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on Corporate Finance |
| By: | Guillaume Arnould (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LABEX Refi - ESCP Europe); Salim Dehmej (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LABEX Refi - ESCP Europe) |
| Abstract: | The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements. |
| Keywords: | Basel III,Financial stability,stress tests,banking,financial regulation |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01222489&r=cfn |
| By: | Admati, Anat R. (Stanford University) |
| Abstract: | Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists. |
| JEL: | G21 G28 G32 G38 H81 K23 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3386&r=cfn |
| By: | Korn, Olaf; Rieger, Marc Oliver |
| Abstract: | This paper investigates corporate hedging under regret aversion. Regret-averse firms try to avoid deviations of their hedging policy from the ex post best policy, an intuitive consideration if one has to justify one's decisions afterward. The study presents a model of a firm that faces uncertain prices and seeks to hedge both profit risk and regret risk with derivatives. It characterizes optimal hedge positions and shows that regret aversion leads to stronger incentives to hedge downside price risk than standard expected utility theory. In the profit region of the price distribution, however, regret aversion reduces the hedging of price risk to avoid large regret in the case of increasing prices. The results show that regret aversion has a strong effect on the choice of the hedging instrument and provides a preference-based explanation for the use of options in corporate risk management. |
| Keywords: | regret aversion,risk management,hedging,derivatives |
| JEL: | D81 G02 G32 G30 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1606&r=cfn |
| By: | Sengupta, Rajdeep (Federal Reserve Bank of Kansas City); Black, Lamont K.; Floros , Ioannis |
| Abstract: | The authors studied bank equity issuance during 2001–14 by publicly traded U.S. banks through seasoned equity offerings (SEOs), private investment in public equity (PIPEs), and the Troubled Asset Relief Program (TARP). Results show that private investors were an active and important source of bank recapitalization in the United States as issuance through SEOs and PIPEs peaked in the recent crisis. |
| Keywords: | Bank equity; Financial crisis; Troubled Asset Relief Program (TARP); Equity issuance; Commercial banks |
| JEL: | G21 G28 G32 |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp16-05&r=cfn |
| By: | Stephen P. Ferris; Reza Houston; David Javakhadze |
| Abstract: | This study examines how the appointment of former politicians and regulators to boards of directors or management teams influences corporate acquisition activity and performance. We find that bidders with political connections are more likely to acquire targets and avoid regulatory delay or denial. The merger premium paid increases with political connectedness. The announcement period returns show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected bidders make more bids and bid on larger targets. Connected acquirers also enjoy superior post-merger financial and operating performance. Published by Elsevier B.V. |
| Keywords: | Political connections, Mergers, Acquisitions, Antitrust law |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nfi:nfiwps:2016-wp-01&r=cfn |
| By: | Ogneva, Maria (University of Southern CA); Piotroski, Joseph D. (Stanford University); Zakolyukina, Anastasia A. (University of Chicago) |
| Abstract: | This paper introduces a new measure of firm's exposure to systematic distress risk--the probability of a recession at the time of a firm's failure. For stocks in the top quintile of the probability of failure, a median hedge portfolio based on our measure generates a positive risk premium of 10%-12% per annum. Our results differ from the previously documented distress-risk anomaly--a negative correlation between the probability of failure and stock returns. We argue that the probability of failure does not capture systematic distress risk well because it does not differentiate between failures occurring in recessions and expansions. |
| JEL: | G11 G12 G32 G33 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3333&r=cfn |
| By: | José García-Quevedo (IEB, Universitat de Barcelona); Agustí Segarra-Blasco (GRIT, Universitat Rovira i Virgili); Mercedes Teruel |
| Abstract: | Theoretical and empirical approaches have stressed the existence of financial constraints in firms’ innovative activities. Although a large number of innovation projects are abandoned before their completion, the empirical evidence has focused on the determinants of innovation while failed projects have received little attention. This paper analyses the role of financial obstacles on the likelihood of abandoning an innovation project by using panel data of potential innovative Spanish firms for the period 2005–2013. Our analysis differentiates between internal and external barriers on the probability of abandoning a project and we examine whether the effects are different depending on the stage of the innovation process. Controlling for potential endogeneity, we use a bivariate probit model to take into account the simultaneity of financial constraints and the decision to abandon an innovation project. Our results show that financial constraints most affect the probability of abandoning an innovation project during the concept stage. |
