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on Corporate Finance |
| By: | Derrien, François; Frésard, Laurent; Slabik, Victoria; Valta, Philip |
| Abstract: | Average stock price reactions of industry rivals in horizontal U.S. mergers and acquisitions around deal announcements are robustly negative. This finding is in contrast to the results in the existing literature, which focuses on smaller samples of deals involving mostly publicly listed firms. Rivals’ returns are more negative in growing and concentrated industries. Moreover, the negative rivals’ stock price reactions are related to future decreases in operating performance, increased probability of bankruptcy and challenges by antitrust authorities, and increased probability of rivals’ future acquisitions. Overall, these results suggest that M&As have strong competitive effects for the rivals of target companies. |
| Keywords: | M&As |
| JEL: | G34 |
| Date: | 2017–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1204&r=cfn |
| By: | CLERE, Roland; MARANDE, Stephane |
| Abstract: | Default risk is the forgotten factor when it comes to equity valuation. And yet, in this article, we show that default risk has a bigger impact on equity values than it does on bond values. Our work is based on a default intensity model that we extrapolate to equities. This model does not presuppose a particular method for estimating distance to default. As a result, unlike Merton structural models, which only apply to indebted companies, it can be used to assess default risk for any company. Highlighting a default risk premium in the cost of capital calculation makes it possible to reconcile the CAPM with evaluation methods based on forecasts in the event of survival. At the same time, the CAPM and default risk can explain the vast majority of bond spreads. The test consisting of estimating “physical” implied default probabilities and the share of systemic risk included in corporate euro bond spreads at end-2015 led us to detect the likely existence of excessive remuneration of investment grade bonds. This finding corroborates identical conclusions reached earlier by other researchers. This potential market anomaly could indicate a windfall for investors. Performing this test again at various points in the economic and financial cycle would help establish whether the bond market is serving a free lunch to investors not bound by regulatory reserve requirements. |
| Keywords: | Cost of equity, credit risk, default risk, credit spread, default spread, default premium, systematic risk, cost of leverage, cost of default, APV, adjusted present value, reduced form model, debt beta, CAPM, Spread AAA, implied cost of capital, ex-ante equity risk premium, forecast bias, optimistic bias premium, recovery rate, probability of default conditional and non-conditional. |
| JEL: | G12 G32 G33 M21 |
| Date: | 2018–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:85659&r=cfn |
| By: | Ramana Nanda; Matthew Rhodes-Kropf |
| Abstract: | An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a startup typically does not have just one investor, but several VCs that come together in a syndicate to finance a venture. In this chapter, we therefore argue for an expansion of the standard perspective to also include frictions within VC syndicates. Put differently, what are the frictions that arise from the fact that there is not just one investor for each venture, but several investors with different incentives, objectives and cash flow rights, who nevertheless need to collaborate to help make the venture a success? We outline the ways in which these coordination frictions manifest themselves, describe the underlying drivers and document several contractual solutions used by VCs to mitigate their effects. We believe that this broader perspective provides several promising avenues for future research. |
| JEL: | D8 G24 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24517&r=cfn |
| By: | Baumöhl, Eduard; Iwasaki, Ichiro; Kočenda, Evžen |
| Abstract: | We analyze the impact of institutional quality on firm survival in 15 Central and Eastern European (CEE) countries. We employ the Cox proportional hazards model with a large dataset of firms from 2006–2015 and control for firm-specific determinants and country differences. Our results show that institutional quality (IQ) is a significant preventive factor for firm survival, and the result is robust to different measures of IQ and industry sectors. Furthermore, we document the existence of diminishing productivity of IQ, as the economic effect upon institutions is largest for low-level IQ countries and smallest for high-level IQ countries. In terms of firm-specific controls, ownership structure plays a vital role in strengthening the probability of firm survival. Notably, foreign ownership helps firms survive in all three country groups, and the effect is again larger for countries with low- and mid-level IQs. ROA, profit margin, solvency ratio, and firm age represent additional significant preventive factors, albeit with smaller economic effects. |
| Keywords: | firm survival, CEE countries, survival and exit determinants, hazards model |
| JEL: | D22 G01 G33 G34 P34 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2018-1&r=cfn |
| By: | Nuri Ersahin |
| Abstract: | I analyze the impact of stronger creditor rights on productivity using plant-level data from the U.S. Census Bureau. Following the adoption of anti-recharacterization laws that give lenders greater access to the collateral of firms in financial distress, total factor productivity of treated plants increases by 2.6 percent. This effect is mainly observed among plants belonging to financially constrained firms. Furthermore, treated plants invest in capital of younger vintage and newer technology, and become more capital-intensive. My results suggest that stronger creditor rights relax borrowing constraints and help firms adopt more efficient production technologies. |
| Keywords: | Creditor Rights; Technology Adoption; Productivity; Bankruptcy |
| JEL: | D24 G32 G33 K22 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:18-20&r=cfn |
| By: | Ono, Arito; Suzuki, Katsushi; Uesugi, Iichiro |
