Research articles for the 2021-06-05
Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws
SSRN
We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through Special Purpose Vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.
SSRN
We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through Special Purpose Vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.
Do Local Constraints on Corporate Political Activities Really Bite? Evidence from Local Adoptions of the American Anti-Corruption Act
SSRN
We examine the consequences of local laws modeled on the American Anti-Corruption Act (“AACAâ€), which aims to constrain corporate political activities. Consistent with these laws significantly increasing the costs of forging local political connections, we find a reduction in the likelihood that: (i) local incumbent politicians are re-elected; and (ii) firms receive local government contracts. We also find a negative capital market reaction to the AACA â€" indicating that shareholders punish firms for losing valuable connections, and a decline in opportunistic reporting, suboptimal investments and corporate risk-taking. Our evidence feeds into the calls to legislate the AACA at the state (federal) level.
SSRN
We examine the consequences of local laws modeled on the American Anti-Corruption Act (“AACAâ€), which aims to constrain corporate political activities. Consistent with these laws significantly increasing the costs of forging local political connections, we find a reduction in the likelihood that: (i) local incumbent politicians are re-elected; and (ii) firms receive local government contracts. We also find a negative capital market reaction to the AACA â€" indicating that shareholders punish firms for losing valuable connections, and a decline in opportunistic reporting, suboptimal investments and corporate risk-taking. Our evidence feeds into the calls to legislate the AACA at the state (federal) level.
JCOERE’s Perspective on European Integration and the Scope of Mutual Trust and Cooperation between Courts: Testing Fairness
SSRN
The PRD has introduced a number of concepts that are new and untested throughout much of the EU. While the concepts themselves are not unfamiliar, many of the new provisions have created a field of controversy and debate among academics, practitioners, and policy makers as legislators begin to work toward implementation of the Directive. The PRD has created fertile ground for these debates because there are so many alternatives available within the legislative framework. Consequently, implementing legislation may generate different variations on the approach to corporate rescue and is not expected to yield a harmonised European approach to preventive restructuring. These differences may also create obstacles, both substantive and procedural in nature, to the coordination of cross-border preventive restructuring procedures among Member State courts. It is in this issue of court-to-court cooperation (enhanced under the EIR Recast), which has been the focus of the JCOERE Project. Among the many issues that arise in the context of restructuring, the assessment of restructuring plan fairness has been a key area of conflict.
SSRN
The PRD has introduced a number of concepts that are new and untested throughout much of the EU. While the concepts themselves are not unfamiliar, many of the new provisions have created a field of controversy and debate among academics, practitioners, and policy makers as legislators begin to work toward implementation of the Directive. The PRD has created fertile ground for these debates because there are so many alternatives available within the legislative framework. Consequently, implementing legislation may generate different variations on the approach to corporate rescue and is not expected to yield a harmonised European approach to preventive restructuring. These differences may also create obstacles, both substantive and procedural in nature, to the coordination of cross-border preventive restructuring procedures among Member State courts. It is in this issue of court-to-court cooperation (enhanced under the EIR Recast), which has been the focus of the JCOERE Project. Among the many issues that arise in the context of restructuring, the assessment of restructuring plan fairness has been a key area of conflict.
Post-Merger Restructuring of the Labor Force
SSRN
We study the restructuring of the labor force after mergers and acquisitions. Overall restructuring is large. Net employment of targets declines by more than half within two years after acquisitions relative to a matched sample, and is concentrated in targets that close all establishments. There is a substantial increase in employee turnover. We place our analysis within a framework in which acquirers seek growth options from targets and provide managerial capabilities to organize production more efficiently. Consistent with this framework, we show that growth and turnover are both higher for managers, and that firms become more hierarchical if they grow and if they become more diversified. Acquirers have a better-educated, better-paid, and more qualified workforce than targets, and they adapt the workforce by hiring new employees who are much younger and less expensive. Mergers create internal labor markets, which are more active if firms have more managerial capacities. However, most hiring is external, especially for managers.
SSRN
We study the restructuring of the labor force after mergers and acquisitions. Overall restructuring is large. Net employment of targets declines by more than half within two years after acquisitions relative to a matched sample, and is concentrated in targets that close all establishments. There is a substantial increase in employee turnover. We place our analysis within a framework in which acquirers seek growth options from targets and provide managerial capabilities to organize production more efficiently. Consistent with this framework, we show that growth and turnover are both higher for managers, and that firms become more hierarchical if they grow and if they become more diversified. Acquirers have a better-educated, better-paid, and more qualified workforce than targets, and they adapt the workforce by hiring new employees who are much younger and less expensive. Mergers create internal labor markets, which are more active if firms have more managerial capacities. However, most hiring is external, especially for managers.
