nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒11‒27
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Capital Allocation across Regions, Sectors and Firms: evidence from a commodity boom in Brazil By Paula Bustos; Gabriel Garber; Jacopo Ponticelli
  2. The Effect of Debt Policy on Firms Performance: Empirical Evidence from Listed Manufacturing Companies on The Ghana Stock Exchange By Prempeh, Kwadwo Boateng; Nsiah Asare, Evelyn; sekyere, Allan McBright
  3. Determinants of capital structure of firms: an analysis on the Euro Zone and the U.K. By Rafael Garcia; António Cerqueira; Elísio Brandão
  4. Option Valuation with IG-GARCH Model and an U-Shaped Pricing Kernel By Christophe Chorro; Fanirisoa Rahantamialisoa H.
  5. Initial Public Offerings in Hot and Cold Markets By Jean Helwege; J. Nellie Liang
  6. Banks' Equity Stakes and Lending : Evidence from a Tax Reform By Bastian von Beschwitz; Daniel Foos
  7. Enterprise credit, household credit and growth: New evidence from 126 countries By Florian Léon
  8. The origin of CEOs and its influence on microfinance performance and risk-taking By Daudi Pascal; Leif Atle Beisland; Roy Mersland
  9. Labor Unemployment Risk and CEO Incentive Compensation By Ellul, Andrew; Wang, Cong; Zhang, Kuo
  10. The influence of CEO power on agency costs in non-profit organisations: evidence from the global microfinance industry By Roy Mersland; Daudi Pascal; Leif Atle Beisland
  12. Capturing The Elusive Convexity Of The Relationship Between Acquirer’s Announcement Returns And The Cash Porti By Tarcisio da Graca
  13. Extending Industry Specialization through Cross-Border Acquisitions By Laurent Frésard; Ulrich Hege; Gordon Phillips

  1. By: Paula Bustos; Gabriel Garber; Jacopo Ponticelli
    Abstract: We study the allocation of capital across regions, sectors and firms. In particular, we assess to what extent growth in agricultural productivity can lead to an increase in the supply of credit in industry and services. For this purpose, we identify an exogenous increase in agricultural profits due to the adoption of genetically engineered soy in Brazil. We find that regions with larger increases in agricultural productivity experienced larger increases in local bank deposits. However, there was no increase in local bank lending. Instead, capital was reallocated towards other regions through bank branch networks. This increase in credit supply affected firms' credit access through the extensive and intensive margin. First, regions with more bank branches receiving funds from soy areas experienced an increase in credit market participation of small and medium sized firms. In addition, banks experiencing faster deposit growth in soy areas increased their lending to firms with whom they had preexisting relationships. In turn, these firms grew faster in terms of employment and wage bill. Our estimates imply that the elasticity of firm growth to credit is largest in the manufacturing sector. These findings suggest that agricultural productivity growth can lead to structural transformation through a financial channel.
    Date: 2016–11
  2. By: Prempeh, Kwadwo Boateng; Nsiah Asare, Evelyn; sekyere, Allan McBright
    Abstract: Adopting a Debt Policy is considered as a momentous decision that influences the firm's value. The purpose of this Study is to empirically investigate the effect of Debt Policy (Short-Term Debt, Long-Term Debt, and Total Debt) on firms’ performance. Annual data was collected from five (5) manufacturing companies listed on the Ghana Stock Exchange (GSE) between 2005 to 2015. The panel data regression model was used to test if there was a significant relationship between the debt ratios and the performance indicators. The financial performance indicators employed in this Study are Gross Margin Profit, Return on Assets (ROA), Tobin's Q Ratio, and Debt Ratios employed are (Short-Term Debt, Long- Term Debt and Total Debt). Firm size and growth opportunity are considered as control variables. The results revealed that listed manufacturing firms in Ghana use 14% equity capital and 86% debt capital to finance their operations. The debt structure is made up of 49% long-term debt and 37% short-term debt. It was also found that debt (Short- Term Debt, Long Term Debt and Total Debt) has a negative effect on firms’ performance. It is, therefore, recommended that listed manufacturing firms should increase the level of equity finance and exploit the advantages of leverage. The Ghanaian government should take concrete steps to develop the country's capital market to enable businesses access long-term capital necessary for the financial performance of the firm in the long run.
