nep-cfn New Economics Papers
on Corporate Finance
Issue of 2014‒11‒22
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Introduction of innovations during the 2007-8 financial crisis: US companies compared with universities By Waters, James
  2. Stock Market Reactions to Announcements of Board of Director Appointments: Evidence from Italy By Rossi, Fabrizio; Cebula, Richard
  3. Capital Structure Arbitrage revisited By Marcin Wojtowicz
  4. Do Election Results Affect the Value of Politically Connected Firms? - The Effect of the Schroeder-Merkel Change of Government on German Prime Standard Firms By Elmar A. Janssen
  5. Are banks’ below-par own debt repurchases a cause for prudential concern? By Lubberink, Martien
  6. Credit risk measurement, leverage ratios and Basel III: proposed Basel III leverage and supplementary leverage ratios By Ojo, Marianne
  7. Female Managers in Hybrid Organizations: Evidence from Financial Cooperatives in Senegal By Anaïs PERILLEUX; Ariane SZAFARZ
  8. The development of capital market and its impact on providing alternative sources of business financing: Empirical analysis By Govori, Fadil
  9. Interrelationship between taxes, capital structure decisions and value of the firm: A panel data study on Indian manufacturing firms By Sinha, Pankaj; Bansal, Vishakha

  1. By: Waters, James
    Abstract: Financing innovation presents informational and control problems for the financier, and different solutions are used for funding of US companies and universities. In this paper we examine how funding characteristics influenced the change in innovation during the 2007-8 financial crisis for both. We extend prior theories of external financing’s effect on company performance during crises, firstly to university performance, and secondly to show the influence of time variation in aggregate funding. Empirical results are consistent with our theory: external dependence and asset intangibility had a limited effect on company innovation on entering the crisis, but increased university innovation. Overall, however, company patenting was more robust than university patenting, despite the out-performance being masked by respective portfolio characteristics.
    Keywords: Innovation; patenting; economic crisis; financing constraint
    JEL: G32 L14 O31
    Date: 2014–10–01
  2. By: Rossi, Fabrizio; Cebula, Richard
    Abstract: The Board of Directors plays an important role in corporate governance. It is an internal mechanism that controls and monitors the actions of managers and aligns the utility functions between corporate owners and managers. The board of directors performs multiple functions that concern, for example, the replacement of the managers, financial policy, the preparation of strategic plans, and other actions that affect the performance of the firm. The board plays an important role since on the one hand it controls the actions of management and on the other it advises management regarding the strategies to be adopted. In this study, 100 announcements for the appointment to the board of directors of 100 Italian listed public companies during the period 2012-2014 are investigated. The results show a positive reaction within 20 days around the announcement date of the appointments. In four of the six study periods, Cumulative Abnormal Returns (CARs) are positive and statistically significant. The difference between the sub-sample composed of a higher presence of women, non-executives, and independents on the Board of Directors does not seem to perform better than the one composed of a smaller presence of women, non-executives, and independents.
    Keywords: stock market reactions; rates of return; announcements of boards of directors
    JEL: G10 G30 G32
    Date: 2013–09–05
  3. By: Marcin Wojtowicz (VU University Amsterdam, the Netherlands)
    Abstract: We study risk and return properties of capital structure arbitrage strategies aiming to profit from temporal mispricing between equity and credit default swaps (CDSs) of companies. We find that capital structure arbitrage provides an attractive annualized return of 24.35% on invested capital. The arbitrage returns are higher for lower rated companies and surprisingly they are also higher for more liquid companies with larger CDS trading volumes. We find that the number of arbitrage trade opportunities can at times cluster and in our sample the concentration of trades occurs when they are most profitable, which highlights the issue of capital allocation. Constructing weekly return indices of capital structure arbitrage, we find that no more than 15% of the returns is explained by common risk factors.
    Keywords: Capital structure arbitrage, credit defaults swaps, equities, limits to arbitrage
    JEL: G11 G12 G14 G19
    Date: 2014–10–20
  4. By: Elmar A. Janssen (University of Paderborn)
    Abstract: This study applies event study methodology to the outcomes of the 2005 election of the German Bundestag. Results are compared to those of Goldman, Rocholl and So (2009) who found that following the 2000 presidential election in the US, value effects were positive for firms connected to the Republicans and significantly different from the negative ones of firms connected to the Democrats. The present study shows that, contrary to expectations, political connections had little impact on the value of politically connected corporations among the companies listed at the DAX, MDAX, SDAX or TecDAX. The key results of this study are: First, there is a significantly smaller fraction of politically connected firms in Germany than in the US. Second, following the start of the exploratory talk and the inauguration of the new government, politically connected companies generate about 0.7 and 1.2 percent higher abnormal returns, respectively. Finally, while there is no significant impact of the election results on the returns of companies with political connections with respect to other different characteristics, there is slight support that connections to the federal parliament are more valuable than those to the state parliaments. The different reactions of the US and the German Stock Market are likely to occur due to the different corporate governance systems. Nearly all identified political connections in the present study are based on memberships on the supervisory board which duties are to give advice and control.
