nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒12‒18
seventeen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Credit Default Swaps, Agency Problems, and Management Incentives By Jongsub Lee; Junho Oh; David Yermack
  2. Is this adverse selection or something else to determine the non-performing loans? Dynamic panel evidence from South Asian countries By Md. Shahidul Islam; Shin-Ichi Nishiyama
  3. Impact of controlled foreign corporation rules on post-acquisition investment and profit shifting in targets By von Hagen, Dominik; Harendt, Christoph
  4. Customer Liquidity Provision : Implications for Corporate Bond Transaction Costs By Jaewon Choi; Yesol Huh
  5. Politically Connected Venture Capitalists in China By Feng, Xunan; Johansson, Anders C.
  6. Rethinking corporate bankruptcy theory in the twenty-first century By Paterson, Sarah
  7. Debt Maturity, Default, and Investment under Rollover Risk and Solvency Concern By Hiroshi Osano; Keiichi Hori
  8. The Relevance of Financial and Economic Factors for Determining Banking Risk across Europe By Renata Karkowska
  9. Moral suasion in regional government bond markets By Ohls, Jana
  10. Investments, financial constraints in non-quoted Swedish Firms By Dastory, Linda; Eklund, Johan; Numminen, Emil
  11. Watermark options By Rodosthenous, Neofytos; Zervos, Mihail
  12. Financial Literacy and Financial Behavior: Evidence from the Emerging Asian Middle Class By Antonia Grohmann
  13. Access to Finance Constraint and SMEs Functioning in Ghana By Nyanzu, Frederick; Quaidoo, Matthew
  14. Good Volatility, Bad Volatility and Option Pricing By Bruno Feunou; Cédric Okou
  15. Contagion via Financial Intermediaries in Pre-1914 Sovereign Debt Markets By Sasha Indarte
  16. Fuzzy Logic Model of Soft Data Analysis for Corporate Client Credit Risk Assessment in Commercial Banking By Brkic, Sabina; Hodzic, Migdat; Dzanic, Enis
  17. Predicting the Equity Market with Option Implied Variables By Prokopczuk, Marcel; Tharann, Björn; Wese Simen, Chardin

  1. By: Jongsub Lee; Junho Oh; David Yermack
    Abstract: We show in a theoretical model that credit default swaps induce managerial agency problems through two channels: reducing the opportunity for managers to transfer value to equityholders from creditors via strategic default, and reducing the intensity of monitoring by creditors, which leads to greater CEO diversion of assets as perquisites. We further show that boards can use compensation awards that increase managerial performance incentives (delta) and risk-taking incentives (vega) in order to mitigate these two agency problems, with increases in managerial vega being particularly useful to alleviate the strategic default-related agency problem. We study equity compensation awards to CEOs of S&P 1500 companies during 2001–2015 and find that they occur in patterns consistent with these predictions.
    JEL: G30 G33 G34 J33 M52
    Date: 2017–11
  2. By: Md. Shahidul Islam (Department of Banking and Insurance, University of Dhaka); Shin-Ichi Nishiyama (Graduate School of Economics, Kobe University)
    Abstract: In the South Asian region, one of the major causes of higher non-performing loans (NPL) is the adverse selection of borrowers by the banks. Using the GMM estimator, we empirically studied the bank-specific, industry specific and macroeconomic specific determinants of non-performing loans of banks in the South Asian countries (Bangladesh, India, Nepal and Pakistan) for the period of 1997-2012 and found that the adverse selection hypothesis of Stiglitz and Weiss (1981) still effective. We found evidence for the bad luck, bad management, skimping and moral hazard hypotheses of Berger and DeYoung (1997) and their effect on the credit risk determination. Bank size, industry concentration, inflation and GDP growth rate all significantly affect the sample countries’ non-performing loans. Empirical results show a moderate degree of persistence of NPL and a late-hit of the global financial crisis in the banking sector of the region.
    Keywords: NPL, cost inefficiency, moral hazard, adverse selection
    JEL: G21 C23
    Date: 2017–12
  3. By: von Hagen, Dominik; Harendt, Christoph
    Abstract: We investigate real investment, financial revenues and profits in formerly domestic firms once they enter a multinational entity (MNE) through an acquisition. We argue that following the acquisition, those targets are tax-optimized in a profit shifting context if they are acquired by MNEs with no controlled foreign corporation (CFC) rules in their headquarters' countries. In this case, we hypothesize that MNE-wide profit shifting opportunities decrease high-tax targets' cost of capital, which may have a positive effect on real investment of these targets. In addition, we hypothesize that financial revenues respectively profits of low-tax targets increase after the acquisition, since they may become destinations of profit shifting themselves. In line with the effects on real investment, profits of high-tax targets should decline. We find evidence for the effects on real investment. Further, these effects can no longer be observed in case of existing CFC rules in the acquirer's headquarters' country. This finding may suggest that CFC rules effectively mitigate MNE-wide profit shifting which in turn has detrimental investment effects. We also find some evidence for the expected effects for financial revenues but not for the profit measure.
