nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒11‒19
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Lobbying in Finance Industry: Evidence from US Banking System By Omer Unsal; M. Kabir Hassan; William J. Hippler
  2. Taxation and Corporate Risk-Taking By Dominika Langenmayr; Rebecca Lester
  3. Leverage and Risk Weighted Capital Requirements By Sudipto Karmakar; Leonardo Gambacorta
  4. Terrorist Attacks and Financial Markets By Bas Bonekamp; Tom van Veen
  5. Financial Crisis, banking sector performance and economic growth in the European Union By Cândida Ferreira
  6. Determinants of Bank Capital in Dual Banking Systems By Mohammad Bitar; M. Kabir Hassan; William J. Hippler
  7. Interest rates, R&D investment and the distortionary effects of R&D incentives By Uluc Aysun; Zeynep Kabukcuoglu
  8. A simple nonlinear predictive model for stock returns By Biqing Cai; Jiti Gao
  9. Sustainabnility of Product Market Collusion under Credit Market Imperfections By Sugata Marjit; Arijit Mukherjee; Lei Yang
  10. An Overview on the Practice and Issues of Hedging in Islamic Finance By Oubdi, Lahsen; Raghibi, Abdessamad
  11. Linkages between financial development, financial instability, financial liberalisation and economic growth in Africa By Batuo, Enowbi; Mlambo, Kupukile; Asongu, Simplice
  12. Insolvency Regimes, Technology Diffusion and Productivity Growth: Evidence from Firms in OECD Countries By Muge Adalet McGowan; Dan Andrews; Valentine Millot
  13. Could High-Tech Companies Learn from Others While Choosing Capital Structure? By Maria Kokoreva; Anastasia Stepanova; Kirill Povk

  1. By: Omer Unsal; M. Kabir Hassan; William J. Hippler
    Abstract: We examine the relationship between corporate lobbying, shareholder-based litigation outcomes, and firm value for financial firms. First, we show that political lobbying lowers the litigation likelihood for financial institutions. Secondly, lobbying firms experience a higher likelihood of having litigation dismissed, and the average settlement amount is significantly lower for lobbying institutions. In addition, shortly after a litigation announcement, lobbying firms experience significantly higher cumulative abnormal returns (CARs), compared to non-lobbying firms. Finally, we show that lobbying firms have higher long-run buy-and-hold abnormal stock returns (BHARs) following lobbying activities. Our results link financial institution lobbying activity with improved legal outcomes and increases in firm value, implying that lobbying may protect financial institutions from reduced firm value through the building of political capital and reducing litigation costs.
    Keywords: Corporate lobbying, corporate fraud, corporate governance
    JEL: G30 G32 G38 K41
    Date: 2016–12
  2. By: Dominika Langenmayr; Rebecca Lester
    Abstract: We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risk-taking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a weak negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.
    Keywords: corporate taxation, risk-taking, net operating losses
    JEL: H25 H32 G32
    Date: 2017
  3. By: Sudipto Karmakar; Leonardo Gambacorta
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios
    Keywords: Bank Capital Buffers, Regulation, Risk-Weighted Assets, Leverage
    JEL: G21 G28 G32
    Date: 2017–10
  4. By: Bas Bonekamp; Tom van Veen
    Abstract: This paper investigates the magnitude and the duration of the effect of a terrorist attack on stock market indices. We investigate the impact of New York (2001), Madrid (2004), London (2005), Boston (2013), Paris (2015), Brussels (2016), Nice (2016) and Berlin(2016) on the stock indices of the USA (S&P), Japan (NIKKEI), Germany (DAX), Spain (IBEX), UK (FTSE), France (CAC) and the Euronext Index (BEL). We use both a graphical analysis and an event study methodology to assess the effect of terrorist attacks on stock market indices. We conclude that both the magnitude and the duration of the effect are moderate and have diminished over the years.
