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on Corporate Finance |
| By: | Toshihiro Okada (School of Economics, Kwansei Gakuin University); Kohei Daido (School of Economics, Kwansei Gakuin University) |
| Abstract: | Some firms may exhibit better operating performance than others because they undertake riskier projects: risk-return tradeoff. We develop a model to examine the effects of financial contracts on a firm's choice between safer (lower risk, lower return) and riskier (higher risk, higher return) projects. The model shows that, assuming a competitive capital market (i.e., financiers with no monopoly power), three types of financial contracts can each be an equilibrium contract, depending on conditions. We show that firms undertake ''safer'' projects when using rollover loans (i.e., short-term loans with a possible rollover), while firms undertake ''riskier'' projects when using non-rollover loans (i.e., long-term loans) or new share issues. The model emphasizes the role of rollover loans (with passive monitoring) as a potential disciplinary device to suppress a firm's risk-taking. The model generates several predictions about the determinants of a firm's risk-taking and its performance. One key prediction of the model is that (risk-neutral) firms with closer bank relationships are more likely to use rollover loans and undertake ''safer'' projects, even with a contestable capital market. We find novel empirical support for the model's predictions. |
| Keywords: | corporate finance, corporate governance, firm risk-taking, firm performance, loan rollover |
| JEL: | G32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:45&r=cfn |
| By: | Fausto Panunzi (Università Bocconi); Andrew Ellul (Indiana University); Marco Pagano (University of Naples Federico II, CSEF, EIEF and CEPR) |
| Abstract: | Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance law affects investment only in family firms that experience a succession. |
| Keywords: | Succession, Family Firms, Inheritance Law, Growth, Investment |
| JEL: | G32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.6&r=cfn |
| By: | Eric VERNIER (labrii, ULCO); Aymeric BOUCHIE DE BELLE (labrii, ULCO) |
| Abstract: | Dans un contexte de crise, il est facile de perdre ses repères, et les comportements irrationnels actuels, la panique généralisée des investisseurs le démontrent. Alors que de nombreuses cessations de paiement des ménages américains étaient constatées depuis plusieurs mois, de nombreux investisseurs ont continué à acheter des produits liés au marché des subprimes. Une lecture de l’histoire financière souligne le caractère récurrent et global des anomalies de marché. Le présent article cherche à savoir en quoi de bons résultats financiers passés influencent l’aversion au risque d’un investisseur. In a context of crisis, it is easy to lose its points of reference; the current irrational behaviours and the general panic of investors demonstrate it. While for sevenal months, many american households have been unable to meet their financial obligation, some investors have kept on buying financial products linked to the market of the subprimes. An interpretation of the financial history underlines the recurring and global character of the markets' abnormalities. The present article tries to know how good financial results achieved in the past can influence the investor’s risk aversion. |
| Keywords: | irrational behaviors, financial history, investor’s risk aversion |
| JEL: | G14 G19 O16 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:rii:riidoc:209&r=cfn |
| By: | William L. Megginson (Price College of Business); Bernardo Bortolotti (Fondazione Eni Enrico Mattei and Università di Torino); Veljko Fotak (University of Oklahoma and Fondazione Eni Enrico Mattei); William Miracky (Monitor Group) |
| Abstract: | This study describes the newly created Monitor-FEEM Sovereign Wealth Fund Database and discusses the investment patterns and performance of 1,216 individual investments, worth over $357 billion, made by 35 sovereign wealth funds (SWFs) between January 1986 and September 2008. Approximately half of the investments we document occur after June 2005, reflecting a recent surge of SWF activity. We document large SWF investments in listed and unlisted equity, real estate, and private equity funds, with the bulk of investments being targeted in cross-border acquisitions of sizeable but non-controlling stakes in operating companies and commercial properties. The average (median) SWF investment is a $441 million ($55 million) acquisition of a 42.3% (26.2%) stake in an unlisted company; the most active SWFs originate from Singapore or the United Arab Emirates. Almost one-third (30.9%) of the number, and over half of the value (54.6%) of SWF investments are directed toward financial firms. The vast majority of SWF investments involve privately-negotiated purchases of ownership stakes in underperforming firms. We perform event study analysis using a sample of 235 SWF acquisitions of equity stakes in publicly traded companies around the world, and document a significantly positive mean abnormal return of about 0.9% around the announcement date. However, one-year matched-firm abnormal returns of SWFs average -15.49%, suggesting equity acquisitions by SWFs are followed by deteriorating firm performance. In cross sectional analysis, we find weak evidence of benefits associated with a monitoring role of SWFs and evidence consistent with agency costs created by conflicts of interest between SWFs and minority shareholder. SWFs have collectively lost over $57billion on their holdings of listed stock investments alone through March 2009. |
| Keywords: | Sovereign Wealth Funds, International Financial Markets, Government Policy and Regulation |
| JEL: | G32 G15 G38 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.22&r=cfn |
| By: | Heitor Almeida; Sang Yong Park; Marti Subrahmanyam; Daniel Wolfenzon |
| Abstract: | In this paper we study the determinants of business groups' ownership structure using unique panel data on Korean chaebols. In particular, we attempt to understand how pyramids form over time. We find that chaebols grow vertically (that is, pyramidally) as the family uses well-established group firms ("central firms") to set up and acquire younger firms that have low profitability and high capital requirements. Chaebols grow horizontally (that is, using direct family ownership) when the family acquires firms that are highly profitable and require less capital. Our evidence suggests that the (previously documented) lower profitability of pyramidal firms is partly due to a selection effect (e.g., the family optimally places low profitability firms in pyramids). To show this, we examine instances of large changes in the ownership structure of group firms. Specifically, we find that poor past performance predicts an increase in the degree of pyramiding in a firm's ownership structure. Most compellingly, we find that the profitability of new group firms in the year before they are added to the group predicts whether they are added to pyramids or controlled directly by the family. We also examine the relative valuation of chaebol firms. We find that the group's central firms trade at a discount relative to other public group firms possibly due to the selection of low-profitability, high capital intensity firms into pyramids. Our results shed light on the process by which pyramids form, and provide new evidence on the performance and valuation of business group firms. |
| JEL: | G32 G34 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14983&r=cfn |
| By: | Bruce I. Carlin; Simon Gervais |
| Abstract: | Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, what legal rules maximize social welfare in the market? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they service clients in the market. All participants in the market are rational, and prices are set based on consistent beliefs about equilibrium actions of the firm and the broker. We characterize the optimal law within our modeling context, and derive how the legal system splits the blame between parties to the transaction. We also analyze how complexity in assessing clients and conflicts of interest affect the law. Since these markets are large, the implications of the analysis have great welfare import. |
| JEL: | G18 K2 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14972&r=cfn |