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on Corporate Finance |
| By: | Yusuff, Olanrewaju; Olasehinde, Noah |
| Abstract: | The study empirically investigated the effect of capital structure on firm performance among agro-allied firms listed on the Nigerian Stock Exchange from 2003 to 2017. Pooled OLS, random effect and fixed effect regressions were used to analyse the data. Performance was measured by return on investment, return on assets and earnings per share while capital structure was captured by leverage and equity finance. Equity finance was found to have a significant effect on returns on investment and assets while leverage impacted earnings per share. Also, firms’ growth and age were positively related to performance while size had an inverse relationship. Therefore, firms should adopt an efficient equity-debt ratio that significantly improves performance over a specific production period. |
| Date: | 2022–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:wczhf&r=cfn |
| By: | ISHIDA Souhei; SUZUKI Katsushi; NISHIMURA Yoichiro |
| Abstract: | This study examines the determinants of the adoption of a term limit system, in which the tenure of the CEO is predetermined, and the impact of adopting the system on firm performance. Our results show that firms with more R&D investment, lower financial institutional shareholdings, and a greater number of educated CEO candidates are more likely to adopt the term-limit system. The relationship between the tenure system and firm performance is an inverted U-shaped for the non-term-limit firms, but no such relationship is found for the term limit firms. We find that the market value of firms that adopt the term limit is higher than that of firms that do not adopt the term limit in the years following CEO turnover, and that CEO turnover takes place before performance would have deteriorated due to the prolonged CEO tenure that would have occurred otherwise in the firms that adopt the term limit. These results are consistent with the idea that the term limit system is adopted in those firms with large disadvantages due to obsolescence of CEO capabilities, rigid strategies, and deteriorating corporate governance caused by long CEO tenure, as well as in those firms with small CEO turnover costs. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:23017&r=cfn |
| By: | Francesco Celentano (University of Lausanne; Swiss Finance Institute); Mark Rempel (University of Wisconsin-Madison) |
| Abstract: | How much does firm intangibility amplify CEOs’ persistent private information and reduce firms’ public listing propensity? We develop a model of competing public and private investors financing firms heterogeneously exposed to persistent private cash flows. Equilibrium financing is driven by information rent differentials in CEO compensation. We validate and structurally estimate the model using firm listing and CEO compensation data. We find private (intangible) cash flows exhibit 63% higher persistence than their tangible counterparts. Further, if firm intangibility levels returned to those of 1980, mean listing propensities would increase 5 percentage points while mean CEO variable pay growth would decrease by 61%. |
| Keywords: | intangible capital, public listings, persistent private information, CEO compensation, private equity premium, assignment model, structural estimation |
| JEL: | C78 D86 E22 G32 M12 O33 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2328&r=cfn |
| By: | McShane, William |
| Abstract: | Competition in the U.S. appears to have declined. One contributing factor may have been heterogeneity in the availability of credit during the financial crisis. I examine the impact of product market peer credit constraints on long-run competitive outcomes and behavior among non-financial firms. I use measures of lender exposure to the financial crisis to create a plausibly exogenous instrument for product market credit availability. I find that credit constraints of product market peers positively predict growth in sales, market share, profitability, and markups. This is consistent with the notion that firms gained at the expense of their credit constrained peers. The relationship is robust to accounting for other sources of inter-firm spillovers, namely credit access of technology network and supply chain peers. Further, I find evidence of strategic investment, i.e. the idea that firms increase investment in response to peer credit constraints to commit to deter entry mobility. This behavior may explain why temporary heterogeneity in the availability of credit appears to have resulted in a persistent redistribution of output across firms. |
| Keywords: | financial crisis, instrumental variables, long-run effects, spillovers, strategic behavior |
| JEL: | G01 G21 G30 L11 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:102023&r=cfn |
| By: | Aitzaz Ahsan Alias Sarang (Iqra University); Nicolas Aubert (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon); Xavier Hollandts (Kedge BS - Kedge Business School) |
| Abstract: | This study examines the relationship between women directors and the cost of equity (COE). Investigating the French firm's sample, we find a significant negative effect of women directors on the cost of equity. Our results also document that the effect of women directors on reducing the cost of equity is significant for firms that have a critical mass of at least four women directors. Using the difference-in-difference (DID) and propensity score matching (PSM) approach, we find that the relationship between female directors and lower equity costs is significant for the period following the Copé–Zimmermann gender quota law. The results show that women directors' presence on corporate boards is also supported by economic reasons. The study provides implications in relation to the Copé–Zimmermann law in France. |
| Keywords: | Cost of Equity, Gender Quota Laws, Critical Mass, Women on Corporate Boards |
