The use of the Internet for corporate reporting in the Mercosur (Southern common market): The Argentina case

This study examines disclosure practices on the websites of companies listed on the Buenos Aires Stock Exchange. We perform content analysis to provide evidence on Internet reporting practices by 84 publicly traded firms. We also identify the characteristics of firms that communicate financial and non-financial information on the Internet. We find that companies in the financial and insurance, services and mining industries disclose more financial and non-financial information on their websites than companies in other industries. The average concentration of ownership is 68%, with 27% of the companies being controlled by foreign groups. Those companies with higher concentration disclose more financial and non financial information than companies with less concentration. Companies in the financial and insurance and service industries, utilize their websites for commercial purposes to facilitate access to customers to their accounts and also to sell services. This e-commerce usage of websites is less developed in other industries. About 71% of companies in the financial and insurance industry are included in the Merval25 index and are audited by Big 4. These companies are both larger in size and less profitable than companies in other industries. We find that profitability and leverage do not have significant effect on corporate Internet reporting practices and that growth has negative effect on corporate Internet reporting practices. We also find that companies in the mining sector provide significantly more disclosure about social responsibility indicating a desire to improve the public image of harming the environment. The results documented, herein, extend the literature on voluntary disclosure of financial and non-financial information using the Internet in emerging markets.     

The strategic use of corporate insurance in China

We use the agency theory to conduct a novel test of the strategic use of property insurance in China's corporate sector. With regard to our main test hypotheses, we find that the incidence of property insurance purchased is directly related to the degree of product–market competitiveness, and positively related to market liquidity and firms’ growth opportunities. However, the homogeneity of market operations is not statistically significant. In our second-stage Cragg regression, market liquidity becomes insignificant while firms’ growth opportunities are now inversely related to the amount of insurance purchased. Additionally, the homogeneity of market operations becomes significantly related to the corporate purchase of property insurance. Therefore, different factors (e.g. cost considerations) may influence the decisions to purchase property insurance and subsequently, the level of coverage provided. We argue that our results are relevant for companies in other emerging markets such as Eastern Europe and companies operating in more developed Western economies such as the European Union (EU).     

Taxes and capital structure: Understanding firms’ savings

The U.S. non-financial corporate sector became a net lender to the rest of the economy in the early 2000s, with close to half of all publicly-traded firms holding financial assets in excess of their debt liabilities. We develop a simple dynamic model of debt and equity financing where firms strive to accumulate financial assets even though debt is fiscally advantageous relative to equity. Moreover, firms find it optimal to fund additional financial asset holdings through equity revenues. The calibrated model matches well the distribution of public firms’ balance sheets during the 2000s and correctly predicts which firms are net savers.     

Corporate Risks and Property Insurance: Evidence From the People's Republic of China

Using panel data (1997–1999) for 235 publicly listed companies in the People's Republic of China, this study empirically tests the linkage between corporate risks and the decision to purchase property insurance and its financial extent. To achieve these objectives, we first estimate a probit insurance participation decision model and then a fixed‐effects insurance volume decision model with Heckman's sample selection correction. Our results indicate that the managerial decision to purchase property insurance is positively related to company size and insolvency risks. By contrast, the amount of property insurance purchased is positively related to systematic risks but negatively related to insolvency and unsystematic risks and company size. We find that the amount of property insurance used by Chinese companies can also be affected by other factors (e.g., the cash flow constraints). In addition, the decision to purchase property insurance and the financial extent to which it is used varies among Chinese companies according to their geographical location. However, state ownership does not appear to be an important determinant of the purchase of property insurance by Chinese publicly listed companies.     

Why firms purchase property insurance

We investigate whether corporate finance incentives affect the extent of corporate hedging with property insurance. Using a database that contains detailed insurance information, we document a positive relation between the expected costs of distress and property insurance coverage. We also show that the dividend payout ratio is negatively associated with property insurance coverage, consistent with the view that firms with high payout ratios insure a smaller fraction of properties due to cash flows in excess of investment needs, easy access to capital markets, or both. Different incentives are important for the insurance deductible and limit of coverage, and the deductible and limit of coverage are substitutes.     

Firing Costs and Capital Structure Decisions

I exploit the adoption of state‐level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm's degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.     

