nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒10‒22
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Long and Short of It : Do Public and Private Firms Invest Differently? By Naomi E. Feldman; Laura Kawano; Elena Patel; Nirupama Rao; Michael Stevens; Jesse Edgerton
  2. Rationality of Corporate Cash Holdings By Ai Oku; Hayato Hashimoto; Keigo Watanabe
  3. The pecking order of innovation finance By Andrea Mina; Henry Lahr
  4. Predictors of Bank Distress: The 1907 Crisis in Sweden By Grodecka, Anna; Kenny, Seán; Ögren, Anders
  5. "Optimal Leverage Strategies for Asian REITs " By Carolyn W. Chang; Kian Guan Lim; Tien Foo Sing
  6. Why do firms choose negative net debt policy? By Katsutoshi Shimizu; Kim Cuong Ly; Weihan Cui
  7. Debt and the Oil Industry - Analysis on the Firm and Production Level By Lips, Johannes
  8. The Role of Ownership and Governance Mechanism in Sukuk Financing by Malaysian Firms: An Application of A Double Selection Model By Ashraf, Dawood; Rizwan, Muhammad Suhail; Azmat, Saad
  9. International Taxation and Productivity Effects of M&As By Todtenhaupt, Maximilian; Voget, Johannes
  10. Measuring Profit Efficiency of Colombian Banks: A Composite Nonstandard Profit Function Approach By Diego Restrepo-Tobón; Jim Sánchez-González

  1. By: Naomi E. Feldman; Laura Kawano; Elena Patel; Nirupama Rao; Michael Stevens; Jesse Edgerton
    Abstract: Using data from U.S. corporate tax returns, which provide a sample representative of the universe of U.S. corporations, we investigate the differential investment propensities of public and private firms. Re-weighting the data to generate observationally comparable sets of public and private firms, we find robust evidence that public firms invest more overall, particularly in R&D. Exploiting within-firm variation in public status, we find that firms dedicate more of their investment to R&D following IPO, and reduce these investments upon going private. Our findings suggest that public stock markets facilitate greater investment, on average, particularly in risky, uncollateralized investments.
    Keywords: Corporate governance ; Investment ; Public firms
    JEL: G34 G31
    Date: 2018–09–28
  2. By: Ai Oku (Chief Economist, Policy Research Institute); Hayato Hashimoto (Former Senior Economist, Policy Research Institute); Keigo Watanabe (Researcher, Policy Research Institute)
    Abstract: Cash equivalents (cash/deposit) held by Japanese firms were as much as 222 trillion yen in Fiscal Year 2017, but their value is discounted by the market. The background may be that cash is not effectively used because it is built up with ROE remaining low. Individual firms may think that their cash holdings behavior is reasonable, but it does not improve market valuation and the firms fail to properly increase their corporate value. Means to improve corporate value using cash they hold may include investment in people and businesses, and return to shareholders if there are surplus funds. We analyzed the rate of stock price increase of firms that had acquired shares of its own shares, and found that the rate of stock price increase of gfirms with room for improvement in capital efficiency h is higher compared with gthe other firms. h In addition, investment toward human capital is important for firms f growth. Corporate managers are required to make more rational decisions concerning cash holdings also with consideration of valuation by the market.
    Keywords: cash holdings, corporate governance, excess cash
    JEL: G32 G34
    Date: 2018–09
  3. By: Andrea Mina; Henry Lahr
    Abstract: This paper examines the relationship between firms' innovation activities and the hierarchy of financing behaviours. We analyse the role of innovation inputs (R&D), intermediate outputs (patents) and outcomes (product and process innovations) as sources of information asymmetry in financing decisions. Our focus on mainly unlisted companies allows us to study the effects of information asymmetries in the context where they are most severe, that is, among small and medium-sized firms. We identify the effect of innovation, alongside the size of the firm, its age and its human capital, on the order of directly observed external capital allocations. Our results show that innovation is strongly associated with a pecking order characterised by increasing agency costs, and that the more uncertain the innovation signal, the stronger its effect on the pecking order. In further robustness tests, this relationship and associated hierarchy of external financing emerge from the data without imposing an a-priori pecking order.
