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on Corporate Finance |
| By: | Miglo, Anton |
| Abstract: | This article presents a new capital structure model based on four factors well documented in literature: asymmetric information, taxes, bankruptcy costs and decision-makers' overconfidence. The model can simultaneously explain several facts about capital structure including those that remain puzzling from existing theories point of view eg. negative correlation between debt and profitability; why firms issue equity etc. Unlike many advanced research on capital structure, a closed-form solution is obtained for most results. |
| Keywords: | capital structure; asymmetric information; overconfidence; debt tax shield; bankruptcy costs |
| JEL: | D81 D82 D84 D86 G32 |
| Date: | 2021–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105102&r=all |
| By: | Yuliyan Mitkov (University of Bonn) |
| Abstract: | I propose a theory of debt maturity as an incentive device to motivate innovation when contracts are fundamentally incomplete and shaped by ex-post renegotiation. The financing of innovative firms must balance two goals. On the one hand, since innovation is inherently risky, the entrepreneur must receive adequate protection after failure. Simultaneously, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. Meeting these two goals can be especially challenging when contracts are incomplete. I show how an appropriate choice of debt maturity, together with ex-post contract renegotiation, embeds a "put option" into the firm's capital structure. The put is exercised when liquidation is efficient, and it partially insures the entrepreneur against failure and thus motivates innovation. The theory has novel empirical implications for the financing patterns of innovative firms. |
| Keywords: | Innovation, Debt maturity, Incomplete contracts, Renegotiation |
| JEL: | C78 D82 D86 G32 G33 O31 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:050&r=all |
| By: | ; Pierre-Olivier Gourinchas; Sebnem Kalemli-Ozcan; Veronika Penciakova |
| Abstract: | We estimate the impact of the COVID-19 crisis on business failures among small and medium-size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Accommodation and food services; arts, entertainment, and recreation; education; and other services are among the sectors most affected. The SME jobs at risk due to business failures related to COVID-19 represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of nonperforming loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets, and would result in a 0.75 percentage point decline in the common equity tier 1 capital ratio. We also evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at-risk firms can be modest (0.54 percent of gross domestic product). However, at a similar level of effectiveness, nontargeted subsidies can be substantially more expensive (1.82 percent of gross domestic product). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery. |
| Keywords: | COVID-19; business failures; liquidity; small business |
| JEL: | D2 E65 G33 |
| Date: | 2020–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:89453&r=all |
| By: | Yan Zhang; Frank Schweitzer |
| Abstract: | The reputation of firms is largely channeled through their ownership structure. We use this relation to determine reputation spillovers between transnational companies and their participated companies in an ownership network core of 1318 firms. We then apply concepts of network controllability to identify minimum sets of driver nodes (MDS) of 314 firms in this network. The importance of these driver nodes is classified regarding their control contribution, their operating revenue, and their reputation. The latter two are also taken as proxies for the access costs when utilizing firms as driver nodes. Using an enrichment analysis, we find that firms with high reputation maintain the controllability of the network, but rarely become top drivers, whereas firms with medium reputation most likely become top driver nodes. We further show that MDSs with lower access costs can be used to control the reputation dynamics in the whole network. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.05010&r=all |
| By: | Fujitani, Ryosuke; Kim, Hyonok; Yamada, Kazuo |
| Abstract: | We show that a peer firm’s management forecast provides information for other firms in the same industry. Specifically, we show that a firm’s management forecast is positively associated with the stock return of other firms in the same industry. Furthermore, we show that such peer effect is observed when peer firms are the first disclosure company in the industry. We also find that the peer effect is more pronounced among firms with higher information asymmetry. Finally, we find that the peer effect is observed only in 2020 and not in other years between 2001 and 2019. Overall, the analysis provides strong evidence of peer effects under the COVID-19 pandemic period. This paper suggests that management forecast of peer firm plays a vital role as useful information set for investors that have limited access to public information due to the global pandemic. |
| Keywords: | information spillover, COVID-19 pandemic, management forecast |
| JEL: | M4 G14 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hmicwp:240&r=all |
| By: | Zhuo Jin; Zuo Quan Xu; Bin Zou |
| Abstract: | We study an optimal dividend problem for an insurer who simultaneously controls investment weights in a financial market, liability ratio in the insurance business, and dividend payout rate. The insurer seeks an optimal strategy to maximize her expected utility of dividend payments over an infinite horizon. By applying a perturbation approach, we obtain the optimal strategy and the value function in closed form for log and power utility. We conduct an economic analysis to investigate the impact of various model parameters and risk aversion on the insurer's optimal strategy. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.06703&r=all |
| By: | Saissi Hassani, Samir (HEC Montreal, Canada Research Chair in Risk Management); Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management) |
