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on Corporate Finance |
| By: | Janeway, W.; Nanda, R.; Rhodes-Kropf, M. |
| Abstract: | We review the growing literature on the relationship between venture capital booms and startup financing, focusing on three broad areas: First, we discuss the drivers of large inflows into the venture capital asset class, particularly in recent years -- which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of venture capital financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VCs choose to fund and terms at which they are funded, independent of investment opportunities -- thereby shaping the trajectory of innovation being conducted by startups. Third, an important insight from recent research is that booms in venture capital financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the US over the past forty years in just two broad areas – information and communication technologies (ICT) and biotechnology. We conclude by highlighting promising areas of further research. |
| Keywords: | Venture capital, start-ups, innovation |
| JEL: | G24 L26 M13 O30 |
| Date: | 2021–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2147&r= |
| By: | Giovanni Ferri (Università di Roma LUMSA); Raffaele Lagravinese (Università degli Studi di Bari "Aldo Moro"); Giuliano Resce (Università degli Studi del Molise) |
| Abstract: | Since its lethality increases exponentially with age, the early 2020 COVID-19 shock unexpectedly raised the risk of corporate disruption at companies led by older CEOs. While normally unprepared successions might be beneficial by replacing entrenched CEOs, this systemic shock projected a possible crowding of older CEOs' successions, with disruption costs dominating changeover benefits. Within this natural experiment, we find that stock returns and volatility worsened at S&P 500 listed companies with older CEOs when the COVID-19 lethal risk emerged. Our results resist various robustness checks. This advises companies to adopt contingency strategies of top managers’ replacement against possibly recurring pandemics. |
| Keywords: | COVID-19; Stock Performance; CEO’s Age; S&P 500 |
| JEL: | C23 G12 G32 M12 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:series_wp_02-2021&r= |
| By: | Boyer, Brian (Brigham Young U); Nadauld, Taylor D. (Brigham Young U); Vorkink, Keith P. (Brigham Young U); Weisbach, Michael S. (Ohio State U and ECGI) |
| Abstract: | Standard measures of PE performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that PE discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of PE secondary markets, we obtain similar results using cash flows and returns of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital. |
| JEL: | G11 G23 G24 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-04&r= |
| By: | Mäkinen, Mikko |
| Abstract: | Can a major financial crisis trigger changes in a bank’s risk-taking behavior? Using the 2008 Global Financial Crisis as a quasi-natural experiment and a difference-in-differences approach, I examine whether the worst crisis-hit Russian banks – the banks that have strong incentives to behavior-altering changes – can decrease their post-crisis exposure to risk. A shift in risk-taking behavior by these banks indicates the learning hypothesis. The findings are mixed. The evidence concerning credit risk is inconsistent with the learning hypothesis. On the other hand, the evidence concerning solvency risk is consistent with the learning hypothesis and corroborates evidence from the Nordic countries (Berglund and Mäkinen, 2019). As such, bank learning from a financial crisis may not depend on the institutional context and the level of development of national financial market. Several robustness checks with alternative regression specifications are provided. |
| JEL: | G01 G21 G32 |
| Date: | 2021–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2021_008&r= |
| By: | Acharya, Viral V.; Byoun, Soku; Xu, Zhaoxia |
| Abstract: | We show theoretically and empirically that in the presence of a time-varying cost of capital (COC), firms have a hedging motive to reduce the overall COC over time by saving cash when COC is relatively low. The sensitivity of cash savings to COC is especially pronounced with respect to the cost of equity and for firms with greater correlation between COC and financing needs for future investments. Both financially constrained and unconstrained firms respond to low COC by saving cash out of external capital issuance in excess of current financial needs. |
| Keywords: | Financial constraint; Hedging; market timing; Precautionary motive |
| JEL: | G32 G35 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15059&r= |
| By: | Flannery, Mark; Hanousek, Jan; Shamshur, Anastasiya; Tresl, Jiri |
| Abstract: | Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly â?? within a year of the acquisition. The typical over-levered firm adjusts its debt-to-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms' pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to over-leveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision. |
| Keywords: | leverage deficit; M&A; target capital structure |
| JEL: | G30 G32 G34 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14911&r= |
| By: | Irina Skvortsova (National Research University Higher School of Economics); Anna Vershinina (National Research University Higher School of Economics) |
