nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒07‒13
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Disappearing Discounts: Hedge Fund Activism in Conglomerates By Kim, Sehoon
  2. Corporate Governance, Information Uncertainty and Market Reaction to Information Signals By Nawaf Almaskati; Ron Bird; Yue Lu; Danny Leung
  3. Killers on the Road of Emerging Start-ups – Implications for Market Entry and Venture Capital Financing By Koski, Heli; Kässi, Otto; Braesemann, Fabian
  4. Feverish Stock Price Reactions to COVID-19 By Ramelli, Stefano; Wagner, Alexander F
  5. Politics and Gender in the Executive Suite By Cohen, Alma; Hazan, Moshe; Weiss, David
  6. Selling Dreams: Endogenous Optimism in Lending Markets By Luc Bridet; Peter Schwardmann
  7. In Search of Distress Risk in Emerging Markets By Gonzalo Asis; Anusha Chari; Adam Haas
  8. 'Too central to fail' firms in bi-layered financial networks: Evidence of linkages from the US corporate bond and stock markets By Mishra, Abinash; Srivastava, Pranjal; Chakrabarti, Anindya S.
  9. Listing Advantages Around the World By Kenichi Ueda; Somnath Sharma
  10. The Role of Corporate Governance and Estimation Methods in Predicting Bankruptcy By Nawaf Almaskati; Ron Bird; Yue Lu; Danny Leung
  11. The Big Bang: Stock Market Capitalization in the Long Run By Kuvshinov, Dmitry; Zimmermann, Kaspar
  12. Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis By Lei Li; Philip E. Strahan; Song Zhang
  13. Information Sharing in a Competitive Microcredit Market By Bos, Jaap; de Haas, Ralph; Millone, Matteo
  14. Hiring New Key Inventors to Improve Firms’ Post-M&A Inventive Output By Marta F. Arroyabe; Katrin Hussinger; John Hagedoorn
  15. Corporate Distress and Supervisory Blacklisting: The Italian Case By Leonella Gori; Rachele Anconetani
  16. Does credit affect stock trading? Evidence from the South Sea Bubble By Braggion, Fabio; Frehen, Rik; Jerphanion, Emiel

  1. By: Kim, Sehoon
    Abstract: Hedge fund activism removes the diversification discount in targeted conglomerate firms. Targeted conglomerates increase investment in segments with better growth opportunities, while reducing each division's over-reliance on their own cash flow relative to their reliance on cash flows from other segments. These improvements are stronger when firms are ex-ante financially constrained, when CEOs are subsequently replaced by outsiders, and when payout is subsequently increased. Refocusing is no more valuable than increasing internal efficiency. The results are not driven by mean reversion. The results are consistent with hedge funds' skill in unlocking the value of internal capital markets in diversified firms.
    Keywords: Conglomerates, Corporate Governance, Diversification, Hedge Fund Activism, Internal Capital Markets, Resource Allocation
    JEL: G23 G31 G32 G34
    Date: 2020–03–09
  2. By: Nawaf Almaskati (University of Waikato); Ron Bird (University of Waikato); Yue Lu (University of Waikato); Danny Leung (University of Technology Sydney)
    Abstract: We examine whether the reaction of investors to earnings announcements is influenced by a firm’s governance profile. We find that firms with better governance characteristics experience a larger initial reaction to both good and bad earnings announcements regardless of the prevailing sentiment and uncertainty conditions. However, the influence of governance is constrained to the announcement period and becomes insignificant during the post-announcement period. In contrast, we demonstrate that changes in market uncertainty and/or investor sentiment are related to the post earnings announcement drift suggesting that investors only return to reconsider their initial reaction to an announcement when there is a change in the conditions that influenced their reaction in the first place. We find that the major channel through which greater corporate governance influences the market response to unexpected earnings news is via lowering information uncertainty and so increasing the credibility of the information provided. Finally, we establish that the two types of uncertainty (market and information) analysed in this paper have very different influence on investor response to information signals.
