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on Corporate Finance |
| By: | M. Hamadi; A. Heinen |
| Abstract: | We consider the effect on performance of very large controlling shareholders, who are mostly organized in voting blocks and business groups, in a sample of Belgian listed firms from 1991 to 2006. Since the shape of the relation between ownership and firm value is a controversial issue in corporate finance, we use semiparametric local-linear kernel-based panel models. These models allow us not to impose a priori functional restrictions on the relation between ownership and performance. Our semiparametric analysis shows that the effect on performance varies depending on the size of ownership stakes and that there are departures from linearity. |
| Keywords: | Family firms, Firm performance, Large shareholders, Ownership concentration, Semiparametric panel |
| JEL: | G32 C23 C14 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201502&r=cfn |
| By: | Berrospide, Jose M. (Board of Governors of the Federal Reserve System (U.S.)); Meisenzahl, Ralf R. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that a one standard deviation increase in credit line drawdown is associated with an increase of 9 percent in average capital expenditures. Low aggregate liquidity amplifies this effect significantly. During the financial crisis, the effect of drawdowns on investment increased to 16 percent. The effect was even larger for smaller and financially constrained firms. We find only limited evidence, mostly for large and investment grade firms, that drawdowns were used to boost (precautionary) cash holdings during the crisis. |
| Keywords: | Credit Lines; Financial Crisis; Investment; Liquidity Management |
| JEL: | E22 G01 G31 G32 |
| Date: | 2015–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-07&r=cfn |
| By: | Peia, Oana (ESSEC Business School); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | This paper analyzes how banks' funding constraints impact the access and cost of capital of small firms. Banks raise external finance from a large number of small investors who face co-ordination problems and invest in small, risky businesses. When investors observe noisy signals about the true implementation cost of real sector projects, the model can be solved for a threshold equilibrium in the classical global games approach. We show that a "socially optimal" interest rate that maximizes the probability of success of the small firm is higher than the risk-free rate, because higher interest rates relax the bank's funding constraint. However, banks will generally set an interest rate higher than this socially optimal one. This gives rise to a built-in inefficiency of banking intermediation activity that can be corrected by various policy measures. |
| Keywords: | Bank finance; Small business; Global games; Optimal return; Strategic uncertainty |
| JEL: | C72 D82 G21 G32 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-15001&r=cfn |
| By: | Scott D Dyreng (Fuqua School of Business, Duke University); Jeffrey L Hoopes (Fisher School of Business, Ohio State University); Jaron H Wilde (Tippie College of Business, University of Iowa) |
| Abstract: | We examine whether public pressure related to compliance with subsidiary disclosure rules influences corporate tax behaviour. ActionAid International, a non-profit activist group, levied public pressure on non-compliant UK firms in the FTSE 100 to comply with a rule requiring UK firms to disclose the location of all of their subsidiaries. We use this natural experiment to examine whether the public pressure led scrutinized firms to decrease tax avoidance and reduce the use of subsidiaries in tax haven countries relative to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behaviour of large publicly-traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behaviour. |
| JEL: | H25 H26 H20 G39 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:1416&r=cfn |
| By: | Johannes Becker (University of Münster); Ronald B Davies (University College Dublin); Gitte Jakobs (University of Münster) |
| Abstract: | Advance pricing agreements (APAs) determine transfer prices for intrafi?rm transactions in advance. This paper interprets these contracts as a means to overcome a hold-up problem that occurs because governments cannot commit to non-excessive future tax rates. In addition, with private information, just as in practice, our APAs will be complex and require lengthy negotiations. Nevertheless, implemented APAs lead to a Pareto improvement even when all agents are risk neutral. However, not all efficient APAs are concluded in equilibrium. International agreements to avoid double taxation will likely reduce the number of realized APAs. |
| Keywords: | Advance Pricing Agreements, Corporate Taxation, Multinational Firms, Transfer Pricing |
| JEL: | H25 M41 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:1426&r=cfn |
| By: | Martin Simmler (University of Oxford) |
| Abstract: | This study provides evidence on the causal impact of debt shiftingactivities of multinational companies (MNC) on their capital accumulation. The identification strategy exploits the corporate tax rate cut of 10%-points in Germany 2008 as a quasi-natural experiment. This reform reduced substantially the incentive of multinational firmsto engage in debt shifting. Using a difference-in-diverences matching strategy (DiD), the results suggest firstly that MNC decrease their fraction of internal borrowing and thus reduced or even stopped shifting profits abroad. Secondly they decreased their capital stock compared to purely domestic firms. Combined, the results suggest that if MNC shift pro ts abroad, their capital accumulation is less depressed by the national tax rate and thus benefits less from a tax ratereduction. The DiD results are confirmed by a structural approach, which focus on the tax incentive to shift profits to the headquarter for the identification. The ndings are particularly strong for firms with a low ratio of profits before interest to their capital stock which suggests that only debt shifting but not transfer pricing fosters capital accumulation. Moreover, it is shown that more generous depreciation allowances decrease the difference in capital accumulation between domestic and multinational firms. |
