nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒11‒02
fifteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Are Corporate Governance Mechanisms, Corporate Strategy and Corporate Financial Characteristics Related to Earnings Management? By Clarissa Tonay
  2. The Mystery of Zero-Leverage Firms: Evidence from Nigerian Quoted Firms By Oluseun Paseda Ph.D
  3. Macroeconomics, firm dynamics and IPOs By Beatriz González
  4. Are CEO Overconfidence and Audit Firm Size Related To Tax Avoidance? By Paulina Sutrisno
  5. Risky Mortgages and Bank Runs By Nurlan Turdaliev; Yahong Zhang
  6. Ownership Structure and earnings management: Empirical evidence from listed pharmaceuticals and chemical firms of Bangladesh By Dewan Azmal Hossain
  7. Fixed Costs and the Division of Labor By Zhou, Haiwen
  8. On Causal Networks of Financial Firms: Structural Identification via Non-parametric Heteroskedasticity By Ruben Hipp
  9. Firm liquidity and solvency under the Covid-19 lockdown in France By Mattia Guerini; Lionel Nesta; Xavier Ragot; Stefano Schiavo
  10. Determinants of Growth Performance of High Growth Firms: An Analysis of The Turkish Manufacturing Sector By Fatma M. Utku-ismihan; M. Teoman Pamukçu
  11. Canadian stock market since COVID‑19: Why a V-shaped price recovery? By Jean-Sébastien Fontaine; Guillaume Ouellet Leblanc; Ryan Shotlander
  12. Survival and the ergodicity of corporate profitability By Mundt, Philipp; Alfarano, Simone; Milaković, Mishael
  13. The Invisible Collateral By Muduli, Silu; Dash, Shridhar Kumar
  14. R&D and firm resilience during bad times By Gupta, Apoorva
  15. Still in search of the sunk cost bias By Negrini, Marcello; Riedl, Arno; Wibral, Matthias

  1. By: Clarissa Tonay (Trisakti School of Management, Jakarta, Indonesia Author-2-Name: Paulina Sutrisno Author-2-Workplace-Name: Trisakti School of Management, Jakarta, Indonesia 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 study aims to examine the effect of corporate governance and several factors of corporate financial characteristics on earnings management. Corporate governance mechanisms such as an independent board, board size, and audit committee size are expected to be able to limit the ability of management to carry out earnings management. Meanwhile, a company's financial characteristics such as corporate strategy, company age, operating cash flow, company growth, profitability, company size and leverage are predicted to affect earnings management. Methodology – Many previous studies have involved the examination of corporate governance mechanisms and corporate financial characteristics of earnings management however, the results of those studies give rise to inconsistencies. Hence, this study seeks to re-examine the existence of corporate governance mechanisms and corporate financial characteristics of earnings management. The sample in this research is non-financial companies listed on the Indonesian Stock Exchange between 2016 and 2018. Findings – This data in this study is analysed using statistical methods such as multiple regression linear. The results of this study indicate that one mechanism of corporate governance, the size of the audit committee, has a positive effect on earnings management, while the financial characteristics of companies such as company size and operating cash flow negatively affect earnings management. Novelty – Other corporate financial characteristics such as corporate strategy, company age, operating cash flow and profitability have a positive effect on earnings management. Meanwhile, the other variables such as board size, leverage and company growth do not have an influence on earnings management. Type of Paper - Empirical.
    Keywords: Earnings Management; Corporate Strategy; Audit Committee Size; Company Age; Operating Cash Flows.