    Keywords: R&D, innovation, information asymmetries, capital structure, pecking order
    Date: 2018–10–17
  4. By: Grodecka, Anna (Sveriges Riksbank); Kenny, Seán (Department of Economic History, Lund University); Ögren, Anders (Department of Economic History, Lund University)
    Abstract: This paper contributes to literature on bank distress using the Swedish experience of the in- ternational crisis of 1907, often paralleled with 2008. By employing previously unanalyzed bank-level data, we use logit regressions and principal component analysis to measure the im- pact of pre-crisis bank characteristics on the probability of their subsequent distress. The crisis was characterized by “creative destruction,” as those banks with weaker corporate governance structures, wider branching networks, operating with lower cost efficiency were more likely to experience distress. We find that poor credit allocation rather than foreign borrowing, as often stressed, were associated with ultimate demise.
    Keywords: bank distress; financial crises; Swedish banks; lender of last resort
    JEL: E58 G21 G28 H12 N23
    Date: 2018–10–12
  5. By: Carolyn W. Chang; Kian Guan Lim; Tien Foo Sing
    Abstract: This paper studies the optimal leverage strategies for REITs in three major Asian markets - Hong Kong, Japan, and Singapore, from 2001 to 2013. REITs are a real-estate-focused investment holding and management companies that are subject to the REIT rules with respect to tax transparency, earning distribution, real estate holding and leverage limit. REITs use relatively less debt than other real estate operating firms, after controlling for agency risks, dividend yields, market risks, and also property sector, country, and year fixed effects. We find that dividend payouts have no effect on the leverage strategies; and the tax ratio increases debt usage of REITs. We also analyse the liquidation costs and business uniqueness effects. We find real estate value to total firm value ratio, as a proxy of liquidation cost, has negative effects on debt ratios for both real estate firms. For the uniqueness reason, REITs with a high concentration of rental revenue stream are more vulnerable to liquidation risks, and thus are more likely to have lower debt ratio.
    Keywords: Capital Structure; Dividend Payout; Liquidation Value; REIT; Uniqueness of Business
    JEL: R3
    Date: 2018–01–01
  6. By: Katsutoshi Shimizu (Department of Economics, Nagoya University); Kim Cuong Ly (School of Management, Swansea University); Weihan Cui (Graduate school of Economics, Nagoya University)
    Abstract: This study investigates a new phenomenon that the number of firms that have negative net debt is increasing. Although zero-leverage becomes prevalent in the world, negative net debt phenomena is more prevalent in Japan. We argue that negative net leverage can be regarded as a special form of zero gross leverage. The main findings are (i) poor investment opportunity, low default costs, low cost of holding cash, and abundant cash are the driving forces of negative net leverages, determinants a cash rich firm is more likely to have negative net debt, (ii) the determinants of negative net leverage is qualitatively similar to those of zero leverage, (iii) in particular, higher default probability is a determinant of debt reduction, lower cost of holding cash is a determinant of cash accumulation, less profitable opportunity is a determinant of decreasing dividends, and (iv) firms continue to reduce debts, increase dividend payments and investments over time after achieving negative net leverage.
    Keywords: pecking order, leverage, cash, investment
    JEL: G32
    Date: 2018–10–08
  7. By: Lips, Johannes
    Abstract: This paper analyzes the relationship between debt and the production decision of companies active in the exploration and production of oil and gas in the United States. Over the last couple of years, the development and application of innovative extraction methods, like hydraulic fracturing and horizontal drilling, led to a considerable increase in United States (US) oil production. In connection with these technological changes, another important economic development in the oil industry was largely debt-driven investment in the oil sector. The extensive use of debt was fostered by the macroeconomic environment of low interest rates and investors searching for yield in the aftermath of the financial crisis. Additionally, the rising prices in the commodities markets until mid 2014 led to higher asset valuation and thus to higher return expectations fueling a virtuous circle. This increased investment activity, especially in the US, raised the production capacity and as a consequence contributed to a higher production of oil and natural gas. This trend continued in spite of the oil price decline in 2014, whereas the oil price slump in 2008 led to a reduction in oil production, which seems to be the more plausible reaction. The aim of this paper can be split into two research questions. The first research question is whether debt and leverage affects production decisions of companies active in the exploration and production (E&P) of crude oil and natural gas. The second research question then is, if the technological changes in the industry and the increased indebtedness of US oil companies led to a markedly different reaction in their production decision following 2014 compared to the similar price decline in 2008. A potential reason for the absence or delay in cutting back production after the price drop in 2014 could be supposedly higher levels of debt prior to the price decline. These questions are addressed applying the relatively new panel vector autoregressive (VAR) approach to a novel dataset combining financial data on publicly listed firms and their production data on well level.
