nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒05‒06
eight papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Optimal Corporate Taxation Under Financial Frictions By Davila, Eduardo; Hebert, Benjamin
  2. The Causal Effect of Institutional Ownership on Firm Level Risk Characteristics By Farid Radmehr; Tolga Cenesizoglu
  3. Government Support and Firm Performance in Vietnam By Nguyen, Hoai Thu Thi; Vu, Huong Van; Bartolacci, Francesca; Quang Tran, Tuyen
  4. Peer Group Choice and Chief Executive Officer Compensation By Larcker, David F.; McClure, Charles; Zhu, Christina
  5. Effect of dividend policy on stock price volatility in the Dow Jones U.S. index and the Dow Jones islamic U.S. index: evidences from GMM and quantile regression By Suwanhirunkul, Prachaya; Masih, Mansur
  6. Do Employee Share Owners Face Too Much Financial Risk? By Kruse, Douglas L.; Blasi, Joseph; Weltmann, Dan; Kang, Saehee; Kim, Jung Ook; Castellano, William
  7. Trade credit and markups By Alvaro Garcia-Marin; Santiago Justel; Tim Schmidt-Eisenlohr
  8. Small Firms and Domestic Bank Dependence in Europe's Great Recession By Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E

  1. By: Davila, Eduardo (Yale University/New York University and NBER); Hebert, Benjamin (Stanford University and NBER)
    Abstract: We study optimal corporate taxation when firms are financially constrained. We describe a corporate taxation principle: taxes should be levied on unconstrained firms, which value resources inside the firm less than constrained firms. Under complete information, this principle completely characterizes optimal corporate tax policy. With incomplete information, the government can use payout policy to elicit whether a firm is constrained, and tax accordingly. In our static model, optimal corporate taxation can be implemented by a corporate dividend tax, and in our dynamic model, the optimal sequence of mechanisms can also be implemented by a corporate dividend tax.
    JEL: G38 H21 H25
    Date: 2019–01
  2. By: Farid Radmehr; Tolga Cenesizoglu
    Abstract: We establish the causal effect of institutional ownership on a firm’s total risk and its systematic and idiosyncratic components using Russell 2000 index membership as an instrument for institutional ownership following (Crane, Michenaud, and Weston, 2016). We find that for a median Russell 1000 firm, a one standard deviation increase in institutional ownership in a given quarter causes a decrease in idiosyncratic volatility of 13.3% in annualized terms, which results in a decrease in total volatility of 12.8%. Institutional investors achieve this effect on a firm’s risk characteristics partially through their effect on its financial performance, as measured by unexpected earnings. More precisely, an increase in institutional ownership increases a firm’s financial performance, which turns to a decrease in its total and idiosyncratic volatility.
    Keywords: Institutional investors, Risk characteristics, Russell Index
    JEL: G11 G20
    Date: 2019
  3. By: Nguyen, Hoai Thu Thi; Vu, Huong Van; Bartolacci, Francesca; Quang Tran, Tuyen
    Abstract: Using a sample of private manufacturing SMEs (small and medium-sized enterprises) in the period 2007-15, we analyze the effect of government support on firms’ financial performance in Vietnam. Contrary to many previous studies, we find that government support affects firms’ financial performance after controlling for heterogeneity, unobservable factors and dynamic endogeneity. The finding supports the viewpoint of institutional theory. Also, the study reveals that assistance measures, such as tax exemptions, soft loans and investment incentives to promote financial performance, are vital for the development of Vietnamese private SMEs.
    Keywords: Government support; innovation; firm financial performance; SMEs; Vietnam
    JEL: H7 H71 M2 M21 O3
    Date: 2018–08–04
  4. By: Larcker, David F. (Graduate School of Business and Rock Center for Corporate Governance, Stanford University); McClure, Charles (Booth School of Business, University of Chicago); Zhu, Christina (The Wharton School, University of Pennsylvania)
    Abstract: We examine the selection of peer groups that boards of directors use when setting the level of CEO compensation. This choice is controversial because it is difficult to ascertain whether peer groups are selected to (i) attract and retain top executive talent or (ii) enable rent extraction by inappropriately increasing CEO compensation. In contrast to prior research, our analysis utilizes the degree to which the observed compensation level of peers in the portfolio is unusual relative to all potential portfolios of peers the board of directors could have reasonably selected. Using a sample of 10,235 firm-year observations from 2008 to 2014, we estimate roughly 33% of board of directors’ choices appear to be associated with rent extraction, whereas the remaining 67% are associated with attracting and retaining high-quality CEO talent. Relative to firms that appear to select peers for aspirational labor market reasons, we find rent extraction firms have more structural governance concerns and realized negative governance outcomes. Over our sample period, we estimate the aggregate excess pay for rent extraction firms is approximately $5.4 billion, or 38% of their total pay.
