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on Corporate Finance |
| By: | Guenzel, Marius; Malmendier, Ulrike M. |
| Abstract: | One of the fastest-growing areas of finance research is the study of managerial biases and their implications for firm outcomes. Since the mid 2000s, this strand of Behavioral Corporate Finance has provided theoretical and empirical evidence on the influence of biases in the corporate realm, such as overconfidence, experience effects, and the sunk-cost fallacy. The field has been a leading force in dismantling the argument that traditional economic mechanisms- selection, learning, and market discipline-would suffice to uphold the rational manager paradigm. Instead, the evidence reveals behavioral forces to exert a significant influence at every stage of a CEO's career. First, at the appointment stage, selection does not impede the promotion of behavioral managers. Instead, competitive environments oftentimes promote their advancement, even under value-maximizing selection mechanisms. Second, while at the helm of the company, learning opportunities are limited since many managerial decisions occur at low frequency, and their causal effect is clouded by self-attribution bias and difficult to disentangle from that of concurrent events. Third, at the dismissal stage, market discipline does not ensure the firing of biased decision-makers as board members themselves are subject to biases in their evaluation of CEOs. By documenting how biases affect even the most educated and influential decision-makers, such as CEOs, the field has generated important insights into the hard-wiring of biases. Biases do not simply stem from a lack of education or is restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations. An important question for future research is how to limit, in each CEO career phase, the adverse effects of managerial biases-from refining selection mechanisms, designing and implementing corporate repairs, and reshaping corporate governance to accounting not only for incentive misalignments but also for biased decision-making. |
| Keywords: | Behavioral Corporate Finance; CEO Careers; corporate governance; Financing; investment; Managerial Biases; mergers and acquisitions; Organizational economics |
| JEL: | G3 G32 G34 G4 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15103&r= |
| By: | Ewens, Michael; Malenko, Nadya |
| Abstract: | Venture capital (VC) backed firms face neither the governance requirements nor a major separation of ownership and control of their public peers. These differences suggest that independent directors could play a unique role on private firm boards. This paper explores the dynamics of VC-backed startup boards using new data on board member entry, exit, and individual director characteristics. We document several new facts about board size, the allocation of control, and composition dynamics. At formation, a typical board has four members and is entrepreneur-controlled. Independent directors are found on the median board after the second financing event, when control over the board becomes shared, with independent directors holding the tie-breaking vote. These patterns are consistent with independent directors playing both a mediating and advising role over the startup life cycle, and thus representing another potential source of value-add to entrepreneurial firm performance. |
| Keywords: | Allocation of control; Board Of Directors; corporate governance; Independent Directors; Mediation role; venture capital |
| JEL: | G24 G34 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15024&r= |
| By: | Antoine L. Noël; Amy Hongfei Sun |
| Abstract: | We propose a theory of optimal firm financing given nested information problems of adverse selection and agency cost. We prove that there exists a unique perfect Bayesian equilibrium with novel features: First, three types of optimal contracts arise endogenously, i.e., equity, transparent debt and opaque debt. Equity and transparent debt are both informational transparent because these contracts require firms to take on a costly technology for verifying types. Opaque debt, however, merely reflects the general information of firms seeking external funds. Any signaling contract that does not involve costly verification does not survive the equilibrium. Second, the equilibrium is either pooling on opaque debt, or mixing with transparent and opaque financing. Third, debt weakly dominates equity. Finally, the optimal debt-to-equity ratio is unique for all firms in a pooling equilibrium, but only for a strict subset of firms in a mixing equilibrium. |
| Keywords: | Optimal Contracts, Capital Structure, External Financing, Asymmetric Information, Information Transparency |
| JEL: | D82 D86 G32 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1459&r= |
| By: | Perla, Jesse; Pflueger, Carolin; Szkup, Michal |
| Abstract: | We investigate how a combination of limited liability and preexisting debt distort firms' investment and equity payout decisions. We show that equity holders have incentives to ``double-sell'' cash flows in default, leading to overinvestment, provided that the firm has preexisting debt and the ability to issue new claims to the bankruptcy value of the firm. In a repeated version of the model, we show that the inability to commit to not double-sell cash flows leads to heterogeneous investment distortions, where high leverage firms tend to overinvest but low leverage firms tend to underinvest. Permitting equity payouts financed by new debt mitigates overinvestment for high leverage firms, but raises bankruptcy rates and exacerbates low leverage firms' tendency to underinvest---as the anticipation of equity payouts from future debt raises their cost of debt issuance. Finally, we provide empirical evidence consistent with the model. |
