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on Corporate Finance |
| By: | Gabriel H. NEUKOMM (University of Zurich and Swiss Finance Institute (Ph.D Program)) |
| Abstract: | Modern corporations use complex debt instruments and pursue acquisitions. In order to analyze the properties of some of these contracts in the event of an acquisition, this paper considers a company that has an incumbent capital structure, comprising one of five practically important structured debt contracts. An opportunity for an acquisition comes along that was not ex-ante contractible. The equityholder decides on the financing of this expansion by trading off tax advantages of debt against costs of bankruptcy. The model yields a number of insights for structured debt and acquisitions, four of which are as follows: First, a seniority clause offers the bondholder protection from agency, but it also decreases the equityholder’s incentives to finance the acquisition. Second, embedded call options are valuable even if interest rates are constant, because they allow the equityholder to issue a new bond at fair value. Third, bankruptcy remoteness is valuable, if assets are very risky. Fourth, convertible bonds are vulnerable to agency and the conversion option bears the same incentive problem as a seniority clause. These properties explains, for example, the otherwise puzzling practice of companies buying out convertible bond holders prior to an acquisition. |
| Keywords: | Capital structure, mergers and acquisitions, structured finance |
| JEL: | G24 G32 G34 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1155&r=cfn |
| By: | Rajna GIBSON BRANDON (University of Geneva and Swiss Finance Institute); Miret PADOVANI (Vienna University) |
| Abstract: | In this paper, we examine the relationship between banks' lobbying activities, their size, nancial strength, and sources of income. First, we nd that banks are more likely to lobby when they are larger, have more vulnerable balance sheets, are less creditworthy, and have more diversied business proles. We also nd that banks engaged in non-traditional businesses, e.g. securitization and trading, or in highly regulated businesses, e.g. insurance, hire more lobbyists and spend larger amounts on lobbying. Finally, we observe that the announcement of the Dodd-Frank bill led to increased lobbying by banks with higher trading revenues. |
| Keywords: | banking, lobbying, nancial regulatory reform, Dodd-Frank bill. |
| JEL: | G21 G28 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1156&r=cfn |
| By: | Arina Nikandrova (Department of Economics, Mathematics & Statistics, Birkbeck); Romans Pancs (University of Rochester) |
| Abstract: | We study a normative model of an internal capital market, used by a company to choose between its two divisions’ pet projects. Each project’s value is initially unknown to all but can be dynamically learned by the corresponding division. Learning can be suspended or resumed at any time and is costly. We characterize an internal capital market that maximizes the company’s expected cash flow. This market has indicative bidding by the two divisions, followed by a spell of learning and then firm bidding, which occurs at an endogenous deadline or as soon as either division requests it. |
| Keywords: | Internal Capital Market, Irreversible Project Selection. |
| JEL: | D82 D83 G32 G31 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1505&r=cfn |
| By: | Jha, Chandan Kumar |
| Abstract: | In this paper, I assess the impact of financial reforms on corruption using a panel of 85 countries for 1984-2005. I find that several, but not all, of the policies targeted towards financial liberalization reduce corruption. Specifically, the abolition of entry barriers, credit controls, and excessive reserve requirements along with improvements in the security markets and banking supervision are associated with lower corruption. |
| Keywords: | Corruption, Banks, Financial Reforms, Liberalization |
| JEL: | D73 G28 O16 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65420&r=cfn |
| By: | Hyeongwoo Kim; Deockhyun Ryu |
| Abstract: | This paper evaluates the speed of convergence across national stock markets employing a nonlinear, nonparametric stochastic model of relative stock prices. We use straightforward operational algorithms for estimating measures of persistence of the relative stock price that are based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). Using stock indices of G7 countries, we obtain strong empirical evidence of convergence of national stock prices in France, Germany, and the UK vis-à-vis the US index. Also, we obtain faster convergence rates from our nonlinear models in comparison with those from linear alternatives. On the contrary, our results imply very limited evidence of convergence for Canada, Italy, and Japan. We obtain similarly weak evidence of convergence from non-G7 developed countries. Our simulation exercise for portfolio switching strategies overall confirm the validity of empirical results in the preset paper. |
| Keywords: | Persistence; Contrarian Strategy; Momentum Strategy; Short Memory in Mean; Short-Memory in Distribution; Max Half-Life; Portfolio Switching Strategies |
