et la réticence à partager le contrôle. Comme le programme ne tient aucun compte de ces diverses dimensions, nous posons l’hypothèse qu’il ne permettra pas l’atteinte de l’objectif premier, qui était d’attirer des investisseurs providentiels dans l’actionnariat des entreprises. Nous supposons également que le programme devrait attirer principalement des entreprises de qualité médiocre, dont la performance après le placement sera faible. L’analyse de l’ensemble des SPEQ agréées entre 1998 et 2003 et des 83 sociétés financées pour lesquelles des données comptables sont accessibles permet de confirmer chacune de ces hypothèses. Le programme n’atteint pas ses objectifs et ne peut pas être considéré comme un succès. L’étude met en évidence l’importance de dessiner très soigneusement les programmes d’aide au financement des petites entreprises. |
| Keywords: | public policy, small business finance, tax incentives, business angels, politiques publiques, financement des petites entreprises, incitatifs fiscaux, investisseurs providentiels |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2005s-13&r=cfn |
| By: | Patrick Bolton; Jose Scheinkman; Wei Xiong |
| Date: | 2005–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:666156000000000673&r=cfn |
| By: | Francis, Jennifer (Fuqua School of Business, Duke University); Olsson, Per (Fuqua School of Business, Duke University); Schipper, Katherine (Financial Accounting Standards Board) |
| Abstract: | We analyze the link between financial reporting choices that affect accruals quality and firms' use of call options. We argue that call options used in compensation arrangements (employee stock options or ESOs) create countervailing incentives for managers to affect accruals quality. On the one hand, poorer accruals quality is associated with greater returns volatility (which leads to an increase in ESO value); on the other hand, better accruals quality is associated with a lower cost of capital (and, therefore, higher share price, which leads to an increase in ESO value). We confirm both effects on accruals quality, and we show that the net effect is for ESOs to worsen accruals quality. We provide additional evidence on this main result by showing that in two settings where the returns volatility incentive to worsen accruals quality is muted or absent (cases where managers hold employer shares and cases where the firm uses call options for financing purposes, such as preferred stock and convertible debt), the overall incentive is for managers to increase accruals quality. |
| Keywords: | Options; Information Quality; Compensation |
| JEL: | G30 M40 |
| Date: | 2005–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0034&r=cfn |
| By: | Cotei, Carmen; Farhat, Joseph Basheer; Mukherjee, Tarun K. |
| Abstract: | Theoretical models predict that going public firms generate positive externalities, creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive informational externalities for the publicly traded rival firms in the same industry and test three related hypotheses. The hypotheses are: 1) Venture backed IPOs convey positive information about industry and this information is transferred to rival firms; 2) Intra-industry information transfer varies with rivals’ characteristics; 3) IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects only in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We also find evidence that the effect on rival firms is stronger if they operate in low concentrated industries (i.e. high competition) and have low growth opportunities. The relative size of IPO firm seems to play an important role in the direction and magnitude of industry rivals' valuation effects. Negative information revealed in the form of downward price revisions adversely affect rival firms’ valuation. |
| Keywords: | Initial public offering (IPO), Venture backing, Positive externalities |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2004-12&r=cfn |
| By: | DING, Yuan; JEANJEAN, Thomas; STOLOWY, Hervé |
| Abstract: | Historically, the format of financial statements has varied from one country to another. Recently, due to the attractiveness of their capital markets, the strength of their accounting professions and the influence of their institutional investors, Anglo-American countries have seen the impact of their accounting practices on other nations increase steadily, even influencing the actual format of financial statements. Given that French accounting regulations allow a certain degree of choice in consolidated balance sheet format (‘by nature’ or ‘by term’) and income statement format (‘by nature’ or ‘by function’), this study examines a sample of 199 large French listed firms in an attempt to understand why some of these firms do not use the traditional French formats (‘by nature’ for the balance sheet and ‘by nature” for the income statement), instead preferring Anglo-American practices (‘by term’ format for the balance sheet and ‘by function’ format for the income statement). We first analyze the balance sheet and income statement formats separately using a logit model, then combine the two and enrich the research design with a generalized ordered logit model and a multinomial logit regression. Our results confirm that the major driving factor behind the adoption of one or two alternative formats is the firm’s degree of internationalization, not only financial (auditor type, foreign listing and the decision to apply alternative accounting standards) but also commercial (company size and the internationalization of sales). |
| Keywords: | Disclosure; Determinants; Financial Statements; Alternative format; France; Logit; Generalized ordered logit; Multinomial logit |
| JEL: | M41 |
| Date: | 2005–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0808&r=cfn |
| By: | Cécile Carpentier; Jean-Marc Suret |