    JEL: G30 J33 M12 M52
    Date: 2019–02
  5. By: Suwanhirunkul, Prachaya; Masih, Mansur
    Abstract: The relationship between stock price volatility and dividend policy remains a “puzzle” with conflicting evidences. The objective of this study is to attempt to shed light on this debate with the help of relatively advanced GMM methods and quantile regressions on the stocks listed in the Dow Jones U.S. Index and Islamic stocks based on the Dow Jones Islamic U.S. Index. Our data is unbalanced panel data consisting of two samples for all stocks (2456 companies) and Islamic stocks (589 companies) in the Dow Jones U.S. Index from the year 2005 to 2017. Our main findings suggest that dividend policy in both samples contributes a minor component to explaining stock price volatility and is becoming less relevant for the overall market. However, dividend yield shows positive relationship with stock price volatility when analyzed based on each class of stocks in the Dow Jones Islamic U.S. Index. Thus there could be a clientele effect in each class of stock for Islamic stocks. It is hoped that the findings of this study would contribute to dividend policy literature and Islamic equity literature.
    Keywords: Dividend policy, stock price volatility, Islamic U.S. index, GMM, Quantiles
    JEL: C22 C58 G32
    Date: 2018–12–24
  6. By: Kruse, Douglas L. (Rutgers University); Blasi, Joseph (Rutgers University); Weltmann, Dan (Western Connecticut State University); Kang, Saehee (Rutgers University); Kim, Jung Ook (Rutgers University); Castellano, William (Rutgers University)
    Abstract: A major theoretical objection against employee ownership is that workers become inadequately diversified and exposed to excessive financial risk. Recent theory concludes that 10-15% of a worker's wealth portfolio can be prudently invested in employer stock provided the rest of the portfolio is properly diversified. This paper analyzes employee share ownership in U.S. family financial portfolios using data from the 2004-2016 Survey of Consumer Finances. We find that 15.3% of families with private-sector employees had employer stock in their portfolio, with a median value of $6,000 and a median percent of family net worth of 3.1%. About one in five (19.2%) of the families with employer stock exceed the 15% threshold. This may be overstated given that the 15% threshold pertains to purchased stock and not to stock granted with no sacrifice by the employee. A higher percentage of families exceed the threshold for stock bought directly than for stock in pension plans. The analysis shows that employee ownership appears to generally add to, rather than substitute for, other wealth, which lessens the financial risk. We also find that families with employer stock are found to express more tolerance of financial risk, have higher self-rated knowledge of personal finances, and are more likely to understand the value of diversification. While financial risk does not appear to represent a substantial problem in practice for most employee share owners, a small minority may face excessive risk. We conclude with approaches to address excessive financial risk in company stock when it appears.
    Keywords: employee ownership, financial risk, wealth, diversification
    JEL: J32 J33 J54 D31 P13
    Date: 2019–04
  7. By: Alvaro Garcia-Marin; Santiago Justel; Tim Schmidt-Eisenlohr
    Abstract: Trade credit is the most important form of short-term finance for U.S. firms. In 2017, non-financial firms had about $3 trillion in trade credit outstanding equaling 20 percent of U.S. GDP. Why do sellers lend to their buyers in the presence of a well-developed financial sector? This paper proposes an explanation for the puzzling dominance of trade credit: When sellers charge markups over production costs and financial intermediation is costly, then buyer-seller pairs can save on their overall financing costs by utilizing trade credit. We derive a model of trade credit and markups that captures this mechanism. In the model, the larger is the markup and the larger is the difference between the borrowing and the deposit rate, the more attractive is trade credit. The model also implies that trade credit use increases with repeated interactions and that this effect is stronger for complex products. Using Chilean data at the firm-level to estimate markups and at the trade-transaction level to analyze payment choices, we find strong support for the model.
    Keywords: trade credit, markups, financial intermediation, learning
    JEL: F12 F14 G21 G32
    Date: 2019
  8. By: Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E
    Abstract: Abstract Small businesses (SMEs) depend on banks for credit. We show that the severity of the Eurozone crisis was worse in countries that borrowed more from domestic banks (``domestic bank dependence'') compared with countries that borrowed more from international banks. Eurozone banking integration in the years 2000-2008 involved cross-border lending between banks while foreign banks' lending to the real sector stayed flat. Hence, SMEs remained dependent on domestic banks and were vulnerable to global banking sector shocks. We confirm, using a calibrated quantitative model, that domestic bank dependence makes sectors and countries with many SMEs vulnerable to global banking shocks.
    Keywords: Banking integration; domestic bank dependence; International Transmission; Small and medium enterprises; sme access to finance
    JEL: F30 F36 F40
    Date: 2019–04

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.