    JEL: G3 G34 G39
    Date: 2020–09–30
  2. By: Oluseun Paseda Ph.D (Department of Banking and Finance, University of Ibadan, Nigeria Author-2-Name: Babatunji Samuel Adedeji Ph.D. Author-2-Workplace-Name: Department of Accounting and Finance, School of Business and Economics, Universiti Putra Malaysia. 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 - Empirical finance literature has added a new twist to the debt conservatism puzzle within the broader capital structure puzzle, namely the phenomenon of zero leverage. Motivated by Strebulaev and Yang (2013), this study investigates the attributes of zero leverage firms in Nigeria in an attempt to add a developing country perspective to the zero-leverage phenomenon observed in firms. Methodology/Technique - The non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2014 constitute the population of the study. Firms with market leverage ratios ranging from 0% to 5% met the criteria for inclusion. Panel data regression techniques such as the generalized method of moments (GMM) and two stage least squares (2SLS) were used in the study. Finding - Zero leverage is persistent across 13 industries and is a declining function of the marginal tax rate, firm size, profitability, and liquidity. Firms that follow a zero-leverage (and almost zero-leverage) policy have higher growth opportunities, more tangible assets, pay higher dividends, are older, and have access to debt markets. Non-debt tax shields do not explain zero-leverage behaviour. Originality/Value - This study addresses the gaps related to the questions of why and how firm-specific attributes affect zero leverage behaviour among Nigerian quoted firms. It sheds light on the economic mechanisms driving zero leverage phenomenon within firms with high debt capacity.
    Keywords: Capital Structure; Zero Leverage Puzzle; Tax Benefits; Debt Capacity; Financing Decisions.
    JEL: G30 G32
    Date: 2020–09–30
  3. By: Beatriz González (Banco de España)
    Abstract: This paper extends a model of firm dynamics to incorporate heterogeneous privately held and publicly traded firms facing different financial frictions, and the decision to become publicly traded (Initial Public Offering, or IPO) is endogenous. This allows changes in the economic environment to affect these firms differently, impacting the selection into becoming publicly traded, and its macroeconomic outcomes. Firms are born privately held and small due to financial frictions. They finance investment with internal resources and debt and have the choice to go public (IPO). The main trade-off is access to external equity financing, at a one-off cost of IPO and an increased cost of operation. The calibrated model is successful in capturing the size distribution of firms, the share of publicly traded firms, and the dynamics around the IPO date. The decrease in corporate and dividend taxes experienced from the 1970s to the 1990s benefited more publicly traded firms financing with equity at the margin. This helps explaining the stock market boom, and the observed changes in the characteristics of firms going public, their investment and payout behavior. I perform some counterfactual exercises to understand what could be the reasons behind the decrease in publicly traded firms since the 2000s: increased cost of being public, increased access to debt, or changes in the idiosyncratic shock process. I find these changes are consistent with part (though not all) of the changes in IPO choice, payout and investment behavior of publicly traded firms in this period.
    Keywords: firm life cycle, macroeconomics, fiscal policy, corporate finance, IPO
    JEL: E23 G32 G35 H25 H32
    Date: 2020–10
  4. By: Paulina Sutrisno (Accounting Department, Trisakti School of Management, Indonesia Author-2-Name: Kashan Pirzada Author-2-Workplace-Name: Asian Research Institute for Corporate Governance (ARICG) and Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Sintok, Malaysia 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 study aims to examine whether audit firm size mitigates the relationship between CEO overconfidence and tax avoidance. CEO overconfidence has the characteristics of a very high level of self-confidence which influences the pattern of thought and the way they make strategic decisions. CEO overconfidence has a tendency to avoid taxes. It aims to show competence in tax management and raise funds for investment. External party oversight, such as by audit firms, will mitigate the relationship between CEO overconfidence and tax avoidance through an attitude of independence, as well as competence and function as examiners of the company's financial reporting. Methodology/Technique - This study uses a sample of Indonesian non-financial companies in the period 2013-2017. This study analyses the data with statistical methods using linear multiple regression. Finding - The results of this study indicate that CEO overconfidence is positively related to tax avoidance, while audit firm size is negatively related to tax avoidance. However, this study has not been able to prove the influence of audit firm size on the relationship between CEO overconfidence and tax avoidance.
    Keywords: CEO overconfidence; Tax Avoidance; Audit Firm Size; Big 4; Book Tax Difference.
