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on Corporate Finance |
| By: | Mehmet Selman Colak |
| Abstract: | There are several indicators and univariate ratios that measure the soundness of firms' balance sheets (Leverage, profitability, liquidity ratio, etc.). However, each indicator alone cannot measure the overall financial risk or the financial distress level of firms. In this study, we measure the financial strength of the real sector firms quoted in Borsa Istanbul (BIST) by producing a composite index score which is a combination of several different corporate finance ratios. In the first part, we will apply multiple discriminant analysis to the variables used in Altman Z-score (1968), which is the most prevalent composite index score measuring the firms’ financial risks in the literature. In the second part, a new index, named as MFA-score (Multivariate Firm Assessment Score) will be introduced by using the ratios that best explain the characteristics of the BIST companies. Both the tailored version of Altman Z-score and our new index score have a predictive power around 90 percent. Furthermore, MFA-score is capable of detecting the impact of macro-economic developments on firm balance sheets, which enables us to use MFA-score as an early warning indicator of financial distress for Turkish firms. Our analyses with MFA-score suggest that non-exporter firms and firms with FX open position have relatively weaker balance sheets. |
| Keywords: | Balance sheets, Financial risk, Altman Z-score, Multiple discriminant analysis, Financial distress, MFA-score |
| JEL: | G30 G33 C18 C43 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1904&r=all |
| By: | Yener Altunbaş (Bangor University); John Thornton (Office of Technical Assistance, US Department of the Treasury; Bangor University); Yurtsev Uymaz (Norwich Business School, University of East Anglia) |
| Abstract: | We test for a link between CEO power and risk taking in US banks. Banks are more likely to take risks if they have powerful CEOs and relatively poor balance sheets. There is little evidence that executive board size and independence have a dampening effect on the channels through which powerful CEOs influence risk-taking and some evidence that institutional investors reinforce the risk-taking preferences of powerful CEOs. |
| Keywords: | Banks, governance, risk, CEO power, boards of directors, institutional investors |
| JEL: | G21 G28 G30 G32 G38 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:19003&r=all |
| By: | Min Hua (Swansea University); Wei Song (Swansea University); Oleksandr Talavera (University of Birmingham) |
| Abstract: | We extend the existing literature on the role of CEO personal characteristics in bank risktaking by showing that the economic conditions at the time when bank CEOs enter the labor market have a significant impact on risk-taking. Specifically, using a unique hand-collected dataset of bank CEOs’ career profiles and demographic characteristics, we find that banks managed by CEOs who started their careers during recessions (i.e., recession CEOs) take less risk than their non-recession counterparts. We also show that recession CEOs are more likely to implement conservative bank policies, have a traditional bank business model, and are negatively related to bank opaqueness. Furthermore, banks with recession CEOs produce superior performance during the recent financial crisis, while they do not outperform those with non-recession CEOs in general or over the pre-crisis period. The negative effect of recession CEOs on bank risk-taking persists after we attempt to address endogeneity concerns and is robust to the introduction of additional robustness checks. Overall, these findings highlight the empirical relevance of the association between the initial labor market conditions when a bank CEO starts her career and bank risk-taking. |
| Keywords: | banks, CEOs, labor market condition, risk-taking |
| JEL: | G01 G21 G32 G34 J24 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:19-04&r=all |
| By: | Yener Altunbaş (Bangor University); John Thornton (Office of Technical Assistance, US Department of the Treasury; Bangor University); Tianshu Zhao (Birmingham Business School, University of Birmingham) |
| Abstract: | We examine the impact of banks’ internal capital markets (ICMs) before the 2008-09 financial crisis on bank risk-taking during the crisis in a panel of 8,068 banks across 16 countries. The size of ICMs was an important driver of risk during the crisis when banks with larger ICMs exhibited lower risk levels. Larger ICMs reduced risk further for well capitalized banks. Banks more likely to be in trouble in a crisis are likely to have smaller ICMs, be larger in size, less well capitalized, less efficient, less profitable, and more dependent on market funding. |
| Keywords: | Banks, governance, risk, CEO power, boards of directors, institutional investors |
| JEL: | G15 G21 G32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:19004&r=all |
| By: | Shan Ge; Michael S. Weisbach |
| Abstract: | Many institutional investors depend on the returns they generate to fund their operations and liabilities. How does these investors’ demand for capital affect the management of their portfolios? We address this issue using the insurance industry because insurers are large investors for which detailed portfolio data are available, and can face financial shocks from exogenous weather-related events. We find that insurers with more financial flexibility have larger portfolio weights on riskier and more illiquid assets, and have higher realized returns. Among corporate bonds, for which we can control for regulatory treatment, we find that more financially flexible insurers have larger portfolio weights on riskier and more illiquid corporate bonds. Following losses, P&C insurers decrease allocations to riskier corporate bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for P&C losses with weather shocks. The change in allocations following losses is larger for more financially constrained insurers and during the financial crisis, suggesting that the shift toward less risky securities is driven by concerns about financial flexibility. The results highlight the importance of financial flexibility to fund operations in institutional investors’ portfolio decisions. |
