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on Corporate Finance |
| By: | Young Jun Choi (Economic Research Institute, The Bank of Korea) |
| Abstract: | It has been 10 years since implementation of the Debtor in Possession (DIP), under which in principle the original management becomes legal administrators under the Debtor Rehabilitation and Bankruptcy Act. While this institution prevents original management from being deprived of their management rights and thus helps the corporates to go through prompt rehabilitation procedures, there have been more than a few cases of abuse of the institution in order to obtain debt relief and maintain control over the corporates. Accordingly, opinions calling for improvement of the institution have been steadily raised, in academia, the National Assembly and the financial sector. Meanwhile, there have been a number of papers from the economics perspective on the effects of corporate governance on the business performances of normal firms. However, it is hard to find studies of such effects on the performances of rehabilitated corporates. This paper has therefore analyzed the effects on rehabilitated firms’ business results of the DIP, which could be regarded as a form of corporate governance of them. To deal with the issue of endogeneity between corporate governance and firms' business performances, we have used propensity score analysis as our main analysis methodology. According to our analysis, opportunistic profit adjustment practices of corporations have declined under the DIP. However, the business performances of the corporates rehabilitated under the DIP have either worsened compared to those of firms without the DIP application or there have been no significant statistical differences between them. These results imply that corporates under the DIP have been unable to adjust their profits due to the court's control, but that their efforts to rehabilitate themselves have been insufficient. This result has the following implications. First, since the DIP was implemented, the number of firms that have applied for corporate rehabilitation has surged, but as there have been no remarkable improvements in the business performances of corporations under the DIP, such that it is necessary to make efforts to enhance the DIP from the overall standpoint of corporate restructuring. Second, from a more detailed perspective, in order to keep management's moral hazard in check, it is necessary to strengthen the function of the creditors committee as well as enhance the abilities of market participants including sovereign credit rating agencies and investment companies to monitor the debtors. |
| Keywords: | DIP, Corporate governance, Propensity score |
| JEL: | G30 G34 G38 |
| Date: | 2017–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1734&r=cfn |
| By: | Hirsch, Julia; Walz, Uwe |
| Abstract: | This paper aims to analyze the effects of financial constraints and the financial crisis on the financing and investment policies of newly founded firms. Thereby, the analysis adds important new insights on a crucial segment of the economy. We make use of a large and comprehensive data set of French firms founded in the years 2004-2006, i.e. well before the financial crisis. Our panel data analysis shows that the global financial crisis imposed a shock (mostly demand-driven) on the financing as well as on the investments of these firms. Moreover, we find that financially constrained firms use less external debt financing and invest smaller amounts. They also rely on less trade credit. With regard to bank financing, newly founded firms which are more financially constrained accumulate less bank debt and repay initial bank debt slower than their non-financially constraint counterparts. Finally, we find that financially constrained firms are affected to a smaller degree by the financial crisis than their less financially constrained counterparts. |
| Keywords: | financial constraints,financial crisis,financing decisions,investment decisions,newly founded firms |
| JEL: | D92 G32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:191&r=cfn |
| By: | Chernenko, Demid |
| Abstract: | This study examines the effects of oligarch ownership on corporate capital structures. Using panel data from Ukraine, I find that oligarch-owned companies employ significantly more debt and liabilities than their peers. However, there is no direct relation between oligarch ownership and target capital structure. Whereas the determinants of target leverage are similar across all owners, differences in firm characteristics also have a fairly small effect. I show that larger leverage is due to better access to debt, which results in lower rebalancing costs and faster restructurings of oligarch-owned companies. The findings clearly suggest that oligarchs benefit from the accumulated advantages. |
| Keywords: | Capital Structure; Leverage; Oligarchs; Influential Ownership; Connected Firms; Cumulative Advantage |
| JEL: | G32 P31 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83641&r=cfn |
| By: | Jie (Jack) He; Tao Shu; Huan Yang |
