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on Corporate Finance |
| By: | Koch, Christoffer (Federal Reserve Bank of Dallas); Okamura, Ken (University of Oxford) |
| Abstract: | Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators in defining the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007–2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These banks were generally larger, faster growing, obtained riskier funding and were more “optimistic”. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue “deep pockets”, but sets corporate governance standards for all banks by suing negligent directors and officers. |
| Keywords: | Financial stability; corporate governance; bank failures; financial ratios |
| JEL: | G21 G28 G33 G34 |
| Date: | 2016–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1601&r=cfn |
| By: | Van Tassel, Peter (Federal Reserve Bank of New York) |
| Abstract: | Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio when deals are likely to succeed. |
| Keywords: | financial economics; option pricing; mergers and acquisitions |
| JEL: | G00 G12 G34 |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:761&r=cfn |
| By: | Rafael Matta; Enrico Perotti |
| Abstract: | We analyse bank runs under fundamental and asset liquidity risk, adopting a realistic description of bank default. We obtain an unique run equilibrium, even as fundamental risk becomes arbitrarily small. When safe returns are securitized and pledged to repo debt, funding costs are reduced but risk becomes concentrated on unsecured debt. We show the private choice of repo debt leads to more frequent unsecured debt runs. Thus satisfying safety demand via secured debt creates risk directly. Collateral fire sales upon default may reduce its liquidity and lead to higher haircuts, which further increase the frequency of runs. |
| Keywords: | Repo credit; bank runs; asset liquidity risk |
| JEL: | G21 G28 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:65099&r=cfn |
| By: | Stefania Cosci (LUMSA University); Valentina Meliciani (University of Teramo); Valentina Sabato (LUMSA University) |
| Abstract: | This paper investigates the impact of relationship lending on innovation (the probability to innovate and the intensity of innovation). Using a unique dataset providing detailed information on bank-firm relationships across European firms, we relate different proxies of relationship lending (soft information, long-lasting relationships, number of banks, share of the main bank) to innovation. We find a very strong and robust positive effect of ‘soft-information intensive’ relationships, a less robust positive effect of long-lasting relationships and a negative effect of credit concentration as measured by the number of banking relationships. We also find that ‘soft-information intensive’ relationships reduce credit rationing for innovative firms, while long-lasting relationships seem to favour innovation via other relational channels. These results raise some concern on the impact of screening processes based on automatic procedures, as those suggested by the Basel rules, on firms’ capability to finance innovative activities in Europe. |
| Keywords: | relationship lending; innovation; R&D; credit constraints; soft information |
| JEL: | G10 G21 G30 O30 O31 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:lsa:wpaper:wpc04&r=cfn |
| By: | Chan, Stephanie; van Wijnbergen, Sweder |
| Abstract: | We highlight the ex ante risk-shifting incentives faced by a bank's shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo's conversion under CoCo designs widely used in practice. Specifically we show that for principal writedown and nondilutive equity-converting CoCos, shareholders/managers have an incentive to take on more risk to make conversion more likely because of those wealth transfers. As a consequence, wide spread use of CoCos will increase systemic fragility. We show that such improperly designed CoCos should not be allowed to fill in loss absorption capacity requirements unless accompanied by higher required equity ratios to mitigate the increased risk taking incentives they lead to. Sufficiently dilutive CoCos do not lead to undesired risk taking behavior. |
| Keywords: | capital requirements; contingent convertible capital; risk shifting incentives; systemic risk |
| JEL: | G01 G13 G21 G28 G32 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11099&r=cfn |
| By: | Kilian Huber |
| Abstract: | This paper analyses the effects of bank lending on GDP and employment. Following losses on international financial markets in 2008/09, a large German bank cut its lending to the German economy. I exploit variation in dependence on this bank across counties. To address the correlation between county GDP growth and dependence on this bank, I use the distance to the closest of three temporary, historic bank head offices as instrumental variable. The results show that the effects of the lending cut were persistent, and resembled the growth patterns of developed economies during and after the Great Recession. For two years, the lending cut reduced GDP growth. Thereafter, affected counties remained on a lower, parallel trend. The firm results exhibit similar dynamics, and show that the lending cut primarily affected capital expenditures. Overall, the lending cut reduced aggregate German GDP in 2012 by 3.9 percent and employment by 2.3 percent. This shows that a single bank can persistently shape macroeconomic growth. |
| Keywords: | banking crisis; financial frictions; lending; GDP; growth; employment |
| JEL: | D2 D53 E24 E44 G0 G21 J01 J23 J30 O16 O40 O47 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:65010&r=cfn |
| By: | Cinderela Andrade dos Santos (FEP-UP, School of Economics and Management, University of Porto); António Cerqueira (FEP-UP, School of Economics and Management, University of Porto); Elísio Brandão (FEP-UP, School of Economics and Management, University of Porto) |
