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on Corporate Finance |
| By: | Paul Borochin; Jie Yang |
| Abstract: | We find that ownership by different types of institutional investor has different implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation relative to fundamentals, as well as the magnitude of this misvaluation. In contrast, transient institutional investors have the opposite effect. Using SEC Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results imply a more nuanced relationship between institutional ownership and firm value and corporate governance. |
| Keywords: | Institutional investors ; Investor type ; Dedicated ; Transient ; Misvaluation ; Corporate governance ; Blockholding ; Portfolio turnover ; Information dissemination ; SEC Regulation FD |
| JEL: | G30 G32 G14 G38 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-88&r=cfn |
| By: | Huong Dang (University of Canterbury); Michael Jolly |
| Abstract: | This study examines the performance of 96 IPOs listed on New Zealand Stock Exchange (NZSE) during the 25-year period from July 1991 to June 2015. The NZX Gross All Index and two portfolios of matched peers based on sector/ industry and either sales forecast or book-to-market ratio are constructed as benchmarks. Compared with three benchmark portfolios, IPO firms outperform in the short term (1 year) but underperform in the medium and long term investment horizons (3-5 years). Depending on the benchmark for which the IPO returns are compared to, investors investing in the IPO portfolio and holding it for five years earn a cumulative average abnormal return (CAR) of between -5 percent and -20.4 percent and an average holding period return differential of between -2.7 percent and -20.07 percent. We conduct three sub-sample analyses to examine the association between differences in valuation multiples (E/P, EBITDA/EV, and P/S) and long term average returns. The findings are consistent with the general consensus of superior returns from value investments: IPOs with above median E/P and EBITDA/EV and below median P/S exhibit higher CAR than IPOs with below median earnings ratio (E/P and EBITDA/EV) and above median P/S. Compared with their respective peers selected based on sales forecasts, IPOs with high E/P achieve a CAR of 9.92 percent over a five-year period whereas IPOs with low E/P experience a five-year CAR of -33.16 percent. |
| Keywords: | Initial public offering; cumulative abnormal return; holding period returns; wealth relative; valuation multiples |
| JEL: | G24 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:16/32&r=cfn |
| By: | Chernobai, Anna (Syracuse University); Ozdagli, Ali K. (Federal Reserve Bank of Boston); Wang, Jianlin (Federal Reserve Bank of Boston) |
| Abstract: | How does business complexity affect risk management in financial institutions? The commonly used risk measures rely on either balance-sheet or market-based information, both of which may suffer from identification problems when it comes to answering this question. Balance-sheet measures, such as return on assets, capture the risk when it is realized, while empirical identification requires knowledge of the risk when it is actually taken. Market-based measures, such as bond yields, not only ignore the problem that investors are not fully aware of all the risks taken by management due to asymmetric information, but are also contaminated by other confounding factors such as implicit government guarantees associated with the systemic importance of complex financial institutions. To circumvent these problems, we use operational risk events as a risk management measure because (i) the timing of the origin of each event is well identified, and (ii) the risk events can serve as a direct measure of materialized failures in risk management without being influenced by the confounding factors that drive asset prices. Using the gradual deregulation of banks’ nonbank activities during 1996–1999 as a natural experiment, we show that the frequency and magnitude of operational risk events in U. S. bank holding companies have increased significantly with their business complexity. This trend is particularly strong for banks that were bound by regulations beforehand, especially for those with an existing Section 20 subsidiary, and weaker for other banks that were not bound and for nonbank financial institutions that were not subject to the same regulations to begin with. These results reveal the darker side of post-deregulation diversification, which in earlier studies has been shown to lead to improved stock and earnings performance. Our findings have important implications for the regulation of financial institutions deemed systemically important, a designation tied closely to their complexity by the Bank for International Settlements and the Federal Reserve. |
| Keywords: | operational risk; bank holding companies; financial deregulation; Glass-Steagall Act; business complexity |
| JEL: | G18 G20 G21 G32 L25 |
| Date: | 2016–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-16&r=cfn |
| By: | Jayati Sarkar (Madras School of Economics); Ekta Selarka (Assistant Professor, Madras School of Economics) |
| Abstract: | This paper provides evidence on the effect of women directors on the performance of family firms with a case study of India. Existing literature on the subject has primarily focused on widely held firms, notably in the US. Given that ownership structure and governance environment of family firms are distinctly different from those of non-family firms, the evidence on the relationship between women on board and firm performance in the context of widely held firms may not apply in the context of family firms. India provides an ideal setting for analyzing this question as the presence of family firms is pervasive and since 2013 India has instituted gender quotas on corporate boards. Using a data-set of 10218 firm year observations over a ten year period from 2005 to 2014 which spans the pre-quota and post-quota years, we find robust evidence that women directors on corporate boards positively impact firm value and that this effect increases with the number of women directors on