nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒05‒10
eleven papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Managerial Ownership Dynamics and Firm Value By Rudiger Fahlenbrach; Rene M. Stulz
  2. The Helping Hand, the Lazy Hand, or the Grabbing Hand? Central vs. Local Government Shareholders in Publicly Listed Firms in China By Yan-Leung Cheung; P. Raghavendra Rau; Aris Stouraitis
  3. Determinants of the Size and Structure of Corporate Boards: 1935-2000 By Kenneth Lehn; Sukesh Patro; Mengxin Zhao
  4. Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market By Morten Bennedsen; Kasper Meisner Nielsen; Thomas Vester Nielsen
  5. Board Structure and Price Informativeness By Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo
  6. Judicial Discretion in Corporate Bankruptcy By Nicola Gennaioli; Stefano Rossi
  7. Testing Conditional Asset Pricing Models: An Emerging Market Perspective By Javed Iqbal; Robert Brooks; Don U.A. Galagedera
  8. When Herding and Contrarianism Foster Market Efficiency: A Financial Trading Experiment By Andreas Park; Daniel Sgroi
  9. The Implications of Aging for the Structure and Stability of Financial Markets By Jane D'Arista
  10. What Determines Financial Structure in the Moroccan Manufacturing Sector? A Firm Level Analysis By Achy, Lahcen; Rigar, Sidi Mohamed
  11. Employee Satisfaction, Firm Value and Firm Productivity By Roger Best

  1. By: Rudiger Fahlenbrach; Rene M. Stulz
    Abstract: From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well, but not more likely to increase their ownership when their firms have poor performance. Because investors learn about the total change in managerial ownership with a lag, changes in Tobin’s q in a period can be affected by changes in managerial ownership in the previous period. In an efficient market, it is unlikely that changes in managerial ownership in one period are caused by future changes in q. When controlling for past stock returns, we find that large increases in managerial ownership increase q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We argue that our evidence cannot be wholly explained by existing theories and propose a managerial discretion theory of ownership consistent with our evidence.
    Keywords: Firm valuation, director and officer ownership, ownership dynamics
    JEL: G30 G32
    Date: 2008–01
  2. By: Yan-Leung Cheung; P. Raghavendra Rau; Aris Stouraitis
    Abstract: We analyze related party transactions between Chinese publicly listed firms and their stateowned enterprise (SOEs) shareholders to examine whether companies benefit from the presence of government shareholders and politically connected directors appointed by the government. We find that related party transactions between firms and their government shareholders seem to result in expropriation of the minority shareholders in firms controlled by local government SOEs or with a large proportion of local government affiliated directors on their board, and in provinces where local government bureaucrats are less likely to be prosecuted for misappropriation of state funds. On the other hand, firms controlled by the central government (or with a large proportion of central government affiliated directors) are benefited in their related party transactions with their central government SOEs.
    Keywords: Law and economics; Government ownership; China; State-Owned Enterprises (SOE); Related party transactions; Political connections
    JEL: G15 G34 K33
    Date: 2008–02
  3. By: Kenneth Lehn; Sukesh Patro; Mengxin Zhao
    Abstract: We argue that the size and composition of corporate boards are determined by tradeoffs involving the information that directors bring to boards versus the coordination costs and free rider problems associated with their additions to boards. Our hypotheses lead to predictions that firm size and growth opportunities are important determinants of these board characteristics. Using a sample of 82 U.S. firms that survived over the period of 1935 through 2000, we find strong support for the hypotheses. The hypotheses also find support in the relation between changes in board size and firms’ merger and divestiture activity, and changes in the geographical diversification of firms. We find no robust relation between firm performance and either board size or composition after accounting for the determinants of these board characteristics.
    Keywords: Board size, board composition, mergers and acquisitions, firm size, growth opportunities, diversification, geographical diversification, firm performance, and endogeneity
    JEL: G32 G34
    Date: 2007–12
  4. By: Morten Bennedsen; Kasper Meisner Nielsen; Thomas Vester Nielsen
    Abstract: We analyse controlling owners incentive to provide non-controlling owners with better protection against self-dealing through offering new shares with tag-along rights, - the private contracting alternative to equal price provision in takeover legislation. Our model identifies two counteracting effects: The benefit of offering tag-along rights is the anti-expropriation effect which makes it harder for new owners to finance a takeover through expropriation of minority owners. The cost is the rent transfer effect which implies that there is a wealth transfer from controlling owners to existing minority owners. Empirically we test the implications of the model using data on equity offerings in Brazil. Consistent with the theoretical predictions we find that offering tag-along rights increases market value of a firm and that companies offering shares with tag-along rights offer larger claims, have less disproportional ownership structure, have a smaller group of existing minority shareholders and are more likely to issue new shares. The paper, thus, find strong support for private contracting being an important alternative governance mechanism to legal protection of investors.
    Keywords: Private contracting, Corporate governance, Emerging markets, Tag-along rights
    JEL: G30 G32 G34 G38
    Date: 2007–11
  5. By: Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo
    Abstract: We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model’s predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring.
