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on Corporate Finance |
| By: | Bonetti, Pietro; Duro, Miguel; Ormazabal, Gaizka |
| Abstract: | This paper examines the effect of disclosure regulation on the market for corporate control. We study the implementation of a recent European regulation imposing tighter disclosure requirements regarding the financial and ownership information provided by public firms. We find a substantial drop in the number of control acquisitions after the implementation of the regulation, a decrease that is concentrated in countries with more dynamic takeover markets. Consistent with the idea that the disclosure requirements increased acquisition costs, we also observe that, under the new disclosure regime, target (acquirer) stock returns around the acquisition announcement are higher (lower), and toeholds are substantially smaller. Overall, our evidence suggests that tighter disclosure requirements can impose significant acquisition costs on bidders and thus slow down the market for corporate control. |
| Keywords: | Acquisitions; Disclosure regulation; market for corporate control; mergers; Proprietary costs; Takeover laws |
| JEL: | G34 G38 K22 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13458&r=all |
| By: | Goodhart, Charles A; Lastra, Rosa M |
| Abstract: | There is widespread concern that the bonus culture for senior managers in limited liability companies is having adverse effects, e.g. on risk-taking, leverage and lower longer-term investment. The moral hazard of limited liability was appreciated in the 19th century, when unlimited or multiple liability, especially for bankers, was widely adopted. Whereas outside, notably retail, investors still need the protection of limited liability, we advocate moving towards a two-tier equity system, primarily for banks, with insiders, senior managers and others with influence over corporate decisions, becoming subject to multiple liability. But the transition costs of doing so suddenly would be great, so our proposal is to start by applying this initially just to Systemically Important Financial Intermediaries. |
| Keywords: | Banking; banks; corporate governance; institutional investors; limited liability; Senior Management Regime; Two Tier Equity |
| JEL: | G30 G32 G39 K20 K22 K29 L14 L20 L21 M14 N20 N21 N23 P10 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13494&r=all |
| By: | Gao, Can; Martin, Ian |
| Abstract: | We define a sentiment indicator that exploits two contrasting views of return predictability, and study its properties. The indicator, which is based on option prices, valuation ratios and interest rates, was unusually high during the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. We interpret it as helping to reveal irrational beliefs about fundamentals. We show that our measure is a leading indicator of detrended volume, and of various other measures associated with financial fragility. We also make two methodological contributions. First, we derive a new valuation-ratio decomposition that is related to the Campbell and Shiller (1988) loglinearization, but which resembles the traditional Gordon growth model more closely and has certain other advantages for our purposes. Second, we introduce a volatility index that provides a lower bound on the market's expected log return. |
| Keywords: | bubbles; Option prices; sentiment; valuation ratios; volatility |
| JEL: | G10 G12 G14 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13454&r=all |
| By: | Anne Eyraud-Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon) |
| Abstract: | The aim of this work is to show that incompleteness is due in general not only to a lack of assets, but also to a lack of information. In this paper we present a simple inuence model where the inuencial agent has access to additional information. This leads to the construction of two models, a complete model and an incomplete model where the only dierence is a dierence of information. This leads to a simple model of incomplete market where the number of assets is not the cause of incompleteness: incomplete information is the explanation. Keywords Information · asymmetric information · option pricing · martin-gales · insider trading · complete market · incomplete market AMS Classication (2000): 60H10, 60G44, 60H07, 60J75, 91G20, 91B70, 93E11. JEL Classication: C60,G11,G14. |
| Keywords: | Insider trading,martin-gales,Information,asymmetric information,option pricing,complete market ·,incomplete market |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01998386&r=all |
| By: | Becker, Bo; Ivashina, Victoria |
| Abstract: | In the past thirty years, defaults on corporate bonds have been substantially higher than the historical average. We show that this increase in credit risk can be largely attributed to an increase in the rate at which new and fast-growing firms displace incumbents (a phenomenon sometimes referred to as 'disruptive innovation'). Industries with a lager presence of firms newly listed on the stock market, as well as industries that receive funding from venture capital, have a higher loss of revenue market share for established firms and subsequently see a rise in corporate bond defaults. Patent filings by individuals as opposed to corporations also predict defaults. These results are not affected by inclusion of controls for industry exposure to offshore manufacturing. |
| Keywords: | corporate bonds; default; Disruption |
| JEL: | G12 G30 G32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13508&r=all |
| By: | Sylvain Catherine; Thomas Chaney (Département d'économie); Zongbo Huang (Chinese University of Hong Kong (CUHK)); David Sraer (Princeton University); David Thesmar (Sloan School of Management (MIT Sloan)) |
| Abstract: | While a mature literature shows that credit constraints causally affect firm level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu&r=all |
| By: | Ester Chen (Peres Academic Center); Ilanit Gavious (Ben-Gurion University); Nadav Steinberg (Bank of Israel) |