board. However, we find that the positive effect of gender diversity on firm performance weakens with the extent to which the family exerts control through occupying key management positions on the board. In addition, women directors affiliated to the family have no significant effect on firm value, whereas - independent women directors do. Our results with respect to profitability are somewhat different; while as in the case of market value, women directors positively impact profitability with the positive effect driven by independent women directors, the effect does not vary with the extent of family control. Taken together, our results suggest that though gender diversity on corporate boards may positively impact firm performance in family firms in general, the extent of family control can have a significant bearing on this relationship. The findings from this study could be instructive for emerging economies like India in promoting gender-based quotas on corporate boards. |
| Keywords: | Board of Directors, gender diversity, promoter control, ownership, regulationClassification-JEL: G32, G34, G38 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2015-130&r=cfn |
| By: | Simplice Asongu (Yaoundé/Cameroun); Ibrahim D. Raheem (Canterbury/UK); Vanessa S. Tchamyou (Yaoundé/Cameroon) |
| Abstract: | Financial dollarization in Sub-Saharan Africa is the most persistent compared to other regions of the world. This study complements the existing scant literature on dollarization in Africa by assessing the role of information sharing offices (public credit registries and private credit bureaus) on financial dollarization in 26 countries of SSA for the period 2001-2012. The empirical evidence is based on Ordinary Least Squares (OLS) and Generalised Method of Moments (GMM). The findings show that information sharing offices (which are designed to reduce information asymmetry) in the banking industry are a deterrent to dollarization. Policy implications are discussed. |
| Keywords: | Dollarization; Openness; Information Asymmetry; Africa |
| JEL: | E31 E41 G20 O16 O55 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:16/048&r=cfn |
| By: | Hirsch, Julia; Walz, Uwe |
| Abstract: | Little evidence exists on the financing decisions of newly founded firms or on the financing dynamics of these firms over their life cycle. We aim to help filling this gap by investigating the financing dynamics of 2,456 French manufacturing firms founded between 2004 and 2006 through their legally required and reported financial statements. Because we observe significant heterogeneity in the financing decision in the firms' founding year, we focus on analyzing whether these differences widen, persist, or converge by using different convergence concepts. We identify a persistence-cum-convergence pattern. We find the existence of ß-convergence (implying that e.g. firms with lower initial levels of debt accumulate more debt over time) but not of ß-convergence (i.e. we observe an increase in the cross-sectional dispersion of the financing structure). We also show that the dynamics of financing matter for the growth path of the firms. |
| Keywords: | financing decisions,life-cycle,firm growth,newly founded firms |
| JEL: | D92 G32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:153&r=cfn |
| By: | Saumitra Bhaduri (Madras School of Economics); Ekta Selarka (Madras School of Economics) |
| Abstract: | Our study investigates the determinants and use of cash holdings by Indian companies. Using a large sample of manufacturing firms that are publicly traded on Bombay Stock exchange for the period of 1998-2012, we present a dynamic panel data regression framework to accommodate the persistence in cash holdings which is typically ignored in the literature. We find significance evidence of persistence in corporate cash holdings of Indian firms. Using this framework, we predict the excess cash holdings and find that firms with higher concentration of insider ownership as well as higher divergence between cash flow and control rights of insiders hold positive excess cash. Not only they hold excess cash but they accumulate cash holdings. The study also finds that business groups on average hold higher cash reserves but at the same time, dissipate cash over time quickly then their standalone counterparts. Further, we find that positive excess cash positively affects dividend payout and propensity to acquisitions. However the study finds that corporate governance plays no role in disbursement of excess cash as dividends or undertaking acquisitions. This indicates absence of agency motive in explaining the dividend payout and propensity of firms to acquire. |
| Keywords: | Cash holdings, Ownership concentration, corporate governance, IndiaClassification-JEL: G32, G34 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2015-135&r=cfn |
| By: | Dietsch, Michel; Düllmann, Klaus; Fraisse, Henri; Koziol, Philipp; Ott, Christine |
| Abstract: | Using a unique and comprehensive data set on the two largest economies of the Eurozone - France and Germany - this paper first proceeds to a computation of the Gordy formula relaxing the ad hoc sizedependent constraints of the Basel formulas. Our study contributes to Article 501 of the Capital Requirements Regulation (CRR) requesting analysis of the consistency of own funds requirements with the riskiness of SME. In both the French and the German sample, results suggest that the relative differences between the capital requirements for large corporates and those for SME (in other words the capital relief for SME) are lower in the Basel III framework than implied by empirically estimated asset correlations. Results show that the SME Supporting Factor in the CRR/CRD IV is able to compensate the difference between estimated and CRR/CRD IV capital requirements for loans in the corporate portfolio. However, no empirical evidence is found supporting the € 1.5 mln SME threshold currently included in Article 501 (CRR). |
| Keywords: | SME finance,Asset correlation,Basel III,CRR/CRD IV,Asymptotic Single Risk factor Model,SME Supporting Factor |
| JEL: | C13 G21 G33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:452016&r=cfn |