nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒02‒12
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Foreign Acquisition and Credit Risk: Evidence from the U.S. CDS Market By Umit Yilmaz
  2. Corporate Governance and CEO Turnover Decisions By Theodosios Dimopoulos; Hannes F. Wagner
  3. Financing and performance of female-owned firms in Middle Eastern and African Economies By Mina Baliamoune-Lutz; Stefan Lutz
  4. The Information Content of Option Demand By Kerstin Kehrle; Tatjana Xenia Puhan
  5. Credit Scores, Social Capital, and Stock Market Participation By Jesse Bricker; Geng Li
  6. Systemic Risk in Europe By Robert F. Engle; Eric Jondeau; Michael Rockinger
  7. Debt Contractsin the Presence of Performance Manipulation By Guttman, Ilan; Marinovic, Ivan
  8. Option Pricing and Hedging with Small Transaction Costs By Jan Kallsen; Johannes Muhle-Karbe
  9. Does Corporate Governance Matter? Evidence from the AGR Governance Rating By Alberto Plazzi; Walter N. Torous
  10. Misvaluation and Return Anomalies in Distress Stocks By Assaf Eisdorfer; Amit Goyal; Alexei Zhdanov
  11. Dividend Growth Predictability and the Price-Dividend Ratio By Ilaria Piatti; Fabio Trojani

  1. By: Umit Yilmaz (Swiss Finance Institute and University of Lugano)
    Abstract: This paper empirically analyses the effect of foreign block acquisitions on the U.S. target firms' credit risk as captured by their CDS. The involvement of foreign investors triggers a major increase, about 42 basis points, in the target firm's CDS. This effect is mostly pronounced for firms with majority control transactions, with acquirers from developed markets, and with diversifying deals. The findings are consistent with the asymmetric information hypothesis. Indeed, foreign block purchases are significantly associated with higher exposure to idiosyncratic stock volatility.
    Keywords: Foreign block acquisitions; Credit risk; CDS spreads; Stock volatility
    JEL: F30 F21 G34 G12 G14 G15
  2. By: Theodosios Dimopoulos (University of Lausanne, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Hannes F. Wagner (Bocconi University)
    Abstract: This paper provides a cross-country analysis to determine whether CEO turnover is a credible disciplining device for managers, whether it is effective in delivering performance improvements, and whether better governance improves the credibility and effectiveness of CEO turnover. The analysis is based on a detailed panel of 5,300 CEO years and spans two distinctly different financial systems- the U.K. and Germany-over the period 1995-2005. We find that CEOs face a credible threat of being removed for underperformance and that the hiring of new CEOs is effective in realizing large profitability improvements in the following years. We also find both relations to be virtually identical in both countries, despite large structural governance differences. Further, we consider a large number of firm-specific governance mechanisms previously proposed as indicators of better governance and find no evidence that any of them improves the observed relations between firm performance and CEO turnover. Taken together, our results suggest that replacing the CEO is an important component of successful turnarounds in underperforming firms and that this economic mechanism appears to work in nearly identical ways across very different financial markets, and across firms with very different quality of governance.
    Keywords: CEO, board, turnover, performance, restructuring
    JEL: G30 G34
  3. By: Mina Baliamoune-Lutz (University of North Florida, Coggin College of Business, 1 UNF Drive, Jacksonville, FL 32224, USA.); Stefan Lutz (European Management School (EMS), Professorship for Economics, Rheinstrasse 4N, Mainz, 55116, Germany.)
    Abstract: Empirical evidence suggests that lack of access to financing is a major constraint to performance by female-owned firms in most countries. Firm performance, financing structure, and constraints have been well explored for firms in developed economies but this is not the case for firms in developing economies, especially in Africa and the Middle-East. Largely due to lack of data availability, existing literature on African firms has presented some survey-based evidence on firm performance and financing structures while detailed financial evidence is lacking. This paper aims at filling this research gap. We identify female-owned firms and examine the impact of ownership structure on financing and firm performance. We use cross-sectional financial data covering 25,500 companies in the Middle East and Africa for the years 2006 to 2014. Our results reveal a clear, but perhaps surprising, gender-specific pattern.
    Keywords: Gender, Ownership, Firm profitability, Financing structure, MENA, Africa, FDI, Globalization.
    JEL: F20 J16 L22 M10
    Date: 2017–02
  4. By: Kerstin Kehrle (Independent); Tatjana Xenia Puhan (University of Mannheim and Swiss Life Asset Managers)
    Abstract: This paper combines the concept of market sidedness with excess option demand (changes in open interest) to solve the empirical challenge of separating directional from uninformed trading motives in widely available, unsigned options data. Our measure of options market sidedness persistently predicts the sign and strength of stock returns. Trading strategies conditional on the measure are highly profitable. For instance, when the measure indicates positive (negative) information, out-of-the-money calls (puts) generate returns of 27% (32%) over roughly four weeks. Risk-adjusted returns of a long-short equity strategy yield more than 2%. An increase in directionally informed demand predicts a decrease in option liquidity and increases in pricing inefficiency.
