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on Corporate Finance |
| By: | Fahlenbrach, Rudiger (Ecole Polytechnique Federale de Lausanne); Prilmeier, Robert (Tulane University); Stulz, Rene M. (Ohio State University and European Corporate Governance Institute) |
| Abstract: | From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperforms the common stock of banks with loan growth in the bottom quartile over the next three years. The benchmark-adjusted cumulative difference in performance over three years exceeds twelve percentage points. The high growth banks also have significantly higher crash risk over the three-year period. This poor performance is explained by fast loan growth as asset growth separate from loan growth is not followed by poor performance. These banks reserve less for loan losses when their loans grow quickly than other banks. Subsequently, they have a lower return on assets and increase their loan loss reserves. The poorer performance of the fast growing banks is not explained by merger activity and loan growth through mergers is not accompanied by the same poor loan performance. The evidence is consistent with fast-growing banks, analysts, and investors failing to properly appreciate the extent to which the fast loan growth results from making riskier loans and failing to charge for these risks correctly. |
| JEL: | G01 G12 G21 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2016-07&r=cfn |
| By: | Udichibarna Bose; Ronald McDonald; Serafeim Tsoukas |
| Abstract: | This paper analyses the impact of policy initiatives co-ordinated by Asian national govern- ments on firms composition of external finance. Using a unique firm-level database of eight Asian countries- Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Tai- wan and Thailand over the period of 1996-2012 and a difference-in-differences approach, the results show a significant response of the debt composition to the policy change. We find that firms increased their uptake of long-term debt, while decreased their short-term debt. We also document that less risky and more profitable firms are more significantly affected by the policy change than riskier and less profitable firms. Finally, we show that the improved access to external finance after the policy initiative helped firms to raise their investment spending. |
| Keywords: | External finance; Emerging Asia; Policy initiatives; Financial constraints |
| JEL: | C23 E44 G15 G32 O16 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2016_18&r=cfn |
| By: | NAKABAYASHI, Masaki (Institute of Social Science, The University of Tokyo) |
| Abstract: | Regarding the gseparation of ownership and management, h many studies on the US market reject relation between ownership structure and performance, or between founding managers f control and performance. We study the relation between ownership structure and performance for Japan from 1878 to 1910, early days of a representative non-Western economy. We show that greater concentration of ownership at the president and/or greater consolidation of ownership by the entire board, contributed to better performance. We further show that greater stockholding ratio of the president reduced on average the leverage bye bond flotation but raised the leverage if it was accompanied by the growth in the return on asset. Moreover, we demonstrate that the distortion of financial leverage was observed in the mediocre or poor performers, and that the leverage distortion could occur because the market only priced in the current return on equity instead of the return on asset, a better predictor of long-term performance. Adverse effect of a less efficient capital market needs to be offset by a greater ownership by managers. |
| Keywords: | managers f moral hazard; ownership structure; financial leverage distortion; market efficiency; Japan |
| JEL: | G32 G34 G12 |
| Date: | 2016–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:itk:issdps:f181&r=cfn |
| By: | Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan) |
| Abstract: | We study how the tradeoff between stock liquidity and stock market scrutiny affects corporate policy. We use panel data that cover public and private companies in Japan. The sample used in our main analysis consists of firms whose ownership is concentrated, in order to mitigate the agency conflicts that come from the separation of ownership and control. We exploit legal reforms as the source of exogenous variation in stock market listing. We find that listing reduces debt financing, especially dependence on long-term debt. In addition, we determine that listing improves profitability. These findings support the stock liquidity hypothesis. However, we also provide evidence that is not consistent with this hypothesis, by reporting that stock market listing does not reduce cash holdings. We discover that it increases capital expenditures and decreases R&D expenses. The two contrasting effects demonstrate the relevance of short-termism pressure from the stock market. We also observe that listing increases dividends and reduces tax aggressiveness, in line with the stock market scrutiny hypothesis. Our findings suggest that the liquidity-scrutiny tradeoff of stock market listing has heterogeneous effects on firm policy, depending on its nature. |
