nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒08‒12
seventeen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Corporate Culture and Merger Success By Francesco Saverio Stentella Lopes; Franco Fiordelisi; Ornella Ricci
  2. Business Tax Policy under Default Risk By Nicola Comincioli; Sergio Vergalli; Paolo M. Panteghini
  3. Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects By Galina Hale; Tumer Kapan; Camelia Minoiu
  4. Ownership Structure, Board of Directors and Firm Performance: Evidence from Taiwan By Aziz Jaafar; Lynn Hodgkinson; Mao-Feng Kao
  5. Inequality, ICT and Financial Access in Africa By Vanessa S. Tchamyou; Guido Erreygers; Danny Cassimon
  6. Project appraisal and the Intrinsic Rate of Return By Magni, Carlo Alberto; Marchioni, Andrea
  7. Payout policy and ownership structure: The case of Islamic and conventional banks By Aziz Jaafar; Andi Duqi; Mohammed Warsame
  8. Age of Firms and the Value of Analyst Recommendation By Hassanudin Mohd Thas Thaker
  9. Rating firms and sensitivity analysis By Magni, Carlo Alberto; Malagoli, Stefano; Marchioni, Andrea; Mastroleo, Giovanni
  10. The accounting-and-finance of a solar photovoltaic plant: Economic efficiency of a replacement project By Magni, Carlo Alberto; Marchioni, Andrea
  11. International debt and Special Purpose Entities: evidence from Ireland By Galstyan, Vahagn; Maqui, Eduardo; McQuade, Peter
  12. Trends in Financial Innovation: Evidence from Fintech Firms By Omer Unsal; Blake Rayfield
  13. The Effect of Working Capital Management on Dividend Policy: An Empirical Analysis of Listed Firms in Ghana By Yakubu, Ibrahim Nandom
  14. Revisiting the finance-growth nexus: A socioeconomic approach By Agiropoulos, Charalampos; Karkalakos, Sotiris; Polemis, Michael
  15. Markups and Productivity under Heterogeneous Financial Frictions By Carlo Altomonte; Domenico Favoino; Tommaso Sonno
  16. Lack of Successors, Firm Default, and the Performance of Small Businesses By TSURUTA Daisuke
  17. Debt Collateralization, Capital Structure, and Maximal Leverage By Feixue Gong; Gregory Phelan

  1. By: Francesco Saverio Stentella Lopes; Franco Fiordelisi (University of Rome III and Middlesex Business School); Ornella Ricci (University of Rome III)
    Abstract: What role does corporate culture play in merger success? We show that corporate culture influences both the probability to act as an acquirer and the outcome of the deal itself. We use text analysis to measure corporate culture for all US listed companies relying on the Competing Values Framework. We disentangle companies culturally oriented inside their organization (focused on collaboration and cost control) from companies oriented outside their organization (focused on competition and innovation). We then study the impact of corporate culture on merger participation and outcome: we show that an internally-oriented corporate culture significantly decreases the participation to merger deals, but has a positive impact on the merger outcome as captured by announcement returns and by post-merger operating performance. Our results suggest that companies focused on collaboration and on their internal processes create more value through their acquisitions.
    Keywords: corporate culture; competing values framework; mergers; operating performance.
    JEL: G34
    Date: 2019–04
  2. By: Nicola Comincioli (University of Brescia and Fondazione Eni Enrico Mattei); Sergio Vergalli (University of Brescia and Fondazione Eni Enrico Mattei); Paolo M. Panteghini (University of Brescia and CESifo)
    Abstract: In this article we use a stochastic model with one representative firm to study business tax policy under default risk. We will show that, for a given tax rate, the government has an incentive to reduce (increase) financial instability and default costs if its objective function is welfare (tax revenue).
    Keywords: Capital Structure, Default Risk, Business Taxation and Welfare
    JEL: H25 G33 G38
    Date: 2019–07
  3. By: Galina Hale; Tumer Kapan; Camelia Minoiu
    Abstract: We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997-2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.
