nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒10‒01
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Long-Term Consequences of Short-Term Incentives By Edmans, Alex; Fang, Vivian; Huang, Allen
  2. Political Risk and Stock Returns in Indonesia By Paulina Yuritha Amtiran
  3. IPO Underpricing: What about the Shipping Sector? By Klova, Valeriia
  4. "Factors Affecting Dividend Policy on Non-Financial Companies in Indonesia" By Novia Wijaya
  5. A Matter of Trust? The Bond Market Benefits of Corporate Social Capital during the Financial Crisis By Amiraslani, Hami; Lins, Karl; Servaes, Henri; Tamayo, Ane
  6. Changes in CEO Stock Option Grants: A Look at the Numbers By Athanasakou, Vasiliki; Ferreira, Daniel; Goh, Lisa
  7. "The Role of Firm Strategy to Intervene the Influence of Corporate Social Performance on Corporate Financial Performance" By Bayu Aprillianto
  8. Changes in Corporate Governance and Top Executive Turnover: The Evidence from Japan By Hideaki Miyajima; Ryo Ogawa; Takuji Saito
  9. Optimal Financing for R&D-Intensive Firms By Richard T. Thakor; Andrew W. Lo
  10. Are CEOs Different? Characteristics of Top Managers By Steven N. Kaplan; Morten Sorensen
  11. The Number of Bank Relationships and Bank Lending to New Firms: Evidence from firm-level data in Japan By OGANE Yuta

  1. By: Edmans, Alex; Fang, Vivian; Huang, Allen
    Abstract: This paper shows that short-term stock price concerns induce CEOs to take value-reducing actions. Vesting equity, our measure of short-term concerns, is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger and acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. These results are inconsistent with CEOs buying underpriced stocks or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.
    Keywords: Repurchases; M&A; Short-Termism; CEO Incentives; Managerial Myopia; Vesting
    JEL: G12 G14 G32 G34 G35 M12 M52
    Date: 2017–09
  2. By: Paulina Yuritha Amtiran (Economic and Business Faculty, Universitas Nusa Cendana, Indonesia Author-2-Name: Rina Indiastuti Author-2-Workplace-Name: Universitas Padjadjaran, Bandung, Indonesia)
    Abstract: "Objective – The research aims to find the relationship between the political risk with stock returns. Methodology/Technique – Using the purposive sampling, secondary data on 30 companies listed in Indonesia Stock Exchange (BEI) of the year 2007-2015. Analysis technique used is weighted least square regression Findings – The results of study Political risks significantly positively associated with stock returns. These results imply a change from the shock of political risk will affect cost of capital of the company increased, causing the company's stock price will go up which in the end impact on improving the company's stock returns obtained. Novelty – The study implies Shock due to the change of political risk has a direct impact on the company's financial condition primarily of the cost of capital companies because it involves policy and investment decisions are made in Indonesia."
    Keywords: BEI; Market Capitalization; Market Returns; Political Risk; Stock Returns.
    JEL: G30 G32
    Date: 2017–06–21
  3. By: Klova, Valeriia (University of Stavanger)
    Abstract: This paper looks at IPO underpricing in the shipping sector. This sector is of interest as it has unique characteristics, among them pro-cyclicality, long history, and ownership concentration. Moreover, the average level of underpricing in shipping is reported to be substantially lower than the overall level. The effects of shipping-specific factors on underpricing are exhaustively studied in this paper for the first time. In connection with shipping characteristics, we hypothesize sev- eral underpricing theories to be relevant explanations of underpricing in the shipping sector. More specifically, we investigate an investor sentiment theory as shipping is highly exposed to business cycles; an information asymmetry argument as there seems to be low information asymmetry in shipping; and two ownership and control theories, namely, the Brennan and Franks managerial control theory and the Stoughton and Zechner agency cost theory, due to the highly-concentrated ownership prevalent in the shipping sector. In addition, we consider a partial adjustment theory that has gained substantial empirical support in the literature. In order to test the aforementioned theories and shipping-specific factors, we perform a cross-sectional regression analysis using a sam- ple of 60 shipping IPOs from four different stock exchanges. The partial adjustment theory and the Stoughton and Zechner agency cost theory are supported by the results, while the investor sen- timent theory, information asymmetry argument, and the Brennan and Franks managerial control theory are rejected. Importantly, the Stoughton and Zechner theory and downward price revisions prevalent among shipping firms can partially explain the low underpricing puzzle in shipping. The robustness of the obtained empirical results is verified using a control sample of non-shipping IPOs.