| Abstract: | Using employee job-level data, we empirically test the equilibrium matching between a firm’s debt usage and its employee job risk aversion (“clientele effect”), as predicted by the existing theories. We measure job risk aversion for a firm’s employees using their labor income concentration in the firm, calculated as the fraction of the employees’ total personal labor income or total household labor income that is accounted for by their income from this particular firm. Using a sample of about 1,400 U.S. public firms from 1990-2008, we find a robust negative relation between leverage and employee job risk aversion, which is consistent with the clientele effect. Specifically, when a firm’s existing employees have higher labor income concentration in it, the firm tends to have lower contemporaneous and future leverage. Moreover, in terms of new hires, firms with lower leverage are more likely to recruit employees with less alternative labor income. Our results continue to hold after we control for firm fixed effects, other employee characteristics such as wages, gender, age, race, and education, and managerial risk attitudes. Further, the matching between a firm’s leverage and its workers’ labor income concentration in it is more pronounced for firms with higher labor intensity and those in financial distress. |
| Keywords: | clientele effect, personal labor income diversification, employee job risk aversion, leverage, capital structure, Longitudinal Employer-Household Dynamics database |
| JEL: | G30 G32 G39 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:18-01&r=cfn |
| By: | Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry |
| Abstract: | This paper provides evidence on how bank performance and strategies vary with the degree of bank internationalization using data for 113 countries over the 2000-2015 period. We investigate if international banks headquartered in developing countries behave and perform differently than those headquartered in high-income countries. Results show that compared to domestic banks, international banks have lower valuations and achieve lower returns on equity in general. This suggests on average bank internationalization has progressed beyond the point where it is in the interest of bank shareholders, potentially because of corporate governance failures and too-big-to-fail subsidies that accrue to large and complex banks. In contrast, developing country international banks seem to have benefited from internationalization compared to their high-income counterparts. Furthermore, for international banks headquartered in developing countries, bank internationalization reduces the cyclicality of their domestic credit growth with respect to domestic GDP growth, smoothing out local downturns. In contrast, if the international bank is from a high-income country investing in a developing country, its lending is relatively procyclical, which can be destabilizing. |
| Keywords: | Bank internationalization; procyclicality; risk-taking; south-south banking |
| JEL: | F36 G21 G28 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12505&r=cfn |
| By: | Trabelsi, Mohamed Ali; Hmida, Salma |
| Abstract: | The contagion generated by the US subprime crisis and the European sovereign debt crisis that hit the Eurozone stock markets is still a highly debated subject. In this paper, we try to determine whether there are contagion effects across the Greek stock market and the Belgian, French, Portuguese, Irish, Italian and Spanish stock markets during both crises periods. To this end, we used a bivariate DCC-GARCH model to measure the extent of dynamic correlations between stock returns of our sample. Our results point to the presence of a contagion effect between all market pairs during the subprime crisis and between the Greek and Portuguese stock markets during the European sovereign debt crisis. On the other hand, our results indicate that credit ratings revisions have a relatively limited effect on the dynamic correlations of the Eurozone stock markets. |
| Keywords: | Financial contagion; European debt crisis; Dynamic conditional correlations |
| JEL: | C22 G01 G15 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83718&r=cfn |
| By: | Nyman, Rickard (University College London, Centre for the Study of Decision-Making Uncertainty); Kapadia, Sujit (Bank of England); Tuckett, David (University College London, Centre for the Study of Decision-Making Uncertainty); Gregory, David (Bank of England); Ormerod, Paul (University College London, Centre for the Study of Decision-Making Uncertainty); Smith, Robert (University College London, Centre for the Study of Decision-Making Uncertainty) |
| Abstract: | This paper applies algorithmic analysis to large amounts of financial market text-based data to assess how narratives and sentiment play a role in driving developments in the financial system. We find that changes in the emotional content in market narratives are highly correlated across data sources. They show clearly the formation (and subsequent collapse) of very high levels of sentiment — high excitement relative to anxiety — prior to the global financial crisis. Our metrics also have predictive power for other commonly used measures of sentiment and volatility and appear to influence economic and financial variables. And we develop a new methodology that attempts to capture the emergence of narrative topic consensus which gives an intuitive representation of increasing homogeneity of beliefs prior to the crisis. With increasing consensus around narratives high in excitement and lacking anxiety likely to be an important warning sign of impending financial system distress, the quantitative metrics we develop may complement other indicators and analysis in helping to gauge systemic risk. |
