nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒10‒04
seventeen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Firms’ risk endogenous to strategic management choices By Delis, Mantos D.; Hasan, Iftekhar; Tsionas, Efthymios G
  2. The relationship between distance-to-default and CDS spreads as measures of default risk for European banks By Kim Ristolainen
  3. The effect of board directors from countries with different genetic diversity levels on corporate performance By Delis, Mantos D.; Gaganis, Chrysovalantis; Hasan, Iftekhar; Pasiouras, Fotios
  4. Labor Rigidity and the Dynamics of the Value Premium By Roberto Marfè
  5. Liquidity, Innovation, and Endogenous Growth By Malamud, Semyon; Zucchi, Francesca
  6. Risk management in light of corporate Governance By Ahmad khateeb
  7. From Financial to Real Economic Crisis: Evidence from Individual Firm-Bank Relationships in Germany By Nadja Dwenger; Frank M. Fossen; Martin Simmler
  8. The winner's curse: Evidence on the danger of aggressive credit growth in banking By Kick, Thomas; Pausch, Thilo; Ruprecht, Benedikt
  9. Structure of Debt Maturity across Firm Types By Cuneyt Orman; Bulent Koksal
  10. Portfolio Selection with Transaction Costs and Default Risk By Giovanni W. Puopolo
  11. Optimal Resolution Procedures and Dividend Policy for Global-Systemically-Important-Banks By Ibrahim Ethem Guney
  12. Evidence for the Existence of Downward Real Earnings Management By Francis, Bill; Hasan, Iftekhar; Li, Lingxiang
  14. Is Volatility Clustering of Asset Returns Asymmetric? By Cathy Ning; Dinghai Xu; Tony Wirjanto
  15. Les exigences de transparence des accords de Bâle: Aubaine ou fardeau pour les pays en développement ? By Etienne Farvaque; Catherine Refait-Alexandre
  16. Economic Activity and Credit Market Linkages: New Evidence from Italy By V. Chiorazzo; V. D’Apice; P. Morelli; Giovanni W. Puopolo
  17. Univariate and multivariate filters to measure the credit gap By Zsuzsanna Hosszú; Gyöngyi Körmendi; Bence Mérõ

  1. By: Delis, Mantos D. (University of Surrey); Hasan, Iftekhar (Fordham University and Bank of Finland); Tsionas, Efthymios G (Athens University of Economics and Business, and Lancaster University Management School, Lancaster University)
    Abstract: Use of variability of profits and other accounting-based ratios in order to estimate a firm's risk of insolvency is a well-established concept in management and economics. This paper argues that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the well-established multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of U.S. banks, and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default, but also well in advance of this default and before conventional measures of bank risk.
    Keywords: risk; strategic management; endogenous; profit function
    JEL: C13 C33 E47 G21 G32
    Date: 2015–08–20
  2. By: Kim Ristolainen (Department of Economics, University of Turku)
    Abstract: CDS spreads are often used as market’s view of credit risk. There is no popular alternative to it; perhaps only the distance-to-default measure based on Merton (1974) comes close to it. In this paper we investigate the relationship between these two measures for large European banks in post subprime crises era. The analysis makes use of conventional Granger causality test statistics for individual banks and for the whole panel data. As for the results, we find that the lead-lag relationship between these variables varies over time and over different banks and economic regimes. The lead of distance-to-default is stronger for banks in problem countries (PIGS), during European debt crises, for relatively small banks and when there are large changes in CDS spread. These results suggest that we may have predictive power by not only using the CDS spread, but also other measures such as the distance-to-default.
    Keywords: financial stability, European banks, distance-to-default, credit default swap, lead-lag relationship
    JEL: G01 G14 G21 G32 G33
    Date: 2015–09
  3. By: Delis, Mantos D. (University of Surrey); Gaganis, Chrysovalantis (University of Crete); Hasan, Iftekhar (Gabelli School of Business, Fordham University and Bank of Finland); Pasiouras, Fotios (University of Surrey, UK, and University of Crete)
    Abstract: We link genetic diversity in the country of origin of the firms’ board members with corporate performance via board members’ nationality. We hypothesize that our approach captures deep-rooted differences in cultural, institutional, social, psychological, physiological, and other traits that cannot be captured by other recently measured indices of diversity. Using a panel of firms listed in the North American and U.K. stock markets, we find that adding board directors from countries with different levels of genetic diversity (either higher or lower) increases firm performance. This effect prevails when we control for a number of cultural, institutional, firm-level, and board member characteristics, as well as for the nationality of the board of directors. To identify the relationship, we use as instrumental variables for our diversity indices the migratory distance from East Africa and the level of ultraviolet exposure in the directors’ country of nationality.
