nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒09‒18
eight papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. CEO pay and the rise of relative performance contracts: a question of governance By Brian Bell; John Van Reenen
  2. The creation function of a junior listing venue: An empirical test on the Alternative Investment Market By Valerie Revest; Alessandro Sapio
  3. Managerial ownership changes and mutual fund performance By Martin, Thorsten; Sonnenburg, Florian
  4. Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR By Cuthbert, James R.; Magni, Carlo Alberto
  5. Political Regimes and Stock Market Performance in Africa By Asongu, Simplice; Nwachukwu, Jacinta C.
  6. Financial Characteristics of North Dakota Farms 2006-2015 By Swenson, Andrew L.
  7. How Do Venture Capitalists Make Decisions? By Paul Gompers; William Gornall; Steven N. Kaplan; Ilya A. Strebulaev
  8. Political Lending By Ahmed Tahoun; Florin P. Vasvari

  1. By: Brian Bell; John Van Reenen
    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; pay; incentives; equity plans
    JEL: G30 J31 J33
    Date: 2016–07
  2. By: Valerie Revest; Alessandro Sapio
    Abstract: Stock markets perform a creation function if the inflow of financial cap- ital in the birth of new privately-held firms is stimulated by the promise of stock market liquidity at a later point in time. Junior stock market segments, characterized by lighter listing procedures and costs, may be suited to perform a creation function, but their liquidity promise may not be reliable due information opacity. We test the creation function of the Alternative Investment Market (AIM), the junior segment of the London Stock Exchange (LSE), by means of dynamic panel data models, where entry at the sectoral level is regressed on capital raised at IPO on AIM and on the LSE main market, venture capital investments, and control variables. Our sample includes UK manufacturing sectors over the 2004-2012 time span. We find that sectors that raised more capital at IPO on AIM housed more new entrants in the subsequent years, whereas the results on main market IPOs and venture capital financing are mixed. The magnitude of this effect increases as the amounts of raised capital are aggregated over longer time horizons. Results are confirmed after endogeneity tests (pseudo diff-in-diff and 2-stage residual inclusion estimators).
    Keywords: Entry, Firm creation, Stock exchange, Junior stock market
    Date: 2016–09–15
  3. By: Martin, Thorsten; Sonnenburg, Florian
    Abstract: We study the dynamics of fund manager ownership for a sample of U.S. equity mutual funds from 2005 to 2011. We find that ownership changes positively predict changes in future risk-adjusted fund performance. A one-standarddeviation increase in ownership predicts a 1.6 percent increase in alpha in the following year. Fund managers who are required to increase their ownership by fund family policy show the strongest increase in alpha. They do so by increasing their trading activity in line with the view that higher ownership aligns interests of managers with those of shareholders and induces higher effort.
    Keywords: Mutual Funds,Fund Manager Ownership Changes,Fund Performance Predictability,Incentive Alignment,Superior Information
    JEL: G11 G14 G20 G23
    Date: 2015
  4. By: Cuthbert, James R.; Magni, Carlo Alberto
    Abstract: The internal rate of return (IRR) is widely used in Private Finance Initiative (PFI) schemes in the UK for measuring performance. However, it is well-known that the IRR may be a misleading indicator of economic profitability. Treasury Guidance (2004) recognises that the the IRR should not be used and net present value (NPV) should be calculated instead, unless the cash flow pattern is even. The distortion generated by the IRR can be quantified by the notion of scheduling effect, introduced in Cuthbert and Cuthbert (2012). We combine this notion with the notion of average IRR (AIRR), introduced in Magni (2010, 2013) and show that a positive scheduling effect arises if the AIRR, relative to a flat payment stream, exceeds the project’s IRR. The scheduling component can be measured in two separate ways, in terms of specific AIRRs, one of which enables the scheduling component to be decomposed into relative capital and relative rate components. We also highlight the role of average capital, whose quotation in the market, in association with IRRs or AIRRs, would deepen the economic analysis of the project.
    Keywords: PFI, AIRR, profitability index, scheduling effect, internal rate of return.
    JEL: G00 G11 G12 G31 M2 M40
    Date: 2016
  5. By: Asongu, Simplice; Nwachukwu, Jacinta C.
    Abstract: This paper assesses the effect of political institutions on stock market performance in 14 African countries for which stock market data is available for the period 1990-2010. The estimation technique used is a Two-Stage-Least Squares Instrumental Variable methodology. Political regime channels of democracy, polity and autocracy are instrumented with legal-origins, religious-legacies, income-levels and press-freedom qualities to account for stock market performance dynamics of capitalization, value traded, turnover and number of listed companies. The findings show that countries with democratic regimes enjoy higher levels of financial market development compared to their counterparts with autocratic inclinations. As a policy implication, the role of sound political institutions has important effects on both the degree of competition for public office and the quality of public offices that favour stock market development on the African continent.
