nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒04‒23
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The influence of the CEO and the largest shareholder on dividend payout policy in Thailand By Thitima Sitthipongpanich
  2. Does gender-balancing the board reduce firm value? By Eckbo, B Espen; Nygaard, Knut; Thorburn, Karin S
  3. Cost of Capital, Returns and Leverage: Empirical Analysis of S&P 500 By Edward Bace
  4. Corporate tax minimization and stock price reactions By Blaufus, Kay; Möhlmann, Axel; Schwäbe, Alexander
  5. Modeling and Forecasting (Un)Reliable Realized Covariances for More Reliable Financial Decisions By Tim Bollerslev; Andrew J. Patton; Rogier Quaedvlieg
  6. Asset Encumbrance, Bank Funding and Financial Fragility By Toni Ahnert; Kartik Anand; Prasanna Gai; James Chapman
  7. Corporate Resilience to Banking Crises: The Roles of Trust and Trade Credit By Ross Levine; Chen Lin; Wensi Xie
  8. The role of corporate financial structure in the export propensity of manufacturing firms By Miravitlles, Paloma; Mora, Toni; Achcaoucaou, Fariza
  9. Boards of directors and bank performance in United Arab Emirates By 齋藤, 純
  10. Executive Compensation, Macroeconomic Conditions, and Cash Flow Cyclicality By Stefano Colonnello

  1. By: Thitima Sitthipongpanich (Dhurakij Pundit University)
    Abstract: In a setting of weak law enforcement and low investor protection, minority shareholders may find it difficult to extract cash from a company. This paper examines whether or not the CEO and the largest shareholder affect dividend decisions. Using a sample of Thai firms, I find that the CEO tenure and the ownership of the largest shareholder increase the likelihood of a dividend payout. As a result of high commitment and incentives, CEOs and the largest shareholder use dividend payments as a mechanism to mitigate free cash flow problems and reduce potential expropriation of minority shareholders. In addition, the possibility of a dividend payout decreases if firms are controlled by domestic financial institutions. Domestic financial institutions seem to play a significant role in monitoring management teams; consequently, the need for a dividend payment in alleviating agency costs is lower than other firms. Moreover, firms are more likely to pay dividends when they have higher profitability and a lower leverage ratio.
    Keywords: Dividend, CEO, large shareholder, agency costs, Thailand
    JEL: G30 G35
  2. By: Eckbo, B Espen; Nygaard, Knut; Thorburn, Karin S
    Abstract: A board gender quota reduces firm value if it forces the appointment of under-qualified female directors. We examine this costly constraint hypothesis using the natural experiment created by Norway's 2005 board gender-quota law. This law drove the average fraction of female directors from 5% in 2001 to 40% by 2008, producing a large exogenous shock to director experience and independence. However, statistically robust analyses of quota-induced shareholder announcement returns, and of long-run stock and accounting performance, fail to reject the hypothesis of a zero valuation effect of this shock to board composition. Moreover, firms did not expand board size, nor is there significant evidence of quota-induced corporate conversions to a (non-public) legal form exempted from the quota law. Finally, our evidence on female director turnover and a novel network-based measure of director gender-power gap also fails to suggest that qualified female directors were in short supply.
    Keywords: ;ong-run performance; busy directors; corporate conversion; director independence; director network power; Gender quota; valuation effect
    JEL: G34 G35
    Date: 2016–03
  3. By: Edward Bace (Middlesex University Business School)
    Abstract: PurposeThe theoretical construct of the weighted average cost of capital (WACC), which uses an expected equity return, suggests that lower WACC, often facilitated by use of debt, should result in commensurate returns to shareholders, and higher shareholder value, that is if management is adept at investing in projects yielding returns at or above the WACC. In other words, finding good projects ought to be made easier by a lower hurdle rate on investment, thus translating into returns comparable to or above the WACC, and higher valuations. Is this actually the case? Does the relation between WACC, actual returns, and financial leverage also hold, as predicted, where higher leverage should result in lower WACC, and higher actual returns?MethodologyThis brief study looks at performance and valuation (total equity market returns to shareholders, and market values, on an annual basis) of S&P 500 companies over a recent ten year period (2006-2015), versus valuations implied by price to book ratios and WACC based on firm leverage. We compare theoretical valuations with the actual, and note variations year on year, but greater similarity over a longer time frame. Regression analysis is performed on these shareholder returns and valuations versus equity cost of these companies as computed using the Capital Asset Pricing Model (CAPM) and Bloomberg data. Another regression is run on WACC versus financial leverage (net debt to market capitalisation) for the same sample.FindingsThe study finds mixed evidence that expected return on equity, regarded as a benchmark for shareholder returns, was commensurate with actual returns and valuations on average over the time frame. R squared is low, but the analysis has significance. While the S&P 500 earned an annual total shareholder return of 11.8% over the period. and average cost of equity was 10.8%, there is a negative relation between values predicted by WACC and the actual ones. ImplicationsThis result leads us to look for other explanations as to why this should be. These include management capabilities, target capital structure and time horizon. We make suggestions for further research, encompassing different and wider samples.
