nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒06‒25
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Abnormal Retained Earnings Around the World By Alves, Paulo
  2. The Impact of Institutions on Bank Governance and Stability: Evidence from African Countries By Samuel Mutarindwa; Dorothea Schäfer; Andreas Stephan
  3. Corporate financialisation in South Africa: From investment strike to housing bubble By Ewa Karwowski
  4. Financialisation: Dimensions and determinants. A cross-country study By Ewa Karwowski; Mimoza Shabani; Engelbert Stockhammer
  5. The effects of financialisation and financial development on investment: evidence from firm-level data in Europe By Daniele Tori; Özlem Onaran
  6. Structural Changes in Corporate Bond Underpricing By Florian Nagler; Giorgio Ottonello
  7. Manipulating Reliance on Intuition Reduces Risk and Ambiguity Aversion By Luigi Guiso; Tullio Jappelli
  8. Optimal Corporate Taxation under Financial Frictions By Hebert, Benjamin; Davila, Eduardo
  9. Common Ownership and Market Entry: Evidence from the Pharmaceutical Industry By Albert Banal-Estañol; Jo Seldeslachts; Melissa Newham
  10. Buy Low, Sell High? Do Private Equity Fund Managers Have Market Abilities? By Tim Jenkinson; Stefan Morkoetter; Thomas Wetzer;

  1. By: Alves, Paulo
    Abstract: Using a firm-level survey database covering 41 countries, we evaluate firms’ abnormal retained earnings. The results of our work show that the trends of cash holdings and retained earnings are independent. While cash holdings around the world are increasing, the opposite has occurred for retained earnings. We show that cash holdings are influenced by precautionary motive and retained earnings by firms’ growth opportunities. Abnormal retained earnings have risen with GDP growth and decreased following the 2008 financial crisis. This result also confirms the hypothesis of firms’ growth opportunities. US firms present positive abnormal retained earnings after the 2008 financial crisis, contrary to the remaining firms around the world. This can explain recent trends in the US stock market.
    Keywords: Abnormal retained earnings; Cash holdings; Firms’ growth opportunities; Precautionary motive.
    JEL: G32 G38
    Date: 2018
  2. By: Samuel Mutarindwa; Dorothea Schäfer; Andreas Stephan
    Abstract: This paper sheds new light on how African countries’ legal systems and institutions influence the governance and stability of their banks. We find that institutional factors, in particular the legal family of origin, political stability, contract enforcement and strength of investor protection promote central corporate governance reforms. Using a difference-in-difference approach, we also reveal that those reforms mediate the impact of institutions on banks. If countries have a corporate governance reform in place their banks show better internal governance and higher stability.
    Keywords: African banks, corporate governance, legal systems, institutions, bank stability
    JEL: G21 G28 G30 G32 G38
    Date: 2018
  3. By: Ewa Karwowski
    Abstract: This article reveals the processes of financialisation in the South African economy by tracing the sources and destinations of NFCs' liquidity. The paper argues that rather than the volume of NFCs' financial investment, the composition of financial assets is crucial to assess corporate financialisation in the country. Non-financial businesses in South Africa fundamentally transformed their investment behaviour during the 1990s, shifting from more productive uses such as trade credit towards highly liquid and potentially innovative (and therefore risky) financial investment. Following the direction of financial flows the article shows that – fuelled by foreign capital inflows – companies' financial operations contributed to the price inflation in South African property markets.
    Keywords: financialisation, emerging markets, financial instability, asset price volatility, heterodox economics
    JEL: B50 F30 F34 G01 G12 G15
    Date: 2017–07
  4. By: Ewa Karwowski (SOAS, University of London); Mimoza Shabani; Engelbert Stockhammer
    Abstract: The financialisation literature has grown over the past two decades. While there is a generally accepted definition, effectively financialisation has been used to describe very different phenomena. This paper proposes a multi-faceted notion of financialisation by distinguishing between financialisation of non-financial companies, households and the financial sector and using activity as well as vulnerability measures of financialisation. We identify seven financialisation hypotheses in the literature and empirically investigate them in a cross-country analysis for 17 OECD countries for the 1997-2007 period. We find that different financialisation measures are only weakly correlated, which suggests the existence of distinct financialisation processes. There is strong evidence across all sectors that financialisation is closely linked to asset price inflation and correlated with a debt-driven demand regime. Financial deregulation encourages financialisation, especially in the financial and household sector. By contrast, there is limited evidence that market-based financial systems tend to be more financialised, meaning financialisation can occur with large banks. Foreign financial inflows do not seem to be a main driver. We do not find indication that a secular investment slowdown precedes financialisation. Overall, our findings suggest that financialisation should be understood as variegated process, playing out differently across economic sectors in different countries.
    Keywords: financialisation, cross country analysis, financial deregulation, property prices
    JEL: B50 B51 G10 G20 G30 P51
    Date: 2016–12
  5. By: Daniele Tori (Open University); Özlem Onaran
    Abstract: In this paper we estimate the effects of financialization on physical investment in selected western European countries using panel data based on the balance-sheets of publicly listed non-financial companies (NFCs) supplied by Worldscope for the period 1995-2015. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets by the NFCs. This finding is robust for both the pool of all Western European firms and single country estimations. The negative impacts of financial incomes are non-linear with respect to the companies' size: financial incomes crowd-out investment in large companies, and have a positive effect on the investment of only small, relatively more credit-constrained companies. Furthermore, we find that a higher degree of financial development is associated with a stronger negative effect of financial incomes on companies' investment. This finding challenges the common wisdom on 'finance-growth nexus'. Our findings support the 'financialization thesis' that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity.
