nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒02‒04
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. CEO power and board structure of banks: a developing country’s perspective By Adeabah, David
  2. The inverted-U relationship between credit access and productivity growth By Aghion, Philippe; Bergeaud, Antonin; Cette, Gilbert; Lecat, Rémy; Maghin, Hélène
  3. The Shift from Active to Passive Investing: Potential Risks to Financial Stability? By Anadu, Kenechukwu E.; Kruttli, Mathias S.; McCabe, Patrick E.; Osambela, Emilio; Shin, Chae Hee
  4. Benign neglect of covenant violations: Blissful banking or ignorant monitoring? By Colonnello, Stefano; Koetter, Michael; Stieglitz, Moritz
  5. Financial markets and the allocation of capital: the role of productivity By Di Mauro, Filippo; Hassan, Fadi; Ottaviano, Gianmarco I. P.
  6. Shareholder Activism Externalities By Li, Zhan
  7. How dynamic hedging affects stock price movements: Evidence from German option and certificate markets By Fischer, Georg
  8. Financial constraints and corporate environmental responsibility By Götz, Martin
  9. Corporate Social Responsibility and Profit Shifting By Hasan, Iftekhar; Karavitis, Panagiotis; Kazakis, Pantelis; Leung, Woon Sau
  10. Bank shocks and firm performance: New evidence from the sovereign debt crisis By Marina-Eliza Spaliara; Serafeim Tsoukas; Luísa Farinha
  11. Bank credit allocation and productivity: stylised facts for Portugal By Nuno Azevedo; Márcio Mateus; Álvaro Pina
  12. The Impact of Jumps on American Option Pricing: The S&P 100 Options Case By Boda Kang; Christina Nikitopoulos Sklibosios; Erik Schlogl; Blessing Taruvinga
  13. Risk Aversion and Entrepreneurship: New Evidence Exploiting Exposure to Massive Earthquakes in Italy By de Blasio, Guido; De Paola, Maria; Poy, Samuele; Scoppa, Vincenzo
  14. An Optimal Dividend Problem with Capital Injections over a Finite Horizon By Ferrari, Giorgio; Schuhmann, Patrick
  15. The economic effects of Brexit- evidence from the stock market By Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas; Usman, Ahmed
  16. Markets for Financial Innovation By Ana Babus; Kinda Cheryl Hachem

  1. By: Adeabah, David
    Abstract: This study examines the implications of CEO power on the board structure of banks in the Ghanaian banking industry. Using a unique hand-collected dataset in respect of 21 commercial banks in Ghana for the 2009 – 2017 periods, the results show that CEO power underscores the absence or lack of gender composition of bank boards and constrains independent directors, while incentivizing larger board size in banks. Meanwhile, ownership structure and listing status critically underpin the CEO power effect on bank board structure, such that the actual sign of the marginal effect of CEO power on bank board structure varies with ownership structure and listing status. Overall, the study contributes to the understanding of the global antecedent of bank corporate governance (i.e. board structure) by providing an understanding of the implications of social connection hypothesis on bank board structure in a developing country's context.
    Keywords: CEO Power,Board Structure,Gender Diversity,Board Size,Board Independence,Social Connection
    JEL: G21 G30 G32
    Date: 2018
  2. By: Aghion, Philippe; Bergeaud, Antonin; Cette, Gilbert; Lecat, Rémy; Maghin, Hélène
    Abstract: In this paper we identify two counteracting effects of credit access on productivity growth: on the one hand, better access to credit makes it easier for entrepreneurs to innovate; on the other hand, better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. We first develop a simple model of firm dynamics and innovation-base growth with credit constraints, where the above two counteracting effects generate an inverted-U relationship between credit access and productivity growth. Then we test our theory on a comprehensive French manufacturing firm-level dataset. We first show evidence of an inverted-U relationship between credit constraints and productivity growth when we aggregate our data at sectoral level. We then move to firm-level analysis, and show that incumbent firms with easier access to credit experience higher productivity growth, but that they also experienced lower exit rates, particularly the least productive firms among them. To confirm our results, we exploit the 2012 Eurosystem's Additional Credit Claims (ACC) program as a quasiexperiment that generated exogenous extra supply of credits for a subset of incumbent firms.
