Abstract We consider the behavior of leverage ratios in a trade-off model with investment. Debt underutilization to retain financial flexibility persists even when firms exercise their last investment options, and it is more (less) severe for more back-loaded (front-loaded) investment opportunities. Leverage paths crucially hinge on the structure of the investment process, which leads firms to have significantly different target leverage ratios. Structural estimation of key parameters reveals that simulated model moments can match data moments. In simulated panels, leverage regression results are in line with the evidence, and average leverage ratios are path-dependent and persistent for extended periods of time. (JEL G31, G32) Received June 11, 2018; editorial decision December 20, 2022 by Editor Uday Rajan
摘要考虑了投资权衡模型中杠杆率的变化规律。即使在公司行使最后的投资选择权时，保持财务灵活性的债务利用不足仍然存在，对于更多的后负荷(前负荷)投资机会来说，这种情况更严重(不那么严重)。杠杆路径在很大程度上取决于投资过程的结构，这导致企业具有显著不同的目标杠杆率。关键参数的结构估计表明，模拟模型矩与数据矩匹配良好。在模拟面板中，杠杆回归结果与证据一致，平均杠杆率具有路径依赖性，并且在较长时间内持续存在。(JEL G31, G32)收稿2018年6月11日;编辑决定，2022年12月20日，编辑Uday Rajan
{"title":"Corporate Investment and Financing Dynamics","authors":"Dirk Hackbarth, Dongming Sun","doi":"10.1093/rcfs/cfad009","DOIUrl":"https://doi.org/10.1093/rcfs/cfad009","url":null,"abstract":"Abstract We consider the behavior of leverage ratios in a trade-off model with investment. Debt underutilization to retain financial flexibility persists even when firms exercise their last investment options, and it is more (less) severe for more back-loaded (front-loaded) investment opportunities. Leverage paths crucially hinge on the structure of the investment process, which leads firms to have significantly different target leverage ratios. Structural estimation of key parameters reveals that simulated model moments can match data moments. In simulated panels, leverage regression results are in line with the evidence, and average leverage ratios are path-dependent and persistent for extended periods of time. (JEL G31, G32) Received June 11, 2018; editorial decision December 20, 2022 by Editor Uday Rajan","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135184687","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}
Iftekhar Hasan, Miriam Marra, Eliza Wu, Gaiyan Zhang
Abstract We analyze how creditor rights affect the nonsynchronicity of global corporate credit default swap spreads (CDS-NS). CDS-NS is negatively related to the country-level creditor-control rights, especially to the “restrictions on reorganization” component, where creditor-shareholder conflicts are high. The effect is concentrated in firms with high investment intensity, asset growth, information opacity, and risk. Pro-creditor bankruptcy reforms led to a decline in CDS-NS, indicating lower firm-specific idiosyncratic information being priced in credit markets. A strategic-disclosure incentive among debtors avoiding creditor intervention seems more dominant than the disciplining effect, suggesting how strengthening creditor rights affects power rebalancing between creditors and shareholders. (JEL G14, G15, G33, G34) Received September 21, 2021; editorial decision March 9, 2023 by Editor Isil Erel
{"title":"Creditor-Control Rights and the Nonsynchronicity of Global CDS Markets","authors":"Iftekhar Hasan, Miriam Marra, Eliza Wu, Gaiyan Zhang","doi":"10.1093/rcfs/cfad010","DOIUrl":"https://doi.org/10.1093/rcfs/cfad010","url":null,"abstract":"Abstract We analyze how creditor rights affect the nonsynchronicity of global corporate credit default swap spreads (CDS-NS). CDS-NS is negatively related to the country-level creditor-control rights, especially to the “restrictions on reorganization” component, where creditor-shareholder conflicts are high. The effect is concentrated in firms with high investment intensity, asset growth, information opacity, and risk. Pro-creditor bankruptcy reforms led to a decline in CDS-NS, indicating lower firm-specific idiosyncratic information being priced in credit markets. A strategic-disclosure incentive among debtors avoiding creditor intervention seems more dominant than the disciplining effect, suggesting how strengthening creditor rights affects power rebalancing between creditors and shareholders. (JEL G14, G15, G33, G34) Received September 21, 2021; editorial decision March 9, 2023 by Editor Isil Erel","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"70 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135184462","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}
Abstract There is mixed evidence on whether the marginal dollar spent on corporate social responsibility is due to agency problems. We propose an approach by modeling how the 2003 dividend tax cut, which increased after-tax insider ownership and better aligned managerial and shareholder interests, affected the marginal dollar spent on firm responsibility. We confirm key predictions of our agency model: following the tax cut, moderate insider-ownership firms experience larger declines in their responsibility ratings and increases in their valuations relative to other firms. We also confirm another implication regarding managerial misalignment using a regression-discontinuity design of close votes on shareholder-governance proposals. (JEL G30, G31, G35) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Do Managers Do Good with Other People’s Money?","authors":"Ing-Haw Cheng, Harrison Hong, Kelly Shue","doi":"10.1093/rcfs/cfad008","DOIUrl":"https://doi.org/10.1093/rcfs/cfad008","url":null,"abstract":"Abstract There is mixed evidence on whether the marginal dollar spent on corporate social responsibility is due to agency problems. We propose an approach by modeling how the 2003 dividend tax cut, which increased after-tax insider ownership and better aligned managerial and shareholder interests, affected the marginal dollar spent on firm responsibility. We confirm key predictions of our agency model: following the tax cut, moderate insider-ownership firms experience larger declines in their responsibility ratings and increases in their valuations relative to other firms. We also confirm another implication regarding managerial misalignment using a regression-discontinuity design of close votes on shareholder-governance proposals. (JEL G30, G31, G35) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"113 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135792948","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}
