nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒12‒07
eight papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Measuring idiosyncratic risks in leveraged buyout transactions By Gottschalg, Oliver; Groh, Alexander Peter; Baule, Rainer
  2. Not So Lucky Any More: CEO Compensation in Financially Distressed Firms By Kang, Qiang; Mitnik, Oscar A.
  3. Q-theory of Investment and Earnings Retentions - Evidence from Scandinavia By Eklund, Johan
  4. Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process By Fabrizi, Simona; Lippert, Steffen; Norbäck, Peh; Persson, Lars
  5. Duration of syndication process and syndicate organization By Christophe J. Godlewski
  6. More myths about the financial crisis of 2008 By Tatom, John
  7. Banks’ centrality in corporate interlock networks: evidences in Italy By Farina, Vincenzo
  8. Financial consequences of the sales variation By Burja, Camelia

  1. By: Gottschalg, Oliver; Groh, Alexander Peter; Baule, Rainer
    Abstract: The authors use a contingent claims analysis model to calculate the idiosyncratic risks in Leveraged Buyout transactions.
    Keywords: Idiosyncratic Risk; LBO; Private Equity; Benchmarking; CCA
    JEL: G13 G24 G32
    Date: 2008–11–27
  2. By: Kang, Qiang (University of Miami); Mitnik, Oscar A. (University of Miami)
    Abstract: There is a debate on whether executive pay reflects rent extraction due to "managerial power" or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define "lucky" grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the "outrage" constraint due to the episode of financial distress.
    Keywords: CEO compensation, CEO turnover, financial distress, lucky grants, bias-corrected matching estimators
    JEL: G30 J33 M52
    Date: 2008–11
  3. By: Eklund, Johan (Ratio Institute, JIBS and CESIS)
    Abstract: In a frictionless milieu retentions should have no impact on investment behavior. However, empirical studies typically find that retentions are an important determinant of investment. Managerial discretion and financial constraints are two alternative explanations that have been suggested. This paper uses a panel of listed Scandinavian firms to examine the importance of retentions as a determinant of investment. Measures of Tobin’s Q, marginal q and sales accelerator are used to control for investment opportunities. Scandinavian firms are found to depend on retentions to a high degree, more so than in other developed economies. This high dependence on retentions suggests that the Scandinavian capital markets are suffering from allocational inefficiencies. Moreover, these market frictions appear too large to per se be caused by information asymmetries or managerial discretion phenomena. Possible institutional explanations are suggested.
    Keywords: investment; liquidity; retained earnings; free cash flow; Tobin’s Q; marginal q
    JEL: G30
    Date: 2008–12–03
  4. By: Fabrizi, Simona (Massey University Auckland); Lippert, Steffen (Massey University Auckland); Norbäck, Peh (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper we construct a model in which entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We show that as exacerbated development by better-informed venture-backed rms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufciently more ecient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed rms' signaling-driven investment, despite the risk of buying a bad innovation. We nally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations.
    Keywords: Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development;
    JEL: C70 D21 D82 G24 L20 M13 O30
    Date: 2008–11–06
  5. By: Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)
    Abstract: What is the influence of syndicate organization on the duration of a loan syndication process? We answer this question using the survival analysis methodology on a sample of loans to borrowers from 59 countries. We find that syndicate size, concentration, experience, reputation, and national diversity clearly matters for the duration of a syndication process and therefore for borrower satisfaction regarding the speed of obtaining the necessary funding. A syndicate organization adapted to specific agency problems of syndication, with numerous, reputable, and experienced arrangers retaining a larger portion of the loan reduces the duration. The latter is also shorter when more lenders come from the same country as the borrower. These effects are more pronounced when the borrower has a low reputation on the syndicated lending market and when his opacity is stronger.
    Keywords: Syndicated loan, syndication process, syndicate organiza- tion, agency costs, experience, reputation, nationality, survival analysis.
    JEL: F30 G15 G21 G32 C41
    Date: 2008
  6. By: Tatom, John
    Abstract: There are numerous myths that surround the financial crisis that began in August 2007. Some of these myths are about the role of bank credit in the crisis, while others concern the weakness of the U.S. banking system and supposed excess leverage—the ratio of assets to equity in banks-- in contributing to the crisis. This paper provides evidence that net new commercial and industrial loans at banks did not slow before the financial crisis began in August 2007, nor was there any slowing in the early months. A subsequent slowing did reach its lowest pace in June-August 2008, but even at its worst, it was not particularly severe. The paper also looks at the safety and soundness of banks as indicated by their equity-assets ratio. The concern is that bank assets are troubled and excessively leveraged, with very low equity-asset ratios so that banks could have to “deleverage” or reduce lending as their equity declines. The shrinkage of bank equity and assets due to deleveraging could deepen the recession. But banks have not suffered significant declines in their equity ratios and they have been holding near record equity ratios. Moreover bank assets are growing rapidly, with equity nearly keeping pace. Ironically the Treasury’s Troubled Asset Relief Program will add $270 beginning in the fourth quarter. The TARP’s injections of bank capital have dried up private sector injections that had appeared on the horizon from sovereign wealth funds and private equity. Equity ratios of banks could become strained in future as total loans and assets continue to expand. The financial crisis has not undermined the safety and soundness of the commercial banking system. It is not likely to do so because most of the expected losses from the foreclosure crisis have already been taken into provisions. Nonetheless, many banks heavily exposed to mortgage losses have failed and more will fail.
    Keywords: foreclosure crisis; deleverage; bank credit;
    JEL: G28 G21
    Date: 2008–11–25
  7. By: Farina, Vincenzo
    Abstract: The idea that the governance mechanisms affect firms’ performance is well acknowledged in management literature. The settings prevailing in governance studies explain board’s roles at the light of the agency theory framework. However, a complementary perspective is focused on the acquisition of critical resources closely related to activation of external relations with the most influential actors of firm’s environment. One such kind of external relationship is called interlocking directorates and occur when an individual simultaneously sits on the board of two companies. Moreover, since banks control financial capital, that is a resource that has a universal value for all firms, they are more likely to be very important actors inside corporate networks. By analyzing interlocking directorates among listed banks and non financial firms in Italy, using the methods and theory of social network analysis (SNA), I find that banks are the most influential actors in the network and that centrality in the network enhances financial performance.
    Keywords: Corporate Governance; Board of Directors; Performance; Social network analysis.
    JEL: L20 G34
    Date: 2008
  8. By: Burja, Camelia
    Abstract: The risk represents a continuously presence within the economical environment specific for one market economy, being an essential element for substantiating the economic decisions. The paper presents many analysis models for the operating risk based on studying the breakeven point, the positioning index and the elasticity coefficient. The analysis conclusions are stronger through studying the factors which influence the elasticity coefficient extend. The analysis is illustrated by an adequate study case.
    Keywords: financial result; operating risk; elasticity coefficient; analysis; factor influences; flexibility
    JEL: G32 D78 D24
    Date: 2008–05

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