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on Corporate Finance |
| By: | Schmalz, Martin |
| Abstract: | The question of whether and how partial common-ownership links between strategically interacting firms affect firm behavior has been the subject of theoretical inquiry for decades. Since then, consolidation and increasing concentration in the asset-management industry has led to more pronounced common ownership concentration (CoOCo). Moreover, recent empirical research has provided evidence consistent with the literature's key predictions. The resulting antitrust concerns have received much attention from policy makers worldwide. However, the implications are more general: CoOCo affects the objective function of the firm, and therefore has implications for all subfields of economics studying corporate conduct -- including corporate governance, strategy, industrial organization, and all of financial economics. This article connects the papers establishing the theoretical foundations, reviews the empirical and legal literatures, and discusses challenges and opportunities for future research. |
| Keywords: | Antitrust; control; industry concentration; network; objective of the firm; ownership; shareholder unanimity |
| JEL: | D21 D22 G10 G30 G32 G34 J41 K21 L10 L16 L21 L40 L41 L42 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12598&r=cfn |
| By: | Raffaele Santioni (Bank of Italy); Ilaria Supino (Bank of Italy) |
| Abstract: | Using unique detailed data, we describe the role of internal capital markets in Italian business groups before and after the financial crisis, an exogenous event which provides an ideal setting to assess whether the working of internal capital markets helps group-affiliated firms to mitigate external financial constraints. Our findings support the hypothesis that internal capital markets are typically activated by firms standing at the top of the control chain given their easier access to external borrowing. Larger and more profitable firms serve as internal suppliers of capital and support financially constrained group members that struggle to stay viable. We also show that firms affiliated to larger and diversified groups benefit from the existence of internal mechanisms of resource reallocation that can substitute external finance when it becomes more expensive and hard to access. During the crisis, group-affiliated firms were more likely to survive than unaffiliated firms. |
| Keywords: | business groups, internal capital markets, financial crisis |
| JEL: | G01 G30 G32 G34 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_421_18&r=cfn |
| By: | Antón, Miguel; Ederer, Florian; Gine, Mireia; Schmalz, Martin |
| Abstract: | We show theoretically and empirically that managers have steeper financial incentives to exert effort and reduce costs when an industry's firms are controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. A side effect of steeper incentives is more aggressive competition. These findings inform a debate about the objective function of the firm. |
| Keywords: | CEO pay; Common ownership; Competition; corporate governance; management incentives |
| JEL: | D21 G30 G32 J31 J41 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12674&r=cfn |
| By: | Duc Thi Luu (University of Kiel, Germany); Mauro Napoletano (OFCE Sciences-Po; SKEMA Business School); Paolo Barucca (University of Zurich, Switzerland; Scuola Superiore Sant'Anna, Pisa (Italy)); Stefano Battiston (University of Zurich, Switzerland) |
| Abstract: | We study how network structure affects the dynamics of collateral in presence of rehypothecation. We build a simple model wherein banks interact via chains of repo contracts and use their proprietary collateral or re-use the collateral obtained by other banks via reverse repos. In this framework, we show that total collateral volume and its velocity are affected by characteristics of the network like the length of rehypothecation chains, the presence or not of chains having a cyclic structure, the direction of collateral flows, the density of the network. In addition, we show that structures where collateral flows are concentrated among few nodes (like in core-periphery networks) allow large increases in collateral volumes already with small network density. Furthermore, we introduce in the model collateral hoarding rates determined according to a Value-at-Risk (VaR) criterion, and we then study the emergence of collateral hoarding cascades in different networks. Our results highlight that network structures with highly concentrated collateral flows are also more exposed to large collateral hoarding cascades following local shocks. These networks are therefore characterized by a trade-off between liquidity and systemic risk. |
| Keywords: | Rehypothecation, Collateral, Repo Contracts, Networks, Liquidity, Collateral-Hoarding Effects, Systemic Risk |
| JEL: | G01 G11 G32 G33 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2018-05&r=cfn |
| By: | Hege, Ulrich; Hutson, Elaine; Laing, Elaine |
| Abstract: | This paper uses the staggered adoption of the Sarbanes-Oxley Act of 2002 for a difference-in-difference identification of the impact of corporate governance on hedging. In a large panel of listed US firms, we focus on two indexes of the legally required governance reforms, but also a wide index of governance quality. We find that the substantial improvements in governance standards robustly lead to less foreign exchange exposure and more foreign exchange derivatives hedging, and that the economic magnitude of the effect is large. Also, the adoption of mandatory governance measures is a stronger predictor of hedging than voluntary improvements. Dynamic panel GMM estimates confirm a significant positive relationship between governance quality and hedging. |
| Keywords: | hedging; foreign exchange exposure; Sarbanes-Oxley Act; corporate governance; board monitoring; staggered introduction |
| JEL: | F23 F31 G34 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32437&r=cfn |
| By: | Roni Michaely; Stefano Rossi; Michael Weber |
| Abstract: | Contrary to the central predictions of signaling models, changes in profits do not empirically follow changes in dividends, and firms with the least need to signal pay the bulk of dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits. Using the Campbell (1991) decomposition, we are able to estimate expected cash flows from data on stock returns. Consistent with our model's predictions, cash-flow volatility changes in the opposite direction from that of dividend changes, and larger changes in volatility come with larger announcement returns. We find similar results for share repurchases. Crucially, the data support the prediction---unique to our model---that the cost of the signal is foregone investment opportunities. We conclude that payout policy conveys information about future cash-flow volatility. |