    Keywords: cross-border interbank exposures ; banking crises ; shock transmission ; bank loans ; real economy
    JEL: F34 G01 F36 G21
    Date: 2019–07–17
  4. By: Aziz Jaafar (Bangor University); Lynn Hodgkinson (Bangor University); Mao-Feng Kao (National Dong Hwa University)
    Abstract: Purpose Using a dataset of listed firms domiciled in Taiwan, the main aim of this paper is empirically assess the effects of ownership structure, board of directors on firm value. Design/methodology/approach Using a sample of Taiwanese listed firms from 1997 to 2015, the study uses a panel estimation to exploit both the cross-section and time-series nature of the data. Furthermore, a 2SLS regression model is used as robustness test to mitigate the endogeneity issue. Findings Our main results show that the higher the proportion of independent directors, the smaller the board size, and together with a two-tier board system and no CEO duality, the stronger the firm’s performance. With respect to ownership structure, block-holders’ ownership, institutional ownership, foreign ownership and family ownership, are all positively related to firm value. Practical implications Although the Taiwanese corporate governance reform concerning the independent director system which is mandatory only for newly-listed companies is a successful, the regulatory authority should require all listed companies to appoint independent directors to further enhance the Taiwanese corporate governance. Originality/value First, unlike much of the previous literature on western developed countries, this study examines the effects of corporate governance mechanisms on firm performance in a newly-industrialised country, Taiwan. Second, while a number of studies use a single indicator of firm performance this study examines both accounting-based and market-based firm performance. Third, this study addresses the endogeneity issue between corporate governance factors and firm performance by using two stage least squares (2SLS) estimation, and details the econometric tests for justifying the appropriateness of using 2SLS estimation
    Keywords: corporate governance, independent directors, board characteristics, ownership structure
    JEL: M40 G34
    Date: 2019–03
  5. By: Vanessa S. Tchamyou (University of Antwerp, Belgium); Guido Erreygers (University of Antwerp, Belgium); Danny Cassimon (University of Antwerp, Belgium)
    Abstract: This study investigates the role of information and communication technology (ICT) on income inequality through financial development dynamics of depth (money supply and liquid liabilities), efficiency (at banking and financial system levels), activity (from banking and financial system perspectives) and size, in 48 African countries for the period 1996 to 2014. The empirical evidence is based on Generalised Method of Moments. While both financial depth and size are established to reduce inequality contingent on ICT, only the effect of financial depth in reducing inequality is robust to the inclusion of time invariant variables to the set of strictly exogenous variables. We extend the analysis by decomposing financial depth into its components, namely: formal, informal, semi-formal and non-formal financial sectors. The findings based on this extension show that ICT reduces income inequality through formal financial sector development and financial sector formalization as opposed to informal financial sector development and financial sector informalization. The study contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of addressing post-2015 Sustainable Development Goals (SDGs) inequality challenges by means of ICT and financial access.
    Keywords: Inequality; ICT; Financial development; Africa
    JEL: I30 L96 O16 O55
    Date: 2018–01
  6. By: Magni, Carlo Alberto; Marchioni, Andrea
    Abstract: Building upon Magni (2011)’s approach, we propose a new rate of return measuring a project’s economic profitability. It is called the intrinsic rate of return (IROR). It is defined as the ratio of project return to project’s intrinsic value. The IROR approach decomposes the NPV into project scale and economic efficiency. In particular, NPV is found as the product of the project’s total invested capital and the excess rate of return, obtained as the difference between the IROR and the minimum attractive rate of return (MARR). This approach provides correct project ranking and is capable of managing time-varying costs of capital. In case of levered projects, shareholder value creation is captured by the equity IROR, which we call Intrinsic Return On Equity (IROE) (net income divided by total equity capital invested). If the project is unlevered, the IROE and the IROR lead to the same decision; if the project is levered, and the nominal value of debt is not equal to the market value of debt, the IROE should be preferred to project IROR.
    Keywords: Investment evaluation, value creation, NPV-consistent decision-making, rate of return, intrinsic.
    JEL: C02 C60 G31
    Date: 2018–09–20
  7. By: Aziz Jaafar (Bangor University); Andi Duqi (University of Bologna); Mohammed Warsame (University of Sharjah)
    Abstract: Using a sample of Islamic and conventional financial institutions domiciled in 16 countries for the period 2000-2015, we examine how ownership structure affects dividend policy. Our main findings indicate that ownership identity is important in explaining dividend policy in these banks, albeit in different patterns. In particular, the results suggest that government ownership seems to exert negative effects on dividend payouts in both types of banks, which is in line with the preference of governments towards bank stability. With respect to family ownership, the impact is negative for conventional banks but positive for Islamic ones, consistent with agency theory. These results are to some extent similar in the case of foreign ownership where it is associated with a higher payout policy in Islamic banks, but not significant in conventional ones. Our results are robust to an array of additional analyses including propensity score matching.
    Keywords: Agency theory, Islamic banking, ownership structure, payout policy.
