nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒11‒21
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Credit policies before and during the financial crisis By Palle Sørensen
  2. How Well Do GPs Bargain? Empirical Evidence on Private Equity Discounts in M&A Transactions By Morkoetter, Stefan; Wetzer, Thomas
  3. Does Financing of Chinese Mergers and Acquisitions Have “Chinese Characteristics”? By Lulu Gu; W. Robert Reed
  4. SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK By Degryse, Hans; Matthews, Kent; Zhao, Tianshu
  5. The role of investment banking in systemic risk profiles. Evidence from a panel of EU banking sectors By Renata Karkowska
  6. Earnings Management and Stock Price Crashes PostCrossdelisting By Gilberto Loureiro; Sónia Silva
  7. CEO turnover and relative performance evaluation By Dirk Jenter; Fadi Kanaan
  8. Do regulations and supervision shape the capital crunch effect of large banks in the EU? By Malgorzata Olszak; Mateusz Pipien; Iwona Kowalska; Sylwia Roszkowska
  9. Role of the Credit Risk Database in Developing SMEs in Japan: Lessons for the Rest of Asia By Kuwahara, Satoshi; Yoshino, Naoyuki; Sagara, Megumi; Taghizadeh-Hesary, Farhad
  10. Equity Offerings, Stock Price Crash Risk, and the Impact of Securities Regulation: International Evidence By Larry Fauver; Gilberto Loureiro
  11. Regional Economic Activity and Stock Returns By Esad Smajlbegovic
  12. Centralized trading of corporate bonds By Samuel Huber; Jaehong Kim
  13. Credit Scarcity in Developing Countries: an Empirical Investigation using Brazilian Firm-Level Data By André Albuquerque de Sant’Anna; Antônio Marcos Hoelz Pinto Ambrozio; Filipe Lage de Sousa; João Paulo Martin Faleiros
  14. Credit Control Rights and Resource Allocation within Firms By Nuri Ersahin; Rustom M. Irani; Hanh Le
  15. A stochastic control approach for options market making By Sofiene El Aoud; Frédéric Abergel
  16. Location Decisions of Non-Bank Financial Foreign Direct Investment: Firm-Level Evidence from Europe By Ronald B. Davies; Neill Killeen

  1. By: Palle Sørensen (Aarhus University and CREATES)
    Abstract: This paper empirically distinguishes between the two main contending explanations for credit cycles. Namely, the bank lending channel and the balance sheet channel. This is done by using unique Danish survey, register, rating, and bank data. The results indicate that the bank lending channel explains most of the changes in credit policy by Danish banks towards small and medium (SME) sized firms. However, the results show that both channels are operational, but the balance sheet channel is surprisingly weak partly because discouragement during the crisis kept struggling firms from applying for credit. The analysis also reveals that the credit supply was weaker in banks that were struggling during the crisis and indirectly that firms could not off-set this effect by changing banks. Furthermore, the evidence suggests that the financial crisis also affected the liquidity of non-financial firms, as credit demand rose immediately following the crisis.
    Keywords: Business Fluctuations, Financial Markets and the Macroeconomy, Banks, and Credit Policies.
    JEL: E32 E44 G21 G32
    Date: 2015–11–10
  2. By: Morkoetter, Stefan; Wetzer, Thomas
    Abstract: We assess the performance of private equity (PE) funds in M&A transactions in comparison to their strategic peers. Controlling for company and deal characteristics, we show that PE funds pay less, on average, than strategic buyers for comparable target corporations. This discount is consistent for all GP and fund characteristics. However, it is stronger for club deals and it disappears for acquisitions of private, non-listed targets. When selling their portfolio companies, PE firms receive only a premium compared to their strategic peers when selling in club deals, otherwise, they sell at comparable pricing levels to other strategic divestitures.
    Keywords: Private Equity, Corporate Finance, Mergers and Acquisitions, Takeover Premiums
    JEL: G15 G30 G32 G34
    Date: 2015–10
  3. By: Lulu Gu; W. Robert Reed (University of Canterbury)
    Abstract: This paper analyzes the financing of Chinese mergers and acquisitions. It is motivated by two issues associated with characteristic features of the Chinese economy. First, foreign ownership restrictions can potentially inhibit Chinese acquiring firms’ use of equity to finance overseas M&A deals. Second, the ability of state-owned enterprizes (SOEs) to secure favorable loan terms may provide them an incentive to rely more on cash financing. We collate data from four databases to obtain a sample of over 6000 M&A deals that were completed during the 1997-2014 period. We find evidence to support the first supposition but not the second.
