nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒04‒22
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Why are Firms with More Managerial Ownership Worth Less? By Fabisik, Kornelia; Fahlenbrach, Rudiger; Stulz, Rene M.; Taillard, Jerome P.
  2. Securities Laws and the Choice Between Loans and Bonds for Highly Levered Firms By Prilmeier, Robert; Stulz, Rene M.
  3. How Financial Management Affects Institutional Investors’ Portfolio Choices: Evidence from Insurers By Ge, Shan; Weisbach, Michael S.
  4. Foreign Competition and the Durability of US Firm Investments By Philippe Fromenteau; Jan Schymik; Jan Tscheke
  5. Financial Constraints and Firm Tax Evasion By James Alm; Yongzheng Liu; Kewei Zhang
  6. Corporate Investment Under the Cloud of Litigation By Bennett, Benjamin; Milbourn, Todd; Wang, Zexi
  7. Chinese acquisitions abroad: are they different? By Clemens Fuest; Felix Hugger; Samina Sultan; Jing Xing
  8. Firm-level Investment Under Imperfect Capital Markets in Ukraine By Oleksandr Shcherbakov
  9. From finance to fascism: The real effect of Germany’s 1931 banking crisis By Sebastian Doerr; Stefan Gissler; José-Luis Peydró; Hans-Joachim Voth
  10. A Theory of Falling Growth and Rising Rents By Aghion, Philippe; Bergeaud, Antonin; Boppart, Timo; Klenow, Peter J.; Li, Huiyu
  11. The Division of Ownership and Control in Listed Jordanian Firms By Ghada Tayem
  12. Entrepreneurial Motivation and Business Performance: Evidence from a French Microfinance Institution By Renaud Bourlès; Anastasia Cozarenco
  13. Frontier Efficiency, Capital Structure, and Portfolio Risk: An Empirical Analysis of U.S. Banks By Ding, Dong; Sickles, Robin C.

  1. By: Fabisik, Kornelia (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Fahlenbrach, Rudiger (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Stulz, Rene M. (Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)); Taillard, Jerome P. (Babson College)
    Abstract: Using more than 50,000 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, our findings are consistent with the literature, showing that there is an increasing and concave relation between q and managerial ownership. We show that these seemingly contradictory results are explained by cumulative past performance and liquidity. Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q.
    JEL: G30 G32
    Date: 2018–12
  2. By: Prilmeier, Robert (Tulane University - A.B. Freeman School of Business); Stulz, Rene M. (Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI))
    Abstract: In contrast to bonds, levered loans do not require SEC registration. We show that this distinction plays an important role in firms’ choice between funding through loans and bonds and helps understand why the market share of cov-lite loans has increased so much. Compared to cov-heavy loans, cov-lite loans are close substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans. SEC-reporting firms that borrow using cov-lite loans are more likely to deregister subsequently. Non-reporting firms are more likely to borrow through highly levered loans than through bonds, even though maturities, amounts, covenants, and ratings are similar between the two sources of funding. As expected from theory, we find that the liquidity advantage of cov-lite loans over cov-heavy loans is highest for non-registered issuers where information asymmetries are greater.
    JEL: D82 G18 G23 G32
    Date: 2019–01
  3. By: Ge, Shan (New York University, Stern School of Business); Weisbach, Michael S. (Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI))
    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 G22 G23 G31 G32
    Date: 2019–03
  4. By: Philippe Fromenteau; Jan Schymik; Jan Tscheke
    Abstract: How does the exposure to product market competition affect the investment horizon of firms? We study if firms have an incentive to shift investments towards more short-term assets when exposed to tougher competition. Based on a stylized firm investment model, we derive a within-firm estimator using variation across investments with different durabilities. Exploiting the Chinese WTO accession, we estimate the effects of product market competition on the composition of US firm investments. Firms that experienced tougher competition shifted their expenditures towards investments with a shorter durability. This effect is larger for firms with lower total factor productivity.
