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on Corporate Finance |
| By: | Ioannidou, Vasso; Pavanini, Nicola; Peng, Yushi |
| Abstract: | We study the benefits and costs of collateral requirements in bank lending markets with asymmetric information. We estimate a structural model of firms' credit demand for secured and unsecured loans, banks' contract offering and pricing, and firm default using detailed credit registry data in a setting where asymmetric information problems in credit markets are pervasive. We provide evidence that collateral mitigates adverse selection and moral hazard. With counterfactual experiments, we quantify how an adverse shock to collateral values propagates to credit supply, credit allocation, interest rates, default, and bank profits and how the severity of adverse selection influences this propagation. |
| Keywords: | asymmetric information; Collateral; credit markets; structural estimation |
| JEL: | D82 G21 L13 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13905&r=all |
| By: | Nyborg, Kjell G; Wang, Zexi |
| Abstract: | We document that enhanced stock liquidity increases a firm's propensity to hold cash. Endogeneity is addressed using a difference-in-differences approach based on tick-size decimalization. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. We propose that firms hold cash also to buy back shares and higher stock liquidity strengthens this incentive. Tests are supportive. Endogeneity is controlled for using the introduction of repurchase safe harbor rules. We conclude that with respect to the effect of stock liquidity on cash holdings, the repurchase motive dominates the real investments motive. |
| Keywords: | corporate cash holdings; Repurchases; Stock liquidity |
| JEL: | G10 G32 G35 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13791&r=all |
| By: | Mavrakana, Christina; Psillaki, Maria |
| Abstract: | This paper investigates the impact of bank governance on European bank performance and risk- taking. More precisely, using a sample of 75 banks from 18 European countries over the 2004-2016 period, we examine the relationship between bank governance variables namely board size, age of directors, financial experience, board independency, gender diversity, governance system and compensation on bank performance and risk-taking. Our empirical analysis shows that experienced directors increase bank performance and reduce risk-taking. Moreover, female directors have a positive impact on bank performance but the results are mixed for risk-taking. We also find that the one-tier system improves bank performance and reduces credit risk. Moreover, compensation is positively related with bank performance. The empirical findings are inconclusive regarding risk-taking. In addition, the impact of board size and age on bank performance differs, depending on the measure. We find that older members increase risk-taking. Finally, equity linked wealth leads to better bank performance but it also increases risk-taking. Our results differ according to time period and location criteria. |
| Keywords: | Bank governance, financial crises, corporate governance, bank performance, executive compensation |
| JEL: | G01 G21 G28 G34 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95776&r=all |
| By: | Leledakis, George N.; Pyrgiotakis, Emmanouil G. |
| Abstract: | Using a sample of 312 bank M&As announced between 1998 and 2016 in the EU-27 countries, this paper investigates the impact of market concentration and the European sovereign debt crisis on the way investors react to these corporate events. In Western European countries, we find results which contrast the conventional wisdom that acquiring banks lose around the merger announcement date. In fact, since 2009, acquiring banks shareholders gain approximately $34 million around the announcement, a $56 million improvement compared to the pre-crisis period. These documented shareholder gains are also accompanied by significant improvements in post-merger profitability. Markedly, we link this superior performance of the post-2008 acquirers with the degree of market concentration in the Western European region. Finally, results for the Eastern European countries indicate that the crisis did not have a significant impact on the quality of bank M&As in the region. |
| Keywords: | European sovereign debt crisis; bank mergers and acquisitions; market concentration; event study |
| JEL: | G01 G14 G15 G21 G34 |
| Date: | 2019–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95739&r=all |
| By: | Arpit Gupta; Kunal Sachdeva |
| Abstract: | Hedge fund managers contribute substantial personal capital, or "skin in the game," into their funds. While these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect investors. We find that funds with more inside investment outperform other funds within the same family. However, this relationship is driven by managerial decisions to invest capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that skin in the game may work as a rent-extraction mechanism at the expense of fund participation of outside investors. |
| JEL: | G23 G32 J33 J54 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26113&r=all |
| By: | Akcigit, Ufuk; Dinlersoz, Emin; Greenwood, Jeremy; Penciakova, Veronika |
| Abstract: | Venture capital (VC) and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and initial patent quality than non-VC-backed ones. VC-backing increases a startup's likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth. |
| Keywords: | Endogenous Growth; mergers and acquisitions; R&D; venture capital |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13932&r=all |
| By: | Chen, Shiqi; Lambrecht, Bart |
| Abstract: | We consider a group of investors with heterogeneous risk preferences that determines a firm's investment policy, and each investor's compensation function. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (busts), reconciling the diversification of opinions hypothesis and the group shift hypothesis. The most (least) risk averse investor has a strictly concave (convex) claim on the firm's net worth. For intermediate risk preferences investors' claim is S-shaped, resembling preferred stock. We derive investors' utility weights absent wealth distribution and under social optimization. |
