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on Corporate Finance |
| By: | Lubberink, Martien; Renders, Annelies |
| Abstract: | Leading up to the implementation of Basel III, European banks repurchased below-par debt securities. Banks are subjected to a prudential filter that excludes unrealized gains on liabilities from changes in own credit standing from the calculation of capital ratios. By repurchasing securities, unrealized gains become realized and increase Core Tier 1 capital. We show that poorly capitalized banks repurchased securities and lost about e9.1bn in premiums to compensate debt holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern. |
| Keywords: | Banking, repurchases, subordinated debt. |
| JEL: | E58 G21 G28 G32 G35 M41 |
| Date: | 2016–06–15 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Giovanni Ferri (LUMSA University); Pierluigi Murro (LUMSA University) |
| Abstract: | The first wave of the global financial crisis – emanating from the US subprime debacle and the bankruptcy of Lehman – hit Europe in the last part of 2008 and through 2009. Coupled with it was the Great Trade Collapse (GTC), whereby trade crumpled intensely. With banks in a tailspin, credit rationing intensified – as measured in various different ways – particularly for the small and medium sized enterprises (SMEs). The extent of such retrenchment in the supply of credit could reflect not only the worsened general condition of the European banks but also vary at the micro level depending on the lending technologies being used in the firm-main bank rapport. Using the EFIGE database, we try to assess the extent to which differences in the lending technologies affect export and foreign activities in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and the UK). |
| Keywords: | Bank-Firm Relationships, Lending Technologies, Trade. |
| JEL: | G21 D82 F10 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Elena Carletti (Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Jan-Peter Siedlarek (Federal Reserve Banks - Federal Reserve Bank of Cleveland); Giancarlo Spagnolo (Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF) |
| Abstract: | We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions. |
| Keywords: | banks; mergers and acquisitions; merger control; antitrust |
| JEL: | G21 G34 K21 L40 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Peng, Lin; Roell, Ailsa; Tang, Hongfei |
| Abstract: | We examine, both theoretically and empirically, the determinants and performance impact of three measures of CEO incentives: pay-performance elasticity (PPE), semi-elasticity (PPSE), and sensitivity (PPS). Larger, more R&D intensive, and low-idiosyncratic risk firms have higher PPE and PPSE, resolving puzzling prior empirical findings based on PPS. Performance is generally hump-shaped in PPE and PPSE; shortfalls relative to predicted levels appear particularly detrimental to firm performance, suggesting that the average firm's incentives are at the low end of the optimal range. Overall, the results obtained with the PPE and PPSE measures accord better with economic intuition than those obtained using PPS. |
| Keywords: | Executive compensation; pay-for-performance elasticity |
| JEL: | G32 G34 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Ioannis Asimakopoulos (Bank of Greece); Panagiotis K. Avramidis (ALBA Graduate Business School at the American College of Greece); Dimitris Malliaropulos (Bank of Greece, University of Piraeus); Nickolaos G. Travlos |
| Abstract: | Using a unique dataset of corporate loans of 13,070 Greek firms for the period 2008-2015 and an identification strategy based on the internal credit ratings of banks, we provide evidence that one out of six firms with non-performing loans are strategic defaulters. Furthermore, we investigate potential determinants of firms’ behavior by relating the probability of strategic default to a number of firm characteristics such as size, age, liquidity, profitability and collateral value. We provide evidence of a positive relationship of strategic default with outstanding debt and economic uncertainty and a negative relationship with the value of collateral. Also, profitability and collateral can be used to distinguish the strategic defaulters from the financially distressed defaulters. Finally, we find evidence that the relationship of strategic default risk with firm size and age has an inverse U-shape, i.e. strategic default is more likely among medium-sized firms compared to small and large firms and it is also more likely among middle-aged firms compared to new-founded and established firms. |
| Keywords: | Strategic default; Non-performing loans; Corporate loans; Leverage |
| JEL: | G01 G21 G32 C23 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Abramov Alexander (RANEPA) |
| Abstract: | The year 2015 saw a continuation of the longest slump in the history of Russia's stock market, which had started in May 2008. In 1997–1998, after the RTS Index had dropped by 91.3%, and the MICEX Index - by 73.0%, from their pre-crisis highs over a period that lasted slightly more than a year, they both managed to recover their former quotes in 58 and 8 months respectively. Now, as of February 2016, after their plummet during the acute phase of the 2008 crisis, both these stock indices have never recovered: the MICEX Index over the period of 88 months, and the RTS Index – 85 months. |
| Keywords: | Russian economy, financial markets, financial institutions |
| JEL: | G01 G12 G18 G21 G24 G28 G32 G33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Andrea M. Buffa (Boston University); Suleyman Basak (London Business School) |
| Abstract: | We study the dynamic decision making of a financial institution in the presence of a novel implementation friction that gives rise to operational risk. We distinguish between internal and external operational risks depending on whether the institution has control over them. Internal operational risk naturally arises in the context of model risk, as the institution exposes itself to operational errors whenever it updates and improves its investment model. In this case, it is no longer optimal to implement the best model available, thus leaving scope for endogenous deviation from it, and hence model sophistication. We show that the optimal exposure to operational risk may well become decreasing in the level of internal operational risk, which in turn makes the exposure to market risk less volatile. We uncover that financial constraints interact with operational risk, whether internal or external, and prompt the institution to always adopt a more sophisticated model. While such constraints are always detrimental when operational risk is internal, they may be beneficial, despite inducing an excessive level of sophistication, when it is external. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Cao, Jerry (Singapore Management University); Julio, Brandon (University of Oregon); Leng, Tiecheng (Singapore Management University); Zhou, Sili (Singapore Management University) |
| Abstract: | We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are selected and promoted in China. The tournament-style promotion system creates incentives for new provincial governors to exert their influence over capital allocation, particularly during the early years of their term. Using a neighboring-province difference-in-differences estimation approach, we find that there is a divergence in investment rates between state owned enterprises (SOEs) and non-state owned enterprises (non-SOEs) following political turnover. SOEs experience an abnormal increase in investment by 6.0% in the year following the turnover, consistent with the incentives of a new governor to stimulate investment. In contrast, investment rates for non-SOEs decline significantly post-turnover, suggesting that the political influence exerted over SOEs crowds out private investment. The effects of political turnover on investment are mainly driven by normal turnovers, and turnovers with less-educated or local-born successors. Finally, we provide evidence that the political incentives around the turnover of provincial governors represent a misallocation of capital as measures of investment efficiency decline post-turnover. |
| Keywords: | Corporate investment, Political turnover, China, SOE, Political uncertainty, Grabbing-hand, Crowding out, Investment efficiency |
| JEL: | G30 G31 G38 |
| Date: | 2016–07–08 |
| URL: | http://d.repec.org/n?u=&r=cfn |
| By: | Radygin Alexandr (Gaidar Institute for Economic Policy); Apevalova Elena (RANEPA); Polezhaeva Natalia (RANEPA) |
| Abstract: | Bankruptcy legislation in the post-Soviet Russia was for the first time introduced in 1992 by the Executive Order of the President “On Measures for the Support and Rehabilitation of Insolvent State-Owned Enterprises (Bankrupt Debtors) and the Application of Special Proceedings to Them” No. 623 of June 14, 1992, which stipulated grounds for liquidation of enterprises, special liquidation proceedings such as reorganization, rehabilitation, direct administration of the enterprise, independent management, auctions for sale of enterprise, and other provisions concerning bankruptcy. |
| Keywords: | Russian economy, bankruptcy, public enterprises |
| JEL: | G33 G38 P2 P31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=cfn |