nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒06‒27
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. When Cutting Dividends Is Not Bad News: The Case Of Optional Stock Dividends By David, Thomas; Ginglinger, Edith
  2. Fire-Sale FDI or Business as Usual? By Ron Alquist; Rahul Mukherjee; Linda L. Tesar
  3. The Structure of Corporate Holdings and Corporate Governance: Evidence from India By Swarnodeep Homroy; Shantanu Banerjee
  4. Determinants and Valuation Effects of the Home Bias in European Banks' Sovereign Debt Portfolios By Horváth, Bálint; Huizinga, Harry; Ioannidou, Vasso
  5. Stock Price Related Financial Fragility and Growth Patterns By Pascal Assmuth
  6. Aspects on the implementation of corporate governance policies by companies in Romania By Ciprian Apostol
  7. How Informed Stock Trading Can Affect Labor Investment Efficiency By Hamdi Ben-Nasr; Abdullah Alshwer
  8. Are Star Funds Really Shining? Cross-trading And Performance Shifting In Mutual Fund Families By Nefedova, Tamara; Parise, Gianpaolo; Eisele, Alexander
  9. Deciphering Corporate Governance and Environmental Commitments among Southeast Asian Transnationals: Uptake of Sustainability Certification By Roda Jean-Marc
  10. Improving the availability of trade finance in developing countries: An assessment of remaining gaps By Auboin, Marc
  11. R&D Tax Credits, Financial Constraints, and R&D Investments (Japanese) By HOSONO Kaoru; HOTEI Masaki; MIYAKAWA Daisuke
  12. Liquidity-Driven FDI By Ron Alquist; Rahul Mukherjee; Linda L. Tesar
  13. Asymmetric information, security design, and the pecking (dis)order By Fulghieri, Paolo; Garcia, Diego; Hackbarth, Dirk

  1. By: David, Thomas; Ginglinger, Edith
    Abstract: This paper provides new evidence on dividend policy by studying optional stock dividends, a mechanism that allows firms to cut cash payouts without a negative market reaction. We find that highly leveraged firms with limited cash holdings and large institutional ownership are more likely to offer optional stock dividends to their hareholders. These firms are the most committed to paying dividends, and optional stock dividends provide them with an opportunity for a stealth cut in dividends during economic downturns. Shareholders overwhelmingly approve optional stock dividends at general meetings with the majority favoring stock dividends over cash dividends. Further, in contrast to dividend cuts, shareholders do not view optional stock dividends as bad news. Our results support the monitoring explanation of optional stock dividends and show that shareholders value a firm’s ability and willingness to pay dividends, even if the final cash payout is reduced.
    Keywords: Dividends; Stock dividends; Scrip dividends; Dividend cuts; Monitoring; SEOs; Long-term investors;
    JEL: G35 G32
    Date: 2015–06
  2. By: Ron Alquist (Kings Peak Asset Management); Rahul Mukherjee (Graduate Institute of International and Development Studies); Linda L. Tesar (University of Michigan and NBER)
    Abstract: Motivated by a set of stylized facts, we develop a model of cross-border mergers and acquisitions (M&As) to study foreign direct investment (FDI) in emerging markets. We compare acquisitions undertaken during financial crises Ð so called fire-sale FDI Ð with acquisitions made during non-crisis periods to examine whether the outcomes differ in the ways predicted by the model. Foreign acquisitions are driven by two sources of value creation. First, acquisitions by a foreign firm relax the target's credit constraint (i.e., a liquidity motive). Second, acquisitions exploit operational synergies between the target and the acquirer (i.e., a synergistic motive). During crises credit conditions tighten in the target economy and the liquidity motive dominates. The model predicts that during crisis relative to non-crisis periods, (1) the likelihood of foreign acquisitions is higher; (2) the proportion of foreign acquisitions in the same industry is lower; (3) the average size of ownership stakes is lower; and (4) the duration of acquisitions is lower (i.e., acquisition stakes are more likely to be flipped). We find support for (1) but not for the other three predictions. The results thus suggest that foreign acquisitions in emerging markets do not differ in these important ways between crisis and normal periods.
    Keywords: Fire sales; foreign direct investment; cross-border mergers and acquisitions; nancial crises; flipping
    JEL: F21 G01 G34
  3. By: Swarnodeep Homroy; Shantanu Banerjee
    Abstract: This paper examines how the structure of corporate holdings impacts upon the corporate governance mechanisms and outcomes. Using a panel data of 500 large listed Indian …firms we compare …firms with dispersed equity ownership, and business group …firms with cross-holdings and concentrated family ownership, within the same institutional frameworks. Contrary to the popular hypothesis that concentrated shareholding leads to worse corporate governance outcomes, we find that the corporate governance outcomes are similar for both types of …firms, even though the incentive alignment mechanisms may be different. The results of this paper suggest that corporate holding structures and governance mechanisms adjusts to optimize value and performance.