    Keywords: cost of capital, leverage, corporate finance
    JEL: G30 G32 G39
  4. By: Blaufus, Kay; Möhlmann, Axel; Schwäbe, Alexander
    Abstract: Tax minimization strategies may lead to significant tax savings, which could, in turn, increase firm value. However, such strategies are also associated with significant costs, such as expected penalties and planning, agency, and reputation costs. The overall impact of firms' tax minimization strategies on firm value is, therefore, unclear. To investigate whether corporate tax minimization increases firm value, we analyze the stock price reaction to news concerning corporate tax avoidance or evasion. Our hand-collected dataset includes 139 tax news items regarding listed German firms over the period from 2003 to 2014. In contrast to previous research, we explicitly distinguish between news about legal tax minimization (tax avoidance) and illegal tax minimization (tax evasion). We show that stock market responses differ significantly between news items concerning legal and illegal activities. While we find negative abnormal returns for tax evasion news, we find positive abnormal returns for tax avoidance news. Our results do not indicate any reputation effect of legal tax minimization. Conversely, the positive market reaction to tax avoidance news is associated with firms that face high reputation risk.
    Keywords: tax avoidance,tax evasion,tax aggressiveness,tax risk,market reaction,event study
    JEL: G14 G30 H25 H26
    Date: 2016
  5. By: Tim Bollerslev (Duke University, NBER and CREATES); Andrew J. Patton (Duke University); Rogier Quaedvlieg (Maastricht University)
    Abstract: We propose a new framework for modeling and forecasting common financial risks based on (un)reliable realized covariance measures constructed from high-frequency intraday data. Our new approach explicitly incorporates the effect of measurement errors and time-varying attenuation biases into the covariance forecasts, by allowing the ex-ante predictions to respond more (less) aggressively to changes in the ex-post realized covariance measures when they are more (less) reliable. Applying the new procedures in the construction of minimum variance and minimum tracking error portfolios results in reduced turnover and statistically superior positions compared to existing procedures. Translating these statistical improvements into economic gains, we find that under empirically realistic assumptions a risk-averse investor would be willing to pay up to 170 basis points per year to shift to using the new class of forecasting models.
    Keywords: Common risks; realized covariances; forecasting; asset allocation; portfolio construction
    JEL: C32 C58 G11 G32
    Date: 2016–04–05
  6. By: Toni Ahnert; Kartik Anand; Prasanna Gai; James Chapman
    Abstract: How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility and raises unsecured funding costs. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and fragility. To mitigate such risk shifting, we study prudential regulatory tools, including limits on encumbrance, minimum capital requirements and surcharges for encumbrance.
    Keywords: Financial Institutions, Financial stability, Financial system regulation and policies
    JEL: D82 G01 G21 G28
    Date: 2016
  7. By: Ross Levine; Chen Lin; Wensi Xie
    Abstract: Are firms more resilient to systemic banking crises in economies with higher levels of social trust? Using firm-level data in 34 countries from 1990 through 2011, we find that liquidity-dependent firms in high-trust countries obtain more trade credit and suffer smaller drops in profits and employment during banking crises than similar firms in low-trust economies. The results are consistent with the view that when banking crises block the normal banking-lending channel, greater social trust facilitates access to informal finance, cushioning the effects of these crises on corporate profits and employment.
    JEL: D22 G01 G21 G32 Z13
    Date: 2016–04
  8. By: Miravitlles, Paloma; Mora, Toni; Achcaoucaou, Fariza
    Abstract: The aim of this study is to analyse the impact of corporate financial structure on a firm's export propensity, especially that of small and medium-sized enterprises (SMEs). The paper contributes to the literature concerned with the relationship between exports and financial constraints from the perspective of firm heterogeneity. Specifically, it explores, by firm size, the link between firms' export propensity and their financial health and ownership concentration. By means of a multivariate probit model applied to a sample of 8,019 Spanish manufacturing firms drawn from the Iberian Balance Sheet Analysis System, this paper provides firm-level evidence for SMEs of a positive link between export propensity and ownership concentration, although if shareholder concentration is very high it can be counterproductive. Other positive effects on the export propensity of SMEs caused either by internal factors (export initial conditions, performance and liquidity) or by external characteristics (regional and sector spillover effects) are also identified.
    Keywords: export propensity,small and medium-size enterprises (SMEs),capital structure,financial constraints,ownership structure
    JEL: F14 G32
    Date: 2016
  9. By: 齋藤, 純
    Abstract: This study presents an empirical analysis about corporate governance of financial institutions in United Arab Emirates (UAE). The purpose of this research is to analyze the influence of the structure of board of directors on the performance of these institutions. To examine the effect of control exerted by particular families on bank management, we estimated models where the dependent variable is return on assets (ROA) and return on equity (ROE), independent variables are board of directors variables, and control variables are bank management variables. Our results show that the control of corporate governance by a ruler's family within a board of directors has a positive effect on bank profitability. Our results indicate that control by a ruler's family through a bank's board of directors compensates for the inadequacy of UAE's corporate governance system.
    Keywords: Banks, Corporate governance, Board of directors, Bank performance, GCC banks
    JEL: G34 D22
    Date: 2016–03
  10. By: Stefano Colonnello
    Abstract: I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial pay-for-performance sensitivity. I show that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. I also show that this reduction should be larger in highly procyclical firms. Using a sample of U.S. public firms, I provide evidence supportive of the model’s predictions. First, I find that equity-based incentives are reduced during recessions. Second, I show that the magnitude of this effect is increasing in a firm’s cash flow cyclicality.
    Keywords: risk-shifting, executive compensation, business cycle
    JEL: G32 J33 M52
    Date: 2016–03

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