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on Corporate Finance |
| By: | Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas) |
| Abstract: | We employ a dynamic adjustment model (Flannery and Rangan, 2006) to investigate the determinants of capital structure and speed of adjustment (Drobetz and Wanzenried, 2006) in a panel of 85 U.S. ICT firms over the years 1990 to 2013. We estimate the capital structure using a wide range of factors commonly used in the empirical literature (growth and investment opportunities, profitability, firm size, default risk, and industry median capital structure). We expand on this literature to include two additional determinants: asset turnover, an inverse measure of firm agency costs (Morellec, et al., 2012; Ang, Cole, and Lin, 2000), and R&D activity (Aghion, et al., 2004). We find that the speed of adjustment increases with firm size, growth opportunities, and distance from the target capital structure, and decreases with default risk and agency costs. We also find that R&D expenditures and agency costs cause firms to maintain lower levels of debt. We employ four recently developed estimators in dynamic panel-data econometrics: the double-censored fractional estimator (Elsas and Florysiak, 2011), the bias-corrected least-squares dummy-variable estimator (Bruno, 2005), the iterative bootstrap-based bias correction for the fixed-effects estimator (Everaert and Pozzi, 2007), and the fixed-effects quasi-maximum-likelihood estimator (Kripfganz, 2016; Hsiao, et al., 2002). In addition, our panel-data regression results show that in the ICT sector, the leverage ratio exhibits high persistence. Moreover, it positively relates to growth and investment opportunities, firm size, capital investment, and industry median capital structure, and negatively relates to profitability and default risk. |
| Keywords: | ICT industry; agency costs; optimal capital structure, dynamic modeling |
| JEL: | G21 G28 G32 G34 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2019-06&r=all |
| By: | Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas) |
| Abstract: | This paper empirically investigates firm-specific determinants of agency costs, a relatively new and unexplored area in corporate finance. We estimate dynamic agency costs models, linking debt, firm size, and R&D activity to agency costs for a panel of U.S. information and communication technology (ICT) firms over 1990-2013. We adopt the Blundell and Bond (1998) two-step system GMM technique, which explicitly accounts for persistence, endogeneity, and unobservable firm heterogeneity. We provide the first evidence that our inverse proxy for agency costs, namely asset turnover (Ang, et al., 2000), exhibits an inverted U-shaped relationship with debt and a U-shaped relationship with firm size and R&D activity. These findings imply that agency costs experience a minimum value (in case of debt) and a maximum value (in case of firm size and R&D activity) and, therefore, that agency costs are higher at both low and high levels of debt, and lower at both low and high levels of firm size and R&D activity. We find that the level of debt of the average firm in the sample falls below the level that minimizes agency costs. We also document that, consistent with the agency literature, short-term debt provides an additional effective monitoring mechanism to alleviate agency costs. Our findings reveal that agency costs are dynamic in nature, mean-reverting, and persistent over time. This notion confirms the Florackis and Ozkan (2009) conjecture that managers behave as though an optimal level of agency costs exist that they pursue. Finally, we find a positive association between firm profitability and agency costs and a negative association between agency costs and firm growth. Extensive additional analysis confirms the robustness of our results. |
| Keywords: | ICT industry; agency costs; non-linearity; dynamic adjustment; system GMM |
| JEL: | G21 G28 G32 G34 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2019-05&r=all |
| By: | Aquiles Kalatzis; Aline Pellicani, Dante Mendes Aldrighi |
| Abstract: | We investigate the effect of pyramidal ownership and family control in investment-cash flow sensitivity of Brazilian firms using financial constraint indexes to a priori classify firms. For constrained firms, we find that family control does not directly influence the investment-cash flow sensitivity, while for unconstrained firms, Family control shows a negative effect in investment decisions. However, the active involvement of the controlling family in the board increases investment-cash flow of unconstrained firms, possibly aggravating agency problems. Regarding the pyramidal ownership, we provide evidences consistent with the idea of internal transfer of funds among firms belonged to the arrangement structure. |
| Keywords: | pyramid; family control; investment-cash flow sensitivity; financial constraint. |
| JEL: | G30 G32 |
| Date: | 2019–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2019wpecon12&r=all |
| By: | Andrea Bellucci (European Commission - Joint Research Centre and MoFiR); Luca Pennacchio (Università di Napoli Parthenope); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.) |
| Abstract: | This study investigates the impact of public subsidies for research and development (R&D) on the debt financing of small and medium-sized enterprises (SMEs). It examines a public program implemented in the Marche region of Italy during the period 2005–2012. The study combines matching methods with a difference-in-difference estimator to examine whether receiving public subsidies affects total indebtedness, the structure and cost of debt of awarded firms. The results indicate that R&D subsidies modify firms’ (especially young firms’) debt structure in favor of long-term financing, and help firms to limit the average cost of debt. Subsidies also foster the use of bank financing, but do not affect the overall level of debt. Taken together, these findings suggest that public funding of SMEs’ innovation projects plays a certification role in access to external financial resources for firms receiving subsidies. |
| Keywords: | R&D subsidies; Finance gap; Debt financing; Debt structure; Certification effects; Resource effect. |
| JEL: | G30 H25 O31 O38 R58 |
| Date: | 2019–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:527&r=all |
| By: | Yassine Bakkar (Université de Limoges, LAPE); Olivier De Jonghe (Economics and Research Department, NBB and European Banking Center, Tilburg University); Amine Tarazi (Université de Limoges, LAPE and Institut Universitaire de France (IUF)) |
| Abstract: | Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks’ balance sheets, specifically lending, and hence the real economy. |
| Keywords: | , capital structure, speed of adjustment, systemic risk, systemic size, bank regulation, lending, balance sheet composition |
| JEL: | G20 G21 G28 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201903-369&r=all |
| By: | Adriano A. Rampini; S. Viswanathan; Guillaume Vuillemey |
| Abstract: | We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that better capitalized institutions hedge more, controlling for risk exposures, both across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to drops in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging. |
| JEL: | D92 E44 G21 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25698&r=all |
| By: | Baltzer, Markus; Koehl, Alexandra; Reitz, Stefan |
| Abstract: | Broker-dealer leverage has recently proven to be strongly procyclical, exhibiting impressive explanatory power for a large cross-section of asset returns in the US. In this paper we add empirical evidence to this finding, showing that European and German broker-dealers actively manage their balance sheets. Moreover, by applying standard Fama-MacBeth regressions as well as dynamic asset pricing models (Adrian, Crump, and Moench, 2015), we confirm the importance of brokerdealer balance-sheet indicators for asset pricing. In particular, leverage shows a procyclical behavior with a positive price of risk. Moreover, high leverage coincides with high asset prices, thereby forecasting lower future returns. |
| Keywords: | broker-dealer leverage,intermediary asset pricing,dynamic asset pricing |
| JEL: | E31 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:102019&r=all |
| By: | Martynova, Natalya; Perotti, Enrico C; Suarez, Javier |
| Abstract: | We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure. |
| Keywords: | Bank Recapitalization; bank supervision; Forbearance |
| JEL: | G21 G28 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13617&r=all |