nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒03‒12
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Why female board representation matters: The role of female directors in reducing male CEO overconfidence in corporate decisions By Jie Chen; Woon Sau Leung; Wei Song; Marc Goergen
  2. The Hidden Information Content: Evidence from the Tone of Independent Director Reports By Jiao Ji; Oleksandr Talavera; Shuxing Yin
  4. Bank Corporate Governance and Future Earnings Predictability By Sabur Mollah; Omar Al Farooque; Asma Mobarek; Philip Molyneux
  5. CDS INDEX OPTIONS UNDER INCOMPLETE INFORMATION By Herbertsson, Alexander; Frey, Rüdiger
  6. Religiosity and Bank Asset Securitization By Omneya Abdelsalam; Marwa Elnahass; Sabur Mollah
  7. Major Government Customers and Loan Contract Terms By Cohen, Daniel A.; Li, Bin; Li, Ningzhong; Lou, Yun
  8. Spillovers in Risk of Financial Institutions By John Cotter; Anita Suurlaht
  9. Asset Securitization and Risk: Does Bank Type Matter? By Omneya Abdelsalam; Marwa Elnahass; Sabur Mollah
  10. Market Discipline and Systemic Risk By Morrison, Alan; Walther, Ansgar
  11. On the Measurement of Large Financial Firm Resolvability By Jarque, Arantxa; Walter, John R.; Evert, Jackson
  12. The Effect of Minority Veto Rights on Controller Tunneling By Fried, Jesse; Kamar, Ehud; Yafeh, Yishay
  13. CEO general managerial skills and corporate social responsibility By Jie Chen; Xicheng Liu; Wei Song
  14. Asset Securitization and Bank risk: Do Religiosity or Ownership Structure Matter? By Omneya Abdelsalam; Marwa Elnahass; Sabur Mollah
  15. The impact of market structure of the banking sector on the growth of bank loans in the EU after the global financial crisis By Georgios Kouretas; Małgorzata Pawłowska
  16. Does Bank Stakeholder Orientation Enhance Financial Stability? Evidence from a Natural Experiment By Woon Sau Leung; Wei Song; Jie Chen
  17. Role of Verification in Peer-to-Peer Lending By Oleksandr Talavera; Haofeng Xu
  18. Are equity market anomalies disappearing? Evidence from the U.K. By John Cotter; Niall McGeever

  1. By: Jie Chen (Cardiff Business School, Cardiff University); Woon Sau Leung (Cardiff Business School, Cardiff University); Wei Song (School of Management, Swansea University); Marc Goergen (Cardiff Business School, Cardiff University)
    Abstract: We provide novel manifestations why female board representation matters. We find that male CEOs at firms with female directors are less likely to be overconfident as they hold fewer deep-in-the-money options. Female directors are associated with less aggressive investment policies, better acquisition decisions, and improved firm performance. This is the case for industries with high overconfidence prevalence, but not for those with low overconfidence prevalence. Finally, firms with female directors experience less of a drop in performance during the 2007-2009 financial crisis. These results are consistent with the view that female directors improve firm outcomes through reducing male CEO overconfidence in corporate decisions.
    Keywords: Female board representation, CEO overconfidence, Investment, Firm performance.
    JEL: G30 G32 G34
    Date: 2018–02–24
  2. By: Jiao Ji (Management School, University of Sheffield); Oleksandr Talavera (School of Management, Swansea University); Shuxing Yin (Management School, University of Sheffield)
    Abstract: The paper investigates the link between the information content of independent directors’ re-ports (IDRs) and future firm performance. By conducting sentiment analysis of 23,984 IDRs of the Chinese listed companies from 2004-2012, we find that the tone of IDRs is positively related with future firm performance. We also posit that the tone of IDRs and its association with firm performance depends on director’s incentives to monitor. Our results suggest that independent directors with greater career concerns (i.e., young directors, an expert in ac-counting or finance) are more critical in evaluating firm fundamentals and express more neg-ative tone in their reports. The relationship between the negative tone of IDRs and future firm performance is stronger for firms with greater monitoring needs. Overall, our evidence is consistent with the conjecture that career concerns motivate independent directors to dissem-inate information to external stakeholders.