    Keywords: Corporate boards, Independent directors, Price informativeness
    JEL: G32 G34
    Date: 2008–02
  6. By: Nicola Gennaioli; Stefano Rossi
    Abstract: We study a demand and supply model of judicial discretion in corporate bankruptcy. On the supply side, we assume that bankruptcy courts may be biased for debtors or creditors, and subject to career concerns. On the demand side, we assume that debtors (and creditors) can engage in forum shopping at some cost. A key finding is that stronger creditor protection in reorganization improves judicial incentives to resolve financial distress efficiently, preventing a "race to the bottom" towards inefficient uses of judicial discretion. The comparative statics of our model shed light on a wealth of evidence on U.S. bankruptcy and yield novel predictions on how bankruptcy codes should affect firm-level outcomes.
    Keywords: Judicial Discretion, Corporate Bankruptcy.
    JEL: G33 K22
    Date: 2007–12
  7. By: Javed Iqbal; Robert Brooks; Don U.A. Galagedera
    Abstract: The CAPM as the benchmark asset pricing model generally performs poorly in both developed and emerging markets. We investigate whether allowing the model parameters to vary improves the performance of the CAPM and the Fama-French model. Conditional asset pricing models scaled by conditional variables such as Trading Volume and Dividend Yield generally result in small pricing errors. However, a graphical analysis shows that the predictions of conditional models are generally upward biased. We demonstrate that the bias in prediction may be caused by not accommodating frequent large variation in asset pricing models. In emerging markets, volatile institutional, political and macroeconomic conditions results in thick tails in the return distribution. This is characterized by excess kurtosis. It is found that the unconditional Fama-French model augmented with a cubic market factor performs the best among the competing models. This model is also more parsimonious compared to the conditional Fama-French model in terms of number of parameters.
    Keywords: Stochastic discount factor; conditional information; kurtosis; emerging markets
    JEL: C51 G12
    Date: 2008–04
  8. By: Andreas Park; Daniel Sgroi
    Abstract: While herding has long been suspected to play a role in financial market booms and busts, theoretical analyses have struggled to identify conclusive causes for the effect. Recent theoretical work shows that informational herding is possible in a market with efficient asset prices if information is bi-polar, and contrarianism is possible with single-polar information. We present an experimental test for the validity of this theory, contrasting with all existing experiments where rational herding was theoretically impossible and subsequently not observed. Overall we observe that subjects generally behave according to theoretical predictions, yet the fit is lower for types who have the theoretical potential to herd. While herding is often not observed when predicted by theory, herding (sometimes irrational) does occur. Irrational contrarianism in particular leads observed prices to substantially differ from the efficient benchmark. Alternative models of behavior, such as risk aversion, loss aversion or error correction, either perform quite poorly or add little to our understanding.
    Keywords: Herding,Informational Efficiency, Experiments.
    JEL: G14 G24 G28
    Date: 2008–04–29
  9. By: Jane D'Arista
    Abstract: Aging populations have altered saving and investment patterns in many developed and emerging market economies. The structural changes that have occurred have important implications for financial stability and for the conduct of monetary policy. As assets and borrowing shifted from banks to pension funds and other institutional investors, the market-based systems that replaced bank-based systems became more procyclical and more vulnerable to systemic risk. In addition, banks’ receding share of financial assets undermined their role in channeling monetary policy initiatives and thus eroded central banks’ ability to counter excessive credit growth and contraction, defuse asset bubbles and act as effective lenders-of-last-resort in crises. This paper offers policy choices and proposals to address the adverse outcomes of these structural and institutional developments that are likely to intensify under the ongoing pressure of demographic change.
    Keywords: aging, banks, pension funds, financial stability, monetary policy
    Date: 2008
  10. By: Achy, Lahcen; Rigar, Sidi Mohamed
    Abstract: The purpose of this paper is to investigate empirically the determinants of financial structure in the Moroccan manufacturing firms. The paper contributes to the empirical literature on capital structure in developing countries. It relies on the data collected by the Firm Analysis and Competitiveness Survey (FACS) carried out in 2000 by the Ministry of trade and industry, and the World Bank. Our findings suggest that firms have relatively high debt ratios composed mainly of short maturity debt. However, their capital structure seems to match the nature of their assets in which tangible assets are underrepresented. Our empirical analysis uses four different measures of leverage and shows that the four main determinants of financial structure in the Moroccan manufacturing firms are the share of tangible assets in total assets, firm's age, its size, and the structure of its ownership. However, the nature of the relationship between these variables and leverage depends on the specific measure used and tends to differ with previous findings in the empirical literature.
    Keywords: Financial structure; non listed firms; Morocco; firm level data
    JEL: O16 G32 G30
    Date: 2005–12–20
  11. By: Roger Best (University of Central Missouri)
    Abstract: We examine whether self-reported employee satisfaction is associated with higher firm valuation and productivity. Using a sample of firms from Fortune magazine’s list of "100 Best Companies to Work For", companies in which employees report high levels of satisfaction, we find that these firms have valuations that are significantly greater than both their respective industry medians and matched firms. The firms in our sample also exhibit greater levels of productivity and efficiency. Thus, successful efforts in increasing employee satisfaction appear to enhance overall firm productivity, which is subsequently rewarded by investors through higher equity values.
    Keywords: Employee satisfaction, firm value, firm productivity
    JEL: G30 G12 J41
    Date: 2008–05

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