Equity market timing and capital structure: International evidence

We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 countries. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic trade-off model.     

Investor sentiment and firm capital structure

We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms' debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is slower in low sentiment periods, indicating higher costs of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms' financing decisions and stock returns.     

Investor protection and price informativeness about future earnings: international evidence

This study draws on the investor protection literature to identify structural factors in a country’s information environment that are likely to explain cross-country differences in the extent to which future earnings information is capitalized in current stock returns. Using a sample of 55,900 firm-years from 32 countries, we find that greater financial disclosure, higher quality earnings, and greater information dissemination through news media are associated with stock prices that are more informative about future earnings, whereas strong enforcement of insider trading laws is associated with stock prices that are less informative about future earnings. We also find that, on average, price informativeness about future earnings is greater in countries with strong investor protection. Our results illuminate the importance of structural factors constituting a country’s information environment in explaining cross-country variation in price informativeness about future earnings.     

Investor protection and corporate cash holdings around the world: new evidence

We provide new evidence that firms under weak governance regimes hold less cash than firms operating under strong governance, contrary to previous literature. Our findings also establish that there are two independent effects for the de jure and de facto aspects of governance that protect minority shareholders. Consistent with managerial empire building prediction, our study reveals that firms deplete their excess cash by overinvesting and this effect is exacerbated in countries with weak governance. The excess cash depletion has an adverse impact on firm performance, more so in countries with weak investor protection which is in support of the agency costs explanation.     

Labor protection and corporate Debt maturity: International evidence

This paper investigates the impact of labor protection on corporate debt maturity structure. We hypothesize that stronger labor protection is conducive to a greater use of short-term debt maturity by firms. Using various country-level indicators as measures of labor protection, and a sample of 114,594 firm-years from 43 countries over the 1990–2010 period, we document robust evidence that firms located in countries where labor enjoys a strong protection tend to borrow more short-term. Our analysis suggests that labor protection is an important institutional factor that plays a role in determining the maturity structure of corporate debt over-and-above economic, legal, and political factors identified in prior research.     

The impact of changes in bank ownership structure on the allocation of capital: International evidence

A new wave of bank privatizations in the past decade has significantly changed the ownership structure of banking systems around the world. This paper explores how these changes affect the allocation of capital within countries. Increases in domestic blockholder ownership of banks adversely affect the allocation of capital through increased lending activity to less productive industries and to those with less dependence on external finance. This result is more pronounced in countries with higher levels of corruption. I find some evidence that foreign presence improves capital allocation efficiency by increasing lending to more productive industries, primarily in common law countries.     

Corporate governance and dynamics capital structure: evidence from Vietnam

This paper examines the relationship between corporate governance and speed of adjustment (SOA) of capital structure for listed firms in Vietnam from 2000 to 2016. We first examine the literature on the influence of crucial corporate governance mechanisms, including gender diversity and managerial ownership, on SOA. Empirically, we then find that board size, board independence, gender diversity, and managerial ownership significantly increase SOA, but CEO duality significantly decreases it. We discuss some policy implications for firms and Vietnamese authorities.     

Board interlocks and capital structure dynamics: evidence from China

Using a sample of Chinese A‐share listed companies from the Shanghai and Shenzhen stock exchanges from 2007 to 2016, this paper investigates the effects of director network centrality on the speed of capital structure adjustment. The results indicate that firms in the central position of the director network have a higher speed of capital structure adjustment and a lower extent of deviation from the target capital structure. This effect is mainly significant for non‐state‐owned enterprises (non‐SOEs). Collectively, the evidence shows the network of interlocked directors creating mechanisms for information and resource exchanges, which enhance the efficiency of corporate financing polices.     

Board monitoring and capital structure dynamics: evidence from bank-based economies

Review of Quantitative Finance and Accounting - We examine the impact of board characteristics on the speed of adjustment and the capital structure dynamics of firms in bank-based economies. Using...     

Investor protection and equity markets

We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) “crime and punishment” framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection.     

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.     

The role of social capital in price efficiency: International evidence

This study finds that firms with higher social capital and trust, as measured by firm environmental and social (E&S) performance, demonstrate better stock price efficiency. The result in a sample of 45 countries remains robust to alternative approaches addressing the endogeneity concerns. This relation is mainly derived from a firm's E&S engagements related to third parties and the whole of society, which regulate the firm's information environment after accounting for other influences. The positive role of E&S performance is further shaped by the firm's associated macro-level trust and social capital, as proxied by the market's cultural and institutional factors.     

