nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒07‒23
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. CEO Pay and the Rise of Relative Performance Contracts: A Question of Governance? By Bell, Brian; Van Reenen, John
  2. Empty creditors and strong shareholders: The real effects of credit risk trading. Second draft By Colonnello, Stefano; Efing, Matthias; Zucchi, Francesca
  3. Debt renegotiation and debt overhang: Evidence from lender mergers By Chu, Yongqiang
  4. Bank Risk Proxies and the Crisis of 2007/09: A Comparison By Noth, Felix; Tonzer, Lena
  5. Executive Compensation, Macroeconomic Conditions, and Cash Flow Cyclicality By Colonnello, Stefano
  6. Bank Loan Announcements and Borrower Stock Returns Before and During the Recent Financial Crisis By Chunshuo LI; Steven ONGENA
  7. Analysing the Determinants of Credit Risk for General Insurance Firms in the UK By Guglielmo Maria Caporale; Mario Cerrato; Xuan Zhang
  8. Do courts matter for firm value? Evidence from the U.S. court system. Second draft By Colonnello, Stefano; Herpfer, Christoph
  9. The Strange Career of Independent Voting Trusts in U.S. Rail Mergers By Pittman, Russell
  10. Creditor Rights and Entrepreneurship: Evidence from Fraudulent Transfer Law* By Nuri Ersahin; Rustom M. Irani; Katherine Waldock
  11. Household Inequality, Entrepreneurial Dynamism and Corporate Financing By Fabio BRAGGION; Mintra DWARKASING; Steven ONGENA

  1. By: Bell, Brian; Van Reenen, John
    Abstract: Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders' return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial 'pay-for-luck' as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this 'compensation effect' is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance.
    Keywords: CEO; equity plans; incentives; Pay
    JEL: G30 J31 J33
    Date: 2016–07
  2. By: Colonnello, Stefano; Efing, Matthias; Zucchi, Francesca
    Abstract: Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of such debt unbundling crucially hinge on shareholder bargaining power. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiations. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders drop by 7.9%, 7%, and 8.8% compared to other firms.
    Keywords: debt decoupling,empty creditors,credit default swaps,shareholder bargaining power,real effects
    JEL: G32 G33 G34
    Date: 2016
  3. By: Chu, Yongqiang
    Abstract: This paper studies whether debt renegotiation mitigates debt overhang and improves investment efficiency. Using mergers between lenders participated in the same syndicated loans as natural experiments that exogenously reduce the number of lenders and thus make renegotiation easier, I find that firms affected by the mergers experience more loan renegotiations and increase capital expenditure investment. I also find that the effect is stronger for firms with higher Q, suggesting improved investment efficiency. Further evidence suggests that the effect concentrates on loans without performance pricing provisions and unsecured loans, providing further support that lender mergers improves investment efficiency for firms suffering from debt overhang ex ante.
    Keywords: Debt Overhang, Renegotiation, Syndicated Loan, Underinvestment, Investment Efficiency
    JEL: G21 G31 G32 G34
    Date: 2016–05
  4. By: Noth, Felix; Tonzer, Lena
    Abstract: Motivated by the variety of bank risk proxies, our analysis reveals that nonperforming assets are a well-suited complement to the Z-score in studies of bank risk.
    Keywords: Banking,Financial Institutions,Risk Proxie
    JEL: G21 G28 G32
    Date: 2015
  5. By: Colonnello, Stefano
    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
  6. By: Chunshuo LI (Zhong Qin Wan Xin Certified Public Accountants); Steven ONGENA (University of Zurich, Swiss Finance Institute and CEPR)
    Abstract: The impact of U.S. bank loan announcements on the stock prices of the corporate borrowers has been decreasing during the two last decades with estimated two-day cumulative abnormal returns slipping from almost 200 basis points in the beginning of the 1980s to close to zero by the turn of the Century. We estimate excess returns before and after the onset of the most recent financial crisis. We find that while prior to August 2007 returns were indeed close to zero, afterwards returns jump back up to around 200 basis points. We surmise that in a booming credit market the certification of corporate borrowers by banks started to play a lesser role, while during the crisis the banks’ role was revitalized. Consistent with this interpretation we find that after August 2007 excess returns increase especially for loans with a longer maturity, and for smaller, levered, less profitable or lowly rated firms.
    Keywords: syndicated loans, borrower’s equity value, asymmetric information, event study, crisis, U.S.
