An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions

Most of the previous studies on the firms’ debt-equity choice utilize the standard single equation Probit (or Logit) model as if firms face a single dichotomous decision to issue debt or equity, but not both. The main purpose of this study is to use a two stage Bivariate Probit–Tobit model to examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues. Our results indicate that the Bivariate-Probit estimation is more efficient than that of two independent Probit equations. An examination of factors that affect the choice of financing form and the size of issue support the predictions of trade-off theory. The pecking order’s prediction that, if external funding is needed, firms issue debt first and then equity finds no support in this study as firms with higher information asymmetry have propensity to issue equity rather than debt. While information asymmetry affects the choice between debt and equity, we find no evidence that it influences the size of issue.     

Return–volume nexus in financial markets: A survey of research

This paper provides a systematic review of the return–volume literature, broadly defined to include theoretical and empirical research relating to the intramarket and cross-market interlinkages between security return and trading volume characteristics in four financial markets, namely, the stock, bond, foreign exchange, and futures markets. Viewed through this lens, this paper attempts to review previous empirical research within a unified theoretical framework that relates the interlinkages between return and volume characteristics in various financial markets. Overall, this paper marks several interesting areas of debate and controversy based on several controversial theories and empirical findings in the literature, suggesting directions for future research.     

A cross-discipline comparison of top-tier academic journal publication rates: 1997–1999

We examine “top-tier” academic journal publications in four major business disciplines (accounting, finance, management, and marketing) during the 1997 through 1999 time period. We document cross-discipline differences with respect to the number of articles published per discipline and the types of institutions that capture these publications. Specifically, the accounting discipline has considerably fewer top-tier articles published relative to other business disciplines. In addition, a significantly higher percentage of accounting top-tier publications are written by authors with top 20 academic affiliation relative to the top-tier publications in other business disciplines. Other cross-discipline differences are also documented.     

Global corporate bond issuance: What role for US quantitative easing?

The paper analyses the link between global corporate bond issuance and US quantitative easing (QE). It finds that purchases and holdings of MBS and Treasuries by the Fed have a strong impact on gross corporate bond issuance across advanced and emerging economies. The results are robust to a large number of checks, including controlling for the reduced supply of domestic and international bank loans in the aftermath of the global crisis which might have induced the corporate sector to issue more bonds. Our results support the “gap-filling” theory (Greenwood et al., 2010) where corporate bonds replace the assets removed from the market by large scale asset purchases. Specifically, asset holdings and purchases crowded out investors from the markets where the Fed intervened and accelerated portfolio rebalancing across assets and countries leading to stronger corporate bond issuance across the globe. A counterfactual analysis shows that bond issuance in emerging markets since 2009 would have been halved without QE.     

Investors’ perception of corporate governance: a spillover effect of Taiwan corporate scandals

The discovery of a series of corporate scandals in Taiwan between 16 June and 15 September 2004 offers a unique opportunity to investigate the perceptions of investors on the value of corporate governance, whilst avoiding any interactions with other exogenous factors such as the lower expected returns on all firms’ investment opportunities during the East Asian or Global financial crises. The main line of reasoning in this study is that at times when news of scandals flows into the market, the perceptions of certain type of investors will lead to a change in their trading habits for non-scandal portfolios. With a comprehensive analysis of order and trade data for all investors identified by investor code, it is found that a substantial proportion of investors ceased trading altogether during the scandal period. This response was particularly discernible among small and medium individuals, despite the fact that the firms in these portfolios were not associated with the scandals. We further examine the ordering behavior of those investors who still traded in the market. It shows that small individual investors began to enter the market more passively, regardless of whether the firms’ ownership structure. And they consistently underperformed in both ownership-structure portfolios. However, foreign institutions and large individuals place more aggressive orders for stocks in firms with strong cash-flow rights leverage and perform particularly well in those portfolios.     

What determines the financing decision in corporate takeovers: Cost of capital,agency problems,or the means of payment?