    JEL: M41 M49
    Date: 2020–09–30
  5. By: Nurlan Turdaliev (Department of Economics, University of Windsor); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: The collapse of housing prices in the aftermath of the U.S. subprime mortgage crisis of 2008 not only worsened the balance sheet positions of the banking sector but also led to a “bank run” in some cases such as the collapse of Lehman Brothers in September 2008. We develop a theoretical model featuring household debt (mortgages) and banking sector frictions. We show that mortgage risks can potentially lead to a bank run equilibrium. Such an equilibrium exists since mortgage risks reduce the liquidation prices of bank assets. We further show that mortgage market regulations such as loan-to-value requirements reduce the likelihood of bank runs.
    Keywords: bank run, mortgage risk, loan-to-value ratio
    JEL: E32 E44 G01 G21 G33
    Date: 2020–10
  6. By: Dewan Azmal Hossain (Department of Accounting & Information Systems, University of Dhaka, Dhaka-1000, Bangladesh Author-2-Name: Author-2-Workplace-Name: 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 study aims to examine the relationship between ownership structure (determined by institutional and foreign ownership) and earnings management in the context of Bangladeshi Pharmaceuticals and Chemical firms. Methodology – Out of 32 listed firms, this study examined 29 firms from the pharmaceuticals and chemical industry of Bangladesh from 2014 to 2018. Three firms are omitted as they got listed in 2018 and 2019 respectively. This study uses discretionary working capital accrual to measure earnings management that is the dependent variable. Ordinary least square regression analysis is conducted to assess the result of this study. Institutional and foreign ownership are independent variables. ROA, size, cash flow from operation, and leverage are control variables. Findings – It is found that institutional ownership is negatively related to earnings management and foreign ownership is positively related to earnings management but none of them are statistically significant indicating institutional and foreign ownership do not help in resolving or reducing the earnings management problems in the context of Bangladeshi pharmaceuticals and chemical firms. Novelty – Previous studies in Bangladesh deal only with the techniques of earnings management. To my knowledge, it is the first study that tries to assess the relationship of ownership structure defined by institutional and foreign shareholdings with earnings management in the context of Bangladeshi pharmaceuticals and chemical firms. These two ownership patterns are selected because they are supposed to increase the quality of financial information and also because in Bangladesh state and general shareholders are too dispersed to monitor the governance issues. The practical implications of this study is that investors should not consider institutional and foreign ownership percentage as a determining factor of good governance when considering investment decisions rather should look for other firm-specific factors as institutional and foreign shareholders are found to be inactive in increasing the quality of financial information in the context of Bangladesh. Policymakers should identify why institutional and foreign shareholders are not active and should revise the governance mechanisms accordingly. Type of Paper - Empirical.
    Keywords: Ownership structure; Institutional Shareholdings; Foreign Shareholdings; Earnings Management; Bangladesh.
    Date: 2020–09–30
  7. By: Zhou, Haiwen
    Abstract: How market size and the level of coordination costs determine the degree of specialization is studied in an infinite horizon model with the amount of capital determined endogenously. Firms producing the same intermediate good engage in oligopolistic competition and choose the degree of specialization of their technologies to maximize profits. A more specialized technology is a technology with a lower marginal cost, but a higher fixed cost. Interestingly, the relationship between the level of coordination costs and a firm’s degree of specialization is ambiguous. A firm in a country with a larger market size, more patient citizens, or a higher amount of knowledge will choose more specialized technologies and this country will have a higher wage rate and a higher capital stock. If fixed costs decrease, firms will choose more flexible manufacturing.