    Keywords: genetic diversity; corporate performance; nationality of board members
    JEL: G30 M10 M14
    Date: 2015–08–17
  4. By: Roberto Marfè
    Abstract: This paper empirically and theoretically investigates the relation between labor rigidity and the value premium. Aggregate labor rigidity shifts dividend risk towards the short horizon and enhances the pricing of short-run risk. In turn, shorter duration equity deserves a premium over longer duration equity, that is the value premium obtains. Con- sistently, labor-share variation strongly explains the contemporaneous and intertemporal excess return of value firms over growth firms. A closed-form general equilibrium model reproduces the term-structure effect of labor rigidity and naturally gives rise to the value premium and its dynamics. The model is robust to many features of financial markets.
    Keywords: value premium, labor rigidity, term-structure, predictability, duration
    JEL: D51 E21 G12
    Date: 2015
  5. By: Malamud, Semyon; Zucchi, Francesca
    Abstract: We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.
    Keywords: Cash management; Creative destruction; Endogenous growth; Financial constraints; Innovation
    JEL: D21 G31 G32 G35 L11
    Date: 2015–09
  6. By: Ahmad khateeb (al-hussein bin talal university)
    Abstract: Corporate Governance operations are carried out by representatives of stakeholders to provide supervision of risk management and control risks of the organization and the emphasis on the adequacy of controls to avoid these risks, which leads to the direct contribution in the achievement of goals and increase the value of the organization, and perhaps is the question "of these actors that contribute to risk management based on rules of corporate Governance? "The answer to this question was the subject of this research to shed light on the concept of risk management and its relationship to the corporate Governance and identification of which can contribute to identifying, measuring and testing and evaluation of risk management. And to identify the extent of the commitment of both boards of directors and the internal auditor and external auditor and audit committees the requirements of corporate governance in risk management in the insurance company and diagnosis the negative and positive aspects of practical applications for risk management and submission of proposals that would increase the effectiveness of risk management in insurance companies The results showed that there is a recognition great importance to these agencies for their role in risk management but differentiated one from the other and to promote this awareness is necessary to Adhere to the principles and standards of the International Auditing and amending legislation related to the duties of these entities and the holding of training courses, continuing all management levels to familiarize them with the elements of corporate governance and effective role in risk management.
    Keywords: corporate Governance , Risk management , insurance company , internal auditor , stakeholders
    JEL: G30 G22 G32
  7. By: Nadja Dwenger; Frank M. Fossen; Martin Simmler
    Abstract: What began as a financial crisis in the United States in 2007–2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy—in particular, to real investment and labor employment by nonfinancial firms. We analyze whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004–2010 period together with the financial statements of each firm’s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm- and bankspecific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labor employment significantly. This effect islarger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity.
    Keywords: Financial crisis, contagion, credit rationing, relationship lending, investment
    JEL: D22 D92 E44 G01 G20 G31 H25 H32
    Date: 2015
  8. By: Kick, Thomas; Pausch, Thilo; Ruprecht, Benedikt
    Abstract: Excessive credit creation by banks was at the root of the recent financial crisis. Nevertheless, micro-prudential regulation lacks a clear methodology to identify these banks. Combining arguments from banking and auction theory, we show that overoptimism causes excessive lending, subsequently yielding abnormal loan write-offs. We propose a new measure of excessive credit growth known from macroeconomics to identify credit booms and test our model for German bank and bankportfolio level data. Unlike traditional measures of (excessive) loan growth, our new measure identifies banks that are affected by abnormal loan write-offs, need capital support, or default in subsequent years.
    Keywords: Excessive credit growth,Winner's curse,Loan-to-GDP gap,Micro-prudential regulation,Identifying weak banks
    JEL: C23 G21 G32
    Date: 2015
  9. By: Cuneyt Orman; Bulent Koksal
    Abstract: We investigate if and when the leading theories of debt maturity are useful in understanding the maturity choices of nonfinancial firms in a major developing economy, Turkey. Unlike most research, we use a dataset that provides financial information on not only large, publicly-traded firms but also small, privately-held firms across a wide variety of industries. Our strongest finding is that firms that have high leverage also have long maturity. Size, asset maturity, and credit quality are also important, although results depend on the type of firm group considered. The stability of the economic environment as measured by inflation and interest rate volatility also influences debt maturity decisions. Our findings are broadly consistent with the liquidity risk theory. The agency theory is also partially useful in understanding firms' maturity decisions, particularly for medium- and large-sized, publicly-traded firms. The signaling theory is most useful when the sample consists of large, publicly-traded firms. We find little evidence that taxes matter for maturity decisions. Our findings also provide some evidence that borrower-lender relationships might matter for debt maturity structures.