    Keywords: Mergers and acquisitions (M&As), foreign ownership restrictions, state owned enterprises (SOEs), M&A financing, Chinese firms
    JEL: G34 G28 N20
    Date: 2015–11–09
  4. By: Degryse, Hans; Matthews, Kent (Cardiff Business School); Zhao, Tianshu
    Abstract: We study the sensitivity of banks’ credit supply to small and medium size enterprises (SMEs) in the UK to banks’ financial condition before and during the financial crisis. Employing unique data on the geographical location of all bank branches in the UK, we connect firms’ access to bank credit to the financial condition (i.e., bank health and the use of core deposits) of all bank branches in the vicinity of the firm over the period 2004-2011. Before the crisis, banks’ local financial conditions did not influence credit availability irrespective of the functional distance (i.e., the distance between bank branch and bank headquarters). However, during the crisis, we find that SMEs with in their vicinity banks that have stronger financial condition face greater credit availability when the functional distance is low. Our results point to a “flight to headquarters” effect during the financial crisis.
    Keywords: financial crisis; credit supply; flight to headquarters; flight to quality; bank organization
    JEL: G21 G29 L14
    Date: 2015–08
  5. By: Renata Karkowska (University of Warsaw, Faculty of Management)
    Abstract: The goal of this study is to identify empirically how non-traditional activities affect directly the risk profiles and profitability of the banking sector. Through a dataset that covers 2678 European banks spanning the period 1996–2011 and the methodology of panel regression, the empirical findings document that investment banks have a negative effect on systemic risk in the banking sector. To show the heterogeneity of systemic risk determinants, the study sample was divided according to the economic development of a country into two groups: advanced and developing countries. We examine the implications of banks’ activity and risk-taking that manifest themselves as spreading and growing instability in the banking system. Then we explore the implications of the interaction between banking risk and structural, macroeconomic and financial market determinants. The findings have implications for both bank risk management and regulators. This paper advances the agenda of making macroprudential policy operational.
    Keywords: systemic risk, investment banking, emerging markets, credit risk, liquidity, bank solvency, instability
    JEL: F36 G21 G32 G33
    Date: 2015–05
  6. By: Gilberto Loureiro (Universidade do Minho - NIPE); Sónia Silva (Universidade do Minho)
    Abstract: We test whether cross-delisted firms from the major U.S. stock exchanges experience an increase in crash risk associated with earnings management. Consistent with our prediction, we find that earnings management have a greater positive impact on stock price crash risk post-cross-delisting when compared to a sample of still cross-listed firms. Moreover, our results suggest that this effect is more pronounced for crossdelisted firms from countries with weaker investor protection and poorer quality of their information environment. We further examine whether managers’ ability to manipulate earnings increases post-cross-delisting around seasoned equity offerings. Our evidence shows that cross-delisted firms that engage in earnings management to inflate reported earnings prior to a seasoned equity offering are more likely to observe a subsequent stock price crash.
    JEL: F30 F31 G15 G30
  7. By: Dirk Jenter; Fadi Kanaan
    Abstract: This paper shows that CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks from firm performance before deciding on CEO retention. Using a hand-collected sample of 3,365 CEO turnovers from 1993 to 2009, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and, to a lesser extent, after bad market performance. A decline in industry performance from the 90th to the 10th percentile doubles the probability of a forced CEO turnover.
    JEL: F3 G3
    Date: 2015–10
  8. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Mateusz Pipien (Department of Econometrics and Operations Research, Cracow University of Economics, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Sylwia Roszkowska (University of Warsaw, Faculty of Management)
    Abstract: This paper extends the literature on the capital crunch effect by examining the role of public policy for the link between lending and capital in a sample of large banks operating in the European Union. Applying Blundell and Bond (1998) two-step robust GMM estimator we show that restrictions on bank activities and more stringent capital standards weaken the capital crunch effect, consistent with reduced risk taking and boosted bank charter values. Official supervision also reduces the impact of capital ratio on lending in downturns. Private oversight seems to be related to thin capital buffers in expansions, and therefore the capital crunch effect is enhanced in countries with increased market discipline. We thus provide evidence that neither regulations nor supervision at the microprudential level is neutral from a financial stability perspective. Weak regulations and supervision seem to increase the pro-cyclical effect of capital on bank lending.
