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on Corporate Finance |
| By: | Anderson, Ronald W.; Bustamante, Maria Cecilia; Guibaud, Stéphane; Zervos, Mihail |
| Abstract: | We study the relation between firm growth and managerial incentive provision under moral hazard when a long-lived firm is operated by a sequence of managers. In our model, firms replace their managers not only upon poor performance to provide incentives, but also when outside managers are at a comparative advantage to lead the firm through a new growth phase. We show how the optimal contract can be implemented with a system of deferred compensation credit and bonuses, along with dismissal and severance policies. Firms with better investment prospects have higher managerial turnover and rely on more front-loaded compensation schemes. Growth-induced turnover can result in positive severance if the principal needs to incentivize the manager to truthfully report the arrival of a growth opportunity. Realized firm growth depends jointly on the exogenous arrival of growth opportunities and the severity of the moral hazard problem. We also find a new component of agency costs due to the spillover effect of the tenure of the incumbent manager onto the present value of future managers’ compensation. |
| Keywords: | Dynamic contracting; managerial turnover; growth; moral hazard |
| JEL: | D82 D86 D92 G30 |
| Date: | 2017–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68784&r=cfn |
| By: | Prescott, Edward Simpson (Federal Reserve Bank of Cleveland); Balla, Eliana (Federal Reserve Bank of Richmond); Mazur, Laurel (University of Maryland); Walter, John R. (Federal Reserve Bank of Richmond) |
| Abstract: | Failure rates of small commercial banks during the banking crisis of the late 1980s were about 7.6%, which is significantly higher than the 5.7% failure rate during the recent crisis. The higher rate is surprising because small banks had significantly increased their commercial real estate (CRE) lending by the second crisis, which is riskier than other types of lending, and economic shocks were more severe in the recent crisis. We compare failure rates in the two periods using a statistical model that allows us to decompose the effect of changes in bank characteristics and economic shocks on failure rates. We find that the severe economic shocks of the recent crisis had a larger impact on high bank failure rates than bank characteristics. Increases in risk from CRE lending were offset by higher capital levels and other changes in bank characteristics. The failure rate would have been much lower in the later crisis if banks were subject to the less severe economic shocks of the earlier crisis. To the extent that higher capital levels were due to Basel I and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, we find that these reforms were beneficial. We also compare Federal Deposit Insurance Corporation (FDIC) losses on failed banks between the two periods. Here, despite the PCA reforms, losses on failed banks were higher in the recent crisis than in the earlier one. These differences are not accounted for by changes in CRE concentrations or the relative size of economic shocks. On this dimension, the reforms of the early 1990s did not seem to help. Finally, we find that a discretionary accounting variable, interest accrued but not yet received, is predictive of both failure and higher FDIC losses in both crises. |
| Keywords: | Bank failures; Regulations; |
| JEL: | G21 G28 |
| Date: | 2017–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1719&r=cfn |
| By: | Baumöhl, Eduard; Iwasaki, Ichiro; Kočenda, Evžen |
| Abstract: | We analyze firm survival determinants in four new European Union member states (Czech Republic, Hungary, Poland, and Slovakia). We employ the Cox proportional hazards model on firm-level data over the period of 2006–2015. We show that less concentrated control of large shareholders, higher solvency, and more board directors are linked with increased probability of firm survival in all four countries. However, an excessive number of board directors shows a detrimental effect. Firms with foreign owners and higher returns on their assets exhibit better survival chances. On the other hand, larger firms and those hiring international auditors show lower probabilities of survival. A number of determinants specifically influence firm survival in different ways across countries. This fact emphasizes that differences in business conditions are important when studying firm survival. |
| Keywords: | firm survival, new EU member states, survival and exit determinants, hazards model, panel data |
| JEL: | D22 G01 G33 G34 P34 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2017-5&r=cfn |