| Keywords: | barriers to innovation, failure of innovation projects, financial constraints |
| JEL: | O31 D21 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2016-02&r=cfn |
| By: | Haring, Magdalena; Niemann, Rainer; Rünger, Silke |
| Abstract: | In this paper we analyze the effect of investor level taxes, firm-specific ownership structure and firm-specific payout policy on firms' capital structure choice. Our analysis is based on data for 10,983 firms from 13 Central and Eastern European (CEE) countries over the time period 2002-2012. Our results show a significant impact of the net tax benefit of debt on the debt ratio of firms. Ignoring firm heterogeneity, an increase in the net tax benefit of debt by 10 percentage points leads to an increase in the debt ratio of 2.49 percentage points. Taking into account investor-level taxation and firm heterogenity, an increase in the net tax benefit of debt of 10 percentage points leads to an increase in the debt ratio of only 1.27 percentage points, if the firm's largest individual domestic owner has more than 50% of the shares. If all individual domestic owners together have more than 50% of the shares, an increase in the net tax benefit of debt of 10 percentage points leads to a negligible increase in the debt ratio of 0.05 percentage points. |
| JEL: | G32 H24 H25 H32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:arqudp:210&r=cfn |
| By: | Pierrick Baraton (CERDI - University of Auvergne); Florian Léon (CREA, Université du Luxembourg) |
| Abstract: | Using an original database of over 3,000 micro and small enterprises (MSEs) that were micro finance institution (MFI) clients in Madagascar over the period of 2008-2014, we observe that around one third of these entrepreneurs switched business sectors in the first five years after starting their business. We find that the probability of an entrepreneur's changing sectors is highly correlated with the size of the first loan obtained from the MFI. This result survives multiple robustness checks, including treatment for endogeneity and attrition. We interpret this finding in terms of financial constraint: a lack of financing prevents an entrepreneur from initially investing in his first choice sector, causing him to change sectors only when he has become financially able to do so. This result challenges the classic distinction made between necessity entrepreneurs" and "opportunity entrepreneurs" and raises important questions concerning entrepreneurial talent allocation. |
| Keywords: | Entrepreneurship, Financial constraint, firm dynamics, Madagascar |
| JEL: | L26 M13 O16 O55 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:16-09&r=cfn |
| By: | David Chambers (Cambridge Judge Business School) |
| Abstract: | The prior literature has advanced differing views on whether Germany during the late 19th and early 20th centuries was an economy supported by an equity-based as well as a bank-oriented financial system. Primarily by deploying a new IPO dataset for the Berlin Stock Exchange encompassing 1870 to 1938, we show German equity markets were well-developed as the 19th century drew to a close and remained so through the 1920s. Our analysis indicates regulation helped to foster development before 1913 but had a deleterious impact during the 1930s and suggests that there was a fruitful coexistence between large banks and markets until the Nazi era. |
| Keywords: | Initial public offerings, Germany, Financial History, Corporate Law, Stock |
| JEL: | N23 N24 G18 G24 K22 |
| Date: | 2016–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:cmh:wpaper:26&r=cfn |
| By: | Bertomeu, Jeremy (?); Ma, Paul (?) |
| JEL: | D72 D82 D83 G20 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3376&r=cfn |
| By: | Christopher F. Baum (Boston College; DIW Berlin); Atreya Chakraborty (University of Massachusetts-Boston); Boyan Liu (Beihang University) |
| Abstract: | In this paper we provide evidence on how firm-specific and macroeconomic uncertainty affects shareholders' valuation of a firm's cash holdings. This extends previous work on this issue by highlighting the importance of the source of uncertainty. Our findings indicate that increases in firm-specific risk generally increase the value of cash while increases in macroeconomic risk generally decrease the value of cash. These findings are robust to alternative definitions of the unexpected change in cash. We extend our analysis to financially constrained and unconstrained firms. |
| Keywords: | cash holdings, marginal value of cash, macro uncertainty, idiosyncratic uncertainty, financial constraints |