    Keywords: corporate governance, two tier system, political connectedness, firm value, event study
    JEL: J53 G14 G34 G38 L14
    Date: 2014–07
  5. By: Lubberink, Martien
    Abstract: In the lead-up to the implementation of Basel III, European banks bought back debt securities that traded at a discount. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that the accounting and prudential rules exclude from regulatory capital calculations, this to safeguard the safety and soundness of the banking system. For a sample of 720 European LMEs conducted from April 2009 to December 2013, I show that banks lost about 9.3 billion euros in premiums to compensate investors for parting from their debt securities. This amount would have been recognized as Core Tier 1 regulatory capital, if regulation would accept the recognition of fair value gains on debt. The premiums paid are particularly high for the most loss absorbing capital securities. More importantly, the premiums increase with leverage and in times of stress, right when conserving cash is paramount to preserve the safety and soundness of the banking system. These results weaken the case of the exclusion from regulatory capital of unrealized gains that originate from a weakened own credit standing.
    Keywords: Banking, repurchases, subordinated debt.
    JEL: E58 G21 G28 G32 G35 M41
    Date: 2014–10–20
  6. By: Ojo, Marianne
    Abstract: The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. As well as highlighting and addressing gaps which exist in the literature relating to liquidity risks, corporate governance and information asymmetries, by way of reference to pre-dominant based dispersed ownership systems and structures, as well as concentrated ownership systems and structures, this paper will also consider the consequences – as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood,indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.? The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a pro-active approach – particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standards.
    Keywords: credit risk; liquidity risks; global systemically important banks (G-SIBs); leverage ratios; harmonization; accounting rules; capital arbitrage; disclosure; stress testing techniques; U.S Basel III Final Rule
    JEL: D8 E3 G3 G32 K2
    Date: 2014–08
  7. By: Anaïs PERILLEUX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), CIRTES and CERMiI); Ariane SZAFARZ (Université Libre de Bruxelles (ULB), SBS-EM, CEB, and CERMi)
    Abstract: This paper brings new insights on gender interaction in the management of hybrid organizations. Our database comes from Union des Mutuelles du Partenariat pour la Mobilisation de l’Epargne et du Crédit au Sénégal (UM-PAMECAS), a Senegalese network made of 38 financial cooperatives providing 419,602 members with micro-loans. We use fixed-effect panel estimation to analyze the interplay of female/male-dominated boards with female/male managers. The regressions explain the average loan size and the proportion of loans granted to women. Our results show that male managers mitigate the social orientation of female-dominated boards. In contrast, female managers tend to enhance this orientation. More puzzling is the influence of female managers associated with male-dominated boards. In this case, the presence of a female manager increases the average loan size and reduces the proportion of loans granted to women. In sum, female managers tend to align their objectives on those of the local board even though their hierarchy is at the central level. They avoid as much as possible conflicts with their local board members.
    Keywords: Gender, Leadership, Board, Microfinance, Financial cooperative, Senegal
    JEL: G20 J54 O16 G34 O55 L31
    Date: 2014–10–24
  8. By: Govori, Fadil
    Abstract: We survey 500 business firms about the initial capital and its adequacy for business startup, how much the banking system meets the needs of business firms for loans, need for new sources of financing, if businesses possess sufficient information regarding the capital market, whether the lack of capital market impacts the acces to finance, why financing with debt is not used by domestic businesses, and whether the issue of bonds will be used to finance businesses in the near future. The purpose of the study is to analyze the impact produced from the development of the capital market on providing alternative sources of business financing. Study hypotheses derive from the current reality and include casual links between study variables. Study covers the analysis of key variables determining the factors which bring out the impact produced from the development of the capital market on providing alternative sources of business financing. The research will involve both quantitative and qualitative approach. The hi-square test analysis has reported that for the observed statistics of the hi-square test, the null hypothesis - development of capital market will better meet the needs of businesses for alternative sources of funding, is proven, hence the hypothesis is valid, and the alternative hypothesis - although the capital market would develop, it will not affect the creation of new alternative sources of funding, is rejected.
    Keywords: Capital adequacy; Sources of financing; Bank loans; Capital market; Debt financing; Survey
    JEL: G20 G21 G30 G31 G32
    Date: 2014–08–17
  9. By: Sinha, Pankaj; Bansal, Vishakha
    Abstract: Since the development of efficient proxies for taxes, many researchers have proved the existence of impact of tax on financing decisions. The ultimate aim of each business decision is to enhance the value of the firm; hence it is important to study the tax implications of financing decisions on the firm’s value. In this study an attempt is made to study the interrelationship between taxes, financing decisions and value of the firm. A panel data of 188 Indian manufacturing firms over a period from 1990 to 2013 is employed to assess the relationship. Unlike the results of Fama and French (1998), the analyses undertaken in this study is able to capture the tax effects of debt. It shows clearly that companies consider partial consequences of employing debt and justify the higher use of debt. This study brings forth the empirical evidence that the personal tax implications flowing through financing decisions contribute towards forming perceptions of the investors and thus may affect the firm value in the opposite direction.
    Keywords: debt, equity, dividends, firm value, corporate tax, personal tax, panel data, fixed effects model
    JEL: C23 G32 G38
    Date: 2014–06–05

This nep-cfn issue is ©2014 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.