Evidence from German Companies of Effects of Corporate Risk Management on Capital Structure Decisions

The author investigates the interaction between risk management and capital structure among publicly listed German companies. By surveying executives at these companies, she computes a risk management score for each company indicating the extent of risk management practices. The scores reflect not only the companies' use of derivatives and “at‐risk” ratios, but also the respondents' assessments of how well risk management has been integrated into existing corporate processes. Some results, though not all, are consistent with finance theory. Most important, companies with more extensive risk management activities have higher debt ratios and lower interest coverage ratios. At the same time, such companies also exhibit lower volatility of cash flow, sales, EBIT, and net income, which helps explain their ability to service more debt. And, finally, companies with more extensive—and, according to their responding executives, more effective—risk management also tend to be larger, have longer debt maturities, lower average costs of debt, and have more tangible assets.     

Why and How UK Firms Hedge

This paper attempts to differentiate among the theories of hedging by using disclosures in the annual reports of 400 UK companies and data collected via a survey. I find, unlike many previous US studies, strong evidence linking the decision to hedge and the expected costs of financial distress. The tests show that this is mainly because my definition of hedging includes all hedgers and not just derivative users. However, when the tests employ the same hedging definition as previous US studies, financial distress cost factors still appear to be more important for this sample than samples of US firms. Therefore, a secondary explanation for the strong financial distress results might be due to differences in the bankruptcy codes in the two countries, which result in higher expected costs of financial distress for UK firms. The paper also examines the determinants of the choice of hedging method distinguishing between non‐derivative and derivatives hedging. My evidence shows that larger firms, firms with more cash, firms with a greater probability of financial distress, firms with exports or imports and firms with more short‐term debt are more likely to hedge with derivatives. Thus, differences in opportunities, in incentives for reducing risk and in the types of financial price exposure play an important role in how firms hedge their risks.     

An empirical analysis of corporate debt maturity structure

This paper provides an empirical investigation of the maturity structure of corporate debt. A dynamic model is estimated by GMM estimation procedure using data for an unbalanced panel of 429 non-financial UK firms over the period of 1983–96. The evidence provides strong support for the hypotheses that firms with more growth opportunities in their investment sets tend to have more shorter-term debt and firm size exerts a negative impact on debt maturity structure. The results also support the maturity-matching hypothesis that firms match the maturity structure of their debt to the maturity of their assets. There is less support for the view that firms use their debt maturity structure to signal information to the market. We do not find evidence for a negative correlation between taxes and debt maturity. Our results also suggest that firms have long-term target ratios and they adjust to the target ratio relatively fast, which might indicate that the costs of being away from target ratios are significant for firms.     

The Relationship between Changes in Fixed Plant Investment and the Likelihood of Emergence from Corporate Financial Distress

Companies experiencing financial distress can attempt to mitigate financial distress through changing the investment in the fixed asset base. Management may choose to expand the asset base in hopes of increasing sales. Alternatively, management may choose to contract the asset base in order to eliminate and/or reduce investment in unprofitable or risky ventures, improve liquidity, reduce earnings volatility, and reduce the need for operating capital.In this study, we examined how observed changes in the investment base affect the likelihood of emergence from a financially distressed condition. We find that, when management chooses to contract the investment in property, plant, and equipment, the likelihood of emergence from financial distress is significantly improved. On the other hand, when management chooses to expand property, plant, and equipment in the face of distress, the distress is only intensified. Our explanation is that companies that choose to contract their fixed asset base in times of trouble are taking steps that will most likely improve their financial condition—they are less likely to need working capital, and can better tolerate increased levels of long-term debt. Conversely, increasing the fixed asset base amplifies the need for working capital, and borrowing money to facilitate the expansion simply increases the necessary uses of that working capital because the debt must be serviced. As a result, companies descend even deeper into financial distress and decrease the likelihood that they will emerge therefrom.     

担保物权制度改革降低了企业债务融资成本吗?——来自中国《物权法》自然实验的经验证据

本文运用双重差分法考察以《物权法》出台为标志的担保物权制度改革是否降低了企业的债务成本。实证结果显示,《物权法》出台后,与固定资产占比较高的企业相比,固定资产占比较低企业的债务成本显著降低。进一步,与《物权法》出台通过扩大可抵押资产范围、加强债权人保护等渠道降低企业债务成本的经济直觉一致,三重差分检验结果表明,担保物权制度改革对企业债务成本的降低作用表现出丰富差异性:其一,与法律制度环境较好地区相比,《物权法》对企业债务成本的降低作用在法律制度环境较差地区相对更大;其二,与金融市场化程度较高地区相比,《物权法》对企业债务成本的降低作用在金融市场化程度较低地区相对更大;其三,与融资约束较弱企业相比,对于融资约束较强的企业而言,《物权法》对债务成本的降低作用相对更强。这些基于中国经济实践的经验证据识别并揭示出了担保物权制度改革促使企业债务成本下降的作用机理,从而对有效缓解企业融资难、融资贵等问题具有借鉴意义。     