| JEL: | G11 G21 G22 G31 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25677&r=all |
| By: | Yulius Kurnia Susanto (Trisakti School of Management, Indonesia Author-2-Name: Arya Pradipta Author-2-Workplace-Name: Trisakti School of Management, Jl. Kyai Tapa No. 20, 11440, Jakarta, Indonesia Author-3-Name: Author-3-Workplace-Name: 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 – Income smoothing is a form of earnings manipulation to show that the company's performance is good. Income smoothing can be detrimental to investors, because investors do not know the real financial position and fluctuations of the company. Management of the company engage in income smoothing because investors tend to focus only on the amount of profit reported without regard to the process of generating profits. The purpose of this research is to obtain empirical evidence about the effect of firm value and size on income smoothing. Methodology/Technique – The sample of the research includes manufacturing companies listed on the Indonesian Stock Exchange from 2014-2016. The samples were determined using a purposive sampling method and there are 51 companies that meet the criteria used. This research uses a logistic regression method for data analysis. Findings – The results of the research show that the effect of firm value on income smoothing is positive and significant. Meanwhile, the effect of firm size on income smoothing is negative and significant. Companies that create value in the eyes of investors will try to retain their investors by engaging in income smoothing. Income smoothing will convince investors to invest in the company. Meanwhile, large companies that are convinced that investors will continue to invest do not typically engage in income smoothing. Novelty –This study proves that, in the context of agency theory, the principal's desires are not often aligned with the wishes of management which can give rise to agency costs, one of which occurs as a result of income smoothing. Further, firm size can minimize opportunist income smoothing actions. Type of Paper: Empirical. |
| JEL: | G32 M41 M49 |
| Date: | 2019–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:jfbr151&r=all |
| By: | Lis Sintha (Universitas Kristen Indonesia, Jl. Mayjen Soetoyo no.2, Cawang, Jakarta (13630), Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: 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 – The purpose of this study is to examine the influence of capital on bankruptcy banks. The hypothesis of this research is that capital has an effect on the bankruptcy of a bank. Methodology/Technique – This research examines financial reports between 2005-2014. An econometric model with a logistical regression analysis technique is used. In this study, capital is measured by CAR, taking into account credit risk; CAR by taking into account market risk; Ratio of Obligation to Provide Minimum Capital for Credit Risk and Operational Risk; Ratio of Minimum Capital Adequacy Ratio for Credit Risk, Operational Risk and Market Risk; Capital Adequacy Requirements (CAR). Findings – The results show that the capital adequacy ratio for market ratio and capital adequacy ratio for credit ratio and operational ratio support the research hypothesis and can form a logit model. The test results of CAR by taking into account credit risk, Minimum Capital Requirement Ratio for Credit Risk, Operational Risk and Market Risk and Minimum Capital Provision Obligations do not support the research hypothesis. Novelty – This paper contribute to bank bankruptcy prediction models based on time dimension and bank groups using financial ratios which are expected can influence bank in bankrupt condition. Type of Paper: Empirical. |
| Keywords: | Banking crisis, Cost of bankruptcy, Adequacy Ratio, Financial ratios, Prediction models |
| JEL: | G32 G33 G39 |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:jfbr152&r=all |
| By: | Kazuhiro Hiraki (Queen Mary University of London); George Skiadopoulos (Queen Mary University of London) |
| Abstract: | We derive a model-free option-based formula to estimate the contribution of market frictions to expected returns (CFER) within an asset pricing setting. We estimate CFER for the U.S. optionable stocks. We document that CFER is sizable, it predicts stock returns and it subsumes the effect of frictions on expected returns as expected theoretically. The sizable alpha of a long-short portfolio formed on CFER is consistent with the size of market frictions and it is not due to model mis-specification. Moreover, we show that various option-implied measures proxy CFER, thus providing a theoretical explanation for their ability to predict stock returns. |
| Keywords: | Alpha, Asset pricing, Implied volatility spread, Limits of arbitrage, Market frictions, Return predictability |
| JEL: | C13 G12 G13 |
| Date: | 2018–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:874&r=all |
| By: | Vo, D.H.; Pham, B.V.-N.; Pham, T.V.-T.; McAleer, M.J. |
