nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒07‒23
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Political Influence, Firm Performance and Survival By Vladimir Sokolov; Laura Solanko
  2. Debt Stocks Meet Gross Financing Needs: A Flow Perspective into Sustainability By Carmine Gabriele; Aitor Erce; Marialena Athanasopoulou; Juan Rojas
  3. Corporate financialisation in South Africa: From investment strike to housing bubble By Ewa Karwowski
  4. Whistleblowers on the Board? The Role of Independent By Campello, Murillo; Ferrés, Daniel; Ormazabal, Gaizka
  5. Abnormal Retained Earnings Around The World By Alves, Paulo; Silva, Paulo
  6. Why Do Boards Exist? Governance Design in the Absence of Corporate Law By Burkart, Mike; Miglietta, Salvatore; Ostergaard, Charlotte
  7. Where Women Make The Difference. The Effects of Corporate Board Gender Quotas on Firms’ Performance across Europe By Simona, Comi; Mara, Grasseni; Federica, Origo; Laura, Pagani;
  8. Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders By Michi Nishihara; Takashi Shibata
  9. What you say and how you say it: Information disclosure in Latin American firms By Maximiliano González; Alexander Guzmán; Diego Fernando Tellez; María Andrea Trujillo
  10. Declining Competition and Investment in the U.S. By Germán Gutiérrez; Thomas Philippon
  11. Capital Adequacy Requirements and Financial Frictions in a Neoclassical Growth Model By Miho Sunaga
  12. Does the Stock Market Boost Firm Innovation?; Evidence from Chinese Firms By Hui He; Hanya Li; Jinfan Zhang
  13. Financialisation and physical investment: a global race to the bottom in accumulation? By Daniele Tori; Özlem Onaran
  14. Impact of the Global Crisis on SME Internal vs. External Financing in China By ShiXue He; Marcel Ausloos
  15. Executive Compensation: A Survey of Theory and Evidence By Alex Edmans; Xavier Gabaix; Dirk Jenter
  16. Customer financing, bargaining power and trade credit uptake By Simona Mateut; Thanaset Chevapatrakul

  1. By: Vladimir Sokolov (National Research University Higher School of Economics); Laura Solanko (Bank of Finland)
    Abstract: We examine how regional-level political influence affects firm financial performance and survival. Combining representative survey data on mid-sized manufacturing firms in Russia with official registry data, we find that politically influential firms exhibit higher profitability and retain larger financial investments than non-influential firms. Most importantly, our empirical analysis suggests that the benefits of influence may be transient. Influential firms experienced significantly lower growth during our sample period than non-influential firms. Moreover, influential firms had a significantly higher probability of being liquidated than non-influential firms and the likelihood of the subsequent plant utilization by a new firm was higher for the politically influential liquidated firms.
    Keywords: political influence, firm performance, firm liquidation, government quality
    JEL: D22 D72 G33 G38
    Date: 2017
  2. By: Carmine Gabriele (ESM); Aitor Erce (ESM); Marialena Athanasopoulou (ESM); Juan Rojas (ESM)
    Abstract: It is well known that no single metric can provide reliable cross-country risk assessments of debt sustainability. While approaches to understanding sustainability have traditionally relied heavily on stock metrics, a consensus is emerging that debt sustainability should be linked to both stock and flow features of underlying public debt. This paper informs this debate by analysing the ability of gross financing needs, the preferred flow metric in current debt sustainability analyses by official institutions, to provide additional information to that provided by standard stock metrics of a sovereign’s likelihood of distress. Our main contribution is to document a significant negative effect from changes in gross financing needs when debt stocks are high. These results support the intuition that countries can sustain very large debt stocks if these do not generate unmanageable flow needs. Additionally, we show that sovereign roll-over needs are a critical element driving this effect. Given the role of official lending in taming the dynamics of this component, our findings also inform the literature on the role of official lending in crises resolution.
    Keywords: Sovereign sustainability, debt stocks, financing needs, maturity
    JEL: H62 H63 F34
    Date: 2017–06–14
  3. By: Ewa Karwowski
    Abstract: This article reveals the processes of financialisation in the South African economy by tracing the sources and destinations of NFCs' liquidity. The paper argues that rather than the volume of NFCs' financial investment, the composition of financial assets is crucial to assess corporate financialisation in the country. Non-financial businesses in South Africa fundamentally transformed their investment behaviour during the 1990s, shifting from more productive uses such as trade credit towards highly liquid and potentially innovative (and therefore risky) financial investment. Following the direction of financial flows the article shows that – fuelled by foreign capital inflows – companies' financial operations contributed to the price inflation in South African property markets.
