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on Corporate Finance |
| By: | Bargeron, Leonce (University of Kentucky); Schlingemann, Frederik P. (University of Pittsburgh); Zutter, Chad J. (University of Pittsburgh); Stulz, Rene M. (Ohio State University) |
| Abstract: | There is a widespread belief among observers that a lower premium is paid when the target CEO is retained by the acquirer in a private equity deal because the CEO's potential conflicts of interest leads her to negotiate less aggressively on behalf of the target shareholders. Our empirical evidence is not consistent with this belief. We find that, when a private equity acquirer retains the target CEO, target shareholders receive an acquisition premium that is larger by as much as 18% of pre-acquisition firm value when accounting for the endogeneity of the retention decision. Our evidence is consistent with what we call the "valuable CEO hypothesis." With this hypothesis, retention of the CEO can be valuable to private equity acquirers because, unlike public operating companies with managers in place, these acquirers have to find a CEO to run the post-acquisition company and the incumbent CEO may be the best choice to do so because she has valuable firm-specific human capital. When a private equity acquirer finds a target with a CEO who can manage the post-acquisition company better than other potential CEOs, we expect target shareholders to receive a larger premium because the post-acquisition value of the target is higher. |
| JEL: | G30 G34 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-04&r=cfn |
| By: | Kamiya, Shinichi (Nanyang Technological University); Kang, Jun-Koo (Nanyang Technological University); Kim, Jungmin (Hong Kong Polytechnic University); Milidonis, Andreas (University of Cyprus); Stulz, Rene M. (Ohio State University) |
| Abstract: | We examine which firms are targets of successful cyberattacks and how they are affected. We find that cyberattacks are more likely to occur at larger and more visible firms, more highly valued firms, firms with more intangible assets, and firms with less board attention to risk management. These attacks affect firms adversely when consumer financial information is appropriated, but seem to have little impact otherwise. Attacks where consumer financial information is appropriated are associated with a significant negative stock market reaction, an increase in leverage following greater debt issuance, a deterioration in credit ratings, and an increase in cash flow volatility. These attacks also affect sales growth adversely for large firms and firms in retail industries, and there is evidence that they decrease investment in the short run. Affected firms respond to such attacks by cutting the CEO's bonus as a fraction of total compensation, by reducing the risk-taking incentives of management, and by taking actions to strengthen their risk management. The evidence is consistent with cyberattacks increasing boards' assessment of target firm risk exposures and decreasing their risk appetite. |
| JEL: | G14 G32 G34 G35 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2018-04&r=cfn |
| By: | Goncalves, Andrei (Ohio State University); Xue, Chen (University of Cincinnati); Zhang, Lu (Ohio State University) |
| Abstract: | This paper provides a careful treatment of aggregation, and to a lesser extent, capital heterogeneity in the investment CAPM. Firm-level investment returns are constructed from firm-level variables, and then aggregated to the portfolio level to match with portfolio-level stock returns. Current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously, and partially explains the positive stock-investment return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes. |
| JEL: | D21 D92 E22 E44 G12 G14 G31 G32 G34 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-12&r=cfn |
| By: | Wruck, Karen H. (Ohio State University); Wu, YiLin (National Taiwan University) |
| Abstract: | Influenced by their compensation plans, CEOs make their own luck through decisions that affect future firm risk. After adopting a relative performance evaluation (RPE) plan, total and idiosyncratic risk are higher, and the correlation between firm and industry performance is lower. The opposite is true for firms that adopt absolute performance evaluation (APE) plans. Plans including accounting-based performance metrics and/or cash payouts have weaker risk-related incentives. The higher idiosyncratic risk associated with RPE increases a firm's exposure to downside stock return risk and lowers credit quality. Our findings are economically consistent with observed differences in firms' financial and investment policies. |
| JEL: | D22 G12 G32 G34 J33 J41 O31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-20&r=cfn |
| By: | Doidge, Craig (University of Toronto); Kahle, Kathleen M. (University of Arizona); Karolyi, George Andrew (Cornell University); Stulz, Rene M. (Ohio State University) |
