nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒08‒27
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. "The Effects of Good Corporate Governance for Corporate Value in Plantation Companies at Indonesian Stock Exchange (IDX)" By Yefni
  2. Equity, debt and moral hazard: the optimal structure of banks’ loss absorbing capacity By Tanaka, Misa; Vourdas, John
  3. Quotes, Trades and the Cost of Capital By Rosu, Ioanid; Sojli, Elvira; Tham, Wing Wah
  4. Repo market functioning: the role of capital regulation By Van Horen, Neeljte; Kotidis, Antonis
  5. The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan By Kasahara, Hiroyuki; Sawada, Yasuyuki; Suzuki, Michio
  6. Would macroprudential regulation have prevented the last crisis? By Aikman, David; Bridges, Jonathan; Kashyap, Anil; Siergert, Caspar
  7. Activism, Strategic Trading, and Liquidity By Kerry Back; Pierre Collin-Dufresne; Vyacheslav Fos; Tao Li; Alexander Ljungqvist
  8. Taming macroeconomic instability : monetary and macoprudential policy interactions in an agent - based model By Mauro Napoletano; Lilit Popoyan; andrea Roventini,
  9. Levered Returns and Capital Structure Imbalances By Filippo Ippolito; Roberto Steri; Claudio Tebaldi
  10. Earning Investor Trust: The Role of Past Earnings Management By Florian Eugster; Alexander F. Wagner
  12. Restoring Trust in Finance: From Principal-Agent to Principled Agent By Gordon Menzies; Thomas Simpson; Donald Hay; David Vines
  13. Dividend Omission Announcement Effect to Market Reaction in Indonesia Stock Exchange By Darmawan, Mr
  14. Transitory versus Permanent Shocks: Explaining Corporate Savings and Investment By Sebastian Gryglewicz; Loriano Mancini; Erwan Morellec; Enrique J. Schroth; Philip Valta
  15. Corporate Bond Dealers' Inventory Risk and FOMC By Alessio Ruzza; Wojciech Zurowski
  16. Convertible bonds and bank risk-taking By Martynova, Natalya; Perotti, Enrico C.
  17. Lending relationships and the real economy: evidence in the context of the euro area sovereign debt crisis By Luciana Barbosa
  18. The real exchange rate, innovation and productivity : regional heterogeneity, asymmetries and hysteresis By Alfaro, Laura; Cunat, Alejandro; Liu, Yanping; Fadinger, Harald

  1. By: Yefni (Accounting, Politeknik Caltex Riau, Indonesia Author-2-Name: Atika Zarefar Author-2-Workplace-Name: Politeknik Caltex Riau, Indonesia Author-3-Name: Arumega Zarefar Author-3-Workplace-Name: Universitas Riau, Indonesia Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: "Objective – This research aims to identify the effect of good corporate governance ('GCG') factors such as the size of the board, the presence of independent commissioners and audit committees, managerial ownership, and institutional ownership on corporate value (price to book value). This study also uses profitability measured by Return on Assets ('ROA') as moderating variables. Methodology/Technique – The object of this study is plantation companies listed on the Indonesian Stock Exchange (IDX) between 2011 to 2015. The samples are selected by using purposive sampling method. The hypothesis in this study is tested by using multiple linear regression. Findings – There are three variables that significantly influence corporate value. These are independent commissioners, managerial ownership, and institutional ownership. Moreover, profitability does not moderate the relationship between GCG and company value. Novelty – The research is intended to find a relationship between good corporate governance and firm performance among plantation companies."
    Keywords: "Audit Committee; Corporate Values; Good Corporate Governance; Independent Commissioner; Institutional Ownership; Managerial Ownership; Price to Book Value; Return on Assets."
    JEL: G31 L25 M41
    Date: 2017–04–21
  2. By: Tanaka, Misa (Bank of England); Vourdas, John (European Central Bank)
    Abstract: This paper develops a model to analyse the optimal ex-ante capital and total loss absorbing capacity (TLAC) requirements, and the ex-post resolution policy of banks. Banks in our model are subject to two types of moral hazard: i) ex-ante, they have the incentive to shirk on project monitoring, thus increasing the risk of failure, and ii) ex-post, poorly capitalised banks have the incentive to engage in asset substitution by ‘gambling for resurrection’. Ex-ante moral hazard can be eliminated by ensuring that banks have sufficient capital and uninsured ‘bail-inable’ debt, while ex-post moral hazard is mitigated by triggering resolution when the minimum capital requirement is breached. We argue that optimal regulation consists of a high TLAC requirement and high capital buffer. Our analysis also suggests that higher system-wide risk would call for a higher capital buffer, but TLAC could be lowered if it does not jeopardise the credibility of bail-in itself.
