nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒04‒16
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Predicting bank failures: The leverage versus the risk-weighted capital ratio By Xi Yang
  2. Organisational mergers: a behavioural perspective on identity management By Giessner, S.R.
  3. Levered Returns By Ivo Welch
  4. The Risk Anomaly Tradeoff of Leverage By Malcolm Baker; Mathias F. Hoeyer; Jeffrey Wurgler
  5. The Impact of Unconventional Monetary Policy on Firm Financing Constraints : Evidence from the Maturity Extension Program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  6. Why Does Fast Loan Growth Predict Poor Performance for Banks? By Rüdiger Fahlenbrach; Robert Prilmeier; René M. Stulz
  7. Contingent Payment Mechanisms and Entrepreneurial Financing Decisions By Miguel de Oliveira Tavares Gärtner; Paulo Jorge Pereira; Elísio Brandão
  8. How mergers affect innovation: Theory and evidence from the pharmaceutical industry By Haucap, Justus; Stiebale, Joel
  9. Does Better Corporate Governance Encourage Higher Payout? : Risk, Agency Cost, and Dividend Policy By BHATTACHARYA, Debarati; LI, Wei-Hsien; RHEE, S. Ghon
  10. A risk governance approach to managing antitrust risks in the banking industry By Denise Scheld; Johannes Paha; Nicolas Fandrey

  1. By: Xi Yang
    Abstract: This paper investigates the efficiency of leverage ratios and risk-weighted capital ratios as bank failure predictors during the global financial crisis. Analyzing 417 bank failures between 2008 and 2012, we find that the predictive power of different capital ratios is not homogeneous across banks. The simple leverage ratio outperforms the risk-weighted ratio in predicting failures of large banks, while both capital ratios are important in predicting the failure of smaller banks. The better performance of the leverage ratio in the case of large banks is especially important during the crisis period of 2008-2010. The findings support the regulatory reforms proposed by Basel Committee on Banking Supervision on the adoption of a supplementary minimum leverage ratio in order to strengthen the resilience of the bank sector.
    Keywords: leverage ratio, risk-weighted capital ratio, bank failure, CAMELS, Logit model
    JEL: G21 G28 G33
    Date: 2016
  2. By: Giessner, S.R.
    Abstract: Organisational mergers are one of the most extreme forms of organisational change processes. Consequently, they often result in difficulties for employees to adjust to the altered organisational conditions. This is often reflected in low levels of employee identification with the post-merger organisation. As a result, merging organisations experience more conflict, less employee motivation, higher turnover and lower performance levels. These low levels of post-merger identification thus often put the strategic and financial goals of the merger at risk. I argue that an organisational behaviour perspective focusing on the management of identity levels during an organisational merger provides important practical insights for employee management. I will first explain why I am personally so fascinated by this topic. I will then present an identity management perspective on organisational mergers. Here, I will consider three key aspects: (1) Identity processes; (2) Intergroup structure; and (3) Leadership. I will conclude by giving an overview of the potential challenges and directions for future research in this field.
    Keywords: mergers, acquisitions, esprit de corps, identity management, post-merger identification, social identity, human resource management, employee adjustment, uncertainty
    JEL: G34 L22 M12 M14
    Date: 2016–04–01
  3. By: Ivo Welch
    Abstract: Do financial markets properly reflect leverage? Unlike Gomes and Schmid (2010) who examine this question with a structural approach (using long-term monthly stock characteristics), my paper examines it with a quasi-experimental approach (using short-term a discrete event). After a firm has declared a dividend (i.e., after the news release), but in the few days that precede the payment date, an investor in the traded equity owns a claim to the dividend cash plus the remaining firm equity within the corporate shell. After the payment date, the shell contains only the dividend-sans-cash firm equity. The empirical evidence confirms rational increases in volatilities but shows unexpected decreases in average returns. The best explanation is behavioral.
    JEL: G12 G31 G32 G35
    Date: 2016–04
  4. By: Malcolm Baker; Mathias F. Hoeyer; Jeffrey Wurgler
    Abstract: Higher-beta and higher-volatility equities do not earn commensurately higher returns, a pattern known as the risk anomaly. In this paper, we consider the possibility that the risk anomaly represents mispricing and develop its implications for corporate leverage. The risk anomaly generates a simple tradeoff theory: At zero leverage, the overall cost of capital falls as leverage increases equity risk, but as debt becomes riskier the marginal benefit of increasing equity risk declines. We show that there is an interior optimum and that it is reached at lower leverage for firms with high asset risk. Empirically, the risk anomaly tradeoff theory and the traditional tradeoff theory are both consistent with the finding that firms with low-risk assets choose higher leverage. More uniquely, the risk anomaly theory helps to explain why leverage is inversely related to systematic risk, holding constant total risk; why leverage is inversely related to upside risk, not just downside risk; why numerous firms maintain low or zero leverage despite high marginal tax rates; and, why other firms maintain high leverage despite little tax benefit.
    JEL: G32
    Date: 2016–03
  5. By: Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
    Abstract: This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market.
