nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒03‒29
six papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Financing innovation By Kerr, William R.; Nanda, Ramana
  2. Insurance activities and systemic risk By Berdin, Elia; Sottocornola, Matteo
  3. Determinants of Polish Enterprises' Propensity to Lease By Anna Białek-Jaworska; Natalia Nehrebecka
  4. A survey of managerial perspective on corporate dividend policy: evidence from Turkish listed firms By Kuzucu, Narman
  5. Coinvestment and risk taking in private equity funds By Bienz, Carsten; Thorburn, Karin; Walz, Uwe
  6. Leaning against the wind: Debt financing in the face of adversity By Brennan, Michael J.; Kraft, Holger

  1. By: Kerr, William R.; Nanda, Ramana
    Abstract: We review the recent literature on the financing of innovation, inclusive of large companies and new startups. This research strand has been very active over the past five years, generating important new findings, questioning some long-held beliefs, and creating its own puzzles. Our review outlines the growing body of work that documents a role for debt financing related to innovation. We highlight the new literature on learning and experimentation across multi-stage innovation projects and how this impacts optimal financing design. We further highlight the strong interaction between financing choices for innovation and changing external conditions, especially reduced experimentation costs.
    Keywords: finance, innovation, entrepreneurship, banks, venture capital, experimentation
    JEL: G21 G24 L26 M13 O31 O32
    Date: 2015–12–11
  2. By: Berdin, Elia; Sottocornola, Matteo
    Abstract: This paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-à-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
    Keywords: systemic risk,insurance activities,systemically important financial institutions
    JEL: G01 G22 G28 G32
    Date: 2015
  3. By: Anna Białek-Jaworska (Faculty of Economic Sciences, University of Warsaw); Natalia Nehrebecka (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)
    Abstract: The paper identifies determinants of financing the purchase of tangible assets by Polish enter-prises with use of financial and operating lease. Analysis of financial lease was based on sta-tistical annual reports for the years 1995−2011 (about 50 thousands companies per year), while research of operating lease used half-year reports for the years 2007−2011, both with use of System GMM. The literature of the subject continuously pursues to explain the rela-tions between choosing a lease and other sources of capital, mainly bank loans. Therefore, the main focus of the study is on the dependence between the capital lease and the long-term bank loan, as well as on the relations between the operating lease, the short-term loan and the long-term debt-based financing with no financial lease element (net). The analyses indicate that medium-sized and large companies are more inclined to finance their assets with capital leas-es than small business and that large companies use more capital leases than small businesses do. It was found that a higher degree of the long-term loan financing results in a lower degree of capital leasing, which indicates the long-term bank loan and capital lease substitutability, similarly as reported by Marston & Harris (1988), Beattie, Goodacre & Thomson (2000), Singh (2011), as well as Lin et al. (2013). The findings for factors affecting the propensity to finance assets with operating leases proves the substitutability of an operating lease and a short-term bank loan, similarly as reported by Beattie, Goodacre & Thomson (2000), Filareto-Deghaye & Singh (2011), as well as Singh (2011).
    Keywords: lease, bank credit, financial lease, operating lease, substitutability, corporate finance, dynamic panel data, system GMM
    JEL: G32 E52 G21 C23 C33
    Date: 2016
  4. By: Kuzucu, Narman
    Abstract: This research paper examines the corporate dividend payout behaviours of non-financial firms from Istanbul Stock Exchange (Borsa Istanbul). Survey method is conducted to investigate managerial views on corporate dividend policy. The study investigates whether the evidence in Turkish stock market on dividend policy is similar to the European and the U.S. firms’ results which are reported earlier by other studies, and moreover in what extent Lintner’s (1956) findings on dividends is supported by today’s listed firms in an emerging market. The financial managers from 38 firms out of 216 non financial companies responded the survey. The results show that there is a significant positive relationship between cash dividends and earnings. Earnings are viewed as the most important factor in dividend decision like in European and the U.S. firms. Sustainable change in earnings, stability and level of future earnings, and the desire to distribute a proportion of earnings to shareholders are the common determinants of dividend policy. The majority of the respondents reports that they target dividends. Dividend yield is the most common measure for dividend targeting. Share repurchases are not viewed as alternative to dividend payouts unlike the U.S. firms. The study finds supporting evidences for bird-in the-hand and signalling hypotheses, and Lintner’s model.
    Keywords: dividend policy, share repurchase, Borsa Istanbul, managerial perspective
    JEL: G32 G35
    Date: 2015–03–31
  5. By: Bienz, Carsten; Thorburn, Karin; Walz, Uwe
    Abstract: Private equity fund managers are typically required to invest their own money alongside the fund. We examine how this coinvestment affects the acquisition strategy of leveraged buyout funds. In a simple model, where the investment and capital structure decisions are made simultaneously, we show that a higher coinvestment induces managers to chose less risky firms and use more leverage. We test these predictions in a unique sample of private equity investments in Norway, where the fund manager's taxable wealth is publicly available. Consistent with the model, portfolio company risk decreases and leverage ratios increase with the coinvestment fraction of the manager's wealth. Moreover, funds requiring a relatively high coinvestment tend to spread its capital over a larger number of portfolio firms, consistent with a more conservative investment policy.
    Keywords: private equity,leveraged buyouts,incentives,coinvestment,risk taking,wealth
    JEL: D86 G12 G31 G32 G34
    Date: 2016
  6. By: Brennan, Michael J.; Kraft, Holger
    Abstract: We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this 'leaning against the wind' and consider three possible explanations: market timing, precautionary financing, and 'making the numbers'. We find no evidence in favor of the first two hypotheses, and provisionally accept the 'making the numbers' hypothesis that managers who are under pressure because of unrealistically optimistic earnings expectations by analysts and deteriorating real opportunities, will rely more heavily on debt financing to boost earnings per share and return on equity.
    Keywords: capital structure,financing policy,managerial incentives
    JEL: G12 G14 G32
    Date: 2015

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