Investor abilities and financial contracting: Evidence from venture capital

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.     

Control/ownership structure,creditor rights protection,and the cost of debt financing: International evidence

We explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms. We find strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yield-spreads, and a negative and significant effect on bond ratings. Control in the hands of widely held financial firms has a positive effect on bond ratings only, while State control has no effect on either bond yield-spreads or ratings. We also find that a higher protection of debtholders’ rights generally reduces bond yield-spreads and increases bond ratings. Our results additionally show that, for both bondholders and rating agencies, the enforcement of debt laws is crucially important. Finally, we document a negative effect of debt covenants on debt costs when there is a high expropriation risk and poor creditor rights protection.     

Investor sentiment and stock volatility: New evidence

This study investigates the predictability of sentiment measure on stock realized volatility. We propose a new investor sentiment index (NISI) based on the partial least squares method. This sentiment index outperforms many existing sentiment indicators in three aspects. First, in-sample result shows that the NISI has greater predictive power relative to the others. Most sentiment indicators show predictability in the non-crisis period only while the NISI is also effective in the crisis period. Furthermore, the NISI exhibits more prominent superiority in longer horizons forecasting. Second, further analysis indicates that the NISI has robust predictability before and after the Chinese stock market turbulence periods while the others not. Importantly, the NISI is still effective significantly after considering leverage effect while most of the others not. Finally, out-of-sample analysis demonstrates that the NISI is more powerful than other sentiment measures. This result is reproducible in different robustness checks.     

Investor sentiment and stock returns: Global evidence

We assess the impact of investor sentiment on future stock returns in 50 global stock markets. Using the consumer confidence index (CCI) as the sentiment proxy, we document a negative relationship between investor sentiment and future stock returns at the global level. While the separation between developed and emerging markets does not disrupt the negative pattern, investor sentiment has a more instant impact in emerging markets, but a more enduring impact in developed markets. Individual stock markets reveal heterogeneity in the sentiment-return relationship. This heterogeneity can be explained by cross-market differences in culture and institutions, along with intelligence and education, to varying degrees influenced by the extent of individual investor market participation.     

Labor protection,ownership concentration,and cost of equity capital: international evidence

Review of Quantitative Finance and Accounting - In this study, we investigate how labor protection institutions and the presence of controlling shareholders interact to determine a firm’s...     

Taxation and capital structure: Empirical evidence from a quasi-experiment in China

China's new Corporate Income Tax Law was passed in March 2007 and took effect on January 1, 2008. It terminated the dual corporate income tax regime by removing the preferential tax treatments offered to foreign investment enterprises (FIEs) and unifying the corporate income tax regime for FIEs and Chinese domestic enterprises (DEs). This paper uses a difference-in-differences approach to determine whether FIEs responded to the law by raising debt ratios. Employing the Chinese Industrial Enterprises Database from 2002 to 2008 to implement the analysis, we find that FIEs have responded to the law by raising debt ratios; the treatment effect is larger for Hong Kong–Macau–Taiwan (HMT) investment enterprises than for other FIEs, which implies that HMT investment enterprises are more sensitive and more responsive to the removal of the preferential tax treatments than other FIEs; and the treatment effect by restricting the control group to State-Owned Enterprises (SOEs) is less than that by restricting the control group to Private-Owned Enterprises (POEs), which is consistent with the perception that SOEs might enjoy more favorable treatments from the Chinese government than POEs. All three findings are consistent with the tax-based theories of capital structure, and hence we conclude that taxation plays an important role in the choice of capital structure. We argue that our conclusion is not China-specific, but a general lesson for modern finance theory and is portable to developed countries.     

Investor Attention and Stock Returns: International Evidence

This article examines the asymmetric/discriminative effects of investor attention on expected stock returns among 15 markets through economic expansions and recessions. The predictive power of attention tends to be short-lived and weakens the autocorrelation within returns. Accounting for business cycles not only confirms that the predictability of attention endures with volatility but also explicates the asymmetric effects that underlying pessimism functions better. International evidence contributes to the literature on investor attention and reveals the discrepant effects of attention with three levels of market efficiency: semi-strong, stronger than semi-strong, and weak.