The Cost of Capital â€" A Back Up for Learners
SSRN
For investing in profitable ventures, the firms intend to recover the investment made in them. Thus, the determination of the respective cost of capital of a venture can provide a base for making decisions on whether to accept the project profitably. In this context, this paper provides some basic explanations to facilitate the learners of the cost of capital with appropriate exhibits for their easy understanding. This paper primarily attempts to explain and illustrate how the determination of the cost of capital for the investment of equity and debt capitals can be made. Relatively, the use of dividendâ€"price and earningsâ€"price measures, Capital Asset Pricing Model (CAPM), Weighted Average Cost of Capital (WACC), Weighted Marginal Cost of Capital (WMCC), and breaking points of financing sources are also explained meaningfully. Further, in determining the optimum capital budget considering various projects, the use of the investment opportunity curve (IOC) and WMCC is also explained and illustrated. Finally, some of the major problems in determining the cost of capital are presented in brief.
SSRN
For investing in profitable ventures, the firms intend to recover the investment made in them. Thus, the determination of the respective cost of capital of a venture can provide a base for making decisions on whether to accept the project profitably. In this context, this paper provides some basic explanations to facilitate the learners of the cost of capital with appropriate exhibits for their easy understanding. This paper primarily attempts to explain and illustrate how the determination of the cost of capital for the investment of equity and debt capitals can be made. Relatively, the use of dividendâ€"price and earningsâ€"price measures, Capital Asset Pricing Model (CAPM), Weighted Average Cost of Capital (WACC), Weighted Marginal Cost of Capital (WMCC), and breaking points of financing sources are also explained meaningfully. Further, in determining the optimum capital budget considering various projects, the use of the investment opportunity curve (IOC) and WMCC is also explained and illustrated. Finally, some of the major problems in determining the cost of capital are presented in brief.
The Cultural Origins of CEO Overconfidence
SSRN
We explore the role of cultural heritage in explaining CEOs overconfidence and its impact on the propensity and performance of corporate acquisitions. CEOs are more prone to overconfidence if the culture in their ancestral country of origin is characterized by strong individualism, independence, long-term orientation, and inequality. We find that the culture-related sources of CEO overconfidence have a significantly negative impact on acquisition performance.
SSRN
We explore the role of cultural heritage in explaining CEOs overconfidence and its impact on the propensity and performance of corporate acquisitions. CEOs are more prone to overconfidence if the culture in their ancestral country of origin is characterized by strong individualism, independence, long-term orientation, and inequality. We find that the culture-related sources of CEO overconfidence have a significantly negative impact on acquisition performance.
Why Corporation Tax Should Be Scrapped
SSRN
Corporation tax is an inefficient way to raise state revenue. It has a negative impact on growth, investment, and entrepreneurship. A 2014 review of the literature found that 57.6% of the amount raised by corporation tax is born by workers. Since 1981, the average corporate tax rate in key OECD countries has dropped from 47% to 29%. However, corporate tax revenues as a share of all taxation have remained stable during this time and even increased as a share of GDP. Economic developments, such as globalisation and the growing importance of intangible assets, underscore the need for reform of the way in which capital income is taxed. The only radical reform that would improve on the status quo without introducing new distortions would be to replace corporation tax with a tax on the income distributed to shareholders. Such a system would overcome the weaknesses of the current system, while reducing incentives for avoidance and raising revenue in a growth-friendly way. This reform could be implemented in stages to ensure the UK’s international tax treaties are updated. Once fully implemented, the new system would see UK shareholders taxed on their worldwide capital income, while foreign shareholders in UK firms would be exempt.
SSRN
Corporation tax is an inefficient way to raise state revenue. It has a negative impact on growth, investment, and entrepreneurship. A 2014 review of the literature found that 57.6% of the amount raised by corporation tax is born by workers. Since 1981, the average corporate tax rate in key OECD countries has dropped from 47% to 29%. However, corporate tax revenues as a share of all taxation have remained stable during this time and even increased as a share of GDP. Economic developments, such as globalisation and the growing importance of intangible assets, underscore the need for reform of the way in which capital income is taxed. The only radical reform that would improve on the status quo without introducing new distortions would be to replace corporation tax with a tax on the income distributed to shareholders. Such a system would overcome the weaknesses of the current system, while reducing incentives for avoidance and raising revenue in a growth-friendly way. This reform could be implemented in stages to ensure the UK’s international tax treaties are updated. Once fully implemented, the new system would see UK shareholders taxed on their worldwide capital income, while foreign shareholders in UK firms would be exempt.
