Corporate debt maturity in the MENA region: Does institutional quality matter?

We investigate corporate debt maturity structure in the MENA region and its firm and institutional determinants using a sample of 444 listed firms over the 2003–2011 period, or 3717 firm-year observations. We find a very limited use of long-term debt by MENA firms; long-term debt represents only 3.41% of the typical MENA firm's total debt, which is much less than what is reported in prior literature on other parts of the world. Consistent with the predictions of debt maturity theories and prior empirical findings, we find that leverage, firm size, and asset tangibility are positively associated with the use of more long-term debt while firms facing a higher risk of default tend to use more short-term debt. In addition, we find that better quality institutions lead to the use of more long-term debt in MENA. Specifically, stronger rule of law, better regulatory effectiveness, better legal protection of creditors, and more developed financial intermediaries are associated with greater use of long-term borrowing by MENA firms. Our findings have important policy implications as they illuminate the path toward needed reforms that would enhance MENA firms' access to long-term debt, which may ultimately result in more private investment and jobs.     

Financial institutional blockholders and earnings quality: Do blockholders contestability and countries' institutions matter?

We examine the relationship between financial earnings quality and block ownership by institutional investors. This relation is vital given the tremendous growth of institutional ownership and the significant influence of large institutional blockholders on financial earnings quality. Our findings indicate that the presence of institutional blockholders drives higher financial earnings quality. Results from an instrumental variable (IV) approach suggest our documented effects are directional. Next, cross-sectional tests prove that the relationship is more pronounced among firms adopting IFRS and those in countries with minority shareholder protection. Moreover, our results reveal that property rights and the lack of contestability partially mitigate the positive association between institutional ownership and earnings quality. Our findings inform the ongoing debate on the influence of institutional ownership on earnings, which institutional and regulatory dimensions affect earnings, and through what channels these effects run. Overall, our results suggest that beyond corporate governance practices that enhance financial earnings quality, different countries' institutions and regulations settings influence the relation of institutional ownership to earnings quality.     

Do corporate boards matter during the current financial crisis?

This study examines the impact of corporate boards on firm performance during the current financial crisis. Using buy-and-hold abnormal returns over the crisis to measure firm performance, we find that board independence, as traditionally defined, does not significantly affect firm performance. However, when we redefine independent directors as outside directors who are less connected with current CEOs, a measure we call strong independence, there is a positive and significant relationship between this measure and firm performance. Second, outside financial experts are important for firm performance. We find that the positive impact of outside financial experts on firm performance is more significant than that of strong independence. Overall, our results suggest that firm performance during a crisis is a function of firm-level differences in corporate boards.     

Does religion matter in corporate decision making in America?

We examine how corporate culture influences firm behavior. Prior research suggests a link between individual religiosity and risk aversion. We find that this relationship also influences organizational behavior. Firms located in counties with higher levels of religiosity display lower degrees of risk exposure, as measured by variances in equity returns or returns on assets. They exhibit a lower investment rate and less growth, but generate a more positive market reaction, when they announce new investments. Finally, chief executive officers are more likely to join a firm with a similar religious environment as in their previous firm when they switch employers.     

Management quality and the cost of debt: Does management matter to lenders?

This paper investigates the effect of organizational capital, typified by various management practices within a firm, on the cost of external debt financing. Using a sample of medium-sized manufacturing firms in the US, we find that better management practices enhance a firm’s external financing capacity by lowering the firm’s cost of bank loans. We do not find any evidence that the lower loan cost of a high-quality-management firm is associated with more restrictive non-price contract terms such as greater collateral requirements and stricter covenants. These results suggest that banks explicitly take into account the risk arising from poor management practices when pricing and designing debt contracts.     

Does ambiguity matter for corporate debt financing? Theory and evidence

Traditional tradeoff theories puzzlingly predict that firms use high leverage, issue debt carrying a high duration and low yield spread, and have optimal debt policies highly affected by managerial risk-shifting behavior. We offer an ambiguity-based explanation for these corporate debt puzzles. The key intuition is that ambiguity-averse managers hold the worst-case belief about EBIT growth, resulting in upward (downward) distortion of bankruptcy (restructuring) probability. While firms under ambiguity aversion take less leverage, optimal leverage increases with ambiguity (if holding information constraints fixed). Our theoretical predictions about the impact of ambiguity aversion on corporate debt financing are supported by empirical evidence. Moreover, we document that the tradeoff models allowing for ambiguity aversion achieve a better performance in fitting real data, and information-constraint heterogeneities can be a distinctive determinant of leverage variations.     