    Keywords: capital ratio, lending, capital crunch, regulations, supervision, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2015–10
  9. By: Kuwahara, Satoshi (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute); Sagara, Megumi (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute)
    Abstract: Small and medium-sized enterprises (SMEs) play a significant role in Asian economies as they contribute to high shares of employment and output. However, SMEs generally have limited access to finance compared to large enterprises. Given the bank-dominated financial systems in Asia, banks are the main source of financing for SMEs. For financial institutions, it is crucial to distinguish sound SMEs from non-healthy ones in order to avoid the accumulation of non-performing loans. Information asymmetry in this sector can be reduced by using accumulated data on SMEs and by employing credit analysis techniques, allowing lending institutions to recognize healthy SMEs. It is crucial for governments to collect SME data and prepare rich databases, such as the Credit Risk Database (CRD) of Japan. This will also help governments to formulate economic policies. In this paper we define and describe in detail the role and characteristics of Japan’s CRD in SME development and explain how it can be an example for other Asian economies to establish similar soft infrastructure that can make important contributions to SME development and boost economic growth.
    Keywords: SME finance; Credit Risk Database; risk models
    JEL: G21 G24 G32
    Date: 2015–11–18
  10. By: Larry Fauver (University of Tennessee); Gilberto Loureiro (Universidade do Minho - NIPE)
    Abstract: We examine whether earnings manipulation around seasoned equity offerings (SEOs) is associated with an increase in the likelihood of a stock price crash post-issue and test whether the enactment of securities regulations attenuate the relation between SEOs and crash risk. Empirical evidence documents that managerial tendency to conceal bad news increases the likelihood of a stock price crash (Jin and Myers, 2006; Hutton, Marcus, and Tehranian, 2009). We test this hypothesis using a sample of firms from 29 EU countries that enacted the Market Abuse Directive (MAD). Consistent with our hypothesis, we find that equity issuers that engage in earnings management experience a significant increase in crash risk post-SEO relative to control groups of non-issuers; this effect is stronger for equity issuers with poor information environments. In addition, our findings show a significant decline in crash risk post-issue after the enactment of MAD that is stronger for firms that actively manage earnings. This decline in post-issue crash risk is more effective in countries with high ex-ante institutional quality and enforcement. These results suggest that the implementation of MAD helps to mitigate managers’ ability to manipulate earnings around SEOs.
  11. By: Esad Smajlbegovic
    Abstract: This study analyzes the link between regional economic conditions and stock returns. I identify all U.S. states that are economically relevant for a firm through textual analysis of annual reports and construct a novel proxy for future regional economic activity. Using this proxy, I find that forecasts on economic conditions of firm-relevant U.S. regions positively predict stock returns on a monthly basis. This finding is robust to short-term reversal, individual stock momentum, industry momentum, geographic dispersion and a list of standard controls. A zero-cost trading strategy based on this new predictive variable generates a risk-adjusted return of 5.75 (5.30) percent per year using an equal-weighted (value-weighted) portfolio. Additionally, these results indicate that information arising from all relevant states matters over and above the information content of the mere headquarter state. Further evidence indicates that forecasts of regional activity also predict firms' real operations, suggesting that economic conditions of U.S. regions capture an important cash flow component of stock returns. Finally, I show that the gradual diffusion of regional information is slower among difficult-to-arbitrage firms.
    JEL: G12 G14 M41 R11
    Date: 2015–11–19
  12. By: Samuel Huber; Jaehong Kim
    Abstract: In the post-crisis period, increased regulation of financial intermediaries led to a signifi- cant decline in corporate bond market liquidity. In order to stabilize these markets, policy makers recently proposed that the trading of corporate bonds should be more centralized. In this paper, we show that a centralization of corporate bond markets always leads to an inferior outcome when compared with the initial over-the-counter structure. The regulator may achieve a superior allocation only if it is feasible for him to also affect market liquidity, by either increasing or decreasing it.
