nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒05‒28
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Role of Financial Constraints for Different Innovation Strategies: Evidence for CESEE and FSU Countries By Sandra M. Leitner; Robert Stehrer
  2. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By De Marco, Filippo; Wieladek, Tomasz
  3. Why don't all firms do 'good' equally? By Shantanu Banerjee; Swarnodeep Homroy; Aurelie Cecile Dominique Slechten
  4. Governance in entrepreneurial ecosystems: Venture capitalists vs. technology parks By Cumming, Douglas; Werth, Jochen Christian; Zhang, Yelin
  5. Bank ownership, board characteristics and performance: Evidence from commercial banks in India By Jayati Sarkar; Subrata Sarkar
  6. Stock Returns and Leverage: Analysis of the Dow Jones Industrial Average, 2000-2015 By Edward Bace
  7. Toward a General Model of Financial Markets By Nihad Aliyev; Xue-Zhong He
  8. Firms’ Strategic Choice of Loan Delinquencies By Morales-Acevedo, Paola
  9. The impact of information-based familiarity on the stock market By Dehua Shen; Xiao Li; Andrea Teglio; Wei Zhang
  10. Identifying the exchange-rate balance sheet effect over firms By César Carrera
  11. Management Science, Economics and Finance: A Connection By Chia-Lin Chang; Michael McAleer; Wing-Keung Wong

  1. By: Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Abstract Due to information asymmetries between the debtor and potential outside investors, entrepreneurs often face sizeable and insurmountable financing constraints. This is a strong deterrent to either starting new or continuing already ongoing innovation projects which not only stymies entrepreneurs’ own future innovation potentials and growth prospects but also severely harms growth potentials of whole economies, making catching-up an unnecessarily long and arduous process. Against this backdrop, the analysis sheds light on the effects of prevailing credit constraints on different innovation strategies (i.e. R&D-based make versus M&E-based buy strategies) of establishments in Central, East and Southeast Europe (CESEE) and the Former Soviet Union (FSU) during three different economic phases. The results point to the detrimental effect of credit constraints which is particularly strong and consistent for the M&E-based ‘buy innovation strategy’ which dominates in the region, but less pronounced and relevant for the less prevalent R&D-based ‘make innovation strategy’. Furthermore, the analysis identifies firm characteristics that are conducive to innovative activities and demonstrates that establishment size, age, the particular international trading status, ownership status as well as whether subsidies were received are important determinants of different innovation strategies.
    Keywords: credit constraints, R&D-based and M&E-based innovation strategies, Central, East and Southeast Europe, Former Soviet Union
    JEL: G21 O16 O31
    Date: 2016–04
  2. By: De Marco, Filippo; Wieladek, Tomasz
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs' asset growth contracts by 6.9% in the first year of a new bank-firm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements; Firm-level real effects; prudential and monetary policy.; relationship lending; SMEs
    JEL: E51 G21 G28
    Date: 2016–05
  3. By: Shantanu Banerjee; Swarnodeep Homroy; Aurelie Cecile Dominique Slechten
    Abstract: This paper shows that di¤erence in equity holding structure leads to heterogeneous firm preference for investing in social capital (CSR). In our theoretical model managerial and customer preferences jointly influence CSR investments. We show that if managerial preference is high, social investments of firms are higher, independent of customer preference. We test our theoretical predications using data from Indian firms. We show that firms with concentrated shareholding invest more in CSR. Firms with dispersed shareholding increase social investments if they export to the United States and the European Union, but they decrease these expenses in reaction to antidumping penalties.
    Keywords: Controlling Stakeholding, Public Goods, Corporate Social Responsibility
    JEL: D13 G28 J12 G32
    Date: 2016
  4. By: Cumming, Douglas; Werth, Jochen Christian; Zhang, Yelin
    Abstract: We argue two alternative routes that lead entrepreneurial start-ups to acquisition outcomes instead of liquidation. On one hand, acquisitions can come about through the control route with external financers such as venture capitalists (VCs). VCs take control through their board seats along with other contractual rights that can bring about changes in a start-up necessary to successfully attract a strategic acquirer. Consistent with this view, we show that VCs often replace the founding entrepreneur as CEO long before an acquisition exit. On the other hand, acquisitions can come about through advice and support provided to the start-up, such as that provided by an incubator or technology park. Based on a sample of 251 Crunchbase companies in the U.S. over the years 2007 to 2014, we present evidence that is strongly consistent with these propositions. Further, we show that the data indicate a tension between VC-backing of start-ups resident in technology parks insofar as such start-ups are slower to become, and less likely to be, acquired.
