nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒04‒23
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Financial Intermediary Capital By Rampini, Adriano A.; Viswanathan, S.
  2. Nominee directors on Indian boards: Direct and moderated influence on international investments By Panicker, Vidya Sukumara; Sumit Mitra; Rajesh Srinivas Upadhyayula
  3. How do Indian firms cope with a crisis? Earnings management characteristics of CNX Nifty 100 companies By Mittal, Amit; Garg, Ajay Kumar
  4. Capital Inflows, Equity Issuance Activity, and Corporate Investment By Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
  5. The Impact of Financial Distress Risk on Equity Returns: A Case Study of Non-Financial Firms of Pakistan Stock Exchange By Idrees, Sahar; Qayyum, Abdul
  6. Real options models of the firm, capacity overhang, and the cross-section of stock returns By Aretz, Kevin; Pope, Peter F.
  7. Why do acquirers prefer M&A? Evidence from Banks in India By Mittal, Amit; Garg, Ajay Kumar
  8. Financial Bubbles in Interbank Lending By Luisa Corrado; Tobias Schuler
  9. Do ownership structure and quality of financial information affect the cost of debt of Tunisian listing firms? By Aida Sy; Lamia Jamel; Abdelkader Derbali

  1. By: Rampini, Adriano A.; Viswanathan, S.
    Abstract: We propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households, that is, have a collateralization advantage. Intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth. The net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity, such as investment, and financing. The accumulation of net worth of intermediaries is slow relative to that of the corporate sector. The model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch, namely, their severity, their protractedness, and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns. The model captures the tentative and halting nature of recoveries from crises.
    Keywords: Collateral; Financial constraints; Financial crises; Financial Intermediation; investment
    JEL: E32 E44 G21 G32
    Date: 2018–03
  2. By: Panicker, Vidya Sukumara (Indian Institute of Management Kozhikode); Sumit Mitra (Indian Institute of Management Kozhikode); Rajesh Srinivas Upadhyayula (Indian Institute of Management Kozhikode)
    Abstract: Extant literature on Corporate Governance predominantly examines the characteristics of Anglo-Saxon system of corporate governance. Characteristics of board of directors, such as board independence are the outcomes of primary agency problems, observed in this model of corporate governance. However, there is a need to examine the role of board across distinct corporate governance systems arising out of their unique economic and regulatory regimes. For instance, countries with higher ownership concentration and weaker investor protection, face a secondary agency problem and rely more on debt financing for growth. In this study, we examine a specific feature in the Indian Corporate Governance context i.e. representatives of financing institutions on the board of the directors, also known as nominee directors. We use a behavioral risk perspective to understand the preferences of these groups of board member. On a sample of 764 unique firms and 4216 firm year observations spanning the period 2006-2017, we find that the nominee directors are negatively associated with internationalization of emerging economy firms. In addition, we also find that the nominee directors negatively moderate the relationship between different ownership groups (such as pressure sensitive investors and family owners) and internationalization investments of emerging economy firms.
    Keywords: Corporate Governance, the Indian Corporate Governance
    Date: 2018–02
  3. By: Mittal, Amit; Garg, Ajay Kumar
    Abstract: An analysis of Indian CNX Nifty 100 companies across the last two recessions or the Global Financial Crises highlights practices of earnings management. The crisis response uncovers the perils of opportunistic earnings management as crises affect balance sheets in FY2007 and FY2012. The study proves indications of Performance measurement hypothesis yet primarily only Opportunistic accruals with negative correlation between Post crisis and precrisis accruals and accruals increasing in the post crisis year. Operating accruals of the firm are synonymous with its Working Capital investment. These translate into dependencies on Working Capital investments to finance growth. Earnings management impairs a firm’s ability to smoothen earnings during a continued crisis. It instead resonates with the build-up of cookie jar reserves in the bigger companies and those that invest in Corporate Governance. The presence of negative accruals may show effects of high growth and slack corporate governance. Banking firms respond with a more sophisticated earnings management strategy where Loan Loss provisions significantly increase with increase in Cash profits.
    Keywords: Discretionary Accruals, Earnings Management, GFC, Global Financial Crisis, Financial Reporting, Corporate Governance, India, CNX Nifty 100
    JEL: G10 G14 G20 G30 M41
    Date: 2016–12
  4. By: Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
    Abstract: We use issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. We show that foreign inflows are strongly correlated with country-level issuance. The relation reflects the behavior of large issuers issuing in domestic equity markets and that of firms issuing in international markets. Those larger, more liquid, and highly valued firms are the ones more likely to raise equity when their country receives capital inflows. To identify supply-side shocks, we instrument capital inflows into each country with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented inflows lead a subset of firms (large domestic issuers and foreign issuers) to raise new equity, which they use mainly to fund investment. Corporate investment increases between one-tenth and four-tenths the amount of foreign equity capital entering the country.
