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on Corporate Finance |
| By: | Cristina Mabel Scherrer (Aarhus University and CREATES); Marcelo Fernandes (Queen Mary University of London and FGV) |
| Abstract: | This paper presents a simple model for dual-class stock shares, in which common shareholders receive both public and private cash flows (i.e. dividends and any private benefit of holding voting rights) and preferred shareholders only receive public cash flows (i.e. dividends). The dual-class premium is driven not only by the firm's ability to generate cash flows, but also by voting rights. We isolate these two effects in order to identify the role of voting rights on equity-holders' wealth. In particular, we employ a cointegrated VAR model to retrieve the impact of the voting rights value on cash flow rights. We find a negative relation between the value of the voting right and the preferred shareholders' wealth for Brazilian cross-listed firms. In addition, we examine the connection between the voting right value and market and firm specific risks. |
| Keywords: | Private benefits, Voting right, Dual-class shares |
| JEL: | G32 G34 G38 G15 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp800&r=cfn |
| By: | Edmans, Alex; Holderness, Clifford |
| Abstract: | This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in addressing free-rider problems and why, like owners of private property in general, blockholders are likely to be active in firm governance. We then examine what distinguishes a blockholder from an ordinary shareholder and advocate additional definitions from the typical threshold of 5% ownership. We next present new evidence on the frequency and characteristics of blockholders in United States corporations. Then we develop a simple unifying model to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares). We survey the empirical evidence on blockholder governance, emphasizing the empirical challenges in identifying causal effects involving blockholders. We highlight the lack of credible instruments for blockholders and argue that exogenous variation should not be a prerequisite for research---a narrow focus on identification may lead to a focus on identifying narrow questions. We emphasize the value of descriptive research with blockholders and how endogeneity concerns can be addressed with economic logic and by directly testing alternative explanations. We close with suggestions for future research. |
| Keywords: | activism; blockholders; exit; governance; Large shareholders; microstructure; property rights.; voice |
| JEL: | D72 D82 D83 G14 G32 G34 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11442&r=cfn |
| By: | Ellis Kofi, Akwaa-Sekyi; Portia, Bosompra |
| Abstract: | The initiation, funding, servicing and monitoring of loans by financial intermediaries has been done without regard to some critical factors which could have averted the likelihood of default. The study aimed at measuring the extent that owner-specific, borrower-specific, loan and lender-specific characteristics could determine the probability of loan default. The study used logistic regression for 224 business customers of a bank in Ghana from its nation-wide branches. The study found that owner’s extra income (ownership characteristics), multiple borrowing, diversion of loan purpose (borrower characteristics), loan price, loan purpose, loan age, repayment plan (loan characteristics) and underfunding (lender characteristics) significantly determined the probability of business loan default. The overall model predicted up to 78.5% of variations in the likelihood of default. The hierarchy of strong determinants given by their odd ratios were loan purpose (47.9 times), underfunding (19.2 times), diversion of loan purpose (11.7 times) multiple borrowing (9.4 times) and owner’s extra income (8.2 times). The study can conclude that financial intermediaries should be wary of the credit granting process taking cognisance of ownership, borrower, loan and lender characteristics especially the significant predictors. Combining quantitative and qualitative variables as determinants of default could be considered in future. |
| Keywords: | borrower-specific characteristics, default, financial intermediaries, lender characteristics, loan characteristics, ownership characteristics |
| JEL: | G21 G32 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71961&r=cfn |
| By: | Eisenberg, Paul |
| Abstract: | The present paper addresses the case study of a financial institution, the Kendallville Bank, developed by The Anti-Fraud Collaboration. The constituents of the Collaboration are the Center for Audit Quality, Financial Executives International, the National Association of Corporate Directors, and The Institute of Internal Auditors. These organisations are concerned with financial reporting fraud deterrence and detection. The case study approaches financial reporting fraud at a multidimensional level. It explores the corporate governance arrangements and management control instruments at place at the Kendallville Bank. The findings are discussed against the theoretical framework of the Agency Theory and the Stewardship Theory. Shortcomings of the arrangements are identified and safeguards are recommended on the background of international corporate governance best practice and academic literature. The risks arising from corporate governance weaknesses are addressed through various risk control procedures. Culture control is acknowledged as a major instrument to improve effectiveness and performance of the bank through a shift in the interpersonal interaction of the Board members, the executive team and the auditors. |