| Date: | 2025–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03875465&r=cfn |
| By: | Edmans, Alex; Gosling, Tom; Jenter, Dirk |
| Abstract: | We survey directors and investors on the objectives, constraints, and determinants of CEO pay. 67% of directors would sacrifice shareholder value to avoid controversy on CEO pay, implying they face significant constraints other than participation and incentive compatibility. These constraints lead to lower pay levels and more one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Respondents view intrinsic motivation and reputation as stronger motivators than incentive pay. They believe pay matters to CEOs not to finance consumption, but because it affects perceptions of fairness. The need to fairly recognize the CEO's contribution explains why flow pay responds to performance, even though CEOs' equity holdings already provide substantial consumption incentives, and why peer firm pay matters beyond retention concerns. Fairness also matters to investors, with shareholder returns an important reference point. This causes CEO pay to be affected by external risks, in contrast to optimal risk sharing. |
| Keywords: | executive compensation; contract theory; CEO incentives; fairness; survey |
| JEL: | G34 G38 M12 M52 |
| Date: | 2021–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118860&r=cfn |
| By: | Miguel Ferreira; Timo Haber; Christian Rorig |
| Abstract: | Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firmsize distribution, even in the top 1%. Incorporating a richer, empirically supported, productivity process into a standard heterogeneous firms model generates a joint distribution of size and credit constraints in line with the data. The presence of large constrained firms in the economy, together with their elevated capital share, explains about 66% of the response of output to a financial shock. We conclude by providing microevidence in support of themodel mechanism. |
| Keywords: | Firmsize; business cycle; financial accelerator |
| JEL: | E62 E22 E23 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:777&r=cfn |
| By: | Pierre Durand (Université Paris Est Créteil, ERUDITE, 94010 Créteil Cedex, France); Gaëtan Le Quang (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Arnold Vialfont (Université Paris Est Créteil, ERUDITE, 94010 Créteil Cedex, France) |
| Abstract: | Using a database comprising US bank balance sheet variables covering the 2000-2018 period and the list of failed banks as provided by the FDIC, we run various models to exhibit the main determinants of bank default. Among these models, Logistic Regression, Random Forest, Histogram-based Gradient Boosting Classification and Gradient Boosting Classification perform the best. Relying on various machine learning interpretation tools, we manage to provide evidence that 1) capital is a stronger predictor of default than liquidity, 2) Basel III capital requirements are set at a too low level. More precisely, having a look at the impact of the interaction between capital ratios (the risk-weighted ratio and the simple leverage ratio) and the liquidity ratio (liquid assets over total assets) on the probability of default, we show that the influence of capital on this latter completely outweighs that of liquidity, which is in fact very limited. From a prudential perspective, this questions the recent stress put on liquidity regulation. Concerning capital requirements, we provide evidence that setting the risk-weighted ratio at 15% and the simple leverage ratio at 10% would significantly decrease the probability of default without hampering banks'activities. Overall, these results therefore call for strengthening capital requirements while at the same time releasing the regulatory pressure put on liquidity. |
| Keywords: | Basel III; capital requirements ; liquidity regulation ; bankruptcy prediction models ; statistical learning ; classification |
| JEL: | C44 G21 G28 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:2308&r=cfn |
| By: | Mariassunta Giannetti; Ralf R. Meisenzahl |
| Abstract: | Regulation and capital constraints may force banks and collateralized loan obligations (CLOs) to sell deteriorating loans, potentially hampering renegotiation and amplifying the initial negative shock to the borrower. We show that banks and CLOs sell downgraded loans to mutual funds and hedge funds. The reallocation of loan shares favors the syndicate's concentration, increasing lenders' incentives to renegotiate. However, syndicates remain less concentrated when potential buyers experience financial constraints and subsequently loans are less likely to be amended and more likely to be downgraded even further. Our findings indicate that existing regulations may amplify shocks to credit quality during periods of generalized distress in the financial system. |
| Keywords: | Debtor Concentration; Credit Quality; Leveraged Lending |
| JEL: | G21 |
| Date: | 2021–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:92973&r=cfn |
| By: | Aldunate, Felipe; Jenter, Dirk; Korteweg, Arthur; Koudijs, Peter |
| Abstract: | Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4, 200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure. |
| Keywords: | limited liability; bank risk taking; financial crises; Great Depression |
| JEL: | G21 G28 G32 N22 |
| Date: | 2021–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118863&r=cfn |
| By: | Luca Fare; Marcus Dejardin; Eric Toulemonde (Development Finance and Public Policies, University of Namur) |