| Keywords: | internal debt shifting, capital accumulation, corporate income taxation, depreciation allowances |
| JEL: | H25 F23 G31 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:1424&r=cfn |
| By: | Thomas Giebe; Miyu Lee; ; |
| Abstract: | There are legal grounds to hear competitors in merger control proceedings, and competitor involvement has gained significance. To what extent this is economically sensible is our question. The competition authority applies some welfare standard while the competitor cares about its own profit. In general, but not always, this implies a conflict of interest. We formally model this setting with cheap talk signaling games, where hearing the competitor might convey valuable information to the authority, but also serve the competitor’s own interests. We find that the authority will mostly have to ignore the competitor but, depending on the authority’s own prior information, strictly following the competitor’s selfish recommendation will improve the authority’s decision. Complementary to our analysis, we provide empirical data of competitor involvement in EU merger cases and give an overview of the legal discussion in the EU and US. |
| Keywords: | merger control, antitrust, European Commission, signaling, efficiency, competitors, rivals |
| JEL: | G34 K21 L4 C73 L2 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2015-011&r=cfn |
| By: | Hsu, Po-Hsuan; Huang, Sterling; Massa, Massimo; Zhang, Hong |
| Abstract: | According to conventional wisdom, family ownership, which signals a lack of social capital and trust in an economy, may impede innovation. This argument, however, fails to recognize that modern family firms can benefit from capitalist institutions that promote innovation. Using a comprehensive sample of U.S. family-owned public firms and patents for the period from 1998 to 2010, we show that family ownership plays multiple roles in promoting innovation and its influence can be attributed to reduced financial constraints, a greater commitment to long-term value, and improved corporate governance. Causality is confirmed through an instrumental variable analysis, a difference-in-difference analysis based on an exogenous regulatory shock and a matched sample analysis. |
| Keywords: | Family firms; innovation; intangible investment |
| JEL: | G32 O32 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10445&r=cfn |
| By: | Lee, Charles M. C. (Stanford University); Li, Kevin K. (University of Toronto); Zhang, Ran (Peking University) |
| Abstract: | We examine the financial health and performance of reverse mergers (RMs) that became active on U.S. stock markets between 2001 and 2010, particularly those from China (around 85% of all foreign RMs). As a group, RMs are small, early-stage companies that typically trade over-the-counter. Chinese RMs (CRMs), however, tend to be more mature and less speculative than either their U.S. counterparts or a group of exchange-industry-size matched firms. Collectively, CRMs outperformed their matched peers from inception through the end of 2011, even after including most of the firms accused of accounting fraud. CRMs that receive private-equity (PIPE) financing from sophisticated investors perform particularly well. Overall, despite the negative publicity (some from short sellers), we find little evidence that CRMs are inherently toxic investments. Our results shed light on the risk-performance trade-off for CRMs, as well as the delicate balance between credibility and access in well-functioning markets. |
| JEL: | G34 M41 N20 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3063&r=cfn |
| By: | Gornall, Will (Stanford University); Strebulaev, Ilya A. (Stanford University) |
| Abstract: | We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset volatility by an order of magnitude relative to that of their borrowers. Second, previously unstudied supply chain effects mean that highly levered financial intermediaries can offer the lowest interest rates. Low asset volatility enables banks to take on high leverage safely; supply chain effects compel them to do so. Firms with low leverage also arise naturally, as borrowers internalize the systematic risk costs they impose on their lenders. Because risk assessment techniques from the Basel framework underlie our model, we can quantify the impact capital regulation and other government interventions have on leverage and fragility. Deposit insurance and the expectation of government bailouts increase not only bank risk taking, but also borrower risk taking. Capital regulation lowers bank leverage but can lead to compensating increases in the leverage of borrowers, which can paradoxically lead to riskier banks. Doubling current capital requirements would reduce the default risk of banks exposed to high moral hazard by up to 90%, with only a small increase in bank interest rates. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3102&r=cfn |
| By: | Bernstein, Shai (Stanford University); Sheen, Albert (Harvard University) |
| Abstract: | How do private equity firms affect their portfolio companies? We document operational changes in restaurant chain buyouts between 2002 and 2012 using comprehensive health inspection records in Florida. Store-level operational practices improve after private equity buyout, as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations--"twin" restaurants over which private equity owners have limited control. Private equity targets also slightly reduce employee headcount, and lower menu prices. These changes to store-level operations require monitoring, training, and better alignment of worker incentives, suggesting private equity firms improve management practices throughout the organization. |
| JEL: | G24 G34 J24 J28 M11 M54 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3008&r=cfn |