nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒09‒11
eight papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The importance of governance and risk management in corporate finance: An empirical analysis of financing and interest rate risks By Happ, Christian
  2. Learning from crisis: Relational capital in lending relationships: Evidence from European family firms By Marco Cucculelli; Valentina Peruzzi; Alberto Zazzaro
  3. Banking Union and the ECB as Lender of Last Resort By Karl Whelan
  4. Partial cross ownership and collusion By Samuel de Haas; Johannes Paha
  5. Finance for Micro, Small, and Medium-Sized Enterprises in India: Sources and Challenges By Singh, Charan; Wasdani, Kishinchand Poornima
  6. Endogenous Growth, Firm Heterogeneity and the Long-run Impact of Financial Crises By Tom Schmitz
  7. Value relevance of companies' financial statements in Poland By Marek Gruszczynski; Rafal Bilicz; Monika Kubik-Kwiatkowska; Aleksander Pernach
  8. Natural resources and capital structure By Kurronen, Sanna

  1. By: Happ, Christian
    Abstract: The dissertation deals with corporate governance and risk management from an empirical corporate finance perspective. Three specific aspects are scrutinized in detail: (1) the governance role of capital structure and ownership structure as well as their respective contribution to firm value, (2) the importance of corporate governance in the process of equity capital increases, and (3) the management of interest rate risk by means of forecasting target rate changes by monetary policy authorities. First, the literature review reveals that capital structure and ownership structure constitute important components of the overall corporate governance framework of the firm. Based on the prevailing separation of ownership and control in (listed) corporations, the chapter focuses on the resulting agency problems and provides an overview of how capital and ownership structure can alleviate these problems. Mitigating agency problems can be accomplished for example through increasing leverage in order to put pressure on the management to generate the required minimum cash flows or by incentivizing managers through managerial share ownership. The main contribution of this chapter is the finding that managers cannot generate firm value simply by setting an optimal capital and ownership structure. Instead, corporate financial policies are jointly optimized in equilibrium and additionally depend on the prevailing level of alternative internal and external corporate governance mechanisms and provisions. In this context, the chapter emphasizes the importance of endogeneity and the relevance of accurately accounting for it in empirical investigations in this research field. Finally, open issues in the literature and avenues for future research are addressed. Second, the role of governance in the context of seasoned equity offerings of real estate companies is scrutinized. Using a 4-factor model event study, average decreases in shareholder value of one percent are documented upon announcement of seasoned equity offerings. Further analyses illustrate that companies with a rather concentrated ownership structure, lower leverage, and less disposable cash experience less negative announcement effects. Therefore, the results suggest that firms with good corporate governance, as indicated by concentrated ownership which facilitates effective monitoring, and a lower probability of overinvestment problems, as indicated by lower cash amounts on firms’ balance sheets, are less likely suspected of squandering the offering proceeds. The chapter therefore concludes that investors evaluate the potential for active monitoring by shareholders on the one hand and the risk of empire building by the management on the other hand when they assess the impact of capital increases. Thus, companies with sound corporate governance and investment policy suffer lower losses in shareholder value. Moreover, the analysis reveals that firms were consistently able to issue equity, even during periods of financial turmoil such as the financial crisis. This is a positive signal for both managers and regulators. Third, the final chapter highlights the risk management perspective of the dissertation by focusing on interest rate changes. The rapid deterioration of credit market conditions during the global financial crisis has emphasized that interest rate risk management is essential. A suitable instrument for this purpose is presented in this chapter which studies target interest rate decisions by the Federal Reserve. These monetary policy decisions significantly affect interest rates on debt markets and thus the financing opportunities of companies (e.g. Kuttner 2001; Swanson/Williams 2014). In order to predict changes of the federal funds target rate, market expectations of future monetary policy are recovered using the prices of federal funds derivatives. Subsequently, changes of these expectations upon the release of macroeconomic news, such as employment or inflation data, are studied using event study methodology. The analysis reveals the following important findings. Prior to 2007, changes in monetary policy expectations are generally consistent with a Taylor rule in which employment-related news dominate whereas inflation-related announcements only have a minor impact. However, the findings change significantly with the beginning of the financial crisis and the approach of the zero lower bound in 2007 and 2008. Monetary policy expectations hardly react to macroeconomic announcements anymore. This suggests that market participants expected a considerable period of monetary policy without any target rate changes irrespective of the macroeconomic development. This seems reasonable due to the overall negative economic outlook by that time and a target rate virtually at zero percent. The results provide new evidence for the existence of different US monetary policy regimes depending on the state of the economy. The onset of the financial crisis seems to have triggered a regime switch. Thus, the chapter also illustrates the importance of adapting interest rate forecasting tools to account for possible policy regime switches, asymmetric distribution of future interest rates, and unconventional monetary policy measures. Only in this way, reasonable expectations of future interest rates can be formed and firms are enabled to manage interest rate risk accordingly.
    Date: 2016–04–14
  2. By: Marco Cucculelli (Università Politecnica delle Marche, Dipartimento di Scienze economiche e sociali); Valentina Peruzzi (Università Politecnica delle Marche, Dipartimento di Scienze economiche e sociali); Alberto Zazzaro (Università Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali, MoFiR - Ancona, Italy, CSEF, Naples, Italy)
    Abstract: In this paper we empirically investigate the effects of active family involvement in the company.s management on bank-firm lending relationships and access to credit. Based on the trade-off between relational and management human capital, we explore whether the relational capital embodied in the family leadership of the company influences the lending relationships with the main bank in terms of information sensitivity and duration. Then, we test whether family firms with family CEOs are more likely to experience a credit restriction from banks than family firms appointing professional CEOs external to the family. Results indicate that family businesses appointing family managers are significantly more likely to maintain soft-information-based and longer-lasting lending relationships. However, having family executives does not have a negative impact on firm.s access to credit, while the creation of soft-information-based and long-lasting lending relationships significantly reduces the likelihood of experiencing credit restrictions. In view of these findings, family relational capital seems to have a univocal beneficial impact on bank-firm relationship in our sample.
