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on Corporate Finance |
| By: | Barattieri, Alessandro; Moretti, Laura; Quadrini, Vincenzo |
| Abstract: | In the period that preceded the 2008 crisis, USfi nancial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other financial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand the factors that could have caused this dynamic, we develop a model where banks make risky investments in the non-financial sector and sell part of their investments to other banks (diversifi cation). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 financial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can capture the dynamics of leverage and interconnectivity observed in the data. |
| Keywords: | Interconnectivity; leverage; risk |
| JEL: | E21 G11 G21 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11502&r=cfn |
| By: | Boot, Arnoud W A; Vladimirov, Vladimir |
| Abstract: | The starting point of our paper is the question: Should a growth firm hoard cash to reduce dilution associated with external financing (by self-financing more) if this means delaying its existing investment opportunity? The analysis of such non-precautionary hoarding gives a stark contrast to the better-known precautionary motive that focuses on hoarding cash in anticipation of the arrival of potential investment opportunities. The latter particularly applies to large and mature firms. Our perspective is that of a growth firm with investment opportunities already present but without the necessary cash to undertake these opportunities; arguably one of the most important settings in corporate finance. While from a precautionary perspective, firms expecting the arrival of better opportunities hoard more, we have the opposite prediction for growth firms for which investment opportunities are already present. Such non-precautionary hoarding features a self-reinforcing effect: firms with better investment opportunities hoard less, yet grow successful and cash-rich more quickly. We show that hoarding affects the choice between public and private financing, and is sensitive to product market competition. Our contrasting insights to those from precautionary theories can help explain puzzling empirical evidence, such as why private firms hoard less than public firms, and why competition drives some firms to prefer hoarding and public financing, while others to prefer the opposite. |
| Keywords: | cash hoarding; cash holdings; Competition; growth firms; public versus private financing; real options |
| JEL: | D92 G31 G32 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11510&r=cfn |
| By: | Zhun Peng (University of Evry and EPEE) |
| Abstract: | In this paper, we study the funding situation of a representative pension fund when it is exposed to extreme shocks of financial markets. We measure the exposure of both asset and liability sides of the fund’s balance sheet and especially when the benefit obligations use a market based discount rate. By assigning different market indexes to the main items of the fund’s balance sheet, we are able to compute the expected funded status conditionally on extreme shocks to different financial markets. We also take into account the links between the corresponding indexes thanks to the CVine Risk Factor (CVRF) model combining factors and copulas. In particular we are able to measure the exposure of the funding status of the fund to extreme shocks to different risk factors (equity, bond, real estate etc...). We find that the fund is particularly exposed to large shocks to the equity risk factor, even if diversification benefits can exist because such shocks simultaneously induce a drop in the asset values and a decrease in the discounted value of the liabilities. However, the first decrease is larger than the second one, thus the funding situation is declined. |
| Keywords: | Regular vine copula, Factorial model, Pension Funds, Stress testing |
| JEL: | G23 G32 J32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:15-06&r=cfn |
| By: | Pan, Yihui (University of Utah); Wang, Tracy Yue (University of Minnesota); Weisbach, Michael S. (Ohio State University) |
| Abstract: | Management risk, which reflects uncertainty about the management's value added, is an important yet unexplored determinant of a firm's default risk and debt pricing. CDS spreads, loan spreads and bond yield spreads all increase at the time of management turnover, when management risk is highest, and decline over the first three years of CEO and CFO tenure, regardless of the reason for the turnover. These effects all vary with the ex ante uncertainty about the new management. Understanding the effects of management risk on corporate liabilities has a number of implications for the pricing of liabilities and corporate financial management. |
| JEL: | G32 G34 M12 M51 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2016-06&r=cfn |
| By: | Maningo, Gary V. (Asian Development Bank Institute) |
| Abstract: | Micro, small, and medium-sized enterprises are a backbone of the Philippine economy. One factor that hinders the growth of these enterprises is their difficulty in accessing finance from banks and other financial institutions. The Credit Surety Fund (CSF) was established to help these enterprises and other organizations become creditworthy and bankable. The CSF is a credit guarantee program initiated by the Bangko Sentral ng Pilipinas that enables enterprises and cooperatives to gain easier access to loans from banks without providing collateral. The CSF pools contributions from cooperatives and nongovernment organizations, local government units, institutions such as the Development Bank of the Philippines, the Land Bank of the Philippines, the Industrial Guarantee and Loan Fund, and other organizations. In this way, it is a public–private partnership that links the key players of the economy to empower enterprises and cooperatives. |
| Keywords: | credit Surety Fund; public–private partnerships; credit innovation; credit guarantee programs |
| JEL: | G21 G24 G32 |
| Date: | 2016–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0589&r=cfn |
| By: | Brav, Alon; Dasgupta, Amil; Mathews, Richmond |
| Abstract: | Blockholder monitoring is key to corporate governance, but blockholders large enough to exercise significant unilateral influence are rare. Mechanisms that enable small blockholders to exert collective influence are therefore important. It is alleged that institutional blockholders sometimes implicitly coordinate their interventions, with one acting as "lead" activist and others as peripheral"wolf pack" members. We present a model of wolf pack activism. Our model formalizes a key source of complementarity across the engagement strategies of activists and highlights the catalytic role played by the leader. We also characterize share acquisition in pack formation, providing testable implications on ownership and price dynamics. |
| JEL: | G34 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11507&r=cfn |
| By: | Iwasaki, Ichiro |
| Abstract: | In this paper, using a unique dataset of industrial firms obtained from enterprise surveys conducted across the Russian Federation in 2005 and 2009, we trace back structural changes in the corporate governance system before and after the global financial crisis. We also empirically examine the impacts of the crisis on the organization of boards of directors and audit systems. Our survey results reveal that, in the Russian industrial sector, the quality of corporate governance has been improved through the crisis. Furthermore, we found that, corresponding to the alignment hypothesis, in firms that decisively reformed their management and supervisory bodies in response to the 2008 financial shock, the total number of worker representative directors significantly declined, as did their proportion to all board members. On the other hand, we also found that, in firms that substantially reorganized their audit system to cope with the crisis, the independence of the audit system was undermined remarkably, corresponding to the expropriation hypothesis. Findings that management behaviors predicted by the two conflicting hypotheses are simultaneously detected—and that their targets are significantly different—deserve special mention. |
| Keywords: | global financial crisis, the evolution of corporate governance, alignment versus expropriation, Russia |
| JEL: | D22 G01 G34 M42 P34 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2016-7&r=cfn |
| By: | Huang, Jing-Zhi (Pennslyvania State University); Shi, Zhan (Ohio State University) |
| Abstract: | Recent evidence has shown that structural models fail to capture interest rate sensitivities of corporate debt. We consider a structural model that incorporates a three-factor dynamic term structure model (DTSM) into the Merton (1974) model. We show that the proposed model largely captures the interest rate exposure of corporate bonds. We also find that for investment-grade bonds, hedging effectiveness substantially improves under the proposed model. Our results indicate that to better capture and hedge the interest rate exposure of corporate bonds, we need to incorporate a more realistic DTSM in the existing structural models. |
| JEL: | G12 G13 G24 G33 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2016-04&r=cfn |