nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒04‒02
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Corporate Leverage and Investment in Portugal By Ana Martins; José Gonçalves; João Duque
  2. Corporate Governance, State Ownership and Firm Performance: An Empirical Study of State-Owned Enterprises in Indonesia By Chermian Eforis
  3. Opportunistic Behavior, External Monitoring Mechanisms, Corporate Governance, and Earnings Management By Agustina Chandra
  4. Stress Tests and Small Business Lending By Kristle Cortés; Yuliya Demyanyk; Lei Li; Elena Loutskina; Philip E. Strahan
  5. Is There a Role for Patents in the Financing of Innovative Firms? By Bronwyn H. Hall
  6. Internal and External Determinants of Audit Delay: Evidence from Indonesian Manufacturing Companies By Patricia Diana
  7. Social media bots and stock markets By Rui Fan; Oleksandr Talavera; Vu Tran
  8. Law and finance in emerging economies: Germany and Britain 1800-1913 By Gerner-Beuerle, Carsten
  9. Constraints of Spanish Insolvency Law. A Predictive Bankruptcy Model for Spanish Industrial SMEs (2007-2015) By Salvador Ortí-Camallonga
  10. Tax and financial reporting aggressiveness: evidence from Europe By Alexandra Fernandes; António Cerqueira; Elísio Brandão
  11. Debt Overhang and Investment Efficiency By Barbiero, Francesca; Popov, Alexander; Wolski, Marcin
  12. Expected Stock Returns and the Correlation Risk Premium By Buss, Adrian; Schönleber, Lorenzo; Vilkov, Grigory
  13. Ownership Structure and Bank Risk: The Effects of Crisis, Market Discipline and Regulatory Pressure By Viet-Dung Tran; M. Kabir Hassan; Reza Houston
  14. Does Taxation Stifle Corporate Investment? Firm-Level Evidence from ASEAN Countries By Serhan Cevik; Fedor Miryugin
  15. Business investment, cost of capital and uncertainty in the United Kingdom — evidence from firm-level analysis By Melolinna, Marko; Tatomir, Srdan; Miller, Helen
  16. Analyzing Credit Risk Transmission to the Non-Financial Sector in Europe: A Network Approach By Christian Gross; Pierre L. Siklos
  17. Does the time horizon of the return predictive effect of investor sentiment vary with stock characteristics? A Granger causality analysis in the frequency domain By Yong Jiang; Zhongbao Zhou
  18. Heterogeneous Investment Dynamics of Manufacturing Firms By Tiago Tavares; Alexandros Fakos

  1. By: Ana Martins (GEE - Gabinete de Estratégia e Estudos do Ministério da Economia); José Gonçalves (GEE - Gabinete de Estratégia e Estudos do Ministério da Economia); João Duque
    Abstract: This analysis aims at assessing the decrease of investment induced by an increase in debt of an excessively indebted corporate sector in Portugal, testing empirically the relationship between corporate indebtedness and investment. The results show evidence of a negative relationship between firms’ investment-to-capital ratio and their indebtedness over the period 2010-15. This type of relation between these variables suggests the need for companies to deleverage. Results also point to asymmetric effects beyond a certain threshold level of indebtedness, namely a debt-to-asset ratio of 45.6%, because greater access to debt can help increase investment levels, but excess leverage can reverse these benefits by raising corporate vulnerabilities. Relationship between debt and investment was also tested along firm sector to deepen the role of firm sector heterogeneity and a negative relationship was also found in the three major sectors (Wholesale and retail, Manufacturing and Construction).