How is a takeover bid financed and what is its impact on the expected value creation of the takeover? An analysis of the sources of transaction financing has been largely ignored in the takeover literature. Using a unique dataset, we show that external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are in fact quite distinct. Acquisitions financed with internally generated funds significantly underperform those financed with debt. The takeover financing decision is influenced by the bidder's pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. The choice of equity versus internal cash or debt financing also depends on the bidder's strategic preferences with respect to the means of payment.     

What drives corporate liquidity? An international survey of cash holdings and lines of credit

We survey chief financial officers from 29 countries to examine whether and why firms use lines of credit versus non-operational (excess) cash for their corporate liquidity. We find that these two liquidity sources are employed to hedge against different risks. Non-operational cash guards against future cash flow shocks in bad times, while credit lines give firms the option to exploit future business opportunities available in good times. Lines of credit are the dominant source of liquidity for companies around the world, comprising about 15% of assets, while less than half of the cash held by companies is held for non-operational purposes, comprising about 2% of assets. Across countries, firms make greater use of lines of credit when external credit markets are poorly developed.     

How to explain non-performing loans by many corporate governance variables simultaneously? A corporate governance index is built to US commercial banks

This paper aims to combine the principal component analysis and GMM dynamic panel data methods in order to estimate the effect of corporate governance system on non-performing loans. The first method is meant to construct a corporate governance index for US commercial banks. The second one allows us to study the relation between the built index and non-performing loans. The advantage of the combination of these methods is reducing the number of corporate governance variables into a single one and ensuring the consistency of GMM estimates, given that a high number of variables leads to an increase in the number of GMM instruments, which in turns results in biased estimators. Applying these methods to US commercial banks, for a period including the financial crisis years, we find that small banks are characterized by a sound corporate governance system that reduces their non-performing loans. In opposition, the corporate governance fails to protect medium and large US commercial banks from excessive risk-taking that damages their loans’ quality and even leads to enormous losses especially during the global financial crisis.     

Exit as governance: do blockholders affect corporate innovation in large US firms?

Using a sample of large US firms, this study shows that blockholders in combination with liquidity can contribute positively to innovation (R&D investments). We contribute to the literature on managerial myopia that has focused mainly on large owners and their type (short-term/long-term). Our results are in line with recent theoretical studies arguing that blockholders in combination with market liquidity can mitigate managerial myopia, as suggested by the exit model of governance. The results indicate that blockholders can be efficient in resolving agency problems and that they can enhance long-term prosperity, even when the individual blockholder investment horizon may not be long.     

The components of the illiquidity premium: An empirical analysis of US stocks 1927–2010

This paper implements a conditional version of the liquidity adjusted CAPM (LCAPM). The conditional LCAPM allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The estimated average annual total illiquidity premium for US stocks 1927–2010 is 1.74–2.08%, which is substantially lower than in most previous studies. The contributions from illiquidity level and illiquidity risk are 1.25–1.28% and 0.46–0.83%, respectively. Of the three illiquidity risk components, risk related to the hedging of wealth shocks is the most important, while commonality risk is the least important. The illiquidity premia are clearly time-varying, with peaks in downturns and crises, but with no general tendency to decrease over time. The level premium and the risk premium are significantly positively correlated, at around 0.35; indicating that in periods of turbulence both illiquidity cost and illiquidity risk premia tend to be high.     

Equity sales in Belgian corporate groups: expropriation of minority shareholders? A clinical study

In Belgian corporate groups, complex pyramidal structures and interlocking ownership lead to separation of ownership and control. This may generate incentives for the controlling shareholder to divert resources within the group through intragroup equity sales. This in turn could lead to significant private benefits at the expense of the minority shareholders. We test this hypothesis by investigating the stock price reaction to the announcement of equity sales in Belgian groups. Our results suggest that intragroup equity sales create value for minority shareholders. Equity sales between group members and non-group members do not seem to affect the value for minority shareholders in Belgian groups.     