    Keywords: International taxation,CFC rules,Profit shifting,Multinational entities,Crossborder mergers and acquisitions,Foreign direct investment
    JEL: F23 G34 H25 H26 H32 H73
    Date: 2017
  4. By: Jaewon Choi; Yesol Huh
    Abstract: The convention in calculating trading costs in corporate bond markets is to assume that dealers provide liquidity to non-dealers (customers) and calculate average bid-ask spreads that customers pay dealers. We show that customers often provide liquidity in corporate bond markets, and thus, average bid-ask spreads underestimate trading costs that customers demanding liquidity pay. Compared with periods before the 2008 financial crisis, substantial amounts of liquidity provision have moved from the dealer sector to the non-dealer sector, consistent with decreased dealer risk capacity. Among trades where customers are demanding liquidity, we find that these trades pay 35 to 50 percent higher spreads than before the crisis. Our results indicate that liquidity decreased in corporate bond markets and can help explain why despite the decrease in dealers' risk capacity, average bid-ask spread estimates remain low.
    Keywords: Bank regulation ; Liquidity ; Corporate bond ; Financial intermediation ; Volcker rule
    JEL: G10 G21 G28
    Date: 2017–11–30
  5. By: Feng, Xunan (Southwestern University of Finance and Economics); Johansson, Anders C. (Stockholm China Economic Research Institute)
    Abstract: We examine how venture capitalists and the firms they back utilize network-based strategies in China. Analyzing a manually collected data set of venture capitalists with political ties, we find that firms backed by politically connected venture capitalists are more likely to obtain approval for initial public offerings (IPOs), their time from venture capital investment to IPO approval is shorter. They also exhibit higher IPO offering prices and lower underpricing, and consequently deteriorating long-term post-IPO stock performance. By exploiting a unique regulatory change, we show that venture capitalists’ political connections had less IPO applications withdrawn during the 2013 financial inspection period. We also find that firms backed by politically connected venture capitalists have higher levels of earnings management, are more often mentioned in newspaper articles concerning substantial operating performance declines and are more often accused of illegal information disclosures quickly after the IPO. Finally, politically connected venture capitalists can obtain higher investment returns and attract more fund flows after successful IPOs. Our findings are robust to several robustness tests and suggest that political relationships are valuable for this important group of financial intermediaries in transitional China.
    Keywords: Venture capital; Institutions; Network-based strategy; Political connections; IPO; China
    JEL: D02 G24 P48
    Date: 2017–12–01
  6. By: Paterson, Sarah
    Abstract: Adopting a comparative UK/US approach, this article argues for the need to rethink corporate bankruptcy theory in the light of developments in the finance market. It argues that these developments have produced an effective mechanism, in large cases, for selecting between companies which will be worth more if they continue to trade and companies which ought to be allowed to fail, such that corporate bankruptcy law need no longer concern itself with steering creditor choice away from a sale of the business and assets and towards a restructuring. Moreover, it suggests that whilst the automatic stay remains a central tenet of corporate bankruptcy law where the market decides that the business and assets should be sold, in cases where the market sees more value if a company continues to trade, corporate bankruptcy law may operate very well without a stay as a resolution procedure for deadlocked negotiations. The article identifies that in many large restructuring cases the only liabilities which are implicated are financial liabilities, and queries the extent to which the distributional concerns of the progressive movement, and US federal bankruptcy law, apply where losses are shared amongst sophisticated financial institutions. It ends with an explanation of why the analysis is limited to large cases, an indication of areas for further research and a note of caution for the future.