| Abstract: | In this paper we investigate cognitive biases as a potential reason for the varied results of M&A in emerging capital markets. We focus on two cognitive biases, CEO overconfidence and availability bias, which significantly influence CEO behavior, encouraging them to be irrational in M&A deals. Based on 237 M&A deals closed by Russian firms during the period 2005–2019 we empirically prove that CEO overconfidence destroys value, and availability bias creates value in M&A deals in the Russian market. We show that due to the low level of corporate governance in emerging capital markets, all corporate governance mechanisms can mitigate CEO irrationalities in M&A. |
| Keywords: | M&A performance, emerging capital markets, cognitive biases, CEO overconfidence, availability bias. |
| JEL: | G34 G41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:82/fe/2021&r= |
| By: | Gilje, Erik P. (U of Pennsylvania); Wittry, Michael D. (Ohio State U) |
| Abstract: | We study how ownership structure, in particular public listing status, affects workplace safety and productivity tradeoffs. Theory offers competing hypotheses on how listing-related frictions affect these tradeoffs. We exploit detailed asset-level data in the U.S. coal industry and find that workplace safety deteriorates dramatically under public firm ownership, primarily in mines that experience the largest productivity increases. We find evidence consistent with information asymmetry between managers and share-holders of public firms, and ties of private firm ownership with local communities being first-order drivers of workplace safety and productivity tradeoffs. |
| JEL: | G30 G32 G34 J24 J38 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-05&r= |
| By: | Richard Fabling (Motu Economic and Public Policy Research) |
| Abstract: | We use tax data from the Longitudinal Business Database to estimate the firm-level average interest rate on liabilities. The mean of this measure has similar time series properties to official statistics on the business borrowing rate, while also enabling detailed disaggregation across different firm types. We document significant variation in interest rate across firms in different industries, and across firms with different apparent borrowing risk. Finally, we compare firms self-reported views on whether they are finance-constrained to an estimated firm-specific interest rate premium, showing that: finance-constrained firms have higher interest rate premia than unconstrained firms; and that at least part of this difference in premia is explained by firm-level differences in risk between constrained and unconstrained firms. |
| Keywords: | Finance constraints; interest rates; risk premia; Longitudinal Business Database |
| JEL: | E43 G32 M21 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:mtu:wpaper:21_05&r= |
| By: | Almeida, Heitor (U of Illinois at Urbana-Champaign); Campello, Murillo (Cornell U); Weisbach, Michael S. (Ohio State U) |
| Abstract: | This paper reexamines the empirical evidence on the cash flow sensitivity of cash presented by Almeida, Campello, and Weisbach (2004). The original paper introduces a model in which financially constrained firms choose to save cash out of incremental cash flows but financially unconstrained do not. The authors find evidence consistent with this hypothesis on a sample of U.S. public firms between 1971 and 2000. This paper extends that analysis in a number of ways. In particular, it uses a larger sample covering the 1971-2019 window, considers a number of alternative definitions of financial constraints, and incorporates new methods and tests suggested by Welch (2020), Almeida, Campello, and Galvao (2010), and Grieser and Hadlock (2019). The original empirical findings are robust to these alternative specifications. |
| JEL: | G30 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-02&r= |
| By: | Taylor, Mark P; Wang, Zigan; Xu, Qi |
| Abstract: | We empirically investigate the real effects of exchange rate risk on investment activities of international firms. We provide cross-country, firm-level evidence that greater unexpected currency volatility leads to significantly lower capital expenditures. The effect is stronger for countries with higher economic openness and for firms that do not use currency derivatives to hedge. We empirically test the implications of two potential mechanisms: Real options and precautionary savings. Our findings are consistent with both explanations. Two historical events in the FX markets strengthen the identification of our results. |
| Keywords: | corporate investment; Exchange rate; uncertainty |
| JEL: | F31 G31 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15053&r= |
| By: | Hussain, Shahzad; Akbar, Muhammad; Malik, Qaisar; Ahmad, Tanveer; Abbas, Nasir |
| Abstract: | Purpose –We examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models.Design/methodology/approach – Our evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008-2018. Furthermore, we analyze the data through Blundell and Bond (1998) technique in full sample as well sub-samples (Big & Small Firms). Findings –We document that corporate governance mechanism reduces the downside risk, whereas, investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveal some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis.Originality/value –Stock market volatility has become a prime area of concern for investors, policy makers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, our work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk. |
| Date: | 2021–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:akf:cafewp:14&r= |