    Keywords: Bank capital; bank capital regulation; total loss absorbing capacity; bank resolution
    JEL: G21 G28 G33 G38
    Date: 2018–07–27
  3. By: Rosu, Ioanid; Sojli, Elvira; Tham, Wing Wah
    Abstract: We study the quoting activity of market makers in relation with trading, liquidity, and expected returns. Empirically, we find larger quote-to-trade (QT) ratios in small, illiquid or neglected firms, yet large QT ratios are associated with low expected returns. The last result is driven by quotes, not by trades. We propose a model of quoting activity consistent with these facts. In equilibrium, market makers monitor the market faster (and thus increase the QT ratio) in neglected, difficult-to-understand stocks. They also monitor faster when their clients are less risk averse, which reduces mispricing and lowers expected returns.
    Keywords: Liquidity; price discovery; volatility; trading volume; monitoring; neglected stocks; risk aversion; inventory; high frequency trading
    JEL: G12 G14
    Date: 2017–07–01
  4. By: Van Horen, Neeljte (Bank of England); Kotidis, Antonis (University of Bonn)
    Abstract: This paper shows that the leverage ratio affects repo intermediation for banks and non-bank financial institutions. We exploit a novel regulatory change in the UK to identify an exogenous intensification of the leverage ratio and combine this with supervisory transaction-level data capturing the near-universe of gilt repo trading. Studying adjustments at the dealer-client level and controlling for demand and confounding factors, we find that dealers subject to a more binding leverage ratio reduced liquidity in the repo market. This affected their small but not their large clients. We further document a reduction in frequency of transactions and a worsening of repo pricing, but no adjustment in haircuts or maturities. Finally, we find evidence of market resilience, based on existing, rather than new repo relationships, with foreign, non-constrained dealers stepping in. Overall, our findings help shed light on the impact of Basel III capital regulation on repo markets.
    Keywords: Capital regulation; leverage ratio; repo market; non-bank financial institutions
    JEL: G10 G21 G23
    Date: 2018–08–03
  5. By: Kasahara, Hiroyuki; Sawada, Yasuyuki; Suzuki, Michio
    Abstract: This article examines the effect of government capital injections into nancially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping banks meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands, which could help firms increase their investment. To test this mechanism empirically, we combine the balance sheet data of Japanese manufacturing firrms with bank balance sheet data and estimate a linear investment model where the investment rate is a function of not only firm productivity and size but also bank regulatory capital ratios. We find that the coefficient of the interaction between a firm's total factor productivity measure and a bank's capital ratio is positive and significant, implying that the bank's capital ratio affects more productive firms. Counterfactual policy experiments suggest that capital injections made in March 1998 and 1999 had a negligible impact on the average investment rate, although there was a reallocation effect, shifting investments from low- to high-productivity firms.
    Keywords: Capital injection, Bank regulation, Banking crisis
    JEL: E22 G21 G28
    Date: 2018–03
  6. By: Aikman, David (Bank of England); Bridges, Jonathan (Bank of England); Kashyap, Anil (University of Chicargo Booth School of Business); Siergert, Caspar (Bank of England)
    Abstract: How well equipped are today’s macroprudential regimes to deal with a re-run of the factors that led to the global financial crisis? We argue that a large proportion of the fall in US GDP associated with the crisis can be explained by two factors: the fragility of financial sector — represented by the increase in leverage and reliance on short-term funding at non-bank financial intermediaries — and the build-up in indebtedness in the household sector. We describe and calibrate the policy interventions a macroprudential regulator would wish to make to address these vulnerabilities. And we compare and contrast how well placed two prominent macroprudential regulators — the US Financial Stability Oversight Council and the UK’s Financial Policy Committee — are to implement these policy actions.
    Keywords: Financial crises; macroprudential policy; leverage; short-term wholesale funding; credit crunch; household debt; aggregate demand externality; countercyclical capital buffer; loan to value ratio; loan to income ratio
    JEL: G01 G21 G23 G28
    Date: 2018–08–03
  7. By: Kerry Back (Rice University); Pierre Collin-Dufresne (Ecole Polytechnique Fédérale de Lausanne, National Bureau of Economic Research (NBER), and Swiss Finance Institute); Vyacheslav Fos (Boston College); Tao Li (City University of Hong Kong); Alexander Ljungqvist (New York University (NYU), National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), European Corporate Governance Institute (ECGI), and Research Institute of Industrial Economics (IFN))
    Abstract: We analyze dynamic trading by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. Variation in parameters can produce either positive or negative relations between market liquidity and economic efficiency, depending on the activism technology and model parameters. Two results that contrast with the previous literature are that (a) the relation between market liquidity and economic efficiency is independent of the activist's initial stake for a broad set of activism echnologies and (b) an increase in noise trading can reduce market liquidity, because it increases uncertainty about the activist's trades (the activist trades in the opposite direction of noise traders) and thereby increases information asymmetry about the activist's intentions.
