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G32
Selected AbstractsTHE EFFECTS OF UNCERTAINTY ON THE LEVERAGE OF NONFINANCIAL FIRMSECONOMIC INQUIRY, Issue 2 2009CHRISTOPHER F. BAUM This paper investigates the link between the optimal level of nonfinancial firms' short-term leverage and macroeconomic and idiosyncratic sources of uncertainty. We develop a structural model of a firm's value maximization problem that predicts a negative relationship between uncertainty and optimal levels of borrowing. This proposition is tested using a panel of nonfinancial U.S. firms drawn from the COMPUSTAT quarterly database covering the period 1993,2003. The estimates confirm that as either form of uncertainty increases, firms decrease their levels of short-term leverage. This effect is stronger for macroeconomic uncertainty than for idiosyncratic uncertainty. (JEL C23, D8, D92, G32) [source] The Effect of Venture Capital Financing on the Sensitivity to Cash Flow of Firm's InvestmentsEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2010Fabio Bertoni G32; D92; G23 Abstract This work studies the effect of venture capital (VC) financing on firms' investments in a longitudinal sample of 379 Italian unlisted new-technology-based firms (NTBFs) observed over the 10-year period from 1994 to 2003. We distinguish the effects of VC financing according to the type of investor: independent VC (IVC) funds and corporate VC (CVC) investors. Previous studies argue that NTBFs are the firms most likely to be financially constrained. The technology-intensive nature of their activity and their lack of a track record increase adverse selection and moral hazard problems. Moreover, most of their assets are firm-specific or intangible and hence cannot be pledged as collateral. In accordance with this view, we show that the investment rate of NTBFs is strongly positively correlated with their current cash flows. We also find that after receiving VC financing, NTBFs increase their investment rate independently of the type of VC investor. However, the investments of CVC-backed firms remain sensitive to shocks in cash flows, whereas IVC-backed firms exhibit a low and statistically not significant investment,cash flow sensitivity that we interpret as a signal of the removal of financial constraints. [source] Internal Capital Markets and Capital Structure: Bank Versus Internal DebtEUROPEAN FINANCIAL MANAGEMENT, Issue 3 2010Nico Dewaelheyns G32; G21 Abstract We argue that domestic business groups are able to actively optimise the internal/external debt mix across their subsidiaries. Novel to the literature, we use bi-level data (i.e. data from both individual subsidiary financial statements and consolidated group level financial statements) to model the bank and internal debt concentration of non-financial Belgian private business group affiliates. As a benchmark, we construct a size and industry matched sample of non-group affiliated (stand-alone) companies. We find support for a pecking order of internal debt over bank debt at the subsidiary level which leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. The internal debt concentration of a subsidiary is mainly driven by the characteristics of the group's internal capital market. The larger its available resources, the more intra-group debt is used while bank debt financing at the subsidiary level decreases. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateral assets) to limit moral hazard and dissipative costs. Overall, our results are consistent with the existence of a complex group wide optimisation process of financing costs. [source] The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel DataEUROPEAN FINANCIAL MANAGEMENT, Issue 3 2009Chrisostomos Florackis G3; G32 Abstract This paper empirically investigates the relationship between managerial entrenchment and agency costs for a large sample of UK firms over the period 1999,2005. To measure managerial entrenchment, we use detailed information on ownership and board structures and managerial compensation. We develop a managerial entrenchment index, which captures the extent to which managers have the ability and incentives to expropriate wealth from shareholders. Our findings, which are based on a dynamic panel data analysis, show that there is a strong negative relationship between managerial entrenchment and our inverse proxy for agency costs, namely asset turnover ratio. There is also evidence that short-term debt and dividend payments work as effective corporate governance devices for UK firms. Finally, our findings reveal that agency costs are persistent over time. The results are robust to a number of alternative specifications, including varying measures of managerial entrenchment and agency costs. [source] Cash Flow Sensitivity of InvestmentEUROPEAN FINANCIAL MANAGEMENT, Issue 1 2009Armen Hovakimian G30; G31; G32 Abstract Investment cash flow sensitivity is associated with both underinvestment when cash flows are low and overinvestment when cash flows are high. The