    Keywords: business groups, corporate governance, concentrated share ownership, corporate holding structure
    JEL: G15 G28 G32
    Date: 2015
  4. By: Horváth, Bálint; Huizinga, Harry; Ioannidou, Vasso
    Abstract: We document that large European banks hold sovereign debt portfolios heavily biased toward domestic government debt. This bias is stronger if the sovereign is risky and shareholder rights are strong, as evidence of a risk-shifting explanation of the home bias. In addition, the bias is stronger if the sovereign is risky and the government has positive ownership in the bank, as evidence of a government pressure channel. The home bias is positively valued by the stock market, as reflected by a positive association between the home bias and Tobin’s q. The home bias premium declines with domestic sovereign risk, but less so for highly leveraged banks, suggesting that both the risk-shifting and government pressure channels are operative. The European Central Bank’s large injections of liquidity in December 2011 and February 2012 reduced the marginal value of the home bias by allowing banks to expand their exposure to domestic government debt.
    Keywords: Bank valuation; Government ownership; Home bias; LTRO; Moral suasion; Risk-shifting; Shareholder rights; Sovereign debt crisis
    JEL: F3 G01 G14 G15 G21 G28
    Date: 2015–06
  5. By: Pascal Assmuth (Center for Mathematical Economics, Bielefeld University)
    Abstract: The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterward. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. We examine trend and volatility cycles at the stock market for their impact on the real economy. For each one we find an application to the investment behaviour of firms. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm's creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. We ask to which extent a channel may contribute to the stock price - output relation when there is mutual feedback. A model 'a la Delli Gatti et al. (2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank's equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners' influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision of managers they act more prudently and this fosters growth.
    Keywords: Heterogeneous Agents Models, Financial Fragility, Stock Prices, Business Cycles
    JEL: E32 G30 C63
    Date: 2015–04
  6. By: Ciprian Apostol (“Alexandru Ioan Cuza” University)
    Abstract: In an era of globalization, characterized by a continuous increase of competitiveness and accentuation mobility of financial flows, corporate governance has become a concept that has attracted a strong public interest, due to its obvious importance to the overall health of companies, and of society as a whole.In this paper aims at developing a methodology for assessing the quality of corporate governance specific companies in Romania and the overall framework provided by the Corporate Governance Code (CGC) issued by the Bucharest Stock Exchange, with the benchmark general methodology adopted by international rating agencies, exactly Standard and Poor's methodology (which substantiates corporate governance scores). In this respect, they consider the following elements: preparation and reporting the "Comply or Explain" Statement, developing corporate governance score and corporate social responsibility.The study method is non-participating observation, which involved the registration of the reported information in the "Comply or Explain" Statement by the companies listed on the Bucharest Stock Exchange in order to ascertain if they are applied elements of corporate governance and transparency ones.
    Keywords: corporate governance, Romanian economy, "Comply or Explain" Statement, corporate governance score, social responsibility
    JEL: G34 M48
    Date: 2015–06
  7. By: Hamdi Ben-Nasr (King Saud University); Abdullah Alshwer (King Saud University)
    Abstract: In this paper, we examine whether managers use information included in stock prices when making labor investment decisions. Specifically, we examine whether stock price informativeness affects labor investment efficiency. We find that a higher probability of informed trading (PIN) is associated with lower deviations of labor investment from the level justified by economic fundamentals i.e., higher labor investment efficiency. This finding is robust to using alternative proxies for stock price informativeness and labor investment efficiency, when we control for earnings quality and mispricing, and when we address endogeneity issues. Furthermore, we examine how the impact of stock price informativeness on labor investment efficiency depends on labor union and financial constraints. Particularly, we find stock price informativeness helps mitigating the adverse effects of labor union and financial constraints on labor investment, respectively. Collectively, our results highlight the importance of information included in stock prices for the investment in human capital.
    Keywords: Stock Price Informativeness, Private Information; Managerial learning, Investment Efficiency; Labor Investment; Corporate Governance
    JEL: G15 G31 G34
    Date: 2015–06
  8. By: Nefedova, Tamara; Parise, Gianpaolo; Eisele, Alexander
    Abstract: This paper exploits institutional trade level data to study cross-trading activity inside mutual fund families. Cross-trades are opposite trades matched between siblings (i.e., funds belonging to the same fund family) without going to the open market. We find that large fund families with weak governance and high within family size dispersion cross-trade more and are more likely to misprice their cross-trades. Additionally, we find that cross-trades are used to increase the performance of the most valuable siblings (on average by 2.5% per annum) at the expense of the less valuable funds. More restrictive governance policies introduced as a consequence of the late trading scandal were effective in reducing the amount and the mispricing of cross-trades.