What do we know about the role of financial reporting in debt contracting and debt covenants?

The paper examines the role of financial reporting in debt contracting and in particular focuses on the definition, measurement, and monitoring of accounting-based covenants used to manage agency relationships arising from borrowing by firms. The paper also reviews research in areas of financial reporting where the presence of accounting-based covenants provides incentives to managers, notably choice of accounting method, lobbying on standard setters' proposals, and accounting earnings management. Although US dominated and latterly increasingly focused on large datasets and quantitative and analytical methods, relevant research is available from a range of methodologies and countries and the paper reflects this variety and identifies both inter-jurisdictional differences and inter-temporal changes in debt contracting practices. Despite the extensive research which is reviewed important areas for new research remain.     

Granularity in banking and growth: Does financial openness matter?

We explore the impact of large banks and of financial openness for aggregate growth. Large banks matter because of granular effects: if markets are very concentrated in terms of the size distribution of banks, idiosyncratic shocks at the bank-level do not cancel out in the aggregate but can affect macroeconomic outcomes. Financial openness may affect GDP growth in and of itself, and it may also influence concentration in banking and thus the impact of bank-specific shocks for the aggregate economy. To test these relationships, we use different measures of de jure and de facto financial openness in a panel dataset for 79 countries and the years 1996–2009. Our research has three main findings: First, bank-level shocks significantly impact upon GDP. Second, financial openness tends to lower GDP growth. Third, granular effects tend to be stronger in financially closed economies.     

Market- vs. bank-based financial systems: Do rights and regulations really matter?

In some countries, banks are firms' key source of financing. In others, firms look mainly to financial markets to meet their financial needs. Why should this be so? This paper provides an explanation tied to legal traditions. Civil-law courts are less effective than their common-law counterparts in resolving conflicts because they have less flexibility in interpreting the laws and creating new rules. Banks emerge in these economies as primary contract enforcers, leading to bank-oriented financial systems. Furthermore, because common-law courts enforce laws effectively, providing them with more detailed creditor and shareholder protection laws has a greater impact on the development of financial markets compared with civil-law systems.     

Do corporate governance mechanisms matter for cash holdings and firm value?

This paper examines the relationships between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia. Firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance. The results support the flexibility hypothesis in that an increase in agency conflicts between managers and minority shareholders leads to entrenched managers having more discretion to hoard cash reserves. In addition, the incremental value of holding excess cash is shown to be negative for firms with a single leadership structure, firms with a pyramidal ownership structure, as well as family-controlled firms. The discounts associated with these firms may reflect investors’ recognition of the possibility of managerial entrenchment.     

Firms’ debt choice in Africa: Are institutional infrastructure and non-traditional determinants important?

We use a World Bank survey data on the financing of incremental production to examine firms’ debt choice decision in eleven African countries, where capital markets are evolving and/or fraught with inadequate institutional infrastructure. Such a landscape suggests that hitherto overlooked nontraditional factors and institutions may be important determinants of debt choice. Interestingly, we find that some nontraditional factors and institutional infrastructure are robust debt choice determinants. Education level of managers, national incidence of corruption and ethnicity of owners are important for non-bank debt choice in Africa, with non-bank debt markets populated largely by the less formal trade credit and lease markets. Both effective legal and political infrastructures foster firms’ preference for non-bank debt while macro-instability discourages preference for non-bank debt; thus, flagging institutional infrastructures as vital for effective non-bank debt markets. Furthermore, we find evidence which confirms that capital markets in Africa are insufficiently spanned by the necessary debt markets; this should motivate relevant authorities to hasten development of public debt markets to supplement the currently limiting non-bank debt markets of trade credits and leases.     

Do conventional financial disclosures matter in alternative financing? Evidence from equity crowdfunding

As a novel form of external financing, equity crowdfunding enables small and early stage firms to raise capital from the public through an online platform. There has been criticism of the benefits and costs of mandating financial statements to promote this alternative form of financing. Using a setting where disclosure of financial statements is optional, this study provides evidence that financial statements influence investors’ decisions and facilitate borderless capital formation. The provision of financial statements appears to enhance how investors view other aspects of disclosure, suggesting a positive reporting externality. These market-wide benefits provide important insights on the role of financial disclosures for market participants, policymakers, and academics.     