    Keywords: Corporate Finance,Oil Industry,Debt,Leverage,PanelVAR,Dynamic Panel Data,Energy Economics
    JEL: C33 C58 G01 G31 Q40 C33 C58 G01 G31 Q40
    Date: 2018
  8. By: Ashraf, Dawood (The Islamic Research and Teaching Institute (IRTI)); Rizwan, Muhammad Suhail (NUST Business School, National University of Sciences and Technology, Islamabad, Pakistan); Azmat, Saad (Lahore University of Management Sciences Lahore, Pakistan)
    Abstract: After controlling for the double selection bias in a sequential three-equation model of the decisions to issuance, to choose a Sukuk structure, and the volume of Sukuk engagements, we find robust evidence suggesting that ownership structure and governance mechanisms play a significant role in controlling agency costs through issuance of Sukuk. In line with monitoring hypothesis, we find that higher government ownership positively influences the decisions to participate, issue a debt-like Sukuk and volume thereof. Similarly, in line with complementarity hypothesis, the empirical evidence suggests that firms with higher board of directors’ independence are more likely to participate in issuing Sukuk with higher volumes. We also find that ethnicity, in the form of a higher proportion of Malay/Muslim members on the board of directors, does not influence the initial decision on whether or not to issue Sukuk. However, once the decision to issue Sukuk is made, firms with higher institutional ownership or a higher proportion of Malay/Muslim board members are more likely to issue equity-like Sukuk
    Keywords: ukuk Financing; Ownership Structure; Governance Mechanisms; Double Selection Models
    JEL: F40 G21 G29
    Date: 2018–05–14
  9. By: Todtenhaupt, Maximilian; Voget, Johannes
    Abstract: We investigate the effect of international differences in corporate taxation on the realization of productivity gains in M&A deals. We argue that tax differentials distort the efficient allocation of productive factors following an M&A and thus mitigate the resulting productivity improvement. Using firm-level data on inputs and outputs of production as well as on corporate M&As, we estimate that a 1 percentage point increase in the absolute tax differential between the locations of two merging firms reduces the subsequent total factor productivity gain by 4.5%. This effect is less pronounced when firms can use international profit shifting to attenuate effective differences in taxation. In a complementary analysis, we use an event study design and a fixed effects model to explore the timing of the response of productivity, as well as, labor and capital input to the tax rate differential after the merger separately for the acquirer and the target. We show that our findings are mainly driven by deals with targets residing in locations with a tax advantage with respect to the acquirer. In these transactions, tax differentials reduce the post-merger adjustment in the target firm and inhibit the full realization of productivity gains.
    Keywords: M&A,productivity,international taxation
    JEL: F23 G34 H25 D24
    Date: 2018
  10. By: Diego Restrepo-Tobón; Jim Sánchez-González
    Abstract: We analyze the profit efficiency of the Colombian banking industry during theperiod 2001 - 2013. Unlike previous studies, we estimate revenue and cost efficiencyseparately and then compute profit efficiency as a composite measure of both costand revenue efficiency. This approach overcomes the mis-specification problems ofthe traditional nonstandard profit function approach used in most of the literatureregarding profit efficiency. We find that profit efficiency improved during the periodunder analysis mainly because gains in revenue efficiency. In addition, and in contrastwith previous studies but in line with economic intuition, we find that while revenue andcost efficiency tend to be negatively correlated, each correlates positively with profitefficiency. Thus, improving either revenue efficiency or cost efficiency has a positiveimpact on profit efficiency.
    Keywords: Profit Efficiency; Revenue Efficiency; Cost Efficiency; Nonstandard Profit Function; Stochastic Frontier
    JEL: D24 G21 G34 L13
    Date: 2018–08–27

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