    Keywords: Kyle model, insider trading, strategic trading, asymmetric information, liquidity, price impact, market depth, activism, unobservable effort, economic efficiency, continuous time
    JEL: G34 G14
    Date: 2016–11
  8. By: Mauro Napoletano (Observatoire français des conjonctures économiques); Lilit Popoyan (Laboratory of Economics and Management); andrea Roventini, (Observatoire français des conjonctures économiques)
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule,focused onoutput gap, inflationand credit growth, and a BaselIII prudential regulationis the bestpolicymix to improve the stability ofthe banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation.
    Keywords: Macro-prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent based computational economics
    JEL: C63 E52 E6 G1 G21 G28
    Date: 2017–02
  9. By: Filippo Ippolito (Universitat Pompeu Fabra, Barcelona Graduate School of Economics, and Centre for Economic Policy Research (CEPR)); Roberto Steri (University of Lausanne and Swiss Finance Institute); Claudio Tebaldi (Bocconi University)
    Abstract: We revisit the relation between equity returns and financial leverage through the lens of a trade-off model with costly capital structure rebalancing. The model provides a “lookalike” Modigliani-Miller equation that predicts that expected equity returns depend on whether a firm’s leverage is above or below its target leverage. The data support the model predictions. Controlling for leverage, overlevered (underlevered) firms earn higher (lower) returns. Controlling for target leverage the textbook positive relationship between leverage and returns is restored, while target leverage is negatively related to returns.
    Keywords: Leverage, Cross Section of Returns, Target Leverage, Dynamic Capital Structure, Financial Frictions
    JEL: G12 G32
    Date: 2017–01
  10. By: Florian Eugster (Stockholm School of Economics); Alexander F. Wagner (University of Zurich, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and European Corporate Governance Institute (ECGI))
    Abstract: HDoes earnings management, even though legal, hamper investor trust in reported earnings? Or do investors regard earnings management as a way for firms to convey private information, or simply as a neutral feature of financial reporting? We find that past abstinence from earnings management increases investor responses to future earnings surprises. Importantly, this effect occurs where managers would in the past have had strong incentives and ample opportunities to misrepresent earnings. Overall, investors seem to interpret the extent to which management resists temptations for misreporting as a “litmus test” of trustworthiness.
    Keywords: Earnings management, earnings response, credibility, trust
    JEL: G14 G30 M41
    Date: 2017–05
  11. By: Oren Rigbi (BGU); Itai Ater (TAU)
    Keywords: Family Business; Restaurant Chains; Founders, International Expansion
    JEL: L83 G32
    Date: 2018
  12. By: Gordon Menzies (University of Technology Sydney); Thomas Simpson (Blavatnik School of Government, University of Oxford); Donald Hay (University of Oxford); David Vines (Department of Economics, Balliol College, St Antony’s College, and Institute for New Economic Thinking (INET) at the Oxford Martin School, University of Oxford; Crawford School of Public Policy, Australian National University; and Centre for Economic Policy Research)
    Abstract: Bonuses in finance represents a bad equilbrium among multiple equilibria. Motivating agents with bonuses can promote untruthfulness, via motivation crowding out, justifying the decision to pay them bonuses. In the equilibrium that works in other professions, moral norms are upheld enough to not require bonuses. Escaping the bad equilibrium is difficult if banks engage in an ‘optimal’ amount of deceit (moral optimization). Restoring trust instead requires that untruthfulness be ruled out a priori (moral prioritization). Reinstating truth telling in finance must contend with a tendency for ethics to be confined to the private domain and motivation crowding out in finance.
    Keywords: Bank Bonuses; Trust; Deregulation
    JEL: G21 G28 H12 E52
    Date: 2018–07–01
  13. By: Darmawan, Mr
    Abstract: This study examined the signalling theory about how the market/investors respond to dividend announcements made by companies listed on the Indonesia Stock Exchange during the period 2008-2012. This period was chosen because the economy and economic growth of Indonesia is relatively stable. In general, the objective of this research is to develop new theoretical approaches, in an effort to resolve the conceptual controversies regarding the impact of dividend policy on firm value. That in detail, in particular, objective: To analyze and empirically test the market reaction to the announcement dividend omissions, as well as Analyze and test empirically the firm-specific characteristics variables that affect the market reaction. The samples are all companies that announced dividend policy for 5 years as many as 242 companies with 729 event announcements. The results showed that in events dividend announcement found a significant reaction from the market. At the announcement of dividend omissions, there are 5 significant observations with 2 observations fit in theory. The study also shows none of the significant characteristics of the company is able to explain the market reaction to dividend announcements.