    Keywords: terrorist attacks, event studies, stock market indices
    JEL: G10 G14 G15
    Date: 2017
  5. By: Cândida Ferreira
    Abstract: This paper uses static and dynamic panel estimates in a sample including all 28 European Union countries during the last decade and provides empirical evidence on the important role that well-functioning EU banking institutions can play in promoting economic growth.The banking sector performance is proxied by the evolution of some relevant financial ratios and economic growth is represented by the annual Gross Domestic Product growth rate. In order to analyse the possible differences arising after the outbreak of the recent international financial crisis, the estimations consider two panels: one for the time period 1998–2012 and another for the subinterval 2007–2012. The results obtained allow us to draw conclusions not only on the importance of the variation of the different operational, capital, liquidity and assets quality financial ratios to economic growth but also on some differences evidenced in the two considered panels, reflecting the consequences of the recent financial crisis and the correspondent reactions of the European banking institutions.
    Keywords: ank performance, economic growth, European Union, financial crisis, panel estimates
    JEL: F30 F40 G20 G30 O40
    Date: 2017–10
  6. By: Mohammad Bitar; M. Kabir Hassan; William J. Hippler
    Abstract: We report new evidence on the bank and country-level determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia’a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize mangers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries.
    Keywords: bank capitalization, Islamic banking, institutional environment, political distress, market discipline, democracy
    JEL: G24 G32 K22
    Date: 2017–10
  7. By: Uluc Aysun (Department of Economics, College of Business Administration, University of Central Florida); Zeynep Kabukcuoglu (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: This paper conducts the first analysis of how interest rates are related to firms' allocation of investment between R&D and non-R&D activities and how R&D incentives alter this relationship. It theoretically predicts that if firms receive incentives mostly in the form of grants and subsidies that reduce their dependence on external finance, their share of R&D spending increases (decreases) during a credit tightening (easing). Conversely, if tax credits are the primary incentive, rms' decrease (increase) their share of R&D spending during a credit tightening (easing). The paper demonstrates empirical support for these predictions by using rm-level financial and sector-level R&D incentives data and a unique methodology that focuses on the within firm allocation of investment.
    Keywords: R&D, finance, grants, tax credits, COMPUSTAT
    JEL: D22 G31 G32 O31 O38
    Date: 2017–11
  8. By: Biqing Cai; Jiti Gao
    Abstract: In this paper, we propose a simple approach to testing and modelling nonlinear predictability of stock returns using Hermite Functions. The proposed test suggests that there exists a kind of nonlinear predictability for the dividend yield. Furthermore, the out-of-sample evaluation results suggest the dividend yield has nonlinear predictive power for stock returns while the book-to-market ratio and earning-price ratio have little predictive power.
    Keywords: Hermite functions, out-of-sample forecast, return predictability, series estimator, unit root.
    JEL: C14 C22 G17
    Date: 2017
  9. By: Sugata Marjit; Arijit Mukherjee; Lei Yang
    Abstract: We study the implications of credit constraints for the sustainability of product market collusion in a bank-financed oligopoly in which firms face an imperfect credit market. We consider two situations, without and with credit rationing, i.e., with a binding credit limit. When there is credit rationing, a moderately higher cost of external financing may affect the degree of collusion, but a substantial increase keeps it unaffected relative to the no-constraint case. A permanent adverse demand shock in this setup does not affect the possibility of collusion, but may aggravate financing constraints and eventually lead to collusion. We consider both Cournot and Bertrand models, and the results are qualitatively the same.
    Keywords: collusion, credit market, debt-equity
    JEL: D21 D43 G21
    Date: 2016
  10. By: Oubdi, Lahsen; Raghibi, Abdessamad
    Abstract: In terms of Islamic banking, which relies on three main pillar of prohibiting Riba, Gharar& Maysir, risk management is still not sufficiently developed. Indeed, Islamic use traditional types of risk management instruments used by conventional banks. Despite Islamic banking has a specific characteristic related essentially to the Profit & Loss Sharing (PLS) principle in Mudarabah & Musharakah contracts. Such instruments change the classic concept of risk in comparison with conventional banks adding new types of risk such as Commodity/Asset price risk and Bundled risk along with neutralizing other type of risks like the liquidity risk. Nevertheless, the rigidity of some Sharia’a scholars has impeded some financial instruments that try to match the real risk management demands by business entities in the global Islamic finance industry. Indeed, it has been widely acknowledged by many observers that the Islamic finance industry will not be able to sustainably continue on this growth trajectory, and may even regress, without a proper market risk management framework that can effectively deal with the complex risks that exist in today’s globalized economy (Chapra& Khan, 2000; Moody's, 2010).The present research article is an attempt to analyze hedging instruments from an Islamic finance perspective. It will approach different fiqhi ruling on them along with the applicability of these instruments in the reality.