    Keywords: Debt maturity structure, Nonfinancial firms, Turkey
    JEL: G3 G32
    Date: 2015
  10. By: Giovanni W. Puopolo (Università Bocconi and CSEF)
    Abstract: I propose a simple consumption/investment problem with transaction costs and default risk. When default occurs, I assume the value of the risky asset drops to zero and the investor receives the terminal wealth only in the form of the other (riskless) security. I show that default risk can generate a first-order effect on the investor’s asset allocation. On the contrary, the liquidity premium is one order of magnitude smaller than the transaction costs, implying that the additional source of risk determined by the possibility of default is not able to generate a first-order effect on asset pricing.
    JEL: C61 D11 D91 G11
    Date: 2015–09–20
  11. By: Ibrahim Ethem Guney
    Abstract: Following the global financial crisis of 2007-2009, bank regulators have adopted special resolution procedures for global systemically important banks. They now have the power to seize these banks when their capital falls below some threshold, and to sell them back to new investors after having restructured them. This paper characterizes the optimal intervention thresholds and studies the interactions with the dividend and equity issuance policies of global systemically important banks. The main findings of our analysis for the optimal regulatory policy are: First, when the restructuring costs are high, it is optimal for regulators to impose dividend payout restrictions for undercapitalized banks. Second, in states of the economy, where capital supply becomes more scarce, these results are aggravated. In particular, regulators intervene relatively earlier, set stricter dividend payout restrictions and require relatively higher initial capital of the banks. Finally, capital supply constraints have an important impact on the financing decisions of shareholders. Banks recapitalize less frequently when the cost of raising equity is high or when the external capital supply is plentiful.
    Keywords: Capital supply uncertainty, Banking regulation, Optimal dividend policy, Resolution procedures, Global systemically important bank
    JEL: G21 G32 G33 G35
    Date: 2015
  12. By: Francis, Bill (Lally School of Management and Technology, Rensselaer Polytechnic Institute); Hasan, Iftekhar (School of Business, Fordham University and Research Department, Bank of Finland); Li, Lingxiang (School of Business, State University of New York-Old Westbury)
    Abstract: Prior studies of real-activity earnings management (REM) focus on earnings-inflating abnormal activities. We seek to establish the existence of downward REM by investigating several corporate events in which managers have incentives to temporarily deflate market valuations. Specifically, we focus on, and find downward REM before, share repurchases, management buyouts (MBOs), and CEO option awards. Large-sample evidence of downward REM is also found in our general analysis of earnings smoothing. Downward REM becomes much smaller or nonexistent when there is a lack of managerial incentives in those events, such as non-carry-through repurchases, incomplete MBOs, and unexpected option awards. Following the research design of Zang (2012), we find that various REM and AEM cost factors consistently influence the magnitude of downward REM and AEM around the three corporate events.
    Keywords: downward earnings management; real earnings management; share repurchase; management buyout; CEO option grant; earnings smoothing
    JEL: G14 G30 G32 M40 M41
    Date: 2015–08–12
  13. By: Victor Ekpu; Alberto Paloni
    Abstract: This paper addresses the question whether business lending is still an important source of bank profits in the UK banking system. This research question is motivated by the effects of the process of financialisation. It has been argued that one of the consequences of financialisation is a dramatic change in business strategies by financial institutions, which have turned to new fields of profitability – namely, transactions in open financial markets and household/consumer lending – moving away from traditional business lending. However, the extent to which commercial banks have embraced financialisation and the contribution of business lending to bank profitability are likely to be the result of bank-specific characteristics. This paper investigates, therefore, whether the profitability of business lending is driven by bank heterogeneity or whether it is possible to identify systematic characteristics which affect it. Using bank level data from BankScope for a total sample of 83 UK banks and building societies for the period 2005-2009 and employing panel fixed effects estimation, we find very strong size effects: in particular, while business lending is a statistically significant source of bank profits, its quantitative importance varies dramatically across bank size. For large banks, business lending contributes to the rate of return on equity very little. This finding is not due to the occurrence of the financial crisis. Indeed, large size effects are found even when the financial crisis is controlled for. While we detected strong size effects, we could not detect any ownership effects. The profitability of business lending depends on whether banks are large or small, not on whether they are domestic or foreign. One possible policy implication of our findings is that capital injections into the larger banks per se are unlikely to lead to an expansion of credit to business.
