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on Corporate Finance |
| By: | Molyneux, Philip; Liu, Hong; Jiang, Chunxia |
| Abstract: | We investigate ownership effects on capital and adjustments speed to the target capital ratio in China from 2000 to 2012 and find that state-owned banks hold higher levels of capital than banks of other ownership types. Foreign banks are more highly capitalized than local non-state banks but under-capitalized compared with the bigger non-state banks with nationwide presence. Foreign banks adjust risk-weighted capital towards their optimal targets at a slower speed than domestic banks, while foreign minority ownership results in a faster adjustment process. Capital is positively influenced by profitability, asset diversification and liquidity risk, but negatively influenced by bank market power. Capital ratios typically co-move with the business cycle although this relationship is reversed during the crisis period due to active government intervention. Our results are robust to various modelling specifications and have important policy implications. Publication keywords: banking, capital, adjustment, ownership, China |
| JEL: | G21 G28 C32 |
| Date: | 2014–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2014_016&r=cfn |
| By: | Hasan, Iftekhar; Massoud, Nadia; Saunders, Anthony; Song, Keke |
| Abstract: | Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposures in the subprime crisis. The evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms. When the short ban was in effect, the market quality of financial stocks without subprime asset exposure had deteriorated to a larger degree than that of financial companies with subprime asset exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also serve as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban. Keywords: short selling, subprime assets, financial crisis, short-sale ban, CDS spread |
| JEL: | G01 G14 G18 G28 G33 |
| Date: | 2015–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_003&r=cfn |
| By: | Francis, Bill; Hasan, Iftekhar; Mani, Sureshbabu; Ye, Pengfei |
| Abstract: | This study examines the performance impact of the relative quality of a CEO’s compensation peers (peers selected to determine a CEO’s overall compensation) and bonus peers (peers selected to determine a CEO’s relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO’s relative peer quality (RPQ). We find that firms with higher RPQ tend to earn superior risk-adjusted stock returns and experience higher profitability growth compared with firms that have lower RPQ. These results cannot be fully explained by a CEO’s power, compensation level, intrinsic talent, nor by the board’s possible motivation to use peers to signal a firm’s prospect. Learning among peers and the increased incentive to work harder induced by the peer-based tournament, however, might contribute to RPQ’s positive performance effect. Preliminary evidence also shows that high RPQ is not associated with increased earnings management or increased risk-taking behaviors. |
| Keywords: | relative peer quality, firm performance, tournament, optimal contract |
| JEL: | G30 |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_006&r=cfn |
| By: | Kerr, William R.; Nanda, Ramana |
| Abstract: | We review the recent literature on the financing of innovation, inclusive of large companies and new startups. This research strand has been very active over the past five years, generating important new findings, questioning some long-held beliefs, and creating its own puzzles. Our review outlines the growing body of work that documents a role for debt financing related to innovation. We highlight the new literature on learning and experimentation across multi-stage innovation projects and how this impacts optimal financing design. We further highlight the strong interaction between financing choices for innovation and changing external conditions, especially reduced experimentation costs. |
| Keywords: | finance, innovation, entrepreneurship, banks, venture capital, experimentation |
| JEL: | G21 G24 L26 M13 O31 O32 |
| Date: | 2015–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_028&r=cfn |
| By: | Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao |
| Abstract: | We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social-capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarter relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer bonds over loans. We conclude that debt holders perceive social capital as providing environmental pressure constraining opportunistic firm behaviors in debt contracting. |
| Keywords: | social capital, cooperative norm, moral hazard, cost of bank loans, public bonds |
| JEL: | G21 G32 Z13 |
| Date: | 2015–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_021&r=cfn |
| By: | Hasan, Iftekhar; Wu, Deming |
| Abstract: | Do banks use credit default swap hedging to substitute for loan sales? By tracking banks’ lending exposures and CDS positions on individual firms, we find that banks use CDS hedging to complement rather than to substitute for loan sales. Consequently, bank loan sales are higher for firms that are actively traded in the CDS market. In addition, we find evidence that suggests that banks sell CDS protection as credit enhancements to facilitate loan sales. This study employs identification strategies similar to the “twin study” design to separate the effects of borrower-side and lender-side factors, and to minimize the omitted-variables bias. |
| Keywords: | loan sales, hedging, credit enhancement, regulatory capital relief, banking |
| JEL: | G14 G21 G23 G28 G32 |
| Date: | 2016–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_009&r=cfn |
| By: | Werner, Max (Helmut Schmidt University, Hamburg); Vianelli, Andrea (K&L Gates LLP); Bodek, Mariusz C. (Head and Co-Founder of comdirect Start-up Garage) |
| Abstract: | This paper offers a new perspective on a fundamental issue of venture capital investments, i.e., the so-called black box of involvement that concerns the paucity of relevant information necessary for venture capital managers to evaluate investments properly. Our paper discusses the application of an internal control prediction market as a monitoring instrument for venture capital investments. We therefore gather research literature and law and financial expertise to discuss uncertain business developments, missing data, and principal–agent conflicts. The results of our paper are expected to make significant contributions to the academic discussion, providing a foundation to open the black box of involvement that current venture capital managers face daily. |