    Keywords: inverted-u relationship; credit; eurosystem
    JEL: J1 F3 G3
    Date: 2018–12
  3. By: Anadu, Kenechukwu E. (Federal Reserve Bank of Boston); Kruttli, Mathias S. (Federal Reserve Board); McCabe, Patrick E. (Federal Reserve Board); Osambela, Emilio (Federal Reserve Board); Shin, Chae Hee (Federal Reserve Board)
    Abstract: The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds’ liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing some types of risk while diminishing others: The shift has probably reduced liquidity transformation risks, although some passive strategies amplify market volatility, and passive-fund growth is increasing asset-management industry concentration. We find mixed evidence that passive investing is contributing to the comovement of assets. Finally, we use our framework to assess how financial stability risks are likely to evolve if the shift to passive investing continues, noting that some of the repercussions of passive investing ultimately may slow its growth.
    Keywords: asset management; passive investing; index investing; indexing; mutual fund; exchange-traded fund; leveraged and inverse exchange-traded products; financial stability; systemic risk; market volatility; inclusion effects; daily rebalancing
    JEL: G10 G11 G20 G23 G32 L1
    Date: 2018–08–27
  4. By: Colonnello, Stefano; Koetter, Michael; Stieglitz, Moritz
    Abstract: Theoretically, bank's loan monitoring activity hinges critically on its capitalisation. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank-firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalised banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands-off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks.
    Keywords: bank monitoring,covenant violations,syndicated loans,business cycle
    JEL: G21 G32 G33 G34
    Date: 2019
  5. By: Di Mauro, Filippo; Hassan, Fadi; Ottaviano, Gianmarco I. P.
    Abstract: The efficient allocation of credit is a key element for the success of an economy. Traditional measures of allocative efficiency focus on the Q-theory of investment and, in particular, on the elasticity of finance to investment opportunities proxied by firm real value added. This paper introduces a theorybased alternative measure that focuses instead on the elasticity of credit to firm productivity. In doing so, it develops a simple theoretical framework that delivers clear predictions for the elasticity of credit to current and future productivity depending on capital market frictions. When applied to the novel firm-level dataset of the Competitiveness Research Network (CompNet) set up by the EU System of Central Banks, the proposed measure leads to normative statements about the efficiency of credit allocation across the largest Eurozone economies, changing the conclusions that one would reach based on traditional empirical applications of Q-theory.
    Keywords: bank credit; capital allocation; productivity; credit constraints
    JEL: D92 G10 G21 G31 O16
    Date: 2018–07–01
  6. By: Li, Zhan
    Abstract: Shareholder activism increases the non-target firm’s outside option and reduces its CEO’s outside option, which leads to higher firm profit and lower CEO compensation. Due to this positive externality, the activist’s intervention is inefficiently low. Several extensions further generate a number of novel insights: The liquidity of the CEO talent market exacerbates the externality; common ownership alleviates the externality but exacerbates the free-rider problem, ultimately reducing market efficiency; regulating activists’ interventions decreases market efficiency when similar firms compete for different CEO talents.
    Keywords: Shareholder activism, externality, common ownership.
    JEL: G14 G34
    Date: 2017–08–07
  7. By: Fischer, Georg
    Abstract: We examine the impact of dynamic hedging demand of German option and discount certificate markets on the autocorrelation of German stock price changes. We theoretically model the demand of liquidity providers in the discount certificate market, a structured financial product with a concave payoff profile, asking whether dynamic hedging by certificate issuers induces negative return autocorrelation in stock markets. We find empirical evidence that the hedging demand of option issuers has a positive impact on return autocorrelation, while the opposite holds for certificate issuers, whose hedging demand enhances the negative return autocorrelation in the stock market. We thus theoretically and empirically provide evidence that there are persistent spillover effects from option and certificate markets to stock markets due to dynamic hedging activities.