| Abstract: | Since reaching a peak in 1997, the number of listed firms in the U.S. has fallen in every year but one. During this same period, public firms have been net purchasers of $3.6 trillion of equity (in 2015 dollars) rather than net issuers. The propensity to be listed is lower across all firm size groups, but more so among firms with less than 5,000 employees. Relative to other countries, the U.S. now has abnormally few listed firms. Because markets have become unattractive to small firms, existing listed firms are larger and older. We argue that the importance of intangible investment has grown but that public markets are not well-suited for young, R&D-intensive companies. Since there is abundant capital available to such firms without going public, they have little incentive to do so until they reach the point in their lifecycle where they focus more on payouts than on raising capital. |
| JEL: | G18 G24 G28 G32 G35 K22 L26 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2018-01&r=cfn |
| By: | Bennett, Benjamin (Ohio State University); Wang, Zexi (University of Bern) |
| Abstract: | We study the short-selling effect on forced CEO turnover. Using difference-in-differences analyses based on the SEC Regulation SHO Pilot Program, we find short selling increases the likelihood of forced turnover. Theories suggest two potential mechanisms: informed short sellers reveal negative information (Revelation), while uninformed short sellers manipulate prices (Manipulation). Consistent with Revelation, we find stronger effects when firms have more earnings management, less informative stock prices, and less competitive product markets. Consistent with Manipulation, we find stronger effects when firms have more growth opportunities, fewer blockholders, and less volatile stock. Manipulative short selling decreases the efficiency of forced turnover. |
| JEL: | G30 G34 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2018-06&r=cfn |
| By: | Hanselaar, Rogier (Erasmus University Rotterdam); Stulz, Rene M. (Ohio State University); Van Dijk, Mathijs A. (Erasmus University Rotterdam) |
| Abstract: | Using quarterly data on IPOs and SEOs in 38 countries over the period 1995-2014, we show that changes in equity issuance are significantly and positively related to lagged changes in aggregate local market liquidity. This relation is at least as economically significant as the well-known relation between equity issuance and lagged stock returns. It survives the inclusion of proxies for market timing, capital market conditions, growth prospects, asymmetric information, and investor sentiment, as well as the exclusion of the financial crisis. Changes in liquidity are less relevant for firms that face greater financial pressures, firms in less financially developed countries, and during the financial crisis. |
| JEL: | F30 G15 G32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2016-24&r=cfn |
| By: | Alfaro, Ivan (BI Norwegian Business School); Bloom, Nicholas (Stanford University); Lin, Xiaoji (Ohio State University) |
| Abstract: | We show how real and financial frictions amplify the impact of uncertainty shocks. We start by building a model with real frictions, and show how adding financial frictions roughly doubles the negative impact of uncertainty shocks. The reason is higher uncertainty alongside financial frictions induces the standard negative real-options effects on the demand for capital and labor, but also leads firms to hoard cash against future shocks, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and factor price volatility. Consistent with the model we find that higher uncertainty reduces firms' investment, hiring, while increasing their cash holdings and cutting their dividend payouts, particularly for financially constrained firms. This highlights why in periods with greater financial frictions--like during the global-financial-crisis--uncertainty can be particularly damaging. |
| JEL: | D22 E23 E44 G32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-30&r=cfn |
| By: | Antonio De Socio (Bank of Italy); Enrico Sette (Bank of Italy) |
| Abstract: | We study the drivers of investment in Italy during the global financial crisis and the sovereign debt crisis. We focus on the effect of leverage while controlling for the role of other drivers: expected demand, profitability, access to credit and uncertainty. As firm-level leverage may be correlated with its unobservable characteristics, we employ instrumental variables estimation, using the median leverage of firms in the same industry and size decile as an instrument. We find that an increase in leverage equal to the interquartile range (about 30 percentage points) is associated with a lower investment rate of 1.9 and 1.4 percentage points (36 and 41 per cent of its mean) during each crisis. We also find that expected demand growth has a strong positive association with investments, whereas this relation holds for profitability only during the sovereign debt crisis. In contrast, credit rationing and uncertainty have a negative, although more limited, effect. Overall, ex-ante high firm indebtedness has been an important driver of the lower investment rate over the last decade. |
| Keywords: | investment, leverage, crisis |
| JEL: | E22 G31 G01 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1173_18&r=cfn |
| By: | Bao, Jack (Federal Reserve Board); Hou, Kewei (Ohio State University) |
| Abstract: | We study the effect of a bond's place in its issuer's maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers' maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices. |
| JEL: | G12 G13 G14 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-17&r=cfn |
| By: | Rossi, Andrea (Ohio State University) |