    Keywords: financialization, financial development, firm-level data, Europe
    JEL: C23 D22 G31
    Date: 2017–06
  6. By: Florian Nagler; Giorgio Ottonello
    Abstract: We show that in the aftermath of the financial crisis underwriters systematically place the most underpriced bonds to closely affiliated investors. We argue that in securing future intermediation in newly issued bonds, underwriters collude with affiliated investors who are rewarded through increased underpricing. We employ a novel identification strategy based on institutional investors' past holdings of bonds issued by underwriters to isolate the strength of underwriter-investor relations. Our channel fully explains the increase in average underpricing in the post-crisis relative to the pre-crisis period. Furthermore, we underpin the mechanism by examining the trading activity of newly issued bonds. Our results are informative about potential implications of post-crisis regulation.
    Keywords: US corporate bond market, underpricing, underwriter-investor relations, post- crisis regulation, reaching for yield
    JEL: G12 G32
    Date: 2017
  7. By: Luigi Guiso (Einaudi Institute for Economics and Finance (EIEF) and CEPR); Tullio Jappelli (University of Naples Federico II, CSEF, and CEPR)
    Abstract: Rational investors perceive correctly the value of financial information. Investment in information is therefore associated with a higher expected portfolio return and Sharpe ratio. Overconfident investo rs overstate the quality of their own information, and thus investment in information is associated with a lower expected Sharpe ratio despite they realize higher average returns. We contrast the implications of these two models using two unique surveys of customers of a leading Italian bank with portfolio data and measures of financial information. We find that the investment in information is positively associated with returns to financial wealth and negatively to Sharpe ratio. The latter falls with proxies for overconfidence. We relate these findings to the wealth inequality debate.
    Keywords: Portfolio Choice, Information, Overconfidence
    JEL: E2 D8 G1
    Date: 2018–06–14
  8. By: Hebert, Benjamin (New York University); Davila, Eduardo (Stanford University)
    Abstract: We study the optimal design of corporate taxation when firms are subject to financial constraints. We find that corporate taxes should be levied on unconstrained firms, since those firms value resources inside the firm less than financially constrained firms. When the government has complete information about which firms are and are not constrained, this principle is sufficient to characterize optimal corporate tax policy. When the government (and other outsiders) do not know which firms are and are not constrained, the government can use the payout policies of firms to elicit whether or not the firm is constrained, and assess taxes accordingly. Using this insight, we discuss conditions under which a tax on dividends paid is the optimal corporate tax. We then extend this result to a dynamic setting, showing that, if the government lacks commitment, the optimal sequence of tax mechanisms can be implemented with a dividend tax. With commitment, we reach a very different conclusion--a lump sum tax on firm entry is optimal. We argue that these two models demonstrate an underlying principle, that optimal corporate taxes should avoid exacerbating financial frictions, and demonstrate that the structure of the financial frictions can drastically change the optimal policy.
    JEL: G18 G33 K35
    Date: 2017–09
  9. By: Albert Banal-Estañol; Jo Seldeslachts; Melissa Newham
    Abstract: Common ownership - where two firms are at least partially owned by the same investor - and its impact on product market outcomes has recently drawn a lot of attention from scholars and practitioners alike. Theoretical and empirical research suggests that common ownership can lead to higher prices. This paper focuses on implications for market entry. To estimate the effect of common ownership on entry decisions, we focus on the pharmaceutical industry. In particular, we consider the entry decisions of generic pharmaceutical firms into drug markets opened up by the end of regulatory protection in the US. We first provide a theoretical framework that shows that a higher level of common ownership between the brand firm (incumbent) and potential generic entrant reduces the generic's incentives to entry. We provide robust evidence for this prediction. The effect is large: a one-standard-deviation increase in common ownership decreases the probability of generic entry by 9-13%. We extend our basic theoretical framework and allow for multiple entrants. Our model shows that for sufficiently high levels of common ownership, the classical idea of entry decisions being strategic substitutes can be reversed into being strategic complements. Our empirical results provide some support for these predictions.
    Keywords: market entry, ownership structure, pharma
    JEL: G23 K21 L11 L41 L65
    Date: 2018–05
  10. By: Tim Jenkinson; Stefan Morkoetter; Thomas Wetzer;
    Abstract: When investors commit capital to a private equity fund, the money is not immediately invested but is called by the fund manager throughout an investment period of up to five years. This business model allows private equity fund managers to invest the committed capital at their own discretion, which gives them the flexibility to time the markets. Based on 5,366 private equity deals, which are benchmarked against around 11,000 transaction market multiples and 170,000 trading market multiples, we find evidence that on average private equity funds are able to add value by timing the markets. Throughout the holding period, private equity funds achieve on average a 0.5 EBITDA market multiple expansion. Market timing ability is not captured by performance measures such as the PME, yet it is a potential source of returns for investors.
    Keywords: Private Equity, Mergers and Acquisitions, Value Creation, Market Timing
    JEL: G15 G20 G34
    Date: 2018–03

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