    Keywords: unconventional monetary policy ; firm‐financial constraints ; bond markets
    JEL: E52 G23 G32
    Date: 2016–02
  6. By: Rüdiger Fahlenbrach; Robert Prilmeier; René M. Stulz
    Abstract: From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperforms the common stock of banks with loan growth in the bottom quartile over the next three years. The benchmark-adjusted cumulative difference in performance over three years exceeds twelve percentage points. The high growth banks also have significantly higher crash risk over the three-year period. This poor performance is explained by fast loan growth as asset growth separate from loan growth is not followed by poor performance. These banks reserve less for loan losses when their loans grow quickly than other banks. Subsequently, they have a lower return on assets and increase their loan loss reserves. The poorer performance of the fast growing banks is not explained by merger activity and loan growth through mergers is not accompanied by the same poor loan performance. The evidence is consistent with fast-growing banks, analysts, and investors failing to properly appreciate the extent to which the fast loan growth results from making riskier loans and failing to charge for these risks correctly.
    JEL: G01 G12 G21
    Date: 2016–03
  7. By: Miguel de Oliveira Tavares Gärtner (CEF.UP and University of Porto, Portugal); Paulo Jorge Pereira (CEF.UP and University of Porto, Portugal); Elísio Brandão (University of Porto, Portugal)
    Abstract: We discuss how Contingent Payment Mechanisms (also known as Contingent Earn-Outs) enable of Entrepreneurial Financing decisions. First, we introduce a taxonomy of contingent payment mechanisms, by combining features regarding their term and amount. Second, we introduce each of these alternative mechanisms on a previously developed real options framework for analyzing Entrepreneurial Financing decisions, in which one wealth constrained Entrepreneur is looking for an external equity provider – taken as a Venture Capitalist – to support a given growth strategy. We conclude that different contingent payment mechanisms are equivalent in obtaining joint support from Entrepreneurs and Venture Capitalists regarding optimum investment timing and, therefore, that the choice on the optimum mechanism to use depends on variables which are exogenous to the model, such as liquidity preferences or constraints, timing requirements, post-deal integration or overall deal terms.
    Keywords: Venture Capital, Entrepreneurial Finance, Real Options, Growth Options, Entrepreneurship, Earn-Outs, Contingent Payments
    JEL: G24 G31 G34 L26
    Date: 2016–03
  8. By: Haucap, Justus; Stiebale, Joel
    Abstract: This papers analyses how horizontal mergers affect innovation activities of the merged entity and its non-merging competitors. We develop an oligopoly model with heterogeneous firms to derive empirically testable implications. Our model predicts that a merger is more likely to be profitable in an innovation intensive industry. For a high degree of firm heterogeneity, a merger reduces innovation of both the merged entity and non-merging competitors in an industry with high R&D intensity. Using data on horizontal mergers among pharmaceutical firms in Europe, we find that our empirical results are consistent with many predictions of the theoretical model. Our main result is that after a merger, patenting and R&D of the merged entity and its non-merging rivals declines substantially. The effects are concentrated in markets with high innovation intensity and a high degree of firm heterogeneity. The results are robust towards alternative specifications, using an instrumental variable strategy, and applying a propensity score matching estimator.
    Keywords: mergers & acquisitions,innovation,R&D incentives,merger policy
    JEL: D22 L13 L4 G34 O31
    Date: 2016
  9. By: BHATTACHARYA, Debarati; LI, Wei-Hsien; RHEE, S. Ghon
    Abstract: We investigate whether corporate governance complements or substitutes for payout policy as an effective method of reducing agency cost through its interplay with the idiosyncratic risk of the firm. Corporate governance acts as a substitute for [complement to] the firm's dividend policy when its idiosyncratic risk is high [low]. Our empirical investigation reveals that moving from the weakest to the strongest quintile of corporate governance increases the predicted probability of dividend payout by 28% when the firm's idiosyncratic risk is at its lowest quintile. On the other hand, when the idiosyncratic risk is at its highest quintile, moving from the weakest to the strongest quintiles of corporate governance decreases the predicted probability of dividend payout by 32%. We also observe that the interplay of governance and idiosyncratic risk considerations shapes up managerial decisions for share repurchase, total payout, and dividend initiation.
    Keywords: Dividend policy, Idiosyncratic risk, Corporate governance, Stock repurchase, Dividend initiation, Agency costs
    JEL: G10 G30
    Date: 2016–03–16
  10. By: Denise Scheld (University of Giessen); Johannes Paha (University of Giessen); Nicolas Fandrey (Protiviti GmbH)
    Abstract: Competition law compliance has become increasingly important in the banking industry as the number of infringements and the associated fines imposed by the European Commission are rising. This article shows that not only governments and regulators, but also shareholders and managers, should be interested in managing antitrust risks in banks in order to avoid competition law infringements. Therefore, this article sets out an approach to assessing the residual risk of antitrust non-compliance as well as the costs associated with such conduct, in order to be able to identify the required intensity of risk management activities. It also shows how antitrust risk management can be implemented in banks’ governance structures using the Three Lines of Defence model and the COSO ERM framework. As a result, it demonstrates how to integrate antitrust risk management activities into existing structures and processes, thus improving the efficiency and effectiveness of overall risk management, in particular antitrust risk management.
    Keywords: risk management, antitrust, compliance, banks, competition
    JEL: G20 G30 G32 L21 K21
    Date: 2015

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