Net foreign asset (com)position: Does financial development matter?

We investigate the relationship between a country's domestic financial development and the (composition of its) net foreign asset position using a pooled mean group estimator and data for 50 countries for the 1970–2007 period. The results show that financial development reduces a country's long-run net foreign asset position. In addition, financial development leads to higher net equity and lower net debt positions. These findings confirm the theoretical predictions of Mendoza et al. (2009). The results are robust to using different indicators of financial development and inclusion of the level of development of a country in the cointegrating relationship.     

Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

This paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.     

Disclosure quality vis-à-vis disclosure quantity: Does audit committee matter in Omani financial institutions?

Review of Quantitative Finance and Accounting - We examine the impact of audit committee (AC) characteristics (e.g. AC foreign members, AC female members, AC members with multiple directorships, AC...     

Grabbing hand or financial constraint mitigation effect? A reexamination of the relationship between institutional development and cash holdings

This study reexamines the impact of institutional development on corporate cash holdings. Our findings confirm that institutional development has a negative effect on corporate cash holdings, which may be partially explained by the financial constraint mitigation effect of institutional development. Our empirical evidence also shows that the corruption index, used as a proxy for the grabbing hand effect, does not mediate the negative effect of institutional development on corporate cash holdings. Furthermore, the impact of institutional development on corporate cash holdings is not significant for large firms and state-owned enterprises. These results are robust to different measures of cash holdings.     

International financial stress spillovers to bank lending: Do internal characteristics matter?

The purpose of this paper is to unveil and assess the potential US financial spillover on Gulf Cooperative Council (GCC) bank lending and to check whether bank's internal characteristics shape such an effect or not. For this purpose, a dynamic panel model is estimated using the GMM system using data on an unbalanced panel of GCC banks over the period 2003–2018. We have found evidence of financial stress spillovers on bank lending and that their distributional impacts vary across time, banks size and capitalization. However, the role of banks liquidity in shaping the impacts of financial stress on lending is found to depend on dry-ups/abundance of market funding liquidity. The results are robust to both splitting the sample into pre- and post- crisis periods as well as to the inclusion of additional potential lending supply determinants.     

Do shareholder protection and creditor rights have distinct effects on the association between debt maturity and ownership structure?

This study examines the effects of the firm's ownership concentration and its institutional environment on corporate debt maturity choices. As ownership concentration and debt maturity are alternative governance mechanisms, we theorize and investigate whether their association is influenced by country-level governance factors that enhance outside monitoring by minority shareholders and debtholders. Our investigation is based on a dataset of 50,599 firm-year observations from 38 countries. We use a propensity-score matching approach and find that the effect of ownership concentration on debt maturity is conditional to country-level governance attributes. Ownership concentration has a negative effect on debt maturity in countries where both shareholder protection and creditor rights are weak. Ownership concentration, however, tends to lengthen debt maturity as protection increases, and this positive effect on the length of debt maturity is stronger in countries enhancing protection towards debtholders (instead of shareholders). We also explore other characteristics of ownership structure, such as the identity and presence of controlling shareholders. These results corroborate the view that entrenched shareholders may use debt maturity opportunistically. Our study provides new insights into the interplay between firm- and country-level governance mechanisms and a deeper understanding of cross-country differences in the association between ownership structure and debt financing.     

Determinants of debt: Empirical evidence on firms in the district of Santarém in Portugal

In recent decades, the theme of the capital structure and its determinants has caused some controversy and aroused great interest in the financial domain. Several theories and studies have emerged applying to this domain. This study aims to test the explanatory power of the determinants of debt which have the greatest support in the financial literature, size, growth, business risk, profitability, tangibility and non-debt tax shields and its validity in accordance with the theories of capital structure, on firms in Santarém's district. The sample contains financial data of 6184 firms for the period 2008–2012. The results indicate that firms in Santarém's district in Portugal have a high level of debt, using mainly short-term debt. The growth and profitability have proved to be determinants of debt, confirming the Pecking Order Theory.