nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒02‒28
sixteen papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  4. Overcoming the Financial Crisis By Andrea de Michelis
  5. Loan Officers and Relationship Lending to SMEs By Hirofumi Uchida; Gregory F. Udell; Nobuyoshi Yamori
  6. CEO Compensation: Too Much is not Enough ! By Nicolas Couderc; Laurent Weill
  7. Stakeholder Capitalism, Corporate Governance and Firm Value By Franklin Allen; Elena Carletti; Robert Marquez
  8. Optimal capital allocation principles By Dhaene, Jan; Tsanakas, Andreas; Emiliano, Valdez; Steven, Vanduffel
  9. Venture Capital and Innovation: Which is First? By Hirukawa, Masayuki; Ueda, Masako
  10. Financial Market Integration Under EMU By Jappelli, Tullio; Pagano, Marco
  11. Testing Asymmetric-Information Asset Pricing Models By Kelly, Bryan; Ljungqvist, Alexander P
  12. Investment Banks as Insiders and the Market for Corporate Control By Bodnaruk, Andriy; Massa, Massimo; Simonov, Andrei
  13. Rhineland exit? By Bovenberg, A Lans; Teulings, Coen N
  14. Financial Signalling by Innovative Nascent Entrepreneurs By Audretsch, David B; Bönte, Werner; Mahagaonkar, Prashanth
  15. International Taxation and Multinational Firm Location Decisions By Barrios, Salvador; Huizinga, Harry; Laeven, Luc; Nicodeme, Gaetan
  16. Capital Structure and Regulation: Do Ownership and Regulatory Independence Matter? By Bortolotti, Bernardo; Cambini, Carlo; Rondi, Laura; Spiegel, Yossi

  1. By: Luís Krug Pacheco (Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto)); Clara Raposo (ICSTE, Business School)
    Abstract: In this paper, we study the timing of initial stock repurchases for a sample of firms from their IPO onwards, using panel adjusted logistic regressions and hazard models to examine which variables may predict and theoretical hypotheses may explain these transactions. First, we find that initial repurchases (in comparison with non-repurchase firms) seem to have similar financial characteristics of dividend initiators (relative to matched dividend postpone firms), as reported by Kale et al., (2006) and Bulan et al., (2006). Second, our empirical findings in the two multivariate empirical approaches used are particularly consistent with the timing and undervaluation signaling hypotheses in explaining the timing of stock repurchases, consistent with the results of Jagannathan and Stephens (2003) for the likelihood of less frequent stock repurchases. We also offer some support for the risk reduction signaling, free cash flow and maturity hypotheses for initial repurchase firms which are also dividend payers.
    Keywords: Stock Repurchases, Initial Stock Repurchases; Timing of Initial Repurchases; Payout Policy.
    JEL: G32 G35
    Date: 2009–02
  2. By: Luís Krug Pacheco (Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto)); Clara Raposo (ICSTE, Business School)
    Abstract: This study investigates the capital sources and uses of firms that are conducting stock repurchase transactions for the first time, both prior and subsequent to those financial operations. We hypothesize that this capital and cash flow analysis may shed some light about the relative importance of some financial motivations and theoretical hypotheses in explaining initial stock repurchases. In particular, our findings support the risk reduction signaling and the dividends substitution hypotheses as the primary drivers for the initial stock repurchase decision. We also find that the importance of the most theoretical explanations and financial motivations vary according to whether initial repurchase firms are also conducting acquisitions and significant divestitures, distributing cash dividends, relying on external financing and using debt or cash reserves.
    Keywords: Stock Repurchases, Initial Stock Repurchases; Sources of Financing; Cash Flow Distribution.