    Keywords: The division of labor, market size, fixed costs, flexible manufacturing, coordination costs
    JEL: D43 L13 O14
    Date: 2020–10–19
  8. By: Ruben Hipp
    Abstract: We investigate the causal structure of financial systems by accounting for contemporaneous relationships. To identify structural parameters, we introduce a novel non-parametric approach that exploits the fact that most financial data empirically exhibit heteroskedasticity. The identification works locally and, thus, allows structural matrices to vary smoothly with time. With this causality in hand, we derive a new measure for systemic relevance. An application on volatility spillovers in the US financial market demonstrates the importance of structural parameters in spillover analyses. Finally, we highlight that the COVID-19 period is mostly an aggregate crisis, with financial firms’ spillovers edging slightly higher.
    Keywords: Econometric and statistical methods; Financial markets; Financial stability
    JEL: C32 C58 L14
    Date: 2020–10
  9. By: Mattia Guerini (Scuola Superiore Sant'Anna); Lionel Nesta (Observatoire français des conjonctures économiques); Xavier Ragot (Observatoire français des conjonctures économiques); Stefano Schiavo (Observatoire français des conjonctures économiques)
    Abstract: We simulate the impact of the Covid-19 crisis on corporate solvency using a sample of around one million French nonfinancial companies, assuming they minimize their production costs in the context of a sharp drop in demand. We find that the lockdown triggers an unprecedented increase in the share of illiquid and insolvent firms, with the former more than doubling relative to a No-Covid scenario (growing from 3.8% to more than 10%) and insolvencies increasing by 80% (from 1.8% to 3.2%). The crisis has a heterogeneous effect across sectors, firm size, and region. Sectors such as hotels and restaurants, household services, and construction are the most vulnerable, while wholesale and retail trade, and manufacturing are more resilient. Micro-firms and large businesses are more likely to face solvency issues, whereas SMEs and medium-large firms display lower insolvency rates. The furlough scheme put forward by the government (activité partielle) has been very effective in limiting the number of insolvencies, reducing it by more than 1 percentage point (approximately 12,000 firms in our sample). This crisis will also have an impact on the overall efficiency of the French economic system, as market selection appears to be less efficient during crisis periods relative to “normal times”: in fact, the fraction of very productive firms that are insolvent significantly increases in the aftermath of the lockdown. This provides a rationale for policy interventions aimed at supporting efficient, viable, yet illiquid firms weathering the storm. We evaluate the cost of such a scheme aimed at strength-ening firms' financial health to around 8 billion euros.
    Keywords: Firm liquidity; Solvency; Covid-19 lockdown
    Date: 2020–07–06
  10. By: Fatma M. Utku-ismihan (Ministry of Agriculture and Forestry); M. Teoman Pamukçu (Middle East Technical University, Ankara, Turkey)
    Abstract: Due to their important contribution to overall growth performance of economies policy makers have attributed great importance to high growth firms (HGFs). In order to examine and support their efforts, researchers have tried to identify the factors that initiate and promote the growth performance of HGFs. However, this is not a simple task since the factors that contribute to the growth performances of firms seem to vary across sectors and countries. This study examines the characteristics of HGFs and attempts to identify those factors that stimulate HGFs in the Turkish manufacturing sector using a rich firm-level dataset over the period 2003-2014.
    Date: 2020–10–20
  11. By: Jean-Sébastien Fontaine; Guillaume Ouellet Leblanc; Ryan Shotlander
    Abstract: Between February 19 and March 23, 2020, the Canadian stock market plunged due to the severe economic impact of COVID-19. By the end of the summer, the stock market had already recovered a significant portion of its losses, leaving many asking if investors see the economy through rose-coloured glasses. Despite these concerns, we find that current market valuations for companies on the Toronto Stock Exchange align well, on average, with the declines in earning forecasts observed since the start of the year. We also find these market valuations are consistent with the discount rate returning to its pre-pandemic level.