| Abstract: | In private equity fund data, there exists a strong negative association between fund growth and performance at the partnership level. As a consequence, there is a consensus that decreasing returns are particularly large. I argue that this inference is unwarranted. In essence, Bayesian-informed expectations reveal that the partnerships whose funds grew the most were on average lucky in the past; as that luck reverts to zero, a spurious negative association between growth and returns is generated in the data. Controlling for this bias, the effect of growth on performance is about 80% smaller and statistically insignificant for both buyout and venture capital funds. Furthermore, I show that, historically, decreasing returns do not seem to have played a major role in the erosion of performance persistence in private equity. These results have implications for fund managers’ and investors’ decisions, and for our understanding of the private equity industry. |
| JEL: | G11 G23 G24 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-26&r=cfn |
| By: | Vlad-Andrei Porumb; Ion Anghel; Costin Ciora |
| Abstract: | In this paper we analyze if the non-financial performance of real estate firms is associated with a decreased cost of capital. Specifically, we assess if firms with higher environmental, social, and corporate governance (ESG) performance benefit from reductions in the cost of debt capital. As ESG performance is associated with higher transparency, it is likely to be rewarded by private debt holders through better lending conditions. We draw on an international sample of real estate companies to test our contentions. Our findings suggest that firms with high ESG performance have a lower cost of debt relative to firms with low ESG performance. The results of this study bring important contributions to the academic literature and have significant practical implications. |
| Keywords: | Banks; debt; non-financial; Performance; real-estate |
| JEL: | R3 |
| Date: | 2017–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2017_357&r=cfn |
| By: | Li, Zhi (Chapman University); Wang, Lingling (University of Connecticut); Wruck, Karen H. (Ohio State University) |
| Abstract: | Adding accounting-based performance plans to management compensation packages influences borrowing costs and structure of corporate debt contracts. After granting long-term accounting-based incentive plans (LTAPs) to CEOs, firms pay lower spreads and have fewer restrictive covenants in new loans. Lenders impose fewer earnings-based covenants after firms adopt earnings-based LTAPs. Results are stronger for firms with high leverage or bankruptcy risk, and that are difficult for lenders to monitor. Results are robust to alternative borrowing cost measures, including new public bond spreads, credit ratings, and CDS spreads. Overall, evidence suggests that adding LTAPs to compensation packages helps align debtholder and shareholder interests. |
| JEL: | G30 J33 M41 M52 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-07&r=cfn |
| By: | DeAngelo, Harry (University of Southern California); Goncalves, Andrei (Ohio State University); Stulz, Rene M. (Ohio State University) |
| Abstract: | Most firms deleverage from their historical peak market-leverage (ML) ratios to near-zero ML, while also markedly increasing cash balances to high levels. Among 4,476 nonfinancial firms with five or more years of post-peak data, median ML is 0.543 at the peak and 0.026 at the later trough, with a six-year median time from peak to trough and with debt repayment and earnings retention accounting for 93.7% of the median peak-to-trough decline in ML. The findings support theories in which firms deleverage to restore ample financial flexibility and are difficult to reconcile with most firms having materially positive leverage targets. |
| JEL: | G31 G33 G35 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-28&r=cfn |
| By: | jiang, zhenghong |
| Abstract: | Abstract In this paper I attempt to investigate impact of external factors that affecting operational risk of logistic company in North America which is Expeditors International of Washington. This study was carried out using the secondary data which was obtained from the annual reports of three companies in consecutive years from 2012 until 2016. Inflation rate has been as the dependent variable to study its relationship with the independent variables such as Return on Equity (ROE), Return On Asset (ROA) and other risk factor variables. |
| Keywords: | inflation, Return on Equity (ROE), Return On Asset (ROA), operational risk |
| JEL: | G32 |
| Date: | 2018–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86856&r=cfn |
| By: | Ge, Shan (Ohio State University) |
| Abstract: | I identify effects of financial constraints on firms' product pricing decisions, using a sample of insurance groups (conglomerates) that contain both life and P&C (property & casualty) subsidiaries. P&C subsidiaries' losses can tighten financial constraints for the life subsidiaries through internal capital markets. I present a model that predicts following P&C losses, premiums should fall for life policies that initially increase insurers' statutory capital, and rise for policies that initially decrease capital. Empirically, I find that P&C losses cause changes in life insurance premiums as my model predicts. The effects are concentrated in more financially constrained groups. Evidence also indicates that life subsidiaries increase capital transfers to P&C subsidiaries following larger P&C losses. These results hold when instrumenting for P&C losses using data on weather damages, implying that P&C losses do cause changes in life insurance premiums and internal capital transfers. My findings suggest that when financial constraints tighten, firms change product prices to relax the constraints, and how prices change depends on the initial impact of selling the products on firms' financial resources. |