| By: | Hombert, Johan; Fraisse, Henri; Lé, Mathias |
| Abstract: | We study the effect of a merger between two large banks on credit market competition. We identify the competitive effect of the merger using matched loan-level and firm-level data and exploiting variation in the merging banks' market overlap across local lending markets. On the credit market side, we find a reduction in lending, in particular through termination of relationships. In the average market, bank credit decreases by 2.7%. On the real side, firm exit increases by 4%, whereas firms that do not exit and firms that start up experience no adverse real effect on investment and employment. |
| Keywords: | Bank megamerger; Banking competition; Credit Supply; Merger |
| JEL: | G21 L13 |
| Date: | 2017–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1146&r=cfn |
| By: | Ogura, Yoshiaki |
| Abstract: | We examine the significance of the distortionary effect of the collateral requirement to investments in assets pledgeable for collateral by small and medium-sized enterprises (SMEs). The theory predicts that the binding collateral constraint causes over-investment if the price of pledgeable assets is expected to go up steeply while it causes under-investment otherwise. Our structural estimation of the Euler equation under a collateral constraint using the dataset on Japanese SMEs in the 1980s and 1990s shows that the collateral constraint is binding when the price of a pledgeable asset is declining, whereas it is not when the price is increasing. This finding indicates that the binding collateral constraint causes mainly the problem of under-investment for many SMEs in a recession and casts doubt on the welfare effect of the loan-to-value (LTV) ratio cap as a macroprudence policy. |
| Keywords: | collateral constraint, investment, small and medium-sized enterprises, real estate price, loan-to-value ratio |
| JEL: | E22 G31 R30 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:remfce:73&r=cfn |
| By: | Beccalli, Elena; Frantz, Pascal |
| Abstract: | This study investigates the likelihood of takeovers or recapitalizations for EU listed banks before and during the financial, using both static and sequential multinomial logistic models. Takeovers and recapitalizations are potential alternatives used to shore up financial institutions. We find that takeovers occur when the bank has low net interest margins. Instead, private recapitalizations occur for banks with lower equity, higher net interest margins, and positive growth at the bank level. Public recapitalizations occur for larger, less liquid banks with positive prospects that operate in bigger banking systems. Both types of recapitalizations occur in countries with lower growth. The determinants for takeovers and recapitalization differ between the pre-crisis and crisis periods. Overall, a need for corporate control exists when traditional banking suffers lower performance, whereas the search for stability explains recapitalizations. |
| Keywords: | banking; recapitalizations; takeovers; EU |
| JEL: | G21 G34 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67305&r=cfn |
| By: | Caspi, Itamar; Graham, Meital |
| Abstract: | Recursive right-tailed unit root tests have recently become a popular tool to test the existence of stock price bubbles. These tests require continuous data on dividend distribution that is not always available, in particular when it comes to sectoral indexes or individual stocks. In this paper we show that it is possible to circumvent this problem by applying the test to an equity bubble using the book-to-market ratio. We illustrate our framework by testing for a bubble in the Israeli stock market, where data on continuous dividend distribution are uncommon. |
| Keywords: | Bubbles, stock markets, book-to-market, explosive root, GSADF test, Israel |
| JEL: | C12 C15 G12 G15 |
| Date: | 2017–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82261&r=cfn |
| By: | Danielsson, Jon; James, Kevin R.; Valenzuela, Marcela; Zer, Ilknur |
| Abstract: | This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings; hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, further frustrating the reliability of risk readings. Finally, particular conclusions on the underlying reasons for the high model risk and the implications for practitioners and policy makers are discussed. |
| Keywords: | model risk; systemic risk; value-at-risk; expected shortfall; Basel III |
| JEL: | G10 G18 G20 G28 G38 |
| Date: | 2016–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:66365&r=cfn |
| By: | Crosignani, Matteo (Federal Reserve Board); Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis); Fonseca, Luis (London Business School) |