    JEL: G21 G35
    Date: 2019–03
  8. By: Hassanudin Mohd Thas Thaker (Department of Economics and Finance, Sunway University, Malaysia Author-2-Name: Azhar Mohamad Author-2-Workplace-Name: Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia (IIUM) 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 paper assesses the value of information disclosure in Malaysian analyst reports by examining three categories of firms, according to their age (young, medium and old). Methodology/Technique - The study uses a market-adjusted method to calculate the cumulative abnormal return and panel regression to test the research objective. The results from the unbalanced panel data reveals that not all information contained in the analyst reports is able to detect the movement in stock returns. Finding - Younger firms recorded two significant results (ROE and SPR) whereas among medium aged firms, TP, CFP, SPR, and MC all had an impact on CAR. The older firms showed that TP, EF, ROE and SPKLCI had an impact on CAR. Novelty – This qualitative inquiry reveals that Malaysian analyst reports tend to disclose information based on simple statistical analyses to formulate recommendations whilst ignoring other significant qualitative information.
    Keywords: Age; Value; Analyst Report; Malaysia.
    JEL: G30 G32 G39
    Date: 2019–06–19
  9. By: Magni, Carlo Alberto; Malagoli, Stefano; Marchioni, Andrea; Mastroleo, Giovanni
    Abstract: This paper introduces a model for rating a firm's default risk based on fuzzy logic and expert system and an associated model of sensitivity analysis (SA) for managerial purposes. The rating model automatically replicates the evaluation process of default risk performed by human experts. It makes use of a modular approach based on rules blocks and conditional implications. The SA model investigates the change in the firm's default risk under changes in the model inputs and employs recent results in the engineering literature of Sensitivity Analysis. In particular, it (i) allows the decomposition of the historical variation of default risk, (ii) identifies the most relevant parameters for the risk variation, and (iii) suggests managerial actions to be undertaken for improving the firm's rating.
    Keywords: Credit rating, default risk, fuzzy logic, fuzzy expert system, sensitivity analysis.
    JEL: C63 C67 G32
    Date: 2019–07–21
  10. By: Magni, Carlo Alberto; Marchioni, Andrea
    Abstract: In this work we illustrate a simple logical framework serving the purpose of assessing the economic profitability and measuring value creation in a solar photovoltaic (PhV) project and, in general, in a replacement project where the cash-flow stream is nonnegative, with some strictly positive cash flows. We use the projected accounting data to compute the average ROI, building upon Magni (2011, 2019) (see also Magni and Marchioni 2018), which enables retrieving information on the role of the project’s economic efficiency and the role of the project scale on increasing shareholders’ wealth. The average ROI is a genuinely internal measure and does not suffer from the pitfalls of the internal rate of return (IRR), which may be particularly critical in replacement projects such as the purchase of a PhV plant aimed at replacing conventional retail supplies of electricity.
    Keywords: Energy project analysis, investment evaluation, value creation.
    JEL: C02 C67 G31
    Date: 2019–05–16
  11. By: Galstyan, Vahagn; Maqui, Eduardo; McQuade, Peter
    Abstract: This paper examines international debt issuance through Irish-resident Special Purpose Entities (SPEs). Using a unique new dataset covering the population of Irish-resident SPEs reporting to the Central Bank of Ireland over the period 2005-2017, we identify cross-country debt financing links channelled through SPEs. The empirical analysis suggests that tax optimisation is an important motive, particularly for sponsors of Irish-resident securitisation vehicles, while investor protection and financial development are important additional considerations for sponsors of non-securitisation vehicles. JEL Classification: F36, G23, G15
    Keywords: international finance, special purpose entities (SPEs)
    Date: 2019–07
  12. By: Omer Unsal; Blake Rayfield
    Abstract: In 1971, the patent for the Automated Teller Machine (ATM) was awarded to David Wetzel. While possibly not the first application of financial technology, since 1971 time, the innovation in the financial industry has grown beyond expectations. However, most studies in innovation ignore the financial sector altogether. In this study, we investigate financial technology firms and innovation. After identifying firms that are considered financial technology, we collect innovation outcomes such as patents and data breaches associated with those firms. We show that patent activity has enjoyed modest growth year over year, however firms still have challenges to overcome such as market risk and data security. This study serves as a perspective on financial technology. This paper is also forthcoming in the International Finance Review.
