Cross-Listings and M&A Activity: Transatlantic Evidence

We analyze whether European firms choose to list shares in the US to facilitate acquisitions. Evidence from a sample of 547 European companies shows that cross-listed firms are significantly more active in acquiring US companies than are their domestically listed peers. This pattern holds even after we account for self-selection in the cross-listing decision. Cross-listed firms are also more likely to use equity payment in large transactions, but after taking self-selection into account, transaction size becomes the key determinant of the use of equity. After cross-listing, the proportion of aggregate M&A volume financed with equity increases.     

Financing patterns around the world: Are small firms different?

Using a firm-level survey database covering 48 countries, we investigate how financial and institutional development affects financing of large and small firms. Our database is not limited to large firms but includes small and medium-size firms and data on a broad spectrum of financing sources, including leasing, supplier, development, and informal finance. Small firms and firms in countries with poor institutions use less external finance, especially bank finance. Protection of property rights increases external financing of small firms significantly more than of large firms, mainly due to its effect on bank finance. Small firms do not use disproportionately more leasing or trade finance compared with larger firms, so these financing sources do not compensate for lower access to bank financing of small firms. We also find that larger firms more easily expand external financing when they are constrained than small firms. Finally, we find suggestive evidence that the pecking order holds across countries.     

Stock Option Expensing: The Role of Corporate Governance

Analysis of the corporate stock option expensing decision (before the practice became mandatory in 2006) continues to be of interest because it provides insight into the underlying factors affecting not only expense recognition, but the overall corporate decision‐making process. Using a sample of 207 companies that volunteered to expense options and more than 1,000 non‐expensing firms, the authors found that companies that provide more disclosure and appeared to have a stronger alignment of managerial and shareholder interests were also more likely to expense stock options—a finding that the authors view as indirect evidence that voluntary expensing was more likely to occur in companies that practiced effective corporate governance. And consistent with the prediction of efficient market theorists, the study also found no significant market reaction to announcements of these decisions to expense options. The study also found that companies that were the heaviest users of options—notably, smaller, high—growth, and less‐profitable firms—were least likely to expense them. And while this finding adds to the weight of evidence suggesting that companies often make accounting decisions designed to boost reported earnings, the authors also recognize that the possibility that the decision by other companies not to expense may have been a strategy designed primarily to preserve access to capital markets.     

Managerial discretion to delay the recognition of goodwill impairment: The role of enforcement

Under International Financial Reporting Standards, managers can use two approaches to increase the estimated fair value of goodwill in order to justify not recognizing impairment: (1) make overly optimistic valuation assumptions, and (2) increase future cash flow forecasts by inflating current cash flows. Because enforcement constrains the use of optimistic valuation assumptions, we hypothesize that enforcement influences the relative use of these two choices. We test this hypothesis by comparing a sample of 1,958 firms from 36 countries that are likely to delay recognizing goodwill impairment (suspect firms) to a sample of control firms. First, we find that firms in high‐enforcement countries use a higher discount rate to test goodwill for impairment than firms in low‐enforcement countries. We also find a more positive association between discount rate and upward cash flow management for suspect firms than for control firms. This result is consistent with suspect firms substituting optimistic valuation assumptions with inflated current cash flows. Second, we find that, relative to control firms, suspect firms exhibit higher upward cash flow management in high‐enforcement countries than in low‐enforcement countries. Third, we show that suspect firms in high‐enforcement countries are more likely to eventually impair goodwill.     

Location and lease intensity

U.S. firms lease assets extensively. We find that, during 1980–2011, the average U.S. firm has a lease intensity of about 40%. Or, the average firm has present and future (up to five years) rent commitments equal to 16.6% of their total assets. We investigate whether agency costs between the lessor and the lessee affect the lease intensity of firms. To do so, we examine the impact of firms' location on the use of operating leases. The main idea of our paper is that, because obtaining information and monitoring is costly for potential lessors, especially when a lessee is relatively far away from financial centers, rural firms are less likely to use operating leases. Consistent with this hypothesis, we show that rural firms tend to have lower lease intensities than similar urban and small city firms. In addition, we find that firms with higher levels of debt capacity lease less and firms that face more financial constraint lease more. Our findings are robust to industry and lease maturity controls and consistent with the existence of an agency problem associated with leasing.     