    Keywords: corporate governance; uncertainty; sentiment; information uncertainty; post-earnings-announcement-drift; information signals
    JEL: D81 G10 G14 G30 G32
    Date: 2019–07–31
  3. By: Koski, Heli; Kässi, Otto; Braesemann, Fabian
    Abstract: Abstract This paper empirically studies the effect of acquisitions made by the large US-based technology companies on the entry dynamics and venture capital financing in different product markets. We use data from 742 product markets globally, distinguishing the US and European markets, for the years 2003-2018. The estimation results based on the difference-in-differences estimation suggest that the technology giants’ buyouts subsequently reduced market entry rates and decreased available venture capital funding in the target product markets of tech giants’ acquisitions. In other words, the acquisitions of technology giants seem to generate the so-called kill zone effect. Our empirical analysis further suggests that this effect was strengthened during the 2010s when large technology companies gained increasing access to user data. Furthermore, we find that technology giants’ acquisitions of platform companies have decreased market entry in non-platform markets. In the US, unlike in the EU area, also available venture capital financing has declined in such non-platform markets from which technology giants have acquired companies.
    Keywords: Acquisitions, Venture capital funding, Competition, Technology giants
    JEL: G24 G34 L1 L41
    Date: 2020–07–01
  4. By: Ramelli, Stefano; Wagner, Alexander F
    Abstract: The market reactions to the 2019 novel Coronavirus disease (COVID-19) shed light on the importance of international trade and financial policies for firm value. Initially, investors priced negative consequences for internationally-oriented US firms, especially those with China exposure. As the virus spread to Europe and the US, markets moved feverishly. Corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the bond market. The content and tone of conference calls mirror this development over time. Overall, the results illustrate how the health crisis morphed into an economic crisis amplified through financial channels.
    Keywords: Coronavirus; Corporate Debt; COVID-19; event study; global value chains; leverage; Pandemic; SARS-CoV-2; Supply Chains
    JEL: F15 F23 F36 G01 G02 G14 G15
    Date: 2020–03
  5. By: Cohen, Alma; Hazan, Moshe; Weiss, David
    Abstract: We investigate whether CEOs' political preferences are associated with the prevalence and compensation of women among non-CEO top executives at U.S. public companies. We find that "Democratic" CEOs are associated with more women in the executive suite. To explore causality, we use an event study approach to show that replacing a Republican with a Democratic CEO increases female representation. Additionally, we discuss how the lack of an association between CEO political preferences and gender diversity in the boardroom influences our interpretation of these results. Finally, gender gaps in the level and performance-sensitivity of compensation diminish, or disappear, under Democratic CEOs.
    Keywords: CEO Politics; Executive Suite; Gender diversity
    JEL: G30 J16 J30 J33 J71 K00 M12 M14 M51 M52
    Date: 2020–03
  6. By: Luc Bridet; Peter Schwardmann
    Abstract: We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders’ contract design shapes these benefits and costs. The model yields three key results. First, the borrower’s motivated cognition increases her material welfare, regardless of whether or not she ends up being optimistic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high.
    Keywords: optimal expectations, motivated cognition, wishful thinking, financial crisis, lending markets, screening
    JEL: D86 D82 G33
    Date: 2020
  7. By: Gonzalo Asis; Anusha Chari; Adam Haas
    Abstract: This paper employs a novel multi-country dataset of corporate defaults to develop a model of distress risk specific to emerging markets. The data suggest that global financial variables such as US interest rates and shifts in global liquidity and risk aversion have significant predictive power for forecasting corporate distress risk in emerging markets. We document a positive distress risk premium in emerging market equities and show that the impact of a global "risk-off" environment on default risk is greater for firms whose returns are more sensitive to a composite global factor.
