nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒10‒22
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Firms' Innovation Strategy under the Shadow of Analyst Coverage By Bing Guo; David Pérez-Castrillo; Anna Toldrà -Simats
  2. Executive Compensation: A Survey of Theory and Evidence By Alex Edmans; Xavier Gabaix; Dirk Jenter
  3. CEO-speeches and stock returns By Bannier, Christina E.; Pauls, Thomas; Walter, Andreas
  4. Has the Push for Equal Gender Representation Changed the Role of Women on German Supervisory Boards? By Bozhinov, Viktor; Koch, Christopher; Schank, Thorsten
  5. Business financing in Europe: How will higher interest rates affect companies' financial situation? By Bendel, Daniel; Demary, Markus; Voigtländer, Michael
  6. Does the Investment Model Explain Value and Momentum Simultaneously? By Andrei S. Gonçalves; Chen Xue; Lu Zhang
  7. Regional Quality and Impaired Firms: Evidence from Italy By De Martiis, Angela; Fidrmuc, Jarko
  8. Squaring Venture Capital Valuations with Reality By William Gornall; Ilya A. Strebulaev
  9. Behavioral Finance Option Pricing Formulas Consistent with Rational Dynamic Asset Pricing By Svetlozar Rachev; Stoyan Stoyanov; Frank J. Fabozzi
  10. Evolution of EU corporate R&D in the global economy: intensity gap, sectors' dynamics, specialisation and growth By Pietro Moncada Paternò Castello

  1. By: Bing Guo; David Pérez-Castrillo; Anna Toldrà -Simats
    Abstract: We study the effect of analyst coverage on firms’ innovation strategy and outcome. By considering three different channels that allow firms to innovate: internal R&D, acquisitions of other innovative firms, and investments in corporate venture capital (CVC), we are able to distinguish between the pressure and information effect of analysts. Using the data of US firms from 1990 to 2012, we find evidence that: i) an increase in financial analysts leads firms to cut R&D expenses, and ii) more analyst coverage leads firms to acquire more innovative firms and invest in CVC. We attribute the first result to the effect of analyst pressure, and the second to the informational role of analysts. In line with the previous literature, we also find that analyst coverage has a negative effect on firms’ future patents and citations; however, this negative effect becomes not significant when firms’ in-house R&D spending and external innovation channels are taken into account. We find that more financial analysts encourage firms to make more efficient investments related to innovation, which increase their future patents and citations. We address endogeneity with an instrumental variables approach and a difference-in-differences strategy where exogenous variation in analyst coverage comes from brokerage house mergers.
    Keywords: financial analysts, innovation, corporate venture capital, acquisition
    JEL: G34 G24 O31
    Date: 2017
  2. 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.
    Keywords: executive compensation, CEO compensation, managerial incentives, pay-for-performance, corporate governance
    JEL: D31 D86 G34 M12
    Date: 2017
  3. By: Bannier, Christina E.; Pauls, Thomas; Walter, Andreas
    Abstract: We analyze the market reaction to the sentiment of the CEO speech at the Annual General Meeting (AGM). Adapting a finance-specific German dictionary based on Loughran and McDonald (2011), we find that CEO speeches' textual sentiment is significantly related to abnormal stock returns and trading volume around the AGM. Investors hence seem to perceive the speeches' sentiment as a valuable indicator of future firm performance.
    JEL: G02 G12 G14
    Date: 2017
  4. By: Bozhinov, Viktor (University of Mainz); Koch, Christopher (University of Mainz); Schank, Thorsten (University of Mainz)
    Abstract: In Germany, an intensive public debate about increasing female participation in leadership positions started in 2009 and proceeded until the beginning of 2015, when the German parliament enacted a board gender quota. In that period, the share of women on supervisory boards for 111 German publicly listed and fully codetermined companies (i.e. those which are affected by the quota law) more than doubled from 10.6 percent in 2009 to 22.6 percent in 2015. In 2016, the first year when the law was effective, the female share increased again by 4.5 percentage points. Using a hand-collected dataset, we investigate whether the rise in female board representation was accompanied by a change in gender differences in board member characteristics and board involvement. We do not find evidence for the "Golden Skirts" phenomenon, i.e., the rise in the female share was not achieved via a few female directors holding multiple board memberships. After controlling for firm heterogeneity, the remuneration of female shareholder (employee) representatives is about 16 (9) percent lower than for males. We interpret this as an overall indication that women are not only underrepresented in German supervisory boards, they are even more underrepresented in important board positions. Indeed, women are less likely to become a chairman and are less often assigned to board committees (except for the nominating committee). Moreover, in 2016 the disadvantage of women (as compared to men) to obtain a committee membership is even larger than in 2009.