| Keywords: | Debt overhang; equity payout restrictions; leverage; Overinvestment; underinvestment |
| JEL: | E20 E22 E44 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15238&r= |
| By: | Corum, Adrian Aycan; Malenko, Andrey; Malenko, Nadya |
| Abstract: | We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and asset management fees are endogenously determined. Funds' ownership stakes and asset management fees determine their incentives to engage in governance. Whether passive fund growth improves aggregate governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even if accompanied by lower passive fund fees, whereas in the latter case, it improves governance only if it does not increase fund investors' returns too much. Regulations that decrease funds' costs of engaging in governance may decrease total welfare. Moreover, even when such regulations are welfare improving and increase firm valuations, they can be opposed by both fund investors and fund managers. |
| Keywords: | Competition; corporate governance; delegated asset management; engagement; Index funds; investment stewardship; passive funds |
| JEL: | G11 G23 G34 K22 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15230&r= |
| By: | Ljungqvist, Alexander P.; Raff, Konrad |
| Abstract: | We ask when and how a diverse board can benefit shareholders. Board diversity may be value-increasing even if some directors have agendas that are not perfectly aligned with shareholders' interests. Diversity commits the board to a high information standard because directors with opposing agendas are deadlocked unless they have persuasive information in support of the optimal course of action. Since deadlock is costly, diversity strengthens directors' incentives to gather information ex ante, which raises expected firm value. Diversity is more likely desirable if the firm's information environment is poor and if directors' opposing agendas are accompanied by sufficiently strong incentives for value maximization. However, if directors cannot credibly communicate their information, a homogeneous board dominates a diverse board. |
| Keywords: | Boards of directors; deadlock; diversity; Monitoring |
| JEL: | G34 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15165&r= |
| By: | Glossner, Simon; Matos, Pedro Pinto; Ramelli, Stefano; Wagner, Alexander F |
| Abstract: | During the COVID-19 market crash, U.S. stocks with higher institutional ownership -- in particular, those held more by active, short-term, and more exposed institutions -- performed worse. Portfolio changes through the first quarter of 2020 reveal that institutional investors prioritized corporate financial strength over "soft" environmental and social performance. Trading data from a large discount brokerage (Robinhood) confirm that retail investors acted as liquidity providers. The effects did not reverse in the second quarter. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes by fire-selling and seeking shelter in "hard" measures of firm resilience. |
| Keywords: | Coronavirus; corporate cash holdings; Corporate Debt; COVID-19; ESG; Institutional Ownership; leverage; Retail investors; tail risk |
| JEL: | F14 G01 G12 G14 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15070&r= |
| By: | Anderson, Ronald W. |
| Abstract: | This paper analyses of how risk is allocated in China's markets for debt issued by non-financial enterprises. Compared to other major corporate bond markets China's is unusual in that unlisted, state-owned enterprises account for a large fraction of the debt issued and that the foundations of the corporate and bankruptcy law are young and still evolving. The implications of these features are described and quantified. The results show that the major changes in relative pricing across different market segments cannot be explained well by standard measures of solvency and liquidity. Rather, the most successful explanation is that major policy actions have had the effect of withdrawing implicit guarantees from private issuers and making more explicit the limits of guarantees afforded to state issuers. |
| Keywords: | bankruptcy reform; Chinese securities markets; corporate bonds; implicit guarantees; State capitalism |
| JEL: | G3 H2 K4 P2 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15135&r= |
| By: | Kiss, Tamás (Örebro University School of Business); Mazur, Stepan (Örebro University School of Business); Nguyen, Hoang (Örebro University School of Business) |
| Abstract: | In this paper we assess whether exible modelling of innovations impact the predictive performance of the dividend price ratio for returns and dividend growth. Using Bayesian vector autoregressions we allow for stochastic volatility, heavy tails and skewness in the innovations. Our results suggest that point forecasts are barely affected by these features, suggesting that workhorse models on predictability are sufficient. For density forecasts, however, we finnd that stochastic volatility substantially improves the forecasting performance. |
| Keywords: | Bayesian VAR; Dividend Growth Predictability; Predictive Regression; Return Predictability |
| JEL: | C11 C58 G12 |
| Date: | 2021–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oruesi:2021_010&r= |
| By: | Cutura, Jannic; Parise, Gianpaolo; Schrimpf, Andreas |
| Abstract: | We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard. |
| Keywords: | bonds; De-risking; liquidity; Mutual funds; swing pricing; tournaments |
| JEL: | E43 G11 G23 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14817&r= |
| By: | Cecilia Caglio; Adam Copeland; Antoine Martin |
