I develop a model of mergers in which M&A deals are used to reallocate investment opportunities. In equilibrium, acquirers lack internal growth options and seek out projects from targets in the M&A market. The model is able to reconcile many features of the merger data that I document, including the high productivity, investment, and valuation of target firms. Furthermore, in my model, profitability is highly predictive of acquisition, and merger transactions naturally lead to a substantial drop in profitability despite creating value for the acquirer.
{"title":"Acquiring Growth","authors":"Oliver Levine","doi":"10.2139/ssrn.1928255","DOIUrl":"https://doi.org/10.2139/ssrn.1928255","url":null,"abstract":"I develop a model of mergers in which M&A deals are used to reallocate investment opportunities. In equilibrium, acquirers lack internal growth options and seek out projects from targets in the M&A market. The model is able to reconcile many features of the merger data that I document, including the high productivity, investment, and valuation of target firms. Furthermore, in my model, profitability is highly predictive of acquisition, and merger transactions naturally lead to a substantial drop in profitability despite creating value for the acquirer.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"128 4","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114047218","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Private firms with relatively high costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting and requires the bank to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit higher levels of financial reporting opacity. Controlling for many other factors, firms with a single bank relationship exhibit more earnings management exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. They also disclose their financial reports about 14 days later and are considerably more likely to miss the mandatory filing date. The length of such firms’ financial reports is also smaller, containing approximately 7.4% fewer characters than the median report. The results are robust to different econometric specifications including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of relationship lending.
{"title":"Bank Relationships and Private Firms’ Financial Reporting Opacity","authors":"C. Hillebrand, Jochen Bigus","doi":"10.2139/ssrn.2629206","DOIUrl":"https://doi.org/10.2139/ssrn.2629206","url":null,"abstract":"Private firms with relatively high costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting and requires the bank to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit higher levels of financial reporting opacity. Controlling for many other factors, firms with a single bank relationship exhibit more earnings management exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. They also disclose their financial reports about 14 days later and are considerably more likely to miss the mandatory filing date. The length of such firms’ financial reports is also smaller, containing approximately 7.4% fewer characters than the median report. The results are robust to different econometric specifications including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of relationship lending.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120846003","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We provide the first empirical evidence of a non-linear relationship between funding liquidity and market liquidity (FL-ML). The relationship depends on the state of business cycle, firm volatility, and the regulatory regime. Due to heightened funding constraints, equity trading costs increased twofold during the recent financial crisis; and even more for low quality firms, confirming the “flight to quality” hypothesis. The FL-ML relationship strengthens after favorable bank stress test results indicating the importance of market intermediation by bank affiliates. The relationship weakens after the enactment of the Volcker Rule as Volcker rule prohibits proprietary trading by banks.
{"title":"Dynamics of Market Liquidity and Funding Liquidity during Financial Crisis, Its Resolution, and the Volcker Rule","authors":"Xiankui Hu, Chinmay Jain, P. Jain","doi":"10.2139/ssrn.1787263","DOIUrl":"https://doi.org/10.2139/ssrn.1787263","url":null,"abstract":"We provide the first empirical evidence of a non-linear relationship between funding liquidity and market liquidity (FL-ML). The relationship depends on the state of business cycle, firm volatility, and the regulatory regime. Due to heightened funding constraints, equity trading costs increased twofold during the recent financial crisis; and even more for low quality firms, confirming the “flight to quality” hypothesis. The FL-ML relationship strengthens after favorable bank stress test results indicating the importance of market intermediation by bank affiliates. The relationship weakens after the enactment of the Volcker Rule as Volcker rule prohibits proprietary trading by banks.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116684225","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using an unbalanced bank level panel data, this study tries to examine how bank-specific characteristics and macroeconomic factors affect the profitability of commercial banks (108 commercial banks) in India in the post reform period from 1999 to 2011. The results indicate that profitability of commercial banks in India, regardless of their ownership, is affected by both internal and external characteristics and changes in the overall banking environment. However, the study finds that the impact is not uniform across bank types. The results indicate that banks’ liquidity conditions and size do not impact neither return on equity (ROE) or return on asset (ROA) of the profitability measure. On the other hand, it is found that profitability of private and foreign banks is positively related to their credit risk. The results indicate that overhead cost affects ROE of private and foreign banks positively while public sector banks negatively. Whereas the impact of overheads cost on ROA is positively significant in the case of all banks and negatively significant in the case of private banks. There exists a negative relationship between the level of capital strength and ROE and a positive relationship between the level capital strength and ROA in the case of all banks and public banks, which indicates that the more is the capital strength, the more is the profitability of these banks. The impact of Macroeconomic factors on ROE is insignificant for all cases with conflicting signs across ownership types of the banks. On the other hand on ROA, these indicators are significant when we pool the whole sample together (i.e. all banks) and private banks as a group.
