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on Corporate Finance |
| By: | Colonnello, Stefano |
| Abstract: | I study the relation between internal governance and creditor governance. A deterioration in creditor governance may increase the agency costs of debt and managerial opportunism at the expense of shareholders. I exploit the introduction of credit default swaps (CDS) as a negative shock to creditor governance. I provide evidence consistent with shareholders pushing for a substitution effect between internal governance and creditor governance. Following CDS introduction, CDS firms reduce managerial risk-taking incentives relative to other firms. At the same time, after the start of CDS trading, CDS firms increase managerial wealth-performance sensitivity, board independence, and CEO turnover performance-sensitivity relative to other firms. |
| Keywords: | creditor governance,credit default swaps,empty creditors |
| JEL: | G32 G34 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:62017&r=cfn |
| By: | Marti G. Subrahmanyam (Stern School of Business, New York University); Dragon Yongjun Tang (Faculty of Business and Economics, University of Hong Kong); Sarah Qian Wang (Warwick Business School, University of Warwick) |
| Abstract: | We investigate the liquidity management of firms following the inception of credit default swaps (CDS) markets on their debt, which allow hedging and speculative trading on credit risk to be carried out by creditors and other parties. We find that reference firms hold more cash after CDS trading commences on their debt. The increase in cash holdings is more pronounced for CDS firms that do not pay dividends and have a higher marginal value of liquidity. For CDS firms with higher cash ow volatility, these increased cash holdings do not entail higher leverage. Overall, our findings are consistent with the view that CDS-referenced firms adopt more conservative liquidity policies to avoid negotiations with more exacting creditors. |
| Keywords: | Credit default swaps; Cash; Liquidity; Empty creditors |
| JEL: | G32 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:202016&r=cfn |
| By: | Klepsch, Catharina; Elsas, Ralf |
| Abstract: | Due to adjustment costs, firms’ only partially adjust toward desired investment levels. By exploiting unique survey data on firms’ desired investments, we examine how and when firms adjust their investments toward stated plans (targets). More precisely, we examine how financing costs due to asymmetric information, disruption costs, and costs due to asset irreversibility influence firms’ adjustment costs and thus adjustment behavior. We find that firms with sufficient cash flows to finance all desired investments adjust significantly faster toward targets than firms with insufficient cash flows. Moreover, firms with either minor investment targets, a large fraction of desired replacement investments or low asset irreversibility adjust within shorter time compared to firms with major investment plans, capacity expansion targets or high asset irreversibility, respectively. Finally, although several prior studies find that the financial crisis of 2008 and 2009 reduced firms’ realized investment spending, our results indicate that firms’ speed of adjustment toward target investments was not influenced by the crisis. |
| JEL: | D92 E22 G31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145486&r=cfn |
| By: | Berndt, Antje (Australian National University); Hollifield, Burton (Carnegie Mellon University); Sandås, Patrik (SIFR) |
| Abstract: | Prior to the subprime crisis, mortgage brokers charged higher percentage fees for loans that turned out to be riskier ex post, even when conditioning on other risk characteristics. High conditional fees reveal borrower attributes that are associated with high borrower risk, such as suboptimal shopping behavior, high valuation for the loan or high borrower-specific broker costs. Borrowers who pay high conditional fees are inherently more risky, not just because they pay high fees. We find a stronger association between conditional fees and delinquency risk when lenders have fewer incentives to screen bor- rowers, for purchase rather than refinance loans, and for loans originated by brokers who have less frequent interactions with the lender. Our findings shed light on the pro- posed QRM exemption criteria for risk retention requirements for residential mortgage securitizations. |
| Keywords: | Mortgage brokers; Loan performance; Subprime crisis; Credit risk retention; Qualied residential mortgages |
| JEL: | G12 G18 G21 G32 |
| Date: | 2017–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0336&r=cfn |
| By: | Mami Koyama (Graduate School of Business Administration, Kobe University); Tomohisa Kitada (Graduate School of Business Administration, Kobe University); Takehisa Kajiwara (Graduate School of Business Administration, Kobe University) |
| Abstract: | We examine the relationship between financial risk and cost behavior, both theoretically and empirically. We suggest that financial risk will affect the degree of discretion in managerial resource adjustment decisions by its impacts on financial flexibility. As expected, our results show that financial risk increases the degree of cost anti-stickiness in the case of a prior activity decrease. On the other hand, financial risk appears to have no statistically significant influence on cost behavior in the case of a prior activity increase. This result is not consistent with our prediction. We also examine the moderating effect of the close relationships between firms and banks on the association between financial risk and asymmetric cost behavior using data on the main bank system in Japan. Consistent with our prediction, our results show that firms’ close ties with the main banks mitigate the adverse impacts of financial risk and allow managers to adjust resources flexibly in response to sales changes, even if the firms face high financial risk. |
| Keywords: | Cost Stickiness, Cost Behavior, Financial Risk, Main Bank System |
| JEL: | M41 D24 D81 G32 G33 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:kbb:dpaper:2016-14&r=cfn |
| By: | Benjamin Hermalin; Michael Weisbach |
| Abstract: | A manager’s current and potential future employers are continually assessing her or his ability. Such assessment is a crucial component of corporate governance and this chapter provides an overview of the research on that aspect of governance. In particular, we review how assessment generates incentives (both good and bad), generates risks that must be faced by both managers and firms, and affects the contractual relationships between those parties in important ways. Assessment (or learning) proves a key perspective from which to study, evaluate, and possibly even regulate corporate governance. Moreover, because learning is a behavior notoriously subject to systematic biases, this perspective is a natural avenue through which to introduce behavioral and psychological insights into the study of corporate governance. |