    Keywords: gender diversity, women on boards, gender quota, board remuneration, committee membership
    JEL: G34 G38 J16 J30
    Date: 2017–09
  5. By: Bendel, Daniel; Demary, Markus; Voigtländer, Michael
    Abstract: Companies' access to finance has a significant impact on their profitability and growth prospects. Without external financing, most firms are not able to invest, which is a prerequisite for economic growth. In contrast to the US, which has a capital market-based financial system, banks are the dominant lenders for firms in the euro area. Banking crises endanger access to finance. In the wake of the banking and sovereign debt crisis in the euro area, risk premiums for sovereign debt went up and spilled over to banking markets. Besides sovereigns, firms too faced credit constraints, especially in countries with presumably less sustainable public debt. After the European Central Bank (ECB) accelerated its accommodative monetary policy stance even further, interest rates for sovereigns and firms fell considerably, enabling firms to lend money at historically low rates. With the strengthened recovery of the euro area, the end of this ultra-low interest rate environment seems to be near, posing new challenges for firms in the euro area. The aim of this study is to analyse how firms have dealt with this changing financing environment in recent years and to what extent companies are ready for a change towards higher interest rates. To answer this research question, we have used data from the survey on the access to finance of enterprises (SAFE) provided by the ECB. We identify companies that are vulnerable to rising interest rates, as they will presumably encounter economic problems when financing costs rise. The percentage of vulnerable companies is extremely high in Greece (9.4 percent), Italy (8.5 percent) and France (5.7 percent). The lowest rate is in Germany (0.7 percent). In relation to the size of the national business sectors, 39 percent of all vulnerable firms are located in Italy, 23 percent in France and 15 percent in Spain. When the ECB starts to normalize monetary policy, these countries could be hit hard through their business sectors' vulnerability. As a comparatively many large companies are prone to the risk of rising interest rates in Portugal (4.0 percent of big Portuguese companies) and Greece (10.0 percent of big Greek companies), the labour markets in those countries could be disproportionally affected when interest rates rise too quickly or become too high.
    JEL: E32 E44 G30
    Date: 2017
  6. By: Andrei S. Gonçalves; Chen Xue; Lu Zhang
    Abstract: Two innovations in the structural investment model go a long way in explaining value and momentum jointly. Firm-level investment returns are constructed from firm-level accounting variables, and are then aggregated to the portfolio level to match with portfolio-level stock returns. In addition, current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums jointly, and partially explains the positive stock-investment return correlations, the procyclicality and short-term dynamics of the momentum and profitability premiums, and the countercyclicality and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.
    JEL: E13 E22 G12 G14 G31
    Date: 2017–10
  7. By: De Martiis, Angela; Fidrmuc, Jarko
    Abstract: We analyze how regional quality affects firm’s efficiency by identifying the impaired firms receiving financial assistance as those paying an implicit interest rate lower than the prime rate. Then, we decompose them into: real impaired firms unable to repay their loans, and those not repaying their debts even if financially they could. The regions with a high share of loans and crime exhibit a higher concentration of distressed firms, and crime increases the performance of existing companies.
    JEL: O43 E51 G33
    Date: 2017
  8. By: William Gornall; Ilya A. Strebulaev
    Abstract: We develop a valuation model for venture capital-backed companies and apply it to 135 U.S. unicorns – private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find reported unicorn post-money valuation average 50% above fair value, with 15 being more than 100% above. Reported valuations assume all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as a IPO return guarantees (14%), vetoes over down-IPOs (24%), or seniority to all other investors (32%). Common shares lack all such protections and are 58% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.