| Abstract: | Small businesses often face a high risk of bankruptcy and harsh financing conditions, which can hamper them to engage in innovation. This paper investigates whether a bankruptcy system that guarantees a good recovery rate for creditors in case of firms’ liquidation stimulates small businesses’ innovation investments through lower interest rates and therefore easier access to credit. With the help of a borrower-lender model we derive insights about the interactions between bankruptcy recovery rate, borrowing interest rates and firms’ investments in innovation. The model gives theoretical underpinnings for a subsequent empirical analysis. By using a cross-country sample of micro (1-9 employees)-, small (10-49 employees)-, and medium (50-249 employees)-sized enterprises (MSMEs), our study provides three main results. It shows that an increase in the bankruptcy recovery rate a) is positively associated to MSMEs’ investments in innovation (investment effect); b) reduces the share of MSMEs that are credit constrained because the cost of borrowing is too high (constraint effect); c) reduces the interest rates dispersion for high profitable MSMEs (dispersion effect). Overall, our findings suggest that improving creditors recovery rate can help promoting the innovative behaviour of small businesses through easier financing conditions. |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nam:defipp:2302&r=cfn |
| By: | Ulrich Hege (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Elaine Hutson; Elaine Laing |
| Abstract: | Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust. |
| Keywords: | Risk management, Financial hedging, Operational hedging, Foreign exchange risk, Sarbanes-Oxley Act, Corporate governance reform, Board monitoring, Risk-taking incentives |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03353022&r=cfn |
| By: | Choi, Jaewon; Dasgupta, Amil; Oh, Ji |
| Abstract: | We show that supply-side effects arising from the bond holdings of open-end mutual funds affect corporate credit risk. In our model, funds exposed to flow-performance relationships are reluctant to roll over bonds of companies with weak cash flow prospects fearing future outflows. This lowers rollover prices, enhancing equityholders' strategic default incentives, engendering a positive association between bond funds' presence and credit risk. Empirically, we find that in firms with weak cash flow prospects, fund holding shares increase CDS spreads, and more so when flows are more sensitive to performance. We use instrumental variables and quasi-experiments to address endogeneity concerns. |
| Keywords: | fund flows; credit risk; flow concerns; bond rollover; default-liquidity loop |
| JEL: | G23 G32 |
| Date: | 2022–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118856&r=cfn |
| By: | René M. Stulz |
| Abstract: | This paper assesses the current state of knowledge about crisis risk and its implications for risk management. Better data that became available since the Global Financial Crisis (GFC) has improved our understanding of crisis risk. These data have been used to show that some types of crises become predictable when one accounts for interactions between risks. Specifically, a financial crisis is much more likely in the years following both high credit growth and high asset valuations. However, some other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. The existing data show that political crises make economic crises more likely, so that, as suggested by the concept of polycrisis, feedback between non-economic crises and economic crises can be important, but there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility appear successful at reducing the adverse impact of crises on firms. |
| JEL: | G01 G21 G32 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31252&r=cfn |
| By: | OGURA Yoshiaki; UESUGI Iichiro; IWAKI Hiromichi |
| Abstract: | In 2008, a government policy bank in Japan expanded its provision of unsecured loans, with many small and medium-sized enterprises subsequently switching from secured to unsecured loans. In this paper, we examine the determinants of firm choice and impacts of these unsecured loans to better understand the distortional effects of any collateral constraints that previously existed in the Japanese economy. Using propensity score matching analysis and instrumental variable regression, we reveal the following. First, younger and growing firms with fewer tangible assets use unsecured loans more intensively. Second, firms choosing unsecured loans increase their investment in intangible assets, including organizational capital. Third, unsecured loan users grew faster than secured loan users, although their credit ratings also deteriorated to some extent. Lastly, the impact of unsecured loans on firm productivity is neutral. Overall, the intrafirm asset reallocation from tangible to intangible assets among unsecured loan users highlights the distortionary effects of collateral constraints. |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:23034&r=cfn |
| By: | Patrick Bolton; Marcin Kacperczyk |
| Abstract: | A growing fraction of companies globally have made commitments to reduce their carbon emissions by a certain date. While the companies that make commitments subsequently reduce their emissions, the effect on overall emissions of companies (including those that do not commit) has been small; the companies that commit, and those that make the most ambitious commitments, tend to have lower emissions; firm commitments are less prevalent in countries where governments have made national commitments. Overall, the commitment movements have been successful in drawing the willing but have found greater resistance from the companies that most need to reduce their emissions. |
| JEL: | D62 D82 G23 G30 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31244&r=cfn |
| By: | Pablo Garcia Sanchez; Alban Moura; Olivier Pierrard |
| Abstract: | Not so well. We reach this conclusion by evaluating the empirical performance of a benchmark DSGE model with real estate and collateral constraints. We estimate the model from U.S. data using Bayesian methods and assess its fit along various dimensions. We find that the model is strongly rejected when tested against unrestricted Bayesian VARs and cannot replicate the persistence of real estate prices and various comovements between aggregate demand, real estate prices, and debt. Performance does not improve with alternative definitions of real estate prices, estimation samples, or detrending approaches. Our results raise doubts about the ability of current DSGE models with real estate and collateral constraints to deliver credible policy insights and identify the dimensions in need of improvement. |