| JEL: | C14 C22 F36 G11 G14 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2015-08&r=cfn |
| By: | Josef Schroth |
| Abstract: | I build a model of optimal managerial compensation where managers each have a privately observed propensity to manipulate short-term stock prices. It is shown that this informational asymmetry reverses some of the conventional wisdom about the relationship between reliance on short-term pay and propensity to manipulate. The optimal compensation scheme features a negative relationship between pay duration and manager manipulation activity, reconciling theory with recent empirical findings (Gopalan et al., 2014). Further, the model predicts that managers who spend more resources manipulating short-term stock prices also put more effort into generating longterm firm value. |
| Keywords: | Economic models, Labour markets, Recent economic and financial developments |
| JEL: | D82 G14 G30 M12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-25&r=cfn |
| By: | Sengupta, Rajdeep (Federal Reserve Bank of Kansas City); Bhardwaj, Geetesh |
| Abstract: | A metric of credit score performance is developed to study the usage and performance of credit scoring in the loan origination process. We examine the performance of origination FICO scores as measures of ex ante borrower creditworthiness using loan-level data on ex post performance of subprime mortgages. Parametric and nonparametric estimates of credit score performance reveal different trends, especially on originations with low credit scores. The data suggest a trend of increased emphasis on higher credit scores accompanying a trend of increased riskiness in other origination attributes. Over time, this increased emphasis on credit scoring coincided with deterioration in FICO performance largely due to the fact that higher credit score originations of later cohorts were more likely to have riskier attributes. However, controlling for other attributes on originations and changes in economic conditions, we find that, as measures of borrower ranking, FICO performance on subprime loans over the years remains fairly stable. |
| Keywords: | Credit scoring; Subprime mortgages |
| JEL: | G21 |
| Date: | 2015–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp15-02&r=cfn |
| By: | Orman, Cuneyt |
| Abstract: | This paper develops a theory of the firm scope where not only research but also ordinary production employees can generate inventions. Separating research from production (“specialization”) solves the two-tier agency problem of inducing simultaneously research effort and managerial truthful-reporting but is costly when capital markets are imperfect. Improvements in capital markets, therefore, promote specialization, allowing a greater number of specialized firms to be established and also enabling them to undertake innovative projects with larger potential outcomes. Moreover, this capital market improvement effect is stronger for innovative activities that are less capital-intensive and that have weaker synergies with existing production activities. The model can help us understand the explosion of small company innovation in the U.S. since late 1970s and the contribution of venture capital to this change. |
| Keywords: | Innovation, Organizational form, Agency problems, Technological synergies, Financial imperfections. |
| JEL: | D86 D2 D82 O32 G24 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65441&r=cfn |
| By: | Ana Dinis; Cidália Lopes (Instituto Superior de Contabilidade e Administração de Coi); Alexandre Silva |
| Abstract: | This article aims to analyze the taxation of insolvent companies and how this process can lead to more tax evasion and tax fraud, in Portugal. Thus, this paper intends to explore how the complexity of the tax system allows tax evasion and tax fraud in insolvency proceedings. This paper is divided in two parts. At first, a review of major studies in national and international context, analyze and debate the issues raised by taxation of insolvent companies from the perspective of tax evasion and fraud. In this regard, the complexity of business insolvency, which becomes even more controversial when embracing the taxation of insolvent companies. Many of the problems that arise for the correct identification of the tax treatment applicable to processes happen to set between tax law and bankruptcy law. Second, we present the results of a study conducted in Portugal in 2013, which qualitatively assesses the perceptions of the Insolvency Administrators (AI), in relation to the taxation of insolvent companies. The technique used for gathering information was the use of questionnaires administered to the entire population of AI. A response rate of 15.48% was obtained. It was concluded that the Portuguese tax system do not make taxation of insolvent companies a clear process, raising many questions about the subject of insolvent companies to tax. Furthermore, the CIRE by giving primacy to the insolvency, for the sake of business recovery, leads to the possibility of tax evasion and fraud. To sum up, it is deemed indispensable the harmonization of procedures, legal and tax, the CIRE and the CIRC in order to a more consistent treatment of tax in insolvency proceedings, in order to annul the tax evasion and tax fraud case insolvency and also allow business recovery. |