| Abstract: | Our research examines whether audit and non-audit fees are associated with firm performance, so, we study this relationship taking into account the impact of operating and corporate governance characteristics on firm performance. The sample in study is non-financial firms in S&P 500 covering the period from 2002 to 2014. We find a significant negative relationship between corporate performance and non-audit fees. This suggests that the increase (decrease) in corporate performance is related to the decrease (increase) in non-audit fees. The results add to the growing body of literature documenting relations between firm performance and remuneration of audit services, as well as to our understanding of the determinants of corporate performance. Furthermore, this study highlights the possible matter of providing non-audit services jointly with audit services, confine the functions of an auditor and consequently compromise the independence, that ultimately decrease the firm performance. |
| Keywords: | Audit Fees, Non-Audit Fees, Corporate Performance, Corporate Governance |
| JEL: | G30 M42 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:570&r=cfn |
| By: | Blanco, Iván; Wehrheim, David |
| Abstract: | Do financial derivatives enhance or impede innovation? We aim to answer this question by examining the relationship between equity options markets and standard measures of firm innovation. Our baseline results show that firms with more options trading activity generate more patents and patent citations per dollar of R&D invested. We then investigate how more active options markets affect firms' innovation strategy. Our results suggest that firms with greater trading activity pursue a more creative, diverse and risky innovation strategy. We discuss potential underlying mechanisms and show that options appear to mitigate managerial career concerns that would induce managers to take actions that boost short-term performance measures. Finally, using several econometric specifications that try to account for the potential endogeneity of options trading, we argue that the positive effect of options trading on firm innovation is causal. |
| Keywords: | innovation, R&D productivity, options market, stock price efficiency, career concerns |
| JEL: | D81 G12 G14 G30 G38 O31 O32 |
| Date: | 2016–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69239&r=cfn |
| By: | Tanndal, Julia; Waldenström, Daniel |
| Abstract: | This study estimates the impact of financial deregulation on top income shares. Using the novel econometric method of constructing synthetic control groups, we show that the "Big Bang"-deregulations in the United Kingdom in 1986 and Japan 1997{1999 increased the share of pre-tax incomes going to top earners by over 20 percent in the U.K. and over 10 percent in Japan. The effect is strongest in the top five percentiles in the U.K. whereas it is mainly driven by the lower part of the top decile in Japan. The findings are robust to placebo tests, alternative ways to construct synthetic controls and scrutiny of post-treatment trends. Higher earnings among financial sector employees appear to be an important mechanism behind this result. |
| Keywords: | income inequality; institutions; synthetic control group |
| JEL: | D31 G28 H24 J30 N20 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11094&r=cfn |
| By: | Sengupta, Rajeswari (Indira Gandhi Institute of Development Research); Anjali Sharma (Indira Gandhi Institute of Development Research) |
| Abstract: | In this paper we analyse the corporate insolvency resolution procedures of India, UK and Singapore within a common framework of well-specified principles. India at present lacks a single, comprehensive law that addresses all aspects of insolvency of an enterprise. The presence of multiple laws and adjudication fora has created opportunities for debtor firms to exploit the arbitrage between the systems to frustrate recovery efforts of creditors. This also adversely impacts timeliness of the resolution process. While the importance of a well-functioning insolvency resolution framework can hardly be overstated, there is no single framework with well-defined rules laid out for organizing an efficient insolvency resolution process. Hence we undertake a cross-country comparison, the underlying motivation being to highlight the similarities as well as differences across the laws and procedures of the three countries. The objective is to learn important lessons for India, in context of the formation of the Bankruptcy Law Reforms Committee (BLRC) in 2014. The Committee has recently recommended an Insolvency and Bankruptcy Code that would be applicable to all non-financial corporations in India. |
| Keywords: | Resolving insolvency, Liquidation, Reorganisation, Adjudicator, Loss given default, Recovery rate, Timeliness, Information system |
| JEL: | G1 G2 G33 G34 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2015-029&r=cfn |
| By: | Norden, L. |
| Abstract: | __Abstract__ Banks play a crucial role for the financing of small and medium-sized enterprises (SMEs). SMEs represent a large fraction of all firms in many economies and contribute significantly to employment and growth. But, SMEs are more informationally opaque, more risky, more financially constrained, and more bank-dependent than large firms, which creates serious challenges in SME finance. In this inaugural address, I focus on lending technologies to cope with key challenges in SME finance. I present evidence from two recent empirical studies. The first conclusion is that relationship lending works. Applying meta-analysis in a cross-country context, we show that, on average, borrowers benefit from relationship lending. SMEs obtain more credit and/or lower loan rates under relationship lending. Furthermore, bank competition makes benefits for borrowers more likely. The second conclusion is that trade credit has limited scope to replace bank debt when the latter is subject to a shock. SMEs in Europe have countered a shock to their bank debt to some extent with trade credit. However, substitution has become increasingly difficult during the financial crisis and was only possible for a subset of firms: the ones with better credit quality and intermediate financial constraints. Overall, a comprehensive understanding of lending technologies such as relationship lending and trade credit is critical for lenders, borrowers, and policymakers to ensure the proper functioning of SME finance. |