    JEL: F3 G12 G15 G33
    Date: 2020–05
  8. By: Mishra, Abinash; Srivastava, Pranjal; Chakrabarti, Anindya S.
    Abstract: Complex mutual dependencies of asset returns are recognized to contribute to systemic risk. A growing literature emphasizes that identification of vulnerable firms is a fundamental requirement for mitigating systemic risk in a given asset market. However, in reality, firms are generally active in multiple asset markets with potentially different degrees of vulnerabilities in different markets. Therefore, to assess combined risks of the firms, we need to know how systemic risk measures of firms are related across markets? In this paper, we answer this question by studying US firms that are active in both stock as well as corporate bond markets. The main results are twofold. One, firms that exhibit higher systemic risk in the stock market also tend to exhibit higher systemic risk in the bond market. Two, systemic risk within an asset category is related to firm size, indicating that `too-big-to-fail’ firms also tend to be `too-central-to fail'. Our results are robust with respect to choose of asset classes, maturity horizons, model selection, time length of the data as well as controlling for all major market level factors. These results have prominent policy implications for identification of vulnerabilities and targeted interventions in financial networks.
    Date: 2020–06–20
  9. By: Kenichi Ueda (University of Tokyo, TCER, and CEPR); Somnath Sharma (University of Tokyo and Reserve Bank of India)
    Abstract: Using the firm-level data of 33 countries over 10 years (2008{2017), we find that the listed firms have lower returns on assets than the similar unlisted firms, in most countries. The result is associated with a higher capital-labor ratio of listed firms, implying that the listed firms face less financial constraints. Moreover, we investigate the institutional factors that exacerbate or mitigate the listing advantages (i.e., ROA difference) across the countries. Compared to English origin, German and Scandinavian law countries strongly narrow the listing advantages but the French law origin shows mixed results. Overall, the listing advantages seem narrowed with stronger creditor's rights but show unclear associations with the strength of corporate governance.
    Date: 2020–05
  10. By: Nawaf Almaskati (University of Waikato); Ron Bird (University of Waikato); Yue Lu (University of Waikato); Danny Leung (University of Technology Sydney)
    Abstract: In a sample covering bankruptcies in public US firms in the period 2000 to 2015, we find that the addition of governance variables significantly improves the classification power and prediction accuracy of various bankruptcy prediction models. We also find that while adding governance variables improves the performance of bankruptcy prediction models, the additional explanatory power provided by adding the governance measures improves the further we are from bankruptcy, which implies that governance variables tend to provide earlier and more accurate warnings of the firm’s bankruptcy potential. Our analysis of five commonly used statistical methods in the literature showed that regardless of the bankruptcy model used, hazard analysis provides the best classification and out-of-sample forecast accuracy among the parametric methods. Nevertheless, non-parametric methods such as neural networks or data envelopment analysis appear to provide better classification accuracy regardless of the model selected.
    Keywords: corporate governance; bankruptcy studies; default prediction; non-parametric methods
    JEL: D81 G10 G14 G30 G32
    Date: 2019–07–31
  11. By: Kuvshinov, Dmitry; Zimmermann, Kaspar
    Abstract: This paper studies long-run trends in stock market capitalization and their drivers. New annual data for 17 advanced economies reveal a striking time series pattern: the ratio of stock market capitalization to GDP was roughly constant between 1870 and 1980, tripled with a historically unprecedented "big bang" in the 1980s and 1990s, and remains high to this day. We use data on equity returns, yields and cashflows to explore the underlying forces behind this structural shift. We show that the big bang is driven by two factors: a secular decline in the equity discount rate from 1980 onwards, and an upward shift in cashflows paid by listed firms. Equity issuance and new listings make next to no contribution to the structural increase in market cap. We also show that high market capitalization forecasts low equity returns, low dividend growth and a high risk of a stock market crash. This suggests that the currently high valuations and capitalization are a sign of high, rather than low risk in equity markets.
    Keywords: equity valuations; return predictability; risk premiums; stock market capitalization; wealth-to-income ratios
    JEL: E44 G10 N20 O16
    Date: 2020–03
  12. By: Lei Li; Philip E. Strahan; Song Zhang
    Abstract: In March of 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from pre-existing credit lines and loan commitments in anticipation of cash flow disruptions from the economic shutdown designed to contain the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Pre-crisis financial condition did not limit banks’ liquidity supply. Coincident inflows of funds to banks from both the Federal Reserve’s liquidity injection programs and from depositors, along with strong pre-shock bank capital, explain why banks were able to accommodate these liquidity demands.