| Abstract: | Utilizing the regulatory change relating to banks' shareholding in Japan as an instrument, this study examines the causal effects of declining shareholding by banks on bank lending and firms’ risk-taking. Banks may hold equity claims over client firms for either of the following two reasons: (i) gaining a competitive advantage by exploiting complementarity between shareholding and lending activities, and (ii) mitigating shareholder–creditor conflict. Exogenous reduction in a bank’s shareholding would then impair the competitiveness of the bank’s lending activities and aggravate the risk-taking behavior of client firms. Using a firm–bank matched dataset for Japan’s listed firms during the period 2001–2006, we empirically test these two hypotheses and obtain the following findings. First, after a bank’s removal from the list of major shareholders of a client firm, the bank’s share of the firm’s loans decreases. Second, volatility of a firm’s return on assets increases after the top shareholding bank is removed from the list of the firm’s major shareholders. Third, the negative impact of a bank’s removal from the list of major shareholders on bank lending mainly applies to non-main banks, while the positive impact of the top shareholding bank’s removal from the list of major shareholders on firms’ risk-taking mainly applies to main banks. |
| Keywords: | Bank shareholding, cross-selling, conflict of interest |
| JEL: | G21 G32 G34 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:remfce:76&r=cfn |
| By: | Jonathan Cohn; Tatyana Deryugina |
| Abstract: | Using novel US environmental spill data, we document a robust negative relationship between the number of spills a firm experiences in a given year and its contemporaneous and lagged (but not future) cash flow. In addition, studying two natural experiments, we find an increase (decrease) in spills following negative (positive) shocks to a firm's financial resources, both in absolute terms and relative to control firms. Overall, our results suggest that firms' financial resources play an important role in their ability to mitigate environmental risk. |
| JEL: | G32 Q52 Q53 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24516&r=cfn |
| By: | Michiel Bijlsma (CPB Netherlands Bureau for Economic Policy Analysis); Clemens Kool (CPB Netherlands Bureau for Economic Policy Analysis); Marielle Non (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | The financial crisis has renewed interest in the finance-growth relationship. We analyze the empirical literature and find a moderate positive but decreasing effect of finance on growth. Empirical studies on the finance-growth relationship show a wide range of estimated effects. We perform a meta-analysis on in total 551 estimates from 68 empirical studies that take private credit to GDP as a measure for financial development and distinguish between linear and logarithmic specifications. First, we find evidence of significantly positive publication bias in both the linear and log-linear specifications. This contrasts with findings in two other recent meta-studies, possibly due to a distortion introduced by their transformation procedure. Second, the logarithmic estimates give a robust significantly positive average effect of financial development on economic growth after correction for publication bias. In our preferred specification a 10 percent increase in credit to the private sector increases economic growth with 0.09 percentage points. For the linear estimates, no significant effect of credit to the private sector on economic growth is found on average. Overall, the evidence points to a positive but decreasing effect of financial development on growth. |
| JEL: | E44 G10 G21 O16 O40 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:340&r=cfn |
| By: | Larmande, François; Stolowy, Hervé |
| Abstract: | This paper investigates the link between one managerial characteristic, the degree of risk aversion, and accounting conservatism. Two models are analyzed, one where the degree of conservatism is chosen by the principal (Board) and accounting information is used for stewardship, and a second where the principal delegates the choice of the degree of conservatism to the manager and accounting information is primarily used for investment efficiency. We show in the first model that higher risk aversion reduces the demand for conservatism from a stewardship point of view. In the second model, we show that delegation is an optimal way for the principal of committing to conservative reporting. Hiring a more risk-averse manager lowers the cost of implementing this conservative reporting. The two models provide opposite predictions for the association between managerial risk aversion and the degree of conservatism. Empirical evidence favors the second model’s prediction. The paper suggests that managers with specific characteristics and incentive contracts might be endogenously chosen by the firm to implement an ex-ante optimal degree of conservatism. |
| Keywords: | Accounting Conservatism; Risk Aversion; Limited Liability; Reporting Bias; Principal-Agent Theory; Stewardship; Investment Efficiency |
| JEL: | D82 D86 G30 M41 M51 M52 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1215&r=cfn |
| By: | Gilbert Mbaraa (Faculty of Economic Sciences, University of Warsaw); Ryszard Kokoszczyński (Faculty of Economic Sciences, University of Warsaw, Narodowy Bank Polski) |
| Abstract: | We develop an agency model of corporate tax evasion and auditing by a residual claimant government and embed it to a macroeconomic environment characterised by credit constraints. In our economy, tax auditing by the government reduces the information asymmetry between lenders and entrepreneurs with an investment opportunity. Corporate governance quality consequently affects macroeconomic variables; with changes in tax rates, auditing and quality of corporate governance having aggregate effects. We show that changes in the revenue system; tax and audit rates, can directly affect asset prices and inflate the effects of exogenous shocks to the economy. |
| Keywords: | corporate governance, credit constraints, taxation, asset pricing, tax evasion, agency problem |
| JEL: | H2 H26 H3 E13 E26 J81 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2018-10&r=cfn |