nep-cfn New Economics Papers
on Corporate Finance
Issue of 2013‒06‒16
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. The Concurrent Impact of Cultural, Political, and Spatial Distances on International Mergers and Acquisitions By MC. Di Guardo; E. Marrocu; R. Paci
  2. Do Acquisitions Relieve Target Firms' Financial Constraints? By Erel, Isil; Jang, Yeejin; Weisbach, Michael S.
  3. Brand Capital and Firm Value By Belo, Frederico; Lin, Xiaoji; Vitorino, Maria Ana
  4. Learning about CEO Ability and Stock Return Volatility By Pan, Yihui; Wang, Tracy Yue; Weisbach, Michael S.
  5. Estimating Default and Recovery Rate Correlations By Jiri Witzany

  1. By: MC. Di Guardo; E. Marrocu; R. Paci
    Abstract: The paper explores the concurrent effects of cultural, political, and spatial distances on M&A flows occurring between any two countries belonging to the whole European Union (27 States) or to the European Neighbors group (16 States) over the period 2000-2011 . By employing zero-inflated negative binomial specifications, entailing both a binary and count process, we adequately model the two different mechanisms which may generate zero observations in the cross-border bilateral deals. Zeros may be due to either the lack of any transactions or unsuccessful negotiations. We find robust evidence that the multi-dimensional distance between two countries negatively affects the probability that they will engage in M&A deals, while the recurrence rate of these deals is positively related to population, gross domestic product, and technological capital and negatively related to geographical distance.
    Keywords: european neighboring countries, Cross-border M&As, cultural and political distances, geographical distance, European Union, zero-inflated models
    JEL: G34 F23 C31
    Date: 2013
  2. By: Erel, Isil (OH State University); Jang, Yeejin (OH State University); Weisbach, Michael S. (OH State University)
    Abstract: Managers often claim that an important source of value in acquisitions is the acquiring firm's ability to finance investments for the target firm. This claim implies that targets are financially constrained prior to being acquired and that these constraints are eased following the acquisition. We evaluate these predictions on a sample of 5,187 European acquisitions occurring between 2001 and 2008, for which we can observe the target's financial policies both before and after the acquisition. We examine whether target firms' post-acquisition financial policies reflect improved access to capital. We find that the level of cash target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline significantly, while investment significantly increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. While the evidence does not speak to whether easing of financial frictions is a pervasive motive for acquisitions, it is consistent with the view that acquisitions ease financial frictions in target firms, especially when the target firm is relatively small.
    JEL: G32 G34 L20
    Date: 2013–05
  3. By: Belo, Frederico (University of MN); Lin, Xiaoji (OH State University); Vitorino, Maria Ana (University of MN)
    Abstract: We study the role of brand capital--a primary form of intangible capital--for firm valuation and risk in the cross section of publicly traded firms. Using a novel empirical measure of brand capital stock constructed from advertising expenditures accounting data, we show that: (i) firms with low brand capital investment rates have higher average stock returns than firms with high brand capital investment rates, a difference of 5.2% per annum; (ii) more brand capital intensive firms have higher average stock returns than less brand capital intensive firms, a difference of 5.1% per annum; and (iii) investment in both brand capital and physical capital is volatile and procyclical. A neoclassical investment-based model in which brand capital is a factor of production subject to adjustment costs matches the data well. The model also provides a novel explanation for the empirical links between advertising expenditures and stock returns around seasoned equity offerings (SEO) documented in previous studies.
    JEL: E32 G12
    Date: 2013–03
  4. By: Pan, Yihui (University of UT); Wang, Tracy Yue (University of MN, Twin Cities); Weisbach, Michael S. (OH State University)
    Abstract: When there is uncertainty about a CEO's quality, news about the firm causes rational investors to update their expectation of the firm's profitability for two reasons: Updates occur because of the direct effect of the news, and also because the news can cause an updated assessment of the CEO's quality, affecting expectations of his ability to generate future cash flows. As a CEO's quality becomes known more precisely over time, the latter effect becomes smaller, lowering the stock price reaction to news, and hence lowering the stock return volatility. Thus, in addition to uncertainty about fundamentals, uncertainty about CEO quality is also a source of stock return volatility, which decreases over a CEO's tenure as the market learns the CEO's quality more accurately. We formally model this idea, and evaluate its implications using a large sample of CEO turnovers in U.S. public firms. Our estimates indicate that there is statistically significant and economically important market learning about CEO ability, even for CEOs whose appointments appear to be unrelated to their predecessors' performance. Also consistent with the learning model is the fact that the learning curve appears to be convex in time, and learning is faster when there is higher ex ante uncertainty about the CEO's ability and more transparency about the firm's prospects. Overall, uncertainty about management quality appears to be an important source of stock return volatility.
    JEL: G32 G34 M12 M51
    Date: 2013–02
  5. By: Jiri Witzany (University of Economics in Prague)
    Abstract: The paper analyzes a two-factor credit risk model allowing to capture default and recovery rate variation, their mutual correlation, and dependence on various explanatory variables. At the same time, it allows computing analytically the unexpected credit loss. We propose and empirically implement estimation of the model based on aggregate and exposure level Moody’s default and recovery data. The results confirm existence of significantly positive default and recovery rate correlation. We empirically compare the unexpected loss estimates based on the reduced two-factor model with Monte Carlo simulation results, and with the current regulatory formula outputs. The results show a very good performance of the proposed analytical formula which could feasibly replace the current regulatory formula.
    Keywords: credit risk, Basel II regulation, default rates, recovery rates, correlation
    JEL: G20 G28 C51
    Date: 2013–04

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