| Abstract: | Any critical analysis of the corporate financial distress of listed firms in international exchange would be incomplete without a serious dissection at the industry level because of the different levels of risks concerned. This paper considers the financial distress of listed firms at the industry level in Vietnam over the last decade. Two periods are considered, namely during the Global Financial Crisis (GFC) (2007 - 2009) and post-GFC (2010 - 2017). The logit regression technique is used to estimate alternative models based on accounting and market factors. The paper also extends the analysis to include selected macroeconomic factors that are expected to affect the corporate financial distress of listed firms at the industry level in Vietnam. The empirical findings confirm that the corporate financial distress prediction model, which includes accounting factors with macroeconomic indicators, performs much better than alternative models. In addition, the evidence confirms that the GFC had a damaging impact on each sector, with the Health & Education sector demonstrating the most impressive recovery post-GFC, and the Utilities sector recording a dramatic increase in bankruptcies post-GFC |
| Keywords: | Listed firms, industry level, corporate financial distress, bankruptcy, distance to default, fundamentals, Global Financial Crisis, Vietnam |
| JEL: | G01 G31 G33 G34 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:115613&r=all |
| By: | Erika Jimena Arilyn (Trisakti School of Management, Jakarta - Indonesia Author-2-Name: Beny Author-2-Workplace-Name: Trisakti School of Management, Jakarta - Indonesia Author-3-Name: Emir Kharismar Author-3-Workplace-Name: Trisakti School of Management, Jakarta - 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 is conducted in order to determine what factors in corporate governance affect the financial performance of a firm. Methodology/Technique – Financial performance, as the dependent variable, is measured by Return on Asset (ROA), while the independent variables (corporate governance) are measured using Board Independence, Board Size, Dividend, Firm Size, and Financial Leverage. The sampling method used in this research is purposive sampling. The requirements for the sample of this research are the non – financial firms included in LQ-45 from 2012 to 2017 that publish annual reports that are available to the public. The research method used in this paper is a quantitative method. Panel data analysis technique and E-views tools were also used. Findings – The results indicate that firm size and percentage of board independence has no effect on financial performance, while board size, dividends, and financial leverage all effect financial performance. Novelty – The study adds to the literature of corporate government and firm performance in emerging countries. Type of Paper: Empirical. |
| Keywords: | Board Independence; Board Size; Dividends; Firm Size; Financial Leverage; Financial Performance. |
| JEL: | M40 M48 M49 |
| Date: | 2019–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:afr170&r=all |
| By: | Manasi Deshpande (University of Chicago, Department of Economics); Tal Gross (Columbia University Mailman School of Public Health); Yalun Su (University of Chicago) |
| Abstract: | We provide the first evidence on the relationship between disability programs and markers of financial distress: bankruptcy, foreclosure, eviction, and home sale. Rates of these adverse financial events peak around the time of disability application and subsequently fall for both allowed and denied applicants. To estimate the causal effect of disability programs on these outcomes, we use variation induced by an age-based eligibility rule and find that disability allowance substantially reduces the likelihood of ad- verse financial events. Within three years of the decision, the likelihood of bankruptcy falls by 0.81 percentage point (30 percent), and the likelihood of foreclosure and home sale among homeowners falls by 1.7 percentage points (30 percent) and 2.5 percentage points (20 percent), respectively. We find suggestive evidence of reductions in eviction rates. Conversely, the likelihood of home purchases increases by 0.86 percentage point (20 percent) within three years. We present evidence that these changes reflect true reductions in financial distress. Considering these extreme events increases the optimal disability benefit amount and suggests a shorter optimal waiting time. |
| Keywords: | disability, bankruptcy, eviction |
| JEL: | D14 H50 I30 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2019-020&r=all |
| By: | Lopes Moreira Da Veiga, María Helena; Casas, Isabel |
| Abstract: | This paper evaluates the application of two well-known asymmetric stochastic volatility (ASV) models to option price forecasting and dynamic delta hedging. They are specied in discrete time in contrast to the classical stochastic volatility (SV) models used in option pricing. There is some related literature, but little is known about the empirical implications of volatility asymmetry on option pricing. The objectives of this paper are to estimate ASV option pricing models using a Bayesian approach unknown in this type of literature, and to investigate the e ect of volatility asymmetry on option pricing for di erent size equity sectors and periods of volatility. Using the S&P MidCap 400 and S&P 500 European call option quotes, results show that volatility asymmetry benets the accuracy of option price forecasting and hedging cost e ectiveness in the large-cap equity sector. However, asymmetric SV models do not improve the option price forecasting and dynamic hedging in the mid-cap equity sector. |
| Keywords: | Volatility Asymmetry; Stochastic Volatility; Option Pricing; Delta Hedging |
| JEL: | C58 C51 C22 |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:28234&r=all |
| By: | Adriana Breccia (Risk Control Limited, London) |
| Abstract: | Numerous studies have examined how market structure affects appropriability of R&D returns and, in turn, R&D investment and innovation speed. Less effort has been spent on the opposite relationship which is instead our focus. In a continuous time model, two firms compete in R&D, with the leading patent affecting the probability of success of a second patent (competing in the same product market); the size and the direction of this effect depends on the level of appropriability, which, unlike previous research, connects competition in R&D and competition in the product market. We find that low appropriability delays R&D investments and thus discovery, with the (future) benefit of a more competitive product market. Secondly, we show that the relation between concentration in R&D and concentration in product markets can be positive or negative depending on the probability of success of an innovation and its level of appropriability. Also, we find that an increase in the probability of success of innovation does not necessarily speed up investment in R&D. |