| Abstract: | We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade. |
| Keywords: | Lender of Last Resort; Unconventional Monetary Policy; Collateral; Sovereign Debt; Eurozone Crisis |
| JEL: | E58 G21 G28 H63 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-039&r=cfn |
| By: | Greenwood, Jeremy (University of Pennsylvania); Han, Pengfei; Sanchez, Juan M. (Federal Reserve Bank of St. Louis) |
| Abstract: | The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, VCs provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., the average cash-on-cash multiple and statistics by funding round concerning the success rate, failure rate, investment rate, equity shares, and the value of an IPO. Raising capital gains taxation reduces growth and welfare. |
| Date: | 2017–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-035&r=cfn |
| By: | GÜNE? TOPÇU (Çanakkale Onsekiz Mart University) |
| Abstract: | This paper examines the impacts of sovereign credit rating changes on the stock markets of the six countries in the Balkans over the period May 20, 1998 to June 19, 2017. It aims to answer 3 questions: (1) Do the announcements provide new information? (2) Do the markets react to a rating change before the event? and (3) Do negative announcements have a quantitatively different impact than positive announcements? The data consist of the rating changes of three rating agencies, namely Standard and Poor?s, Moody?s, and Fitch IBCA, the daily stock price indices of the six countries and a benchmark index, i.e., S&P Europe 350. The impacts of upgrades and downgrades will be examined separately. Event study methodology will be used in analyzing cross-country data. |
| Keywords: | Sovereign credit ratings, credit rating agencies, stock markets, event study, the Balkans |
| JEL: | G14 G15 G24 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:5808229&r=cfn |
| By: | Bremus, Franziska; Neugebauer, Katja |
| Abstract: | This paper investigates how the withdrawal of banks from their cross-border business impacted the borrowing costs of European firms since the crisis. We combine aggregate information on total and cross-border credit with firm-level survey data for the period 2010 - 2014. We find that the decline in cross-border lending led to a deterioration in the borrowing conditions of small firms. In countries with more pronounced reductions in cross-border credit inflows, the likelihood of a rise in firms’ external financing costs increased. This result is mainly driven by the interbank channel, which plays a crucial role in transmitting shocks to the real sector across borders. |
| Keywords: | international banking; firm finance; credit constraints |
| JEL: | F34 F36 G15 G21 |
| Date: | 2018–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:84298&r=cfn |
| By: | Uwe Jirjahn |
| Abstract: | From a theoretical viewpoint the relationship between foreign ownership and unionization is ambiguous. On the one hand, foreign owners have better opportunities to undermine workers' unionization. On the other hand, workers of foreign-owned firms have an increased demand for the protection provided by unions. Which of the two opposing influences dominates can vary according to moderating circumstances. This study shows that firm size and industry-level bargaining play a moderating role. The relationship between foreign ownership and unionization is negative in larger firms whereas it is positive in smaller firms. Coverage by industry-level collective bargaining makes a positive relationship both stronger and more likely. |
| Keywords: | Corporate Globalization, Foreign Direct Investment, Union Membership, Firm Size, Centralized Collective Bargaining |
| JEL: | F23 J51 J52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:201709&r=cfn |
| By: | Iwasaki, Ichiro |
| Abstract: | Using a unique firm-level dataset obtained from a large-scale questionnaire survey conducted in late 2015, we examined the generality and heterogeneity of corporate governance systems between the eastern and western regions of Russia. The survey results strongly suggest that various characteristics of corporate governance systems observed in industrial firms and listed companies are, in fact, common and long-term trends that are seen across all Russian business sectors. At the same time, however, we also found pronounced regional heterogeneity between the eastern and western regions, with companies in the east being more reluctant than those in the west to introduce a governance system to monitor and supervise top management. Regression analysis shows that this finding is robust, even after a series of firm-level attributes are simultaneously controlled for. |