{"title":"The Determinants of Commercial Banks Profitability in India","authors":"Nagaraju Thota","doi":"10.2139/ssrn.2544838","DOIUrl":"https://doi.org/10.2139/ssrn.2544838","url":null,"abstract":"Using an unbalanced bank level panel data, this study tries to examine how bank-specific characteristics and macroeconomic factors affect the profitability of commercial banks (108 commercial banks) in India in the post reform period from 1999 to 2011. The results indicate that profitability of commercial banks in India, regardless of their ownership, is affected by both internal and external characteristics and changes in the overall banking environment. However, the study finds that the impact is not uniform across bank types. The results indicate that banks’ liquidity conditions and size do not impact neither return on equity (ROE) or return on asset (ROA) of the profitability measure. On the other hand, it is found that profitability of private and foreign banks is positively related to their credit risk. The results indicate that overhead cost affects ROE of private and foreign banks positively while public sector banks negatively. Whereas the impact of overheads cost on ROA is positively significant in the case of all banks and negatively significant in the case of private banks. There exists a negative relationship between the level of capital strength and ROE and a positive relationship between the level capital strength and ROA in the case of all banks and public banks, which indicates that the more is the capital strength, the more is the profitability of these banks. The impact of Macroeconomic factors on ROE is insignificant for all cases with conflicting signs across ownership types of the banks. On the other hand on ROA, these indicators are significant when we pool the whole sample together (i.e. all banks) and private banks as a group.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-03-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129087548","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we offer the first large sample evidence on the availability and usage of credit lines in U.S. public corporations and use it to re-examine the existing findings on corporate liquidity. We show that the availability of credit lines is widespread and that average undrawn credit is of the same order of magnitude as cash holdings. We test the trade-off theory of liquidity according to which firms target an optimum level of liquidity, computed as the sum of cash and undrawn credit lines. We provide support for the existence of a liquidity target, but also show that the reasons why firms hold cash and credit lines are very different. While the precautionary motive explains well cash holdings, the optimum level of credit lines appears to be driven by the restrictions imposed by the credit line itself, in terms of stated purpose and covenants. In support to these findings, credit line drawdowns are associated with capital expenditures, acquisitions, and working capital.
{"title":"Credit Lines: The Other Side of Corporate Liquidity","authors":"Filippo Ippolito, Ander Pérez-Orive","doi":"10.2139/ssrn.1762115","DOIUrl":"https://doi.org/10.2139/ssrn.1762115","url":null,"abstract":"In this paper we offer the first large sample evidence on the availability and usage of credit lines in U.S. public corporations and use it to re-examine the existing findings on corporate liquidity. We show that the availability of credit lines is widespread and that average undrawn credit is of the same order of magnitude as cash holdings. We test the trade-off theory of liquidity according to which firms target an optimum level of liquidity, computed as the sum of cash and undrawn credit lines. We provide support for the existence of a liquidity target, but also show that the reasons why firms hold cash and credit lines are very different. While the precautionary motive explains well cash holdings, the optimum level of credit lines appears to be driven by the restrictions imposed by the credit line itself, in terms of stated purpose and covenants. In support to these findings, credit line drawdowns are associated with capital expenditures, acquisitions, and working capital.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-02-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129911466","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the information content of the limit order book (LOB) on the Tokyo Stock Exchange, the world’s second largest order-driven market. We find that high frequency microstructure parameters, such as the current cost-to-trade 1% of average daily volume and LOB slope, contain information about future trade price location, price volatility, speed of trading, return autocorrelation and cross-correlation. We also document that the average trade size in LOB is the driving force in the standard volume–volatility relationship, which is contrary to previous findings for other markets. These results are helpful in understanding the price discovery process in a purely order driven market and have potential applications in academics and industry for optimizing the order submission strategies.
{"title":"Evolution of Volatility, Trade Price Location, Correlations, and Speed of Trading in the Limit Order Book","authors":"P. Jain, P. Jain, Thomas H. Mcinish","doi":"10.2139/ssrn.1913982","DOIUrl":"https://doi.org/10.2139/ssrn.1913982","url":null,"abstract":"We investigate the information content of the limit order book (LOB) on the Tokyo Stock Exchange, the world’s second largest order-driven market. We find that high frequency microstructure parameters, such as the current cost-to-trade 1% of average daily volume and LOB slope, contain information about future trade price location, price volatility, speed of trading, return autocorrelation and cross-correlation. We also document that the average trade size in LOB is the driving force in the standard volume–volatility relationship, which is contrary to previous findings for other markets. These results are helpful in understanding the price discovery process in a purely order driven market and have potential applications in academics and industry for optimizing the order submission strategies.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121668009","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper empirically examines whether the generally accepted finding that the firm’s accounts receivable tend to be industry-specific is valid for private mature Belgian firms between 2001 and 2008. The initial average receivable of the firm’s industry in 2001 is not an important determinant in explaining the future accounts receivable of mature private Belgian firms. This result implies that the firm’s accounts receivable is firm-specific. The findings are robust for European countries with medium customer payment risk such as The United Kingdom and France. A tentative explanation for these findings is provided.
