Debt structure and corporate performance in emerging markets

This paper examines the effects of public and bank debt financing on firm performance in emerging markets. Using data on 700 publicly traded firms from the BRIC countries, it is documented that bank debt may have a positive effect on firm profitability. While overall market assessment of bank debt financing is negative, it is found that fully bank-financed firms lose less of their market value. Main findings remain unchanged after addressing potential endogeneity issues by introducing a novel instrumental variable. Overall, the results suggest that higher levels of bank financing may have positive effects on firm profitability and market valuation.     

Firm location and corporate debt

This study examines the influence of a firm’s geographical location on corporate debt and provides evidence that the higher cost of collecting information on firms distant from urban areas has significant implications on a wide array of corporate debt characteristics. We find that rural firms face higher debt yield spreads and attract smaller and less prestigious bank syndicates than urban firms. Rural firms attempt to reduce their informational disadvantage by relying more on relationship banking. Our results on the effect of location on corporate debt are robust to the inclusion of an extensive set of firm and issue characteristics.     

Corporate social performance,ownership structure,and corporate governance in France

Empirical evidence of the influence of shareholders and governance practices on corporate social responsibility (CSR) policies is mixed, and most studies have been conducted in the United States. This study of the French market and its unique characteristics reveals the forms of shareholding and CSR implementations, thereby shedding new light on the influence of shareholders on corporate social performance (CSP). Specifically, with a sample of French listed companies, the authors investigate how ownership concentration, ownership type, and governance practices relate to CSP. The geography of capital is relevant, but little evidence arises of the importance of shareholders’ identity. That is, neither family nor institutional shareholders influence CSP, and large shareholders seem to place less emphasis on CSR, suggesting that they are reluctant to invest in it. Finally, the results related to good governance practices are mixed, but board independence provides a foundation for good CSR.     

Institutions,banking structure and the cost of debt: new international evidence

This paper analyses the effect of institutions and the structure of the banking system on the cost of debt for a sample of firms from 37 countries. The cost of debt decreases with the rule of law, the protection of creditors’ rights and the weight of banks in the economy. Bank financing and bank concentration have a positive differential effect on the cost of debt in those countries where the financial difficulties of banks are greater. Legal enforcement, the protection of creditors’ rights and the weight of bank financing have a greater influence in countries with a lower degree of economic development.     

Female directors on the board and cost of debt: evidence from Australia

We examine whether the presence of female board members has any impact on the cost of debt among Australian listed companies. We find that female presence on the board is negatively associated with the cost of debt. Most importantly, our findings support the argument of critical mass theory that a certain threshold of gender balance is required for enhancing board effectiveness. Our results are valid irrespective of alternate model specifications and endogeneity issues. Overall, the results provide support to the ASX Corporate Governance Principles and Recommendation for the appointment of female directors on corporate boards.     

Firm life cycle and debt maturity structure: evidence from China

This study examines the effect of firm life cycle on debt maturity structure (DMS) in China. We reveal that DMS is relatively low in the introduction and recession periods, while long‐term debt ratio of growth companies is high. Companies in booming industries need funds but have difficulty obtaining long‐term loans, whereas companies in recession can use more long‐term loans. The Chow test shows that DMS changed markedly before and after the new normal of China’s economy and the implementation of the ‘mass entrepreneurship and innovation campaign’. It is urgent to address sunset industries to improve the efficiency of resource allocation.     

The effect of corporate social responsibility on stock performance: new evidence for the USA and Europe

This paper provides new empirical evidence for the effect of corporate social responsibility on corporate financial performance. In contrast to former studies, we examine two different regions, namely the USA and Europe, and disentangle firm and sector specific impacts. Our econometric analysis shows that environmental and social activities of a firm compared with other firms within the industry are valued by financial markets in both regions. However, the respective positive effects on average monthly stock returns between 2003 and 2006 are more robust in the USA and, in addition, non-linear. Our analysis furthermore points to biased parameter estimates if incorrectly specified econometric models are applied: the seemingly significantly negative effect of environmental and social performance of the industry to which a firm belongs strongly declines and mostly becomes insignificant if the explanation of stock performance is based on the Fama–French three-factor or the Carhart four-factor models instead of the simple Capital Asset Pricing Model.     

