nep-cfn New Economics Papers
on Corporate Finance
Issue of 2013‒10‒18
nine papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements By Michel Blanchette; François-Éric Racicot; Komlan Sedzro
  2. Bank lending strategy, credit scoring and financial crises By Kleimeier S.; Dinh T.H.T.; Straetmans S.T.M.
  3. Risk allocation under liquidity constraints By Herings P.J.J.; Csóka P.
  4. Do Firms Issue More Equity When Markets Are More Liquid? By Stulz, Rene M.; Vagias, Dimitrios; Van Dijk, Mathijs A.
  5. CEO Investment Cycles By Pan, Yihui; Wang, Tracy Yue; Weisbach, Michael S.
  6. Limited Managerial Attention and Corporate Aging By Loderer, Claudio F.; Stulz, Rene M.; Waelchli, Urs
  7. Corporate Liquidity Management: A Conceptual Framework and Survey By Almeida, Heitor; Campello, Murillo; Cunha, Igor; Weisbach, Michael S.
  8. Market-Based Bank Capital Regulation By Bulow, Jeremy; Klemperer, Paul
  9. Corporate Governance, Incentives, and Tax Avoidance By Armstrong, Christopher S.; Blouin, Jennifer L.; Jagolinzer, Alan D.; Larcker, David F.

  1. By: Michel Blanchette (Université du Québec en Outaouais); François-Éric Racicot (Telfer School of Management at the University of Ottawa); Komlan Sedzro (École des sciences de la gestion à Université du Québec à Montréal)
    Abstract: International Financial Reporting Standards (IFRS) has become the new dominant set of accounting standards; however the transition to the new regime may be fairly disruptive for users of financial statements as comparability and trend analysis may be impaired. The objective of this study is to impart evidence of the impact of IFRS adoption in Canada on financial statement figures and ratios of publicly-traded companies. The analysis is based on the comparison of accounting figures and financial ratios computed under IFRS and pre-changeover Canadian GAAP (CGAAP) for the same period using a sample of 150 Canadian companies listed on the Toronto Stock Exchange which mandatory adopted IFRS in 2011. Empirical tests are conducted to identify the main areas of differences and investigate specific effects related to company’s industry affiliation and auditor. The results of the analysis indicate that at the aggregate level IFRS adoption does not significantly change the central values that describe the financial position and performance of Canadian companies reported in financial statements. However, differences between individual IFRS and CGAAP values can be large, particularly in the balance sheet, and are not randomly distributed across industries. Moreover, the volatility of financial statement figures is higher in IFRS than in CGAAP. The study concludes that databases built from aggregated accounting information may generally be consistent in IFRS and CGAAP whereas cash flows may be relied on to avoid the subjectivity inherent to accounting adjustments.
    Keywords: International Financial Reporting Standards, IFRS, Canadian Generally Accepted Accounting Principles, CGAAP, Financial Statements, Financial Ratios, IFRS Adoption, Balance sheet, Income statement, Assets, Liabilities, Shareholder's equity, non-controlling interest
    JEL: M41 M48 G10 G14 G17
    Date: 2013–10
  2. By: Kleimeier S.; Dinh T.H.T.; Straetmans S.T.M. (GSBE)
    Abstract: Adverse selection inherent in the bank-borrower relationship typically intensifies during crises. This problem is expecially severe in emerging markets, characterized by weak institutions and banks with poorly developed monitoring and screening abilities. Exploiting a unique sample of Vietnamese loans, we show that by updating their credit scoring models banks can significantly improve their screening abilities. Our results suggest that a crisis fundamentally changes default patterns and that a model based on post-crisis data outperforms models based on pre-crisis data. We conclude that updating credit scoring models is a viable alternative to credit rationing for banks and, in combination with relationship lending, can lead to improved loan pricing, efficiency and profitability.
    Keywords: Financial Markets and the Macroeconomy; Banks; Depository Institutions; Micro Finance Institutions; Mortgages; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance;
    JEL: E44 G21 O16
    Date: 2013
  3. By: Herings P.J.J.; Csóka P. (GSBE)
    Abstract: Risk allocation games are cooperative games that are used to attribute the risk of a financial entity to its divisions. In this paper, we extend the literature on risk allocation games by incorporating liquidity considerations. A liquidity policy specifies state-dependent liquidity requirements that a portfolio should obey. To comply with the liquidity policy, a financial entity may have to liquidate part of its assets, which is costly. The definition of a risk allocation game under liquidity constraints is not straight-forward, since the presence of a liquidity policy leads to externalities. We argue that the standard worst case approach should not be used here and present an alternative definition. We show that the resulting class of transferable utility games coincides with the class of totally balanced games. It follows from our results that also when taking liquidity considerations into account there is always a stable way to allocate
    Keywords: Cooperative Games; General Financial Markets: General (includes Measurement and Data);
    JEL: C71 G10
    Date: 2013
  4. By: Stulz, Rene M. (OH State University and ECGI, Brussels); Vagias, Dimitrios (Erasmus University Rotterdam); Van Dijk, Mathijs A. (Erasmus University Rotterdam)
    Abstract: This paper investigates how public equity issuance is related to stock market liquidity. Using quarterly data on IPOs and SEOs in 36 countries over the period 1995-2008, we show that equity issuance is significantly and positively related to contemporaneous and lagged innovations in aggregate local market liquidity. This relation survives the inclusion of proxies for market timing, capital market conditions, growth prospects, asymmetric information, and investor sentiment. Liquidity considerations are as important in explaining equity issuance as market timing considerations. The relation between liquidity and issuance is driven by the quarters with the greatest deterioration in liquidity and is stronger for IPOs than for SEOs. Firms are more likely to carry out private instead of public equity issues and to postpone public equity issues when market liquidity worsens. Overall, we interpret our findings as supportive of the view that market liquidity is an important determinant of equity issuance that is distinct from other determinants examined to date.