    Keywords: Brexit, Text Analysis, Tone, Independent Director Report, Corporate Governance
    JEL: G30
    Date: 2018–03–05
  3. By: João M. Pinto (Católica Porto Business School, Universidade Católica Portuguesa); Mário C. Santos (Católica-Lisbon School of Business and Economics, Universidade Católica Portuguesa)
    Abstract: We examine the factors that influence non-financial firms’ choice between corporate financing (CF) and structured finance (SF). Using a sample of 4,970 Western European deals closed between 2000 and 2016, we find that floatation costs, information asymmetry, and renegotiation and liquidation risks affect firms’ financing decisions. Findings also suggest that firms choose SF when they are less creditworthy and seek long-term financing, and that firms resorting to project finance are smaller and less profitable and have lower short-term debt, lower asset tangibility, and less growth opportunities than corporate bond issuers have. Firms that prefer asset securitization to corporate bonds tend to be smaller, more levered, and less profitable and have lower proportions of fixed assets. Finally, findings are consistent with the hypothesis that firms choose asset securitization to reduce funding costs.
    Keywords: debt financing choice; security design; off-balance sheet financing; project finance; asset securitization; corporate bonds
    JEL: F34 G01 G12 G21 G24
    Date: 2018–02
  4. By: Sabur Mollah (School of Management, Swansea University); Omar Al Farooque (UNE Business School, University of New England); Asma Mobarek (Cardiff Business School, Cardiff University); Philip Molyneux (Bangor Business School, Bangor University)
    Abstract: This study examines the impact of corporate governance on earnings predictability of future cash flow, a forward-looking earnings quality indicator, in large banks from 35 countries over the period 2004–2010. We find that board structure and CEO power have a significant positive influence on future cash flows although these findings vary for emerging markets and between common and civil law countries. Board structure and CEO power are more effective in predicting future cash flows in civil law countries whereas in common law countries risk governance is a more accurate predictor of future earnings. Similarly, we find differences between developed and emerging countries. While in both domains there is no qualitative difference in CEO power to predict future cash flows, board structure and risk governance appear less effective in emerging economies. The study has important implications for policy makers and regulators for different legal regimes (civil vs. common law) and for countries at different stages of economic development (developed vs. emerging) due to the varying impact of governance on bank earnings quality in these countries.
    Keywords: Earnings Predictability, Corporate Governance, Bank, GAAP/IFRS.
    JEL: G21 G32 G38
    Date: 2018–02–24
  5. By: Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University); Frey, Rüdiger (Not stated)
    Abstract: We derive practical formulas for CDS index spreads in a credit risk model under incomplete information. The factor process driving the default intensities is not directly observable, and the filtering model of Frey & Schmidt (2012) is used as our setup. In this framework we find a computationally tractable expressions for the payoff of a CDS index option which naturally includes the so-called armageddon correction. A lower bound for the price of the CDS index option is derived and we provide explicit conditions on the strike spread for which this inequality becomes an equality. The bound is computationally feasible and do not depend the noise parameters in the filtering model. We outline how to explicitly compute the quantities involved in the lower bound for the price of the credit index option as well as implement and calibrate this model to market data. A numerical study is performed where we show that the lower bound in our model can be several hundred percent bigger compared with models which assume that the CDS index spreads follows a log-normal process. Also a systematic study is performed in order to understand the impact of various model parameters on CDS index options (and on the index itself).
    Keywords: Credit risk; CDS index; CDS index options; intensity-based models; dependence modelling; incomplete information; nonlinear filtering; numerical methods
    JEL: C02 C63 G13 G32 G33
    Date: 2016–12
  6. By: Omneya Abdelsalam (Durham University); Marwa Elnahass (Newcastle University); Sabur Mollah (School of Management, Swansea University)
    Abstract: The global financial turmoil of 2007–2008 underlines the importance of understanding asset securitization, a process that allows banks to shed credit risk, fund their credit growth, and arbitrage capital requirements. Examining this ethically questionable activity has become crucial given its perceived long-term social impact. This paper examines the factors that motivate banks’ decisions to enter into asset securitization. In particular, we examine the influence of both organizational and geographic religiosity as important ethical parameters of economic choices on banks’ decisions to securitize their assets. We employ propensity scores using a unique database on asset securitization of banks in 22 countries during the period of 2003–2012. We find that both types of religiosity indicators are significantly associated with banks’ decisions to securitize. Banks located in countries with high religious importance scores show a lower likelihood to securitize. We also find that religiously adhered banks are likely to embark on a constrained model of securitization, which involves a high level of monitoring. In addition, our analysis suggests that religiously adhered banks are less likely to engage in asset securitization to reduce credit risk by shifting it to new investors. This conclusion is supported by their lower credit risk in the years before securitization. Alternatively, our results suggest that these banks embark on asset securitization to improve their financial and regulatory performance. Our study emphasizes the importance of considering religiosity as an important institutional factor and a monitoring mechanism in future global banking studies. Findings in this study are of importance to researchers, to local and international regulators, and to different stakeholders in the international banking sector.