    Keywords: Risk Management, Islamic Finance, Hedging, Future
    JEL: G13 G23
    Date: 2017–10–13
  11. By: Batuo, Enowbi; Mlambo, Kupukile; Asongu, Simplice
    Abstract: In the aftermath of the 2008 global financial crisis, the implications of financial liberalisation for stability and economic growth has come under increased scrutiny. One strand of literature posits a positive relationship between financial liberalisation and economic growth and development. However, others emphasise the link between financial liberalisation is intrinsically associated with financial instability which may be harmful to economic growth and development. This study assesses linkages between financial instability, financial liberalisation, financial development and economic growth in 41 African countries for the period 1985-2010. The results suggest that financial development and financial liberalisation have positive effects on financial instability. The findings also reveal that economic growth reduces financial instability and the magnitude of reduction is higher in the pre-liberalisation period compared to post-liberalisation period.
    Keywords: Economic Growth , Financial Development, Financial instability and Africa
    JEL: G23 O16 O47 O55
    Date: 2017–01
  12. By: Muge Adalet McGowan (OECD); Dan Andrews (OECD); Valentine Millot (OECD)
    Abstract: This paper explores the link between the design of insolvency regimes across countries and laggard firms’ multi-factor productivity (MFP) growth, using new OECD indicators of the design of insolvency regimes. Firm-level analysis shows that reforms to insolvency regimes that lower barriers to corporate restructuring are associated with higher MFP growth of laggard firms. These results are consistent with the idea that insolvency regimes that do not unduly inhibit corporate restructuring can incentivise experimentation and provide scope to reconfigure production and organisational structures in order to faciliate technological adoption. The results also highlight policy complementarities, with insolvency regimes that reduce the cost of entrepreneurial failure potentially enhancing the MFP gains from lowering administrative entry barriers in product markets. Finally, we find that reducing debt bias in corporate tax systems and well-developed venture capital markets are associated higher laggard firm MFP growth, suggesting that equity financing can also be an important driver of technological diffusion. These findings carry strong policy implications, in light of the fact that there is much scope to reform insolvency regimes in many OECD countries and given evidence that stalling technological diffusion has contributed to the aggregate productivity slowdown.
    Keywords: equity financing, insolvency, laggard firms, Productivity, technological diffusion, venture capital
    JEL: D24 G33 G34 K35 O16 O40 O43 O47
    Date: 2017–11–06
  13. By: Maria Kokoreva (National Research University Higher School of Economics); Anastasia Stepanova (National Research University Higher School of Economics); Kirill Povk (National Research University Higher School of Economics)
    Abstract: This paper analyzes why high-tech firms are less likely to have debt in their capital structure. The share of zero-leverage firms increased in the US in the Software & Services, Hardware Equipment and the Pharmaceutical & Biotechnical industries which are treated as high-tech firms in our research. We divide the sample of US-based firms from the RUSSELL 3000 index for the period from 2004 to 2015 into two groups, one of them includes only high-tech firms, another contains all other firms from the sample. Traditional determinants of corporate structure such as size, age, asset tangibility, profitability and market-to-book ratio cannot fully explain why high-tech firms choose a zero-debt policy. We found that high-tech firms are more financially constrained than non-high-tech firms. The managerial entrenchment hypothesis could not predict zero-leverage for high-tech firms, but it can partially predict the debt conservatism of non-high-tech firms. The evidence shows that the excess cash hypothesis explains why unconstrained high-tech firms have zero-leverage but does not explain it for non-high-tech firms. Finally, we did not find a significant influence of the financial flexibility hypothesis for the decision of unconstrained high-tech firms to be unlevered, while for their non-high-tech counterparts this hypothesis fits
    Keywords: capital structure, zero-leverage, zero debt, high-tech firm
    JEL: Z
    Date: 2017

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.