nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒07‒02
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Do Credit Card Companies Screen for Behavioral Biases? By Hong Ru; Antoinette Schoar
  2. Activist Hedge Funds: Evidence from the Recent Financial Crisis By Khan, Zazy
  3. News versus Sentiment : Predicting Stock Returns from News Stories By Heston, Steven L.; Sinha, Nitish R.
  4. Financing Durable Assets By Adriano A. Rampini
  5. The real effects of universal banking on firms’ investment: Micro-evidence from 2004-2009 By F. Vinas
  6. On the relationship between corporate governance and value creation in an economic crisis: Empirical evidence for the Spanish case By Santiago Lago-Peñas; Elena Rivo-López; Mónica Villanueva-Villar
  7. Managing the diversity: board age diversity, directors’ personal values, and bank performance By Talavera, Oleksandr; Yin, Shuxing; Zhang, Mao

  1. By: Hong Ru; Antoinette Schoar
    Abstract: We look at the supply side of the credit card market to analyze the pricing and marketing strategies of credit card offers. First, we show that card issuers target less-educated customers with more steeply back-loaded fees (e.g., lower introductory APRs but higher late and over-limit fees) compared offers made to educated customers. Second, issuers use rewards programs to screen for unobservable borrower types. Conditional on the same borrower type, cards with rewards, such as low introductory APR programs, also have more steeply backloaded fees. In contrast, cards with mileage programs, which are offered mainly to the most-educated consumers, rely much less on back-loaded fees. Finally, using shocks to the credit risk of customers via increases in state-level unemployment insurance, we show that card issuers rely more heavily on back-loaded and hidden fees when customers are less exposed to negative cash flow shocks. These findings are in line with the recent behavioral contract theory literature.
    JEL: G02 G1 G21 G23
    Date: 2016–06
  2. By: Khan, Zazy
    Abstract: This study extends the empirical evidence of hedge fund activism impact on target firm performance. We investigate whether activism strategies as well as their effects have changed following the recent financial crisis of 2007-2008. The analysis is based on the U.S. data covering 112 hedge funds, 551 target firms, from 2000 to 2013. We find that returns to activism accrue to approximately 5% during the (-20, +5) event window. Activism-related categories that generate significant and positive abnormal returns include capital structure, business strategy, and general undervaluation. Since the financial crisis, business-related activism generates the highest returns, followed by activism in financially depressed firms. We also find significant cross-sectional abnormal returns, both before and during the crisis, for hedge funds who do not pre-specify an objective. One year post-activism performance suggests that target firms experience substantial improvement in value, profit margin, and investment.
    Keywords: Hedge funds, event studies, crisis, corporate governance
    JEL: G30 G32 G34
    Date: 2015–03–15
  3. By: Heston, Steven L.; Sinha, Nitish R.
    Abstract: This paper uses a dataset of more than 900,000 news stories to test whether news can predict stock returns. We measure sentiment with a proprietary Thomson-Reuters neural network. We find that daily news predicts stock returns for only 1 to 2 days, confirming previous research. Weekly news, however, predicts stock returns for one quarter. Positive news stories increase stock returns quickly, but negative stories have a long delayed reaction. Much of the delayed response to news occurs around the subsequent earnings announcement.
    Keywords: News ; Text Analysis
    JEL: G12 G14
    Date: 2016–06
  4. By: Adriano A. Rampini
    Abstract: This paper studies the effect of durability on the financing of durable assets. We show that more durable assets require larger down payments of internal funds per unit of capital making them harder to finance, because durability affects the price of an asset and hence the overall financing need more than its collateral value. This insight has implications for the choice between new and used capital, technology adoption, and the rent versus buy decision. Constrained borrowers purchase used assets which are less durable than new assets and adopt less durable, low quality assets, that are otherwise dominated technologies. More durable assets are more likely to be rented given their larger financing need. Legal enforcement affects trade and technology adoption; weak legal enforcement economies are net importers of used assets and invest a larger fraction in less durable, low quality assets. There is a critical distinction between the pledgeability and durability of assets: pledgeability facilitates financing whereas the net effect of durability is to impede financing.
    JEL: D24 D91 D92 E22 G32 O16
    Date: 2016–06
  5. By: F. Vinas
    Abstract: Most studies analyzing the transmission of financial shocks to the real economy fail to uncover real effects at firm level. Taking into account banks' business models, this article attempts to fix that issue. Two banking models are considered: traditional and universal banks, the latter providing sophisticated financial services (market-making on derivatives, management of large commitments). Relying on a unique database on credits, banks and firms covering more than 5,000 firms over 2004-2009, the paper shows that in period of high liquidity, both models have a similar credit supply, but in liquidity crisis, universal banks had a significantly lower credit supply, contrary to traditional banks, leading to real effects on firm’s investment.
    Keywords: Crisis, Retail Bank, Universal Bank, Firm, Credit, Credit Line, Maturity, Long-Term Credit, Short-Term Credit, Liquidity, Investment.
    JEL: E22 E51 G01 G21 G24
    Date: 2016
  6. By: Santiago Lago-Peñas; Elena Rivo-López; Mónica Villanueva-Villar
    Abstract: This paper analyses the effect of corporate governance on value creation. It relies upon a dataset that includes the companies listed on the Spanish Stock Exchange for the period from 2005 to 2012. Attention is focused on the structure and composition of boards. In particular, four variables are analysed: board_size, board_independence, board_diligence (measured by the number of meetings), and duality (chairman and chief executive officer being the same person). Over the period of the deepest economic crisis (2009-2012) the most significant variables that had a positive effect on value creation were board_independence and board_size. The global financial crisis has highlighted the need for effective corporate governance. Policy makers should think about translating the recommendations of the Good Governance Codes into legislation (mandatory), to improve corporate governance
    Keywords: Corporate Governance, Value Creation, Board, Economic Crisis, Independence
    JEL: G32 G34 H11
    Date: 2016–06
  7. By: Talavera, Oleksandr; Yin, Shuxing; Zhang, Mao
    Abstract: This study examines the role of board age diversity on bank performance. Using a sample of 97 Chinese banks, we document a negative and significant relationship between age diversity and bank performance. To further investigate the negative link between age diversity and bank performance, we decompose age diversity into personal value diversities. In particular, a variety of directors’ views with respect to work, prudence, and wealth harm bank performance. This indicates that age diversity among directors can affect bank performance via their values.
    Keywords: corporate governance, board of directors, age diversity, value diversity, bank performance
    JEL: G21 G30 J1 J10
    Date: 2016

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