| Keywords: | Systemic risk; text mining; big data; sentiment; uncertainty; narratives; forecasting; early warning indicators |
| JEL: | C53 D83 E32 G01 G17 |
| Date: | 2018–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0704&r=cfn |
| By: | Garicano, Luis; Steinwender, Claudia |
| Abstract: | We introduce a novel empirical strategy to measure the size of credit shocks. Theoretically, we show that credit shocks reduce the value of long-term relative to short-term investments. Empirically, we can therefore compare the reduction of long-term relative to short-term investments within firms, allowing for firm-times-year fixed effects. Using Spanish firm level data, we estimate the credit crunch to be equivalent to an additional tax rate of around 11% on the longest lived capital. To pin down credit constraints as the underlying cause, we apply triple differences strategies using foreign ownership or pre-crisis debt maturity. |
| JEL: | D24 E22 E32 G31 |
| Date: | 2016–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:65862&r=cfn |
| By: | Englmaier, Florian (LMU Munich); Fahn, Matthias (JKU Linz) |
| Abstract: | The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylized fact, most of them focusing on a fundamental agency problem between shareholders and managers. The present paper shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce, and if it faces a volatile environment, investments into general, non-relationship-specific, capital can increase the efficiency of a firm\'s labor relations. |
| Keywords: | relational contracts; corporate finance; capital investments; |
| JEL: | C73 D21 D86 G32 |
| Date: | 2018–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:62&r=cfn |
| By: | Shang-Jin Wei; Jing Zhou |
| Abstract: | This paper examines the role of public governance quality in determining the composition of a country’s external liabilities and the capital structure of firms. In our theory, better institutional quality tends to promote a higher share of foreign direct investment and equity investment in total foreign liabilities, and a higher share of long-term debt within the debt/loan category. Similar prediction holds for the capital structure of firms. We conduct extensive empirical investigation by exploring both firm level data and country level data and find supportive evidence for these predictions. |
| JEL: | F3 G15 G32 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24184&r=cfn |
| By: | Mathias S. Kruttli; Phillip J. Monin; Sumudu W. Watugala |
| Abstract: | We show that when only a few investors own a substantial portion of a hedge fund's net asset value, flow volatility increases because investors' exogenous, idiosyncratic liquidity shocks are not diversified away. Using confidential regulatory filings, we confirm that high investor concentration hedge funds experience more volatile flows. These hedge funds hold more cash and liquid assets, which help absorb large, unexpected outflows. Such funds have to pay a liquidity premium and generate lower risk-adjusted returns. Investor concentration does not affect flow-performance sensitivity. These results are robust to including lock-up and redemption periods, strategy, manager ownership, and other controls. |
| Keywords: | Investor concentration ; Hedge funds ; Flows ; Portfolio liquidity ; Precautionary cash |
| JEL: | G11 G20 G23 |
| Date: | 2017–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-121&r=cfn |
| By: | Donaldson, Jason Roderick; Malenko, Nadya; Piacentino, Giorgia |
| Abstract: | We develop a dynamic model of board decision making. We show that directors may knowingly retain the policy they all think is the worst just because they fear they may disagree about what policy is best in the future-the fear of deadlock begets deadlock. Board diversity can exacerbate deadlock. Hence, shareholders may optimally appoint a biased director to avoid deadlock. On the other hand, the CEO may appoint unbiased directors, or even directors biased against him, to create deadlock and thereby entrench himself. Still, shareholders may optimally give the CEO some power to appoint directors. Our theory thus gives a new explanation for CEO entrenchment. It also gives a new perspective on director tenure, staggered boards, and short-termism. |
| Keywords: | CEO turnover; Corporate Boards; deadlock; director elections; entrenchment |
| JEL: | G34 M12 M14 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12503&r=cfn |
| By: | Gospodinov, Nikolay (Federal Reserve Bank of Atlanta) |
| Abstract: | This paper documents and characterizes the time-varying structure of U.S. and international asset co-movements. Although some of the time variation could be genuine, the sampling uncertainty and time series properties of the series can distort significantly the underlying signal dynamics. We discuss examples that illustrate the pitfalls from drawing conclusions from local trends of asset prices. On a more constructive side, we find that the U.S. main asset classes and major international stock indices share a factor that is closely related to the business cycle. At even lower frequency, the common asset co-movement appears to be driven by demographic trends. |
| Keywords: | cross-asset; within-asset and international asset co-movements; rolling correlation; time-variability; persistence; higher moments; risk factors; sampling frequency |
| JEL: | G13 G14 G17 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2017-11&r=cfn |