Stine Louise von Rüden, Marti G Subrahmanyam, Dragon Yongjun Tang, Sarah Qian Wang
Abstract Liquidity injections by central banks have become frequent and massive, but their real effects on corporate investment remain unclear. We examine the longer-term refinancing operations (LTROs) of the European Central Bank (ECB) during the eurozone sovereign crisis and show that greater LTRO funding to banks is associated with lower corporate investment. Riskier banks received funds through the LTROs and subsequently increased their holdings of risky sovereign debt. Corporate investment reductions are associated with these banks. Further, concurrent fiscal and regulatory policies impeded the effectiveness of the ECB liquidity injections. Our findings identify the contributing factors for these failures of monetary policy. (JEL E52, E58, G32) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Can Central Banks Boost Corporate Investment? Evidence from ECB Liquidity Injections","authors":"Stine Louise von Rüden, Marti G Subrahmanyam, Dragon Yongjun Tang, Sarah Qian Wang","doi":"10.1093/rcfs/cfad006","DOIUrl":"https://doi.org/10.1093/rcfs/cfad006","url":null,"abstract":"Abstract Liquidity injections by central banks have become frequent and massive, but their real effects on corporate investment remain unclear. We examine the longer-term refinancing operations (LTROs) of the European Central Bank (ECB) during the eurozone sovereign crisis and show that greater LTRO funding to banks is associated with lower corporate investment. Riskier banks received funds through the LTROs and subsequently increased their holdings of risky sovereign debt. Corporate investment reductions are associated with these banks. Further, concurrent fiscal and regulatory policies impeded the effectiveness of the ECB liquidity injections. Our findings identify the contributing factors for these failures of monetary policy. (JEL E52, E58, G32) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"115 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-03-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135080924","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}
Christopher P Clifford, William C Gerken, Tian Qiu
Abstract We examine the role of race and racial concordance between financial advisors and their local community. We document significant differences in stock market participation based on community racial composition, as well as differences in the characteristics of communities served by minority advisors. Notably, minority advisors are more likely to serve racially concordant communities, which tend to be poorer. We find that racial concordance has only a modest relation with local stock market participation. However, while minority advisors are more likely to leave the industry, this relation is mitigated among advisors located in more concordant communities. (JEL G20, G50, D14, J15)
{"title":"Racial Concordance in the Market for Financial Advice","authors":"Christopher P Clifford, William C Gerken, Tian Qiu","doi":"10.1093/rcfs/cfad005","DOIUrl":"https://doi.org/10.1093/rcfs/cfad005","url":null,"abstract":"Abstract We examine the role of race and racial concordance between financial advisors and their local community. We document significant differences in stock market participation based on community racial composition, as well as differences in the characteristics of communities served by minority advisors. Notably, minority advisors are more likely to serve racially concordant communities, which tend to be poorer. We find that racial concordance has only a modest relation with local stock market participation. However, while minority advisors are more likely to leave the industry, this relation is mitigated among advisors located in more concordant communities. (JEL G20, G50, D14, J15)","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"495 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136173533","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}
Abstract We investigate the causal impact of corporate governance on equity volatility in a quasi-natural experimental setting by exploiting the staggered passage of governance reforms in the past 25 years. Using a sample of 33,831 firms from 48 countries, we find that equity volatility drops by one-fifth following the passage of reforms that increase board independence. This effect is driven by an adjustment in fixed operating costs as managerial expropriation decreases, rather than by changes in firms’ investments, profitability, asset risk, or financing decisions. We rationalize these findings with a model in which minority shareholders are subject to sticky managerial expropriation. (JEL G12, G32, G34) Received October 14, 2021; editorial decision July 26, 2022 by Editor Robert Marquez. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory","authors":"Louis Gagnon, Alexandre Jeanneret","doi":"10.1093/rcfs/cfad002","DOIUrl":"https://doi.org/10.1093/rcfs/cfad002","url":null,"abstract":"Abstract We investigate the causal impact of corporate governance on equity volatility in a quasi-natural experimental setting by exploiting the staggered passage of governance reforms in the past 25 years. Using a sample of 33,831 firms from 48 countries, we find that equity volatility drops by one-fifth following the passage of reforms that increase board independence. This effect is driven by an adjustment in fixed operating costs as managerial expropriation decreases, rather than by changes in firms’ investments, profitability, asset risk, or financing decisions. We rationalize these findings with a model in which minority shareholders are subject to sticky managerial expropriation. (JEL G12, G32, G34) Received October 14, 2021; editorial decision July 26, 2022 by Editor Robert Marquez. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-02-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136176566","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}