    JEL: G32 G35
    Date: 2009–02
  3. By: Luís Krug Pacheco (Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto)); Clara Raposo (ICSTE, Business School)
    Abstract: We present univariate and multivariate evidence to show that firms which engage in initial stock repurchases have some specific economic and financial attributes when compared to size-and industry-matched firms. We find that initial repurchase firms are younger, have lower leverage and operating risk, and higher payouts, operating cash flows, profitability and market-to-book than matched non-repurchase firms. Compared to secondary or “seasoned” repurchase matched firms, these initial repurchase firms are also younger and have higher cash, profitability, sales growth and market-to-book, as well as lower payouts, leverage and retained earnings. Therefore, we analyze the determinants and motivations that may explain why firms repurchase their own stock for the first time by studying the theoretical hypotheses found in the financial literature that are most important in explaining initial stock repurchases. The results support the free cash flow and risk reduction signaling hypotheses and the flexibility motivation for conducting stock repurchases. We do not find strong support for any other theoretical explanations of stock repurchases, such as undervaluation signaling, timing, tax effects and options and dilution hypotheses.
    Keywords: Stock Repurchases, Initial Stock Repurchases; Payout Policy, Theoretical Hypotheses.
    JEL: G32 G35
    Date: 2009–02
  4. By: Andrea de Michelis
    Abstract: The global financial crisis that emerged in mid 2007 has caused considerable economic disruptions in the United States and elsewhere, and exposed major flaws in the global financial system. After examining the origins of the crisis, this paper recommends specific policy responses to resolve the immediate problems and discusses how to make the US financial system more resilient and stable in the future.<P>Surmonter la crise financière<BR>La crise financière qui a éclaté à la mi-2007 a provoqué des perturbations économiques considérables aux États-Unis et ailleurs, et révélé des failles majeures dans le système financier mondial. Après une analyse des origines de la crise, ce chapitre préconise des réponses spécifiques pour résoudre les problèmes immédiats et étudie les moyens de rendre le système financier des États-Unis plus résilient et plus stable dans l’avenir.
    Keywords: United States, États-Unis, surveillance prudentielle, financial regulation, financial crisis, crise financière, deleveraging, housing finance, financement du logement, financial supervision, réglementation des marchés financiers, market stability regulator, securitisation, subprime mortgage, autorité de contrôle pour la stabilité des marchés financiers, crédit hypothécaire à risques, réduction de l’effet de levier, titrisation
    JEL: E44 G20 G21 G28 R21
    Date: 2009–02–24
  5. By: Hirofumi Uchida (Wakayama University, Faculty of Economics); Gregory F. Udell (Kelly School of Business, Indiana University); Nobuyoshi Yamori (Nagoya University, Graduate School of Economics)
    Abstract: Previous research suggests that loan officers play a critical role in relationship lending by producing soft information about SMEs. For the first time, we empirically confirm this hypothesis. We also examine whether the role of loan officers differs from small to large banks as predicted by Stein (2002). While we find that small banks produce more soft information, the capacity and manner in which loan officers produce soft information does not seem to differ between large and small banks. This suggests that, although large banks may produce more soft information, they likely tend to concentrate their resources on transactions lending.
    Keywords: Relationship lending, Small- and medium-sized enterprises, hierarchical organizations, soft information
    JEL: D82 G21 L14
    Date: 2009–02
  6. By: Nicolas Couderc; Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg)
    Abstract: This paper conducts an analysis of the relationship between CEO compensation and managerial performance on a large panel of US public firms, by taking into account the different components of CEO compensation. We estimate a stochastic frontier model in which managerial performance is related to compensation components. We find a positive and significant influence of CEO compensation on managerial performance, with a differentiated impact for components of compensation. We show that increases in salary, bonus, and options grants tend to enhance managerial performance. Our findings tend therefore to support the view that compensation contracts can be designed to increase managerial performance.
    Keywords: Executive compensation, corporate governance, stochastic frontier.
    JEL: C30 G30 J33
    Date: 2009
  7. By: Franklin Allen; Elena Carletti; Robert Marquez
    Abstract: In countries such as Germany, the legal system is such that firms are necessarily stakeholder oriented. In others like Japan social convention achieves a similar effect. We analyze the advantages and disadvantages of stakeholder-oriented firms that are concerned with employees and suppliers compared to pure shareholder-oriented firms. We show that in a context of imperfect competition stakeholder firms have higher prices and lower output than shareholder-oriented firms. Surprisingly, we also find that firms can be more valuable in a stakeholder society than in a shareholder society. With globalization stakeholder firms and shareholder firms often compete. We identify the circumstances where stakeholder firms are more valuable than shareholder firms, and compare these asymmetric equilibria with symmetric equilibria with stakeholder and shareholder firms. Finally, we show that, in some circumstances, firms may voluntarily choose to be stakeholder-oriented because this increases their value.