| Abstract: | We use confidential and novel data to measure the benefit to broker-dealers of being affiliated with a bank holding company and the resulting access to internal sources of funding. We accomplish this by comparing the balance sheets of broker-dealers that are associated with bank holding companies to those that are not and we find that the latter dramatically re-structured their balance sheets during the 2007-09 financial crisis, pivoting away from trading illiquid assets and toward more liquid government securities. Specifically, we estimate that broker-dealers that are not associated with bank holding companies both increased repo as a share of total assets by 10 percentage points and also increased the share of long inventory devoted to government securities by 15 percentage points, relative to broker-dealers associated with bank holding companies. |
| Keywords: | broker-dealers; shadow banking; liquidity risk; repo market |
| JEL: | G2 G21 G23 |
| Date: | 2021–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:92032&r= |
| By: | Zinsou Daniel Nakou (ESP-LMAGI - École supérieure Polytechnique de Dakar - UCAD - Université Cheikh Anta Diop [Dakar, Sénégal]); Serge Francis Simen (ESP-LMAGI - École supérieure Polytechnique de Dakar - UCAD - Université Cheikh Anta Diop [Dakar, Sénégal]) |
| Abstract: | This paper aims to analyze the relationship between governance mechanisms on the performance of Beninese public enterprises. We carried out a quantitative study based on a questionnaire with 200 employees in 20 Beninese public companies whose data were presented and processed in the SPSS 21.0 and Amos 21.0 software. Our results indicated on the one hand that the characteristics and the various committees of the Board of Directors as well as the Statutory Auditor represent the main internal mechanisms of the governance system of Beninese public enterprises; the Technical and Financial Partners and the managerial labor market represent the main external mechanisms of the governance system of Beninese public enterprises. As for the effects of the main mechanisms of the governance system on the performance of Beninese public enterprises, the analysis of the results reveals a negative influence of the managers' labor market on the performance of enterprises; while the characteristics and mode of operation of the Statutory Auditors have no effect on the latter. On the other hand, the characteristics and the different committees of the Board of Directors as well as the Technical and Financial Partners have a positive influence on the performance of Beninese public enterprises. |
| Abstract: | Ce papier se propose d'analyser la relation entre les mécanismes de gouvernance sur la performance des entreprises publiques béninoises. Nous avions procédé à une étude quantitative basée sur un questionnaire auprès de 200 salariés dans 20 entreprises publiques béninoises dont les données ont été présentées et traitées dans les logiciels SPSS 21.0. Nos résultats ont indiqué d'une part, que les caractéristiques et les différents comités du Conseil d'Administration ainsi que le Commissariat aux Comptes représentent les principaux mécanismes internes du système de gouvernance des entreprises publiques béninoises ; d'autre part, que les Partenaires Techniques et Financiers ainsi que le marché du travail des managers représentent les principaux mécanismes externes du système de gouvernance des entreprises publiques béninoises. Quant aux effets des principaux mécanismes du système de gouvernance sur la performance des entreprises publiques béninoises, l'analyse des résultats révèle une influence négative du marché du travail des managers sur la performance des entreprises tandis que, les caractéristiques et le mode de fonctionnement du Commissariat aux Comptes sont sans effet sur cette dernière. Par contre, les caractéristiques et les différents comités du Conseil d'Administration ainsi que les Partenaires Techniques et Financiers ont une influence positive sur la performance des entreprises publiques béninoises. |
| Keywords: | Statutory Auditors,Public company,corporate governance mechanisms,performance,Board of Directors,Conseil d’Administration,mécanismes de gouvernance d’entreprise,Entreprise publique,Commissariat aux Comptes |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03231344&r= |
| By: | Michele Fioretti (Département d'économie); Victor Saint-Jean (Département d'économie); Simon C Smith (Federal Reserve Board) |
| Abstract: | During the onset of the COVID-19 pandemic, conflicting incentives caused most shareholders to adverse corporate social responsibility (CSR) –measured by firms’ charitable donations– since it would further burden firms’ already strained finances. Those shareholders that favored donations, large individual investors, did so to bolster their own images as they are typically synonymous with the donating firms. Image gains do not pass through to institutional shareholders, who instead preferred to donate themselves rather than having the firms they invested in donate. Taken together, our results cast doubts on large corporations’ willingness to demand costly CSR measures across firms in their portfolios. |
| Keywords: | Shareholder influence; Corporate decisions; Charitable donations; COVID-19 |
| JEL: | G32 G41 M14 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/3t26b67lmf8nnqo12dbjl5bqom&r= |
| By: | Kargar, Mahyar; Lester, Benjamin; Lindsay, David; Liu, Shuo; Weill, Pierre-Olivier; Zuniga, Diego |
