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on Corporate Finance |
| By: | Coles, Jeffrey; Lemmon, Michael; Meschke, Felix |
| Abstract: | This paper presents a parsimonious, structural model that captures primary economic determinants of the relation between firm value and managerial ownership. Supposing that observed firm size and managerial pay-performance sensitivity (PPS) maximize value, we invert our model to panel data on size and PPS to obtain estimates of the productivity of physical assets and managerial input. Variation of these productivity parameters, optimizing firm size and compensation contract, and the way the parameters and choices interact in the model, all combine to deliver the well-known hump-shaped relation between Tobin’s Q and managerial ownership (e.g., McConnell and Servaes (1990)). Our structural approach illustrates how a quantitative model of the firm can isolate important aspects of organization structure, quantify the economic significance of incentive mechanisms, and minimize the endogeneity and causation problems that so commonly plague empirical corporate finance. Doing so appears to be essential because, by simulating panel data from the model and applying standard statistical tools, we confirm that the customary econometric remedies for endogeneity and causation can be ineffective in application. |
| JEL: | L20 G34 G32 |
| Date: | 2007–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4374&r=cfn |
| By: | Andrea Eisfeldt; Adriano Rampini |
| Abstract: | This paper studies the financing role of leasing and secured lending. We argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. We provide empirical evidence consistent with this prediction. Our theory is consistent with the explanation of leasing by practitioners, namely that leasing "preserves capital," which the academic literature considers a fallacy. Review of Financial Studies, forthcoming. |
| Keywords: | Leasing, secured debt, collateral, repossession, debt capacity, capital structure |
| JEL: | D23 D92 E22 G31 G32 G33 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:07-19&r=cfn |
| By: | Rodolfo Apreda; ; |
| Abstract: | This paper sets forth that sinking funds foster corporate governance, either when they intend to build up the principal of bonds and financial hybrids to be repaid at maturity date, or to plan ahead the purchase of fixed assets in the future. To lay foundations, firstly we expand on the logic of sinking funds, by reviewing the standard model of capital formation. Proven drawbacks of this model, however, pave the way for our proposal of undertaking a portfolio management approach for which we furnish an iterative resetting program that deals with unavoidable imbalances of the underlying portfolio. Secondly, we develop the pragmatics of sinking funds, which focus on the choice problem attached to sinking funds and the fiduciary role expected from an appointed portfolio manager. Lastly, we move on to a protocol with suitable covenants to be embedded in a bond placement, so as to enhance the governance of those organizations that dare to avail themselves of sinking funds. |
| Keywords: | sinking fund, corporate governance, bonds placement, financial hybrids, fixed assets, capital formation, portfolio management. |
| JEL: | G38 G30 G32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:351&r=cfn |
| By: | Reena Aggarwal; Isil Erel; René Stulz; Rohan Williamson |
| Abstract: | Using an index which increases as a firm adopts more governance attributes, we find that 12.7% of foreign firms have a higher index than matching U.S. firms. The best predictor for whether a foreign firm adopts more governance attributes than a comparable U.S. firm is whether the firm comes from a common law country. We show that the value of foreign firms is negatively related to the difference between their governance index and the index of matching U.S. firms. This relation is robust to various approaches to control for the endogeneity of corporate governance and is consistent with the hypothesis that foreign firms are valued less because country characteristics make it suboptimal for them to invest as much in governance as comparable U.S. firms. Overall, our evidence suggests that firm-level governance attributes are complementary to rather than substitutes for country-level investor protection, so that better country-level investor protection makes it optimal for firms to invest more in internal governance. Our evidence supports the view that minority shareholders of a typical foreign firm would benefit from an increase in investment in governance, but that the firm's controlling shareholder and possibly other stakeholders would not. |
| JEL: | G30 G32 G34 G38 K22 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13288&r=cfn |
| By: | Pornpinun Chantapacdepong |
| Abstract: | This paper generates monthly risk premia data using zero coupon government treasury bills for 43 countries over the period of 1994-2006. The measure of risk premia is based on the ARCH-in-Mean (ARCH-M) model introduced by Engle, Lilien and Robins (1987). We show that the risk premia are time varying and also vary considerably across sample countries. Countries with better financial development and higher income generally have lower risk premia of government assets. This study also examines the macroeconomic and political determinants of the risk premia by using cross-section and dynamic panel regression analyses. The results show that the risk premia are significantly affected by macroeconomic circumstances, especially economic growth and the real e¤ective exchange rate. The results are robust across the majority of countries in our study. |
| Keywords: | ARCH-in-Mean, term structure of interest rates, risk premium, dynamic panel regression analysis. |
| JEL: | E43 E44 G12 G15 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:07/597&r=cfn |
| By: | Dirk Hackbarth (Department of Finance, Olin School of Business, Washington University in St. Louis); Jianjun Maio (Department of Economics, Boston University and Department of Finance, the Hong Kong University of Science and Technology) |
| Abstract: | This paper develops a continuous time real options model to study the interaction between industry structure and takeover activity. In an asymmetric industry equilibrium, firms have an endogenous incentive to merge when restructuring decisions are motivated by operating and strategic benefits. The model predicts that (i) the likelihood of restructuring activities is greater in more concentrated industries or in industries that are more exposed to exogenous shocks; and (ii) the magnitude of returns arising from restructuring to both merger firms and rival firms are higher in more concentrated industries. While recent real options models contend that competition erodes the option value of waiting and hence accelerates the timing of mergers, in our model, increased competition delays the timing of mergers. |
| Keywords: | industry structure; anticompetitive effect; real options; takeovers. |
| JEL: | G13 G14 G31 G34 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-018&r=cfn |