    Keywords: Cross-trading; Performance; Governance; Mutual Fund Families;
    JEL: G34 L25
    Date: 2015–06
  9. By: Roda Jean-Marc
    Abstract: Promoting tropical forest sustainability among corporate players is a major challenge. Many tools have been developed, but without much success. Southeast Asia has become a laboratory of globalization processes, where the development and success of agribusiness transnationals raises questions about their commitment to environmental concerns. An abundance of literature discusses what determines the behavior of Asian corporations, with a particular emphasis on cultural factors. Our hypothesis is that financial factors, such as ownership structure, may also have a fundamental role. We analyzed the audited accounts of four major Asian agribusiness transnationals. Using network analysis, we deciphered how the 931 companies relate to each other and determine the behavior of the transnationals to which they belong. We compared various metrics with the environmental commitment of these transnationals. We found that ownership structures reflect differences in flexibility, control and transaction costs, but not in ethnicities. Capital and its control, ownership structure, and flexibility explain 97% of the environmental behavior. It means that existing market-based tools to promote environmental sustainability do not engage transnationals at the scale where most of their behavior is determined. For the first time, the inner mechanisms of corporate governance are unraveled in agricultural and forest sustainability. New implications such as the convergence of environmental sustainability with family business sustainability emerged.
    Keywords: Southeast Asia, oil palm, forest, transnationals, investment strategy, emerging markets, competitiveness, network analysis, network metrics, ethnic business, ownership structure, family business. agribusiness
    JEL: D85 F02 F23 G32 L14 L73 Q01 Q13 Q23
    Date: 2014
  10. By: Auboin, Marc
    Abstract: While conditions in trade finance markets returned to normality in the main routes of trade, the structural difficulties of poor countries in accessing trade finance have not disappeared - and might have been worsened during and after the global financial crisis. In fact, there is a consistent flow of information indicating that trade finance markets have remained characterized by a greater selectivity in risk-taking and flight to "quality" customers. In that environment, the lower end of the market has been struggling to obtain affordable finance, with the smaller companies in the smaller, poorer countries most affected. In an area where statistics are difficult to find, this paper looks at recent available information and provides background on the persistent and significant market gaps for trade finance in developing countries, notably in Africa and developing Asia. It discusses various initiatives in which the WTO and partner institutions are involved to alleviate in part this situation.
    Keywords: trade financing,cooperation with international financial institutions,coherence,G-20,developing countries
    JEL: F13 F34 F36 O19 G21 G32
    Date: 2015
  11. By: HOSONO Kaoru; HOTEI Masaki; MIYAKAWA Daisuke
    Abstract: Research and development (R&D) expenditures are affected potentially by the present and past use of R&D tax credits through two channels. While the present use of R&D tax credits promotes R&D investment through a reduction in capital cost, the past use promotes the investment through an increase in internal funds. We empirically investigate how these two channels affect the R&D investment of Japanese manufacturing firms by using firm-level data. Our results can be summarized as follows. First, the effect of the present use of R&D tax credit on R&D investment is smaller for firms that are more likely to depend on external finance (i.e., firms that operate in industries with higher dependence on external finance) than for those that are less likely to depend on external finance, suggesting that higher agency cost associated with the larger use of external finance partially mitigates the effect of R&D tax credits. Second, the past use of R&D tax credits does not necessarily lead to significant increase in the internal funds for firms that are more likely to depend on external finance, which implies that the use of R&D tax credits does not contribute to the promotion of firms' R&D investment. These results jointly imply that the effect of R&D tax credits on R&D investment is limited for financially constrained firms.
    Date: 2015–06
  12. By: Ron Alquist (Kings Peak Asset Management); Rahul Mukherjee (Graduate Institute of International and Development Studies); Linda L. Tesar (University of Michigan and NBER)
    Abstract: We develop a model of foreign direct investment (FDI) in which financially liquid foreign firms acquire liquidity-constrained target firms. Using a large dataset of emerging-market acquisitions, we find evidence supporting three central predictions of the model: (i) firms in external finance dependent and intangible sectors are more likely to be targets of foreign acquisitions; (ii) these targets have ownership structures with larger foreign stakes; (iii) these effects are most prominent in countries with low levels of financial development. The regression evidence indicates that liquidity is at least as economically important as technology- or trade-related motives for FDI in emerging-market economies.
    Keywords: Foreign direct investment; cross-border mergers and acquisitions; nancial development; external nance dependence; asset tangibility; emerging markets.
    JEL: F21 F23 G34 L24 L60
  13. By: Fulghieri, Paolo; Garcia, Diego; Hackbarth, Dirk
    Abstract: We study a security design problem under asymmetric information, in the spirit of Myers and Majluf (1984). We introduce a new condition on the right tail of the firm-value distribution that determines the optimality of debt versus equity-like securities. When asymmetric information has a small impact on the right-tail, risky debt is preferred for low capital needs, but convertible debt is optimal for larger capital needs. In addition, we show that warrants are the optimal financing instruments when the firm has already pre-existing debt in its capital structure. Finally, we provide conditions that generate reversals of the standard pecking order.
    Keywords: asymmetric information; debt-equity choice; pecking order; security design
    JEL: D82 G32
    Date: 2015–06

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