    Keywords: Initial Public Offering; IPO underpricing; Shipping sector; Partial adjustment theory; Investor sentiment theory; Stoughton and Zechner theory.
    JEL: G30
    Date: 2017–09–19
  4. By: Novia Wijaya (Trisakti School of Management, Indonesia. Author-2-Name: Agathon Felix Author-2-Workplace-Name: Trisakti School of Management, Indonesia.)
    Abstract: "Objective – The objective of this study is to obtain empirical evidence and analyse the factors that affect the dividend policy of non-financial firms listed on the Indonesian Stock Exchange. The factors studied include liquidity, leverage, growth, price/earnings, size, earnings per share, price to book ratio, ownership, age of the firm, floating rate, profitability, and free cash flow. Methodology/Technique – The sampling method used in this study is purposive sampling, in which the samples are taken based on suitable characteristics of the population to generate representative samples. The total number of samples in this study are 105 non-financial firms listed on the Indonesian Stock Exchange between 2011 and 2015. The hypothesis is tested by using multiple regression analysis. Findings – The results of this study show that earnings per share, price to book ratio, and floating rate affect the dividends policy while liquidity, leverage, growth, price/earnings, size, ownership, age of the firm, profitability, and free cash flow has no effect on dividend policy. Novelty – The study findings contribute the companies to establish an appropriate dividend policy to satisfy the interest of both parties that is companies future growth and its investors."
    Keywords: Dividend Policy; Price to Book Ratio; Ownership; Age of the Firm; Floating Rate; Free Cash Flow.
    JEL: G32 G35 M41
    Date: 2017–07–20
  5. By: Amiraslani, Hami; Lins, Karl; Servaes, Henri; Tamayo, Ane
    Abstract: We investigate whether a firm's social capital, and the trust that it engenders, are viewed favorably by bondholders. Using the financial crisis as an exogenous shock to trust, and firms' corporate social responsibility (CSR) activities as a proxy for social capital, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms. These findings are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that debt investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.
    Keywords: corporate bonds; cost of debt; CSR; financial crisis; social capital; Trust
    JEL: G12 G21 G32 M14
    Date: 2017–09
  6. By: Athanasakou, Vasiliki; Ferreira, Daniel; Goh, Lisa
    Abstract: We study changes in CEO stock option grants. Unlike most of the literature, we focus on the number rather than the value of options granted. We first provide a detailed description of the main aggregate trends in CEO stock option grants. We then consider the cross-sectional heterogeneity in option-granting activity. We find that CEOs who either overinvest or underinvest subsequently receive fewer stock options as part of their compensation packages. CEOs who hold exercisable deeply-in-the-money options (overconfident CEOs) also receive fewer stock options in subsequent periods. Our findings provide insights into the dynamics of CEO compensation contracts.
    Keywords: CEO overconfidence; corporate investment; stock option grants
    JEL: G30 G32 J33 M41 M52
    Date: 2017–09
  7. By: Bayu Aprillianto (University of Jember, Indonesia Author-2-Name: Yosefa Sayekti Author-2-Workplace-Name: University of Jember, Indonesia)
    Abstract: "Objective – A Corporate Social Responsibility (CSR) implementation has been implemented since over 50 years ago. All of the CSR implementation divided into two categories, namely Strategic CSR and Non-Strategic CSR. A Strategic CSR implementation should consider the firm strategy based on the CSR concept and firm strategy. Some empirical studies have tested the influence of CSR on Corporate Financial Performance. The results of those studies are still inconclusive. Methodology/Technique – The purpose of this study is to analyze firm strategy as intervening variable between Corporate Social Performance and Corporate Financial Performance. This study used capital intensity and product differentiation to measure the firm strategy. The samples were 33 companies of LQ-45, listed in Indonesian Stock Exchange. Findings – The results did not indicate that firm strategy intervenes the influence of Corporate Social Performance on Corporate Financial Performance, both directly and indirectly. Novelty – The research suggests future studies to employ the other ratios representing Firm Strategy that will strengthen the literature."
