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on Corporate Finance |
| By: | Paul A. Gompers; Steven N. Kaplan; Vladimir Mukharlyamov |
| Abstract: | Most research on the CEO labor market studies public company CEOs while largely ignoring CEOs in private equity (PE) funded companies. We fill this gap by studying the market for CEOs among U.S. companies purchased by PE firms in large leveraged buyout transactions. 71% of those companies hired new CEOs under PE ownership. More than 75% of the new CEOs are external hires with 67% being complete outsiders. These results are strikingly different from studies of public companies, particularly, Cziraki and Jenter (2022) who find that 72% of new CEOs in S&P 500 companies are internal promotions. The most recent experience of 67% of the outside CEOs was at a public company with almost 50% of external hires having some previous experience at an S&P 500 firm. We estimate the total compensation of buyout CEOs and find that it is much higher than that of CEOs of similarly sized public companies and slightly lower than that of S&P 500 CEOs. Overall, our results suggest that the broader market for CEOs is active and that, at least for PE funded portfolio companies, firm-specific human capital is relatively unimportant. |
| JEL: | G24 G3 G32 J30 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30899&r=cfn |
| By: | Sébastien Galanti (LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique); Aurélien Leroy (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux); Anne-Gaël Vaubourg (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | We aim to determine whether analyst coverage improves European firms' access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect estimate and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms' debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms' financial conditions. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03900604&r=cfn |
| By: | Nakatani, Ryota |
| Abstract: | Does the maturity of debt matter for productivity? Using data on Italian firms from 1997 to 2015, we study the relationship among debt maturity, productivity, and firm characteristics. We find that productivity is positively associated with short-term debt and negatively associated with long-term debt. This result supports the hypothesis that the less intense monitoring of firm performance and fewer liquidation fears stemming from the long maturity of debt causes a moral hazard, while short-term debt serves as a disciplinary device to improve firm performance in the short run. This effect is evident in small- and medium-sized enterprises and old firms. In contrast, large firms can utilize long-term financing to improve productivity through long-term investments. Firms improve productivity by purchasing intangible assets financed by short-term debt. |
| Keywords: | Debt maturity; Productivity; SMEs; Firm size; Firm age; Intangibles |
| JEL: | D22 D24 G32 O16 O34 |
| Date: | 2023–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:116172&r=cfn |
| By: | Joern Block; Young Soo Jang; Steven N. Kaplan; Anna Schulze |
| Abstract: | Despite its large and increasing size in the U.S. and Europe, there is relatively little research on the private debt (PD) market, particularly compared to the bank and syndicated loan markets. Accordingly, in this paper, we survey U.S. and European investors with private debt assets under management (AuM) of over $300 billion. These investors are primarily direct lending funds. We ask the general partners (GPs) how they source, select, and evaluate deals, how they think of private debt relative to bank and syndicated loan financing, how they monitor their investments, how they interact with private equity (PE) sponsors and how they view the future of the market. The respondents provide primarily cash flow-based loans and believe that they finance companies and leverage levels that banks would not fund. The direct lending funds target unlevered returns that appear high relative to their risk. They use leverage in their funds, but appreciably less than banks and collateralized loan obligation funds (CLOs). They use and negotiate for both financial and incurrence covenants to monitor their investments. The presence of PE sponsors helps them lend more and craft more effective covenants. U.S. and European funds are similar on many dimensions, but the European funds rely less on PE sponsors and compete more with banks. Overall, the private debt market is both different from, but shares characteristics with the bank loan and syndicated loan markets. |
| JEL: | G24 G32 G34 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30868&r=cfn |
| By: | Tanveer Hussain (School of Economics and Management, University of Minho, Portugal); Gilberto Loureiro (NIPE/Center for Research in Economics and Management, University of Minho, Portugal) |
| Abstract: | We study the corporate governance portability from bidders to targets in Mergers and Acquisitions and its impact on bidder announcement returns. We find that the bidder’s cumulative abnormal returns are higher in acquisitions where the bidder’s corporate governance quality exceeds that of the target. This result suggests a positive valuation effect for bidder shareholders resulting from the portability of good firm corporate governance from bidders to targets. We also find that this effect is stronger when bidders are domiciled in countries with better corporate governance. The results pass several robustness tests, including alternative measures of firm corporate governance and different sample periods. |
| Keywords: | corporate governance portability; global mergers and acquisitions; M&A announcement returns; international corporate governance |
| JEL: | G30 G34 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:8/2022&r=cfn |
| By: | Egemen Eren; Semyon Malamud; Haonan Zhou |
| Abstract: | We document that firms in emerging markets borrow more in foreign currency when the local currency actually provides a better hedge in downturns. Motivated by this fact, we develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. Crucially, the nature of this equilibrium depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using a granular dataset including more than 4, 800 firms in 19 emerging markets between 2005 and 2021. Our results have implications for evaluating and mitigating risks arising from currency mismatches in corporate balance sheets. |
| Keywords: | foreign currency debt, corporate debt, signaling, exchange rates |
| JEL: | D82 F34 G01 G15 G32 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1067&r=cfn |
| By: | Bilgin, Rumeysa (Istanbul Sabahattin Zaim University) |
| Abstract: | The previous literature on capital structure has produced plenty of potential determinants of leverage over the last decades. However, their research models usually cover only a restricted number of explanatory variables, and many suffer from omitted variable bias. This study contributes to the literature by advocating a sound approach to selecting the control variables for empirical capital structure studies. We applied two linear LASSO inference approaches and the double machine learning (DML) framework to the LASSO, random forest, decision tree, and gradient boosting learners to evaluate the marginal contributions of three proposed determinants; cash holdings, non-debt tax shield, and current ratio. While some studies did not use these variables in their models, others obtained contradictory results. Our findings have revealed that cash holdings, current ratio, and non-debt tax shield are crucial factors that substantially affect the leverage decisions of firms and should be controlled in empirical capital structure studies. |