Lease Financing and Corporate Governance

Lease financing is a well‐recognized mechanism for reducing the agency costs of debt. This study examines whether firms that attempt to control the agency costs of equity through strong governance structures, including Chief Executive Officer compensation alignment and board structure, are more likely to use an agency cost reducing debt structure, such as leasing. For a sample of large firms, we find that firms who use more incentive compensation and have more outside directors also tend to use more lease financing, suggesting these agency cost reducing measures are complements.     

Limited attention by lenders and small business debt financing: Advertising as attention grabber

Developing predictions by drawing upon the limited attention perspective, we investigate if small firms may use advertising as an attention grabber to increase their opportunities to access debt financing. Using a sample of over a million observations, we find that small firms with higher advertising expenditure are more likely to gain access to debt financing, thus increasing their financial leverage. Our tests show that lenders constrained by a limited attentional capacity are more likely to be attracted by small firms with higher advertising expenditure, and that small firms with financial constraints are not found to use advertisement intentionally to acquire resource.     

Agency costs,taxes and debt: The UK evidence

This paper provides an empirical examination of the impact of the corporation tax and agency costs on firms' capital structure decisions. Our evidence suggests that the agency costs are the main determinants of corporate borrowing. Consistent with the agency theory, we find that firms that have fewer growth options have more debt in their capital structure. Moreover, our results show that debt mitigates the free cash flow problem and that firms that are more likely to be diversified and less prone to bankruptcy are highly geared. the negative effect of insider shareholding on leverage disappears, however; when all the agency mechanisms are accounted for. In addition, we find that, in the long run, companies that are tax exhausted exhibit significantly lower debt ratios than tax-paying firms. However, in the short run, firms' capital structure decisions are not affected by taxation.     

现金持有量的现金流敏感性实证研究:来自2000—2009年食品饮料行业上市公司的证据

本文对2000—2009年中国食品饮料行业上市公司的样本数据进行了实证研究,发现小规模公司现金持有量对其内部现金流表现出一定程度的敏感性,而大规模公司的现金持有量则对其内部现金流没有表现出敏感性。原因可能在于小规模公司比大规模公司面临更强的融资约束。     

The Leasing Decision: A Comparison of Theory and Practice

The UK leasing industry has grown dramatically in the 1980s. The academic literature suggests that there are two major reasons for leasing—taxation benefits and off-balance sheet financing. Recently taxation and financial reporting changes have substantially reduced the taxation and off-balance sheet financing benefits from leasing. Against this background a postal questionnaire survey of the opinions of UK financial managers on various issues relating to finance leases was undertaken. This paper reports on the findings of the questionnaire survey. A distinguishing feature of the survey is that the replies were analysed by various financial characteristics of the responding companies.     

An analysis of majority owner‐managed companies in the UK

This paper investigates the characteristics of 73 UK companies in which managers have an ownership stake of greater than 50 per cent. We find that majority owner‐managed companies make less use of alternative corporate control systems and are less likely to remove their chief executive officer or other board members following poor performance. However, our sample firms actually outperform diffusely held companies of similar size in the same industry. The determinants of majority control appear more closely related to the characteristics of the controlling shareholders rather than the firm's operating environment. Changes in the ownership structure of our sample companies owe more to changes in owner‐specific characteristics and security issuance than they are related to changes in the company's operating environment or company performance. We conclude that despite the obvious agency costs of managerial entrenchment for closely held companies, for the present sample at least the incentive alignment benefits of large director shareholdings are beneficial to outside shareholders.     