| Keywords: | Venture Capital; Venture; Capital Investments; Seed Capital; Monitoring; Managing; Black Box |
| JEL: | G32 G34 G39 |
| Date: | 2016–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:ris:vhsuwp:2016_165&r=cfn |
| By: | Subrata Sarakar (Indira Gandhi Institute of Development Research) |
| Abstract: | This paper analyzes two notions of compliance, 'compliance in letter' and 'compliance in spirit', using data on Board and Audit Committee meetings from India under its Clause 49 corporate governance regulations. The analysis is based on the sample of top 500 companies listed on the country's oldest stock exchange - the Bombay Stock Exchange -- and covers a period of seven years starting from 2006 when the modified version of the clause that contained a large number of corporate governance regulations came into effect in India. The analysis shows that while most of the companies complied with the explicit regulations relating to the number and interval between meetings, a significant percentage of the companies held all their Board and Audit Committee meetings on the same day which is not prohibited under the regulations but unexpected given the onerous responsibilities that same-day meetings put on directors who serve both on the Board and the Audit Committee. The incidence of same-day Board and Audit Committee meetings did not correlate with poor past performance of the company and multiple directorships of directors which could be potential drivers of same-day meeting for generating higher attendance to harness the expertise of as many directors as possible. Instead the incidence of same-day meetings correlated strongly with poor governance structures captured by lower board size, lower percentage of independent directors on the Board and the presence of inside directors in Audit Committees. Same-day Board and Audit Committee meetings did not result in higher meeting attendance by directors. The empirical analysis suggests that while 'compliance in letter' was high, compliance in spirit was low |
| Keywords: | Corporate Governance, Compliance, Board of Directors, Audit Committee |
| JEL: | C43 G18 G34 M41 M42 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2016-015&r=cfn |
| By: | Francis, Bill B.; Hasan, Iftekhar; Sun, Xian; Wu, Qiang |
| Abstract: | We show that firms led by politically partisan CEOs are associated with a higher level of corporate tax sheltering than firms led by nonpartisan CEOs. Specifically, Republican CEOs are associated with more corporate tax sheltering even when their wealth is not tied with that of shareholders and when corporate governance is weak, suggesting that their tax sheltering decisions could be driven by idiosyncratic factors such as their political ideology. We also show that Democratic CEOs are associated with more corporate tax sheltering only when their stock-based incentives are high, suggesting that their tax sheltering decisions are more likely to be driven by economic incentives. In sum, our results support the political connection hypothesis in general but highlight that the specific factors driving partisan CEOs’ tax sheltering behaviors differ. Our results imply that it may cost firms more to motivate Democratic CEOs to engage in more tax sheltering activities because such decisions go against their political beliefs regarding tax policies. |
| Keywords: | political preference, tax sheltering, CEO, Democrats, Republicans, incentives |
| JEL: | G21 H26 G32 P16 |
| Date: | 2016–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_005&r=cfn |
| By: | Grashuis, Jasper; Cook, Michael |
| Abstract: | The interrelationship of capital, ownership, and governance in U.S. farmer cooperatives is not well-understood. In order to better conceptualize the overall structure of farmer cooperatives, a new framework is constructed with member ownership diversity, member control delegation, and financial flexibility as its three dimensions. Primary survey data on 371 U.S. farmer cooperatives is collected and analyzed to discover moderate to strong correlation coefficients for ownership and governance (0.27), ownership and capital (0.33), and governance and capital (0.51). An ordered probit model is specified and estimated for each structure. The empirical relationship of member ownership diversity and member control delegation is characterized by bi-directionality, which implies endogeneity must be addressed in future research. On the whole, the ownership structure and the capital structure are independent, although the probability of financial flexibility is increased by outside investment in subsidiary organizations. In terms of governance, delegation of real control from board directors to senior managers has a positive impact on the capital structure. Most hypotheses, as informed by agency, finance, and cooperative theory, are accepted, suggesting the three-dimensional framework has merit. |
| Keywords: | Capital Structure, Agricultural Cooperative, Survey Data, Ordered Probit, Agribusiness, Agricultural Finance, Industrial Organization, Q13, Q14, Q15, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235677&r=cfn |
| By: | Buchanan, Bonnie; Cao, Xuying (Cathy); Liljeblom, Eva; Weihrich, Susan |
| Abstract: | We examine how firms respond to uncertainty around U.S. tax policy changes, namely the individual level tax rate increases set to take effect on January 1, 2011 and January 1, 2013. We provide evidence that firms time the uncertainty in the tax environment and revise their dividend policy to an expected tax increase. We find that firms are likely to initiate their dividends or intensively increase their existing dividend amount one year before the expected tax increase. In addition, in 2012 when there is much less uncertainty on dividend tax changes than in 2010, firms are less likely to initiate a regular dividend but are more likely to initiate special dividends. The results suggest that firms facing less tax uncertainty are less likely to make long-term commitments on regular dividend payments but are more likely to take advantage of the last-minute low tax benefits by issuing special dividends. Furthermore, the response to the possible elimination of a tax cut was strongest in firms with high levels of tax-affected ownership, supporting the argument that when facing policy uncertainty, firms behave to prepare for the worst scenarios, which in this case is a tax increase. |
| Keywords: | dividend taxes, uncertainty, payout policy, special dividends |
| JEL: | G35 G32 G38 H32 |
| Date: | 2016–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_011&r=cfn |