    Keywords: business lending, bank profitability, financialisation, UK banking system, bank size, bank ownership, panel data econometrics
    JEL: E44 G20 G21
    Date: 2015–09
  14. By: Cathy Ning (Department of Economics, Ryerson University, Toronto, Canada); Dinghai Xu (Department of Economics, University of Waterloo, Waterloo, Ontario, Canada); Tony Wirjanto (School of Accounting & Finance and Department of Statistics & Actuarial Science,University of Waterloo, Waterloo, Ontario, Canada)
    Abstract: Volatility clustering is a well-known stylized feature of financial asset returns. In this paper, we investigate the asymmetric pattern of volatility clustering on both the stock and foreign exchange rate markets. To this end, we employ copula-based semi-parametric univariate time-series models that accommodate the clusters of both large and small volatilities in the analysis. Using daily realized volatilities of the individual company stocks, stock indices and foreign exchange rates constructed from high frequency data, we find that volatility clustering is strongly asymmetric in the sense that clusters of large volatilities tend to be much stronger than those of small volatilities. In addition, the asymmetric pattern of volatility clusters continues to be visible even when the clusters are allowed to be changing over time, and the volatility clusters themselves remain persistent even after forty days.
    Keywords: Volatility clustering, Copulas, Realized volatility, High-frequency data.
    JEL: C51 G32
    Date: 2014–06
  15. By: Etienne Farvaque (LEM, Université de Lille); Catherine Refait-Alexandre (CRESE, Univ. Bourgogne Franche-Comté)
    Abstract: Nous analysons l’impact que les exigences de transparence inscrites dans les accords de Bâle ont sur le profit des banques. Leur mise en application au sein des pays en développement fait débat, car les effets attendus sont ambigus. Ainsi, une transparence accrue, impliquant une augmentation des coûts associés - en particulier les coûts opérationnels - pourrait réduire les profits bancaires, même si le niveau des capitaux requis peut diminuer. Le cadre institutionnel joue alors un rôle primordial.
    Keywords: transparence, banques, profits, ratios de capital, discipline de marché, pays en développement
    JEL: G21 G28
    Date: 2015–09
  16. By: V. Chiorazzo (Italian Banking Association); V. D’Apice (Italian Banking Association); P. Morelli (Italian Banking Association); Giovanni W. Puopolo (Università Bocconi and CSEF)
    Abstract: We investigate the interactions between the business cycle and credit markets in Italy, focusing on how macroeconomic shocks affect the banking sector (i.e. the real effect) and in turn how the financial system’s reaction influences the economic activity (i.e. the feedback effect). We find evidence of both effects, with the former conveyed primarily by the creditworthiness of large firms. Moreover, using data from the Bank Lending Survey provided by the ECB, we disentangle credit supply shocks due to factors inside the banking sector (the bank lending channel), from those outside the banking sector (the borrower’s balance-sheet channel), finding that both types of shocks have a significant impact on the real economy. Our results have far reaching implications for financial stability.
    Keywords: Real effect, Feedback effect, Bank Lending Channel, Balance-Sheet Channel, VAR, Business Cycle
    JEL: E32 E44 G28 G01 G21
    Date: 2015–09–20
  17. By: Zsuzsanna Hosszú (Magyar Nemzeti Bank (Central Bank of Hungary)); Gyöngyi Körmendi (Magyar Nemzeti Bank (Central Bank of Hungary)); Bence Mérõ (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: Within the framework of the Basel III capital regulation, macroprudential authorities may order the accumulation of countercyclical capital buffers in the period when systemic risks are building up. According to recommendations, it is worth setting the size of the capital buffer on the basis of the magnitude of the credit-to-GDP ratio gap. Therefore, the time series of Hungary’s credit-to-GDP ratio is decomposed to trend and cyclical components (credit gap) using four trend filtering methods: univariate Hodrick–Prescott filter, univariate Christiano–Fitzgerald filter, univariate Beveridge–Nelson filter and multivariate Hodrick–Prescott filter. The decomposition was carried out separately for the household and corporate segments. Of the four methods, it is the results of the multivariate Hodrick–Prescott filter, which also uses the information content of other variables, that reflect experts’ assessment relating to developments in lending in Hungary the most. In addition, endpoint uncertainty was also the smallest in this case, i.e. the receipt of new data caused the smallest changes in the values estimated for previous periods here.
    Keywords: countercyclical capital buffer, credit gap, trend filtering method
    JEL: C30 E32 G28
    Date: 2015

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