| JEL: | G22 G28 G30 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-27&r=cfn |
| By: | Schwert, Michael (Ohio State University) |
| Abstract: | This paper investigates the pricing of bank loans relative to the borrower's existing public bonds. After accounting for seniority, banks earn an economically large premium relative to the market price of credit risk. To quantify the premium, I apply a structural model that accounts for priority structure, prices the firm's bonds, and matches expected losses given default and secondary market bid-ask spreads. In a sample of secured term loans to non-investment-grade firms, banks earn an average rate premium of 143 bps, equal to 43% of the all-in-drawn spread. This paper provides novel evidence of firms' willingness to pay for the special qualities of bank loans. |
| JEL: | G12 G21 G32 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-23&r=cfn |
| By: | Dante B Canlas; Johnny Noe E Ravalo; Eli M Remolona |
| Abstract: | How susceptible to contagion are bank deposits associated with financial inclusion? To shed light on this question, we analyze the behavior of deposits of different account sizes around three significant bank closures in the Philippines. When we look at the three events by applying difference-in-difference regressions to a dataset that distinguishes between small and large deposits at the town level, we find no evidence that the closure of a large bank leads to withdrawals by depositors at other banks nearby, whether the depositors are large or small. For two of the events, we do find some evidence that depositors, both large and small, anticipate that their bank is about to fail, and they start to withdraw before the bank is closed. With more comprehensive branch-level data for one of the events, we find that a bank closure does lead to reduced deposits at bank branches nearby. All this suggests that, while a bank failure can lead to contagion, the behavior of small depositors is no different from that of large depositors, and thus financial inclusion is unlikely to add to financial instability. |
| Keywords: | financial inclusion, financial stability, contagion, bank run, event study, selection bias |
| JEL: | G21 G28 C21 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:724&r=cfn |
| By: | Helen Bao; Haotong Li |
| Abstract: | This paper studies the influence of CEO overconfidence on firms’ financial performance and corporate social responsibility (CSR) in the US real estate investment trust (REIT) market. CEO overconfidence has been shown to have both negative and positive influences on firms. This paper is the first to combine the two sides in a single framework. We find that firms with overconfident CEOs tend to have better CSR performance. In addition, better CSR performance can increase firms’ financial performance, but this positive relationship is undermined by the existence of overconfident CEOs. Our results not only shed light on the two sides of CEO overconfidence in the real estate sector, but also provide a new prospective for research on the CSR–financial performance relationship. |
| Keywords: | CEO overconfidence; Corporate Social Responsibility; Financial Performance; REIT |
| JEL: | R3 |
| Date: | 2017–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2017_157&r=cfn |
| By: | Agarwal, Sumit (Georgetown University); Amromin, Gene (Federal Reserve Bank of Chicago); Ben-David, Itzhak (Ohio State University); Dinc, Serdar (Rutgers University) |
| Abstract: | U.S. House of Representatives Financial Services Committee considered many important banking reforms in 2009-2010 including the Dodd-Frank Act. We show that during this period, the foreclosure starts on delinquent mortgages were delayed in the districts of committee members even though there was no difference in delinquency rates between committee and non-committee districts. In these areas, banks delayed the start of the foreclosure process by 0.5 months (relative to the 12-month average). The total estimated cost of delay to lenders is an order of magnitude greater than the campaign contributions by the Political Action Committees of the largest mortgage servicing banks to the committee members in that period and is comparable to these banks’ lobbying expenditures. |
| JEL: | D72 G01 G21 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-21&r=cfn |
| By: | Jana Kliestikova (University of Zilina, Faculty of Operation and Economics of Transport and Communications, Department of Economics); Maria Kovacova (University of Zilina, Faculty of Operation and Economics of Transport and Communications, Department of Economics); Tomas Kliestik (University of Zilina, Faculty of Operation and Economics of Transport and Communications, Department of Economics) |