| JEL: | G32 G34 D81 |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:918&r=cfn |
| By: | Daines, Robert M. (Stanford University); McQueen, Grant R. (Brigham Young University); Schonlau, Robert J. (Brigham Young University) |
| Abstract: | In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm's disclosures. |
| JEL: | D82 G30 J33 K22 M41 M52 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3314&r=cfn |
| By: | Reddy, Kotapati Srinivasa |
| Abstract: | Extensive research on cross-border mergers and acquisitions performed in different institutional settings shows that legal and regulatory infrastructure, level of investor protection, and key macroeconomic factors are the most important determinants. With this in mind, we analyze and discuss the telecommunications market leader Vodafone’s cross-border acquisition of Hutchison equity stake in CGP Investments, which has long-time delayed (litigated) in an Asian emerging market‒India‒in the view of corporate gains tax. Regarding theory testing and development, we test 14 theories and two theorems that have propounded in five management research forums, namely international economics, international business (IB), strategic management, organization studies, and corporate finance. Further, based on shortcomings of the existing theories we develop new theory‒Farmers Fox Theory‒and offer lawful propositions for future research that would advance the existing IB knowledge on Institutional Voids in Emerging Economies. We therefore conclude that a given country’s weak regulatory system benefits both the acquirer and the target firm; at the same time, this economic behavior would adversely affect its fiscal income or budget. Lastly, we offer some policy guidelines for legal and regulatory system, and suggest fruitful recommendations for multinational managers. |
| Keywords: | Cross-border mergers and acquisitions; Foreign direct investment; Hutchison Whampoa; Vodafone; Internationalization; Corporate governance; Emerging economies; Liability of foreignness; Institutional and regulatory framework |
| JEL: | G3 G34 M1 M16 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74264&r=cfn |
| By: | Abdoulaye Seck; Fatoumata Lamarana Diallo; Founty Alassane Fall; KARAMOKO CAMARA; Ndeye Khadidiatou Mouhamed DIOP; Abdelkrim Araar |
| Abstract: | Despite an increase in the share of female-owned existing and new start-up firms in Senegal, there is still a wide belief that female entrepreneurs are discriminated against in the credit market. This paper empirically investigates such gender-based discrimination, and the extent to which it might be translated into lower efficiency. Using firm-level data and a methodological approach that consists of the data envelopment analysis, an endogenous switching regression and a propensity score matching, the paper finds no evidence to support the common wisdom that women are discriminated in the credit market. In addition, to the extent that they benefit from credit, female reap equal returns from the funds, efficiency-wise. These results do not however call for the abandonment of gender-biased public policies aiming at promoting access to credit and entrepreneurship, but suggest they be grounded on more robust footings such as managers’ education, firms’ ownership, sectorial activities with respect to capital intensity, and geographical locations. |
| Keywords: | Gender, access to credit, firms’ efficiency, Senegal. |
| JEL: | G21 J16 L25 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:pmmacr:2015-14&r=cfn |
| By: | Cosimo Abbate; Alessandro Sapio |
| Abstract: | Financialization is persuading academics and policy-makers that the growth of SMEs can be unleashed by promoting their quotation on stock markets. Is that true? Answering this can give clues on the functions that stock markets actually perform in the financialized world. The market may allow collecting finance for productive investments, or mainly provide firms with opportunities for value extraction. It may work as a selection device or as a risk-sharing mechanism. In this paper, we test hypotheses linking the shape of the firm growth rates distribution to stock market functions, through quantile regressions. We use a sample of UK manufacturing companies listed on AIM, a junior segment of the London Stock Exchange, and comparably small and young unlisted companies. We find that the operating revenues and total assets of AIM-listed gazelles grow faster than for their unlisted peers, after controlling for lagged values of size, age, and growth. Yet, there is a loss reinforcing effect for companies listed on the AIM. After controlling for endogeneity by estimating instrumental variable quantile treatment effect (IVQTE), our findings dismiss the existence of a treatment effect of public quotation and are consistent with the stock market attracting relatively risky companies. |
| Keywords: | Firm growth; Quantile regression; Stock market; Financialization |
| Date: | 2016–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2016/33&r=cfn |