    JEL: F30 G15 G32
    Date: 2013–07
  5. By: Pan, Yihui (University of UT); Wang, Tracy Yue (University of MN, Twin Cities); Weisbach, Michael S. (OH State University)
    Abstract: This paper documents the existence of a CEO Investment Cycle, in which firms disinvest early in a CEO's tenure and increase investment subsequently, leading to "cyclical" firm growth in assets as well as in employment over CEO tenure. The CEO investment cycle occurs for both firings and non-performance related CEO turnovers, and for CEOs with different relationships with the firm prior to becoming CEO. The magnitude of the CEO cycle is substantial: The estimated difference in investment rate between the first three years of a CEO's tenure and subsequent years is approximately 6 to 8 percentage points, which is of the same order of magnitude as the differences caused by other factors known to affect investment, such as business cycles or financial constraints. We present a variety of tests suggesting that this investment cycle is best explained by a combination of agency-based theories: Early in his tenure the CEO disinvests poorly performing assets that his predecessor established and was unwilling to give up on. Subsequently, the CEO overinvests when he gains more control over his board. There is no evidence that the investment cycles occur because of shifting CEO skill or productivity shocks. Overall, the results imply that public corporations' investments deviate substantially from the first-best, and that governance-related factors internal to the firm are as important as economy-wide factors in explaining firms' investments.
    JEL: G32 G34 M12 M51
    Date: 2013–08
  6. By: Loderer, Claudio F. (Institute for Financial Management, University of Bern); Stulz, Rene M. (OH State University and ECGI, Brussels); Waelchli, Urs (Institute for FInancial Management, University of Bern)
    Abstract: As firms have more assets in place, more of management's limited attention is focused on managing assets in place rather than developing new growth options. Consequently, as firms grow older, they have fewer growth options and a lower ability to generate new growth options. This simple theory predicts that Tobin's q falls with age. Further, competition in the product market is expected to slow down the decrease in Tobin's q because it forces firms to look for alternative sources of rents. Similarly, greater competition in the labor market reduces the decrease in Tobin's q with age because old firms are in a better position to hire employees that can help with innovation. In contrast, competition in the market for corporate control should accelerate the decline because it forces management to focus more on managing assets in place whose performance is more directly observable than on developing growth options where results may not be observable for some time. We find strong support for these predictions in tests using exogenous variation in competition.
    JEL: G30 L20
    Date: 2013–09
  7. By: Almeida, Heitor (University of IL); Campello, Murillo (Cornell University); Cunha, Igor (New University of Lisbon); Weisbach, Michael S. (OH State University)
    Abstract: Ensuring that a firm has sufficient liquidity to finance valuable projects that occur in the future is at the heart of the practice of financial management. Yet, while discussion of these issues goes back at least to Keynes (1936), a substantial literature on the ways in which firms manage liquidity has developed only recently. We argue that many of the key issues in liquidity management can be understood through the lens of a framework in which firms face financial constraints and wish to ensure efficient investment in the future. We present such a model and use it to survey many of the empirical findings on liquidity management. Much of the variation in the quantity of liquidity can be explained by the precautionary demand for liquidity. While there are alternatives to cash holdings such as hedging or lines of credit, cash remains "king", in that it still is the predominate way in which firms ensure future liquidity for future investments. We discuss theories on the choice of liquidity measures and related empirical evidence. In addition, we discuss agency-based theories of liquidity, the real effects of liquidity choices, and the impact of the 2008-9 Financial Crisis on firms' liquidity management.
    JEL: G31 G32
    Date: 2013–10
  8. By: Bulow, Jeremy (Stanford University); Klemperer, Paul (University of Oxford)
    Abstract: Today's regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is "ERNs" (equity recourse notes--superficially similar to, but importantly distinct from, "cocos") which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being "right".
    JEL: G10 G21 G28 G32
    Date: 2013–08
  9. By: Armstrong, Christopher S. (University of PA); Blouin, Jennifer L. (University of PA); Jagolinzer, Alan D. (University of CO); Larcker, David F. (Stanford University)
    Abstract: This paper examines the link between corporate governance, managerial incentives, and tax avoidance. Similar to other investment opportunities, unresolved agency problems may cause managers to over- or under-invest in tax avoidance relative to the preferences of shareholders. Using quantile regression, we find that the impact of corporate governance on tax avoidance is most pronounced in the upper and lower tails of the tax avoidance distribution, but not at the mean or median of this distribution. Specifically, we find a positive relation between the financial sophistication and independence of boards and tax avoidance in the upper tail of the tax avoidance distribution, but a negative relation in the lower tail of the tax avoidance distribution. However, we find no relation between corporate governance and tax avoidance and either the conditional mean or median of the tax avoidance distribution. These results suggest that corporate governance tends to decrease extremely high levels of tax avoidance and increase extremely low levels of tax avoidance, which may be symptomatic of over- and under-investment, respectively, by managers. Our results also suggest that inferences about these relations that are drawn from the conditional mean and median and unlikely to be representative across the entire tax avoidance distribution.
    JEL: G34 H25 H26 K34 M41
    Date: 2013–04

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