| Abstract: | Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the IFRS, we investigate whether and how dividend payments based on unrealized revaluation earnings affect a firm’s default risk. Our results indicate that in the era of fair value accounting, the origin of the dividend payout—coming from unrealized versus realized earnings—has a significant effect on a firm’s default risk above and beyond the effect of the extent of the payment. Specifically, controlling for various determinants of financial risk, including the amount of the dividends paid (originating from either realized or unrealized earnings), companies are over three times more likely to subsequently require debt restructuring if they distribute dividends based on unrealized earnings. However, this enhanced risk seems to be mispriced by the market; firms that distribute dividends based on unrealized earnings exhibit an insignificantly different cost of debt than firms that never do so. |
| Keywords: | cost of debt, default risk, dividends, fair value accounting |
| JEL: | M21 M41 G35 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2017.05&r=all |
| By: | Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David |
| Abstract: | We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment. JEL Classification: E22, E32, E44, F34, F36, G32 |
| Keywords: | bank-sovereign nexus, debt maturity, firm investment, rollover risk |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192241&r=all |
| By: | Babus, Ana; Hachem, Kinda |
| Abstract: | We propose a model where both security design and market structure are endogenously determined to explain why standardized securities are frequently traded in decentralized markets. We find that issuers offer debt contracts in thinner markets where investors have a higher price impact, and equity in deeper markets. In turn, investors accept to trade in thinner markets to elicit less variable securities from issuers if gains from trade are small. Otherwise, investors choose to trade in deeper markets where their price impact is minimized. We also show that there exist equilibrium market structures in which both debt and equity are traded. |
| Keywords: | market structure; price impact; security design |
| JEL: | D86 G23 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13457&r=all |
| By: | Peleg Lazar, Sharon; Raviv, Alon |
| Abstract: | We present a model where bank assets are a portfolio of risky debt claims and analyze stockholders' risk-taking behavior while considering the strategic interaction between debtors and creditors. We find that: (1) as the leverage of a bank increases, risk shifting by borrowers increases, even if their leverage is unchanged (zombie lending). (2) While the literature demonstrates that an increase in the co-movement of a loan portfolio increases the bank's cost of default directly, we find that the increase in co-movement causes an increase in risk shifting that further increases the cost of default (3) Risk shifting decreases with the diversification of a loan portfolio. |
| Keywords: | Risk taking, Banks, Comovements, Deposit insurance, Zombie lending |
| JEL: | G21 G28 G32 G38 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92134&r=all |
| By: | Wang, Luxia; Chong, Terence Tai Leung; He, Yiyao; Liu, Yuchen |
| Abstract: | This paper measures the influence of venture capital (VC) on IPO valuations in China. It is found that the authentication effect is dominated by the grandstanding effect, suggesting that VC firms in China greatly value their reputations. It is also shown that the market-specific characteristics of non-VC-backed firms are more closely related to their initial returns, compared to those of VC-backed firms. In addition, corporate fundamentals play a more important role in the valuation for VC-backed firms than for non-VC-backed firms. |
| Keywords: | Venture Capital, IPO, Price Volatility. |
| JEL: | G24 |
| Date: | 2018–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92079&r=all |
| By: | Favara, Giovanni; Gao, Janet; Giannetti, Mariassunta |
| Abstract: | Little is known on whether financial factors influence firms' vulnerability to uncertainty shocks. We show that access to debt markets mitigates the effects of uncertainty on corporate policies. We use the staggered introduction of anti-recharacterization laws in U.S. states-which strengthened creditors' rights to repossess collateral pledged through SPVs-to identify firms' improved access to debt markets. After the passage of the laws, firms that face more uncertainty hoard less cash, and increase leverage and intangible investment. Firms' vulnerability to uncertainty shocks is reduced by the enhanced ability to issue debt through SPVs. |
| Keywords: | anti-recharacterization laws; cash; Creditor rights; Financial Frictions; Hedging; intangible assets; SPVs |
| JEL: | G3 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13531&r=all |
| By: | Giebe, Thomas; Lee, Miyu |
| Abstract: | There are legal grounds to hear competitors in merger control proceedings, and competitor involvement has gained significance. To what extent this is economically sensible is our question. The competition authority applies some welfare standard while the competitor cares about its own profit. In general, but not always, this implies a conflict of interest. We formally model this setting with cheap talk signaling games, where hearing the competitor might convey valuable information to the authority, but also serve the competitor's own interests. We find that the authority will mostly have to ignore the competitor but, depending on the authority's own prior information, strictly following the competitor's selfish recommendation will improve the authority's decision. Complementary to our analysis, we provide empirical data of competitor involvement in EU merger cases and give an overview of the legal discussion in the EU and US. |
| Keywords: | merger control, antitrust, European Commission, signaling, efficiency, competitors, rivals, competition |
| JEL: | C73 G34 K21 K4 L13 L2 L4 |
| Date: | 2019–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62428&r=all |
| By: | Raphael Flepp (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich) |