    Keywords: Structured products,Derivatives,Dynamic hedging,Stock return autocorrelation,Market microstructure
    JEL: D40 G12 G21
    Date: 2019
  8. By: Götz, Martin
    Abstract: This paper analyzes the effect of financial constraints on firms' corporate social responsibility. Exploiting heterogeneity in firms' exposure to a monetary policy shock in the U.S., which reduced financial constraints for some firms, I find that firms increase their environmental responsibility. I use facility-level data to account for unobservable time-varying influences on pollution and find that toxic emissions decrease when parent companies are more exposed to the monetary policy shock. I further find that these facilities are also more likely to implement pollution abatement activities. Examining within-parent company heterogeneity I find that pollution abatement investments center on facilities at greater risk of facing additional costs due to environmental regulation. The findings are consistent with the idea that a reduction in financial constraints reduces pollution as it allows firms to implement pollution abatement measures.
    Keywords: Corporate Social Responsibility,Emissions,Financial Constraints,Pollution,Bond Markets
    JEL: G32 E52 Q52 Q53
    Date: 2018
  9. By: Hasan, Iftekhar; Karavitis, Panagiotis; Kazakis, Pantelis; Leung, Woon Sau
    Abstract: In this work we investigate the relationship between corporate social responsibility (CSR) and profit shifting. First, we employ worldwide data for parent firms and their foreign subsidiaries to derive a profit shifting measure. Then, drawing on legitimacy theory and risk-management strategy, we find corporate social responsibility to be positively correlated with profit shifting. In addition, we find this relationship to be stronger in parent firms in countries under the territorial tax system. We perform a battery of sensitivity tests and robustness checks to corroborate our findings. By and large, our results suggest that multinational firms with higher CSR scores shift larger amounts of profits to their low-tax foreign subsidiaries, potentially indicating strategic planning in the choice of CSR investments by multinational enterprises.
    Keywords: corporate social responsibility; profit shifting; legitimacy theory; risk-management; corporate tax systems; agency problems
    JEL: F23 G30 G32 H25 H26 L10 L21 M14
    Date: 2019–01–19
  10. By: Marina-Eliza Spaliara; Serafeim Tsoukas; Luísa Farinha
    Abstract: Prior empirical investigations of corporate failures consider the effects of macroeconomic conditions and financial health, but the literature contains limited evidence of the real effects of the bank shocks caused by the sovereign debt crisis. Using a rich source of high-quality firm-bank matched data for 2005-2014, this study examines the real effects of bank shocks on firms’ survival prospects in Portugal. We first present evidence that a funding outflow is associated with a reduction in the credit supply. Furthermore, firms borrowing from banks exposed to the funding outflow are more likely to fail. We also uncover significant heterogeneity in firms’ financial positions and show that the negative effect of a funding shock is stronger for younger, higher-risk firms, and those that used their potential lines of bank credit.
    JEL: E44 F32 F34 G15 G21
    Date: 2018
  11. By: Nuno Azevedo; Márcio Mateus; Álvaro Pina
    Abstract: With a dataset covering 95% of total outstanding credit to non-financial corporations recorded in the Portuguese credit register, we investigate whether outstanding loans by resident banks to 64 economic sectors have been granted to the most productive firms. We find evidence of misallocation, which reflects the joint effects of credit supply and credit demand decisions taken over the course of time, and the adverse cyclical developments following the accumulation of imbalances in the Portuguese economy for a protracted period. In 2008-2016, the share of outstanding credit granted to firms with very low productivity (measured or inferred) was always substantial, peaking at 44% in 2013, and declining afterwards with the rebound in economic activity and the growing allocation of new loans towards lower risk firms and away from higher risk firms. Furthermore, we find that misallocation is associated with slower reallocation. The responsiveness of credit growth to firm relative productivity is much lower in sectors with relatively more misallocated credit and when banks have a high share of such credit in their portfolios.
    JEL: D24 G21 O16 O40 O47
    Date: 2018
  12. By: Boda Kang; Christina Nikitopoulos Sklibosios (Finance Discipline Group, UTS Business School, University of Technology Sydney); Erik Schlogl (Finance Discipline Group, UTS Business School, University of Technology Sydney); Blessing Taruvinga (Finance Discipline Group, UTS Business School, University of Technology Sydney)
    Abstract: This paper analyzes the importance of asset and volatility jumps in American option pricing models. Using the Heston (1993) stochastic volatility model with asset and volatility jumps and the Hull and White (1987) short rate model, American options are numerically evaluated by the Method of Lines. The calibration of these models to S&P 100 American options data reveals that jumps, especially asset jumps, play an important role in improving the models’ ability to fit market data. Further, asset and volatility jumps tend to lift the free boundary, an effect that augments during volatile market conditions, while the additional volatility jumps marginally drift down the free boundary. As markets turn more volatile and exhibit jumps, American option holders become more prudent with their exercise decisions, especially as maturity of the options approaches.