| Abstract: | Most countries have set up structures and programs for new business creation and financing. We analyze strategies implemented in France, Germany and United Kingdom, where the proportion of government funds in venture capital financing is significantly smaller than in the Quebec, yet the rate of creation and growth of tech start-ups is comparable. In these countries, intervention is based on R&D, transfer, incubation and start-up, in high technology industries exclusively. Except in France, universities are pivotal to new business creation. Internal or subordinated divisions of ministries are created to manage and evaluate governmental programs, define priorities and avoid financing non-crucial industries. Often of limited duration, government programs must abide by rigorous performance and accreditation criteria. Tax incentives are generally not associated with these initiatives. <P>La plupart des pays ont instauré des institutions et des mécanismes dédiés à la création de nouvelles entreprises et au financement de leur croissance. Nous analysons les stratégies mises en place par la France, l’Allemagne et le Royaume-Uni. Dans ces pays, la part de l’État dans le financement par capital de risque est significativement inférieure à celle du Québec sans que la performance en termes de création et de croissance d’entreprises technologiques ne semble inférieure. Ces pays ont privilégié une action ciblée, axée sur les stades de R&D, transfert, incubation et démarrage, clairement restreinte aux technologies. Les universités sont, à l’exception de la France, au centre de l’effort de création de nouveaux projets d’entreprises. Des structures internes ou directement subordonnées aux ministères sont mises en place pour gérer et évaluer les programmes, établir les priorités et éviter les dérapages vers des secteurs en demande de fonds mais non prioritaires. Les programmes, dont la durée de vie est souvent limitée, sont très largement soumis à des critères de performance et d’accréditation rigoureux. Les modes d’intervention autres que les déductions fiscales sont privilégiés. |
| Keywords: | small business, public policy, business creation, financing, start-ups, petite entreprise, politiques publiques, création d'entreprises, financement, Europe |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2005s-12&r=cfn |
| By: | Cécile Carpentier; Jean-Marc Suret |
| Abstract: | To ease the financing of growing SMEs, governments found or indirectly fund venture capital companies. These companies act in a context of extreme information asymmetry and potentially exorbitant agency costs. The rigorous governance of these companies is thus pivotal to their performance. We analyze the financial reporting guidelines put in place for American SBICs by the Small Business Administration, along with the valuation guidelines issued by venture capital associations and institutions in several countries. SBICs are subject to rigorous uniform financial reporting and valuation standards, which likely partly explains their performance in recent years. We also describe the efforts of diverse institutions to develop venture capital valuation guidelines. The most rigorous methods entail filing the initial terms of the financial deal, which could allow more efficient control of the selection process of investments. The Quebec government would benefit from implementing more rigorous reporting and valuation guidelines. <P>Pour faciliter le financement des entreprises en croissance, les gouvernements mettent en place ou financent indirectement des sociétés de capital de risque. Celles-ci interviennent dans un contexte d’asymétrie informationnelle où les coûts d’agence sont potentiellement très élevés. L’encadrement strict de ces sociétés est donc une condition essentielle à leur performance. Nous analysons le cadre de reddition de comptes mis en place pour les Small Business Investment Companies (SBICs) par la Small Business Administration américaine, puis les normes d’évaluation des placements préconisés par les associations et organismes de capital de risque dans plusieurs pays. Les SBICs sont soumises à un cadre uniforme strict de reddition de comptes et d’évaluation, qui explique probablement en partie leur bonne performance dans les années récentes. Nous montrons également les efforts déployés par divers organismes pour développer un cadre d’évaluation des placements de capital de risque. Les méthodes les plus rigoureuses demanderaient l’archivage des conditions initiales du placement, ce qui contribuerait à un contrôle plus efficace du processus de sélection des investissements. Les initiatives québécoises gagneraient très certainement à disposer d’un cadre de reddition de comptes et d’évaluation plus strict que celui qui semble actuellement prévaloir. |
| Keywords: | public policy, venture capital, governance, reporting guidelines, valuation guidelines , politique publique, capital de risque, gouvernance, normes comptables, normes d’évaluation |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirpro:2005rp-07&r=cfn |
| By: | Rubens Penha Cysne (EPGE/FGV) |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:584&r=cfn |
| By: | Kenichiro Suzuki; David Cobham |
| Keywords: | financial systems, corporate finance, bank-industry relationships, main bank, firm size, Japan. |
| JEL: | G1 G3 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:0501&r=cfn |
| By: | Nicholas Chan; Mila Getmansky; Shane M. Haas; Andrew W. Lo |
| Abstract: | Systemic risk is commonly used to describe the possibility of a series of correlated defaults among financial institutions---typically banks---that occur over a short period of time, often caused by a single major event. However, since the collapse of Long Term Capital Management in 1998, it has become clear that hedge funds are also involved in systemic risk exposures. The hedge-fund industry has a symbiotic relationship with the banking sector, and many banks now operate proprietary trading units that are organized much like hedge funds. As a result, the risk exposures of the hedge-fund industry may have a material impact on the banking sector, resulting in new sources of systemic risks. In this paper, we attempt to quantify the potential impact of hedge funds on systemic risk by developing a number of new risk measures for hedge funds and applying them to individual and aggregate hedge-fund returns data. These measures include: illiquidity risk exposure, nonlinear factor models for hedge-fund and banking-sector indexes, logistic regression analysis of hedge-fund liquidation probabilities, and aggregate measures of volatility and distress based on regime-switching models. Our preliminary findings suggest that the hedge-fund industry may be heading into a challenging period of lower expected returns, and that systemic risk is currently on the rise. |
| JEL: | G12 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11200&r=cfn |
| By: | Genevieve Boyreau-Debray; Shang-Jin Wei |
