nep-cfn New Economics Papers
on Corporate Finance
Issue of 2014‒11‒07
four papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&D Tax Credits By Falato, Antonio; Sim, Jae W.
  2. Are Sovereign Wealth Funds contrarian investors? By Alessio Ciarlone; Valeria Miceli
  3. When do firms invest in corporate social responsibility? A real option framework By Cassimon, Danny; Engelen, Peter-Jan; Van Liedekerke, Luc
  4. Pay increase may not be a strong incentive for undertaking acquisitions By Swarnodeep Homroy

  1. By: Falato, Antonio (Board of Governors of the Federal Reserve System (U.S.)); Sim, Jae W. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper uses the staggered changes of R&D tax credits across U.S. states and over time as a quasi-natural experiment to examine the impact of innovation on corporate liquidity. By generating plausibly independent variation in firms' incentive to invest in R&D, we are able to assess the empirical importance of specific theories of the link between innovation and corporate liquidity. Firms increase (decrease) their cash to asset ratios by about one and a half percentage point when their home state increases (cuts) R&D tax credits. These baseline difference-in-differences estimates hold up to a battery of validation, falsification, and robustness checks, which corroborate their internal and external validity. The treatment effect of R&D tax credits increases monotonically with several specific proxies for debt and equity financing frictions. Increases (cuts) in tax credits also lead to increases (decreases) in the ratios of cash to bank lines of credit and to book equity, and to decreases (increases) in bank debt, secured debt, and overall net indebtness, supporting debt and equity financing channels through which innovation impacts the demand for cash. We also find support for a product market competition channel, and assess repatriation and agency explanations. Overall, our analysis offers endogeneity-free evidence that innovation is a first-order driver of corporate liquidity management decisions.
    Keywords: Determinants of corporate cash holdings; financial economics of innovation
    Date: 2014–05–21
  2. By: Alessio Ciarlone (Banca d'Italia); Valeria Miceli (Università Cattolica del Sacro Cuore)
    Abstract: This paper investigates the determinants of the investment activity of Sovereign Wealth Funds (SWFs) at a macro level, with special emphasis on the possible reaction to a financial crisis in a potential target economy. The analysis relies upon a specially built proprietary database, which encompasses 1,903 acquisition deals spanning the period 1995-2010 and involving 29 out of the 69 existing SWFs. According to a three-step modelling approach, we find that this class of investors prefers to invest in countries with a higher degree of economic development, larger and more liquid financial markets, institutions that offer better protection of legal rights, and a more stable macroeconomic environment. Most importantly, and in stark contrast with the existing empirical literature on other major institutional investors, SWFs seem to engage in ‘contrarian’ investment behaviour, i.e. increasing their acquisitions in countries where crises hit. The results are shown to be valid if we consider both the likelihood of a country being the target of SWFs’ investments and the amount SWFs choose to invest in each country. Capital flows stemming from SWFs’ acquisition activity worldwide may therefore eventually have a stabilizing effect on local markets during periods of financial turmoil, protecting the targeted countries from foreign shocks instead of propagating them globally.
    Keywords: Sovereign Wealth Funds, cross-border investment, acquisition determinants, contrarian, financial crises
    JEL: F21 G01 G15 G23 G34
    Date: 2014–09
  3. By: Cassimon, Danny; Engelen, Peter-Jan; Van Liedekerke, Luc
    Abstract: In this paper, the process for firms to decide whether or not to invest in corporate social responsibility is treated from a real option perspective. We extend the Husted (2005) framework with an important extra parameter that allows us to understand the timing of CSR investment and explain why some companies drag their feet over CSR investments. Our model explicitly allows for the impact of the opportunity cost of delaying the CSR investment decision, providing firms with tools to determine the optimal moment of exercising the CSR investment option. We illustrate our timing model through a case study and analyze governmental support strategies for CSR from a real options perspective.
    Keywords: real options; CSR; stakeholder management; reputational risk; optimal timing
    JEL: D81 G13 G31 M14 K42
    Date: 2014–10
  4. By: Swarnodeep Homroy
    Abstract: A large body of literature suggests that CEOs have misaligned incentives to undertake acquisitions in an attempt to increase their pay. This paper shows that the likelihood of post-acquisition CEO turnover can act as a constraint on such incentives. The acquisition premium in pay decreases by 50% if the likelihood of post-acquisition turnover is controlled for. This suggests a significant survivor bias in previous estimates of acquisition premium. Given a smaller pay premium for undertaking acquisitions and non-zero risk of dismissal, a risk-averse agent may not have strong incentives to undertake an acquisition for the marginal pay increase. The likelihood of dismissal seems to carry stronger incentive effects than post-acquisition pay increase.
    Keywords: Agency problem, mergers and acquisitions, CEO pay, Severance
    JEL: G34 J31 J33 M52
    Date: 2014

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