    Keywords: stakeholder-oriented firms, shareholder-oriented firms, firm value, globalization
    JEL: G34 D43
    Date: 2009
  8. By: Dhaene, Jan; Tsanakas, Andreas; Emiliano, Valdez; Steven, Vanduffel
    Abstract: This paper develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimisation argument, requiring that the weighted sum of measures for the deviations of the business unit’s losses from their respective allocated capitals be minimised. This enables the association of alternative allocation rules to specific decision criteria and thus provides the risk manager with flexibility to meet specific target objectives. The underlying general framework reproduces many capital allocation methods that have appeared in the literature and allows for several possible extensions. An application to an insurance market with policyholder protection is additionally provided as an illustration.
    Keywords: Capital allocation; risk measure; comonotonicity; Euler allocation; default option; Lloyd’s of London.
    JEL: G00 G20
    Date: 2009–01–23
  9. By: Hirukawa, Masayuki; Ueda, Masako
    Abstract: Policy makers typically interpret positive relations between venture capital investments and innovations as an evidence that venture capital investments stimulate innovation ('VC-first hypothesis'). This interpretation is, however, one-sided because there may be a reverse causality that innovations induce venture capital investments ('innovation-first hypothesis'): an arrival of new technology increases demands for venture capital by driving new firm startups. We analyze this causality issue of venture capital investments and innovation in the US manufacturing industry using both total factor productivity (TFP) growth and patent counts as measures of innovation. Using a panel AR regression as well as industry-by-industry AR regressions, we find that TFP growth is often positively and significantly related with future VC investment, which is consistent with the innovation-first hypothesis. We find little evidence that supports the VC-first hypothesis. More surprisingly, one-year lagged VC investments are often negatively and significantly related with both TFP growth and patent counts.
    Keywords: Innovation; Venture Capital
    JEL: D24 G24 O31 O32
    Date: 2008–12
  10. By: Jappelli, Tullio; Pagano, Marco
    Abstract: The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets.
    Keywords: EMU; financial market integration
    JEL: G20
    Date: 2008–12
  11. By: Kelly, Bryan; Ljungqvist, Alexander P
    Abstract: Theoretical asset pricing models routinely assume that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using plausibly exogenous variation in the supply of information caused by the closure or restructuring of brokerage firms' research operations. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors' demands fall as information asymmetry increases. Cross-sectional tests support the comparative statics. Prices and uninformed demand experience larger declines, the more investors are uninformed, the larger and more variable is turnover, the more uncertain is the asset's payoff, and the noisier is the better-informed investors' signal. We show that prices fall because expected returns become more sensitive to a liquidity-risk factor. Our results imply that information asymmetry has a substantial effect on asset prices and that a primary channel linking asymmetry to prices is liquidity.
    Keywords: analyst coverage; Asymmetric-information asset pricing; liquidity
    JEL: G12 G14 G24
    Date: 2009–02
  12. By: Bodnaruk, Andriy; Massa, Massimo; Simonov, Andrei
    Abstract: We study holdings in M&A targets by financial conglomerates which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before M&A announcements. These stakes are positively related to the probability of observing the bid and to the target premium. We argue that this can be explained in terms of advisors, privy to important information about the deal, investing in the target in the expectation of its price to increase. We document the high profits of this strategy. We also document a positive relationship between the advisory stake and the deal characteristics. The advisory stake is positively related to the likelihood of deal completion and to the termination fees. However, these deals are not wealth-creating: there is a negative relation between the advisory stake and the viability of the deal. These results provide new insights into the conflicts of interest affecting financial intermediaries simultaneously advising on deals and investing in equities.