The Capital Structure Puzzle: The Evidence Revisited

Since the formulation of the M&M propositions almost 50 years ago, financial economists have been debating whether there is such a thing as an optimal capital structure—a proportion of debt to equity that maximizes shareholder value. Some finance scholars have followed M&M in arguing that both capital structure and dividend policy are largely "irrelevant" in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of greater debt against the costs of financial distress. Yet another theory says that companies do not have capital structure targets, but simply follow a financial "pecking order" in which retained earnings are preferred to outside financing, and debt is preferred to equity when outside funding is required.
In reviewing the evidence that has accumulated since M&M, the authors argue that taxes, bankruptcy (and other "contracting") costs, and information costs all appear to play an important role in corporate financing decisions. While much of the evidence is consistent with the argument that companies set target leverage ratios, there is also considerable support for the pecking order theory's contention that firms are willing to deviate widely from their targets for long periods of time. According to the authors, the key to reconciling the different theories—and thus to solving the capital structure puzzle—lies in achieving a better understanding of the relation between corporate financing stocks (the levels of debt and equity in relation to the target) and flows (or which security to issue at a particular time).     

Corporate Financing Decisions: UK Survey Evidence

Abstract:  Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory , but 60% claim to follow a financing hierarchy, consistent with pecking order theory . These two theories are not viewed by respondents as either mutually exclusive or exhaustive. Many of the theoretical determinants of debt levels are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry. Results also indicate that cross-country institutional differences have a significant impact on financial decisions.     

Deleveraging Corporate America: Job and Business Recovery Through Debt Restructuring

When the Great Recession roiled capital and labor markets in early 2009, up to a third of U.S. public corporations, and nearly 60% of privately owned companies, reported high levels of financial distress resulting from frozen credit markets. And the problems of “debt overhang” and corporate underinvestment were clearly in evidence as the combination of default risk and a relatively new provision of the tax code restricted the ability of distressed companies to deleverage their capital structures. But as described in this article, at least 110 U.S. companies used a little known provision in the American Recovery and Reinvestment Act of 2009 to defer taxes on the cancellation of debt income (CODI) resulting from exchanges or repurchases of significant amounts of debt. This suspension of tax policy gave many distressed U.S. companies the flexibility to cut costs, shore up balance sheets, and boost liquidity, thereby keeping themselves in business and their workers employed throughout the economic crisis. The 110 companies examined either repurchased or exchanged a total of $32.5 billion of corporate debt. The deleveraging of these companies, which represented more than $2.2 trillion in total assets and $520 billion in market capitalization, helped them to remain solvent throughout the downturn and retain their collective 2.2 million employees. The resulting tax savings are estimated to have saved (or in some cases created) almost 90,000 jobs, while contributing $3.2 billion to total corporate earnings and $10.7 billion of output to the national gross domestic product. Although this approach could be criticized as adding to the federal budget deficit, the deferral of taxes on CODI is viewed as a targeted financial policy tool aimed directly at boosting the productive capacity and employment of corporate enterprises.     

RISK MANAGEMENT FOR MIDDLE MARKET COMPANIES

This article reinforces the message of the one immediately preceding by showing that small to medium‐sized firms have even stronger (non‐tax) motives for hedging risks than their large corporate counterparts. Although middle market companies have traditionally been viewed as less sophisticated than their larger corporate counterparts in the risk management arena, the authors suggest that such companies have become increasingly receptive to new hedging strategies using derivative products. When used appropriately, such products allow companies to stabilize their periodic operating cash flow by eliminating specific sources of volatility such as fluctuations in interest rates, exchange rates, and commodity prices. Smaller companies recognize that a single swing in a budgeted cost can have a catastrophic effect on an entire budget, whereas a larger company can more easily absorb such a cost. Moreover, because the principal owners of mid‐sized firms often have a substantial part of their net worth tied up in the business, they are likely to have a far stronger interest than typical outside shareholders in using risk management to reduce the volatility of corporate profits and firm value. Perhaps most important to owners whose firms rely on debt financing, the greater cash flow stability resulting from active risk management significantly reduces the possibility of financial distress or bankruptcy. In this article, three representatives of Bank of America's risk management practice discuss three different exposures faced by middle market companies—those arising from changes in interest rates, foreign exchange rates, and commodity prices—and show how these risks can be managed with derivatives. Besides shielding companies from financial trouble, risk management is also likely to improve their access to the money and capital markets. By protecting the firm's access to capital, risk management increases the odds that the firm will not be forced to pass up good investment opportunities because of capital constraints or fear of getting into financial difficulty.     

Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads

In this paper, we empirically examine if sovereign risk matters for corporate bonds in developed economies. Using a unique panel data sample of 897 corporate bonds from eleven countries within the Economic and Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads). In the time period from March 2006 to June 2012, we find sovereign risk to be a significant driver of corporate risk. The effect is stronger for companies with domestic revenue structure, for companies that are (partly) owned by the government, and companies active in the utility and transportation sector. Interestingly, the impact of sovereign risk on corporate risk during the acute European sovereign debt crisis period decreases if ratings are examined, but increases if z-spreads are utilized. Rating agencies seem to take a more differentiated view on individual company risk during the sovereign debt crisis, while institutional investors might want to reduce their exposure to a country in financial distress as a whole, regardless of whether sovereign or corporate bonds are held.     

Secured and unsecured debt in creditor-friendly bankruptcy

This article develops a continuous-time asset pricing model for valuing corporate securities in the presence of both secured and unsecured debt. We consider a framework where creditors dominate the negotiation process. This is consistent with the increasing influence of creditors in bankruptcy. We show that the unsecured creditors are incentivized to liquidate the firm prematurely relative to the first-best threshold. However, if the firm’s liquidation value is very low, it should complement its secured debt with unsecured debt as a form of insurance to avoid early liquidations. Our results have important implications for the debt structure and the resolution of financial distress of modern firms with substantial intangible assets.     

Too much of a good thing? A theory of short-term debt as a sorting device

This paper shows that the liquidity risk associated with short-term debt financing can be used to sort insolvent firms out of financial markets when their solvency risk is private information. Notwithstanding this sorting role of short-term debt, unregulated financial firms tend to choose an inefficiently short debt maturity structure. This inefficiency arises for two reasons. First, by issuing more short-term debt, low-risk firms reduce their expected funding costs. This leads to a misalignment of private and social incentives as firms fail to fully internalize the social costs of becoming illiquid. Second, while the sorting role of short-term debt is reflected in a decline of long-term interest rates when more short-term debt is issued, creditors’ inability to observe firms’ solvency risk leads to an excessive reduction of long-term interest rates. This further distorts firms’ funding choice towards short-term debt.     

Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms

This study provides evidence that transactions costs discourage debt reductions by financially distressed firms when they restructure their debt out of court. As a result, these firms remain highly leveraged and one-in-three subsequently experience financial distress. Transactions costs are significantly smaller, hence leverage falls by more and there is less recurrence of financial distress, when firms recontract in Chapter 11. Chapter 11 therefore gives financially distressed firms more flexibility to choose optimal capital structures.     

PETROZUATA: A CASE STUDY OF THE EFFECTIVE USE OF PROJECT FINANCE

Companies are increasingly using project finance to fund large-scale capital expenditures. In fact, private companies invested $96 billion in project finance deals in 1998, down from $119 billion in 1997 largely due to the Asian crisis, but up more than threefold since 1994. The decision to use project finance involves an explicit choice of organizational form as well as financial structure. With project finance, sponsoring firms create legally distinct entities to develop, manage, and finance the project. These entities borrow on a limited or non-recourse basis, which means that loan repayment depends on the project's cash flows rather than on the assets or general credit of the sponsoring organizations. Despite the non-recourse nature of project borrowing, projects are highly leveraged entities, with debt to total capitalization ratios averaging 60–70%. Petrozuata, a $2.4 billion oil field development project in Venezuela, is a recent example of the effective use of project finance for several reasons. First, the analysis shows a typical setting where project finance is likely to create value, that of a large-scale investment in Greenfield assets (in this case, wells, pipelines, and upgrader) that can function as a stand-alone economic entity and support a high leverage ratio. Given the nature of this investment, one can think of project finance as venture capital for fixed assets, except that the investments are 100 to 1000 times larger and financed primarily with debt rather than equity. Besides highlighting the types of assets appropriate for project finance, this article illustrates the sizeable transactions costs associated with structuring a deal as well as the full range of benefits accruing to project sponsors. The structure allows sponsors to capture tax benefits not otherwise available, reduces information costs for creditors and other investors, and lowers the overall cost of financial distress. The combination of high leverage, concentrated equity ownership, and direct control in project finance also addresses a wide range of incentive problems that destroy value in diversified companies. Analysis of the explicit contractual terms of the deal reveals a careful allocation of project risks in an attempt to elicit optimal behavior by each of the participants. As illustrated in the Petrozuata case, limiting completion and operating risks are important undertakings. But project finance is most valuable as an instrument for managing sovereign risks. Indeed, the ability of project finance to limit sovereign risk is the one feature that cannot be replicated under conventional corporate financing schemes.