| Abstract: | We study liquidity conditions in the corporate bond market during the COVID-19 pandemic, and the effects of the unprecedented interventions by the Federal Reserve. We find that, at the height of the crisis, liquidity conditions deteriorated substantially, as dealers appeared unwilling to absorb corporate debt onto their balance sheets. In particular, we document that the cost of risky-principal trades increased by a factor of five, forcing traders to shift to slower, agency trades. The announcements of the Federal Reserve's interventions coincided with substantial improvements in trading conditions: dealers began to "lean against the wind" and bid-ask spreads declined. To study the causal impact of the interventions on market liquidity, we exploit eligibility requirements for bonds to be purchased through the Fed's corporate credit facilities. We find that, immediately after the facilities were announced, trading costs for eligible bonds improved significantly while those for ineligible bonds did not. Later, when the facilities were expanded, liquidity conditions improved for a wide range of bonds. We develop a simple theoretical framework to interpret our findings, and to estimate how the COVID-19 shock and subsequent interventions affected consumer surplus and dealer profits. |
| Keywords: | corporate bonds; COVID-19; intermediation; liquidity; SMCCF |
| JEL: | G12 G14 G21 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15231&r= |
| By: | P. A. Gloor; A. Fronzetti Colladon; F. Grippa; B. M. Hadley; S. Woerner |
| Abstract: | The purpose of this study is to examine the impact of board member composition and board members' social media presence on the performance of startups. Using multiple sources, we compile a unique dataset of about 500 US-based technology startups. We find that startups with more venture capitalists on the board and whose board members are active on Twitter attract additional funding over the years, though they do not generate additional sales. By contrast, startups which have no venture capitalists on the board and whose board members are not on Twitter show an increased ability to translate assets into sales. Consistent with other research, our results indicate that startups potentially benefit from working with VCs because of the opportunity to access additional funding, although their presence does not necessarily translate into sales growth and operational efficiency. We use a number of control variables, including board gender representation and board members' position in the interlocking directorates' network. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.10237&r= |
| By: | Hadar Gafni; Marek Hudon; Anaïs A Périlleux |
| Abstract: | Crowdfunding has created new opportunities for poor microentrepreneurs. One crucial question is the impact that the purpose of a loan—either business investment or basic necessities—may have on the success of a campaign. Investigating a prosocial crowdfunding platform, we find that loans taken out to meet basic needs are funded faster than business-related loans, especially for small amounts, which can be explained by the prosocial motivation of microlenders. Moreover, female microborrowers are funded faster than men, especially for basic needs loans. Our results therefore suggest an ethical blind spot, since prosocially motivated crowdlenders may unintentionally end up producing adverse effects, replicating gender role by supporting women to a lesser extent when they apply for business loans. This finding expands prosocial motivational theory in ethical finance. |
| Keywords: | Basic necessities; Business loans; Crowdfunding; Ethical finance; Gender preference; Microfinance; Microlending |
| Date: | 2020–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/312803&r= |
| By: | Ahrens, Steffen (FU Berlin); Bosch-Rosa, Ciril (TU Berlin); Kassner, Bernhard (LMU Munich) |
| Abstract: | We study the relationship between overconfidence and the political and financial behavior of a nationally representative sample. To do so, we introduce a new method of eliciting overconfidence that is simple to understand, quick to implement, and captures respondents\' excess confidence in their own judgment. Our results show that, in line with theoretical predictions, an excessive degree of confidence in one\'s judgment is correlated with lower portfolio diversification, larger stock price forecasting errors, and more extreme political views. Additionally, we find that overconfidence is correlated with voting absenteeism. These results appear to validate our method and show how overconfidence is a bias that permeates several aspects of peoples\' life. |
| Keywords: | overconfidence; soep; survey; |
| JEL: | C83 D91 G41 |
| Date: | 2021–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:283&r= |
| By: | Thomas von Brasch (Statistics Norway); Ivan Frankovic; Eero Tölö |
| Abstract: | In this paper, we study how lower corporate tax rates impact investment by including two novel channels into a DSGE model used for fiscal policy analysis in Norway. We capture both how foreign firms relocate and invest in the country when corporate taxes are reduced and how the inflow of FDI increase exports which spills over to domestic firms who then increase their investment further. We find that a one percentage point reduction in the corporate tax rate increases investment by 0.6%, most of which can be attributed to the FDI-export link. The corporate tax cut becomes self-financed when the FDI-export link is included, but only if other countries do not follow suit and also lower their corporate tax rates. When using the model to analyze the tax reform in Norway from 2014 to 2019, we find overall positive effects on investment and employment. |
| Keywords: | Corporate profit tax; Foreign direct investment; Exports; Imports; User cost of capital; Depreciation; Tax reform |
| JEL: | E62 H21 H25 H32 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:955&r= |