    Keywords: Asset pricing; Coronavirus disease (COVID-19); Financial markets
    JEL: G14
    Date: 2020–10
  12. By: Mundt, Philipp; Alfarano, Simone; Milaković, Mishael
    Abstract: The cross-sectional variation in corporate profitability has occupied research across fields as diverse as strategic management, industrial organization, finance, and accounting. Prior work suggests that industry affiliation as well as different forms of corporate idiosyncrasies are important determinants of profitability, but it disagrees widely on the quantitative importance of particular effects. This paper shows that industry and corporate specificities become irrelevant in the long run because profitability is ergodic conditional on survival, implying that there is a uniform, time-invariant regularity in profitability that applies across firms. Conditional on survival, we cannot reject the hypothesis that corporations are on average equally profitable and also experience equally volatile fluctuations in their profitability, irrespective of their individual characteristics. The same is not true for shorter-lived firms, even for up to 20 years after entry or before exit, and would explain the contradictory findings in the extant literature, which usually considers samples containing heterogeneous mixtures of surviving and shorter-lived companies. Therefore the mere fact of survival, rather than any previously suggested set of variables, becomes the only relevant information for corporate profitability in the long run.
    Keywords: performance,dynamic competition,corporate strategy,stochastic differential equation
    JEL: C14 L10 D21 E10
    Date: 2020
  13. By: Muduli, Silu; Dash, Shridhar Kumar
    Abstract: A borrower may hesitate to borrow from her close relatives and family members as it costs them in terms of reduction in social insurance in the case of default. This invisible cost reduces credit risk. India’s household indebtedness survey shows some evidence on these borrowing preferences. This perspective on borrowing decisions derived from the community can be used as one of the dimensions in credit risk evaluation and in policy formulation.
    Keywords: Network, Trust, Credit Risk
    JEL: C92 D82 G21
    Date: 2019–12–07
  14. By: Gupta, Apoorva
    Abstract: Can being innovative help firms to shield themselves from the disruptive effects of a recession? Using data for Spanish manufacturing firms, this paper finds that innovative firms suffered considerably less compared to noninnovative firms during the Great Recession. The operating mechanism for the resilience of innovative firms to market disruption during a recession is product differentiation, and not reduction in marginal cost of production and prices with process innovation. The data does not support alternative explanations such as better access to capital, or difference in labour moving costs for innovative firms. The results provide evidence for the role of innovation in making firms dynamically capable and resilient to large negative shocks.
    Keywords: Innovation,Recession,Resilience,Product differentiation,Dynamic capability
    JEL: L25 O30 O31 E32
    Date: 2020
  15. By: Negrini, Marcello (General Economics 0 (Onderwijs), RS: GSBE Theme Human Decisions and Policy Design, Microeconomics & Public Economics); Riedl, Arno (RS: GSBE Theme Human Decisions and Policy Design, Microeconomics & Public Economics); Wibral, Matthias (RS: GSBE Theme Human Decisions and Policy Design, Microeconomics & Public Economics)
    Abstract: Evidence from hypothetical scenarios strongly suggests the existence of a sunk cost bias, the tendency to ‘throw good money after bad money.’ However, the few studies using incentives are inconclusive. In addition, evidence on potential psychological channels underlying such a bias is scarce. We present a laboratory experiment designed to investigate the sunk cost bias and to test some prominent psychological mechanisms. Inspired by the hypothetical scenarios, we use a two-stage investment task in which an initial investment needs to be made to start a project. In the initial investment stage, the size of the investment and the responsibility of the investor are exogenously varied. In the second investment stage, participants can either decide to terminate the project or to make an additional investment to finish the project. We do not find evidence for the sunk cost bias. To the contrary, we observe a robust reverse sunk cost bias. That is, the larger the initial investment, the lower the likelihood to continue investing in a project. Moreover, whether or not subjects are responsible for the initial investment, does not affect their additional investment. More waste averse individuals also do not react more strongly to sunk cost whereas being in the loss domain decreases additional investment. Importantly, we replicate the sunk cost bias when using hypothetical scenarios. Surprisingly, the reverse sunk cost bias also holds for those participants who exhibit a strong sunk cost bias in the hypothetical scenarios.
    JEL: C91 D01 D90 D91
    Date: 2020–10–13

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