    JEL: G2
    Date: 2020–05
  13. By: Bos, Jaap; de Haas, Ralph; Millone, Matteo
    Abstract: We analyze contract-level data on approved and rejected microloans to assess the impact of a new credit registry in Bosnia and Herzegovina, a country with a competitive microcredit market. Our findings are threefold. First, information sharing reduces defaults, especially among new borrowers, and increases the return on lending. Second, lending tightens at the extensive margin as loan officers, using the new registry, reject more applications. Third, lending also tightens at the intensive margin: microloans become smaller, shorter and more expensive. This affects both new borrowers and lending relationships established before the registry. In contrast, repeat borrowers whose lending relationship started after the registry introduction begin to benefit from larger loans at lower interest rates.
    Keywords: Credit registry; information sharing; microcredit; overborrowing
    JEL: D04 D82 G21 G28
    Date: 2020–03
  14. By: Marta F. Arroyabe (Essex Business School, UK); Katrin Hussinger (Department of Economics and Management, Université du Luxembourg); John Hagedoorn (UNU-MERIT, United Nations University - Maastricht, NL)
    Abstract: Although merger and acquisitions (M&As) are acknowledged as an important means to access innovative assets and know-how, firms’ inventive output often declines in the post-M&A period. Financial, managerial and organizational constraints related to the M&A event contribute to inventive output declines and inventors’ departure. Prior literature treats the acquiring firm as a passive observer of invention declines. This study argues that acquiring firms can take measures by hiring new key inventors. We show that the hiring of new key inventors in the post-M&A period can counteract invention declines in two ways. First, these newly hired inventors are associated with an increase of corporate inventive output after the M&A. Second, they are also associated with an improved inventive output of inventors already working for the acquiring firm. These results suggest that an appropriate hiring policy can counteract declining inventive output of firms in the aftermath of M&As.
    Keywords: M&A, post-M&A inventive output, key inventors, KBV
    JEL: O32 G34 M10
    Date: 2020
  15. By: Leonella Gori; Rachele Anconetani
    Abstract: The paper focuses on two control instruments created by the Italian Companies and Exchange Commission (CONSOB), the Blacklist and the Grey-list, to monitor the going-concern perspectives of listed Italian companies in distress situations. The study analyzes the determinants underlying the probability to enter the lists, the main characteristics of the firms included in the lists, particularly referring to the Altman’s Z-Score ratios, and the characteristics, which favor the likelihood of exiting the lists. Through the use of logistic and OLS models, the research demonstrates that the entering, the stay, and the exiting of the companies from the Consob lists can be accurately predicted by the indicators of the Z-Score and the most relevant profitability ratios. This is an innovative analysis of the determinants that affect the relationship between the Consob and the companies listed in the Italian Stock Exchange. In particular, it could generate useful knowledge for the companies evaluating an IPO on the Italian market or already listed and contribute to creating awareness of the parameters affecting the going concern evaluation by the authority.
    Keywords: Consob, disclosure, distress, going-concern, regulation
    Date: 2020
  16. By: Braggion, Fabio; Frehen, Rik; Jerphanion, Emiel
    Abstract: We study the relationship between credit, stock trading and asset prices. There is a wide array of channels through which credit provision can fuel stock prices. On one extreme, cheap credit reduces the cost of capital (discount rate) and boosts prices without trading or wealth transfers. On the other extreme, extrapolators use credit to ride a bubble and lose money. We construct a novel database containing every individual stock transaction for three major British companies during the 1720 South Sea Bubble. We link each trader's stock transactions to daily margin loan positions and subscriptions of new share issues. We find that margin loan holders are more likely to buy (sell) following high (low) returns. Loan holders also sign up to buy new shares of overvalued companies and incur large trading losses as a result of the bubble.
    Keywords: Bubble; Credit Provision; Investor Behavior; Margin Loans
    JEL: G01 G12 G21 N23
    Date: 2020–03

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