    JEL: G21 G32 H11 D80
  7. By: Guglielmo Maria Caporale; Mario Cerrato; Xuan Zhang
    Abstract: Abstract This paper estimates a reduced-form model to assess the credit risk of General Insurance (GI) non-life firms in the UK. Compared to earlier studies, it uses a much larger sample including 30 years of data for 515 firms, and also considers a much wider set of possible determinants of credit risk. The empirical results suggest that macroeconomic and firm-specific factors both play important roles. Other key findings are the following: credit risk varies across firms depending on their business lines; there is default clustering in the GI industry; different reinsurance levels also affect the credit risk of insurance firms. The implications of these findings for regulators of GI firms under the coming Solvency II are discussed.
    Keywords: Insolvent, Doubly Stochastic, Insurance, Reinsurance
    JEL: G22 C58
    Date: 2016
  8. By: Colonnello, Stefano; Herpfer, Christoph
    Abstract: We estimate the link between the court system and firm value by exploiting a U.S. Supreme Court ruling which changed firms' exposure to different courts. We find that exposure to courts which are highly ranked by the U.S. Chamber of Commerce increases firm value. The effect is driven by courts' attitude towards businesses more than by their efficiency and is more pronounced for firms in industries with high litigation risk. We also test whether firms benefit from the ability to steer lawsuits into friendly courts, so-called forum shopping. We provide evidence that a reduction in firms' ability to forum shop decreases firm value, whereas a reduction in plaintiffs' ability to forum shop increases firm value.
    Keywords: courts,forum shopping,circuit splits,governance
    JEL: G32 G34 G38 K40
    Date: 2016
  9. By: Pittman, Russell
    Abstract: Voting trust arrangements have a long history at both the Interstate Commerce Commission and the Surface Transportation Board as devices to protect the incentives of acquiring firms and maintain the independence of acquiring and target firms during the pendency of regulatory investigation of the merger proposal. However, they are not without problems. The STB argued in 2001 that as Class I railroads have become fewer and larger, it may be difficult to find alternative purchasers for the target firm if the STB turns down the proposal. The Antitrust Division argued in 2016 that joint stock ownership creates anticompetitive and/or otherwise undesirable incentives, even if the independence of the voting trustee is complete. On the other hand, the functions served by voting trusts in railroad mergers are served by merger termination fees and other contractual “lockup” mechanisms in other parts of the economy, without the same incentive problems as voting trusts. Thus voting trusts may no longer serve a useful function in railroad merger deliberations.
    Keywords: railroads, mergers, voting trusts, merger termination fees, merger lockup provisions
    JEL: D82 G34 K23 L92 N71 N72
    Date: 2016–07–19
  10. By: Nuri Ersahin; Rustom M. Irani; Katherine Waldock
    Abstract: We examine entrepreneurial activity following the adoption of fraudulent transfer laws in the U.S. These laws strengthen creditor rights by removing the burden of proof from creditors attempting to claw back funds that were transferred out of failing businesses. These laws are particularly important for entrepreneurs whose personal assets are often commingled with those of the venture. Using establishment-level data from the U.S. Census Bureau, we find significant declines in start-up entry, churning among new entrants, and closures of existing ventures after the passage of these laws. Our findings suggest that strengthening creditor rights can, in some circumstances, impede entrepreneurial activity and slow down the process of creative destruction.
    Keywords: Creditor Rights; Bankruptcy; Entrepreneurship; Creative Destruction; Law and Finance Ersahin
    JEL: G21 G33 K22 L26 M13
    Date: 2016–07
  11. By: Fabio BRAGGION (Tilburg University); Mintra DWARKASING (Tilburg University); Steven ONGENA (University of Zurich, Swiss Finance Institute and CEPR)
    Abstract: We empirically test hypotheses emanating from recent theory predicting that household wealth inequality may determine entrepreneurial dynamism and corporate financing. We construct two measures of wealth inequality at the US MSA/county level: One based on the distribution of financial rents in 2004 and another one related to the distribution of land holdings in the late Nineteenth century. Our results suggest that in more unequal areas business creation, especially of high-tech ventures, is lower and more likely to be financed via bank and family financing. Wealth inequality seemingly also affects local institutions such as banks, schools, and courts. OR from paper: We empirically test hypotheses emanating from recent theory showing how household wealth inequality may determine corporate financing and entrepreneurial dynamism. We employ a historic measure of wealth inequality, i.e., the distribution of land holdings at the US county level in 1890, and saturate specifications with comprehensive sets of fixed effects and characteristics. The estimated coefficients suggest that county-level wealth inequality robustly increases sole-ownership and the proportion of equity, family and bank financing, yet decreases angel and venture capital financing. Inequality further reduces the likelihood local firms are high-tech and depresses various other measures of entrepreneurial dynamism.
    Keywords: inequality, corporate financing, entrepreneurship
    JEL: D31 G3 L26

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