accessibility of external capital is positively correlated with cash flows, intensifying investment cash flow sensitivity. Managers actively counteract the variations in internal and external liquidity by accumulating working capital when liquidity is high and draining it when liquidity is low. These results imply that cash flow sensitive firms face financial constraints, which are binding in low cash flow years. Traditional indicators of financial constraints, such as size and dividend payout, successfully distinguish firms that may potentially face constraints, but are less successful in distinguishing between periods of tight and relaxed constraints. These periods are much more clearly separated by the KZ index, which, on the other hand, is less successful in identifying firms that are likely to face liquidity constraints. [source] Payout Policy Pedagogy: What Matters and WhyEUROPEAN FINANCIAL MANAGEMENT, Issue 1 2007Harry DeAngelo G35; G32; H25 Abstract This paper argues that we should abandonMM (1961)irrelevance as the foundation for teaching payout policy, and instead emphasise the need to distribute the full value generated by investment policy (,full payout'). Because MM's assumptions restrict payouts to an optimum, their irrelevance theorem does not provide the appropriate prescription for managerial behaviour. A simple example clarifies why the correct prescription is ,full payout', and why both payout and investment policy matter even absent agency costs (DeAngelo and DeAngelo, 2006). A simple life-cycle generalisation explains the main stylised facts about the payout policies of US and European firms. [source] Capital Cash Flows, APV and ValuationEUROPEAN FINANCIAL MANAGEMENT, Issue 1 2007Laurence Booth G31; G32 Abstract This paper examines three different methods of valuing companies and projects: the adjusted present value (APV), capital cash flows (CCF) and weighted average cost of capital (WACC) methods. It develops the appropriate WACC and beta leveraging formulae appropriate for each valuation model, so that given a particular valuation model the correct APV and CCF values can be determined from the WACC value and vice versa. Further it goes on to show when the perpetuity formulae give poor estimates of the value of individual cash flows, even though the overall values are correct. The paper cautions that the APV and CCF models require more information than is currently known, such as the value of the corporate use of debt, and consequently can give misleading results, particularly in sensitivity analyses. [source] The Role of Investment, Financing and Dividend Decisions in Explaining Corporate Ownership Structure: Empirical Evidence from SpainEUROPEAN FINANCIAL MANAGEMENT, Issue 5 2006Julio Pindado G31; G32; G35 Abstract This paper analyses the determinants of ownership structure by focusing on the role played by investment, financing and dividend decisions. The use of the Generalised Method of Moments allows us to provide new evidence on this important corporate governance topic, since it controls for the endogeneity problem. Our most relevant findings show that: i) increases in debt lead insiders to limit the risk they bear by reducing their holdings; ii) monitoring by large outside owners substitutes for the disciplinary role of debt; and iii) both inside and outside owners are encouraged to increase their stakes in the firm in view of higher dividends. Our results hold after controlling for equity issues and share repurchases. [source] The Determinants of Debt Maturity Structure: Evidence from France, Germany and the UKEUROPEAN FINANCIAL MANAGEMENT, Issue 2 2006Antonios Antoniou G20; G32 Abstract We examine the determinants of the debt maturity structure of French, German and British firms. These countries represent different financial and legal traditions that may have implications on corporate debt maturity structure. Our model incorporates the factors representing three major theories (tax considerations, liquidity and signalling, and contracting costs) of debt maturity. It also controls for capital market conditions. The results confirm the applicability of most theories of debt maturity structure for the UK firms. However, the evidence from France and Germany are mixed. Overall the findings suggest that the debt maturity structure of a firm is determined by firm-specific factors and the country's financial systems and institutional traditions in which it operates. [source] Share Repurchases, Dividends and Executive Options: the Effect of Dividend ProtectionEUROPEAN FINANCIAL MANAGEMENT, Issue 1 2006Eva Liljeblom G12; G32; G35 Abstract We study the determinants of share repurchases and dividends in Finland. We find that higher foreign ownership serves as a determinant of share repurchases and suggest that this is explained by the different tax treatment of foreign and domestic investors. Further, we also find support for the signalling and agency cost hypotheses for cash distributions. The fact that 41% of the option programmes in