    Keywords: "Corporate Financial Performance; Corporate Social Performance; Firm Strategy; Non-Strategic CSR; Strategic CSR."
    JEL: L25 M14 M41
    Date: 2017–07–17
  8. By: Hideaki Miyajima; Ryo Ogawa; Takuji Saito
    Abstract: We examine the turnover of top executives in Japanese firms throughout the period from 1990 to 2013. During this time, the presence of a main bank has been weakened, the ownership of institutional investors has dramatically increased, and independent outside directors have been introduced in many firms. We find that top executive turnover sensitivity to corporate performance has not changed, although return on equity (ROE) and stock returns displace return on assets (ROA) as performance indicators that turnover is most sensitive to. The evidence also indicates that instead of the main bank, foreign institutional investors have begun to play an important governance role in Japan. However, the main bank does not abandon its governance role. While the scope of the main bank’s authority may have substantially contracted, main banks continue to perform a certain role in disciplining management.
    JEL: G34 G38 K22
    Date: 2017–09
  9. By: Richard T. Thakor; Andrew W. Lo
    Abstract: We develop a theory of optimal financing for R&D-intensive firms that uses their unique features—large capital outlays, long gestation periods, high upside, and low probabilities of R&D success—that explains three prominent stylized facts about these firms: their relatively low use of debt, large cash balances, and underinvestment in R&D. The model relies on the interaction of the unique features of R&D-intensive firms with three key frictions: adverse selection about R&D viability, asymmetric information about the upside potential of R&D, and moral hazard from risk shifting. We establish the optimal pecking order of securities with direct market financing. Using a tradeoff between tax benefits and the costs of risk shifting for debt, we establish conditions under which the firm uses an all-equity capital structure and firms raise enough financing to carry excess cash. A firm may use a limited amount of debt if it has pledgeable assets in place. However, market financing still leaves potentially valuable R&D investments unfunded. We then use a mechanism design approach to explore the potential of intermediated financing, with a binding precommitment by firm insiders to make costly ex post payouts. A mechanism consisting of put options can be used in combination with equity to eliminate underinvestment in R&D relative to the direct market financing outcome. This optimal intermediary-assisted mechanism consists of bilateral “insurance” contracts, with investors offering firms insurance against R&D failure and firms offering investors insurance against very high R&D payoffs not being realized.
    JEL: D82 D83 G31 G32 G34 O31 O32
    Date: 2017–09
  10. By: Steven N. Kaplan; Morten Sorensen
    Abstract: We use a dataset of over 2,600 executive assessments to study thirty individual characteristics of candidates for top executive positions – CEO, CFO, COO and others. We classify the thirty candidate characteristics with four primary factors: general ability, execution vs. interpersonal, charisma vs. analytic, and strategic vs. managerial. CEO candidates tend to score higher on these factors; CFO candidates score lower. Conditional on being a candidate, executives with greater interpersonal skills are more likely to be hired, suggesting that such skills are important in the selection process. Scores on the four factors also predict future career progression. Non-CEO candidates who score higher on the four factors are subsequently more likely to become CEOs. The patterns are qualitatively similar for public, private equity and venture capital owned companies. We do not find economically large differences in the four factors for men and women. Women, however, are subsequently less likely to become CEOs, holding the four factors constant.
    JEL: G34 J16 M12 M5 M51
    Date: 2017–09
  11. By: OGANE Yuta
    Abstract: This paper examines how the number of bank relationships affects bank lending to new firms using a unique firm-level data set of more than 1,000 small and medium-sized enterprises (SMEs) incorporated in Japan between April 2003 and June 2008. We employ a two-stage least squares (2SLS) estimator—one of the instrumental variables estimators—to address the possible bias caused by omitted variables and/or reverse causality. We find that an increase in the number of bank relationships increases long-term lending to new firms. We also find that this rise may boost total lending to such firms. Furthermore, the findings in this paper suggest that the most significant difference in the effects of the number of bank relationships on bank lending is the difference between a single bank relationship and multiple bank relationships. We show that these results are unlikely to be driven by omitted variables and/or reverse causality.
    Date: 2017–09

This nep-cfn issue is ©2017 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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