nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒03‒27
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The market for corporate debt private placements By Nicola Branzoli; Giovanni Guazzarotti
  2. As American as Apple Inc.: International tax and ownership nationality By Chris Sanchirico
  3. Assessing Solvency of Financial Institutions: An Option-theoretic Approach By Jie Dai
  4. Financial constraints and modes of market exit in Slovenian manufacturing and service firms By Nina Ponikvar; Katja Zajc Kejžar; Darja Peljhan
  5. Banks’ supply of long term credit after a liquidity shock: Evidence from 2007-2009 By P. Pessarossi; F. Vinas
  6. Women on the board and executive duration: Evidence for European listed firms By Buchwald, Achim; Hottenrott, Hanna
  7. Does Basel III bring anything new? A comparison between capital accords Basel II and Basel III By Max Kubat
  8. Exchange Rate Exposure and Risk Management: The case of Japanese Exporting Firms By Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
  9. An Attempt to Disperse the Italian Interlocking Directorship Network: Analyzing the Effects of the 2011 Reform By Carlo Drago; Roberto Ricciuti; Paolo Santella
  10. The real estate market, the supply chain and credit: the effects of the great recession By Cristina Fabrizi; Raffaella Pico; Luca Casolaro; Mariano Graziano; Elisabetta Manzoli; Sonia Soncin; Luciano Esposito; Giuseppe Saporito; Tiziana Sodano
  11. Gender and dynamic agency: theory and evidence on the compensation of top executives By Albanesi, Stefania; Olivetti, Claudia; Prados, María José
  12. How Cyclical Is Bank Capital? By Haubrich, Joseph G.
  13. Bank Stability and Enforcement Actions in Banking By Stefano Caiazza; Matteo Cotugno; Franco Fiordelisi; Valeria Stefanelli
  14. Securization and banks´ capital structure By Andres Almazan; Alfredo Martín-OliverAuthor-X-Name-First: AlfredoAuthor-X-Name-Last: Martín-OliverAuthor-Workplace-Name: UNIVERSITAT ILLES BALEARS; Jesús Saurina
  15. The impact of Internet technology on the Romanian banks performance By Lavinia Mihaela Gutu
  16. Innovations in transferring insurable risk to capital markets – Insurance-Linked Securities (ILS) application by the non-financial companies By Joanna Błach; Monika Wieczorek-Kosmala; Maria Gorczyńska; Anna Doś
  17. Debt concentration of European Firms By Giannetti, Caterina
  18. Legal and institutional determinants of factoring in SMEs: Empirical analysis across 25 European countries By Ginés Hernández-Cánovas; Ana Mol-Gómez-Váquez; Johanna Koëter-Kant

  1. By: Nicola Branzoli (Banca d'Italia); Giovanni Guazzarotti (Banca d'Italia)
    Abstract: The paper describes the characteristics of the market for private placements and discusses the necessary conditions for their uptake in Europe. A private placement is a method of financing used mainly by medium-sized companies which, unable to access the public bond market, turn to one or more large institutional investors. Compared to a public offering, a private placement is characterized by: i) lower costs of issue, ii) greater contractual flexibility, iii) lower size and lower secondary market liquidity, iv) lower information asymmetry between investors and issuers. The development of the market for private placements, one of the European Commission’s initiatives for the Capital Markets Union, can help companies to finance long-term investments and contribute to the development of the public bond market. A wider use of private placements in Europe is hindered by the fact that non-bank intermediaries are small in size, there is a lack of financial information about medium-sized companies, and the regulations and market practices across Europe are not yet sufficiently harmonized.
    Keywords: debt financing, corporate bonds, private placement
    JEL: G23 G24 G28 G32 G38
    Date: 2015–03
  2. By: Chris Sanchirico (University of Pennsylvania)
    Abstract: The ownership nationality of large US multinational companies plays an implicit but important role in the current debate over how such companies should be taxed. This paper identifies that role and investigates what is actually known about where these companies’ shareholders reside.