    Keywords: Firms’ Performance, Debt policy, gross margin profit, Return on Asset (ROA), Tobin’s Q Ratio, Ghana Stock Exchange
    JEL: G0 G00 G30
    Date: 2016–11–20
  3. By: Rafael Garcia (FEP-UP, School of Economics and Management, University of Porto); António Cerqueira (FEP-UP, School of Economics and Management, University of Porto); Elísio Brandão (FEP-UP, School of Economics and Management, University of Porto)
    Abstract: The capital structure of firms has been a widely discussed subject in the world of corporate finance in the last decades. The aim of this paper is to analyse how some of its determinants previously studied by several authors, either firm characteristics and institutional settings, affect the financial structure of said firms. We perform a multivariate analysis with OLS using two equations, one for each of the dependent variables (market leverage and book leverage). We use a White estimator (diagonal) to avoid possible heteroscedasticity problems due to the use of panel data. Our sample includes firms from the UK, traditionally labeled as a market-oriented economy, and the Eurozone, considered a set of bank-oriented economies, totaling 4337 firms. The results suggest that there are no major differences in these two sets, concerning the behaviour of the determinants of capital structure. Furthermore, we interpret our results in light of the major theories on the subject, namely the trade-off, pecking order and market-timing theories. We also note that the 2008 financial crisis did not provoke any apparent change in the behaviour of structure determinants. With this work we hope to further understand the difference between bank and market oriented economies, as well as compare the main theories on the topic of determinants of capital structure of firms, on an empirical level, and finally to analyse the impact of the 2008 financial crisis on this topic.
    Keywords: capital structure, financial leverage, trade-off, pecking order, market-oriented, bank-oriented
    JEL: G01 G14 G32
    Date: 2016–11
  4. By: Christophe Chorro (Centre d'Economie de la Sorbonne); Fanirisoa Rahantamialisoa H. (Centre d'Economie de la Sorbonne)
    Abstract: Empirical and theoretical studies have attempted to establish the U-shape of the log-ratio of conditional risk-neutral and physical probability density functions. The main subject of this paper is to question the use of such a U-shaped pricing kernel to improve option pricing performances. Starting from the so-called Inverse Gaussian GARCH model (IG-GARCH), known to provide semi-closed form formulas for classical European derivatives when an exponential affine pricing kernel is used, we build a new pricing kernel that is non-monotonic and that still has this remarkable property. Using a daily dataset of call options written on the S&P500 index, we compare the pricing performances of these two IG-GARCH models proving, in this framework, that the new exponential U-shaped stochastic discount factor clearly outperforms the classical exponential affine one. What is more, several estimation strategies including options or VIX information are tested taking advantage of the analytical tractability of these models
    Keywords: Option valuation; Pricing kernel; VIX; IG-GARCH; S&P500
    JEL: G12 G22
    Date: 2016–11
  5. By: Jean Helwege; J. Nellie Liang
    Abstract: Asymmetric information models characterize hot IPO markets as periods when better quality firms have an incentive to issue equity, and cold markets when the lemons premium associated with equity is too high to draw in many issuers. Recent empirical evidence, however, suggests that firms that issue in hot markets are a major source of stock price underperformance of equity issuers. We investigate these opposing views with data on IPO firms that issued in 1983, a hot market, and 1988, a cold market. We find that the two sets of firms have similar operating performance, but stock returns are worse for firms that went public in the hot market. Our results are largely consistent with investor overoptimism in hot markets, but not with the asymmetric information models.
    Keywords: Initial public offerings ; stock price underperformance ; asymmetric information
  6. By: Bastian von Beschwitz; Daniel Foos
    Abstract: Several papers find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks’ equity stakes are immaterial for their lending.
    Keywords: Relationship banking ; Ownership ; Monitoring
    JEL: G21 G32
    Date: 2016–10
  7. By: Florian Léon (CREA, Université du Luxembourg)
    Abstract: This paper attempts to distinguish the effects of household and enterprise credit on Economic growth. To do so, I create a new, hand-collected database covering 143 countries over the period 1995-2014 (126 countries are employed for econometric analysis). Estimation results confirm recent evidence documenting the absence of the effect of total credit to growth. Findings also show that household credit has a negative effect on growth, but I fail to provide robust support for a positive effect of business credit.
    Keywords: Financial development, Household credit, Enterprise credit, Economic growth
    JEL: E44 G21 O16
    Date: 2016
  8. By: Daudi Pascal; Leif Atle Beisland; Roy Mersland
    Abstract: This study examines the relationships between the origin of chief executive officers (CEOs), and the performance and risk-taking levels of their companies. It is based on a sample of 353 microfinance institutions (MFIs) from 76 countries, with data covering the period 1996-2011. We use return on assets and operational costs as performance metrics, and the standard deviation of return on assets and operational costs as measures of risk. The results suggest that MFIs with an internally-recruited CEO achieve a significantly higher performance than MFIs with an externally-recruited CEO. More specifically, MFIs with an ‘insider CEO’ have a positive association with return on assets, but a negative association with operational costs. Moreover, internally-recruited CEOs appear to be associated with a lower level of risk. We believe that these results are important and have clear policy implications, in particular for an industry with such a thin labour market for CEOs and lack of managerial capacity. Our findings are consistent with the view that insider CEOs have firm-specific skills, experience and network resources that result in an enhanced MFIs performance and low-risk.