| Abstract: | Bankruptcy is one of the most important business externalities. Prediction of corporate failures has become a challenging and discussed issue over the years. However, there is no research dedicated to the opportunity to hide the possible bankruptcy of the company through the creative accounting. Therefore, the main goal of presented study is to identify the challenging scientific gap represented by Earnings management models, through which companies can legally modify, hide and play with their financial data. We focus on the proper literature review in selected issue emphasizing the need to concentrate on the creation of a quality model for the detection and quantification of Earnings Management, which will take into account the specificities of the national environment as well as of the global development trends in the area concerned. |
| Keywords: | earning management, bankruptcy, creative accounting, insolvency |
| JEL: | M41 G33 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:7508682&r=cfn |
| By: | Armada Nunes Namuele (University of Evora, Portugal) |
| Abstract: | This research aims to analyse the main requirements in terms of financial reporting and corporate governance mechanisms established by the Capital Market Commission (CMC) of Angola to companies operating on the capital market of Angola. Using a qualitative investigation approach, we conclude that, overall, Angola is providing itself with a legal framework that is in convergence with the major orientations of the international organizations, regarding the requirements made to entities operating in the capital market, in terms of governance and oversight of those corporations, of their financial reporting process. However, there is an urgent need for the CMC of Angola to orient or even advocate the mandatory adoption of the IASB’s international accounting standards for entities operating (or intending to operate) in the capital market of Angola. At the Corporate Governance level, we found a fairly convergence of the principles and recommendations of the CMC regarding the OECD Corporate Governance principles. |
| Keywords: | Corporate Governance; Financial Reporting; Capital Market; Angola |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:smo:fpaper:002&r=cfn |
| By: | Badi Baltagi (Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244); Peter H. Egger (ETH Zurich, CEPR, CESifo, GEP); Michaela Kesina (ETH Zurich) |
| Abstract: | Whether a firm is able to attract foreign capital and whether it may participate at the export market depends on whether the fixed costs associated with doing so are at least covered by the incremental operating profits. This paper provides evidence that success for some firms in attracting foreign investors and in exporting appears to reduce the associated fixed costs with exporting or foreign ownership in other firms. Using data on 8,959 firms located in Shanghai, we find that contagion and spillovers in exporting and in foreign ownership decisions within an area of 10 miles in the city of Shanghai amplify fixed-cost reductions for both exporting as well as foreign ownership of neighboring firms. Contagion among exporters and among foreign-owned firms, respectively, amplify shocks to the profitability of these activities to a large extent. These findings are established through the estimation of a spatial bivariate probit model. |
| Keywords: | Firm-Level Exports, Firm-Level Foreign Ownership, Contagion, Spatial Econometrics, Chinese Firms |
| JEL: | C11 C31 C35 F14 F23 L22 R10 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:max:cprwps:211&r=cfn |
| By: | Erel, Isil (Ohio State University); Jang, Yeejin (Purdue University); Minton, Bernadette A. (Ohio State University); Weisbach, Michael S. (Ohio State University) |
| Abstract: | Firms hold liquid assets to enhance their ability to invest efficiently when external financing costs are high, especially during poor macroeconomic conditions. Using a sample of 47,378 acquisitions from 36 countries between 1997 and 2014, we study how the relation between firms' cash holdings and their acquisition decisions changes over macroeconomic cycles. We find that higher cash holdings increase the likelihood a firm will make an acquisition. Better macroeconomic conditions, which lower the cost of external finance, also increase the likelihood of an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: they decrease with acquirer cash holdings and with better macroeconomic conditions. The results are consistent with the view that firms choose liquidity levels to insure against poor macroeconomic conditions. |
| JEL: | G31 G34 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-13&r=cfn |
| By: | Basir, Yana |
| Abstract: | Liquidity risk management is really important in any organization to manage their liquidity. This study attempted to investigate the relationship between firm-specific and macroeconomic factors toward liquidity risk in Bajaj Auto company. This study is based on annual report of 5 years, the duration starting 2011-2015. The analysis show that firm specific factors and macroeconomic factors influence liquidity risk. |
| Keywords: | Liquidity risk, Corporate governance, Firm-specific factors, Macroeconomic factors |
| JEL: | Z00 |
| Date: | 2018–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86863&r=cfn |