    Keywords: insider trading; mergers and acquisitions; risk arbitrage
    JEL: G23 G32 G34
    Date: 2008–09
  13. By: Bovenberg, A Lans; Teulings, Coen N
    Abstract: We argue in favour of the shareholder model of the firm for three main reasons, First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle between the stakeholders about the ultimate goal of the company. In many cases, the vague Rhineland principles no longer offer much protection to workers. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs, which harms the position of job seekers, including new entrants to the labour market. Third, and most importantly, making shareholders the ultimate owner of the firm provides the best possible diversification of firm- specific risks. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. Diversification of this risk on the capital market is an efficient form of social insurance. Reducing the claims of workers on the surplus of the firm can be seen as the next step in the emancipation of workers. Workers derive their security not from the firm that employs them but from the value of their own human capital. In such a world, global trade in corporate control, global competition and creative destruction associated with these developments are more legitimate. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm’s surplus, thereby protecting workers against firm-specific risks. Indeed, in Denmark, workers bear less firm- specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. This is why corporate governance legislation that gives moral legitimacy to the claim of insiders on the surplus of the firm is damaging. The transition from the Rhineland model (in which management serves the interests of all stakeholders) towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights without benefiting from increased job creation and higher starting wages. Whereas the claims of older workers on the surplus of a firm may thus have some legitimacy, younger cohorts should be denied such moral claims. These problems require extreme political skill to solve. In particular, they may require some grandfathering provisions or temporary explicit transfers from younger to older generations.
    Keywords: corporate governance; employment protection; optimal risk sharing; wagesetting
    JEL: E24 G32 G34
    Date: 2008–08
  14. By: Audretsch, David B; Bönte, Werner; Mahagaonkar, Prashanth
    Abstract: Innovative new ventures fail if they cannot attract resources needed to commercialise new ideas and inventions. Obtaining external resources is a central issue for nascent entrepreneurs - people who are in the process of starting new ventures. We argue in this paper that, a way to deal with this problem is to signal appropriability and feasibility of innovation to the financiers through patenting and prototyping activities, right in the early stages of the venture. We build a new dataset of over 900 nascent entrepreneurs with information on financing from conventional sources as well as business angels and venture capitalists. Our results suggest that patenting and prototyping increase the likelihood of obtaining external finance, especially equity. However, the most important determinant of debt is house ownership. This indicates that new start-ups need to protect their innovations and at the same time, should also prototype the intended product in order to obtain start-up finance. New ventures should therefore strategically use their innovativeness in order to obtain external finance.
    Keywords: Entrepreneurship; Finance; Information Asymmetries; Innovation
    JEL: G14 G24 G32 L26 M13 O34
    Date: 2009–02
  15. By: Barrios, Salvador; Huizinga, Harry; Laeven, Luc; Nicodeme, Gaetan
    Abstract: Using a large international firm-level data set, we estimate separate effects of host and parent country taxation on the location decisions of multinational firms. Both types of taxation are estimated to have a negative impact on the location of new foreign subsidiaries. In fact, the impact of parent country taxation is estimated to be relatively large, possibly reflecting its international discriminatory nature. For the cross-section of multinational firms, we find that parent firms tend to be located in countries with a relatively low taxation of foreign-source income. Overall, our results show that parent-country taxation – despite the general possibility of deferral of taxation until income repatriation – is instrumental in shaping the structure of multinational enterprise.
    Keywords: corporate taxation; dividend withholding taxation; location decisions
    JEL: F23 G32 H25 R38
    Date: 2008–11
  16. By: Bortolotti, Bernardo; Cambini, Carlo; Rondi, Laura; Spiegel, Yossi
    Abstract: We construct a comprehensive panel data of 92 publicly traded European utilities over the period 1994-2005 in order to study the relationship between capital structure, regulated prices, and firm value, and examine if and how this interaction is affected by ownership structure and regulatory independence. We show that regulated firms in our sample tend to have a higher leverage if they are privately-controlled and if they are regulated by an independent regulatory agency. Moreover, we find that the leverage of these firms has a positive and significant effect on their regulated prices, but not vice versa, and it also has a positive and significant effect on their market values. Our results are consistent with the theory that privately-controlled firms use leverage strategically to shield themselves against regulatory opportunism.
    Keywords: capital structure; leverage; private and state ownership; Regulated utilities; regulatory agencies; regulatory independence
    JEL: G31 G32 L33
    Date: 2008–12

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