| Keywords: | corporate governance system, legal form of incorporation, board of directors, audit system, regional heterogeneity, Russia |
| JEL: | D22 G34 L22 M42 P25 P31 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rrcwps:72&r=cfn |
| By: | Francesco Marchionne (Indiana University); Beniamino Pisicoli (University of Bari, Dipartimento di Scienze Economiche e Metodi Matematici); Michele Fratianni (Indiana University, Universita' Politecnica delle Marche) |
| Abstract: | To reconcile the mixed results emerging from the empirical literature, we first develop a theoretical model whose main implication is a concave impact of regulation on the probability of a crisis, and then we test this relationship by applying a Probit model of a non-linear specification to annual data from 1999 to 2011 drawn from 132 countries. Our key inference is that the probability of a financial crisis fits an inverted U-shaped curve: it rises as regulation stringency moves from low to medium levels and falls from medium to high levels. Countries located at the intermediate level of regulatory stringency face more financial instability than countries that are either loosely or severely regulated. We identify the latter two groups as falling in "liberalization traps". Institutional quality interacts significantly with the regulatory environment, implying trade-offs between regulatory stringency and institutional quality. |
| Keywords: | crisis, banks, institutions, liberalization, regulation |
| JEL: | G01 G21 G28 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:143&r=cfn |
| By: | Daher, Wassim; Aydilek, Harun; Saleeby, Elias G. |
| Abstract: | This paper investigates the effect of different risk attitudes on the financial decisions of two insiders trading in the stock market. We consider a static version of the Kyle (1985) model with two insiders. Insider 1 is risk neutral while insider 2 is risk averse with negative exponential utility. First, we prove the existence of a unique linear equilibrium. Second, we obtain somewhat surprising results on how the risk attitudes affect the market liquidity, the price efficiency, when we carry out a comparative static analysis with respect to Tighe (1989) and Holden and Subrahmanyam(1994) models. |
| Keywords: | Insider trading, Risk neutrality, Risk aversion, Exponential Utility, Market structure, Kyle model |
| JEL: | D8 D82 G1 G14 |
| Date: | 2017–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81733&r=cfn |
| By: | Bayer, Ralph; Cowell, Frank A. |
| Abstract: | Firms are usually better informed than tax authorities about market conditions and the potential profits of competitors. They may try to exploit this situation by under-reporting their own taxable profits. The tax authority could offset firms’ informational advantage by adopting “smarter” audit policies that take into account the relationship between a firm׳s reported profits and reports for the industry as a whole. Such an audit policy will create an externality for the decision makers in the industry and this externality can be expected to affect not only firms׳ reporting policies but also their market decisions. If public policy takes into account wider economic issues than just revenue raising what is the appropriate way for a tax authority to run such an audit policy? We develop some clear policy rules in a standard model of an industry and show the effect of these rules using simulations. |
| Keywords: | Tax compliance; evasion; oligopoly |
| JEL: | J1 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:65996&r=cfn |
| By: | Mai Chi Dao; Camelia Minoiu; Jonathan David Ostry |
| Abstract: | We examine the relationship between real exchange rate depreciations and indicators of firm performance using data for a sample of more than 30,000 firms from 66 (advanced and emerging market) countries over the 2000-2011 period. We show that depreciations boost profits, investment, and sales of firms that are more financially-constrained and have higher labor shares. These findings are consistent with the view that depreciations boost internal financing opportunities by reducing real wages, thereby spurring investment. We show that these effects on firm performance are enduring, including in the market valuation of firms. |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/183&r=cfn |
| By: | Athreya, Kartik B. (Federal Reserve Bank of Richmond); Mustre-del-Rio, Jose (Federal Reserve Bank of Kansas City); Sanchez, Juan M. (Federal Reserve Bank of St. Louis) |
| Abstract: | Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise. |
| Keywords: | default; financial distress; consumer credit; credit card debt |
| JEL: | D60 E21 E44 |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:17-14&r=cfn |