    Keywords: corporate law; law and economics; law and finance; legal theory
    JEL: F3 G3
    Date: 2016
  7. By: Hiroshi Osano (Institute of Economic Research, Kyoto University); Keiichi Hori (School of Economics,kwansei Gakuin University)
    Abstract: We consider the effects of the endogenous interaction between rollover risk and solvency concern-generated by not only debt rollover but also by an assessment regarding the firm's solvency risk via a learning process over time-on the decisions of the firm about debt maturity, default, investment, and leverage policies. We distinguish between short-term liquidity uncertainty and long-term solvency uncertainty in order to clarify how the two sources of uncertainty affect such decisions of the firm. If debt maturity is exogenously determined, it is important to note that the effect of long-term solvency uncertainty on the investment policy-debt overhang-is opposite to that of short-term liquidity uncertainty. If debt maturity is endogenously determined, we show that the equilibrium debt maturity inceases (decreases) with short-term liquidity (long-term solvency) uncertainty when the chosen debt maturity is sufficiently long, and that for any debt maturity the firm's incentives to default increase (decrease) with short-term liquidity (long-term solvency) uncertainty whereas the firm's incentives to invest decrease (increase) with short-term liquidity (long-term solvency) uncertainty.
    Keywords: debt maturity, debt overhang, debt rollover, investment,learning.
    JEL: D83 G31 G32 G33
    Date: 2017–09
  8. By: Renata Karkowska
    Abstract: The goal of this study is to identify empirically how country-level development, taking into account the financial and macroeconomic environment, affect the risk profiles of the banking sector in Europe. Through a dataset that covers 3,399 European banks spanning the period 1996-2011, and the methodology of panel regression, the empirical findings document the heterogeneity of banking risk determinants. I examine the implications of bank leverage that manifest itself as spreading and growing instability.
    Keywords: banking risk, leverage, financial market, liberalization, economic growth, lending
    JEL: F36 G21 G32 G33
  9. By: Ohls, Jana
    Abstract: In the context of the German regional government bond market, this paper studies the hypothesis that governments use moral suasion to persuade home government-owned banks to hold more home government debt. The empirical approach makes use of German banks' ownership structure, heterogeneity in the states' fiscal strength and detailed bank-level panel data on German banks' state bond portfolio on the security- and bank-level for the time period Q4:2005-Q2:2014. Results show that home state-owned banks hold a significantly higher amount of home state bonds than other home banks when fiscal fundamentals of the home state are weak. Banks located in other German states hold fewer state bonds in these situations. These findings are in line with moral suasion by state governments and are robust against controlling for observed and unobserved alternative incentives for banks' (home) state bond holdings such as risk-shifting by banks, lending opportunities or information asymmetries.
    Keywords: banks' sovereign bond portfolios,home bias,moral suasion,political economy of banking
    JEL: G11 G18 G21 G28
    Date: 2017
  10. By: Dastory, Linda (Royal Institute of Technology); Eklund, Johan (Department of Industrial Economics, Blekinge Inst of Technology); Numminen, Emil (Department of Industrial Economics, Blekinge Inst of Technology)
    Abstract: Using panel data from 10 573 non-quoted Swedish SMEs over the period 2006-2014, we examine how dependent investments made by Swedish SMEs are of internally generated cash-flows. To control for investment opportunities, we use an accelerator model. Applying a static accelerator model our result shows that, investment levels are in fact affected by the availability of internal funding. It takes between 2-2.5 years for the capital stock to adjust to shocks in demand. As the speed of the adjustment rate increases firms’ investment levels become more dependent on internal funding, indicating high adjustment costs. Finally, as firms become larger their investment level becomes less dependent on internal funding, indicating that it may be easier for larger firms to attract external funding.
    Keywords: Non-quoted SMEs; Cash flow; Investments; Financial Constraints; Accelerator model.
    JEL: D92 E22
    Date: 2017–12–12
  11. By: Rodosthenous, Neofytos; Zervos, Mihail
    Abstract: We consider a new family of derivatives whose payoffs become strictly positive when the price of their underlying asset falls relative to its historical maximum. We derive the solution to the discretionary stopping problems arising in the context of pricing their perpetual American versions by means of an explicit construction of their value functions. In particular, we fully characterise the free-boundary functions that provide the optimal stopping times of these genuinely two-dimensional problems as the unique solutions to highly non-linear first order ODEs that have the characteristics of a separatrix. The asymptotic growth of these free-boundary functions can take qualitatively different forms depending on parameter values, which is an interesting new feature.
    Keywords: optimal stopping; running maximum process; variational inequality; two dimensional free-boundary problem; separatrix
    JEL: C61 G13
    Date: 2017–01
  12. By: Antonia Grohmann
    Abstract: This paper analyses financial literacy and financial behavior of middle class people living an urban Asian economy. Other than most papers on financial literacy that focus on people in developed countries, we surveyed people living Bangkok. Using standard financial literacy questions, we find that financial literacy levels are largely comparable to industrialized countries, but understanding of more advanced financial concepts is lower. Similarly, savings accounts are held by most people, but more sophisticated products are a lot less common. We further show, in line with the literature, that higher financial literacy leads to improved financial decision making.
