nep-cfn New Economics Papers
on Corporate Finance
Issue of 2024‒04‒08
nine papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. R(a)ising Prices While Struggling: Firms’ Financial Constraints and Price Setting By Nicoletta Berardi
  2. Board Compensation and Investment Efficiency By Martin Gregor; Beatrice Michaeli
  3. Board Bias, Information, and Investment Efficiency By Martin Gregor; Beatrice Michaeli
  4. Using High-dimensional Corporate Governance Variables to Predict Firm Performance By Nicholas BENES; Ben GARTON; MIYAKAWA Daisuke; YAMANOI Junichi
  5. Big data and start-up performance By Rodepeter, Elisa; Gschnaidtner, Christoph; Hottenrott, Hanna
  6. On dividends and market valuations of Australia’s listed electricity utilities: regulated vs. merchant By Paul Simshauser
  7. Turnover-based corporate income taxation and corporate risk-taking By Siahaan, Fernando; Amberger, Harald; Sureth, Caren
  8. Fostering SME survival through insolvency proceedings: a legitimacy perspective on retrenchment, age, and firm-specific distress By Rachid Achbah; Marc Fréchet
  9. Regional Financial Development and Micro and Small Enterprises in Peru By Jennifer De la Cruz

  1. By: Nicoletta Berardi
    Abstract: Working Paper Series no. 942. This paper investigates the interaction between financial constraints faced by firms and their price setting behaviour. We find systematic differences in the frequencies of price increases and decreases between financially constrained and unconstrained firms, consistently across several alternative proxies. Financial constraints affect price adjustments asymmetrically. When firms are financially struggling, they are more likely to increase their prices, while simultaneously exhibiting greater rigidity in lowering prices.
    Keywords: Producer Price Setting, Firm Financial Constraints, Customer Market
    JEL: E31 G30
    Date: 2024
  2. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Beatrice Michaeli (UCLA Anderson School of Management)
    Abstract: In their role as initiators of new business projects, CEOs have an advantage over access to and control over project-related information. This exacerbates pre-existing agency frictions and may lead to investment inefficiencies. To counteract this challenge, incentive compensation for corporate boards (responsible for approving major projects) emerges as a critical governance tool. Our study demonstrates that the optimal compensation design requires strategically allocating a liability burden between CEOs and boards. When this burden is shifted onto the boards, shareholders reduce management rents, albeit at the expense of residual inefficiency. Our findings thus highlight that shareholders' tolerance for investment inefficiencies may be rooted in optimal compensation. We predict that contracts tolerating excessive investments are optimal under conditions of low labor market value for CEOs, severe CEO empire-building, and attractive outside options for directors. Because of structural changes associated with the reallocation of financial incentives, the non-financial characteristics of CEOs and boards may impact investment efficiency, information quality, project profits, and management rents in a non-monotonic manner.
    Keywords: Board monitoring, director compensation, investment inefficiency
    JEL: D83 D86 G30 G31 G34
    Date: 2024–03
  3. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Beatrice Michaeli (UCLA Anderson School of Management)
    Abstract: We study how interest alignment between CEOs and corporate boards influences investment efficiency and identify a novel force behind the benefit of misaligned preferences. Our model entails a CEO who encounters a project, gathers investment-relevant information, and decides whether or not to present the project implementation for approval by a sequentially rational board of directors. The CEO may be able to strategically choose the properties of the collected information---this happens, for instance, if the project is ``novel" in the sense that it explores new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO's empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. From the shareholders' perspective, the board that maximizes firm value is either conservative or neutral (has interests aligned with those of the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. Our analysis shows that board's commitment power and bias are substitutes.
    Keywords: Empire-building, biased board, underinvestment, overinvestment, endogenous information
    JEL: D83 D86 G30 G31 G34
    Date: 2024–03
  4. By: Nicholas BENES; Ben GARTON; MIYAKAWA Daisuke; YAMANOI Junichi
    Abstract: The purpose of this paper is to empirically identify and quantify correlations between corporate governance practices of firms and their future financial performance. LASSO estimation technique was used on a comprehensive set of corporate governance-related variables provided by The Board Director Training Institute of Japan (BDTI) and compared to firms’ total shareholder returns (TSR) as well as other performance measures for the listed firms in Japan. Through LASSO, we find the following: First, a number of corporate governance policies or attributes that relate to external monitoring have positive correlations with future TSR as expected. Second, somewhat unexpectedly, only a few variables associated with internal monitoring and incentive practices show correlations with future TSR. Third, such unconditional associations between specific corporate governance practices and TSR are affected by other governance practices. After confirming the stability of these results through OLS estimation, we constructed a prediction model of firms’ future TSR and further show that the investment strategy based on the model’s predictions could generate non-negligible improvement in returns by including the corporate governance-related variables in the predictors. These results suggest that high-dimensional corporate governance variables contain more informative signals associated with future firm performance than simple reliance on purely financial data can provide.