Multinationality and capital structure dynamics: A corporate governance explanation

This paper examines the impact of corporate governance on capital structure dynamics. Using ordinary least squares regressions on 17,496 firm-year observations for 2,294 US multinational companies (MNCs) over the period 1990–2018, we find that MNCs with strong corporate governance use more debt than those with weak governance. Furthermore, strong corporate governance is associated with a faster speed of adjustment to capital structure. This relationship is more pronounced for MNCs than domestic companies, particularly for overlevered firms. We also use the two-part zero-inflated fractional regression model, instrumental variable, and structural equation model estimations to deal with any endogeneity concerns associated with the explanatory variables. Overall, our findings, which withstand a battery of robustness checks, suggest that improvements in corporate governance reduce the costs of monitoring for bondholders, resulting in increased debt financing.     

Government ownership,corporate governance and tax aggressiveness: evidence from China

This study investigates how government ownership and corporate governance influence a firm's tax aggressiveness. Using Chinese listed companies during 2003–2009, we find that compared with government‐controlled firms, non‐government‐controlled firms pursue a more aggressive tax strategy. In particular, non‐government‐controlled firms with a higher percentage of the board shareholdings and with a CEO who also serves as the board chairman are more aggressive. For government‐controlled firms, we find that board shareholding has an impact on tax aggressiveness and it does not differ between local and central government‐controlled firms. However, local government‐controlled firms in less developed regions where the implementation of corporate governance measures is generally less effective are more tax aggressive than those in other regions.     

Corporate governance,capital structure and firm performance: Evidence from Thailand

We examine the relationship between corporate governance and firm performance for a panel sample of 493 firms of non-financial firms in Thailand during the period 2001–2014. We find that for the full sample, corporate governance is not associated with financial leverage and firm performance. Leverage has a positive effect on firm performance. When we split firms into small and large firm subsamples, we observe some influence of corporate governance. The negative effect of audit committee size on firm performance is evident for large firms while the effect of audit reputation on firm performance is evident for small firms only. Furthermore, financial leverage mediates the effect of audit committee size on firm performance for the large firms.     

Managerial incentives and corporate leverage: evidence from the United Kingdom

This paper investigates the effect of managerial incentives and corporate governance on capital structure using a large sample of UK firms during the period 1999–2004. The analysis revolves around the view that managerial incentives are important in determining a firm's leverage. However, we argue that the exact impact of these incentives on leverage is likely to be determined by firm‐specific governance characteristics. To conduct our investigation, we construct a simple corporate governance measure using detailed ownership and governance information. We present evidence of a significant non‐monotonic relationship between executive ownership and leverage. There is also strong evidence suggesting that corporate governance practices have a significant impact on leverage. More importantly, the results reveal that the nature of the relation between executive ownership and leverage depends on the firm's corporate governance structure.     

Corporate governance and the dynamics of capital structure: New evidence

The effects of corporate governance on optimal capital structure choices have been well documented, though without offering empirical evidence about the impact of corporate governance quality on the adjustment speed toward an optimal capital structure. This study simultaneously considers two effects of debt originating from agency theory—the takeover defense and the disciplinary effects of debt—on the speed of adjustment to the optimal capital structure. Corporate governance has a distinct effect on the speed of capital structure adjustment: weak governance firms that are underlevered tend to adjust slowly to the optimal capital structure, because the costs of the disciplinary role of debt outweigh the benefits of using debt as a takeover defense tool. Although overlevered weak governance firms also adjust slowly, they do so because they are reluctant to decrease their leverage toward the target level to deter potential raiders, especially if they face a serious takeover threat. Therefore, this study finds that both overlevered and underlevered firms with weak governance adjust slowly toward their target debt levels, though with different motivations.     

Insider ownership and corporate performance: Evidence from the adjustment cost approach

This paper examines the relation between insider ownership and corporate performance in the presence of adjustment costs and investigates how the adjustment costs are determined. In a model specification without adjustment costs, we find that insider ownership is significantly positively associated with corporate performance. But once we allow for adjustment costs, the relationship no longer exists. We find that insider ownership and corporate performance can be explained by their respective lagged values and that many firm characteristics that were previously useful in explaining these two variables turn out to be statistically insignificant. In addition, there is no evidence that insider ownership and corporate performance affect each other. This is consistent with the adjustment cost argument. It is also consistent with the “endogeneity” argument suggested by Demsetz [Demsetz, H. 1983. The structure of ownership and the theory of the firm. Journal of Law and Economics 26, 375–390.], Demsetz and Lehn [Demsetz, H., Lehn, K., 1985. The structure of corporate ownership: causes and consequences. Journal of Political Economy 93, 1155–1177.], and Demsetz and Villalonga [Demsetz, H., Villalonga, B., 2001. The ownership structure and corporate performance. Journal of Corporate Finance 7, 209–233.]. Finally, we document that the speed of adjustment of insider ownership is positively related to insiders' market timing but negatively to the number of insiders and that the speed of adjustment of Tobin's Q is positively associated with financial leverage and stock price volatility.     