    Keywords: financialisation, emerging markets, financial instability, asset price volatility, heterodox economics
    JEL: B50 F30 F34 G01 G12 G15
    Date: 2017–07
  4. By: Campello, Murillo; Ferrés, Daniel; Ormazabal, Gaizka
    Abstract: Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors on their boards. This finding is robust to self-selection and is pronounced when independent directors hold more outside directorships and fewer stock options -when those directors have fewer economic ties to indicted firms. Results are even stronger when independent directors' appointments were attributable to SOX, preceded their CEO's own appointment, or followed class action suits|when directors have fewer ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support in other firms. Firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs. They are also more likely to dismiss scandal-laden CEOs after public indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to mitigate those costs. We argue that understanding these incentive-compatible dynamics is key in designing strategies for cartel detection and prosecution.
    Keywords: Cartel Prosecution; Antitrust Policy; Leniency Programs; Independent Directors;
    JEL: G30 K21 L41
    Date: 2017–07
  5. By: Alves, Paulo; Silva, Paulo
    Abstract: Using a firm-level survey database covering 50 countries we evaluate firms´ abnormal retained earnings. The results of our work indicate that firms located in emerging markets retain more earnings than firms from developed countries. On the other hand, firms located on common law based countries retain earnings above the expected and higher than firms placed on civil law based countries. A possible explanation, according to our results, can be seen in the economic growth that these countries have shown in the past 20 years. The financial crisis of 2008 and its impact in the abnormal retained earnings can help to validate this result. Finally, we would like to draw attention upon the impact of the firms´ size on abnormal retained earnings. According to our results this relationship is positive. This strongly questions the growth of smaller companies.
    Keywords: Abnormal retained earnings; Financing choices; Institutional environment; Small firms.
    JEL: G31 G34
    Date: 2017
  6. By: Burkart, Mike; Miglietta, Salvatore; Ostergaard, Charlotte
    Abstract: We study how owners trade off the costs and benefits of establishing a board in a historical setting, where boards are optional and authority over corporate decisions can be freely allocated across the general meeting, the board, and management. We find that informed owners and boards are substitutes, and that boards exist in firms most prone to collective action problems. Boards monitor, advise, and mediate among shareholders, and these different roles entail different allocations of authority. Boards also arise to balance the need for small shareholder protection with the need to curb managerial discretion.
    Keywords: authority allocation; Boards; corporate governance; private contracting
    JEL: D23 G3 K2 N80
    Date: 2017–07
  7. By: Simona, Comi; Mara, Grasseni; Federica, Origo; Laura, Pagani;
    Abstract: We study the effect of corporate board gender quotas on firm performance in Belgium, France, Italy and Spain. The empirical analysis is based on accounting panel data from Bureau Van Dijk’s Amadeus. Our identification strategy relies on both double and triple difference estimators with ex-ante matching. We find that gender quotas had either a negative or an insignificant effect on firm performance in the countries considered with the exception of Italy, where we find a positive impact on productivity. We then focus on Italy and offer possible explanations for the positive effect of gender quotas using detailed information on board members’ characteristics.
    Keywords: Gender quotas, corporate governance, firm performance, productivity
    JEL: G30 G38 J3
    Date: 2017–07–12
  8. By: Michi Nishihara (Graduate School of Economics, Osaka University); Takashi Shibata (Graduate School of Social Sciences, Tokyo Metropolitan University)
    Abstract: We develop a dynamic model in which a distressed firm optimizes the bankruptcy choice and its timing. When the distressed firm fs shareholders sell the assets, they are better informed about the asset value than outsiders are. We show that this asymmetric information can delay the asset sales to signal asset quality to outsiders. More debt and lower asset value can reduce the signaling cost and mitigate the asset sales delay. Notably, we show that the firm changes the bankruptcy choice from selling out to liquidation bankruptcy when the signaling cost associated with selling out is high. This distortion in the bankruptcy choice greatly lowers the debt value, whereas it has a weak impact on the equity value.
    Keywords: bankruptcy; adverse selection; asymmetric information; signaling game; real options; M&A
    JEL: D82 G13 G33
    Date: 2017–07
  9. By: Maximiliano González; Alexander Guzmán; Diego Fernando Tellez; María Andrea Trujillo
    Abstract: Firms in Latin America could differentiate themselves by adopting better information disclosure practices. In this paper, we construct an Information Disclosure Index (IDI) for a sample of 454 firms in the six largest Latin America countries. We look at 3.191 company reports and show that firms with better disclosure practices have better market valuation (Tobin’s Q) and operating performance (ROE). We then measure the tone of the information disclosed using word content analysis, and find that uncertainty in tone is negatively associated with higher firm valuation (Tobin’s Q) and better financial performance (ROE).