our sample are dividend protected allows us to test more directly the ,substitution/managerial wealth' hypothesis for the choice of distribution method. When options are dividend protected, the relationship between dividend distributions and the scope of the options programme turns to a significantly positive one instead of the negative one documented in US data. [source] Analysing Perceived Downside Risk: the Component Value-at-Risk FrameworkEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2004Winfried G. Hallerbach G3; G32; G1; G14 Abstract Multinational companies face increasing risks arising from external risk factors, e.g. exchange rates, interest rates and commodity prices, which they have learned to hedge using derivatives. However, despite increasing disclosure requirements, a firm's net risk profile may not be transparent to shareholders. We develop the ,Component Value-at-Risk (VaR)' framework for companies to identify the multi-dimensional downside risk profile as perceived by shareholders. This framework allows for decomposing downside risk into components that are attributable to each of the underlying risk factors. The firm can compare this perceived VaR, including its composition and dynamics, to an internal VaR based on net exposures as it is known to the company. Any differences may lead to surprises at times of earnings announcements and thus constitute a litigation threat to the firm. It may reduce this information asymmetry through targeted communication efforts. [source] Why Study Large Projects?EUROPEAN FINANCIAL MANAGEMENT, Issue 2 2004An Introduction to Research on Project Finance G32; G34; L22; G31 Abstract Despite the fact that more than $200 billion of capital investment was financed through project companies in 2001, an amount that grew at a compound annual rate of almost 20% during the 1990s, there has been very little academic research on project finance. The purpose of this article is to explain why project finance in general and why large projects in particular merit separate academic research and instruction. In short, there are significant opportunities to study the relationship among structural attributes (i.e., high leverage, contractual details, and concentrated equity ownership), managerial incentives, and asset values, as well as improve current practice in this rapidly growing field of finance. [source] Shareholder Wealth Effects of European Domestic and Cross-border Takeover BidsEUROPEAN FINANCIAL MANAGEMENT, Issue 1 2004Marc Goergen G32; G34 Abstract This paper analyses the short-term wealth effects of large intra-European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short-term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains. [source] Differences between European and American IPO MarketsEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2003Jay R. Ritter G24; G32; G14; G15 Abstract This brief survey discusses recent developments in the European initial public offering (IPO) market. The spectacular rise and fall of the Euro NM markets and the growth of bookbuilding as a procedure for pricing and allocating IPOs are two important patterns. Gross spreads are lower and less clustered than in the USA. Unlike the USA, some European IPOs, especially those in Germany, have when-issued trading prior to the final setting of the offer price. Current research includes empirical studies on the valuation of IPOs and both theoretical and empirical work on the determinants of short-run underpricing. [source] The Impact of Institutional Differences on Derivatives Usage: a Comparative Study of US and Dutch FirmsEUROPEAN FINANCIAL MANAGEMENT, Issue 3 2003Gordon M. Bodnar F30; G15; G32 Abstract This paper examines the influence of institutional differences on corporate risk management practices in the USA and the Netherlands. We compare results to surveys in each country using a strategy that corrects for differences over industry and size classes across the Dutch and US samples. We document several differences in the firms' uses and attitudes towards derivatives and attempt to attribute them to the differences in the institutional environments between the USA and the Netherlands. We find that institutional differences appear to have an important impact on risk management practices and derivatives use across US and Dutch firms. [source] Price Differentials between Dual-class Stocks: Voting Premium or Liquidity Discount?EUROPEAN FINANCIAL MANAGEMENT, Issue 3 2003Robert Neumann G32; G34 Abstract A series of papers suggest that private benefits can explain the price differentials between stock classes carrying different voting rights. However, in Denmark the premium is negative for several firms over long periods. This indicates that in the absence of takeover contests, where the voting right becomes crucial in a transfer of corporate control, the price differential in stock classes with identical dividend rights is more likely to reflect investors' liquidity risks. Whereas the existing literature tends to focus