    Keywords: Asset Securitization, Bank type, Religiosity, Bank Risk.
    JEL: C23 G01 G21 G28 L50 M41
    Date: 2018–02–24
  7. By: Cohen, Daniel A. (University of Texas at Dallas - Naveen Jindal School of Management); Li, Bin (University of Texas at Dallas - Naveen Jindal School of Management); Li, Ningzhong (University of Texas at Dallas); Lou, Yun (Singapore Management University)
    Abstract: This study examines how a firm’s business relationship with the U.S. government, in particular, sales to the government, impacts its loan contract terms and how the effect is different from that of major corporate customers. We find that firms with major government customers have a lower number of covenants and are less likely to have performance pricing provisions in their loan contracts than other firms, whereas major corporate customers do not have such impacts. We do not find evidence that major government customers affect the supplier firm’s loan spread, security, or maturity. We conjecture that lenders benefit from the strict monitoring activities of the government customer and reduce the use of covenants and performance pricing in loan contracts when the borrowing firm has a government customer.
    Keywords: Government Customers; Loan Contract Terms
    JEL: G32 G38
    Date: 2016–11–13
  8. By: John Cotter (University College Dublin); Anita Suurlaht (University College Dublin)
    Abstract: We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. A multiple structural break estimation procedure is employed to detect sudden changes in the time varying spillover indices in response to major market events and policy events and policy interventions undertaken by the European Central Bank and the Bank of England. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables; whereas the role of the other variables reverses over the course of the crisis. Real estate market risk is also found to be mostly affected by country specific events. The shock transmission dynamics of interest rate risk and interbank liquidity risk differs for the UK and Eurozone countries; empirical results imply that interest rate changes lead changes in interbank liquidity.
    Keywords: macro-financial state variables, financial crisis, spillover effects, credit default swaps, real estate risk.
    JEL: G01 G15 G20
    Date: 2018–02–19
  9. By: Omneya Abdelsalam (Durham University); Marwa Elnahass (Newcastle University); Sabur Mollah (School of Management, Swansea University)
    Abstract: This study is among the first attempts to tests for the relative differences between Islamic and conventional asset securitizations on bases of bank’s capitalization and risk (credit risk and liquidity risk) during two evidential crises, financial crisis (2007-2009) and the political crisis (2011-2012). We employ GMM estimation for uniquely constructed data for global asset securitization of commercial banks in 22 countries in the years 2003 to 2012, data of 672 global banks (4889 year-observations). We find that on average, securitized banks are less capitalized but more liquid than non-securitized banks. Islamic banks (IBs) involved in securitization hold higher quality loan portfolios and are more prudent but less liquid than securitizing conventional banks (CBs). We find no relative differences between the two sectors with respect to capitalization. Results are robust during the financial crisis. Additional tests, distinguishes between retained and non-retained interests for asset securitizations to test whether the level of control of the securitizing assets affect banks’ risk and capital adequacy. We find that non-retain interests by banks over securitization indicate significantly high prudence by banks however; this is associated with lower liquidity Our results are of importance to both local and international regulators as well as different stakeholders in banks. The bank type does not matters but the relative size of retained interests to the total issuance is that matters because it shows that there is impact on credit risk. Constrained model of IBs do not improve their liquidity though but helped with loan portfolio.
    Keywords: Securitisation, Islamic banks, Conventional banks, Bank Risk, Capitalization.
    JEL: C23 G01 G21 G28 L50 M41
    Date: 2018–02–24
  10. By: Morrison, Alan; Walther, Ansgar
    Abstract: We analyze a general equilibrium model in which financial institutions generate endogenous systemic risk, even in the absence of any government support. Banks optimally select correlated investments and thereby expose themselves to fire sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence of banks' fundamental role as delegated monitors. Our model sheds light on recent and historical trends in measured systemic risk. Technological innovations and government-directed lending can cause surges in systemic risk. Strict capital requirements and well-designed government asset purchase programs can combat systemic risk.