    Keywords: Disclosure, Content analysis, Corporate governance, Firm value
    JEL: G15 G34
    Date: 2016–10–01
  10. By: Germán Gutiérrez; Thomas Philippon
    Abstract: The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. We argue that declining competition is partly responsible for this phenomenon. We use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, we show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing we show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, we provide some evidence that the increase in concentration can be explained by increasing regulations.
    JEL: D4 E22 G31
    Date: 2017–07
  11. By: Miho Sunaga (Graduate School of Economics, Osaka University)
    Abstract: I introduce nancial market friction into a neoclassical growth model. I consider a moral hazard problem between bankers and workers in the macroeconomic model. Using the model, this study analyzes how capital adequacy requirements for banks affect the economy. I show that strengthening capital adequacy requirements is desirable for an economy whose nancial market has not developed sufficiently. Regulatory authorities should pull up the minimum capital adequacy ratio in a country whose nancial market has not developed sufficiently. Moreover, there is no need to change the minimum cap- ital adequacy ratio in a country whose nancial market has developed sufficiently even if the economy experiences a recession.
    Keywords: Capital adequacy requirements; Economic Growth; Financial Intermedi- aries; Macro-prudential policies
    JEL: E44 G21 G28
    Date: 2017–07
  12. By: Hui He; Hanya Li; Jinfan Zhang
    Abstract: The paper analyses the effect of the stock market on firm innovation through the lens of initial public offering (IPO) using uniquely matched Chinese firm-level data. We find that IPOs lead to an increase in both the quantity and quality of firm innovation activity. In addition, IPOs expand a firm’s scope of innovation beyond its core business. The impact of IPOs on firm innovation varies across financial constraints, corporate governance, and ownership structures. Our results further illustrate that IPOs induce a firm to increase the number of inventors and enable better retention of existing inventors after the IPO. Finally, we show that the enhanced innovation activity resulting from IPOs increases a firm’s Tobin’s Q in the long run.
    Date: 2017–06–30
  13. By: Daniele Tori; Özlem Onaran
    Abstract: We estimate the effects of financialisation on physical investment in the developed and developing countries using panel data based on balance-sheets of publicly listed non-financial companies (NFCs) for the period 1995-2015. Among the developed economies, we focus on the cases of the USA, Japan, and a group of Western European countries. In the developing world, we present estimations based on the group of the NFCs in all developing countries as well as BRICS as a group- and country specific estimations for South Africa, South Korea, India, and China. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets. The negative impacts of financial incomes are non-linear with respect to the companies' size; financial income crowds out investment in large companies, and have a positive effect on the investment of only smaller, relatively more credit-constrained companies. Our findings support the ‘financialisation thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity in both developed and developing countries.
    Keywords: financialisation, investment, non-financial sector, firm data, developing countries
    JEL: C23 D22 O16
    Date: 2017–07
  14. By: ShiXue He; Marcel Ausloos
    Abstract: Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Trade-Off Theory, shows that the leverage decreases with profitability, non-debt tax shields and the liquidity, and increases with firm size and tangibility. A positive relationship is found between firm growth and debt ratio, though not highly significantly. It is shown that the SMEs with high growth rates are those which will more easily obtain external financing after a financial crisis. It is recognized that the China government should reconsider SMEs taxation laws.
    Date: 2017–07
  15. By: Alex Edmans; Xavier Gabaix; Dirk Jenter
    Abstract: This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -- shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research.
    JEL: D31 D86 G34 M12
    Date: 2017–07
  16. By: Simona Mateut; Thanaset Chevapatrakul
    Abstract: We investigate the impact of well-established trade credit theories on different parts of the distribution of trade credit taken by firms. Our results suggest that the trade credit - bank loans substitution increases at the higher trade credit quantiles and is stronger for larger firms (financing theory). Firms with high market shares operating in less concentrated industries have higher account payables to assets ratios (bargaining power theory). While the customer bargaining power motive strengthens up to the 70th quantile and prevails in industries independent on external finance, financing reasons play the main role especially at the higher trade credit quantiles.
    Keywords: Keywords: trade credit; bargaining power; panel quantile regression
    Date: 2017

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