    Keywords: Financial Markets; Government Policy; Development
    JEL: G10 G18 G28 P16 P43
    Date: 2016–01
  6. By: Swenson, Andrew L.
    Abstract: The performance of over 500 North Dakota farms, 2006-2015, is summarized using 16 financial measures. Farms are categorized by geographic region, farm type, farm size, gross cash sales, farm tenure, net farm income, debt-to-asset, and age of farmer to analyze relationships between financial performance and farm characteristics. Five-year averages, 2010-2014, are also presented. In 2015, median and average acreage per farm was 1,847 and 2,371, respectively. Median and average cash farm revenue was $499,756 and $687,287, respectively. Over 70% of farms were crop farms and 50 percent of farms had gross sales exceeding $500,000. Median age of farm operators was 48. Median net farm income in 2015 declined to $18,982, the lowest since 1997, from $54,543 in 2014. The 10 year high was $238,054 in 2012. Financial measures for 2012, 2011, 2010, 2008 and 2007 were much superior to those in other years for the 2006-2015 period. The Red River Valley and crop farms typically had stronger profitability, solvency, and repayment capacity than other regions and farm types, respectively, but not in 2013 and 2014. Median net farm income of livestock farms decreased to $18,999 in 2015 from a ten year high of $95,130 in 2014. Median term debt coverage ratio was 0.69 in 2015 compared to a 2010-2014 average of 2.75. Farms with sales less than $500,000 were nearly twice as likely to have debt-to-asset higher than 70 percent as farms with sales greater than $500,000. Farms that own some crop land, but less than 40 percent of the land they operate were more likely to be crop farms, farm more acreage, have larger sales, and be more profitable. As expected, solvency and percent of crop land owned increased with farmer age. Median net farm income as a percent of gross revenue was the lowest in the decade in 2015, at 5.1%, and the highest in 2012, at 36.8%.
    Keywords: Farm financial management, farm management, farm income, liquidity, solvency, profitability, repayment capacity, financial efficiency, financial benchmarks, tenure, North Dakota, Agribusiness, Agricultural Finance, Farm Management, Financial Economics, Land Economics/Use, Production Economics,
    Date: 2016–09
  7. By: Paul Gompers; William Gornall; Steven N. Kaplan; Ilya A. Strebulaev
    Abstract: We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment selection; valuation; deal structure; post-investment value-added; exits; internal firm organization; and relationships with limited partners. In selecting investments, VCs see the management team as more important than business related characteristics such as product or technology. They also attribute more of the likelihood of ultimate investment success or failure to the team than to the business. While deal sourcing, deal selection, and post-investment value-added all contribute to value creation, the VCs rate deal selection as the most important of the three. We also explore (and find) differences in practices across industry, stage, geography and past success. We compare our results to those for CFOs (Graham and Harvey 2001) and private equity investors (Gompers, Kaplan and Mukharlyamov forthcoming).
    JEL: G24 G3 L26
    Date: 2016–09
  8. By: Ahmed Tahoun (London Business School); Florin P. Vasvari (London Business School,)
    Abstract: Using a unique dataset provided by the Center for Responsive Politics (CRP), we document a direct channel through which financial institutions contribute to the net worth of members of the U.S. Congress, particularly those sitting on the finance committees in the Senate and the House of Representatives. These individuals report greater levels of leverage and new liabilities as a proportion of their total net worth, relative to when they are not part of the finance committee or relative to other congressional members. Politicians increase new liabilities by over 30% of their net worth in the first year of their finance committee membership. We do not find similar patterns for members of non-finance powerful committees. We find no evidence that finance committee members arrange new personal liabilities ahead of their appointments to the committees. Finance committee members also report liabilities with lower interest rates and longer maturities. Finally, focusing on banks that lend to U.S. Congress members, we find that the weaker performing financial institutions lend to more finance committee members and provide more new debt to these politicians. Our findings suggest that lenders may create political connections with finance committee members in an attempt to obtain regulatory benefits.
    Keywords: U.S. Congress members, Finance Committee, Personal Debt, Information disclosure
    JEL: D71 D72 G11 G21 G38 P16 N30 I31 I32 C81 C83 D60 D63 O12 O15
    Date: 2016–08

This nep-cfn issue is ©2016 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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