    Keywords: Entrepreneurship,Entrepreneurial Finance,Governance,Technology Park,Incubator,Board of Directors,Venture Capital,Angel
    JEL: G23 G24 L26
    Date: 2016
  5. By: Jayati Sarkar (Indira Gandhi Institute of Development Research); Subrata Sarkar (Indira Gandhi Institute of Development Research)
    Abstract: The role of governance mechanisms in determining bank outcomes has been studied mostly in the context of developed economies and focused mainly on private banks. In this paper we examine the importance of board size and board composition in determining bank outcomes using data from an emerging economy, India, and using a sample that includes both public and private banks. Relatedly, we also examine the effect of CEO tenure in influencing bank outcomes, a topic that acquires particular importance in context of public sector banks where the tenure of the CEO is relatively short. Using data that spans over ten years from 2003-2012 that witnessed a large number of governance reforms in India, the results of our empirical analysis suggest that while board size plays an insignificant role in determining bank outcomes, board independence plays a significant role. There is a strong ownership effect with board independence having a significant effect on performance of private sector banks and negatively impacting the performance of private sector banks. The analysis also reveals that longer tenure of the CEO has significant effects in improving bank outcomes both in terms of financial performance and asset quality. These positive effects strengthen in the later years of CEO tenure. Our results have governance implications for strengthening the composition of board of directors and CEO tenure, especially in publicly owned banks.
    Keywords: Banks, Regulation, Ownership, Board of Directors, CEO Duality, CEO Tenure
    JEL: G21 G28 G32 G34 L32 L33
    Date: 2016–05
  6. By: Edward Bace (Middlesex University Business School)
    Abstract: PurposeThe theoretical framework of the weighted average cost of capital (WACC) posists that lower WACC, often achieved by use of debt, should facilitate good returns to shareholders, and higher shareholder value, that is if management is adept at investing in projects yielding returns above the WACC. In other words, finding good projects should be made easier by a lower hurdle rate on investment, thus translating into returns comparable to or above the WACC. Does the relationship between WACC, actual returns, and financial leverage hold as predicted, wherein higher leverage should result in higher actual returns and higher valuations, in line with expectations?MethodologyThis brief study looks at performance (total equity market returns to shareholders, on an annual basis) of Dow Jones Industrial Average companies over a recent sixteen year period (2000-2015), versus financial leverage, on the hypothesis that higher leverage (within limits) should enhance shareholder returns. Regression analysis is performed on these shareholder returns versus net debt to market capitalisation of these companies using Bloomberg data. FindingsThis investigation finds evidence that shareholder returns were not positively related to financial leverage on average over the time period. In fact, a negative relationship is observed, in that higher debt was accompanied by lower returns. The analysis shows significance, and does not support arguments for benefits of financial leverage to returns. Meaningful variations are noted year on year, with greater adherence to expectations over a longer time frame.On the other hand, a negative relationship between WACC and leverage is supported by our analysis, as predicted by the theory, although the results of this small sample lack significance. The benefit of more low cost debt funding translates in our observation into lower WACC, if not better actual realised returns.ImplicationsThis result implies that the market over this period is not rewarding firms that use more leverage, or that greater use of debt is not translating into benefits associated with lower WACC. These observations lead us to look for explanations, including management capabilities, target capital structure and time horizon. We make suggestions for further research, encompassing different and wider samples. These explanations have wider ramifications for interpretation and implementation of cost of capital theories.