| Abstract: | We model the new quantitative aspects of market risk management for banks that Basel established in 2016 and came into effect in January 2019. Market risk is measured by Conditional Value at Risk (CVaR) or Expected Shortfall at a confidence level of 97.5%. The regulatory backtest remains largely based on 99% VaR. As additional statistical procedures, in line with the Basel recommendations, supplementary VaR and CVaR backtests must be performed at different confidence levels. We apply these tests to various parametric distributions and use non-parametric measures of CVaR, including CVaR- and CVaR+ to supplement the modelling validation. Our data relate to a period of extreme market turbulence. After testing eight parametric distributions with these data, we find that the information obtained on their empirical performance is closely tied to the backtesting conclusions regarding the competing models. |
| Keywords: | Basel III; VaR; CVaR; Expected Shortfall; backtesting; parametric model; non-parametric model; mixture of distributions; fat-tail distribution |
| JEL: | C44 C46 C52 G21 G24 G28 G32 |
| Date: | 2021–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2021_001&r=all |
| By: | Mattia Guerini (COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019), GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Philipp Harting (Universität Bielefeld = Bielefeld University); Mauro Napoletano (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po, GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur) |
| Abstract: | We develop a model to study the impact of corporate governance on firm investment decisions and industry competition. In the model, governance structure affects the distribution of shares among short-and long-term oriented investors, the robustness of the management regarding possible stockholder interference, and the managerial remuneration scheme. A bargaining process between firm's stakeholders determines the optimal allocation of financial resources between real investments in R&D and financial investments in shares buybacks. We characterize the relation between corporate governance and firm's optimal investment strategy and we study how different governance structures shape technical progress and the degree of competition over the industrial life cycle. Numerical simulations of a calibrated setup of the model show that pooling together industries characterized by heterogeneous governance structures generate the well-documented inverted-U shaped relation between competition and innovation. |
| Keywords: | governance structure,industry dynamics,competition,technical change |
| Date: | 2020–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03040281&r=all |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa) |
| Abstract: | In this study, we assess the relevance of decreasing information asymmetry on life and non-life insurance consumption, by using data from 48 African countries during the period 2004-2014. Reduced information asymmetry is proxied by information sharing offices, namely: public credit registries and private credit bureaus. The empirical evidence is based on the Generalised Method of Moments. The findings show that information sharing offices increase insurance consumption with a comparatively higher magnitude in life insurance penetration, relative to non-life insurance penetration. Practical and theoretical implications are discussed. |
| Keywords: | Insurance; Information Asymmetry |
| JEL: | I30 G20 G22 O16 O55 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:20/057&r=all |
| By: | Christine Blandhol; Magne Mogstad; Peter Nilsson; Ola L. Vestad |
| Abstract: | Do employees benefit from worker representation on corporate boards? Economists and policymakers are keenly interested in this question – especially lately, as worker representation is widely promoted as an important way to ensure the interests and views of the workers. To investigate this question, we apply a variety of research designs to administrative data from Norway. We find that a worker is paid more and faces less earnings risk if she gets a job in a firm with worker representation on the corporate board. However, these gains in wages and declines in earnings risk are not caused by worker representation per se. Instead, the wage premium and reduced earnings risk reflect that firms with worker representation are likely to be larger and unionized, and that larger and unionized firms tend to both pay a premium and provide better insurance to workers against fluctuations in firm performance. Conditional on the firm’s size and unionization rate, worker representation has little if any effect. Taken together, these findings suggest that while workers may indeed benefit from being employed in firms with worker representation, they would not benefit from legislation mandating worker representation on corporate boards. |
| JEL: | G34 G38 J31 J54 J58 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28269&r=all |
| By: | Joseph Haimberg; Stephen Portnoy |
| Abstract: | The use of the Canonical Regression Quantiles Index proved that non-controlled companies that engage in long-term operational and financial goals post superior future performance. The Index indicates that current CEO compensation influences future performance. The Index provides a method for determining CEO pay for the next 1-2 year and is a useful method to distinguish over/underpaid CEOs as an unbiased alternative to the peer groups comparison used by most compensation consultants. This determination is statistically weak, but future research using the Canonical Regression Quantiles with a larger data set may lead to increased sensitivity and a powerful unbiased method for replacing compensation consultants who are responsible for the decoupling of CEO compensation and corporate performance. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.02296&r=all |
| By: | Berger, Marius; Hottenrott, Hanna |
| Abstract: | Research suggests that public subsidies for newly founded firms have a positive effect on follow-on financing, in particular, Venture Capital (VC). This study differentiates between Government VC, Independent VC, Corporate VC, and Business Angels and shows that public subsidies are not relevant for all of these sources. When accounting for firm characteristics that drive both selection into public subsidies as well as into VC financing through econometric matching techniques, we find that subsidies are only linked to Government VC and Business Angel financing. |
| Keywords: | Start-up Subsidies,Entrepreneurship Policy,Entrepreneurial Finance,Venture Capital,Business Angels |
| JEL: | G24 L26 O25 O31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20086&r=all |