Ilona Babenko, Benjamin Bennett, John M Bizjak, Jeffrey L Coles, Jason J Sandvik
Abstract Many of the events that trigger clawback provisions are associated with risky corporate policies and variable performance outcomes. We propose and test the hypothesis that clawback provisions motivate managers to reduce firm risk. Panel ordinary least squares, general method of moments with instrumental variables, and propensity square matching models all indicate that clawback provisions decrease the volatility of stock returns. The channels that connect clawback presence to firm risk include more conservative investment and financial policies. The clawback-induced reduction in risk-taking appears to benefit shareholders on average. The gains from reduced risk-taking are larger for firms with fewer growth options, lower R&D, and prior wrongdoing. (JEL G32, G34, J33, M41, M52, M55)
{"title":"Clawback Provisions and Firm Risk","authors":"Ilona Babenko, Benjamin Bennett, John M Bizjak, Jeffrey L Coles, Jason J Sandvik","doi":"10.1093/rcfs/cfad003","DOIUrl":"https://doi.org/10.1093/rcfs/cfad003","url":null,"abstract":"Abstract Many of the events that trigger clawback provisions are associated with risky corporate policies and variable performance outcomes. We propose and test the hypothesis that clawback provisions motivate managers to reduce firm risk. Panel ordinary least squares, general method of moments with instrumental variables, and propensity square matching models all indicate that clawback provisions decrease the volatility of stock returns. The channels that connect clawback presence to firm risk include more conservative investment and financial policies. The clawback-induced reduction in risk-taking appears to benefit shareholders on average. The gains from reduced risk-taking are larger for firms with fewer growth options, lower R&D, and prior wrongdoing. (JEL G32, G34, J33, M41, M52, M55)","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135201610","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}
Darren J Aiello, Mark J Garmaise, Gabriel Natividad
Abstract The U.S. mortgage market exhibits competitive instability in which some lenders rapidly emerge from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we analyze the impact on a lender of a surge in originations by its competitors. We show that the quickest-growing (but not the largest) competitors divert applications and originations from other lenders. Facing a quickly growing competitor, lenders charge higher interest rates, partially because of the increased risk of their loans. Loan performance suffers for other lenders as the quickest-growing competitor’s originations increase. (JEL G21, D40) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Competing for Deal Flow in Local Mortgage Markets","authors":"Darren J Aiello, Mark J Garmaise, Gabriel Natividad","doi":"10.1093/rcfs/cfad001","DOIUrl":"https://doi.org/10.1093/rcfs/cfad001","url":null,"abstract":"Abstract The U.S. mortgage market exhibits competitive instability in which some lenders rapidly emerge from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we analyze the impact on a lender of a surge in originations by its competitors. We show that the quickest-growing (but not the largest) competitors divert applications and originations from other lenders. Facing a quickly growing competitor, lenders charge higher interest rates, partially because of the increased risk of their loans. Loan performance suffers for other lenders as the quickest-growing competitor’s originations increase. (JEL G21, D40) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135276701","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}
Pub Date : 2022-09-10eCollection Date: 2023-02-01DOI: 10.1093/rcfs/cfac032
Timothy E Dore, Rebecca Zarutskie
We show that newly hired workers earn higher wages in response to higher firm leverage. Consistent with compensating differential models, these higher wages appear to reflect compensation for the risk of earnings losses in the event of financial distress. For tenured workers, increases in leverage are not associated with higher wages. Our findings suggest that the wage costs of debt and optimal capital structure for a firm depend on expected employee turnover, as well as on the firm's future growth and hiring plans. Variation in local labor market conditions also significantly affects the relationship between firm leverage and employee pay. (JEL G32, G33, J21, J31, J61) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"When Does Higher Firm Leverage Lead to Higher Employee Pay?","authors":"Timothy E Dore, Rebecca Zarutskie","doi":"10.1093/rcfs/cfac032","DOIUrl":"10.1093/rcfs/cfac032","url":null,"abstract":"<p><p>We show that newly hired workers earn higher wages in response to higher firm leverage. Consistent with compensating differential models, these higher wages appear to reflect compensation for the risk of earnings losses in the event of financial distress. For tenured workers, increases in leverage are not associated with higher wages. Our findings suggest that the wage costs of debt and optimal capital structure for a firm depend on expected employee turnover, as well as on the firm's future growth and hiring plans. Variation in local labor market conditions also significantly affects the relationship between firm leverage and employee pay. (<i>JEL</i> G32, G33, J21, J31, J61) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.</p>","PeriodicalId":75179,"journal":{"name":"The review of corporate finance studies","volume":"12 1","pages":"36-77"},"PeriodicalIF":0.0,"publicationDate":"2022-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9903401/pdf/cfac032.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"10766257","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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