Are female top executives more risk-averse or more ethical? Evidence from corporate cash holdings policy

This study examines the impact of gender in the C-Suite on corporate decision making. In particular, we investigate the influence of the Chief Financial Officer (CFO)’s gender on the agency costs of free cash flow. We document that female CFOs reduce cash holdings in firms with excess cash, which should alleviate the agency conflict arising from managerial discretion. We also find that female CFOs at firms with surplus cash increase distributions to shareholders in the form of dividends. The empirical evidence also shows that the reduction in cash does not lead to suboptimal investment policies. Of the two competing hypotheses – gender-ethics hypothesis and risk-aversion hypothesis—these results are consistent with the view that female CFOs undertake more ethical but not more risk-averse decisions than their male counterparts. Our results are robust to a battery of robustness tests.     

25 years and counting of corporate finance: What have we learned and where are we going?

This Special Issue pays tribute to the Journal of Corporate Finance (JCF) and its cutting-edge research. We do this by taking stock of the trends of research published in the Journal over the last 25 years, reviewing areas being researched currently, and offering some insight into fruitful areas of corporate finance research going forward. To that end, the Special Issue includes a blend of articles that represent the past, present, and future of corporate finance research. In particular, we highlight areas of corporate finance research that may be promising and offer insights on the potential of JCF going forward.     

Are overconfident CEOs better leaders? Evidence from stakeholder commitments

We find evidence that the leadership of overconfident chief executive officers (CEOs) induces stakeholders to take actions that contribute to the leader's vision. By being intentionally overexposed to the idiosyncratic risk of their firms, overconfident CEOs exhibit a strong belief in their firms’ prospects. This belief attracts suppliers beyond the firm's observable expansionary corporate activities. Overconfident CEOs induce more supplier commitments including greater relationship-specific investment and longer relationship duration. Overconfident CEOs also induce stronger labor commitments as employees exhibit lower turnover rates and greater ownership of company stock in benefit plans.     

Are red or blue companies more likely to go green? Politics and corporate social responsibility

Using the firm-level corporate social responsibility (CSR) ratings of Kinder, Lydenberg, Domini, we find that firms score higher on CSR when they have Democratic rather than Republican founders, CEOs, and directors, and when they are headquartered in Democratic rather than Republican-leaning states. Democratic-leaning firms spend $20 million more on CSR than Republican-leaning firms ($80 million more within the sample of S&P 500 firms), or roughly 10% of net income. We find no evidence that firms recover these expenditures through increased sales. Indeed, increases in firm CSR ratings are associated with negative future stock returns and declines in firm ROA, suggesting that any benefits to stakeholders from social responsibility come at the direct expense of firm value.     

Are corporate bond market returns predictable?

This paper examines the predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to December 31, 2010. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Both investment-grade and high-yield bond returns can be predicted by past stock market returns in-sample and out-of-sample, and the predictive relation is much stronger between stocks and high-yield bonds. By contrast, there is little evidence that stock returns can be predicted by past bond returns. These findings are robust to various model specifications and test methods, and provide important implications for modeling the term structure of defaultable bonds.     

Investment and access to external finance in Europe: Does analyst coverage matter?

We aim to determine whether analyst coverage improves European firms’ access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect framework and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms’ debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms’ financial conditions.     

Are corruption and corporate tax avoidance in the United States related?

Review of Accounting Studies - We examine whether state-level corruption and corporate tax avoidance in the United States (U.S) are related. Using a sample of 36,078 U.S. firm-year...     

Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?

We assess the degree of market fragmentation in the euro-area corporate bond market by disentangling the determinants of the risk premium paid on bonds at origination. By looking at over 2400 bonds we are able to isolate the country-specific effects which are a suitable indicator of the market fragmentation. We find that, after peaking during the sovereign debt crisis, fragmentation shrank in 2013 and receded to pre-crisis levels only in 2014. However, the low level of estimated market fragmentation is coupled with a still high heterogeneity in actual bond yields, challenging the consistency of the new equilibrium.     