    Keywords: Financial Technology; Financial Innovation; Patents; Data Breach
    JEL: O33 O16
    Date: 2019–07
  13. By: Yakubu, Ibrahim Nandom
    Abstract: Relying on more recent data spanning 2007-2016, this paper investigates the impact of working capital management (WCM) on dividend policy of listed non-financial firms in Ghana. Specifically, the study assesses the effect of cash conversion cycle (CCC), days inventory outstanding (DIO), profitability, and firm growth on dividend policy. Employing the ordinary least squares (OLS) analytical technique, the findings reported that working capital management (in terms of cash conversion cycle and days inventory outstanding) and dividend policy are positively related, with DIO having a significant effect on dividend policy. The results also established a positive association between the control variables (profitability and firm growth) and dividend policy albeit insignificantly. Based on the findings, the study concludes that working capital management in terms of days inventory outstanding (DIO) is a critical factor influencing firms’ dividend policy decisions. The study extends the inconclusive empirical evidence on the determinants of dividend policy and fills the lacuna in existing literature by focusing on how working capital management practices influence dividend policy of firms in Ghana. The findings are also useful to the board of directors of non-financial firms in deciding an appropriate dividend policy, and to the shareholders in making investment decisions.
    Keywords: Dividend policy; working capital; profitability; firms; Ghana
    JEL: M00 M1 M21 M41
    Date: 2019–05–13
  14. By: Agiropoulos, Charalampos; Karkalakos, Sotiris; Polemis, Michael
    Abstract: Despite the fact that financial development is recognised as a vital determinant of countries’ economic growth path, many empirical studies fail to further isolate the role of socioeconomic indicators on accelerating growth. This study attempts to fill this gap by examining the statistical significance and the behavior of several socioeconomic indicators on economic growth. We apply parametric (System GMM estimators) and semi-parametric techniques along the lines of Baltagi and Li (2002) on a panel data set of 19 EU countries over the period 1995-2017. We test for nonlinear effects on economic growth for three banking indicators (domestic credit, non-performing loans and banking capitalization). In contrast to the related literature, our findings provide sufficient evidence of nonlinear relationships between several aspects of financial development and economic growth. Our results imply significant policy implications for policy makers and regulators in their effort of balancing banking development with a resurgence in economic growth within the EU periphery.
    Keywords: Socioeconomic aspects; Growth; Banking development; Semi-parametric analysis; Non-linear effects.
    JEL: C14 G20 O11
    Date: 2019–07–18
  15. By: Carlo Altomonte; Domenico Favoino; Tommaso Sonno
    Abstract: We incorporate heterogeneous financial frictions in a setting of monopolistically competitive firms with endogenous markups. Before producing, firms must pledge collateral to obtain a bank loan, needed to cover part of production costs. Firms differ both in productivity and in their cost of raising collateral. Firm-specic financial frictions, together with productivity, therefore figure in the equilibrium expressions of prices and markups. We validate our theoretical results on a representative sample of European manufacturing firms surveyed during the financial crisis. Guided by our model we retrieve from balance-sheet data firm-specic measures of access to finance, total factor productivity and markups, and then use these variables to estimate our equilibrium equations structurally. Consistent with our model, we show how heterogeneity in access to finance explains part of the dispersion of prices and markups, even after controlling for firms' productivity and size. In the aggregate industry equilibrium, the amount of collateral required by banks significantly affects the cost pass-through to prices.
    Keywords: Financial frictions, heterogeneous firms, markups
    JEL: D24 E22 F36 G20
    Date: 2018
  16. By: TSURUTA Daisuke
    Abstract: We investigate the effects of the lack of successors on small businesses with an elderly manager. Using firm-level data from Japan, which is a country with an ageing population, we find the following results. First, smaller, younger, highly leveraged, and non-growing firms are likely to have no successor. Second, firms with an elderly manager are more likely to exit and default if they have no successors, and this was particularly the case during the period of the global financial crisis around 2009. This result suggests that these firms have less incentive to repay debts because they are not going concerns. As a result of the high probability of default and exit, the annual rate of change in bank borrowing is low if firms with an elderly manager have no successor. Third, using the propensity score matching method, we find that sales growth for firms with no successor is lower than that for other firms.
    Date: 2019–07
  17. By: Feixue Gong (Massachusetts Institute of Technology); Gregory Phelan (Williams College)
    Abstract: We study the effects of allowing risky debt to be used as collateral in a general equilibrium model with heterogeneous agents and collateralized financial contracts. With debt collateralization, investors switch to using exclusively high-leverage contracts for every investment they choose (issuing risky debt when possible). High-leverage positions maximize the ability of contracts to serve as collateral, expanding the set of state-contingencies created from collateralized debt. We provide conditions under which debt collateralization will increase the price of the underlying asset. Our results also apply to variations in capital structure since many capital structures implicitly provide the ability to use debt contracts as collateral.
    Keywords: Leverage, margins, asset prices, default, securitized markets, asset-backed securities, collateralized debt obligations
    JEL: D52 D53 G11 G12
    Date: 2019–07

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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