    Keywords: Corporate debt, leverage, investment, threshold
    JEL: E22 F34 G31 G32
    Date: 2018–03
  2. By: Chermian Eforis (Universitas Multimedia Nusantara, Scientia Garden-Gading Serpong, 15820, Tangerang, Indonesia)
    Abstract: Objective – The purpose of this research is to determine the effect of good corporate governance (GCG) on Indonesia's SOEs and the influence of state ownership on company performance. Methodology/Technique – This study examines State Owned Enterprises in Indonesia that were listed on the Indonesia Stock Exchange between 2011 and 2015. Findings – The empirical results show that GCG and state ownership both have a positive influence on the company's financial performance (in this case, Return On Assets). However, the percentage of state ownership has a negative effect on the relationship between Good Corporate Governance and Return On Assets. Novelty – One agency cost is monitoring expenditure by the principal. Privatization is one way to improve the performance of SOEs. Privatization is believed to improve the performance of SOEs, as a result of increased supervision of the performance of SOEs in Indonesia.
    Keywords: State Owned Enterprises; Good Corporate Governance; State Ownership; Return On Assets; Indonesia.
    JEL: G32 H70 G34
    Date: 2018–03–04
  3. By: Agustina Chandra (Trisakti School of Management, Jl. Kyai Tapa No. 20, 11440, Jakarta, Indonesia Author-2-Name: Wimelda Author-2-Workplace-Name: Trisakti School of Management, Jl. Kyai Tapa No. 20, 11440, Jakarta, Indonesia)
    Abstract: Objective - The purpose of this research is to analyze the effect of motivational bonus, leverage, firm size, corporate governance (audit committee's size, the proportion of independent commissioners, institutional ownership, managerial ownership) and free cash flow on earnings management. Methodology/Techniques - Earnings management is analyzed in this research using the modified Jones model. The population for the research consists of manufacturing companies listed on the Indonesian Stock Exchange (IDX) between 2013-2015. The final sample includes 60 manufacturing companies. Findings - The result of this study indicate that motivational bonus, leverage, firm size and free cash flow have an influence on earnings management practices. Motivational bonuses and free cash flow as opportunistic behavior also influence earnings management. In addition, leverage and firm size as external monitoring mechanism influence earnings management practices while audit committee size, the proportion of independent commissioners, institutional ownership and managerial ownership as corporate governance practices in companies has no significant effect on earnings management practices. Hence, it is concluded that corporate governance has no effect on earnings management practices in Indonesia.
    JEL: G34 G02
    Date: 2018–03–11
  4. By: Kristle Cortés; Yuliya Demyanyk; Lei Li; Elena Loutskina; Philip E. Strahan
    Abstract: Post-crisis stress tests have altered banks’ credit supply to small business. Banks affected by stress tests reduce credit supply and raise interest rates on small business loans. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and exit markets where they do not, as quantities fall most in markets where stress-tested banks do not own branches near borrowers, and prices rise mainly where they do. These reductions in supply are concentrated among risky borrowers. Stress tests do not, however, reduce aggregate credit. Small banks increase their share in geographies formerly reliant on stress-tested lenders.
    JEL: G2
    Date: 2018–03
  5. By: Bronwyn H. Hall
    Abstract: It is argued by many that one of the benefits of the patent system is that it creates a property right to invention that enables firms to obtain financing for the development of that invention. In this paper, I review the reasons why ownership of knowledge assets might be useful in attracting finance and then survey the empirical evidence on patent ownership and its impact on the ability of firms to obtain further financing at different stages of their development, both starting up and after becoming established. Studies that attempt to separately identify the role of patent rights and the underlying quality of the associated innovation(s) will be emphasized, although these are rather rare.
    JEL: G24 G32 L26 O34
    Date: 2018–03
  6. By: Patricia Diana (Universitas Multimedia Nusantara, Gading Serpong - Tangerang, 15810, Banten, Indonesia Author-2-Name: Maggy Author-2-Workplace-Name: Universitas Multimedia Nusantara, Gading Serpong - Tangerang, 15810, Banten, Indonesia)
    Abstract: Objective – This study aims to examine and explain the relationship between a company's internal factors such as profitability, solvency and audit committee, and external factors including complexity and size of public accounting firms, with audit delay. Methodology/Technique – The importance of financial information is, in part, due to its utility for assessment of company performance. Hence, financial information should be produced and reported as quickly as possible each year. Findings – This study finds that manufacturing companies with high debt levels and low profitability experience longer audit delay. Moreover, the results in this study show that debt level is the most influential and significant factor with a positive relationship to audit delay. Novelty – This study shows that profitability, the number of members on an audit committees and public accounting firm (KAP) size all have an insignificant negative relationship with audit delay. Further, complexity has an insignificant positive relationship with audit delay.