Does external finance pressure affect corporate disclosure of Chinese non-state-owned enterprises?

We examine whether external finance pressure influences information disclosure of Chinese non-state-owned enterprises (NSOEs), which are often entrepreneurial firms. Existing Chinese stock exchange regulations stipulate that firms need to meet certain earnings performance criteria to qualify for rights issue or avoid delisting. These regulatory criteria create pressures for firms in need for external equity financing to manipulate earnings in order to meet and beat the performance targets. To examine this, we exploit an exogenous event of Chinese accounting standards change in 2007, when firms are given greater accounting disclosure discretion. Following this change, we find evidence consistent with increased earnings manipulation among NSOEs that barely meet these performance targets. This effect is also more pronounced among such NSOEs with weaker political connections, which increases their dependence on the capital market for external financing. Our findings have policy implications for the financing of NSOEs and entrepreneurial firms in emerging economies.     

Are correlations constant? Empirical and theoretical results on popular correlation models in finance

Multivariate GARCH models have been designed as an extension of their univariate counterparts. Such a view is appealing from a modeling perspective but imposes correlation dynamics that are similar to time-varying volatility. In this paper, we argue that correlations are quite different in nature. We demonstrate that the highly unstable and erratic behavior that is typically observed for the correlation among financial assets is to a large extent a statistical artifact. We provide evidence that spurious correlation dynamics occur in response to financial events that are sufficiently large to cause a structural break in the time-series of correlations. A measure for the autocovariance structure of conditional correlations allows us to formally demonstrate that the volatility and the persistence of daily correlations are not primarily driven by financial news but by the level of the underlying true correlation. Our results indicate that a rolling-window sample correlation is often a better choice for empirical applications in finance.     

Are corporate governance attributes associated with accounting conservatism?

This article investigates the association between the board of directors, the audit committee and the external auditor (as well as an aggregate governance index) and the extent of conservatism evident in Australian firms’ financial reporting. Overall, the results provide only weak evidence that firms with certain governance characteristics report more conservatively. Evidence of any such link is restricted to measures of board composition and leadership, and even then the results are sensitive to the method used to measure the extent of conservatism in financial reporting.     

Are for-profit hospital conversions harmful to patients and to Medicare?

We examine how changes in hospital ownership to and from for-profit status affect quality and Medicare payments per hospital stay. We hypothesize that hospitals converting to for-profit ownership boost post acquisition profitability by reducing dimensions of quality not readily observed by patients and by raising prices. We find that 1-2 years after conversion to for-profit status, mortality of patients, which is difficult for outsiders to monitor, increases while hospital profitability rises markedly and staffing decreases. Thereafter, the decline in quality is much lower. A similar decline in quality is not observed after hospitals switch from for-profit to government or private nonprofit status.     

Access to internal capital,creditor rights and corporate borrowing: Does group affiliation matter?

We examine whether the effect of increased creditor rights on corporate borrowing depends on firm's access to internal capital. By exploiting a creditor protection reform in India, empirical outcomes strongly indicate that strengthening of creditor rights leads to increased corporate borrowing among firms that have constrained access to internal capital compared to business group affiliated firms, which have relatively easier access to internal capital. Further, the increased corporate borrowing by firms with constrained access to internal capital, in the post-reform period, is associated with a greater expansion of real investments, improved operational performance, and better market valuation. Taken together, these findings indicate that expanding creditor rights may aid in improving allocative efficiency.     

Do relative leverage and relative distress really explain size and book-to-market anomalies?

In a capital asset pricing model (CAPM) framework, Ferguson and Shockley [2003. Equilibrium “anomalies”. Journal of Finance 58, 2549–2580] propose two factors constructed on relative leverage and relative distress, and show that the two factors subsume Fama and French's [1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3–56] factors constructed on size and book-to-market (BM) in explaining the cross-sectional average returns of the 25 size-BM portfolios. Based on tests on individual securities, we find that all factors fail to fully explain the common asset-pricing anomalies. In the spirit of Merton's [1973. An intertemporal capital asset pricing model. Econometrica 41, 867–887] intertemporal CAPM, we propose an augmented five-factor model, which incorporates Ferguson and Shockley's [2003. Equilibrium “anomalies”. Journal of Finance 58, 2549–2580] factors into the Fama–French three-factor model. The empirical results show that a simple conditional version of the augmented model is able to explain most well-known asset-pricing anomalies.     