    Keywords: Ownership nationality, home country bias, home equity bias, home bias, TIC system, CPIS, institutional investment managers, Section 13(f), Investment Company Act, Investment Advisers Act, Forms 13F, N-CSR, N-Q, ADV, PF, 1042-S
    JEL: K34 K22 K33 H24 H22 H25 H87 E62 F2 F3 F36 F4 F42 G23 G24 G28 G38
    Date: 2014
  3. By: Jie Dai (FISMS, Sobey School of Business, Saint Mary's University)
    Abstract: In this paper, we quantify the subtle concepts of soundness and safety of financial institutions through option pricing theory. This approach permits to intuit many solvency issues, including capital adequacy, financial strain or distress, balance sheet rebuilding and critical recapitalization, through private capital injections or government rescue programs. Numerical examples to implement the involved calculations are provided to illustrate the economic principles that underpin many governmentsponsored rescue plans, such as the Troubled Assets Relief Program (TARP) in the U.S. This option approach applies easily to the general topic of capital structure decisions and thereby improves upon the static theory which is usually limited to trade-off between tax benefits and bankruptcy costs.
    Keywords: Soundness and safety of financial institutions, Capital adequacy, Recapitalization
    JEL: G01 G28 G32
    Date: 2014–07
  4. By: Nina Ponikvar (University of Ljubljana, Faculty of Economics); Katja Zajc Kejžar (University of Ljubljana, Faculty of Economics); Darja Peljhan (University of Ljubljana, Faculty of Economics)
    Abstract: The recent financial and economic crisis has brought back the attention to studying the characteristics of surviving firms and those exiting the market. Among these characteristics the access to finance has received large attention, since the economic crisis decreased the availability of finance and increased its costs. Further, literature from industrial organization, entrepreneurship and strategic management all show that factors behind different types of firm exit decisions, such as bankruptcy, voluntary liquidation, mergers and acquisitions (M&A) differ. Our paper studies factors that influence the firm’s decision to exit the market by explicitly considering alternative firm exit modes. Our competing risk models are estimated with a standard multinomial logit model and the alternative multinomial probit model on the population of Slovenian firms in 2006-2012. We distinguish between (1) court driven exit as a result of bankruptcy or forced liquidation; (2) voluntary liquidation, (3) disappearances from the dataset as a result of mergers and acquisitions, and (4) termination based on a resolution/decision of the registration agency or according to the law. We argue that decision over whether to close down a business or to sell out to another company is influenced by financial constraints, firm specific characteristics (size, age, productivity, capital intensity), and industry factors. The paper tests whether different facets of financial constraints and other firm and industry level characteristics hold different degrees of relevance for alternative routes of the firm operations termination. In measuring financial constraints as antecedent to an exit event, we propose the exploratory factor analysis and derive to three dimensions of the financial constraint measure, i.e. liquidity, operational-efficiency factor, and profitability factor and in this way contribute to the financial constraints literature. We contribute to the firm exit literature by showing that court-driven exit, voluntary liquidation and M&A follow diverse exit routes driven by different firm level and industry characteristics. We find that the main difference between bankrupt and liquidated firms is that the choice of exiting through voluntary liquidation is characterized by economic distress while firms choosing to exit by bankruptcy are firms in financial and economic distress. Economically distressed firms have bad prospects because of low or negative profitability and little opportunity for improvement. The main characteristic of financially distressed firms is high leverage level causing problems in repaying debts. Firms that decided to exit by M&A usually have profitability problems, but are not financially distressed.
    Keywords: firm exit, financial constraints, bankruptcy, liquidation, merger and acquisition (M&A)
    JEL: G32 L25 C23
    Date: 2014–07
  5. By: P. Pessarossi; F. Vinas
    Abstract: We study the real effect on banks’ credit supply after a negative liquidity shock. Controlling for demand effects, we take advantage of the exogenous international interbank market freeze in 2007-2008 to assess the causal relation between French banks’ liquidity risk and their lending. We find that banks with a lower funding risk and a lower ratio of long-term loans to long-term funding and deposits provide more loans after the shock. The difference in lending between banks only exists for long-term loan supply. Small firms bear the decline in longterm lending.
    Keywords: financial institutions, liquidity risk, loan maturity.
    JEL: G01 G21 G28
    Date: 2015
  6. By: Buchwald, Achim; Hottenrott, Hanna
    Abstract: The participation of women in top-level corporate boards (or rather the lack of it) is subject to intense public debate. Several countries are considering legally binding quotas to increase the share of women on boards. Indeed, research on board diversity suggests positive effects of gender diverse boards on corporate governance and even firm performance. The mechanism through which these benefits materialize remain however mostly speculative. We study boards of directors in a large sample of listed companies in 15 European countries over the period 2003-2011 and find that female representation on firms' non-executive boards is associated with reduced turnover and an increase in tenure of executive board members. An increase in the performance-turnover sensitivity of executives suggests that this effect may be explained by better monitoring practices rather than by less effective control or a 'taste for continuity'.