    Keywords: Option Demand, Market Sidedness, Open Interest, Liquidity, Market Microstructure
    JEL: D82 G10 G12 G14
  5. By: Jesse Bricker; Geng Li
    Abstract: While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities.
    Keywords: Credit scores ; Social Capital ; Stock market participation ; Trust
    JEL: D14 G10 O16
    Date: 2017–02
  6. By: Robert F. Engle (New York University, New York University (NYU), and National Bureau of Economic Research (NBER)); Eric Jondeau (University of Lausanne and Swiss Finance Institute); Michael Rockinger (University of Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute)
    Abstract: Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system as a whole is undercapitalized. In this paper, we investigate the case of non-U.S. institutions, with several factors explaining the dynamics of financial firms returns and with asynchronicity of time zones. We apply this methodology to the 196 largest European financial firms and estimate their systemic risk over the 2000-2012 period. We find that, for certain countries, the cost for the taxpayer to rescue the riskiest domestic banks is so high that some banks might be considered too big to be saved.
    Keywords: Systemic Risk, Marginal Expected Shortfall, Multi-factor Model
    JEL: C32 G01 G20 G28 G32
  7. By: Guttman, Ilan (NYU); Marinovic, Ivan (Stanford University)
    Abstract: Empirical and survey evidence suggest that firms often manipulate reported numbers to avoid debt covenant violations. The theoretical literature, by and large, has ignored the consequences of this phenomenon on debt contracting. Departing from a standard debt financing setting with continuation decisions based on reported contractible signals, we study how firms ability to manipulate reports affect the design of debt contracts. The model generates an array of novel (and perhaps surprising) empirical predictions regarding the optimal covenant, the interest rate, the efficiency of the continuation/liquidation decisions, and the likelihood of covenant violations.
    JEL: D82 D86 G30 M12
    Date: 2017–01
  8. By: Jan Kallsen (Munich University of Technology); Johannes Muhle-Karbe (University of Michigan at Ann Arbor)
    Abstract: An investor with constant absolute risk aversion trades a risky asset with general Itôdynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the associated welfare, expressed in terms of the local dynamics of the frictionless optimizer. By applying these results in the presence of a random endowment, we obtain asymptotic formulas for utility indifference prices and hedging strategies in the presence of small transaction costs.
    Keywords: transaction costs, indifference pricing and hedging, exponential utility, asymptotics
    JEL: G13 G11
  9. By: Alberto Plazzi (University of Lugano and Swiss Finance Institute); Walter N. Torous (Massachusetts Institute of Technology)
    Abstract: Poor corporate governance permits unreliable financial reporting by a firm's management. The AGR governance rating is based on the premise that a more accurate assessment of the effects of corporate governance can be formulated by taking this output of corporate governance into account in addition to traditional governance inputs such as board structure. We document that the time series variation in a firm's AGR score reliably forecasts the firm's Return on Assets (ROA) and other measures of firm performance. A portfolio going long shares of better governed firms with high AGR scores and shorting shares of poorly governed firms with low AGR scores generates a risk-adjusted return of approximately 5% per year. Most of this return differential originates with firms having poor corporate governance. Overall, our results are consistent with a causal link between corporate governance and future firm and stock price performance.
    Keywords: corporate governance, AGR, operating performance
    JEL: G11 G12 G14 G34
  10. By: Assaf Eisdorfer (University of Connecticut); Amit Goyal (University of Lausanne; Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Alexei Zhdanov (Pennsylvania State University)
    Abstract: Return anomalies are most pronounced among distressed stocks. We attribute this finding to the role of misvaluation and investors' inability to value distressed stocks correctly. We treat distressed stocks as options and construct a valuation model that explicitly takes into account the value of the option to default (or abandon the firm). We show that anomalies exist only among the subset of distressed stocks classified as misvalued by our model. There is little evidence that more misvalued stocks are harder to arbitrage than less misvalued stocks.
    Keywords: Financial Distress, Return Anomalies, Misvaluation
    JEL: G12 G13 G33
  11. By: Ilaria Piatti (University of Oxford); Fabio Trojani (University of Geneva and Swiss Finance Institute)
    Abstract: Conventional tests of present-value models over-reject the null of no predictability. In order to better account for the intrinsic probability of detecting predictive relations by chance alone, we develop a new nonparametric Monte Carlo testing method, which does not rely on distributional assumptions to aggregate the information from the time series of price-dividend ratios and dividend growth. We find evidence of return predictability, but no apparent evidence of dividend growth predictability in postwar US data, thus reconciling the diverging conclusions in the literature. Our findings are robust to the specification of the predictive information set, the choice of the sample period and the use of different cash-flow proxies.
    Keywords: Predictability, Predictive regression, Present-value model, State-space model, Bootstrap, Likelihood ratio test
    JEL: C12 C14 C22 G12

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