    Keywords: Family firm, family CEO, soft-information, relational capital, relationship lending, credit rationing
    JEL: D22 G21 G22
    Date: 2016–09
  3. By: Karl Whelan
    Abstract: This paper focuses on how the lender of last resort function works in the euro area. It argues that the Eurosystem does not provide a clear and transparent lender of last resort facility and discusses how this has promoted financial instability and has critically undermined free movement of capital in the euro area. Until this weakness in the euro area’s policy infrastructure is fixed, it will be difficult to have a truly successful banking union.
    Keywords: European Central Bank; Lender of last resort; Banking union
    JEL: E58 G21
    Date: 2016–08
  4. By: Samuel de Haas (University of Giessen); Johannes Paha (University of Giessen)
    Abstract: This article finds that non-controlling minority shareholdings among competitors lower the sustainability of collusion. This is the case under an even greater variety of situations than was indicated by earlier literature. The collusion destabilizing effect of minority shareholdings is mainly caused by their unilateral effects, and it is particularly prevalent in the presence of an effective antitrust authority.
    Keywords: Collusion, Coordinated Effects, Minority Shareholdings, Merger Control, Unilateral Effects
    JEL: G34 K21 L41
    Date: 2016
  5. By: Singh, Charan (Asian Development Bank Institute); Wasdani, Kishinchand Poornima (Asian Development Bank Institute)
    Abstract: Finance for micro, small, and medium-sized enterprises (MSMEs) has been a concern for all stakeholders including entrepreneurs, financial institutions, and government organizations. The key objective of the study was to identify various challenges faced by MSMEs in sourcing of finance during different stages of their life cycle. This study is a first-of-its-kind attempt to focus on these aspects. The study further explores whether the financial awareness of MSME entrepreneurs is a major limitation in the identification and utilization of sources of finance. Data was collected through personal interviews using a structured questionnaire from a sample of 85 MSMEs. The survey was conducted mainly in the city of Bangalore covering a wide spectrum of sectors like precision tools, weavers, jewelers, food retailers, metal works, textiles, and book shops. The results reinforce the findings of other studies that utilization of formal sources like banks is significantly small compared with informal sources like personal and family wealth. The study found that the main challenges faced in underutilization of formal sources were inadequacy of collateral assets and lack of financial awareness of entrepreneurs. Based on the conclusion that requirement of finance differs with the life-cycle stage of the MSME, recommendations have been proposed for entrepreneurs, financial institutions, and policy makers.
    Keywords: India; SME; small and medium-sized enterprises; microenterprises; finance; loans; capital; start-up; economic growth; firms; banks; financial institutions; financial awareness; sources of finance
    JEL: G20 L26 O23
    Date: 2016–09–08
  6. By: Tom Schmitz (Università Bocconi)
    Abstract: I propose a new endogenous growth model with heterogeneous firms and aggregate shocks. The model shows that firm heterogeneity generates several new amplification and persistence mechanisms for a transitory shock to financing conditions. This shock imposes financing constraints, which force small and young innovating firms (with low retained earnings) to reduce their R&D, and therefore leads to R&D misallocation. Furthermore, it lowers entry and persistently reduces the mass of innovating firms. Thus, even as financing constraints disappear, aggregate R&D and innovation remain persistently depressed, as the remaining large firms can only imperfectly substitute for the R&D of the missing generation of young and small ones. Finally, lower R&D during and after the shock also limits the scope for incremental follow-up innovations. My model's main features are in line with developments in the Spanish manufacturing sector during the 2008-2013 economic and financial crisis.
    Date: 2016
  7. By: Marek Gruszczynski; Rafal Bilicz; Monika Kubik-Kwiatkowska; Aleksander Pernach
    Abstract: Paper presents three attempts to model the relationship between financial reports of the companies listed on the Warsaw Stock Exchange and their market valuation. Main sections of the paper include: (1) overview of the contemporary issues in the ''value relevance'' studies with reference to the methodology of financial microeconometrics, (2) outcome of the research by M. Kubik-Kwiatkowska on value relevance of annual and quarterly reports, (3) results of the attempts by R. Bilicz on the association between E/P ratio and quarterly accounting data, (4) findings by A. Pernach on the relationship between ROIC or revenue and the market value. All results show that various connections between financials and valuation exist, depending on the approach.
    Keywords: value relevance of accounting statements, financial microeconometrics, comparative valuation
    Date: 2016–08
  8. By: Kurronen, Sanna
    Abstract: ​This paper examines the effect of natural resources on capital structure of the firm. Using an extensive dataset of listed firms in 70 countries, we show that firms operating in resource extraction industries have less debt and that that debt tends to have a longer maturity than that of other non-financial firms. Moreover, non-resource firms in resource-dependent countries are found to be less indebted than their counterparts in other countries. The results suggest that the very fact of a firm’s location in a resource-dependent country may be an overlooked country-specific de-terminant of firm capital structure and that financial institutions in resource-dependent countries may play a role in exacerbating a nation’s resource curse.
    Keywords: resource dependence, capital structure, panel data
    JEL: G32 O13 Q32
    Date: 2016–08–29

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