    Keywords: CEO; microfinance; performance; risk
    JEL: G21 G32 M12
    Date: 2016–11–21
  9. By: Ellul, Andrew; Wang, Cong; Zhang, Kuo
    Abstract: We investigate the impact of workers' exposure to unemployment risk on the design of CEO incentive compensation. Through its impact on risk-taking activities, option-based compensation is likely to also influence unemployment risk which is internalized by the firm. Exploiting state-level changes in unemployment benefits as a source of variation in workers' unemployment costs, we find that after unemployment insurance benefits become more generous boards increase the CEOs' convex payoff structure. This behavior is consistent with the view that CEO's risk-taking incentives are amplified by the board to take advantage of lower costs associated with unemployment risk. The increase in convexity payoff structures is stronger when CEO wealth is tied closely to firm performance, more pronounced in labor-intensive industries, and attenuated by the strength of unionization. Changes in the incentive structures are associated with riskier investment and financing strategies and better performance. Results suggest that executive compensation is one mechanism used by boards to internalize labor market frictions in firms' decisions.
    Keywords: Executive compensation; Human Capital; leverage; Risk Taking; unemployment risk
    JEL: G32 G34
    Date: 2016–11
  10. By: Roy Mersland; Daudi Pascal; Leif Atle Beisland
    Abstract: This paper examines agency costs incurred by microfinance organisations. We argue that differences in agency costs not only stem from differences in ownership form but are also influenced by the amount of power wielded by the chief executive officer (CEO). We proxy for agency costs using operating expenses, asset utilisation, liquidity and tangible asset intensity. Using a sample of 374 microfinance organisations located in 76 countries, we find evidence that agency costs are higher in microfinance organisations set up as non-profits, but only if the CEO is powerful. Our empirical evidence illustrates the importance of installing proper governance mechanisms to minimise agency costs, in particular in the non-profit sector.
    Keywords: CEO; NPO; agency costs; microfinance
    JEL: M12 L31 D23 G21
    Date: 2016–11–21
  11. By: Ayse Altiok-Yilmaz (Bahcesehir University); Elif Akben-Selcuk (Kadir Has University)
    Abstract: The impact of corporate performance on the likelihood of voluntary or disciplinary CEO turnover has been a central research topic in finance. To date, the majority of the studies in the area focused on developed countries and documented a negative relationship between the two variables. However, considering institution differences and different corporate governance mechanisms in emerging markets, the results could differ in other countries. The objective of the present study is to investigate the relationship between CEO turnover and financial performance in an emerging market, Turkey. The sample includes non-financial firms listed on Borsa Istanbul and the period of analysis covers the years 2005-2014. A firm-year is defined as a turnover year if there was a change in the name of the CEO as announced in the company news. The empirical results are consistent with prior literature and indicate that financial performance is negatively associated with the probability of CEO turnover. The effect size is stronger in the case of disciplinary turnovers and findings are robust to alternative performance measures. These results suggest that corporate governance mechanisms are not ineffective in Turkey.
    Keywords: CEO turnover, financial performance, Turkey.
  12. By: Tarcisio da Graca (University of Quebec at Outaouais)
    Abstract: We find empirical evidence that the acquirer’s announcement return is a U-shaped function of the cash portion of the payment in mergers and acquisitions (M&As), ceteris paribus. The convexity of this function has long been theoretically predicted in an asymmetric information model, but it remained elusive in empirical investigations. We argue that this elusiveness might have been due to insufficient statistical power of the univariate methods applied to test the convexity hypothesis. We study a sample of U.S. M&As from 1990 to 2008. We apply a structural M&A event study methodology that accounts for the interaction of two M&A effects: synergy (change in total value) and dominance (distribution of synergies between the parties). This interaction simultaneously determines the parties’ announcement returns. In addition, we consider that the cash portion is an endogenous variable, as well (as the use of a mix of cash and stock as payment can be a form of risk sharing arrangement in two-sided asymmetric information model). Empirically modeling these interdependencies is the likely source of the extra statistical power that allows us to capture the convexity effect. We discuss the U-shaped function in terms of an interplay between two commonly cited motives for the use of different methods of payments: capital gains tax deferral and asymmetric information. All in all, we estimate the acquirer’s announcement return is the lowest when the payment consists of approximately 50 percent of cash.
    Keywords: event study, mergers & acquisitions, convexity
    JEL: G14 G34
  13. By: Laurent Frésard; Ulrich Hege; Gordon Phillips
    Abstract: We investigate the role of industry specialization in horizontal cross-border mergers and acquisitions. We find that acquirers from more specialized industries in a country are more likely to buy foreign targets in countries that are less specialized in these same industries. The role of industry specialization in foreign acquisitions is more prevalent when contracting inefficiencies and exporting costs limit arms' length relationships. The economic gains in cross-border deals are larger when specialized acquirers purchase assets in less specialized industries. These results are consistent with an internalization motive for foreign acquisitions, through which acquirers can apply localized intangibles on foreign assets.
    JEL: D22 D4 D53 G34 L1 L11
    Date: 2016–11

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.