    Keywords: Profitability; Debt; Complexity; Audit Committees; Audit Delays.
    JEL: M42 M41
    Date: 2018–02–21
  7. By: Rui Fan (School of Management, Swansea University); Oleksandr Talavera (School of Management, Swansea University); Vu Tran (School of Management, Swansea University)
    Abstract: This study examines whether stock indicators are affected by information in social media such as Twitter. Using a daily sample of tweets with a FTSE 100 firm name over two years, we find insignificant associations between tweets/bot-tweets and stock returns whereas there is a strongly significant association with volatility and trading volume. Using a high-frequency sample, we detect a positive (negative) impact of tweets (bot-tweets) on stock returns. The impact of bot-tweets vanishes within 30 minutes. The results for volatility and trading volume are consistent with the daily data analysis. In addition, event study reveals a bounce-back pattern of price reactions in response to negative retweets. Abnormal increases in tweets/bottweets have significant effects on stock volatility, trading volume and liquidity.
    Keywords: Social media bots, investor sentiments, noise traders, text classification, computational linguistics
    JEL: G12 G14 L86
    Date: 2018–03–23
  8. By: Gerner-Beuerle, Carsten
    Abstract: By most standards, Britain in the 19th century was the world's leading financial nation, with more developed capital markets than any other country. An influential view in the law and finance literature argues that, holding macroeconomic factors constant, the different financial development can be attributed to more stringent disclosure regulation in Britain. Presenting a granular analysis of regulatory reform in Britain and Germany, this article shows that the level of disclosure regulation was largely comparable in both countries during the relevant period and that reform initiatives were not an exogenous stimulus of financial development, but evolved incrementally in response to changing market conditions. On the other hand, the legal regime governing the formation of stock corporations developed in diametrically opposed directions in the two countries as a result of concerted efforts by policy makers to change market conditions. The article argues that these rules, which were relevant to organisational choice and the availability of different sources of financing, stand out as the most striking difference between Germany and the UK.
    Keywords: law and finance; financial development; disclosure regulation; private enforcement; liability for incorrect disclosures
    JEL: N0 F3 G3
    Date: 2017–03–03
  9. By: Salvador Ortí-Camallonga (Department of Finance, University of Valencia, Spain)
    Abstract: Why almost 90% of Spanish SMEs that declare insolvency end up in liquidation? Academic works on insolvency focus either on legal terms – normative bias, impact on business’ death rate, and contrast to internal restructuring processes, to name a few – or on financial aspects – especially bankruptcy predictive models – . This work argues that a combined approach could be elucidating. For this purpose, it configures a predictive model – inspired on Atlman’s z-score – for Spanish SMEs of industrial sectors for the period 2007-2015. This investigation argues that operative difficulties can be detected well in advance to official declaration of insolvency; and provides specific evidence of Spanish Law constrains.
    Keywords: Insolvency Proceedings, Spanish SMEs, Bankruptcy forecast, Logistic Regression, Financial Distress
    JEL: G34 G17 K10
    Date: 2018
  10. By: Alexandra Fernandes (Alexandra Fernandes); António Cerqueira (António Cerqueira); Elísio Brandão (Elísio Brandão)
    Abstract: This study examines the relation between financial and tax aggressive reports on public companies from Europe-15, over the period of 2001-2015. Also, it pretends to analyse if the link between tax and financial aggressiveness gets weaker after IFRS adoption in Europe. To run empirical work, I use discretionary accruals calculated by modified-Jones model (Dechow, Sloan, and Sweeney 1995) as a proxy of financial aggressiveness (DFIN) and discretionary permanent differences as a measure of tax aggressiveness (DTAX) (used by Mary Frank, Luann Lynch and Sonja Rego, 2009), which I estimate using EGLS cross section weights for year and Fama- French 12 industries. To prove that firms with aggressive tax report tend to be financial aggressive and that the link between tax and financial aggressiveness is more significant before IFRS implementation I analyse Pearson and Spearman correlation. Additionally, I estimate relation between DTAX and DFIN when controlling for firm size, earnings management and tax planning incentives using OLS and apply the same model with period restriction for before and after IFRS adoption. Results suggest that financial aggressive firms tend to also be tax aggressive and the link between these two aggressive reports is weaker after IFRS adoption
    Keywords: Tax planning, earnings management, book tax differences, aggressive financial report, aggressive tax report.