    Date: 2024–02
  5. By: Rodepeter, Elisa; Gschnaidtner, Christoph; Hottenrott, Hanna
    Abstract: Big Data (BD) is becoming widely available and manageable. This raises the question of whether Big Data Analytics (BDA) in companies leads to better decision-making andhence performance. Based on a large, representative set of start-ups in Germany, we study the adoption of BDA among small and young ventures and analyze its economic effects using various short- and longer-term performance measures. We investigate the effect of adopting BDA on the new ventures' cost structure, sales, profits, survival rate, growth, and their probability of receiving Venture Capital (VC) financing while taking into account fac tors that drive BDA adoption. Our findings, however, show that using BDA does not lead to an immediate competitive advantage in terms of the classical short-term performance measures. BDA adoption is rather associated with greater sales/profit uncertainty, higher (personnel) costs, and a higher probability of failure. Yet, the increased risk of adopting BDA is compensated by a prospect of higher long-term performance conditional on survival. BDA-adopting start-ups perform better than comparable ones when considering longer-term performance measures such as their growth and their ability to secure VC.
    Keywords: Big data, Innovation, Productivity, Start-ups, Survival, Venture capital
    Date: 2023
  6. By: Paul Simshauser
    Keywords: Electricity, regulated utilities, dividend policy
    JEL: D25 D80 G32 L51 Q41
    Date: 2022–04
  7. By: Siahaan, Fernando; Amberger, Harald; Sureth, Caren
    Abstract: This study investigates the effect of a Turnover-based Corporate Income Tax (TbCIT) on corporate risk-taking. TbCIT is a simplified presumptive tax levied on a firm's turnover and commonly applied to SMEs and hard-to-tax income. Using a rich sample of Indonesian firms for the years 2009 to 2021, we provide evidence that corporate risk-taking is negatively associated with a firm's TbCIT exposure. The negative effect is stronger for firms in industries with high profit margins and firms with prior year losses. However, we find no association between risk-taking and the effective TbCIT rate. Overall, our findings extend prior research on the effects of limited risk sharing between taxpayers and the government by showing that turnover-based taxation can depress corporate risk-taking. Our study also informs policymakers about potential unintended consequences of adopting simplified, turnover-based tax regimes.
    Keywords: turnover-based tax, corporate income tax, risk-taking, SMEs taxation
    JEL: H25 H32 G32 O53
    Date: 2023
  8. By: Rachid Achbah (UL2 UFR SEG - Université Lumière - Lyon 2 - UFR de Sciences économiques et de gestion - UL2 - Université Lumière - Lyon 2, COACTIS - COnception de l'ACTIon en Situation - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne); Marc Fréchet (UJM - Université Jean Monnet - Saint-Étienne, COACTIS - COnception de l'ACTIon en Situation - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne)
    Abstract: This study examines the interaction between insolvency proceedings and strategic variables and their relationship with firm survival. Unlike previous research, this study considers the firm's legal status, including insolvency proceedings, and fills a gap in the literature by considering legal considerations in business studies. Adopting a legitimacy perspective, we employ a Cox proportional hazards model to construct a survival model based on a theoretical framework encompassing insolvency proceedings retrenchment, firm age, and causes of financial distress. Our sample consists of French SMEs facing financial difficulties. The findings reveal that initiating insolvency proceedings is negatively associated with firm survival. However, retrenchment of employees or assets during insolvency proceedings is associated with a higher likelihood of survival. Contrary to expectations, firm age showed a negative association with firm survival during the insolvency proceedings. Moreover, the study revealed a positive association between insolvency proceedings and firm survival in cases of firm-specific financial distress. This research provides new insights into the relationship between insolvency proceedings and firm survival.
    Keywords: SMEs, Insolvency proceedings, Legitimacy, Retrenchment, Firm survival, SMEs Insolvency proceedings Legitimacy Retrenchment Firm Survival, Firm Survival
    Date: 2024–02–10
  9. By: Jennifer De la Cruz (Departamento de Economía de la Pontificia Universidad Católica del Perú.)
    Abstract: Empirical studies suggest that credit constraints prevent the development of Micro and Small Enterprises (MSEs). This study contributes to the analysis by exploring whether higher regional financial development affects the creation and growth of MSEs in Peru. Based on four cross-sectional databases, mainly the 2018 National Household Survey on Living Conditions and Poverty, this paper finds that there is a positive impact on entrepreneur profits; however, the effect is negative on the likelihood of running a business. Interactions between informality and financial frictions may explain this result. Informal financing emerges as an alternative in this context. This study addresses endogeneity issues by using the number of commercial bank branches per 1, 000 inhabitants in 1995 as an instrument of the degree of regional financial development in 2018. JEL Classification-JE: G20, O16, R11.
    Keywords: Financial Development, Micro and Small Enterprises, Informal Finance, Instrumental Variables.
    Date: 2024

This nep-cfn issue is ©2024 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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