primarily on corporate control-related explanations, this paper documents the impact of liquidity on price spreads between dual-class shares. [source] Secured Creditor Recovery Rates from Management Buy-outs in DistressEUROPEAN FINANCIAL MANAGEMENT, Issue 2 2003David Citron G33; G32 Buy-out literature suggests that secured creditors will recoup substantial proportions of the funds they extend to finance the initial buy-out. This paper uses a unique dataset of 42 failed MBOs to examine the extent of credit recovery by secured lenders under UK insolvency procedures and the factors that influence the extent of this recovery. On average, secured creditors recover 62 per cent of the amount owed. The percentage of secured credit recovered is increased where the distressed buy-out is sold as a going concern and where the principal reason for failure concerns managerial factors. The presence of a going concern qualification in the audit report and the size of the buy-out reduce the recovery rate by secured creditors. [source] Ownership, Governance, and Bank Performance: Korean ExperienceFINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 4 2005Sungho Choi G21; G32; G34 The paper examines the effect of ownership and governance on firm performance. Tracing the post financial crisis experience, 1998,2002, of the Korean commercial bank industry, the paper investigates whether the involvement of foreign investors in the ownership structure had any significant effect on the banks' performance i.e., return and risk measures. Further, it examines the effects of the presence of outside directors, especially directors from foreign countries, in the corporate board structure impacts banks performance. Evidence indicates that the extent of the foreign ownership level, not the mere existence of foreign ownership, has a significant positive association with the bank return and a significant negative association with the bank risk. The number of outside board of directors does not have any significant affect on performance however the presence of a foreign director on that board is significantly associated with bank return and risk. These findings are relatively robust under the different specifications of performance measures. [source] Risk Changes around Calls of Convertible BondsFINANCIAL REVIEW, Issue 3 2010Luis García-Feijóo G14; G32 Abstract We examine changes in equity and asset betas around convertible bond calls and report two major findings. First, calling firms exhibit an increase in asset betas following the call. We argue that the finding is consistent with the implications of the sequential financing theory but not of the backdoor equity financing theory. Second, abnormal returns at call announcements are negative only for the subsample of firms that also exhibit an increase in equity beta. We conclude that risk changes help explain the market reaction to convertible bond calls. [source] Prior Payment Status and the Likelihood to Pay Dividends: International EvidenceFINANCIAL REVIEW, Issue 3 2010Mia Twu G32; G35 Abstract By using the signaling model and the life-cycle theory, I examine the importance of prior payment status in determining the likelihood to pay dividends. I categorize firms into those that paid dividends previously and those that did not. My results show that strong dividend stickiness exists and the determinants to pay differ significantly for the two groups of firms. High growth and low insider holdings make prior payers more likely to pay but prior nonpayers less likely to pay. Furthermore, prior payers are more sensitive to profitability and earned/contributed equity mix, while prior nonpayers are more sensitive to risk and dividend premiums. Finally, taking the prior payment status into account eliminates the problem of overestimating the portion of payers put forth by previous studies. [source] Hedging, Financing and Investment Decisions: A Simultaneous Equations FrameworkFINANCIAL REVIEW, Issue 2 2007Chen-Miao Lin D84; G31; G32 Abstract We empirically investigate the interactions among hedging, financing, and investment decisions. We argue that the way in which hedging affects a firm's financing and investing decisions differs for firms with different growth opportunities. We find that high growth firms increase their investment, but not leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage. [source] Initial Public Offerings: CFO PerceptionsFINANCIAL REVIEW, Issue 4 2006James C. Brau G14; G24; G32; G34 Abstract We examine four issues pertaining to initial public offerings (IPOs) using a survey of 438 chief financial officers (CFOs). First, why do firms go public? Second, is CFO sentiment stationary across bear and bull markets? Third, what concerns CFOs about going public? Fourth, do CFO perceptions correlate with returns? Results support funding for growth and liquidity as the primary reasons for IPOs. CFO sentiment is generally stationary in pre- and post-bubble years. Managers are concerned with the direct costs of going public, such as