| Keywords: | insolvent firms. Tax on Corporate Income Tax (IRC). Tax evasion and fraud; insolvent firms. Tax on Corporate Income Tax (IRC). Tax evasion and fraud. |
| JEL: | G33 K34 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:por:obegef:036&r=cfn |
| By: | Tom Horlick-Jones; Jonathan Rosenhead |
| Abstract: | Ambiguity, the existence of multiple plausible (though possibly contested) ways of making sense of the characteristics of decision situations, can present significant difficulties for a wide range of risk management tasks. We will argue that ambiguity is present in risk management situations to a far greater extent that is commonly appreciated. The concept of ambiguity has arisen in different forms across disciplinary literatures and domains of practice. In this paper, we situate our experience of finding ways of supporting planning and decision-making processes concerned with ambiguous risks in the context of those wider perspectives. Our own efforts have employed a hybrid form of problem structuring methods (drawn from operational research and management science) and ethnography (drawn from sociology and anthropology). These engagements with organisational and inter-organisational risk management issues have led us to recognise that ‘untangling’ otherwise intractable risk management problems may be regarded, in some sense, as a therapeutic process. In this paper, we develop this therapeutic interpretation of the untangling of collective ambiguities using illustrations from a concrete problem situation. We set this therapeutic reading of decision processes in the context of wider perspectives, including those drawn from Habermas’ theorisation of communication, the sociology of science and the literature on citizen engagement and deliberation processes. |
| Keywords: | organizational risk management; ambiguity; uncertainty; plural rationalities; ethnomethodology; problem structuring methods; practical reasoning; the metaphor of psychotherapy; engagement; transdisciplinarity |
| JEL: | J50 G32 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:62497&r=cfn |
| By: | Arnold, Eva A.; Größl, Ingrid; Koziol, Philipp |
| Abstract: | German savers are renowned for preferring safe, long-term investments, thus providing patient capital, with bank deposits playing an important role. Using a comprehensive data set for the German banking sector, we examine whether German depositors are really that patient, abstaining from any type of market discipline, and how the financial crisis might have changed a well-established habit. Our empirical investigation reveals the existence of market discipline with a high degree of heterogeneity depending on banks' governance structures. The announcement of a state guarantee for bank deposits following the collapse of Lehman Brothers succeeded in calming depositors of all banking groups but did not remove market discipline entirely. Remaining disciplinary reactions by depositors of different banking groups increase in homogeneity but some differences remain. |
| Keywords: | market discipline,bank depositor behavior,bank risk taking,deposit rates |
| JEL: | G10 G20 G30 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:132015&r=cfn |
| By: | Didier Brandao,Tatiana; Levine,Ross Eric; Schmukler,Sergio L. |
| Abstract: | How many and which firms issue equity and bonds in domestic and international markets, how do these firms grow relative to non-issuing firms, and how does firm performance vary along the firm size distribution? To evaluate these questions, a new data set is constructed by matching data on firm-level capital raising activity with balance sheet data for 45,527 listed firms in 51 countries. Three main patterns emerge from the analysis. (1) Only a few large firms issue equity or bonds, and among them a small subset has raised a large proportion of the funds raised during the 1990s and 2000s. (2) Issuers grow faster than non-issuers in assets, sales, and employment, that is, firms do not simply use securities markets to adjust their financial accounts. (3) The firm size distribution of issuers evolves differently from that of non-issuers, tightening among issuers and widening among non-issuers. |
| Keywords: | Access to Finance,Economic Theory&Research,Debt Markets,Microfinance,Emerging Markets |
| Date: | 2015–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7353&r=cfn |
| By: | Ronald W. Anderson (London School of Economics and Political Science (LSE)); Cecilia Bustamante (London School of Economics and Political Science (LSE)); Stéphane Guibaud (London School of Economics and Political Science (LSE)) |
| Abstract: | We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is better able to grow the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. The use of golden parachutes is suboptimal, unless the firm needs to incentivize its managers to truthfully report the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract may imply excessive retention. |
| Keywords: | Agency; Firm growth; Managerial turnover |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2gg54vdji291pb220pomk85ev8&r=cfn |