AUDITOR CONCENTRATION AND MARKET SHARES IN THE US: 1988–1999 A DESCRIPTIVE NOTE

This paper examines from a historical perspective the effects of the Big Eight and Big Six accounting firm mergers on concentration measures and market share percentages of major accounting firms in the US large company audit market. Concentration ratios and Herfindahl indices reflect an increasingly concentrated audit market, though individual firms differ in their success at capturing market shares in the three exchanges examined, as well as in their ability to capture newly listed companies or companies switching auditors over the 1988 to 1999 period.     

The US 2000–2002 market descent: clarification

Didier Sornette and Wei-Xing Zhou respond to the issues raised by Anders Johansen in his comment ‘An alternative view’ published in Quantitative Finance 3 C6.     

The US financial crisis and corporate dividend reactions: for better or for worse?

Review of Quantitative Finance and Accounting - We examine how changes in dividend policy in 2008 as the financial crisis was unfolding influenced firm risk-adjusted returns in the following years....     

Bank risk-taking and corporate investment: Evidence from the Global Financial Crisis of 2007–2009

In this paper, we explore the relation between the banking sector's risk-taking and a firm's investment (“corporate investment”). Specifically, we ask whether firms' cash holdings moderate the effect of the banking sector's risk-taking on corporate investment. Based on a panel sample of publicly listed non-financial firms in 15 EU countries during the period 1990–2015, we document several key findings. First, both cash holdings and the banking sector's risk-taking are positively associated with corporate investment. Second, bank loan growth, which roughly captures the supply of bank credit, is not related to corporate investment. Third, firms with smaller cash holdings disproportionately invest more than do firms with larger cash holdings during periods of higher risk-taking by the banking sector.     

Challenges of corporate governance: Twenty years after Cadbury,ten years after Sarbanes–Oxley

This paper sets the background to the Special Issue of the Journal of Empirical Finance on Challenges of Corporate Governance. It identifies the alternative approaches that can be taken to solve agency problems stemming from asymmetries of information: (i) ex-post monitoring through audit and information provision, (ii) ex-ante monitoring through boards, and (iii) incentivisation through the alignment of managerial incentives with shareholders. It discusses how the UK and the US have responded to corporate failures and relates the development of regulation in these countries to the three alternative approaches. It concludes with a discussion of three groups of challenges: (i) understanding alternative regulatory approaches, (ii) determining the importance of geo-diversity of business culture, and (iii) overcoming the problems of the political economy of corporate governance.     

Economic Impacts of the Possible China–US Trade War

This article uses a multi-country global general equilibrium (GE) model to numerically simulate the effects of possible China–US trade wars. We introduce an endogenous trade imbalance structure with trade cost into the model which helps to explore both tariff and non-tariff trade war effects. Our simulation results show that China will be significantly hurt by the China–US trade war, but negative impacts are affordable. The US can gain under unilateral sanction measures to China, but will lose if China takes retaliation measures. Comparing the effects under mutual trade war, China will lose more than the US. Introducing non-tariff barrier trade wars will intensify the negative effects, and comparatively negative effects to China are larger than to the US. Mexico’s involvement in trade war with the US will strengthen the negative effects and comparatively hurt the US more. Under non-cooperative and cooperative Nash bargaining equilibrium, the US can gain more than China in trade war negotiation, which means the US has stronger bargaining power than China. Additionally, trade wars between China and the US will hurt most countries and the world especially in GDP and manufacturing employment, but benefit their welfare and trade.     

A network analysis of global banking: 1978–2010

We analyze the global banking network using data on cross-border banking flows for 184 countries during 1978–2010. We find that the density of the global banking network defined by these flows is pro-cyclical, expanding and contracting with the global cycle of capital flows. We also find that country connectedness in the network tends to rise before banking and debt crises and to fall in their aftermath. Despite a historically unique build-up in aggregate flows prior to the global financial crisis, network density in 2007 was comparable to earlier peaks. This suggests that factors other than connectedness, such as the location of the initial shock to the core of the network, have contributed to the severity of the crisis. The global financial crisis stands out as an unusually large perturbation to the global banking network, with indicators of network density in 2008 reaching all-time lows.