    Keywords: import competition, firm investment behavior, investment life-span, short-termism
    JEL: F14 F36 G32 L20 D22
    Date: 2019–04
  5. By: James Alm (Tulane University); Yongzheng Liu (Renmin University of China); Kewei Zhang (Renmin University of China)
    Abstract: Most analyses of tax evasion examine individual behavior, not firm behavior, given obvious and recognized data issues. We use data from the Business Environment and Enterprise Performance Survey to examine tax evasion at the firm level, focusing on a novel determinant of firm tax evasion: the financial constraints (or credit constraints) faced by the firm. Our empirical results indicate across a range of alternative specifications that more financially constrained firms are more likely to be involved in tax evasion activities, largely because evasion helps them deal with financing issues created by financial and credit constraints. We further show that the effects of financial constraints are heterogeneous across firm ownership, firm age, and firm size. Lastly, we present some suggestive evidence on the possible channels through which the impact of financial constraints on firm tax evasion may operate, including a reduction of information disclosure through the banking system, an increase in the use of cash for transactions, and an increase in bribe activities in exchange for tax evasion opportunities.
    Keywords: Tax evasion; financial constraints; firm-level data.
    JEL: E26 G2 H26
    Date: 2019–04
  6. By: Bennett, Benjamin (Ohio State University (OSU) - Department of Finance); Milbourn, Todd (Washington University in Saint Louis - Olin Business School); Wang, Zexi (University of Bern)
    Abstract: We study the effect of legal risk on firms’ investment. Using legal risk measures based on the number of litigious words in SEC 10-K filings, we find legal risk reduces investment. Underlying mechanisms include both i) a financing channel, whereby legal risk reduces credit ratings, increases bank loan costs, and decreases borrowing, and ii) an attention channel, whereby legal risk consumes top-management’s attention. Accordingly, we find legal risk has negative effects on firms’ investment efficiency and stock performance. We address endogeneity concerns through a DiD analysis utilizing staggered adoptions of universal demand laws across states.
    JEL: G30 G31 K20
    Date: 2018–09
  7. By: Clemens Fuest; Felix Hugger; Samina Sultan; Jing Xing
    Abstract: In recent years Chinese acquisitions abroad have increased significantly. This paper uses a large dataset on cross-border M&A deals to investigate whether Chinese foreign acquisitions differ from acquisitions coming from other countries. We find that Chinese acquirers buy targets with lower profitability, larger size, higher debt levels, and more patents. However, private and state-owned Chinese investors differ in preferences for location in offshore financial centers, industry diversification, natural resources and technology. Chinese state-owned acquirers are similar to government-led acquirers from other countries in pursuing target firms in the resource extraction industry. Policy initiatives like the Belt and Road Initiative and Made in China 2025 influence investment patterns of Chinese state-owned acquirers but not those of private investors. Surprisingly, for acquisition prices, we find that Chinese investors pay less for firms with similar observable characteristics than investors from other countries.
    Keywords: cross-border M&A, China, government acquirers
    JEL: G34 G38 F02
    Date: 2019
  8. By: Oleksandr Shcherbakov
    Abstract: This paper develops and estimates a model of firm-level fixed capital investment when firms face borrowing constraints. Dynamically optimal investment functions are derived for the firms with and without financial constraints. These policy functions are then used to construct the likelihood of observing each of the investment regimes in the data. Structural parameters are estimated using data from the Ukrainian manufacturing sector in 1993–1998. I provide empirical evidence of the role of market and ownership structure for firm-level investment behavior. I also discuss the effects of international trade exposure and involvement in non-monetary transactions on the probability of facing financial constraints and the resulting fixed capital accumulation path. Estimation results are used to illustrate the welfare implications of financial constraints in the Ukrainian manufacturing sector.
    Keywords: Econometric and statistical methods; Economic models; Firm dynamics
    JEL: C61 C63 D24 G31
    Date: 2019
  9. By: Sebastian Doerr; Stefan Gissler; José-Luis Peydró; Hans-Joachim Voth
    Abstract: Do financial crises radicalize voters? We analyze a canonical case – Germany during the Great Depression. After a severe banking crisis in 1931, caused by foreign shocks and political inaction, radical voting increased sharply in the following year. Democracy collapsed six months later. We collect new data on pre-crisis bank-firm connections and show that banking distress led to markedly more radical voting, both through economic and non-economic channels. Firms linked to two large banks that failed experienced a bank-driven fall in lending, which caused reductions in their wage bill and a fall in city-level incomes. This in turn increased Nazi Party support between 1930 and 1932/33, especially in cities with a history of anti-Semitism. While both failing banks had a large negative economic impact, only exposure to the bank led by a Jewish chairman strongly predicts Nazi voting. Local exposure to the banking crisis simultaneously led to a decline in Jewish-gentile marriages and is associated with more deportations and attacks on synagogues after 1933.
