nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒02‒08
twelve papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Capital (Mis)allocation and Incentive Misalignment By Alexander Schramm; Alexander Schwemmer; Jan Schymik
  2. Do Acquirer Announcement Returns Reflect Value Creation? By Ben-David, Itzhak; Bhattarcharya, Utpal; Jacobsen, Stacey
  3. Are Bank Merger Characteristics Important for Local Community Investment? By Minton, Bernadette A.; Taboada, Alvaro G.; Williamson, Rohan
  4. Zombies at Large? Corporate Debt Overhang and the Macroeconomy By Òscar Jordà; Martin Kornejew; Moritz Schularick; Alan M. Taylor
  5. No-fault Default, Chapter 11 Bankruptcy, and Financial Institutions By Robert C. Merton; Richard T. Thakor
  6. Financial Distress, Tax Loss Carried Forward, Corporate Governance and Tax Avoidance By Mayang Sekar Pembayun Khamisan
  7. Unequal and Unstable: Income Inequality and Bank Risk By Yuliyan Mitkov; Ulrich Schüwer
  8. Collective Memories on the 2010 European Debt Crisis By Laura Arnemann; Kai A. Konrad; Niklas Potrafke
  9. The Remarkable Growth in Financial Economics, 1974-2020 By G. William Schwert
  10. Are bigger banks better? Firm-level evidence from Germany By Kilian Huber
  11. On the Theory of Knowledge Resource Inequality: Role of Knowledge Capital in Social Transformation By Chatterjee, Sidharta
  12. Financial structure, capital openness and financial crisis By Zhai, Weiyang

  1. By: Alexander Schramm; Alexander Schwemmer; Jan Schymik
    Abstract: We study how managerial incentives affect the allocation of capital inside firms. To identify the effect of incentives on investment decisions we use a within-firm estimator that exploits variation across capital goods and a US accounting reform as an exogenous shock to managers' short-termist incentives. Our evidence shows that capital (mis)allocation within firms can be amplified by short-termist incentives. More short-term incentives cause a shift in investment expenditures away from durables towards more short-lived capital goods, effectively shortening the durability of firms' capital stocks. To study the economic implications of this within-firm misallocation channel, we then build a model of firm investments with incentive frictions that we calibrate to the US economy. We show that even moderate increases in short-termist incentives, such as those around the accounting reform, may cause substantial inefficiencies. These inefficiencies lead to large within-firm spreads in the marginal products of capital goods, causing long-run declines in output and real wages.
    Keywords: Corporate investment; Firm dynamics; Capital reallocation; Short-term incentives
    JEL: E22 G31 D24 D25 L23
    Date: 2021–01
  2. By: Ben-David, Itzhak (Ohio State U); Bhattarcharya, Utpal (Hong Kong U of Science and Technology); Jacobsen, Stacey (Southern Methodist U)
    Abstract: Stock returns around acquisition announcements are widely viewed as being reflective of the net present value created by these transactions. As such, announcement returns should correlate with acquisition outcomes. Using a new measure of realized transaction-level acquisition failure, as well as acquirer firm-level performance, we show that while these outcomes can be predicted based on observable deal and firm characteristics, they are largely uncorrelated with announcement returns. Our results cast doubt on the usefulness of announcement returns as a measure of the value created in acquisitions and call for caution in other contexts.
    JEL: G02 G14 G32 G34
    Date: 2020–10
  3. By: Minton, Bernadette A. (Ohio State U); Taboada, Alvaro G. (Mississippi State U); Williamson, Rohan (Georgetown U)
    Abstract: Using a sample of 3,964 bank mergers during the 1999-2016 period, we examine the effects of merger and local market characteristics on local small business lending through banks' dependence on soft information acquisition relative to technology driven lending. Mergers involving small or in-state acquirers are positively associated with small business loan (SBL) originations in counties where the target bank has a presence, particularly in counties with a larger number of small firms. In contrast, mergers involving large acquirers are associated with fewer SBL originations while those involving out-of-state acquirers have no impact on SBL originations. Analyses of acquirer bank SBL origination activity post-merger corroborate our county-level results. Post-merger, small bank acquirers increase in SBL originations, while large acquirers do not. Examining the behavior of local competitor banks shows that competitors of small acquirers decrease SBL originations, partially offsetting the positive effect associated small bank acquirers. Taken together, our findings underscore the importance of soft information acquisition in small business lending and suggest one-size-fits-all policy solutions are not likely to lead to common outcomes at the local level. Encouraging mergers by small banks and by in-state acquirers can positively affect small business lending and community investment, particularly in counties with a large fraction of small firms.
    JEL: G20 G21 G34 O16
    Date: 2020–12
  4. By: Òscar Jordà; Martin Kornejew; Moritz Schularick; Alan M. Taylor
    Abstract: With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near- universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.
    JEL: E44 G32 G33 N20
    Date: 2020–12
  5. By: Robert C. Merton; Richard T. Thakor
    Abstract: This paper analyzes the costs and benefits of a no-fault-default debt structure as an alternative to the typical bankruptcy process. We show that the deadweight costs of bankruptcy can be avoided or substantially reduced through no-fault-default debt, which permits a relatively seamless transfer of ownership from shareholders to bondholders in certain states of the world. We show that potential costs introduced by this scheme due to risk shifting can be attenuated via convertible debt, and we discuss the relationship of this to bail-in debt and contingent convertible (CoCo) debt for financial institutions. We then explore how, despite the advantages of no-fault-default debt, there may still be a functional role for the bankruptcy process to efficiently allow the renegotiation of labor contracts in certain cases. In sharp contrast to the human-capital-based theories of optimal capital structure in which the renegotiation of labor contract in bankruptcy is a cost associated with leverage, we show that it is a benefit. The normative implication of our analysis is that no-fault-default debt, when combined with specific features of the bankruptcy process, may reduce the deadweight costs associated with bankruptcy. We discuss how an orderly process for transfer of control and a predetermined admissibility of renegotiation of labor contracts can be a useful tool for resolving financial institution failure without harming financial stability.