| Keywords: | Health; long-term care costs; uncertainty; stochastic model |
| JEL: | C60 D15 D81 I12 I18 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp171&r=cfn |
| By: | Ali, Waris; Bekiros, Stelios; Hussain, Nazim; Khan, Sana Akbar; Nguyen, Duc Khuong |
| Abstract: | This paper systematically analyzes and synthesizes the literature on the determinants and consequences of corporate social responsibility (CSR) disclosure. The study is unique in that it synthesizes based on the geographical setting of the original research. We analyzed 135 empirical studies published in Chartered Association of Business Schools (ABS) ranked journals from 1982 to 2020. The results reveal that various global, country-specific, market-specific, and firm-specific factors are important in determining a firm's CSR disclosure policies. These factors are consistently relevant in both developed and developing economies. Furthermore, the synthesis shows that companies achieve various CSR disclosure-related benefits in the form of a better reputation, enhanced financial performance, better access to external finances, better stakeholder management, and enhanced corporate accountability. In terms of theories, we observe a high heterogeneity among various studies examining the same empirical phenomenon. Based on the analysis and review results, we identify avenues for future research. |
| Keywords: | consequences; corporate social responsibility; determinants; disclosure; reporting; systematic review |
| JEL: | J1 |
| Date: | 2023–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118798&r=cfn |
| By: | Lucia Dalla Pellegrina; Damla Diriker; Paolo Landoni; Davide Moro; Mahinda Wijesiri |
| Abstract: | This paper contributes to a growing body of literature on microfinance institutions, where the equilibrium between social and financial sustainability is one of the hottest topics. However, the evidence regarding this relationship in the European microfinance sector is scarce. In the current study, we intend to fill this knowledge gap. Specifically, using an original dataset obtained from a survey conducted in 2016-2017 on 159 Microfinance institutions (MFIs) operating in 38 European countries, we investigate whether pursuing proactive social sustainability can improve financial sustainability, measured by technical efficiency. Overall, our results show that MFIs that are more likely to comply with their social sustainability objectives (especially on the extensive margin, with a higher number of loans granted and on the intensive margin, by serving a higher share of women) are also doing well financially. The only aspect on which social sustainability does not seem to have a positive effect on financial sustainability is the financing of the poorest through the provision of small-scale loans. These peculiarities are somehow common to other non-European contexts. On the other hand, a phenomenon that seems peculiar to the European context is that larger MFIs, especially those operating in a context not subject to stringent financial regulation tend to show a comparative advantage and better withstand competition from the traditional banking sector. Our results are robust to alternative measures of financial sustainability and to the use of the Generalized Method of Moments (GMM) and Instrumental Variable (IV) estimation techniques to overcome the problem of endogeneity. |
| Keywords: | Microfinance, European Union, social sustainability, outreach, mission drift, financial sustainability. |
| JEL: | G21 I32 L26 O16 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:515&r=cfn |
| By: | Lucia Dalla Pellegrina; Damla Diriker; Paolo Landoni; Davide Moro; Mahinda Wijesiri |
| Abstract: | This paper contributes to a growing body of literature on microfinance institutions, where the equilibrium between social and financial sustainability is one of the hottest topics. However, the evidence regarding this relationship in the European microfinance sector is scarce. In the current study, we intend to fill this knowledge gap. Specifically, using an original dataset obtained from a survey conducted in 2016-2017 on 159 Microfinance institutions (MFIs) operating in 38 European countries, we investigate whether pursuing proactive social sustainability can improve financial sustainability, measured by technical efficiency. Overall, our results show that MFIs that are more likely to comply with their social sustainability objectives (especially on the extensive margin, with a higher number of loans granted and on the intensive margin, by serving a higher share of women) are also doing well financially. The only aspect on which social sustainability does not seem to have a positive effect on financial sustainability is the financing of the poorest through the provision of small-scale loans. These peculiarities are somehow common to other non-European contexts. On the other hand, a phenomenon that seems peculiar to the European context is that larger MFIs, especially those operating in a context not subject to stringent financial regulation tend to show a comparative advantage and better withstand competition from the traditional banking sector. Our results are robust to alternative measures of financial sustainability and to the use of the Generalized Method of Moments (GMM) and Instrumental Variable (IV) estimation techniques to overcome the problem of endogeneity. |
| Keywords: | Microfinance, European Union, social sustainability, outreach, mission drift, financial sustainability. |
| JEL: | G21 I32 L26 O16 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:511&r=cfn |