    Keywords: Financial crises, banking, Great Depression, democracy, anti-Semitism
    JEL: E44 G01 G21 N20 P16
    Date: 2018–03
  10. By: Aghion, Philippe (College de France); Bergeaud, Antonin (Banque de France); Boppart, Timo (IIES); Klenow, Peter J. (Stanford University); Li, Huiyu (Federal Reserve Bank of San Francisco)
    Abstract: Growth has fallen in the U.S., while firm concentration and profits have risen. Meanwhile, labor’s share of national income is down, mostly due to the rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to accelerating ICT advances. In response, the most efficient firms spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find their markets more difficult to enter profitably and innovate less. Even the most efficient firms do less innovation eventually because they are more likely to compete with each other if they try to expand further.
    Date: 2019–03–27
  11. By: Ghada Tayem (University of Jordan)
    Abstract: Firms listed on the Amman Stock Exchange (ASE) represent an important part of the economic activity in Jordan with 63.5% of market capitalization to GDP in 2016. However, there is little known about the ownership of Jordanian listed firms. This study is the first to document in details the ownership and control structures of more than 200 firms listed on the ASE. In this study I document the immediate ownership of shareholders who control over 5% of the votes in the sample firms. If principal shareholders are legal entities, I identify their owners, the owners of their owners and so on. Then, percentage control is computed using the weakest link rule to identify the ultimate controller at different cut-offs. If the corporation is identified as closely held I assign it one of the following identities: Family, Foreign, State, Widely Held Financial Institution, Widely Held Corporation and other. The study shows that around one third of listed firms are single firms with virtually no deviation between ownership and control. Single firms are mostly owned by families. The other two thirds of listed firms are group affiliated. In some cases control of group affiliated firms is enhanced by their ultimate controllers by the use of pyramids and cross holdings which leads to a diversion of voting rights and cash flow rights especially at the 5% and 10% levels. The control of group affiliated firms is mostly in the hands of families with some groups controlled by foreigners (mainly from the Saudi Arabia) and the state. Finally, corporate wealth is concentrated among a small number of investors, mostly families.
    Date: 2019
  12. By: Renaud Bourlès (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Anastasia Cozarenco (CERMi - Centre for European Research in Microfinance, MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier)
    Abstract: This article examines the link between entrepreneurial motivation and business performance in the French microfinance context. Using hand-collected data on business microcredits from a Microfinance Institution (MFI), we provide an indirect measure of entrepreneurial success through loan repayment performance. Controlling for the endogeneity of entrepreneurial motivation in a bivariate probit model, we find that "necessity entrepreneurs" are more likely to have difficulty repaying their microcredits than "opportunity entrepreneurs". However, type of motivation does not appear to make a difference to business survival. We build a stylized model to develop formal arguments supporting this outcome. We test for the robustness of our results using parametric duration models, and show that necessity entrepreneurs experience difficulties in loan repayment earlier than their opportunity counterparts, corroborating our initial findings.
    Keywords: opportunity and necessity entrepreneurs,business microcredit,loan repayment,business survival
    Date: 2018–12
  13. By: Ding, Dong (Rice U); Sickles, Robin C. (Rice U)
    Abstract: The measurement of firm performance is central to management research. Firms' ability to effectively allocate capital and manage risks are the essence of their production and performance. This study investigated the relationship between capital structure, portfolio risk levels and firm performance using a large sample of U.S. banks from 2001-2016. Stochastic frontier analysis (SFA) was used to construct a frontier to measure firm's cost efficiency as a proxy for firm performance. We further look at their relationship by dividing the sample into different size and ownership classes, as well as the most and least efficient banks. The empirical evidence suggests that more efficient banks increase capital holdings and take on greater credit risk while reducing risk weighted assets. Moreover, it appears that increasing the capital buffer impacts risk-taking by banks depending on their level of cost efficiency, which is a placeholder for how productive their intermediation services are performed. More cost efficient banks that are well-capitalized tend to maintain relatively large capital buffers versus banks that are not. An additional finding, which is quite important, is that the direction of the relationship between risk-taking and capital buffers differs depending on what measure of risk is used.
    Date: 2018–06

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