| Keywords: | Corporate Governance, Board Committees, Auditor Ethics, Agency Theory, Stewardship Theory, Change Risk, Culture Control |
| JEL: | A23 G21 G31 G34 M12 M14 M42 M53 |
| Date: | 2016–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73257&r=cfn |
| By: | Oleg Chuprinin; Denis Sosyura |
| Abstract: | We study the relation between mutual fund managers’ family backgrounds and their professional performance. Using hand-collected data from individual Census records on the wealth and income of managers’ parents, we find that managers from poor families deliver higher alphas than managers from rich families. This result is robust to alternative measures of fund performance, such as benchmark-adjusted return and value extracted from capital markets. We argue that managers born poor face higher entry barriers into asset management, and only the most skilled succeed. Consistent with this view, managers born rich are more likely to be promoted, while those born poor are promoted only if they outperform. Overall, we establish the first link between family descent of investment professionals and their ability to create value. |
| JEL: | D14 G23 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22517&r=cfn |
| By: | Dyballa, Katharina (TU Dortmund); Kraft, Kornelius (TU Dortmund) |
| Abstract: | Contrary to previous literature we hypothesize that labor's interest may well – like that of shareholders – aim at securing the long-run survival of the firm. Consequently, employee representatives on the supervisory board could well have an interest in increasing incentive-based compensation to avoid management's excessive risk taking and short-run oriented decisions. We compile unique panel data on executive compensation over the periods 2006 to 2011 for 405 listed companies and use a Hausman-Taylor approach to estimate the effect of codetermination on the compensation design. Finally, codetermination has a significantly positive effect on performance-based components of compensation, which supports our hypothesis. |
| Keywords: | executive compensation, board representation, principal-agent theory, corporate finance, Hausman-Taylor |
| JEL: | J52 L20 G32 M12 C33 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10153&r=cfn |
| By: | Acheson, Graeme G.; Campbell, Gareth; Turner, John D. |
| Abstract: | This paper examines the origins of investor protection under the common law by analysing the development of shareholder protection in Victorian Britain, the home of the common law. In this era, very little was codified, with corporate law simply suggesting a default template of rules. Ultimately, the matter of protection was one for the corporation and its shareholders. Using c.500 articles of association and ownership records of publicly-traded Victorian corporations, we find that corporations afforded investors with just as much protection as is present in modern corporate law and that firms with better shareholder protection had more diffuse ownership. |
| Keywords: | Law and finance,ADRI,shareholder protection,corporate ownership,common law |
| JEL: | G32 G34 G38 K22 N23 N43 N83 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eabhps:1603&r=cfn |
| By: | Becker, Bo (Stockholm School of Economics); Ivashina, Victoria (Harvard University and NBER) |
| Abstract: | In 2015, 70% of newly-issued leveraged loans had weaker enforcement features, called covenant-light or “cov-lite;” this is nearly a three-time increase in cov-lite issuance compared to a previous peak in 2007. We evaluate whether this development can be attributed to market overheating, increased borrower demand for cov-lite loans, or a rise in creditor coordination costs. The last hypothesis stems from the increasing involvement of non-bank institutions and, in particular, the rise of mutual fund participation in the leveraged loan market after the financial crisis. Based on the wider syndication, (narrower) skills, and diverse incentives of non-bank institutional lenders, optimal contracts between them and corporate borrowers likely involve fewer monitoring tools and weaker control rights. We evaluate these explanations of cov-lite contract provisions in a large sample of U.S. loans for the 2001–2014 period. Consistent with creditor-driven explanations for cov-lite issuance, we show that cov-lite prices compress as the prevalence of cov-lite rises. Time patterns in cov-lite issuance closely match inflows to institutional lenders, and at a given time, cov-lite loans are, overwhelmingly, those with the highest ownership by structured products and/or mutual funds. The number and share of structured products and mutual funds also impact the propensity toward other contractual features that influence when and how creditors have control. However, these factors are less relevant in explaining the strength of restrictions on indebtedness, liens, payments, or assets sales. |
| Keywords: | Credit cycles; Loan contracts; Debt Covenants |
| JEL: | G11 G22 G30 |
| Date: | 2016–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0325&r=cfn |