{"title":"Does The Firm’s Receivable Policy Tend to be Uniform Across their Industry and Stable over Time? Evidence from Matured Firms","authors":"Balbinder Singh Gill","doi":"10.2139/ssrn.1881546","DOIUrl":"https://doi.org/10.2139/ssrn.1881546","url":null,"abstract":"This paper empirically examines whether the generally accepted finding that the firm’s accounts receivable tend to be industry-specific is valid for private mature Belgian firms between 2001 and 2008. The initial average receivable of the firm’s industry in 2001 is not an important determinant in explaining the future accounts receivable of mature private Belgian firms. This result implies that the firm’s accounts receivable is firm-specific. The findings are robust for European countries with medium customer payment risk such as The United Kingdom and France. A tentative explanation for these findings is provided.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"53 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132505093","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper discusses using a particular Excel assignment in a Corporate Finance course at the undergraduate and graduate level. Excel worksheets allow students to more readily see interactions between concepts, and a finance major who is sufficiently skilled in Excel has an advantage entering the job market over those who are not. The paper discusses using an Excel assignment that requires students to complete financial statements and calculate financial ratios and cash flows. It also discusses methods for evaluating the worksheets that the students turn in. Grading Excel assignments can be tedious. This paper also discusses using resources within Excel to reducing the time spent on evaluating student work and making it more efficient.
{"title":"Effective and Efficient Use of Excel in Teaching Financial Ratios and Cash Flows","authors":"Mark Tengesdal","doi":"10.2139/SSRN.1929012","DOIUrl":"https://doi.org/10.2139/SSRN.1929012","url":null,"abstract":"This paper discusses using a particular Excel assignment in a Corporate Finance course at the undergraduate and graduate level. Excel worksheets allow students to more readily see interactions between concepts, and a finance major who is sufficiently skilled in Excel has an advantage entering the job market over those who are not. The paper discusses using an Excel assignment that requires students to complete financial statements and calculate financial ratios and cash flows. It also discusses methods for evaluating the worksheets that the students turn in. Grading Excel assignments can be tedious. This paper also discusses using resources within Excel to reducing the time spent on evaluating student work and making it more efficient.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-09-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125393640","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The purpose of this paper is to examine empirically the real options to shutdown, startup, and abandon existing production assets using detailed information for 1,121 individual power plants for the period 2001--2009, a total of 8,189 plant-year observations. We find strong evidence of real options effects. We find that uncertainty about the outcome of ongoing deregulation in retail electricity markets (i) decreases the probability of shutting down operating plants, and, (ii) decreases the probability of starting up plants which were previously shutdown.
{"title":"Keeping the Lights On Until the Regulator Makes Up His Mind!","authors":"Stein-Erik Fleten, Erik Haugom, C. Ullrich","doi":"10.2139/ssrn.1928618","DOIUrl":"https://doi.org/10.2139/ssrn.1928618","url":null,"abstract":"The purpose of this paper is to examine empirically the real options to shutdown, startup, and abandon existing production assets using detailed information for 1,121 individual power plants for the period 2001--2009, a total of 8,189 plant-year observations. We find strong evidence of real options effects. We find that uncertainty about the outcome of ongoing deregulation in retail electricity markets (i) decreases the probability of shutting down operating plants, and, (ii) decreases the probability of starting up plants which were previously shutdown.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-09-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128081718","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A simple characterisation of a naive investor, in terms of tolerance of Drawdown Risk, is presented which allows investors focusing on cumulative returns (rather than consumption) to easily and simply quantify their investment choices.
{"title":"Portfolio Choice and the Casual Investor","authors":"D. Edelman","doi":"10.2139/ssrn.1927468","DOIUrl":"https://doi.org/10.2139/ssrn.1927468","url":null,"abstract":"A simple characterisation of a naive investor, in terms of tolerance of Drawdown Risk, is presented which allows investors focusing on cumulative returns (rather than consumption) to easily and simply quantify their investment choices.","PeriodicalId":307682,"journal":{"name":"Midwest Finance Association 2012 Annual Meeting (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-09-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130095517","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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