| JEL: | D81 D83 G34 M12 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23121&r=cfn |
| By: | Onaran, Özlem; Tori, Daniele |
| Abstract: | According to econometric estimations using firm balance sheets of the publicly listed companies in the UK, in large non-financial corporations (NFCs), investment rate would have been 16% higher without the rise in financial payments, and 41% higher without the increasing financial incomes, and in the small NFCs, investment would have been 35% higher without the rise in financial incomes. |
| Keywords: | Financialization; Investment; Non-financial sector; Firm data; UK; productivity puzzle; |
| JEL: | C23 G31 |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:gpe:wpaper:16129&r=cfn |
| By: | Pejman Abedifar (School of Management, University of St Andrews); Paolo Giudici (Department of Economics and Management, University of Pavia); Shatha Hashem (University of Pavia) |
| Abstract: | This paper investigates how banking system stability is affected when we combine Islamic and conventional finance under the same roof. We compare systemic resilience of three types of banks in 6 GCC countries with dual banking systems: fully-fledged Islamic banks (IB), purely conventional banks (CB) and conventional banks with Islamic windows (CBw). We employ market-based systemic risk measures such as MES, SRISK and DeltaCoVaR to identify which sector is more vulnerable to a systemic event, and use graphical network models to determine the banking sector that can more easily spread a systemic shock to the whole system. Using a sample of 2,608 observations on 79 publicly traded banks operating over the 2005-2014 period, we find that CBw is the least resilient sector to a systemic event and is more interconnected with other banks during crisis times. |
| Keywords: | graphical network models, Islamic banking, partial correlations, systemic risk measures |
| JEL: | G21 C58 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0134&r=cfn |
| By: | Michael, Bryane; Goo, Say-Hak |
| Abstract: | Hong Kong contributes to poor corporate governance on the Mainland. Could regulatory reform in Hong Kong help improve corporate governance standards/practices (and thus firm value) on the Mainland? In this paper, we discuss ways to incentivize Mainland firms to improve their corporate governance by adopting numerous market-value increasing reforms in Hong Kong. These include the limited extra-territorial application of corporate governance provisions, changes to the Listing Rules to ‘contract’ for better corporate governance, and incentives to collect better corporate governance data. Other reforms include increasing financial transparency (particularly about corporate ownership and control), reducing financial firms’ incentives to trade in shell corporations, regulating relationships with tax havens, and encouraging the redrafting of China’s 2002 Code of Corporate Governance. We provide 31 recommendations and estimate that these recommendations can increase market values on the Mainland by 7% (or in value of roughly $330 billion), while improving the value-added of Hong Kong’s own incorporation/corporate services companies. |
| Keywords: | Chinese corporate governance,extra-territoriality,Hong Kong,Listing Rules |
| JEL: | G34 N25 M14 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:149992&r=cfn |
| By: | Stéphane Sorbe; Åsa Johansson; Øystein Bieltvedt Skeie |
| Abstract: | Multinational enterprises (MNEs) manipulate the location of their debts to reduce their corporate tax burden. Indeed, by locating debts in higher-tax rate countries, MNEs can deduct interest payments against a higher tax rate. This paper provides evidence of such manipulation of debt location. The analysis is based on a large sample of firm-level data from the ORBIS database. By comparing the indebtedness of MNE entities with similar characteristics but different debt shifting opportunities, the analysis suggests that a 1 percentage point higher tax rate is associated with 1.3% higher third-party debt. This is a lower bound estimate of debt manipulation, since it excludes the manipulation of internal debt. The analysis also shows that strict rules limiting interest deductibility (e.g. thin capitalisation or interest-to-earnings rules) can reduce debt manipulation. The possibility to locate debts in higher-tax rate countries reduces the effective cost of debt for MNE groups. The empirical analysis suggests that this can lead MNE groups to increase their overall external indebtedness, compounding the “debt bias” existing in most tax systems. Dette et planification fiscale des multinationales Les entreprises multinationales manipulent l'emplacement de leurs dettes pour réduire le montant de leur impôt sur les sociétés. En effet, en plaçant des dettes dans les pays à taux élevé d'impôt, les entreprises multinationales peuvent déduire les paiements d'intérêts contre un taux d'imposition plus élevé. Ce document fournit la preuve d'une telle manipulation de l'emplacement de la dette. L'analyse est basée sur un large échantillon de données d’entreprises de la base de données ORBIS. En comparant l'endettement des entités multinationales ayant des caractéristiques similaires mais différentes possibilités de manipuler l’emplacement leur dette, l'analyse suggère qu’un taux d'imposition de 1 point de pourcentage plus élevé est associé à une dette externe accrue de 1,3%. Ceci est une estimation de la limite inférieure de l’ampleur de la manipulation de la dette, car elle exclut la manipulation de la dette interne. L'analyse montre également que les règles strictes limitant la déductibilité des intérêts (par exemple des règles relatives à la sous-capitalisation ou de règles sur les ratios intérêts-bénéfices) peuvent réduire la manipulation de la dette. La possibilité de localiser les dettes dans les pays à taux d'imposition élevé réduit le coût effectif de la dette pour les groupes multinationaux. L'analyse empirique suggère que cela peut entraîner des groupes multinationaux à augmenter leur endettement global externe, ce qui aggrave le biais en faveur du financement par la dette existant dans la plupart des systèmes fiscaux. |
| Keywords: | capital structure, debt bias, interest-to-earnings, multinational tax planning, thin capitalisation rules |
| JEL: | G32 H25 H26 |
| Date: | 2017–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1357-en&r=cfn |