    Keywords: Corporate Governance,Executive Turnover,Gender,TMT Diversity
    JEL: G34 J24 J63 L25 M00
    Date: 2015
  7. By: Max Kubat (University of Economics, Prague)
    Abstract: Basel Accords represent the most important documents of banking supervision. Basel II came into force almost at the same time as the financial crisis set in. Relatively soon after this, the work on the new capital accord known as Basel III was initiated. The question is whether the new agreement brings something really principally different from Basel II, or whether it is just a tool to reassure the public and markets with some form of stricter requirements. Basel Committee is based on G-20 countries representation. Introduction contains a brief explanation of how the Basel capital accords are reflected in European law. The first part of the article explains core principles of Basel II with several possible explanations of its failure. The second part clarifies the main principles of Basel III and compares them with Basel II. The criterion for comparison is search for fundamental distinctions between the introduced tools. From five monitored areas (definition of capital, capital requirements, risk coverage, leverage ratio, liquidity management) three of them meet this criterion. The redefinition of capital means only better clarification and unification of definitions. The risk coverage part focuses on technical issues, but no new risks are perceived. There is a significant change about new capital requirements. Two new buffers are requested. While previous capital requirement were based on direct connection with risks, the connection between capital conservation buffer and countercyclical buffer is only indirect to measured risks. Also the leverage ratio and liquidity management bring new tools and thus principle change. There is a significant change in leverage ratio that brings a new tool which is not based on risk. It makes the calculation easier and should avoid cheating in capital manipulation. Liquidity management is a completely new part of banking regulation measures, therefore there is nothing to compare with Basel II.
    Keywords: Basel capital accords; Basel II; Basel III; capital requirements; capital adequacy
    JEL: L51 F02 G28
    Date: 2014–05
  8. By: Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
    Abstract: This paper investigates the relationship between the Japanese firms’ exposure to the exchange rate risk and risk management, such as choice of invoicing currency, and financial and operational hedge. The firm’s exposure to the exchange rate risk is estimated by co-movements of the stock prices and exchange rates, following Dominguez (1998) and others. Data on risk management measures—financial and operational hedging, the choice of invoice currency and the price revision strategy (pass-through)—were collected from a questionnaire survey covering all Tokyo Stock Exchange listed firms in 2009. Results show the followings: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure. Second, the higher the US dollar invoicing share, the greater is the foreign exchange exposure. But, risk is reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use the combination of risk management tools to mitigate the degree of the exchange rate risk.
    JEL: F31 G15 G32
    Date: 2015–03
  9. By: Carlo Drago (Department of Economics (University of Verona)); Roberto Ricciuti (Department of Economics (University of Verona)); Paolo Santella (ESMA)
    Abstract: The purpose of this paper is to analyze the effects on the Italian directorship network of the corporate governance reform that was introduced in Italy in 2011 to prevent interlocking directorships in the financial sector. Interlocking directorships are important communication channels among companies and may have anticompetitive effect. We apply community detection techniques to the analysis of the networks in 2009 and 2012 to ascertain the effect of the reform. We find that, although the number of interlocking directorships decreases in 2012, the reduction takes place mainly at the periphery of the network whereas the network core is stable, allowing the most connected companies to keep their strategic position.
    Keywords: interlocking directorships, corporate governance, community detection, social networks
    JEL: C33 G34 G38 L14
    Date: 2015–03
  10. By: Cristina Fabrizi; Raffaella Pico; Luca Casolaro; Mariano Graziano; Elisabetta Manzoli; Sonia Soncin; Luciano Esposito; Giuseppe Saporito; Tiziana Sodano (Bank of Italy)
    Abstract: The supply chain of the real estate sector accounts for one fifth of Italian GDP; its importance for the banking system is even greater: lending to this sector accounts for more than one third of total loans to the private sector. The crisis in the construction and real estate sector started even before the global financial crisis of 2008 and hit firms in the sector and the banks that finance them. The fall in turnover and profitability has greatly increased the economic and financial vulnerability of firms, undermining their ability to repay their debt, particularly, in the case of large and highly leveraged firms. Due to the increase of loans classified as bad debts, the banking system has tightened conditions on new loans to this sector
    Keywords: Real estate cycle, trades, quotes, construction companies and real estate services, bank loans
    JEL: E01 G21 L74 L85 R21 R31
    Date: 2015–03
  11. By: Albanesi, Stefania (Federal Reserve Bank of New York); Olivetti, Claudia; Prados, María José
    Abstract: We document three new facts about gender differences in executive compensation. First, female executives receive a lower share of incentive pay in total compensation relative to males. This difference accounts for 93 percent of the gender gap in total pay. Second, the compensation of female executives displays lower pay-performance sensitivity. A $1 million increase in firm value generates a $17,150 increase in firm-specific wealth for male executives and a $1,670 increase for females. Third, female executives are more exposed to bad firm performance and less exposed to good firm performance relative to male executives. We find no link between firm performance and the gender of top executives. We discuss evidence on differences in preferences and the cost of managerial effort by gender and examine the resulting predictions for the structure of compensation. We consider two paradigms for the pay-setting process, the efficient contracting model and the “managerial power" or skimming view. The efficient contracting model can explain the first two facts. Only the skimming view is consistent with the third fact. This suggests that the gender differentials in executive compensation may be inefficient.