Firm characteristics and audit committees complying with ’best practice‘ membership guidelines

This study investigates demand and supply characteristics associated with firms that voluntarily established audit committees meeting ‘best practice’ membership guidelines. We focus on a set of best practice criteria rather than on the separate elements of the best practice criteria as in past studies. We conduct our tests using a sample of New Zealand listed companies that, relative to firms in other capital markets, are smaller and have more concentrated ownership. This setting differs from prior research because we expect the costs of voluntarily achieving best practice to be reasonably high. The results show that demand factors are not significantly related to the presence of an audit committee that conforms with best practice membership guidelines. However, supply factors (i.e. those firms with larger and more independent boards) are more likely to form audit committees that meet best practice. These results suggest that compliance costs will be greater for firms with smaller and less independent boards of directors if they are required to comply with best practice requirements.     

Ownership structure and collateral requirements: Evidence from China's listed firms

This paper examines the effect of ownership structure on collateral requirements using a sample of China's listed firms from 2007 to 2009. We find that compared to privately controlled companies, state-controlled companies are less likely to be required to pledge collateral, and such a difference is more pronounced for firms in troubled industries. The empirical results also show that the effect of state control on collateral requirements is weaker in companies with more foreign ownership. Moreover, the effect of state control on collateral requirements is weaker in companies with more third party guarantees. Finally, we find that the effect of state control on collateral requirements is more pronounced for firms operating in regions with more government intervention.     

Do dividend tax cuts lead firms to increase dividends: Evidence from China

Dividend taxation is an important component of investors’ taxes and has attracted the attention of policymakers and financial economists. However, the theory of dividends and the reform of dividend taxation remain a puzzle. This paper analyzes the effect of dividend taxation on firms’ dividend policies. Using a natural experiment and difference-in-difference estimation, we find that China’s dividend tax cut in 2005 led firms to increase their dividend payments. Companies with higher proportions of tradable individual shares or investment fund shares were more likely to increase their dividend payments. However, opportunistic behavior also exists, where companies with higher proportions of shares held by executives were also more likely to increase their dividend payments. These findings support the existence of a causal relationship between China’s tax cut and firms’ increased dividend payments and imply that the reform of dividend taxation in 2005 achieved its goal.     

The long-term effects of loan guarantees on SME performance

We estimate the treatment effect of guaranteed loans on the growth of a large sample of French small and medium-sized enterprises (SMEs). The nature of our sample allows us to estimate the treatment effect up to 10 years after the treatment and to consider several performance measures and moderating factors. Our findings indicate that beneficiaries of guaranteed loans experience significantly higher growth in sales, employment, and total assets than otherwise similar companies. The effects are long lasting, do not entail a slowdown in productivity growth, are mostly driven by organic growth rather than by external acquisitions, and are larger in firms that are typically more financially constrained (young or small). Guaranteed-loan beneficiaries are also more likely to survive than non-beneficiaries. Our results are consistent across different identification strategies (matching, difference-in-differences, instrumental variable estimation) and control group choices.     

The Effect of Corporate Governance on the Use of Enterprise Risk Management: Evidence From Canada