    JEL: D21 G21 G23 G32 G33 G38 K12 L22
    Date: 2021–01
  6. By: Mayang Sekar Pembayun Khamisan (Trisakti School of Management, Kyai Tapa 20, 11440, Jakarta, Indonesia Author-2-Name: Silvy Christina Author-2-Workplace-Name: Trisakti School of Management, Kyai Tapa 20, 11440, 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 obtain empirical evidence about the factors that influence tax avoidance. The independent variables tested in this research were financial distress, tax loss carried forward, institutional ownership, managerial ownership, audit committee, audit quality, firm size, and return on assets with e Cash Effective Tax Rate (CETR) used as a dependent variable in this study. Methodology/Technique - The companies used in this study are manufacturing companies listed on the Indonesia Stock Exchange (IDX) with a research period of 2016-2018. The number of research samples used were 162 data. The method of sampling used purposive sampling and this research used multiple regression analyses to test the hypothesis. Finding - This research provides the result that financial distress, tax loss carried forward, institutional ownership, managerial ownership, audit committee, audit quality, firm size, and return on assets have no influence on tax avoidance. Originality/value - The difference between this study and previous studies is that this study focuses on financial distress, tax loss carried forward and corporate governance. Type of Paper - Empirical.
    Keywords: Financial Distress, Tax Loss Carried Forward, Institutional Ownership, Managerial Ownership, Audit Committee, Audit Quality, Firm Size, Return on Assets, Cash Effective Tax Rate.
    JEL: M41 M49
    Date: 2020–12–31
  7. By: Yuliyan Mitkov; Ulrich Schüwer
    Abstract: We provide evidence that regions in the U.S. with higher income inequality tend to have a riskier banking sector. However, not all banks are more risky, as reflected in a higher dispersion of bank risk. We show how a model based on risk-shifting incentives where banks channel insured deposits into subprime loans can account for both findings. In equilibrium, a competition to risk-shift emerges, leading to a subprime lending boom in which loans to high-risk borrowers carry negative NPVs. Some banks engage in risk-shifting by lending to high-risk subprime borrowers, while the rest specialize in lending to low-risk prime borrowers.
    Keywords: Inequality, Financial stability, Agency costs, Composition of credit, Banking competition
    JEL: G11 G21 G28 G51
    Date: 2021–01
  8. By: Laura Arnemann; Kai A. Konrad; Niklas Potrafke
    Abstract: We examine whether collective memories on the aid&reform programs chosen to handle the 2010 European debt crisis differ between citizens from borrower and lender countries. We use new international survey data for non-experts and experts in member countries of the euro area. The results show that non-experts from borrower and lender countries remember aspects of the programs in different manners; indicating biases for assessments of how the crisis outcomes are perceived in borrower and lender countries. Nation-serving biases may well explain if the European debt crisis has reduced the sense of belonging rather than bringing European citizens closer together.
    Keywords: collective memories, European debt crisis, nation-serving biases, aid&reform programmes, experts
    JEL: F36 F55 H12 H87
    Date: 2021
  9. By: G. William Schwert
    Abstract: Academic finance has grown and evolved in the 46 years since the Journal of Financial Economics (JFE) began publishing papers. This paper uses detailed data on the 2,858 papers written by 3,152 different authors published in the JFE from 1974-2019. Cumulatively, these papers have received 278,018 citations from other published papers as reflected in the Social Science Citation Index. Increasing computing power and electronic communication have likely resulted in trends toward more empirical work, more co-authorship, and more complex papers. Growth in the demand for finance faculty has driven up faculty salaries, and therefore the demand for journal services.
    JEL: G10 G20 G30
    Date: 2020–12
  10. By: Kilian Huber
    Abstract: The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in post-war Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.
    Keywords: bank regulation, big banks, bank size, economic growth, Brexit, economic geography, employment, globalisation, productivity,technological change
    JEL: E24 E44 G21 G28
    Date: 2020–12
  11. By: Chatterjee, Sidharta
    Abstract: Inequality is an effect of much concern for economists and policy makers. Inequality gives rise to poverty, a phenomenon still troubling the world economy characterized by a gap–wherein the standard deviation between the rich and the poor is too high. Various factors attribute to growing inequality, but one which is often overlooked is–misallocation of knowledge resources. In this paper, we reinforce the concept of knowledge as being a capital resource. Following this, by using a simple model, we attempt to explain inequality born out of its heterogeneous allocation and its discrete nature of distribution as a capital resource. The effect being that, lack of access to quality education for those who need it most creates a phenomenon which we call knowledge resource inequality (KRI).
    Keywords: Allocation, Capital Resource Inequality (CRI), education, Knowledge resource inequality (KRI), economic planning
    JEL: H4 O1 O15
    Date: 2021–01–07
  12. By: Zhai, Weiyang
    Abstract: This paper examines how the financial structure and capital openness of a country have affected the likelihood of financial crisis over the past two decades. By applying a panel probit estimation to a sample of 38 countries, we find the following. 1) An economy with a more market-based financial structure is less likely to experience a currency crisis. 2) More capital openness is associated with a lower probability of a currency crisis. 3) Countries with a more market-based financial structure are also less likely to experience a currency crisis if that structure is coupled with a more open capital account. 4) Unlike what is found for currency crises, neither financial structure nor capital openness has any effect on banking crises.
    Keywords: financial structure; capital openness; currency crisis; banking crisis
    JEL: G01 G15 G28
    Date: 2020–12–29

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