    Keywords: gender differences in executive pay; incentive pay; pay-performance sensitivity
    JEL: G3 J16 J31 J33 M12
    Date: 2015–03–01
  12. By: Haubrich, Joseph G. (Federal Reserve Bank of Cleveland)
    Abstract: The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the countercyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced countercyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short summary of capital concepts and regulation from early America to the present.
    JEL: E32 G21 G28 N20
    Date: 2015–03–19
  13. By: Stefano Caiazza (Università di Roma "Tor Vergata"); Matteo Cotugno (Università di Catania); Franco Fiordelisi (Università di Roma III); Valeria Stefanelli (Università Niccolò Cusano)
    Abstract: This paper analyzes the causes and consequences of the enforcement actions (sanctions) imposed by supervisory authorities for banks. Focusing on a sample of Italian banks between 2005 and 2012, we found 302 sanctions regarding 3,588 persons (i.e. Board of directors, Top Managers, and Chief Executive Officers) were sanctioned in banks. We have three main results. First, enforcement actions are given to banks having high credit risk and poor Return on Assets (both one and two years in before the sanction). Second, sanctioned banks are unable to change their conduct in the first year following the enforcement sanction and the stability levels do not improve. Rather, it takes at least two years after an enforcement action so that banks are able to improve their stability. We also provide evidence that socio-eco-demographic differences in Italy have a substantial impact on the banks reaction after enforcement actions.
    Keywords: Enforcement actions, Supervisory, Credit Risk
    JEL: G20 G21 G32
    Date: 2015–03–20
  14. By: Andres Almazan (UNIVERSITY OF TEXAS AT AUSTIN); Alfredo Martín-OliverAuthor-X-Name-First: AlfredoAuthor-X-Name-Last: Martín-OliverAuthor-Workplace-Name: UNIVERSITAT ILLES BALEARS; Jesús Saurina (Banco de España)
    Abstract: Asset securitization offers banks the possibility of altering their capital structures and the financial intermediation process. This study shows that the introduction of securitization is associated with fundamental changes in the funding policies of banks. In particular, we present evidence of more intense use of securitization by banks (i) with stronger growth opportunities; (ii) with liquidity constraints; (iii) with costlier alternative sources of funding; and (iv) with restricted access to capital markets owing to adverse selection. Securitization is also observed to be higher on the pecking order of financing choices of small and medium-sized banks and non-listed banks, which are likely to face more severe adverse selection problems
    Keywords: securitization, capital structure, adverse selection, pecking order
    JEL: G32 G21
    Date: 2015–03
  15. By: Lavinia Mihaela Gutu (Bucharest University of Economic Studies)
    Abstract: In the last decades the Internet technology era has developed increasingly more and currently it spans the whole business world. Nowadays no manager can conceive the existence of a successful business without its existence in the online environment. Therefore, more and more companies have moved a part of their activities on the Internet in recent years. This fact helps them to become more popular and to attract more customers. So, for the business world, it is well-known that a respectable company should have a website. Banks are also involved in this process. The information technology and communication revolution has affected the financial services, too. The majority of banks have websites today. Here they communicate with the public and carry out certain activities with clients so that they no longer have to go to the bank. But how does the Internet influence the performance of a bank? Since it is about a revolution in this field, it is expected that banks’ performance to increase. The presence of a bank on the Internet through a website, the Internet banking and any other activities undertaken by the bank in the online environment such as online advertising should improve its financial results. Even if the bank spends more resources in this regard, it is expected that more customers to be attracted and that operations made by banks’ employees to be replaced with this kind of technology. This paper examines this issue in the case of Romanian banking industry starting with 2005. How has the Internet technology affect the performance of a bank in terms of ROE? Have the banks benefit from this kind of technology revolution or the costs of these service affects their results since the users of this technology is lower than the developed countries?