    Keywords: macro-prudential regulation; market discipline; return correlation; systemic risk
    JEL: G01 G21
    Date: 2018–02
  11. By: Jarque, Arantxa (Federal Reserve Bank of Richmond); Walter, John R. (Federal Reserve Bank of Richmond); Evert, Jackson (Federal Reserve Bank of Richmond)
    Abstract: We say that a large financial institution is "resolvable" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans ("living wills") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact score that compares expected losses in the economy stemming from a resolution in bankruptcy with those expected under an assisted resolution or a bailout, based solely on objective characteristics of a bank holding company. We provide a framework that allows us to discuss the data needed and the concepts that underlie the construction of such a score. Importantly, the same firm characteristics may be ascribed different impacts under different resolution methods or crisis scenarios, and these impacts can depend on policymakers' assessments. We say that a firm's structure is acceptable if its impact score under bankruptcy is lower than that of any other resolution method. We study the current score used to designate firms as GSIBs and propose a modified version that we view as a starting point for an impact score.
    Keywords: resolution; bankruptcy; financial regulation; safety net
    JEL: G01 G21 G28 G33
    Date: 2018–03–02
  12. By: Fried, Jesse; Kamar, Ehud; Yafeh, Yishay
    Abstract: A central challenge in the regulation of controlled firms is curbing controller tunneling. As independent directors and fiduciary duties are widely seen as not up to the task, a number of jurisdictions have given minority shareholders veto rights over these transactions. To assess these rights' efficacy, we exploit a 2011 regulatory reform in Israel that gave the minority the ability to veto pay packages of controllers and their relatives ("controller executives"). We find that the reform curbed the pay of controller executives and led some controller executives to quit their jobs, or work for free, in circumstances suggesting their pay would not have received approval. These findings suggest that minority veto rights can help curb controller tunneling.
    Keywords: controlling shareholders; corporate governance; corporate law; Executive compensation; minority shareholders; related party transactions; securities regulation; shareholder voting; tunneling; veto rights
    JEL: G18 G34 G38 J33 J38 K22 L20 M12 M52
    Date: 2018–02
  13. By: Jie Chen (Cardiff Business School, Cardiff University); Xicheng Liu (School of Management, Swansea University); Wei Song (School of Management, Swansea University)
    Abstract: This study examines the impact of managerial skill sets on corporate social responsibility (CSR). We show that firms with chief executive officers (CEOs) who gain general managerial skill sets through their lifetime work experience (i.e., generalist CEOs) tend to engage in less CSR. This finding remains consistent after considering potential endogenous matching between CEO types and firms, as well as alternative measures of CSR. We further show that the negative relationship between generalist CEOs and CSR becomes more prominent when CEOs are close to the timing of job-hopping, especially for firms with a higher level of institutional ownership and institutional investors who frequently alter their holding positions. These findings are consistent with the argument that CEOs who frequently face the short-term performance pressure from the labor market are reluctant to invest in projects which are likely to generate profits over the long run.
    Keywords: Corporate social responsibility; General human capital; Labor market evaluation; Long-term investment.
    JEL: G32 G34 J24 M14
    Date: 2018–02–24
  14. By: Omneya Abdelsalam (Durham University); Marwa Elnahass (Newcastle University); Sabur Mollah (School of Management, Swansea University)
    Abstract: We test the impact of religiosity and ownership structure on the risk profile of banks, which issued securitisation. We employ GMM estimation using unique database on asset securitization of 672 commercial banks (4889 year-observations) in 22 countries (from 2003-2012), which have dual banking system. We find that banks with higher securitisation activity have consistently shown a riskier profile by being significantly less adequately capitalised and offering higher ratio of net loans to total assets. Controlling for bank type (Islamic and conventional banks), we find that although Islamic banks, in general, show a conservative approach towards risk by keeping higher reserves and more liquidity, banks involved in new issuance of asset securitization as still exposed to a higher risk profile . Controlling for a country religiosity shows different risk profile of banks in countries with different religiosity thresholds. Controlling for different types of bank ownership highlights an additional exposure to credit risk in addition to capital adequacy and liquidity risks. Our results emphasize the importance of identifying the impact of bank type and the religiosity / culture factors in global banking studies. Our results are of importance to both local and international regulators as well as different stakeholders in banks.