| Keywords: | Banks, SME Finance, Bank Lending, Banking, Finance, Credit, Lending Technology, Relationship Lending, Trade Credit |
| JEL: | G21 G24 O16 E22 L11 L25 |
| Date: | 2015–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:ems:euriar:77636&r=cfn |
| By: | Kleymenova, Anya; Rose, Andrew K; Wieladek, Tomasz |
| Abstract: | Using data from British and American banks, we provide empirical evidence that government intervention affects banking globalization along three dimensions: depth, breadth and persistence. We examine depth by studying whether a bank’s preference for domestic, as opposed to external, lending (funding) changes when it is subjected to a large public intervention, such as bank nationalization. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than either private banks from the same country or nationalized banks from different countries, consistent with an impact on the breadth of globalization. Third, we study the Troubled Asset Relief Program (TARP) to examine the persistence of the effect of large government interventions. We find weak evidence that upon entry into the TARP, foreign lending declines but domestic does not. This effect is observable at the aggregate level, and seems to disappear upon TARP exit. Collectively, this evidence suggests that large government interventions affect the depth and breadth of banking globalization, but may not persist after public interventions are unwound. |
| Keywords: | bank; data; domestic; effect; empirical; foreign; liability; nationalization; panel; TARP |
| JEL: | F36 G28 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11108&r=cfn |
| By: | Raoul Minetti (Michigan State University); Pierluigi Murro (LUMSA University); Monica Paiella (University Parthenope) |
| Abstract: | This paper tests the impact of family ownership on fi rms' export decisions using a data set of 20,000 Italian manufacturers. We fi nd that family ownership increases the probability that fi rms export, although the effect weakens as ownership concentration rises. The bene fit of family owners is especially pronounced when they retain control rights (ownership is aligned with control) and seek the support of external managers (ownership is partially separated from management). The results suggest that families better internalize the long-run benefi ts of internationalization, but that their limited competencies could attenuate this benefi t in high-tech industries and in remote and unfamiliar export markets. |
| Keywords: | Family firms; Export; Corporate governance |
| JEL: | G32 G34 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:lsa:wpaper:wpc03&r=cfn |
| By: | Crass, Dirk; Czarnitzki, Dirk; Toole, Andrew A. |
| Abstract: | Most marketing practitioners and scholars agree that marketing assets such as brand equity significantly contribute to a firm's financial performance. In this paper, we model brand equity as an unobservable stock that results from up to thirty years of past brand-related investment flows. Using firm-specific trademarks as investment proxies, our results show a significant long-run impact on financial performance. The dynamic profile of brand-related investments has an inverted-U shape that reaches its peak after eleven years. On average, it takes four years before brand related investments show a positive return, and investments older than nineteen years show no significant impact. For the median trademarking firm, brand equity contributes 265,000 Euro to annual profits. |
| Keywords: | Brand Equity,Firm Profitability,Intellectual Property Rights,Trademarks |
| JEL: | O31 O34 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:16004&r=cfn |
| By: | Shaikh, Salman Ahmed |
| Abstract: | The two most important problems identified in a post-financial crisis look back are perverse incentives and de-linking of financial sector growth and activities with the real sector of the economy. These problems are inherently avoided by Islamic banks. In this study, we take 7 year data from 2007 to 2013 for all 5 full-fledged Islamic banks. We attempt to empirically explore the determinants of liquidity risk in Islamic banks. As per the findings, deposits to total capital ratio increases the liquidity risk. It is plausible since greater deposit mobilization implies greater liabilities of banks. The increase in this ratio implies that a greater portion of funds with banks are in the form of deposit liabilities as compared to own capital. We also find that increase in capital to financing ratio decreases the liquidity risk which is again consistent with apriori expectations. The results further highlight that improvement in efficiency also reduces the liquidity risk by freeing tied up resources. Finally, the increase in spread increases liquidity risk since there is a tradeoff between increasing spread and credit risk. Higher spreads improve profitability, but they narrow the scale of operations due to which finance to deposit ratio decreases. For Islamic banks, it is true that finance to deposit ratio and spread move in opposite directions. |
| Keywords: | Islamic Banking, Islamic Finance, Interest Free Banking, Risk Management, Credit Risk, Liquidity Risk |
| JEL: | G21 G32 |
| Date: | 2015–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68749&r=cfn |