    Keywords: American options; S&P 100 options; Method of Lines; asset jumps; volatility jumps; stochastic interest rate
    JEL: C60 G13
    Date: 2019–01–01
  13. By: de Blasio, Guido (Bank of Italy); De Paola, Maria (University of Calabria); Poy, Samuele (Università Cattolica del Sacro Cuore); Scoppa, Vincenzo (University of Calabria)
    Abstract: This paper investigates the impact of risk attitudes on the decision to become an entrepreneur. In contrast to previous research, we handle endogeneity issues relying on an instrumental variables strategy considering as a source of exogenous variation in risk aversion the early exposure to a massive earthquake. Using several waves of the Bank of Italy Survey of Household Income and Wealth (SHIW), we find that individuals experiencing an earthquake become significantly more risk averse. Second-stage estimates show that risk aversion has a significant negative impact on the probability of becoming an entrepreneur.
    Keywords: entrepreneurship, risk attitudes, natural disasters, instrumental variables
    JEL: D81 D91 L26 C36
    Date: 2018–12
  14. By: Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Schuhmann, Patrick (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this paper we propose and solve an optimal dividend problem with capital injections over a finite time horizon. The surplus dynamics obeys a linearly controlled drifted Brownian motion that is reflected at zero, dividends give rise to time-dependent instantaneous marginal profits, whereas capital injections are subject to time-dependent instantaneous marginal costs. The aim is to maximize the sum of a liquidation value at terminal time and of the total expected profits from dividends, net of the total expected costs for capital injections. Inspired by the study in [13] on reflected follower problems, we relate the optimal dividend problem with capital injections to an optimal stopping problem for a drifted Brownian motion that is absorbed at zero. We show that whenever the optimal stopping rule is triggered by a time-dependent boundary, the value function of the optimal stopping problem gives the derivative of the value function of the optimal dividend problem. Moreover, the optimal dividends' distribution strategy is also triggered by the moving boundary of the associated stopping problem. The properties of this boundary are then investigated in a case study in which instantaneous marginal profits and costs from dividends and capital injections are constants discounted at a constant rate.
    Keywords: optimal dividend problem, capital injections, singular stochastic control, optimal stopping, free boundary
    Date: 2018–08–16
  15. By: Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas; Usman, Ahmed
    Abstract: We study stock market reactions to the Brexit referendum on 23 June 2016 in order to assess investors’ expectations about the effects of leaving the European Union on the UK economy. Our results suggest that initial stock price movements were driven by fears of a cyclical downturn and by the sterling depreciation following the referendum. We also find tentative evidence that market reactions to two subsequent speeches by Theresa May (her Conservative Party conference and Lancaster House speeches) were more closely correlated with potential changes to tariffs and non-tariff barriers on UK-EU trade, indicating that investors may have updated their expectations in light of the possibility of a hard Brexit. We do not find a correlation between the share of EU migrants in different industries and stock market returns.
    Keywords: Brexit; depreciation; event study; recession; stock market; tariffs
    JEL: F15 F23 G14
    Date: 2018–09
  16. By: Ana Babus; Kinda Cheryl Hachem
    Abstract: We propose a model where both security design and market structure are endogenously determined to explain why standardized securities are frequently traded in decentralized markets. We find that issuers offer debt contracts in thinner markets where investors have a higher price impact, and equity in deeper markets. In turn, investors accept to trade in thinner markets to elicit less variable securities from issuers if gains from trade are small. Otherwise, investors choose to trade in deeper markets where their price impact is minimized. We also show that there exist equilibrium market structures in which both debt and equity are traded.
    JEL: D86 G23
    Date: 2019–01

This nep-cfn issue is ©2019 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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