    Keywords: Keywords: cost of capital, WACC, leverage, stock returns, valuation, DJIA
    JEL: G10 G32 G39
  7. By: Nihad Aliyev; Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: This paper aims to discuss the possibilities of capturing efficient market hypothesis and behavioral finance under a general framework using the literature of decision theories and information sciences. The focus is centered on the broad definition of rationality, the imprecision and reliability of information. The main thesis advanced is that the root of behavioral anomalies comes from the imprecision and reliability of information. Modeling on basis of imprecision and reliability of information within the broad definition of rationality will lead us to a more general model of financial markets.
    Keywords: Efficient markets; Behavioral finance; Decision theory; Information uncertainty
    JEL: G02 G10 G14 D81
    Date: 2016–04–01
  8. By: Morales-Acevedo, Paola (Monetary Policy Department, Central Bank of Sweden)
    Abstract: I analyze the repayment decisions of firms with multiple loans that, for liquidity constraints or strategic reasons, stop making payments in some but not all their loans. Using a sample of commercial loans from Colombia over the period 2002:03 – 2012:06, I find that firms are less likely to stop making payments on loans granted by banks with which they have long relationships and by banks with which they have a clean repayment history. These results suggest that firms are concerned with losing the benefits gained through the relationship. I also find that firms are more likely to stop making payments on loans from foreign banks when compared to domestic banks, and equally on loans from state owned banks when compared to private banks. This suggests that the ability and willingness of the bank to punish the firm for misbehaving play an important role in a firm’s decision. Overall, the results suggest that firms assess their delinquency choices based on their perceived ability to obtain new loans in the future.
    Keywords: Payment delinquencies; strategic choice; lending relationship; foreign ownership; state banks
    JEL: G21 G32 G33
    Date: 2016–04–01
  9. By: Dehua Shen (Department of Economics, Universitat Jaume I, Castellón, Spain); Xiao Li (College of Management and Economics, Tianjin University, China); Andrea Teglio (Department of Economics, Universitat Jaume I, Castellón, Spain); Wei Zhang (College of Management and Economics, Tianjin University, China)
    Abstract: Since the familiarity-based investment plays an important role in portfolio construction, mounting literature has investigated the nature of familiarity and summarized two contradicting hypotheses: information-based trading and behavioral heuristic explanation. However, existing studies leave blank for this issue in Chinese stock market. In this paper, we prove that the familiarity-based investment is driven by information through utilizing the “Approach Your Company, Know Your Investment” activities organized by Shenzhen Stock Exchange. In particular, the empirical results show that investors holding stocks with high degrees of familiarity earn more abnormal returns compared with those investing in stocks with less familiarity and such discrepancy remains in the subsequent 50 trading days. Moreover, we observe that the information-based familiarity results in significant decreases in both liquidity and volatility. All these findings not only complement the existing literature through providing alternative evidence for the nature of familiarity in developing markets, but also have implications for both individual investors and policy makers.
    Keywords: Familiarity, Information advantages, Home bias, Psychological bias, Liquidity and volatility
    JEL: G11 G14
    Date: 2016
  10. By: César Carrera (Banco Central de Reserva del Perú)
    Abstract: I use firm-level data on investment and evaluate the balance sheet effect of changes in the exchange rate. The fact that a depreciation not only generates an expansion (for a small open economy that exports raw materials) but also has the potential of recession (in a dollarized economy in which most firms’ liabilities are in foreign currency) brings up the question on what the final effect of a depreciation over either investment or production is. Following Bleakley and Cowan (2008), I evaluate if this channel is operating. My estimations indicates that this effect tends to disappear when terms of trade are considered, result that is robust to different specifications.
    Keywords: Balance sheet effect, exchange rate, investment
    JEL: E22 F41 G31
    Date: 2016–04
  11. By: Chia-Lin Chang (National Chung Hsing University Taiwan); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain); Wing-Keung Wong (Hong Kong Baptist University, Hong Kong, PR China; Asia University, Taiwan)
    Abstract: This paper provides a brief review of the connecting literature in management science, economics and finance, and discusses some research that is related to the three disciplines. Academics could develop theoretical models and subsequent econometric models to estimate the parameters in the associated models, and analyze some interesting issues in the three disciplines.
    Keywords: Management science; economics; finance; theoretical models; econometric models
    JEL: A10 G00 G31 O32
    Date: 2016–05–23

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