Determinants and consequences of voluntary corporate social responsibility disclosure: Evidence from private firms

We examine whether and how private firms differ from public firms in determining corporate social responsibility (CSR) disclosure policies. We document that private firms are less likely to issue CSR reports compared with their public peers. Adopting a bivariate probit model that accommodates partial observability, we find that the effect is mainly driven by a supply-side force rather than a demand-side force. From a debtholder-oriented perspective, while public firms enjoy more favorable credit ratings and a lower cost of debt due to CSR disclosure, private firms do not reap similar benefits from CSR disclosure. Corporate governance and CSR assurance alleviate debtholders' concern on private firms’ engagements in CSR.     

Ownership structure, contingent-fit, and business-unit performance: A research model and empirical evidence

This study investigates the influence of contingent-fit on the relationship between ownership structure and business-unit performance. We predict that contingent-fit between business strategy and its contextual variables will have a positive relationship with business-unit performance. We also predict that widely-held companies will perform better than their closely-held counterparts but that the magnitude of the performance differential will decrease with the increasing level of contingent-fit.Overall, the results are consistent with our predictions. We found that contingent-fit is positively related to business-unit performance and widely-held business-units perform better than their closely-held counterparts. The performance advantage, however, was mitigated by the level of contingent-fit.     

Diversification,corporate governance and firm value in small markets: evidence from New Zealand

We find that diversified firms in New Zealand are associated with a value discount of 19–42 per cent relative to single‐segment (undiversified) firms. Although several competing explanations have been offered in the literature, we find that the strength of corporate governance explains between 15–21 per cent of this discount. Specifically, board size, busyness of directors, CEO ownership and whether or not compensation of directors includes equity‐based components collectively explain a large part of the reported discount. Our results from companies trading in New Zealand complement recent findings in the US by not only confirming the existence of a diversification discount but also emphasizing the role of poor governance in destroying shareholder wealth by pursuing a value‐destroying corporate strategy. All our results hold after controlling for potential endogeneity in the decision to diversify and the choice of corporate governance structure by employing two‐way fixed‐effects and dynamic‐panel generalized method of moments regression techniques.     

Corporate social responsibility performance,financial distress and firm life cycle: evidence from Australia

This study examines the association between corporate social responsibility (CSR) performance and financial distress and additionally the moderating impact of firm life cycle stages on that association. Based on a sample of 651 publicly listed Australian firm‐years’ data covering the 2007–2013 period, our regression results show that positive CSR activity significantly reduces financial distress of the firm. In addition, the negative association between positive CSR performance and financial distress is more pronounced for firms in mature life cycle stages. Our results are robust to alternative proxy measures of financial distress, CSR performance and life cycle stages.     

Executive stock option vesting conditions,corporate governance and CEO attributes: evidence from Australia

We investigate the association between executive stock option (ESO) vesting conditions, corporate governance and CEO attributes. Using observations from the 250 largest Australian firms, we find that stronger corporate governance is positively associated with the length of the vesting period and the use of performance hurdles. We also find that when CEOs approach retirement, firms are more likely to grant longer time‐vesting options but are less likely to impose performance hurdles. Further, more powerful CEOs appear to influence the granting of ESOs with less restrictive vesting conditions. Our findings suggest that both corporate governance and CEO attributes significantly shape the design of ESOs.     

Treasury Safety,Liquidity, and Money Premium Dynamics: Evidence from Debt Limit Impasses

Treasury securities enjoy a “money premium” because they are ultra-safe and liquid. However, during debt limit impasses, the safety and liquidity of Treasury securities temporarily deteriorate, eroding the money premium. Using past impasses, we find the money premium eroded by roughly six basis points across all Treasury securities and up to 50 basis points for the shortest maturities at the greatest risk of a delayed principal payment. Safety and liquidity each accounted for about half of the erosion. The deterioration of safety and liquidity also appears to interact, consistent with theories of default-driven liquidity risk and the information sensitivity of debt.     

Diversification strategy,efficiency, and firm performance: Insight from emerging market

We investigate further the inconsistencies of the diversification-performance link by introducing efficiency as moderating factor. A data of 319 firms was used to conduct a panel data analysis excluding the financial sector industries and the results show three important findings. First, industrial diversification shows a significant contribution in performance improvement while international diversification shows no effect on performance. Yet, international-conglomerate shows a significant negative relationship with performance. Meanwhile, the efficiency results are contrary to our conjecture. We find that efficiency is a factor to enhance performance, but it is not the moderating variable on the diversification-performance link. This implies that the efficiency of the firm has no connection with the link between diversification and performance.