| Date: | 2023–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:e26qf&r=cfn |
| By: | Nicolas Hommel; Augustin Landier; David Thesmar |
| Abstract: | The key purpose of corporate finance is to provide methods to compute the value of projects. The baseline textbook recommendation is to use the Present Value (PV) formula of expected cash flows, with a discount rate based on the CAPM. In this paper, we ask what is, empirically, the best discounting method. To do this, we study listed firms, whose actual prices and expected cash flows can be observed. We compare different discounting approaches on their ability to predict actual market prices. We find that discounting based on expected returns (such as variants on the CAPM or multi-factor model), performs very poorly. Discounting with an Implied Cost of Capital (ICC), imputed from comparable firms, obtains much better results. In terms of pricing methods, significant, but small, improvements can be obtained by allowing, in a simple and actionable way, for a more flexible term structure of expected returns. We benchmark all of our results with flexible, purely statistical models of prices based on Random Forest algorithms. These models do barely better than NPV-based methods. Finally, we show that under standard assumptions about the production function, the value loss from using the CAPM can be sizable, of the order of 10%. |
| JEL: | D24 G31 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30898&r=cfn |
| By: | Burkart, Mike; Zhong, Hongda |
| Abstract: | We analyze rights and public offerings when informed shareholders strategically choose to subscribe. Absent wealth constraints, rights offerings achieve the full information outcome and dominate public offerings. When some shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights. In both rights and public offerings, there is a trade-off between investment efficiency and wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low types opt for rights offerings, while intermediate types select public offerings. |
| Keywords: | ES/S016686/1; ES/T003758/1; OUP deal |
| JEL: | G32 |
| Date: | 2023–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:117895&r=cfn |
| By: | Benjamin Bennett; René M. Stulz; Zexi Wang |
| Abstract: | Public attention to a firm may provide valuable monitoring, but it may also have a dark side by constraining management’s decisions and distracting it. We use inclusion in the S&P 500 index as a positive shock to public attention. Media coverage, Google searches, SEC downloads, SEC comment letters, shareholder proposals, analyst coverage, and lawsuits increase following inclusion. Post-inclusion performance falls and is negatively related to the increase in attention. Included firms’ investment and payout policies become more similar to those of index peers and the increase in similarity is positively related to the size of the attention increase. |
| JEL: | G24 G31 G32 G35 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30858&r=cfn |
| By: | Thomas Schneider; Philip Strahan; Jun Yang |
| Abstract: | This paper studies banks’ investment in risk management practices following the Global Financial Crisis and the advent of stress testing. Banks that experienced greater losses during the Crisis exhibit stronger demand for risk management talents. Banks increase their demand for highly skilled stress test labor in anticipation of a test and following poor performance on a test. Following this higher demand, banks exhibit lower systematic risk and lower profitability. While stress testing has modernized banks’ internal risk management by spurring the acquisition of highly skilled risk management talent, recent changes to the tests could erode its efficacy. |
| JEL: | G20 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30867&r=cfn |
| By: | Se-Jik Kim; Hyun Song Shin |
| Abstract: | This paper presents a "time-to-build" theory of supply chains which implies a key role for the financing of working capital as a determinant of supply chain length. We apply our theory to offshoring and trade, where firms strike a balance between the productivity gain due to offshoring against the greater financial cost due to longer supply chains. In equilibrium, the ratio of trade to GDP, inventories and productivity are procyclical and closely track financial conditions. |
| Keywords: | global value chains, offshoring, trade finance |
| JEL: | F23 F36 G15 G21 L23 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1070&r=cfn |
| By: | Ampudia, Miguel (Bank for International Settlements); Busetto, Filippo (Bank of England); Fornari, Fabio (Bank of England) |
| Abstract: | We test whether a simple measure of corporate insolvency based on equity return volatility – and denoted as Distance to Insolvency (DI) – delivers better predictions of corporate default than the widely-used Expected Default Frequency (EDF) measure computed by Moody’s. We look at the predictive power that current DIs and EDFs have for future defaults, both at a firm-level and at an aggregate level. At the granular level, both DIs and EDFs anticipate corporate defaults, but the DI contains information over and above the EDF, especially at longer forecasting horizons. At an aggregate level the DI shows superior forecasting power compared to the EDF, for horizons between three and twelve months. We illustrate the predictive power of the DI measure by examining how corporate defaults would have evolved during Covid-19 had the ECB not implemented the pandemic emergency purchase programme (PEPP). |
| Keywords: | Default probability; equity volatility; Distance to Insolvency; Expected Default Frequency |
| JEL: | C53 C58 G33 |
| Date: | 2022–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1001&r=cfn |
| By: | Davide Furceri; Siddharth Kothari; Nour Tawk; Julia Estefania-Flores; Pablo Gonzalez-Dominguez |
| Abstract: | This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high debt firms seeing a larger decline in investment than low debt firms. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28 percent of the average medium-term decline of investment following a recession. This effect is especially larger for firms that are credit constrained—small and less profitable firms, as well as firms with high share of short-term debt—and that therefore may find it more difficult to rollover or raise new funds to invest in new projects. The results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls. |
| Keywords: | Scarring; Corporate Debt; Recessions; Firms; Local Projection; scarring effect; debt dummy; debt firm; investment to recession; Economic recession; Capital spending; Global |
| Date: | 2022–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/211&r=cfn |