    Keywords: Securitisation, Islamic banks, Conventional banks, Bank Risk, Capitalization.
    JEL: C23 G01 G21 G28 L50 M41
    Date: 2018–02–24
  15. By: Georgios Kouretas (Department of Business Administration, Athens University); Małgorzata Pawłowska (Warsaw School of Economics, Narodowy Bank Polski)
    Abstract: The aim of this research is to investigate the issue of asymmetry of the credit market determinants of bank loans (corporate, consumer, and residential mortgage loans) between the CEE-11 countries (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Rumania) and the other countries (Austria, Belgium, Denmark, Finland, France, Greece, Italy, Spain, the Netherlands, Ireland, Luxembourg, Germany, Portugal, Sweden, United Kingdom, Malta, and Cyprus) after the global financial crisis (GFC) of 2007–09. For the analysis, we used annual bank-level data, which are collected from the Bankscope-Orbis database and interest rates for different loans from the European Central Bank and macroeconomic data on GDP growth. Panel data includes commercial banks, savings banks, and cooperative banks that were operating in the EU countries from the period 2010–2016. Using the methodology of panel regression, this study finds differences of the determinants of the growth of loans for two groups of countries after the global financial crisis. Panel data analysis of CEE-11 countries against other EU countries also finds differences between determinants of different types of bank loans.
    Keywords: banks, credit growth, concentration, foreign ownership, EU, CEE-11
    JEL: F36 G2 G21 G34 L1
    Date: 2018
  16. By: Woon Sau Leung (Cardiff Business School, Cardiff University); Wei Song (School of Management, Swansea University); Jie Chen (Cardiff Business School, Cardiff University)
    Abstract: Using the staggered enactment of US state constituency statutes, which provides plausibly exogenous variations in directors’ fiduciary duties, we find that stakeholder orientation significantly reduces bank risk. This relation cannot be explained by reverse causality, local economic conditions and coincidental state antitakeover laws and banking deregulation policies. Consistent with lower risk-taking, we find that banks reduce risk through increasing capital and lending to safer borrowers. Furthermore, stakeholder orientation improves bank performance only for those banks that take excessive risk. Finally, banks that previously received a statute passage fared significantly better during the crises. Overall, our findings highlight the importance of bank directors’ fiduciary duties in safeguarding financial stability, and more broadly, support the increasing calls for greater emphasis on stakeholder interests in the current bank regulatory and governance reforms.
    Keywords: Bank risk-taking; Stakeholder orientation; Constituency statutes; Fiduciary duties; Financial stability.
    JEL: G01 G21 G28 G32 M14
    Date: 2018–02–24
  17. By: Oleksandr Talavera (School of Management, Swansea University); Haofeng Xu (School of Management, Swansea University)
    Abstract: Using data from a leading Chinese Peer-to-Peer (P2P) lending platform from 2012 to 2015, we investigate the role of verification in the P2P lending market. We find that borrowers with thorough and complete verification are more likely to obtain funding and also less likely to default on loans. We also find that borrowers that have incomplete verification are more likely to upwardly misrepresent their income. This leads to higher default rates for this group when compared to the default rates of more thoroughly verified borrowers. The further analysis documents that returning borrowers are more likely to maintain a good credit record. We discuss the implications of our findings for the role of verification in the growing P2P lending sector and the design of a stable financial system.
    Keywords: Information asymmetry, verification, P2P, income exaggeration
    JEL: G21 G23
    Date: 2018–03–02
  18. By: John Cotter (University College Dublin); Niall McGeever (University College Dublin)
    Abstract: We study the persistence over time of nine well-known equity market anomalies in the cross-section of U.K. stocks. We find strong evidence of diminished statistical significance for most of these anomalies including the return reversal and momentum effects. Two anomalies – firm profitability and stock turnover – remain quite robust throughout our sample period. These results hold for both portfolio sorts and Fama-MacBeth regression analyses and are robust to the use of alternative methods of risk adjustment. Our findings are consistent with improvements in market efficiency overtime with respect to well-known anomaly variables.
    Keywords: Anomalies, Asset Pricing, Market Efficiency
    JEL: G10 G12
    Date: 2018–02–19

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