underwriting fees, as well as indirect costs. We find a negative relation between a focus on immediate growth and long-term abnormal returns. [source] Corporate Governance and Asset Sales: The Effect of Internal and External Control MechanismsFINANCIAL REVIEW, Issue 3 2006Robert C. Hanson G32; G34 Abstract We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets. [source] Working capital management in SMEsACCOUNTING & FINANCE, Issue 3 2010Sonia Baños-Caballero G30; G31; G32 Abstract This paper analyses the determinants of Cash Conversion Cycle (CCC) for small- and medium-sized firms. It has been found that these firms have a target CCC length to which they attempt to converge, and that they try to adjust to their target quickly. The results also show that it is longer for older firms and companies with greater cash flows. In contrast, firms with more growth opportunities, and firms with higher leverage, investment in fixed assets and return on assets have a more aggressive working capital policy. [source] Capital gains taxation and shareholder wealth in takeoversACCOUNTING & FINANCE, Issue 2 2010Martin Bugeja H24; G32; G34 Abstract Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non-taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains. [source] Divestitures, wealth effects and corporate governanceACCOUNTING & FINANCE, Issue 2 2010Sian Owen G32; G34 Abstract We analyse the market reaction to divestiture decisions and determine the impact of corporate governance practices. We find the market reaction is significant and can be determined using internal governance mechanisms. We evaluate the determinants of the decision to sell using a control sample of firms displaying characteristics often associated with divestitures indicating that these firms may face the same incentives to divest but elect not to restructure in this manner. Our results suggest that a combination of strong internal and external governance may force managers to act in a manner that is incompatible with their personal desires. [source] Underwriter reputation, earnings management and the long-run performance of initial public offeringsACCOUNTING & FINANCE, Issue 1 2010Shao-Chi Chang M41; G14; G24; G32 Abstract This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less-aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post-offer performance of an IPO firm's stocks only for those firms associated with less-prestigious underwriters. [source] Risk disclosures on the second tier markets of the London Stock ExchangeACCOUNTING & FINANCE, Issue 4 2009Paula Hill G32 Abstract The identification, management and disclosure of risks have been the subject of recent legislation, directives and reporting standards issued across a number of international jurisdictions. To inform the disclosure debate, this paper provides a detailed analysis of the risk warning disclosures of initial public offering (IPO) companies and the factors that drive such disclosures. We find that risk disclosures of IPO companies contain a greater proportion of forward-looking information but a lower proportion of information on internal controls and risk management than the disclosures of listed companies. We find evidence that such disclosure has increased across time but that larger directors' shareholdings are associated with a reduction in risk disclosure. [source] Effect of diversification on capital structureACCOUNTING & FINANCE, Issue 4 2009Maurizio La Rocca G30; G32 Abstract Previous empirical financial studies have paid little attention to the role of diversification strategy on financial choices. This study analyses the financing strategies of multibusiness firms, suggesting the relevance of sorting the diversification phenomena into its related and unrelated components. The implications of our findings are important because they explain earlier contradictory results on capital-structure determinants and offer an explanation of how the degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours. [source] Private placements of convertible securities: stock returns, operating performance and abnormal accrualsACCOUNTING & FINANCE, Issue 4 2009Jan L. Williams G14; G32 Abstract This study examines long-run stock returns, operating performance and abnormal accruals of private placements of convertible securities. We investigate the effects surrounding private placements to test and differentiate the implications of several competing hypotheses. While the monitoring and certification hypotheses suggest positive effects, the managerial entrenchment, overvaluation and windows-of-opportunity hypotheses suggest the opposite. We find that placing firms generally experience positive effects in the pre-periods and negative effects in the post-periods. Our overall findings are more consistent with the predictions of the overvaluation and windows-of-opportunity hypotheses while our post-placement evidence is also consistent with the predictions of the managerial entrenchment hypothesis. [source] | ||||||||||||||||||||||