| Keywords: | stock market listing, stock liquidity, stock market scrutiny, natural experiment |
| JEL: | G30 |
| URL: | http://d.repec.org/n?u=RePEc:mof:wpaper:ron283&r=cfn |
| By: | Gandhi, Priyank (University of Notre Dame); Lustig, Hanno (Stanford University); Plazzi, Alberto (University of Lugano and Swiss Finance Institute) |
| Abstract: | Equity is a cheap source of funding for a country's largest financial institutions. In a large panel of 31 countries, we find that the stocks of a country's largest financial companies earn returns that are significantly lower than stocks of non-financials with the same risk exposures. In developed countries, only the largest banks' stock earns negative risk-adjusted returns, but, in emerging market countries, other large non-bank financial firms do. Even though large banks have high betas, these risk-adjusted return spreads cannot be attributed to the risk anomaly. Instead, we find that the large-minus-small, financial-minus-nonfinancial, risk-adjusted spread varies across countries and over time in ways that are consistent with stock investors pricing in the implicit government guarantees that protect shareholders of the largest banks. The spread is significantly larger for the largest banks in countries with deposit insurance, backed by fiscally strong governments, and in common law countries that offer shareholders better protection from expropriation. Finally, the spread also predicts large crashes in that country's stock market and output. |
| JEL: | G01 G12 G21 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3454&r=cfn |
| By: | Emanuele Brancati; Marco Macchiavelli |
| Abstract: | We challenge the common view that short-term debt, by having to be rolled over continuously, is a risk factor that exposes banks to higher default risk. First, we show that the average effect of expiring obligations on default risk is insignificant; it is only when a bank has limited access to new funds that maturing debt has a detrimental impact on default risk. Next, we show that both limited access to new funds and shorter maturities are causally determined by deteriorating market expectations about the bank's future profitability. In other words, short-term debt is not a cause of fragility but the result of creditors losing faith in the long-run prospects of the bank, hence forcing it to shorten its debt maturity. Finally, we build a model that endogenizes the debt maturity structure and predicts that worse market expectations lead to a maturity shortening. |
| Keywords: | Banks ; Debt issuance ; Financial crisis ; Maturity structure ; Rollover risk |
| JEL: | G01 G21 G32 |
| Date: | 2016–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-74&r=cfn |
| By: | Langenmayr, Dominika (Catholic University of Eichstatt-Ingolstadt and CESifo, Munich); Lester, Rebecca (Stanford University) |
| Abstract: | We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risktaking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery. |
| JEL: | G32 H25 H32 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3470&r=cfn |
| By: | Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan) |
| Abstract: | Economic theory dating back to Domar and Musgrave (1944, Quarterly Journal of Economics 58, 388-422) suggests that the tax treatment of gains and losses can affect incentives for firms to undertake high-risk investments. We take advantage of a 2002 tax reform in Japan as a natural experiment to test the theory. This tax reform introduced a consolidated taxation system (CTS). The CTS allows business groups to offset gains with losses across firms in their group. Thus, the CTS can mitigate disincentives to high-risk investments. Using information on R&D as the investment risk measures, we estimate dynamic investment models with unique panel data of Japanese firms between 1994 and 2012. For identification, we take an instrumental variable approach in a difference-in-differences framework or in a triple-differences framework. We provide evidence that the CTS increases R&D, in agreement with Domar and Musgrave (1944). We also find evidence that the CTS enhances risk-sharing across group members and across asset types. These findings suggest that mitigating tax asymmetries is an effective policy to help encourage both risk-taking and risk-sharing. |
| Keywords: | tax asymmetries, R&D, business group, risk-taking, risk-sharing, natural experiment |
| JEL: | G31 G38 H25 H32 |
| URL: | http://d.repec.org/n?u=RePEc:mof:wpaper:ron273&r=cfn |