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on Corporate Finance |
| By: | Lensink, Robert; Pham Thi Thu, Tra (Groningen University) |
| Abstract: | The theoretical literature on a firm?s choice of debt maturity argues that a borrowing firm can signal its value in asymmetric information setting by borrowing short. This well-known fact is based on Flannery (1986). This paper questions the use of debt maturity as a signalling device. We demonstrate that Flannery?s (1986) signalling outcome is vulnerable on two accounts. First, the separating equilibrium established by Flannery is not driven by the incentive compatibility. Second, derivations of the separating equilibrium appear to be vulnerable due to the lack of the refinements of pooling equilibria. If correct constraints are provided, the parameter space for the separating equilibrium shrinks, moderating the signalling role of debt maturity. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:06e03&r=cfn |
| By: | Hernandez-Canovas, Gines (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Koeter-Kant, Johanna |
| Abstract: | We examine the influence of cross country differences on debt maturity for small and medium size enterprises (SMEs) using a sample of 3366 SMEs from 19 European countries. We analyze a country's legal environment, institutional environment, banking structure and economic situation while controlling for firm specific characteristic. We find that SMEs in countries with high property rights that protect their creditors or enforce existing laws are more likely to obtain long-term debt. We also show evidence that banks seem to rely more on the legal, economic, and institutional determinants when determining the length of a loan agreement for micro firms than when granting loans to medium size firms. |
| Keywords: | Debt maturity; Small business lending; Banks; Legal system |
| JEL: | G21 G30 G32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:vuarem:2006-9&r=cfn |
| By: | D'Mello, Ranjan (Wayne State University); Krishnaswami, Sudha (University of New Orleans); Larkin, Patrick J. (Fayetteville State University) |
| Abstract: | We investigate the tradeoff theory as an explanation for how managers allocate cash to post-spin-off parent and subsidiary firms. Spin-offs provide an opportunity to examine the determinants of cash holdings free from the confounding effects of the pecking order theory. Our results indicate that difference in asset size, sales growth, research and development expenses, net working capital, and leverage significantly affect the difference in cash holdings of post-spin-off entities. These results suggest that cash holdings are decreasing in the ease of raising cash and availability of cash from internal sources, and are increasing in growth opportunities, asymmetric information levels, and financial distress costs. |
| Keywords: | Trade-off theory, Spin-off, Cash holding |
| JEL: | G34 C12 C21 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-02&r=cfn |
| By: | Shen, Yang-Pin (Yuan Ze University); Wei, Peihwang P. (University of New Orleans) |
| Abstract: | In this study, we examine the determinants of firms’ IPO decisions in Taiwan, for the sample period of 1989 to 2000. The regulations in Taiwan permit us to identify firms that met IPO requirements but chose not to go public. The unique regulatory environment allows a clear comparison of firms that choose IPOs and those that do not. With the exception of Pagano, Panetta and Zingales (1998), we are not aware of any similar study. Their paper examines the IPO market in Italy, and there seem to be considerable differences between that market and Taiwan market. Indeed, we find strong evidence that IPOs are not motivated by financing needs or constraints while they do. Some of our results are nevertheless consistent with theirs -- in particular, we find that larger and profitable firms are more likely to list equity. Our other findings also provide support for, though not overwhelmingly, information asymmetry, listing costs, liquidity, owners’ diversification desire, and market timing as factors influencing IPO decisions. Finally, we present evidence strongly consistent with venture capital providing certification to firm credibility. |
| Keywords: | Initial public offering (IPO), Venture capital, Taiwan stock market |
| JEL: | G32 G15 G24 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-07&r=cfn |
| By: | Albanesi, Stefania |
| Abstract: | This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs’ effort, which is not observed. The presence of idiosyncratic risk in capital returns implies that constrained-efficient allocations display an intertemporal wedge on entrepreneurial capital that can be positive or negative. The properties of optimal marginal taxes on entrepreneurial capital depend on the sign of this wedge. If the wedge is positive, the marginal capital tax should be decreasing in capital returns, while the opposite is true when the wedge is negative. The optimal tax system equalizes after tax returns on all assets, thus reducing the variance of capital returns after tax relative to other assets. If entrepreneurs are allowed to sell shares of their capital to outside investors, returns to externally owned capital are subject to double taxation at the level of the entrepreneur and at the level of the outside investors. Even if entrepreneurs can purchase private insurance against their idiosyncratic risk, optimal asset taxes are essential to implement the constrained-efficient allocation if entrepreneurial portfolios are private information. |
| Keywords: | entrepreneurial capital; optimal taxation; private information |
| JEL: | E6 H2 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5647&r=cfn |
| By: | Margit Osterloh; Bruno S. Frey |
| Abstract: | The most influential approach of corporate governance, the view of shareholders supremacy does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder interests by making the board more responsible to shareholders, and monitoring of top management by independent outside directors should be strengthened. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firmspecific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this dilemma: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm who are making firm-specific knowledge investments. (3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they provide a step in the direction of a more adequate theory of the firm as a basis for corporate governance. |
| Keywords: | Corporate governance; shareholders; board directors; insiders; firm-specific knowledge |
| JEL: | D23 D83 L14 G34 M50 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2006-12&r=cfn |
| By: | Krishnaswami, Sudha (University of New Orleans); Yaman, Devrim (Western Michigan University) |