| Abstract: | State-owned financial institutions have been proposed as a way to address market failure, but the recent literature has also highlighted their pathological problems. This paper studies the case of China for pitfalls of a state-dominated financial system, including possible segmentation of the internal capital market due to local government interference and mis-allocation of capital. Even without formal legal prohibition to capital movement across regions, we find that capital mobility within China is low. Furthermore, to the extent some capital moves around the country, the government (as opposed to the private sector) tends to allocate capital systematically away from more productive regions toward less productive ones. In this context, a smaller role of the government in the financial sector might increase economic efficiency and the rate of economic growth. |
| JEL: | G1 F3 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11214&r=cfn |
| By: | Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Munehisa Kasuya (Research and Statistics Department, The Bank of Japan); Jouchi Nakajima (Graduate School of Economics, University of Tokyo) |
| Abstract: | To the extent that a borrower faces switching costs in a relationship with an individual bank, bank-specific financial health might affect a borrower's cost of funds. The costs would be particularly large for firms that have a close relationship with limited number of banks. The purpose of this paper is to investigate whether weakened financial conditions of banks reduced investment of small and medium firms in Japan. Estimating Tobin's Q investment functions, we examine the determinants of investment for unlisted Japanese companies in the late 1990s and the early 2000s. We find that several measures on bank-specific financial health have significantly large impacts on borrower's investment, even when observable characteristics relating to Tobin's Q, cash-flow, and leverage are controlled for. We also find that multiple banking relationships, which tend to have a negative impact on investment in general, may be beneficial in relieving a hold up problem when deteriorated bank health does matter. |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf330&r=cfn |
| By: | Nam, Jouahn; Wang, Jun; Zhang, Ge |
| Abstract: | We examine the impact of the May 2003 dividend tax cut and managerial stock holdings on corporate dividend initiation decision. We find that managers who hold sizable stakes in their companies are more likely to initiate dividends following this tax cut. This positive relation is stronger for firms with higher growth opportunities. These results are consistent with the hypothesis that managers initiate dividends to maximize their own wealth. Moreover, the market reacts negatively (most positively) to dividend initiation announcements by firms with higher (lower) growth opportunities and higher (lower) managerial share holdings. |
| Keywords: | Dividend tax cut, Managerial stock holdings, Dividend payout |
| JEL: | G30 G35 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2004-09&r=cfn |
| By: | Mazumder, M. Imtiaz; Miller, Edward M.; Varela, Oscar Albert |
| Abstract: | The weekend effect is described as the tendency for Monday security returns to be low (or negative) compared to other days of the week. The weekend effect may not be exploited by trading individual stocks because of transactions costs. However, the institutional characteristics of the US-based international open-end mutual funds may allow investors to exploit the weekend effect because mutual funds lack much of the transactions costs associated with individual stocks. This paper extends the study of Compton and Kunkel (1999), Varela (2002), and Miller, Prather and Mazumder (2003) by examining the weekend predictability and profitable trading opportunities for international mutual funds. The rationale behind the weekend predictability and profitability of international funds lies on the fact that the Net Asset Values (NAVs) of international funds are computed from stale prices of the underlying assets of these funds. The sample of international funds is divided into two sub-samples and the initial sub-sample is used to test the weekend effect and develop trading strategies. Returns of trading strategies are then evaluated out-of-sample and compared with the returns of a buy-and-hold strategy. Empirical findings suggest that smart investors may earn higher risk-adjusted returns by following daily dynamic trading strategies. Results also document that trading strategies based on the weekend effect produce higher risk-adjusted returns. Finally market timing models are also tested for trading strategy returns and Treynor-Mazuy and Henriksson-Merton timing measures are positive and statistically significant. Moreover, the trading rules of this study may be useful in future if fair value pricing or other institutional regularities eliminate any profitable trading opportunity based on the US market signals. |
| Keywords: | Mutual funds, Weekend effect, Trading rule, Market efficiency |
| JEL: | G12 G14 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2004-10&r=cfn |
| By: | WenShwo Fang (Feng Chia University); YiHao Lai (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada Las Vegas) |
| Abstract: | The effects of exchange rate risk have interested researchers, since the collapse of fixed exchange rates. Little consensus exists, however, regarding its effect on exports. Previous studies implicitly assume symmetry. This paper tests the hypothesis of asymmetric effects of exchange rate risk with a dynamic conditional correlation bivariate GARCH(1,1)-M model. The asymmetry means that exchange rate risk (volatility) affects exports differently during appreciations and depreciations of the exchange rate. The data include bilateral exports from eight Asian countries to the US. The empirical results show that real exchange rate risk significantly affects exports for all countries, negative or positive, in periods of depreciation or appreciation. For five of the eight countries, the effects of exchange risk are asymmetric. Thus, policy makers can consider the stability of the exchange rate in addition to its depreciation as a method of stimulating export growth. |
| Keywords: | depreciation, exchange rate risk, exports, bivariate GARCH-M model |
| JEL: | C32 F14 F31 F41 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-09&r=cfn |