    JEL: E62 G32 H26
    Date: 2017–11
  11. By: Barbiero, Francesca; Popov, Alexander; Wolski, Marcin
    Abstract: Using a pan-European dataset of 8.5 million firms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. This effect is robust to controlling for firm fixed effects and for country-sector-time fixed effects. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories highlighting the disciplining role of debt over equity.
    Keywords: Banking crises.; Debt overhang; Investment misallocation
    JEL: E22 E44 G21 H63
    Date: 2018–03
  12. By: Buss, Adrian; Schönleber, Lorenzo; Vilkov, Grigory
    Abstract: We show that the correlation risk premium can predict future market excess returns in-sample and out-of-sample for long horizons and contains information that is non-redundant relative to the variance risk premium. To exploit this predictability, we develop a novel estimation methodology that uses contemporaneous increments of option-implied variables, efficiently removing any lag in estimation of variance and correlation risk betas. The methodology leads to considerable out-of-sample predictability, with an R2 of 7.0% at an annual horizon, and substantial economic gains for investors. The results are supported by a multi-asset general-equilibrium model in which variance and correlation risk are endogenously priced.
    Keywords: correlation risk premium; diversification}; option-implied information; out-of-sample return predictability
    JEL: G11 G12 G13 G17
    Date: 2018–02
  13. By: Viet-Dung Tran; M. Kabir Hassan; Reza Houston
    Abstract: Using a large panel of US BHC over the 2001:Q1-2015:Q4, we investigate the risk-taking behaviors of banks within a comparison perspective – between public and private banks - where there exists substantial differences of asymmetry information and agency problems. We document evidence of greater stability of public banks versus their private peers. However, public banks become riskier than private banks during the last crisis. These findings suggest a mixed evidence of risk-taking mitigating role of listing status. Regulatory pressure is effective in limiting risk taking by undercapitalized public banks before, but not during the crisis, casting doubt the effectiveness of regulators during the turmoil times. Public banks with high franchise value expose to risk less than others during the crisis. Debtholders discipline is ineffective in curbing the risk-taking behavior of banks. Our study is of interest for regulators, policymakers who are in search of improving bank risk-taking behavior.
    Keywords: bank listing status; risk taking; crisis; market discipline; regulatory pressure
    JEL: G21 G28 G34 G38
    Date: 2018–03
  14. By: Serhan Cevik; Fedor Miryugin
    Abstract: This paper conducts a firm-level analysis of the effect of taxation on corporate investment patterns in member states of the Association of Southeast Asian Nations (ASEAN). Using large-scale panel data on nonfinancial firms over the period 1990–2014, and controlling for macro-structural differences among countries, we find a significant degree of persistence in firms’ net fixed investments over time, which vary with firm characteristics, such as size, sales, profitability, leverage, and age. Our analysis brings up interesting empirical results, including nonlinear patterns of behavior in firms’ capital investment decisions acrosss ASEAN countries. Concerning the main variable of interest, we find that a moderate level of taxation does not hinder business investment, but this effect turns negative as higher tax burden raises the user cost of capital and distorts resource allocations.