    JEL: F21 F3 F36 F41 G11 G15 G3 O16
    Date: 2018–03
  5. By: Idrees, Sahar; Qayyum, Abdul
    Abstract: This study aims to investigate the relationship of financial distress risk and the equity returns of financially distressed firms listed on Pakistan Stock Exchange (PSX). Several studies have suggested that firm distress risk factor could be behind the book-to-market and size effects. Fama and French (1993) three factor Model is used for examining the relationship among equity returns, financial distress risk, size and book-to-market equity ratio. Non-financial firms listed on PSX are taken from the time-period of 2010-2016. Ohlson’s (1980) O-Score “bankruptcy prediction model” is used for the prediction of financial distress risk and forecasted the distress risk firms listed on PSX. The panel (unbalanced) data is used to get the empirical findings and showed that the financial distress risk and book-to-market equity effect are statistically insignificant to explain the stock returns of distress firms due to the inefficiency of market. However, size effect is significant in explaining the stock returns of distress firms. The study also reveals that it is important to predict financial distress risk with a better predictor in order to avoid the uncertainties in PSX.
    Keywords: Financial Distress Risk, Equity Returns, Book-to-Market Effect, Size, Pakistan Stock Exchange
    JEL: C0 C3 C33 G1 G2
    Date: 2018
  6. By: Aretz, Kevin; Pope, Peter F.
    Abstract: We use a stochastic frontier model to obtain a stock-level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this "capacity overhang" estimate relates significantly negatively to the cross-section of stock returns, even when controlling for popular pricing factors. The negative relation persists among small and large stocks, stocks with more or less reversible investments, and in good and bad economic states. Capacity overhang helps explain momentum and profitability anomalies, but not value and investment anomalies. Our evidence supports real options models of the firm featuring valuable divestment options.
    JEL: M40
    Date: 2018–02–17
  7. By: Mittal, Amit; Garg, Ajay Kumar
    Abstract: This study provides deeper insight into the linkages between Bank M&A and M&A literature and test the hypotheses that Acquirers gain significantly from a M&A strategy. Analyzing the Banking industry as an example of Horizontal mergers, the study aims to validate that M&A is a value creating strategy. A market model based event study provides robust results. We include private and public targets in the period 2006-2015. In a study of 24 M&A transactions in Indian Banks during the period 2006 -2015, we find convincing evidence for both acquirer and target gains. The t-statistic for Abnormal Returns is significant and Positive Abnormal Returns are shown. Size and profitability measures are not significant in this sample. Acquirers earning positive returns engage in multiple acquisitions and contribute significantly to positive abnormal returns in the sample. Acquirer returns depend on both Target and Acquirer Financial characteristics including Target Loan Loss provisions, Acquirer Tier I Capital, Acquirer proportion of Fee and Interest Income. The key limitation of the study is the unavailability of a larger sample of data.
    Keywords: Banking, Mergers & Acquisitions, Markets for Corporate Control, Horizontal mergers, Acquirer returns, India
    JEL: G14 G21 G34
    Date: 2017–04
  8. By: Luisa Corrado; Tobias Schuler
    Abstract: As a result of the global financial crisis countercyclical capital requirements have been discussed to prevent financial bubbles generated in the banking sector and to mitigate the adverse effects of financial repression after a bubble burst. This paper analyses the effects of an endogenous capital requirement based on the credit-to-GDP gap along with other policy instruments. We develop a macroeconomic framework which endogenizes market expectations on asset values and allows for interbank transactions. We then show how a bubble in the banking sector relaxes financing constraints. In policy experiments we find that an endogenous capital requirement can effectively reduce the impact of a financial bubble. We show that central bank intervention (\leaning against the wind") instead has only a minor effect.
    Keywords: Financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies
    JEL: E44 E52
    Date: 2018
  9. By: Aida Sy (SUNY - The State University of New York); Lamia Jamel (Université de Sousse); Abdelkader Derbali (Institut Supérieur de Gestion Sousse)
    Abstract: The main objective of this paper is to investigate empirically the relationship between the boards with other internal governance mechanisms such as ownership structure, quality of financial information and the cost of debt. To do so, we use a sample of 28 Tunisian listing firms during the period from 2007-2015. The empirical results show that the ownership structure and the quality of financial information have an important role in determining the characteristics of the cost of debt. The results also indicate that the cost of debt is related positively with factors from the boards of directors, to the size of the listing firms and negatively to the institutional participation on the capital of firm.
    Keywords: cost of debt,Corporate governance,Board of Directors,ownership structure
    Date: 2017

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