| Abstract: | In this paper, we account for boards’ misperceptions when replacing a top manager by differentiating between managerial turnovers following actual poor performance and managerial turnovers following seemingly poor performance due to bad luck in order to investigate their subsequent effects on performance. We focus on managerial changes within football organizations and analyze dismissals from the top European leagues. To account for the mean reversion of performance, we create a control group of non-dismissals using the nearest neighbor approach. To account for boards’ misperceptions, we differentiate between dismissals and non-dismissals that occur either due to poor playing performance on the pitch or due to a sequence of bad luck, which is measured using "expected goals". We find that dismissals after poor playing performance on the pitch increase subsequent performance, while dis-missals after a series of bad luck do not. Our results have important implications regarding the design of future turnover studies and the costs of boards’ ineffective turnover decisions. |
| Keywords: | football, managerial turnover, performance, football |
| JEL: | J44 L83 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:zrh:wpaper:380&r=all |
| By: | Dessein, Wouter; Prat, Andrea |
| Abstract: | We argue that economists have studied the role of management from three perspectives: contingency theory (CT), an organization-centric empirical approach (OC), and a leader-centric empirical approach (LC). To reconcile these three perspectives, we augment a standard dynamic firm model with organizational capital, an intangible, slow-moving, productive asset that can only be produced with the direct input of the firm's leadership and that is subject to an agency problem. We characterize the steady state of an economy with imperfect governance, and show that it rationalizes key findings of CT, OC, and LC, as well as generating a number of new predictions on performance, management practices, CEO behavior, CEO compensation, and governance. |
| Keywords: | CEO; Management; Organizational Capital |
| JEL: | L22 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13513&r=all |
| By: | Basak, Suleyman; Chabakauri, Georgy; Yavuz, M. Deniz |
| Abstract: | Empirical evidence suggests that investor protection has significant effects on ownership concentration and asset prices. We develop a dynamic asset pricing model to address the empirical regularities and uncover some of the underlying mechanisms at play. Our model features a controlling shareholder who endogenously accumulates control over a firm and diverts a fraction of its output. Better investor protection decreases stock holdings of controlling shareholders, increases stock mean-returns, and increases stock return volatilities when ownership concentration is sufficiently high, consistent with the related empirical evidence. The model also predicts that better protection increases interest rates and decreases the controlling shareholder's leverage. |
| Keywords: | Asset Pricing; controlling shareholders; expropriation; investor protection; stock holdings |
| JEL: | G12 G32 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13472&r=all |
| By: | Nathan Foley-Fisher; Stefan Gissler; Stephane Verani |
| Abstract: | This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity was a shift towards relatively small trades among a greater number of dealers in the interdealer market. |
| Keywords: | Broker-dealers ; Corporate bonds ; Insurance companies ; Market liquidity ; Over-the-counter markets ; Securities lending |
| JEL: | G01 G12 G23 G22 |
| Date: | 2019–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-11&r=all |
| By: | Nathan Foley-Fisher; Stefan Gissler; Stéphane Verani |
| Abstract: | This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity was a shift towards relatively small trades among a greater number of dealers in the interdealer market. |
| Keywords: | over-the-counter markets, corporate bonds, market liquidity, securities lending, insurance companies, broker-dealers |
| JEL: | G01 G12 G22 G23 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:768&r=all |
| By: | Ben-David, Itzhak; Franzoni, Francesco; Moussawi, Rabih; Sedunov, John |
| Abstract: | Large institutional investors own an increasing share of equity markets in the U.S. The implications of this development for financial markets are still unclear. The paper presents novel empirical evidence that ownership by large institutions predicts higher volatility and greater noise in stock prices, as well as more fragility at times of crisis. Evidence from a natural experiment suggests a causal interpretation of this effect. When studying the channel, we find that large institutional investors exhibit traits of granularity, i.e. subunits within a firm display correlated behavior, which reduces diversification of idiosyncratic shocks. |
| Keywords: | Concentration; fire sales; granularity; institutional investors; liquidity |
| JEL: | G01 G12 G23 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13427&r=all |
| By: | Tuuli, Saara |
| Abstract: | This paper investigates the impact of the model-based approach to bank capital regulation (i.e. the Internal Ratings Based Approach; IRBA) on firms' access to finance. A difference-in-differences methodology is used given that the IRBA, introduced as part of Basel II, was adopted by different banks in different times. The results suggest that firms indirectly affected by the new regulation via their main bank adopting the IRBA faced a 6-7 percentage point higher probability of facing a deterioration in their access to finance. When the sample is adjusted for the demand for credit, this estimate increases to 12-13 percentage points. The impact is found to come via increases in the cost of credit and to a smaller extent, reductions in the volume or size of loans. Around three-quarters of the effect is attributed to the sensitivity of the IRBA capital requirements to economic conditions, with adopting banks also found to specialize in low-risk lending. |
| JEL: | G21 G28 E51 |
| Date: | 2019–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_004&r=all |