    Keywords: Characteristics of the Company; Dividend Omissions; Market Reactions
    JEL: G2
    Date: 2018–06–04
  14. By: Sebastian Gryglewicz (Erasmus University Rotterdam); Loriano Mancini (University of Lugano and Swiss Finance Institute); Erwan Morellec (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Enrique J. Schroth (City University London and Centre for Economic Policy Research (CEPR)); Philip Valta (University of Bern)
    Abstract: We model the investment and cash policies of a firm facing financing frictions, transitory cash flow shocks, and permanent productivity shocks. While cash holdings increase and investment and Tobin's $q$ decrease with the volatilities of either type of shocks, a higher correlation between these shocks makes the firm hold less cash, invest more, and become more valuable. We verify these predictions on a large sample of U.S. firms using estimates of permanent and transitory cash flow shocks obtained via structural estimation. Our results suggest that corporate policies and valuations are better understood when distinguishing between permanent and transitory cash flow shocks.
    Keywords: Cash holdings, Investment, permanent vs. transitory shocks
    JEL: G31 G32 G35
    Date: 2017–06
  15. By: Alessio Ruzza (University of Lugano and Swiss Finance Institute); Wojciech Zurowski (University of Lugano and Swiss Finance Institute)
    Abstract: Macroeconomic announcements increase trading activity, with potential consequences for liquidity. This paper studies the effect of FOMC announcements on the US corporate bond market liquidity. The releases do not seem to create adverse selection. We obtain the probability distribution of monetary policy outcomes from 30 day Fed funds Futures. Despite the low toxicity of the order flow, dealers increase the price for liquidity provision in the presence of monetary policy uncertainty and unexpected Fed rate changes. Trading costs decomposition reveals that inventory risk aversion drives the dealers' behaviour. We conclude that a dealership market falls short around macroeconomic announcements, even when adverse selection may be absent.
    Keywords: corporate bond market, inventory risk, FOMC, Fed funds futures
    JEL: G12 G14
    Date: 2017–05
  16. By: Martynova, Natalya; Perotti, Enrico C.
    Abstract: We study how contingent capital affects banks' risk choices. When triggered in highly levered states, going-concern conversion reduces risk-taking incentives, unlike conversion at default by traditional bail-inable debt. Interestingly, contingent capital (CoCo) may be less risky than bail-inable debt as its lower priority is compensated by a lower induced risk. The main beneficial effect on risk incentives comes from reduced leverage upon conversion, while any equity dilution has the opposite effect. This is in contrast to traditional convertible debt, since CoCo bondholders have a short option position. As a result, principal write-down CoCo debt is most desirable for risk preventive pur- poses, although the effect may be tempered by a higher yield. The risk reduction effect of CoCo debt depends critically on the informativeness of the trigger. As it should ensure deleveraging in all states with high risk incentives, it is always inferior to pure equity.
    Keywords: Banks,Contingent Capital,Risk-shifting,Financial Leverage
    JEL: G13 G21 G28
    Date: 2018
  17. By: Luciana Barbosa
    Abstract: The recent euro area sovereign debt crisis put the financial sector under pressure and imposed several challenges, mainly in the countries most affected by the crisis. The sovereign-bank linkage can negatively affect the economic activity, especially by bank-dependent firms. This study explores the heterogeneity across banks in their funding structure, sovereign exposures, solvency, and availability of collateral, with the aim of investigating the effect of the crisis on firms' investment and employment decisions. Exploring a detailed database that covers virtually all bank loans granted to Portuguese firms, for the period 2007-2012, the results suggest an impact on investment and employment paths for firms whose lenders depend more heavily on interbank and market funding. Moreover, the results also stress the importance of assets eligible as collateral in monetary operations conducted by Central Bank. The findings suggest how a deterioration in sovereign creditworthiness can affect the real economy via the banking sector.
    JEL: E22 E24 E44 E51 G21 G31
    Date: 2017
  18. By: Alfaro, Laura; Cunat, Alejandro; Liu, Yanping; Fadinger, Harald
    Abstract: We evaluate manufacturing firms' responses to changes in the real exchange rate (RER) using detailed firm-level data for a large set of countries for the period 2001-2010. We uncover the following stylized facts: In export-oriented emerging Asia, real depreciations are associated with faster growth of firm-level TFP, higher sales and cash-flow, and higher probabilities to engage in R&D and to export. We find negative effects for firms in other emerging economies, which are relatively more import dependent, and no significant effects for firms in industrialized economies. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, affect demand, borrowing-constraints and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on productivity growth across regions into these channels. We estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements and conduct several robustness analyses. Effects on physical TFP growth, while different across regions, are non-linear and asymmetric.
    Keywords: real exchange rate , innovation , productivity , exporting , importing , financial constraints , firm-level data
    JEL: F O
    Date: 2018

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