This article examines the use of enterprise risk management (ERM) by companies in Canada, the characteristics that are associated with the use of ERM, what obstacles companies face in implementing ERM, and what role, if any, corporate governance guidelines have played in the decision to adopt ERM. We obtained our data from the responses to a mail survey sent to Canadian Risk and Insurance Management Society members as well as telephone interviews with 19 of the respondents. The results indicate that 31 percent of the sample had adopted ERM and that reasons for adopting ERM include the influence of the risk manager (61 percent), encouragement from the board of directors (51 percent), and compliance with Toronto Stock Exchange (TSE) guidelines (37 percent). The major deterrents to ERM were an organizational structure that discourages ERM and an overall resistance to change. Although only about one‐third of companies indicated that they had adopted an ERM approach, evidence was clear that a larger portion of the sample was moving in that direction, as indicated by what changes they had observed in their companies in the past three years. These include the development of company‐wide guidelines for risk management (45 percent), an increased awareness of nonoperational risks by operational risk management personnel and an increased awareness of operational risks by nonoperational risk management personnel (49 percent), more coordination with different areas responsible for risk management (64 percent), and more involvement and interaction in the decision making of other departments. Contrary to what we expected, there was not a significant difference between firms that are listed on the TSE versus those that are not in terms of the propensity to use ERM. However, the fact that 37 percent of firms indicated that the TSE guidelines were influential in their decision to adopt ERM provides some evidence that the guidelines are influencing companies’ risk management strategies.     

Executive Stock Options: To Expense or Not?

In analyzing the decision to expense stock options, we find a greater likelihood of options expensing for firms with greater transparency and a closer alignment of interests between managers and shareholders. These results provide indirect evidence that expensing is more likely in firms that practice good corporate governance. We show that firms are less likely to expense when option usage is higher and that this negative relation is stronger for firms that are smaller, have high growth, and are less profitable. We also find that the announcement period returns are not significantly different from zero.     

Tax shelters and corporate debt policy

We gather a unique sample of 44 tax shelter cases to investigate the magnitude of tax shelter activity and whether participating in a shelter is related to corporate debt policy. The average annual deduction produced by the shelters in our sample is very large, equaling approximately nine percent of asset value. These deductions are more than three times as large as interest deductions for comparable companies. The firms in our sample use less debt when they engage in tax sheltering. Compared to companies with similar pre-shelter debt ratios, the debt ratios of firms engaged in tax shelters fall by about 8%. The tax shelter firms in our sample appear underlevered if shelters are ignored but do not appear underlevered once shelters are considered.     

On Corporate Divestiture

This paper investigates why firms choose to divest their units/segments, and how firms choose among the three divestiture mechanisms (equity carveout, spinoff, and asset selloff). A direct comparison is conducted on firms viable choices on a comprehensive sample of corporate divestiture transactions in the period of 1985-1998. Our multinomial logit analysis provides a complete picture on corporate divestitures. We find that, in support for the focusing hypothesis, highly diversified firms are more likely to divest units when suffering from low operating efficiency. Our results are also consistent with the proposition that firms are divesting to relax their credit constraint, as firms with higher leverage ratios and low cash income are more likely to engage in carveouts or selloffs. We find limited evidence of information asymmetry as the major determinant of divestitures. We provide new findings on firms choice among the three divestiture options. We report that, conditioned on the decision to divest, firms mainly use asset selloffs in divesting smaller units operating in the same industry. Firms with larger divested units are more likely to use spinoff or carveout transactions. Parent firms having high revenue growth, high book-to-market ratio, and divesting unit when market sentiment is high are less likely to use spinoffs. Firms having high dividend yield, less information asymmetry, and divesting units operating in different industries are more likely to use carveout as an exit mechanism. Alternative specification of an ordered logit analysis generates consistent findings.JEL Classification: G34     

Ownership structure, family control, and acquisition decisions

We investigate how ownership and family control influence the decision to take part in M&As as an acquirer or as an acquired company in a sample of 777 large Continental European companies in the period 1998-2008. We find that ownership is negatively correlated with the probability of launching a takeover bid, and family firms are less likely to make acquisitions, especially when the stake held by the family is not large enough to assure the persistence of family control. On the passive side of M&A deals, the effect of the largest shareholders' ownership on the decision to accept an acquisition proposal depends non-linearly on the voting rights they hold, and family control reduces the probability of being acquired by an unrelated party. We do not find evidence that family-controlled firms destroy wealth when they acquire other companies. Finally, we document that ownership and family control, while being negatively correlated with M&A activity, are not negatively correlated with growth in firm size.