Why do banks choose to finance with equity?

A majority of U.S. banks between 1973 and 2012 held equity capital significantly beyond the required minimum. We study the risk-return tradeoff in connection with a bank’s capital structure, and identify several new significant market factors that drive the level of equity capital in banks. During normal growth periods, bank leverage is negatively related to a level of competition and loan portfolio diversification, while high bank leverage is associated with low past liquidity. During recessions and expansions, the roles of those factors change following distortions in risk-return tradeoff. In distress, when banks approach regulatory capital requirements, market determinants of book leverage lose their significance; however, leverage does not decrease until a bank is within 1% of the minimal capital threshold.     

Do regulatory policies matter to corporate innovation?

This paper examines the relationship between regulation and innovation from both theoretical and empirical perspectives. The theoretical model focuses on the role of competition policy (measured by increases in the number of firms) and the strength of intellectual property rights in fostering cost-reducing R&D, under both R&D competition and R&D cooperation. It is shown that, theoretically, competition policy and intellectual property rights are complements under R&D competition, while they are substitutes under R&D cooperation. Moreover, under R&D competition, innovation is maximized through strict competition policy and strong intellectual property rights; whereas under R&D cooperation, innovation is maximized through strict competition policy and weak intellectual property rights. The empirical model tests the effect of several regulatory policies on innovation in several MENA countries. The results of dynamic panel data regressions point that competition policy and intellectual property rights are complements. In addition to competition policy and intellectual property rights protection, the following country/regulation characteristics are considered: human capital, government efficiency, foreign direct investment, natural resources dependence, labor market regulations, and GDP level. The paper finds that the extent of regulations in all categories has statistically significant effects on R&D, except FDI. One explanation is that most FDI to the MENA region flows to natural resources and non-tradable sectors, which are less relevant to R&D than other sectors (e.g., manufacturing and information and communications technology sectors).     

Are the strategic stars aligned for your corporate brand?

In recent years, companies have increasingly seen the benefits of creating a corporate brand. Rather than spend marketing dollars on branding individual products, giants like Disney and Microsoft promote a single umbrella image that casts one glow over all their products. A company must align three interdependent elements--call them strategic stars--to create a strong corporate brand: vision, culture, and image. Aligning the stars takes concentrated managerial skill and will, the authors say, because each element is driven by a different constituency: management, employees, or stakeholders. To effectively build a corporate brand, executives must identify where their strategic stars fall out of line. The authors offer a series of diagnostic questions designed to reveal misalignments in corporate vision, culture, and image. The first set of questions looks for gaps between vision and culture; for example, when management establishes a vision that is too ambitious for the organization to implement. The second set addresses culture and image, uncovering possible gaps between the attitudes of employees and the perceptions of the outside world. The last set of questions explores the vision-image gap--is management taking the company in a direction that its stake-holders support? The authors discuss the benefits of a corporate brand, such as reducing marketing costs and building a sense of community among customers. But they also point to cases in which a corporate brand doesn't make sense--for instance, if you are a product incubator, if you've recently experienced M&A activity, or if you are expecting fallout from risky ventures.     

Move to success? Headquarters relocation,political favoritism,and corporate performance

This study documents an unexplored corporate rent-seeking phenomenon in non-representative regimes—relocating headquarters (HQ) to the political center. Focusing on China, we find that firms that relocate their HQs to Beijing (the political center) enjoy increased political favors, but those that move to Shanghai or Shenzhen (the country's two main economic centers) do not. Although both groups of movers experience improved profitability, their sustainable growth paths diverge after relocating. Firm productivity and innovation worsen after relocating to Beijing, but improve after moving to Shanghai or Shenzhen. Overall, these findings support the argument that political favoritism benefits firms' profitability but impairs their productivity and innovation.