    Keywords: Financial literacy, Saving, Borrowing, Household finance
    JEL: D14 G11 D91
    Date: 2017
  13. By: Nyanzu, Frederick; Quaidoo, Matthew
    Abstract: Well-functioning small and medium enterprises (SMEs) are a fundamental part of the economic fabric in developing countries, and play a crucial role in contributing to GDP growth, reducing unemployment as well as furthering innovation and prosperity. Unfortunately, they are strongly restricted in accessing the capital that they require to grow, expand and function, with nearly half of SMEs in developing countries rating access to finance as a major constraint. This paper examines the link between access to finance and SMEs functioning in Ghana. The study resorts to the current World Bank Enterprise Survey data released for Ghana (2013); and using chi-square, logit and ordered logit analysis, it finds out that access to credit is a major constraint of SMEs in Ghana with implications for their functioning and growth. The study recommends, therefore, that governments should create the enabling environment for SMEs to function effectively by providing financing avenues and improving access to financing.
    Keywords: Financial Constraint, Small and Medium Enterprises, Functioning, Ghana
    JEL: G20 M20
    Date: 2017–12
  14. By: Bruno Feunou; Cédric Okou
    Keywords: Asset Pricing, Econometric and statistical methods
    JEL: G12
    Date: 2017
  15. By: Sasha Indarte (Northwestern University)
    Abstract: This paper uses new data on the timing of sovereign defaults during 1869-1914 to quantify an informational channel of contagion via shared financial intermediaries. Concerns over reputation incentivized Britain’s merchant banks to monitor, advise, and occasionally bail out sovereigns. Default signaled to investors that a merchant bank was not as willing or able to write and support quality issues, suggesting that its other bonds may underperform in the future. In support of this channel, I find that during a debt crisis, a 5% fall in the defaulting bond’s price leads to a 2.19% fall in prices of bonds sharing the defaulter’s bank. This is substantial compared to the 0.24% price drop among bonds with different banks. Information revelation about financial intermediaries can be a powerful source of contagion unrelated to a borrower’s fundamentals. In modern financial markets, third parties such as credit rating agencies, the IMF, or the ECB could similarly spread contagion if news about their actions reveals information about their willingness to monitor risky borrowers or intervene in crises.
    Date: 2017
  16. By: Brkic, Sabina; Hodzic, Migdat; Dzanic, Enis
    Abstract: This paper deals with the use of fuzzy logic as a support tool for evaluation of corporate client credit risk in a commercial banking environment. It defines possibilistic distribution of soft data used for corporate client credit risk assessment by applying fuzzy logic modeling, with a major goal to develop a new expert decisionmaking fuzzy model for evaluating credit risk of corporate clients in a bank. Currently, predicting a credit risk of companies is inaccurate and ambiguous, as well as affected by many internal and external factors that cannot be precisely defined. Unlike traditional methods for credit risk assessment, fuzzy logic can easily incorporate linguistic terms and expert opinions which makes it more adapted to cases with insufficient and imprecise hard data, as well as for modeling risks that are not fully understood. Fuzzy model of soft data, presented in this paper, is created based on expert experience of corporate lending of a commercial bank in Bosnia and Herzegovina. This market is very small and it behaves irrationally and often erratically and therefore makes the risk assessment and management decision making process very complex and uncertain which requires new methods for risk modeling to be evaluated. Experts were interviewed about the types of soft variables used for credit risk assessment of corporate clients, as well as for providing the inputs for generating membership functions of these soft variables. All identified soft variables can be grouped into following segments: stability, capability and readiness/willingness of the client to repay a loan. The results of this work represent a new approach for soft data usage/assessment with an aim of being incorporated into a new and superior soft-hard data fusion model for client credit risk assessment.
    Keywords: fuzzy logic, credit risk, default risk, commercial banking
    JEL: C53 G21 G32
    Date: 2017–11
  17. By: Prokopczuk, Marcel; Tharann, Björn; Wese Simen, Chardin
    Abstract: We comprehensively analyze the predictive power of several option implied variables for monthly S & P 500 excess returns and realized variance. The correlation risk premium (CRP) emerges as a strong predictor of both excess returns and realized variance. This is true both in- and out-of-sample. A timing strategy based on the CRP leads to utility gains of more than 4.63% per annum. In contrast, the variance risk premium (VRP), which strongly predicts excess returns, does not lead to economic gains.
    Keywords: Equity Premium; Option Implied Information; Portfolio Choice; Predictability; Timing Strategies
    JEL: G10 G11 G17
    Date: 2017–11

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