| JEL: | G35 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24237&r=cfn |
| By: | Stefano Cosma; Alessandro G. Grasso; Francesco Pagliacci; Alessia Pedrazzoli |
| Abstract: | Equity crowdfunding is an emerging financing tool that can help social start-ups and firms to bring people and resources together around a project. This paper focuses on equity crowdfunding. We look at this as a complementary financing channel useful for promoting innovation and social change by paring down the traditional features of financial investment. Our unique dataset regards all the Italian Equity Crowdfunding campaigns launched by different platforms on the Italian equity crowdfunding market from 2013 to 2018. Our aim is twofold: a) to describe some characteristics of the Italian Equity crowdfunding market; b) to describe the characteristics of the social firms which have had recourse to equity crowdfunding, in order to investigate which factors influence the campaign’s success. The results suggest that social firms’ investment offerings are not different from those of non-social ones, but so far, the Italian equity crowdfunding market does not seem suitable for supporting the financial needs of this type of firm, on the side of either investors or firms. |
| Keywords: | equity crowdfunding; sustainability; social enterprises; entrepreneurial finance |
| JEL: | G23 G24 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:18022&r=cfn |
| By: | Rosario Roca (Bank of Italy); Francesco Potente (Bank of Italy); Luca Giulio Ciavoliello (Bank of Italy); Alessandro Conciarelli (Bank of Italy); Giovanni Diprizio (Bank of Italy); Lanfranco Lodi (Bank of Italy); Roberto Mosca (Bank of Italy); Tommaso Perez (Bank of Italy); Jacopo Raponi (Bank of Italy); Emiliano Sabatini (Bank of Italy); Antonio Schifino (Bank of Italy) |
| Abstract: | We investigate the valuation risk affecting financial instruments classified as L2 and L3 for accounting purposes. These are instruments that are not directly traded in active markets and are often relatively complex, opaque and illiquid. There is a huge volume of L2 and L3 instruments in the balance sheets of SSM banks (around €6.8 trillion worth, considering both assets and liabilities). We argue that the complexity and opacity of these instruments create substantial room for discretionary accounting and prudential choices by financial intermediaries, which have incentives to use this discretion to their advantage. The current regulatory reporting standard is not sufficient to make a comprehensive assessment of the overall risks stemming from L2 and L3 instruments. We highlight that these instruments share some characteristics with NPLs (illiquidity, opacity), and argue that the risk they pose might also be comparable. |
| Keywords: | fair value accounting, level 2 instruments, L3 instruments, prudential regulation |
| JEL: | G21 G28 G32 M41 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_417_17&r=cfn |
| By: | Schoenmaker, Dirk |
| Abstract: | To guide the transformation towards a sustainable and inclusive economy, the United Nations has developed the Sustainable Development Goals (SDGs). Sustainable development is an integrated concept with three aspects: economic, social and environmental. This paper starts by reviewing the environmental and social challenges that society is facing. Why should finance contribute to sustainable development? The main task of the financial system is to allocate capital to its most productive use. Financial institutions have started to avoid unsustainable companies from a risk perspective, which we label as Sustainable Finance 1.0 and 2.0 in our new framework. The frontrunners are now increasingly investing in sustainable companies and projects to create long-term value for the wider community (Sustainable Finance 3.0). |
| Keywords: | corporate governance; Environmental; Short-termism; Social and Governance (ESG) Risks; Sustainable Development; Sustainable Finance |
| JEL: | G11 G21 H23 H41 Q01 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12603&r=cfn |
| By: | Döttling, Robin; Ladika, Tomislav; Perotti, Enrico C |
| Abstract: | We model how technological change leads to a shift in corporate investment towards intangible capital, and test its implications for corporate financial policy. While tangible assets can be purchased and funded externally, most intangible capital is created by skilled workers investing their human capital, so it requires lower upfront outlays. Indeed, U.S. high-intangibles firms have larger free cash flows and lower total investment spending, and do not appear more financially constrained. We model and test how these firms optimally retain cash for both a precautionary as well as a retention motive. The optimal reward for risk-averse human capital involves deferred compensation and a commitment to retain cash. High-intangibles firms also should favor a payout policy of repurchases over dividends to avoid penalizing unvested claims. Our empirical evidence supports these predictions. |
| Keywords: | cash holdings; corporate leverage; deferred equity; equity grants; Human Capital; intangible assets; share vesting.; Technological change |
| JEL: | G32 G35 J24 J33 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12618&r=cfn |
| By: | Gianpaolo Parise; Fabrizio Leone |
| Abstract: | Nepotism emerges in a multiplicity of contexts from political assignments to firm hiring decisions, but what are its real effects on the economy? This paper explores how nepotism affects corporate investment. To measure nepotism, we build a unique dataset of family connections among individuals employed in strategic positions by the same firm. We address endogeneity concerns by exploiting the heterogeneity in ancestries across U.S. counties to construct a measure of inherited family values. We find that firms headquartered in counties where locals inherited strong family values exhibit more nepotism. Using this measure and the percentage of family households in the county as instrumental variables, we provide evidence that nepotism hinders investment. Overall, our results suggest that underinvestment in these firms is driven by both lower quality of hired workers and lower incentive to exert effort. |
| Keywords: | nepotism, investment, moral hazard, hiring practices, family ties |
| JEL: | G31 J33 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:693&r=cfn |