| Abstract: | Theoretical research argues that convertible bonds mitigate the contracting costs of moral hazard, adverse selection, and financial distress. Using firm-specific and macroeconomic factors of the contracting costs, we examine the extent to which they impact the likelihood of issuance and the structure of convertible bonds. Our evidence indicates that moral hazard, adverse selection, and expected financial distress costs are all important determinants of the likelihood of issuing convertible bonds over straight bonds. We also analyze the structure of convertible bonds issued by studying whether these bonds are more debt-like or equity-like. The evidence indicates that moral hazard costs do not influence bond structure, while adverse selection costs are somewhat important in determining the structure. Expected financial distress costs have the strongest statistical and economic impact on convertible bond structure. |
| Keywords: | Convertible bonds, Moral hazard, Adverse selection, Financial Distress |
| JEL: | G32 G30 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-04&r=cfn |
| By: | Krishnaswami, Sudha (University of New Orleans); Yaman, Devrim (Western Michigan University) |
| Abstract: | We analyze whether fluctuation in economy-wide factors cause time-series variation in the contracting costs of moral hazard, adverse selection, and financial distress, and so create windows of opportunity for firms to issue debt. Using the announcement period abnormal returns as one measure of the overall contracting costs of debt issues, we specifically study whether economy-wide factors affect the impact of firm-specific measures of contracting costs on the abnormal returns. We find that debt issues are more costly in periods of higher interest rates and in industry downturns. When we partition the impact of each issue- and firm-specific measure of contracting costs across high and low levels of each economy-wide variable, we find that only the measures of agency cost become significant in general, but issue-specific measures of financial distress also become relevant in subsamples. |
| Keywords: | Straight debt, Contracting costs, Moral hazard, Financial distress, Adverse selection |
| JEL: | G32 G30 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-11&r=cfn |
| By: | He, Wei (University of Texas of the Permian Basin); Mukherjee, Tarun K. (University of New Orleans); Wei, Peihwang P. (University of New Orleans) |
| Abstract: | In this paper, we examine factors influencing the choice between tracking stocks and minority carve-outs and their performances. We expand the research in this field by incorporating a fa ctor that was largely ignored in extant literature: managerial entrenchment. We find that the following firms have a greater tendency to choose tracking stocks over carve-outs: firms with a tendency to increase executive pays--especially those in the form of subsidiary stocks, firms that are more tightly controlled by their executives, and firms with greater financial strength prior to restructuring. The former two are consistent with our conjecture that managerial entrenchment plays a role in the choice between tracking stocks and carve-outs. The latter result is consistent with our other hypothesis that prior financial strength influences the decision. Equally important findings are that both are characterized by poor long-term performances and that tracking stocks’ performances are on average inferior to those of carve-outs. Evidence suggests that these sub-par performances can be partially attributable to managerial entrenchment. |
| Keywords: | Carve-out, Managerial entrenchment, Restructuring |
| JEL: | G14 G34 C12 C35 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-12&r=cfn |
| By: | D'Mello, Ranjan (Wayne State University); Krishnaswami, Sudha (University of New Orleans); Larkin, Patrick J. (Fayetteville State University) |
| Abstract: | We empirically examine whether the elimination of negative synergies, the reduction of internal capital market inefficiencies, and the mitigation of information problems following spinoffs lower cost of equity. The results indicate that there is no decrease in the cost of equity in the full sample, which suggests that the gains around spinoffs are primarily a consequence of improvements in cash flow and operating performance rather than a decline in systematic risk or the cost of equity. However, we find a positive relation between the spinoff gains and a decrease in the cost of equity for the subsample of firms with high information asymmetry, and for the subsample of non-focus-increasing spinoffs shown in prior studies to have no improvements in future cash flow or operating performance. For firms with high information asymmetry, the relation between the spinoff gains and the decline in cost of equity is attributable to a decline in the cost of equity of the post-spinoff parent entity. The results indicate that spinoffs facilitate a decrease in adverse selection costs, and this is especially value enhancing for the parent firms, which are higher growth and more reliant on external capital. |
| Keywords: | Spinoff, Cost of equity, Information asymmetry |
| JEL: | G34 C22 C12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-14&r=cfn |
| By: | Baker, H. Kent (American University); Mukherjee, Tarun K. (University of New Orleans) |
| Abstract: | We survey editors from 15 "core" and 35 "non-core" finance journals to learn their views about specific issues involving survey research. Based on responses from 25 editors, none of their journals has an established policy involving the publication of survey research. The evidence shows that survey-based manuscripts typically go through the same review process as other manuscripts. However, editors of "core" versus "non-core" journals have mixed views about the role that survey research should play in the finance literature. The editors provide their views about the strengths and weaknesses of survey research as well as topic areas that would benefit from using this approach. A review of a finance journals shows that the publication of survey-based papers is an infrequent event for most journals. |
| Keywords: | Survey-based Finance Research, Importance of Finance Survey Research |
| JEL: | G00 |
| Date: | 2006–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-15&r=cfn |
| By: | Baker, H. Kent (American University); Mukherjee, Tarun K. (University of New Orleans); Paskelian, Ohannes George (University of New Orleans) |
| Abstract: | We report the results of a 2004 survey from managers of dividend-paying Norwegian firms listed on the Oslo Stock Exchange about their views on dividend policy. Specifically, we identify the most important factors in making dividend policy decisions and managers’ views about various dividend-related issues. The most important determinants of a firm’s dividend policy are the level of current and expected future earnings, stability of earnings, current degree of financial leverage, and liquidity constraints. No significant correlation exists between the overall rankings of factors influencing dividend policy between Norwegian and U.S. managers. Norwegian managers express mixed views about whether a firm’s dividend policy affects firm value. Respondents point to the possible role of dividend policy as a signaling mechanism. No support exists for the tax-preference explanation for paying dividends. |
| Keywords: | Dividend policy, Cash dividends |
| JEL: | G35 |
| Date: | 2005–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-16&r=cfn |