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on Corporate Finance |
| By: | Ellul, Andrew; Pagano, Marco |
| Abstract: | Corporate leverage responds differently to employees' legal protection in bankruptcy depending on whether leverage is chosen to curtail workers' bargaining power or is driven by credit constraints. Using newly collected cross-country data on employees' rights in corporate bankruptcy, we estimate the impact of such rights on firms' capital structure, applying triple-diff strategies that exploit time-series, cross-country and firm-level variation. The estimates show that leverage increases more substantially in response to rises in corporate property values or in profitability at firms where employees have strong seniority in liquidation and weak rights in restructuring, consistently with the strategic use of leverage. |
| Keywords: | bankruptcy; leverage; seniority; wage bargaining; workers’ rights |
| JEL: | G31 G32 G38 H25 H26 M40 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12033&r=cfn |
| By: | Chen Lin; Thomas Schmid; Michael S. Weisbach |
| Abstract: | Production inflexibility together with product price uncertainty creates production risk, which is a potentially important factor for firms’ liquidity management. One industry for which production risk can be measured is the electricity producing industry. We use data on hourly electricity prices in 41 markets to measure fluctuations in output prices and information on over 60,000 power plants to approximate firms’ cost to vary output quantities. Our results suggest that higher electricity price volatility leads to increased cash holdings, but only in firms using inflexible production technologies. This effect is robust to a number of specification choices including instrumenting for volatility in electricity prices using weather forecast data. After deregulation, firms hold 20-25% more cash, suggesting that the process of deregulation increases the risk firms’ face. Production risk affects cash holdings most in financially constrained firms, and in firms that cannot easily hedge the electricity price through derivative markets. Capital market liquidity and balance sheet liquidity appear to be substitutes for one another. |
| JEL: | G3 G32 G35 L5 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23434&r=cfn |
| By: | Lindbeck, Assar (Research Institute of Industrial Economics (IFN)); Weibull, Jörgen (Department of Economics) |
| Abstract: | We analyze investment decisions when information is costly, with and without delegation to an agent. We use a rational-inattention model and compare it with a canonical signal-extraction model. We identify three "investment conditions". In "sour" conditions, no information is acquired and no investment made. In "sweet" conditions, investment is made "blindly", i.e. without acquiring costly information. In intermediate, "normal" conditions, the decision-maker acquires information and conditions the investment decision upon the information obtained. We investigate if the investor can benefit from employing an agent when the agent's effort and information is private. Not even in the case of a risk neutral agent will the principal perfectly align the agent's incentives with her own at the moment of investment (had the principal known the agent's private information). Optimal contracts for risk neutral agents not only reward good investments but also punishes bad investments. Such contracts include three components: a fixed salary, stocks and options. |
| Keywords: | Investment; Rational inattention; Signal Extraction; Principal-agent; Information aquisition; Contract; Bonus; Penalty |
| JEL: | D01 D82 D86 G11 G23 G30 |
| Date: | 2017–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1171&r=cfn |
| By: | Alfaro, Laura; Asis, Gonzalo; Chari, Anusha; Panizza, Ugo |
| Abstract: | This paper documents a set of stylized facts about leverage and financial fragility in the nonfinancial corporate sector in emerging markets since the Global Financial Crisis (GFC). Corporate debt vulnerability indicators prior to the Asian Financial Crisis (AFC) attributed to corporate financial roots provide a benchmark for comparison. The firm-level data suggest that emerging markets post-GFC have lower leverage ratios than the five Asian crisis countries (Asian Five) in the run-up to the AFC. However, a broader set of emerging market countries show weaker liquidity, solvency, and profitability indicators. More countries are also in the Altman Z-score's “grey zone†, that is, at risk for corporate distress. Regression estimates confirm that leading up to the AFC and in the aftermath of the GFC, firms with higher leverage have Zscores that are closer to the financial distress range. The data also corroborate two macro-related hypotheses: first, that leverage interacted with currency depreciation had a statistically significant adverse impact on Z-scores in pre-AFC; and second, that in countries with higher GDP growth leverage is correlated with less corporate financial fragility. Consistent with Gabaix (2011) the paper finds a granularity effect in that large firms are systemically important— idiosyncratic shocks to large firms significantly correlate with GDP growth in our emerging markets sample. Also, the more-levered large firms are more vulnerable to exchange rate shocks than smaller firms with comparable levels of leverage. While this result holds for the average country in our sample, there is substantial cross-country heterogeneity. |
| Keywords: | Corporate Debt; emerging markets; financial fragility; Firm-Level Data; Large Firms |
| JEL: | F34 G01 G15 G32 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12038&r=cfn |