| Keywords: | governance; Group decisions; investment; Payout; Risk Preference |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13888&r=all |
| By: | Carattini, Stefano; Sen, Suphi |
| Abstract: | The climate challenge requires ambitious climate policy. A sudden increase in carbon prices can lead to major shocks to the stock market. Some assets will lose part of their value, others all of it, and hence become “stranded”. If the markets are not ready to absorb the shock, a financial crisis could follow. How well investors anticipate, and thus how large these shocks may be, is an empirical question. We analyze stock market reactions to the rejection of two carbon tax initiatives by voters in Washington state. We build proper counterfactuals for Washington state firms and find that these modest policy proposals with limited jurisdiction caused substantial readjustments on the stock market, especially for carbon-intensive stocks. Our results reinforce concerns about “stranded assets” and the risk of financial contagion. Our policy implications support the inclusion of transition risks in macroprudential policymaking and carbon disclosure and climate stress tests as the main policy responses. |
| Keywords: | Carbon pricing, financial returns, systemic risk, macroprudential policies, voting |
| JEL: | G12 H23 H71 L50 Q58 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2019:09&r=all |
| By: | Jason Roderick Donaldson; Nadya Malenko; Giorgia Piacentino |
| Abstract: | We develop a dynamic model of board decision-making. We show that a board could retain a policy all directors agree is worse than an available alternative. Thus, directors may retain a CEO they agree is bad—a deadlocked board leads to an entrenched CEO. We explore how to compose boards and appoint directors to mitigate deadlock. We find that board diversity and long director tenure can exacerbate deadlock. Moreover, we rationalize why CEOs and incumbent directors have power to appoint new directors: to avoid deadlock. Our model speaks to short-termism, staggered boards, and proxy access. |
| JEL: | G3 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26155&r=all |
| By: | Abdisa, Lamessa T. |
| Abstract: | The poor business environment mainly poor infrastructure is found to has paramount importance in explaining Africa's disadvantage relative to other similar countries. To cope with this poor supply of electricity, firms adopt different mechanisms to reduce the resulting effects. The commonly adopted coping strategy is an investment in self-generation of electricity. This study examined the role of investing in self-generation in mitigating the outage loss and evaluated the outage loss differential between �firms that invested in self-generation and those that did not, using World Bank Enterprise Survey data collected from �firms operating in 13 Sub-Saharan African countries. The result obtained shows that, though self-generation has reduced the amount of outage loss for fi�rms that invested in self-generation, these firms continue to face higher unmitigated outage loss compared to firms without such investment. In spite of this, �firms that invested in self-generation would have incurred 36%-99% more than the current amount of outage loss if they do not engaged in self-generation. Similarly, �firms that did not invest in self-generation would have reduced their outage loss by 2% - 24% if they had engaged in self-generation. The study thus, recommended a di�fferential supply interruption to be followed by public authorities based on �firms' degree of vulnerability to power interruptions. |
| Keywords: | Self-generation, Outages, Sub-Sahara Africa, Firm |
| JEL: | L60 L81 N77 Q41 |
| Date: | 2019–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95758&r=all |
| By: | Lemos, Renata; Scur, Daniela |
| Abstract: | This paper investigates the impact of family CEOs on firm organizational choices and the causes and consequences of these decisions. We focus on second-generation (dynastic) family firms, collect new data on CEO successions for over 900 firms in Latin America and Europe and merge it with unique data on organizational choices, specifically, structured management practices. We use variation in the gender composition of the outgoing CEOs' children for identification. There is clear preference for male heirs: conditional on number of children, having at least one son is correlated with a 30pp higher likelihood of dynastic family succession. As the gender composition of the outgoing CEO's children is unlikely to affect decisions on mid-level managerial practices, we use it as an instrumental variable for family succession. Dynastic CEO successions lead to almost one standard deviation lower adoption of structured management practices, with an implied productivity decrease of about 10%. We rationalize this finding with a new conceptual framework that accounts for the importance of implicit employment commitments to employees of dynastic firms in determining the adoption of monitoring technologies. We find empirical evidence that, controlling for lower levels of knowledge and skills of family CEOs, concerns for reputation and ''family name'' can play a role in constraining investment in structured management practices. Overall, our empirical results shed new light on dynastic firms' persistent performance deficit and apparent lag in the adoption of structured management practices. |
| JEL: | D22 M11 M12 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13794&r=all |
| By: | Lei Li; Elena Loutskina; Philip E. Strahan |
| Abstract: | This paper shows that banks raising deposits in more concentrated markets have more funding stability, which enhances banks’ ability to extend longer-maturity loans. We show that banks raising deposits in concentrated markets exhibit less pro-cyclical financing costs and profits, which in turn reduces the funding risk of originating long-term illiquid loans. Consistently, banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those with deposit HHI one standard deviation below average. Deposit concentration also allows banks to charge lower maturity premiums. Access to banks raising funds in concentrated markets improves growth in industries traditionally reliant on long-term credit. |
| JEL: | G2 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26163&r=all |