    Keywords: Electornic banking, banks' performance, Internet banking
    JEL: G21 G29 G30
    Date: 2014–10
  16. By: Joanna Błach (University of Economics in Katowice, Department of Finance); Monika Wieczorek-Kosmala (University of Economics in Katowice, Department of Finance); Maria Gorczyńska (University of Economics in Katowice, Department of Finance); Anna Doś (University of Economics in Katowice, Department of Finance)
    Abstract: In this paper we focus on financial innovations that have emerged as a result of the convergence of the capital market and insurance market. These new solutions called Insurance-Linked Securities (ILS) were created in 1990s. by insurers and reinsurers in order to improve the liquidity of insurance market by providing the opportunity to transfer insurable risk to capital market. However, nowadays the application of ILS have been extended beyond financial sector. In particular, the application of ILS in the new, different way by the non-financial companies is regarded here as innovations.The prime purpose of the paper is to justify a statement that in recent years, capital market innovations within transferring insurable risk to capital markets (ILS) have grown on diversity. Our objective is to critically analyze the innovative solutions within transferring insurable risk to capital market, and assess their potential for the use by non-financial companies. We address the limitations and possible consequences of these solutions. To achieve the expected results we use the document analysis and select important information in order to provide systemized characteristics of Insurance-Linked Securities. Our intention is also to initiate a debate on the possible use of insurance-linked securities in non-financial sector, focusing on their potential advantages and positive consequences for the non-financial companies as well as on potential limitations and obstacles.From the analyzed group of insurance-linked securities available on the capital market, we have selected these solutions that can be applied by the non-financial companies, i.e.: cat bonds, insurance-linked derivatives (including weather derivatives) and contingent capital structures. These innovations may be applied in order to improve the integrated risk management process in the non-financial companies in two ways: (1) as an alternative (substitute) to traditional risk management instruments (e.g. insurance policy) conditional upon their efficiency (similar protection at lower costs or better protection at comparable costs); (2) as a complementary solutions to traditional instruments, if they provide access to tools and mechanisms not available directly by the application of traditional solutions. However, there are many constraints, both on the supply and demand side of the ILS market that limit their application by non-financials. Further research may be focused on the analysis of the solutions that can be applied in order to overcome these problems and improve the development of the ILS innovations offered to non-financials.I
    Keywords: management, financial innovations, non-financial companies, insurance-linked securities, cat bonds, insurance derivatives, weather derivatives, contingent capital
    JEL: G30 G32 G22
    Date: 2014–06
  17. By: Giannetti, Caterina
    Abstract: This paper investigates the level of debt specialization across European firms relying on a cross-country comparable sample of manufacturing firms. We find that a number of firm characteristics -- such as firm size and age -- help predict the firm composition of the various types of debts (i.e. debt specialization) but not the level of each debt share. In particular, we observe that small and young firms have a more concentrated debt structure (i.e. they rely on few types of debt). However, these relationships are not linear and seem to be U-shaped. We also find that Spanish firms have the most diversified debt structure, and that diversified firms are less likely to experience a severe reduction in turnover.
    Keywords: Debt specialization, European firms, Firm financing
    JEL: F20 G32
    Date: 2015–03–12
  18. By: Ginés Hernández-Cánovas (Universidad Politécnica de Cartagena); Ana Mol-Gómez-Váquez (Universidad Politécnica de Cartagena); Johanna Koëter-Kant (Vrije Universiteit Amsterdam)
    Abstract: We use a survey data set of 4348 SMEs from 25 European countries to analyze the association between the use of factoring as a form of SME financing and the legal environment of the country where in which they operate. Our findings indicate that firms operating in countries with legal environments that weakly protect the rights of creditors, such as those under French-civil-law, with political instability or high enforcement costs, are more likely to use factoring. We hypothesize that in such environments bank financing could be more restricted and factoring might be an alternative source to alleviate SMEs financing constraints. In line with this argument, we find that firms experiencing some financing difficulties are more likely to use factoring. We also show that the likelihood of using factoring increases for firms located in growing economies. Factoring might be a means for these firms to finance the enlargement of their business activity. (Ginés Hernández-Cánovas acknowledges financial support by Fundación Séneca (Project 15403/PHCS/10), and by Ministerio de Ciencia e Innovación (Project ECO2011-29080)
    Keywords: Factoring, SMEs financing, financial constraints, legal system.
    JEL: G00 G30 G32
    Date: 2014–07

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