    Date: 2018–03–02
  15. By: Melolinna, Marko (Bank of England); Tatomir, Srdan (Bank of England); Miller, Helen (Institute for Fiscal Studies)
    Abstract: We use new firm-level estimates of the cost of capital and uncertainty to study the drivers of UK business investment in a neoclassical investment model. We construct firm-specific measures of the cost of capital and uncertainty and use new UK survey data to estimate firm-specific investment hurdle rates. There is substantial variation in the cost of capital and uncertainty faced by firms and we find both matter for investment. Firm heterogeneity might help explain the difference in firms’ investment paths shortly after the Great Recession. This suggests that, while common shocks, that is, aggregate uncertainty matters, it is also important to capture firm-specific uncertainty to better explain investment dynamics. Overall, between 2000 and 2015 investment responded relatively sluggishly to the cost of capital and more sharply to uncertainty, especially after the financial crisis. There are implications for monetary and macroeconomic policy. The relative importance of measures that alleviate uncertainty compared to changes in monetary policy rates could be larger than generally recognised.
    Keywords: Investment; micro data; panel regression; hurdle rates; cost of capital; uncertainty
    JEL: C23 D22 E22 E44
    Date: 2018–03–02
  16. By: Christian Gross; Pierre L. Siklos
    Abstract: A high-dimensional network of European CDS spreads is modeled to assess the transmission of credit risk to the non-financial corporate sector in Europe. We build on a network connectedness approach that uses variance decompositions in vector autoregressions (VARs) to characterize the dependence structure in the panel of CDS spreads. Our main findings suggest a sectoral clustering in the CDS network, where financial institutions are located in the center of the network and non-financial as well as sovereign CDS are grouped around the financial center. The network has a geographical component re flected in differences in the magnitude and direction of real-sector risk transmission across European countries. We identify an increase in the transmission of financial and sovereign credit risk to the non-financial sector during the global financial crisis and the European debt crisis. By contrast, we find that the transmission of risk within the non-financial sector remains largely unaffected by crisis events.
    Keywords: networks, financial-real linkages connectedness, systemic risk, credit risk, contagion
    JEL: C01 C32 G01 G15
    Date: 2018–03
  17. By: Yong Jiang; Zhongbao Zhou
    Abstract: Behavioral theories posit that investor sentiment exhibits predictive power for stock returns, whereas there is little study have investigated the relationship between the time horizon of the predictive effect of investor sentiment and the firm characteristics. To this end, by using a Granger causality analysis in the frequency domain proposed by Lemmens et al. (2008), this paper examine whether the time horizon of the predictive effect of investor sentiment on the U.S. returns of stocks vary with different firm characteristics (e.g., firm size (Size), book-to-market equity (B/M) rate, operating profitability (OP) and investment (Inv)). The empirical results indicate that investor sentiment has a long-term (more than 12 months) or short-term (less than 12 months) predictive effect on stock returns with different firm characteristics. Specifically, the investor sentiment has strong predictability in the stock returns for smaller Size stocks, lower B/M stocks and lower OP stocks, both in the short term and long term, but only has a short-term predictability for higher quantile ones. The investor sentiment merely has predictability for the returns of smaller Inv stocks in the short term, but has a strong short-term and long-term predictability for larger Inv stocks. These results have important implications for the investors for the planning of the short and the long run stock investment strategy.
    Date: 2018–03
  18. By: Tiago Tavares (CIE ITAM); Alexandros Fakos (ITAM)
    Abstract: In this paper we study firm-level investment dynamics by incorporating an idiosyncratic investment cost shock in a dynamic investment model of heterogeneous firms with adjustment costs. We interpret this idiosyncratic shock as an investment wedge summarizing firm deviations from model implied efficient behavior. We estimate our dynamic model using data micro-level data of Greek manufacturing firms, allowing for firms to be heterogenous in both profitability and investment cost. Our estimation results show that the level of dispersion of the idiosyncratic investment shock is of the same order of magnitude as the profitability shock which tends to be substantial in most micro-studies. We also find evidence that the investment wedge is correlated with variables not explicitly taken into account by our model such as measures of firm-level leverage and export intensity. This suggests that a financial channel in models of capital accumulation may be crucial in explaining data patterns.
    Date: 2017

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