    JEL: G13 G24 G32 M13
    Date: 2017–10
  9. By: Svetlozar Rachev; Stoyan Stoyanov; Frank J. Fabozzi
    Abstract: We derive behavioral finance option pricing formulas consistent with the rational dynamic asset pricing theory. In the existing behavioral finance option pricing formulas, the price process of the representative agent is not a semimartingale, which leads to arbitrage opportunities for the option seller. In the literature on behavioral finance option pricing it is allowed the option buyer and seller to have different views on the instantaneous mean return of the underlying price process, which leads to arbitrage opportunities according to Black (1972). We adjust the behavioral finance option pricing formulas to be consistent with the rational dynamic asset pricing theory, by introducing transaction costs on the velocity of trades which offset the gains from the arbitrage trades.
    Date: 2017–10
  10. By: Pietro Moncada Paternò Castello
    Abstract: The Thesis is composed by three complementary research investigations on the economic and policy aspects of EU corporate R&D.Collectively, the work first reviews the theoretical and empirical literature of corporate R&D intensity decomposition; it then investigates the EU R&D intensity and its decomposition elements comparatively with most closed competitors and with emerging economies over the period 2005-2013. Finally, it inspects further some key aspects that can be associated to the EU R&D intensity gap: sectoral dynamics and the resulting sectoral and technological specialisations as well as the drivers for R&D investment growth across sectors and firms' age groups of top R&D investing firms over time. These studies also address the possible policy implications that derive from their outcomes.The investigations rely on literature as well as on company data, mainly from nine editions (2006-2014) of the EU Industrial R&D Investment Scoreboard. For analytical purposes they use literature review, meta-analysis, descriptive statistics, R&D intensity decomposition computational approach, Manhattan distance and Technological Revealed Comparative Advantage metrics, and a multinominal logit regression model. The results of these three research works are novel in several aspects. It indicates that literature results on R&D intensity decomposition differ because of data and methodological heterogeneities, and that the structural cause is the main determinant of EU R&D intensity gap if sector compositions of the countries are considered. It inspects how the use of different data sources and analytical methods impact differently on R&D intensity decomposition results, and what the analytical and policy implications are.The empirical research results of this Thesis confirm the structural nature of the EU R&D intensity gap. In the last decade the gap between the EU and the USA has widened, whereas the EU gap with Japan has remained relatively stable. In contrast, the emerging countries' R&D intensity gap compared to the EU has remained relatively stable, while companies from emerging economies are considerably reducing such gap. Besides, as novel contribution to the state of the art of the literature, this Thesis uncovers the differences between EU and US by inspecting which sectors, countries and firms are more accountable for the aggregate R&D intensity performance of these two economies, and it finds a high heterogeneity of firms' R&D intensity within sectors. Furthermore, it shows that there is a bigger population of both larger and smaller US top R&D firms which invest more strongly in R&D than competitors, and that the global R&D investment is concentrated in a few firms, countries and industries. Finally, the research founds a slightly higher EU R&D shift over sectors compared to the US, but not strongly enough towards high-tech sectors. Also, the EU has an even broader technological specialisation than its already broad industrial R&D sector specialisation, while the USA leads by number of technological fields belonging mostly to the industrial R&D sectors of its specialisation. Furthermore, the EU has been better able than the USA and Japan to maintain its world share of R&D investment even during the years of economic and financial crisis. Lastly, the study also indicates that firms make a complementary use of capital expenditures and R&D intensity for their R&D investment growth strategies and it reveals that there are differences in their use between firms' age classes across sectors. Overall, the main results of the Thesis suggest that to reach a more positive R&D dynamics and boost its competitiveness, the EU should adapt its industrial structure and increase the weight of high R&D intensive sectors. A focus on creating the conditions for firm creation and growth in new-emerging innovative sectors is advised together with favouring the exploitation of the full capacity of EU leading - but mature - sectors to also absorb high-technology from other sectors.
    Keywords: Corporate R&D intensity decomposition; EU corporate R&D intensity gap; Top world R&D investors; Corporate R&D distribution; Sectors' dynamics; Sector specialisation; Technological specialisation; R&D investment growth; EU industry; EU R&D policy; Literature survey; Empirical analysis
    Date: 2017–10–20

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