| Keywords: | real options, intellectual property, R&D, geometric Brownian motion, Stackelberg games |
| JEL: | C7 D8 O3 K4 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1902&r=all |
| By: | Bryan Hardy; Felipe Saffie |
| Abstract: | We use unique firm level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency and lending in domestic currency, largely to related partners (trade credit), accumulating currency risk in the process. The interest rate differential between local and foreign currency borrowing largely drives this behavior at a quarterly frequency, inducing an expansion in gross trade credit and sales. Firms that were active in carry-trade have decreased investment following a large depreciation, independent of currency exposure levels and export status, but maintain their supply of trade credit. |
| Keywords: | emerging market corporate debt, currency mismatch, liability dollarization, carry trades, trade credit |
| JEL: | E44 G15 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:773&r=all |
| By: | Friska Firnanti (Accounting, Trisakti School of Management, Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: 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 obtain the empirical evidence on the influence of dividend policy, income tax, firm size, profitability, and leverage on income smoothing. Methodology/Technique – In this research, income smoothing is proxied with the Eckel index and logistic regression is used to test the hypothesis. The research population consists of non-financial companies listed on the Indonesian Stock Exchange from 2013 to 2016. The sampling method used in this research is purposive sampling. The number of companies selected is 79 with 316 data. Findings – The results show that dividend policy, income tax, profitability, and leverage all have an influence on income smoothing. Meanwhile, firm size has no significant influence on income smoothing. Novelty – These findings are consistent with a firm's dividend policy and income tax having an incremental impact on income smoothing behavior. Type of Paper: Empirical. |
| Keywords: | Income Smoothing; Dividend Policy; Income Tax; Firm Size; Profitability; Leverage. |
| JEL: | M40 M41 M49 |
| Date: | 2019–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:afr169&r=all |
| By: | Silvy Christina (Trisakti School of Management, Kyai tapa No. 20, 11440, Jakarta, Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: 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 empirically examine the effect of tax planning on firm value. The population of this research consists of manufacturing companies listed on the Indonesian Stock Exchange (IDX) from 2014 to 2016. Methodology/Technique – This research uses 3 recent years and uses variables not used in previous research. The 43 respondents were chosen using purposive sampling. The hypotheses were tested using multiple regressions with Eviews program to determine the relationship between each independent variable to firm value. Findings – The empirical results show that tax planning that is measured by the cash effective tax rate has a negative effect on firm value, while tax planning measured by effective cash rate and tax savings has no effect on firm value. Novelty – The study recommends the need for firms to institute more robust tax planning practices that will help reduce their effective tax liabilities and therefore improve their overall value. Firms that engage in better tax planning practices are likely to get higher firm value. Type of Paper: Empirical. |
| Keywords: | Firm Performance; Tax Planning; Effective Tax Rate; Cash Effective Tax Rate; Tax Saving. |
| JEL: | M40 M42 M49 |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:afr167&r=all |
| By: | Yener Altunbaş (Bangor University); John Thornton (Office of Technical Assistance, US Department of the Treasury; Bangor University) |
| Abstract: | In a panel of 121 countries, financial development increases income inequality in high- and lower- income countries across inequality quantiles but promotes greater inequality in upper-middle-income countries. Financial development appears to impact financial inclusion for the poor and rich differently as a country’s income level changes. |
| Keywords: | Income inequality; Financial development; Quantile regression |
| JEL: | D31 D63 F02 O11 O15 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:19002&r=all |
| By: | Marc Goergen (IE Business School, Madrid, Spain); Dimitrios Gounopoulos (University of Bath); Panagiotis Koutroumpis (Queen Mary University of London) |
| Abstract: | We examine initial public offerings (IPOs) with single, multiple, and no credit ratings. We document a beneficial effect of credit ratings on IPO underpricing, which is amplified by the existence of multiple credit ratings. Multiple ratings also reduce the extent of filing price revisions. Credit rating levels matter for IPOs with more than one rating but not for those with a single rating. Firms with multiple credit ratings also have higher probabilities of survival than those with a single or no rating. Finally, IPOs awarded a first credit rating between BB and BBB are more likely to seek an additional rating. |
| Keywords: | Initial public offerings (IPOs); credit ratings; IPO underpricing; survivorship |
| JEL: | G10 G14 G39 |
| Date: | 2019–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:884&r=all |