nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒09‒24
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Divisional Buyouts by Private Equity and the Market for Divested Assets By Hege, Ulrich; Lovo, Stefano; Slovin, Myron B.; Sushka, Marie E.
  2. Firm Failure in Russia during Economic Crises and Growth : A Large Survival Analysis By Iwasaki, Ichiro; Kim, Byung-Yeon
  3. Divers and Hindrances of Enterprise Risk Management (ERM) Implementation: Evidence from India By AMAN SRIVASTAVA
  4. Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks By Yiming Cao; Raymond Fisman; Hui Lin; Yongxiang Wang
  5. Liquidity Requirements and Bank Deposits: Evidence from Ethiopia By Nicola Limodio; Francesco Strobbe
  6. When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education By Charlie Eaton; Sabrina Howell; Constantine Yannelis
  7. Local peer effects and corporate investment By Bao, Yangming; Goetz, Martin
  8. Crowding out effect and traders' overreliance on public information in financial markets: a lesson from the lab By Ruiz-Buforn, Alba; Alfarano, Simone; Camacho-Cuena, Eva; Morone, Andrea
  9. Information and Liquidity of OTC Securities : Evidence from Public Registration of Rule 144A Bonds By Song Han; Alan G. Huang; Madhu Kalimipalli; Ke Wang
  10. Firm Leverage, Labor Market Size, and Employee Pay By Timothy E. Dore; Rebecca Zarutskie
  11. Have Capital Market Anomalies Worldwide Attenuated in the Recent Era of High Liquidity and Trading Activity? By Benjamin R. Auer; Horst Rottmann

  1. By: Hege, Ulrich; Lovo, Stefano; Slovin, Myron B.; Sushka, Marie E.
    Abstract: We study the role and performance of private equity (PE) in corporate asset sales. Corporate sellers obtain significantly positive excess returns in PE deals, gains in wealth significantly greater than for intercorporate asset sales. Based on exit valuations for 98% of PE deals, we find gains in enterprise value in buyouts are significantly greater than for benchmark firms. Corporate seller excess returns are positively correlated with subsequent gains in asset enterprise value. A parsimonious auction model suggests that only restructuring capabilities of PE (not acquisition of undervalued assets) can explain the pattern of the gains generated in these PE deals.
    Keywords: Divisional buyouts; asset sales; private equity; restructuring; auction
    JEL: G32 G34
    Date: 2018–08
  2. By: Iwasaki, Ichiro; Kim, Byung-Yeon
    Abstract: In this paper, we trace the survival status of more than 110,000 Russian firms in the years of 2007–2015 and examine the determinants of firm survival across periods of economic crisis and growth. Applying the Cox proportional hazards model, we find that the effects of some variables regarded as key determinants of firm survival are not always robust across business cycles. Among the variables that constantly affect firm survival across business cycles and industries, concentration of ownership, the number of board directors and auditors, firm age, and business network are included. By contrast, the effects of some ownership-related variables on firm survival vary depending on the nature of economic recessions such as a global crisis and a local one. There is also evidence that an international audit firm increases the probability of firm survival; however, gaps in the quality between international audit firms and those from Russia decrease over time. These findings suggest that one should not make hasty generalizations regarding the determinants of firm survival by looking at a specific economic period or industry.
    Keywords: Firm failure, Economic crises and growth, Cox proportional hazards model, Russia
    JEL: D22 G01 G33 G34 P34
    Date: 2018–06
    Abstract: After global financial crisis, risk management failures of business firms were highlighted and a need of integrated risk management system was felt globally. Indian firms were no more exception to these developments and it became mandatory for all listed Indian firms to introduce a formal risk management system after introduction of clause 49 in the year 2000. Since then all public and private sector firms in India started developing a formal risk management system. Even after one and half decade the level of implementation of enterprise risk management and its understanding by people working in these firms is immature and questionable. The purpose of this paper is to identify drivers and hindrances of enterprise risk management implementation in listed Indian companies. The study used a primary survey of top and middle level executives working in listed companies of India. An online questionnaire is circulated for data collection from 500 public and private companies listed on National stock exchange of India. Total findings of 15 drivers and 30 hindrances, collected from literature review were found critical and respondents were asked to priorities on a five point scale. The findings of the study identified significant drivers and hindrances of ERM implementation for listed Indian firms. Findings of this study can be used by top level management of companies of emerging economies likes India for efficient implementation of ERM.
    Keywords: Enterprise Risk Management, Divers of ERM, Hindrances of ERM
    JEL: G30
    Date: 2018–06
  4. By: Yiming Cao; Raymond Fisman; Hui Lin; Yongxiang Wang
    Abstract: We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, a result of both more loan issuance and higher value per loan. We estimate that daily end-of-month lending is 95 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 2.1 percentage points (more than 16 percent) more likely to be classified as bad in the years following issuance; a back-of-the-envelope calculation suggests that the incremental loans made in order to hit targets are 26 percent more likely to eventually turn bad. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.
    JEL: G21 M52
    Date: 2018–08
  5. By: Nicola Limodio; Francesco Strobbe
    Abstract: Liquidity requirements can stimulate deposit growth by increasing depositor repayment in bad states, which can also promote lending and branching. We study an unexpected policy change which fostered the liquid assets of Ethiopian banks by 33% in 2011, and present three findings in line with this hypothesis. First, a panel of bank depositors shows deposit growth among wealthy and highly educated individuals. Second, a survey reports higher deposits in branches opened after the policy and in university cities. Third, bank balance sheets and two sources of bank exposure to the policy highlight an increase in deposits, loans and branches.