    Keywords: Monetary theory, over-the-counter markets, financial regulation, corporate bonds, liquidity
    JEL: D52 D62 E31 E44 E50 G11 G12 G28
    Date: 2015–11
  13. By: André Albuquerque de Sant’Anna (Brazilian Development Bank); Antônio Marcos Hoelz Pinto Ambrozio (Brazilian Development Bank); Filipe Lage de Sousa (Brazilian Development Bank); João Paulo Martin Faleiros (Brazilian Development Bank)
    Abstract: The aim of this paper is investigating whether Brazilian industrial firms are credit constraint. We exploit a rich database that contains more than 3.000 firms with characteristics that may affect their degree of credit constraints: size, being listed in the Brazilian stock market and level of exports-sales ratio. Our results show that all dimensions considered here may affect the sensitiveness of in-vestment to cash flow, i.e., large firms, stock market listed companies as well as large export capac-ity are associated with inexistence or less credit restriction. Specifically, considering firm’s size, our results corroborate the economic theory prediction and empirical international literature. However, when compared to Brazilian studies, our findings are similar to Terra (2003), however, they differ from Aldrighi and Bisinha (2010) evidences that are based only on listed firms. Furthermore, the in-fluence of being listed in the stock market and export capacity is beyond any possible correlation with size. Even small and middle firms are not credit constraint when listed in the stock market or when the exports-sales ratio is higher.
    Keywords: Credit Constraint, Firm’s Investment, Cash Flow, Exports, Stock Market
    JEL: D92 E22
  14. By: Nuri Ersahin; Rustom M. Irani; Hanh Le
    Abstract: We examine the within-firm resource allocation effects of creditor interventions and their relationship to performance gains at firms violating financial covenants. By linking firm-level data to establishment-level data from the U.S. Census Bureau, we show that covenant violations are followed by large reductions in employment and more frequent establishment sales and closures. These operational cuts are concentrated in violating firms' noncore business lines and unproductive establishments. We conclude that refocusing activities and improving productive efficiency are important mechanisms through which creditors enhance violating firms' performance.
    Keywords: Creditor Rights; Covenant Violations; Employment; Asset Sales; Firm Value
    JEL: D22 D24 G21 G31
    Date: 2015–11
  15. By: Sofiene El Aoud (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec); Frédéric Abergel (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris)
    Abstract: In this paper, we establish a model for market making in options whose underlying is perfectly liquid. In our model framework, the stock price follows a generic stochastic volatility model under the real-world probability measure P. Market participants price options on this stock under a risk-neutral pricing measure Q, and they may misspecify the parameters controlling the dynamics of the volatility process. We consider that there is an agent who is willing to make markets in an option on the stock with the aim of maximizing his expected utility from terminal wealth at the maturity of this option. Since market impact is an important feature in the microscopic time scale and should be taken into account in high frequency trading, we study di erent forms of this function argued in the recent literature. Through the use of optimal stochastic control, we provide exact expressions of optimal bid and ask quotes of the market making strategy in the case where the agent is risk-neutral. Afterward, we suppose that the agent is risk-averse and wants to reduce the variance of the nal wealth. In addition, this agent tries not to accumulate a large inventory in order not to have a signi cant exposure to market risk. For this purpose, we perturb the utility function by a penalty on the variance of nal wealth and also on accumulated inventory. Using singular perturbation with respect to the penalty parameter, we provide analytic approximations of the optimal bid and ask quotes. In order to con rm our theoretical results, we perform Monte Carlo simulations of the optimal market making strategy in the case where the stock price process follows a Heston model. We show that the opti- mal strategy is more pro table than a zero-intelligence strategy. Besides, we highlight the e ects of the misspeci cation of the parameters on the performance of the strategy.
    Date: 2015–09–01
  16. By: Ronald B. Davies; Neill Killeen
    Abstract: The non-bank financial sector in the euro area has more than doubled in size over the last decade reflecting the substantial growth in shadow banking activities. However, a large proportion of the non-bank financial sector remains unmapped as granular balance sheet information is not available for almost half of the sector. Motivated by these data gaps and employing firm-level data, this paper examines the location decisions of newly incorporated foreign affiliates in the non-bank financial sector across 27 European countries over the period 2004 to 2012. The probability of a country being chosen as the location for a new foreign affiliate is found to be negatively associated with higher corporate tax rates and geographic distance but increases with the size and financial development of the host country. The financial regulatory regime in the host country and gravity related controls such as the home and host country sharing a common legal system, language, border and currency are also found to impact the likelihood of non-bank financial FDI.
    Keywords: Foreign direct investment; Financial sector; Shadow banking; Location decisions; Conditional logit models
    JEL: F23 G23 G32
    Date: 2015–11

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