    Keywords: Banking, Liquidity Requirements, Financial Development
    JEL: G21 G38 O16
    Date: 2018
  6. By: Charlie Eaton; Sabrina Howell; Constantine Yannelis
    Abstract: This paper uses private equity buyouts to study a transition from lower- to higher-powered profit-maximizing incentives in higher education, a sector heavily dependent on government subsidy. Private equity owners have especially high-powered incentives to maximize profits. In a subsidized industry, this could intensify focus on capturing government aid at the expense of consumer outcomes. Employing novel data on 88 private equity deals and 994 schools with private equity ownership, we find that private equity buyouts lead to higher enrollment and profits, but also to lower education inputs, higher tuition, higher per-student debt, lower graduation rates, lower student loan repayment rates, and lower earnings among graduates. Neither changes to the student body composition nor a selection mechanism fully explain our results. In a series of tests exploiting regulatory events and thresholds, we find that private equity-owned schools are better able to capture government aid.
    JEL: G24 G38 H52 I2 J01
    Date: 2018–08
  7. By: Bao, Yangming; Goetz, Martin
    Abstract: We examine how a firms' investment behavior affects the investment of a neighboring firm. Economic theory yields ambiguous predictions regarding the direction of firm peer effects and consistent with earlier work, we find that firms display similar investment behavior within an area using OLS analysis. Exploiting time-variation in the rise of U.S. states' corporate income taxes and utilizing heterogeneity in firms' exposure to increases in corporate income tax rates, we identify the causal impact of local firms' investments. Using this as an instrumental variable in a 2SLS estimation, we find that an increases in local firms' investment reduces the investment of a local peer firm. This effect is more pronounced if local competition among firms is stronger and supports theories that firm investments are strategic substitutes due to competition.
    Keywords: Investments,Peer Effects,Agglomeration,Corporate Income Tax
    JEL: G31 G38
    Date: 2018
  8. By: Ruiz-Buforn, Alba; Alfarano, Simone; Camacho-Cuena, Eva; Morone, Andrea
    Abstract: In this paper, we study experimentally the information aggregation process in a market as a function of the access to different sources of information, namely an imperfect, public and costless signal into a market where the participants have access to costly and imperfect private information. Our results show that the release of public information provokes a crowding out effect on the traders' information demand while it keeps constant market informativeness, but significantly reduces price informativeness. Traders overrely on public information, which has a significant negative impact on the overall market performance. We detect the emergence of the overrelying phenomenon, despite the absence of an explicit incentive to the subjects to coordinate, demonstrating, therefore, that the adverse effects of releasing public information in a financial market are more relevant than generally assumed, based on the results of previous experiments inspired by simple coordination models. Our results pose new questions when a regulatory institution has to decide the appropriate level of transparency of its communication strategy.
    Keywords: Experiments, financial markets, private and public information, overrelying, crowding out
    JEL: C92 D82 G14
    Date: 2018–09–05
  9. By: Song Han; Alan G. Huang; Madhu Kalimipalli; Ke Wang
    Abstract: The Rule 144A private debt represents a significant and growing segment of the U.S. bond market. This paper examines the market liquidity effects of enhanced information disclosure induced by the public registration of 144A bonds. Using the regulatory version of TRACE data for the period 2002-2013, we find that following public registration of 144A bonds, dealer-specific effective bid-ask spreads narrow, especially for issues with higher ex-ante information asymmetry. Our results are consistent with existing theories that disclosure reduces information risk and thus improves market liquidity.
    Keywords: Rule 144A bond ; Public registration ; Information disclosure ; Broker-dealers ; Liquidity
    JEL: G12 G14
    Date: 2018–08–30
  10. By: Timothy E. Dore; Rebecca Zarutskie
    Abstract: We provide new estimates of the wage costs of firms’ debt using an empirical approach that exploits within-firm geographical variation in workers’ expected unemployment costs due to variation in local labor market in a large sample of public firms. We find that, following an increase in firm leverage, workers with higher unemployment costs experience higher wage growth relative to workers at the same firm with lower unemployment costs. Overall, our estimates suggest wage costs are an important component in the overall cost of debt, but are not as large as implied by estimates based on ex post employee wage losses due to bankruptcy; we estimate that a 10 percentage point increase in firm leverage increases wage compensation for the median worker by 1.9% and total firm wage costs by 17 basis points of firm value.
    Date: 2018–08
  11. By: Benjamin R. Auer; Horst Rottmann
    Abstract: We revisit and extend the study by Chordia et al. (2014) which documents that, in recent years, increased liquidity has significantly decreased exploitable returns of capital market anomalies in the US. Using a novel international dataset of arbitrage portfolio returns for four well-known anomalies (size, value, momentum and beta) in 21 developed stock markets and more advanced statistical methodology (quantile regressions, Markov regime-switching models, panel estimation procedures), we arrive at two important findings. First, the US evidence in the above study is not fully robust. Second, while markets worldwide are characterised by positive trends in liquidity, there is no persuasive time-series and cross-sectional evidence for a negative link between anomalies in market returns and liquidity. Thus, this proxy of arbitrage activity does not appear to be a key factor in explaining the dynamics of anomalous returns.
    Keywords: capital market anomalies, attenuation, liquidity, quantile regression, Markov regime-switching, panel analysis
    JEL: G14 G15
    Date: 2018

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