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Corporate Finance and Governance

Works Count: 157157

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This cluster of papers explores the relationship between corporate governance, investor protection, ownership structure, financial constraints, and their impact on firm performance, dividend policy, capital structure, board composition, and the role of institutional investors in mergers and acquisitions. It also investigates the influence of managerial traits, CEO characteristics, and the preferences of institutional investors on corporate financial policies.

Keywords

Corporate Governance; Investor Protection; Ownership Structure; Financial Constraints; Firm Performance; Dividend Policy; Capital Structure; Board Composition; Institutional Investors; Mergers and Acquisitions

Management ownership and market valuation

1988-01-01

Randall Mørck , Andrei Shleifer , Robert W. Vishny

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Legal Determinants of External Finance

1997-07-01

Rafael La Porta , Florencio López‐de‐Silanes , Andrei Shleifer +1 more

ABSTRACT Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have … ABSTRACT Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.

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Additional evidence on equity ownership and corporate value

1990-10-01

John J. McConnell , Henri Servaes

COUNTERSPECULATION, AUCTIONS, AND COMPETITIVE SEALED TENDERS

1961-03-01

William Vickrey

The investment opportunity set and corporate financing, dividend, and compensation policies

1992-12-01

Clifford W. Smith , Ross L. Watts

The Hubris Hypothesis of Corporate Takeovers

1986-01-01

Richard Roll

Despite many excellent research papers, we still do not fully understand the motives behind mergers and tender offers or whether they bring an increase in aggregate market value. In their … Despite many excellent research papers, we still do not fully understand the motives behind mergers and tender offers or whether they bring an increase in aggregate market value. In their comprehensive review article (from which the above quote is taken), Jensen and Ruback (1983) summarize the empirical work presented in over 40 The hubris hypothesis is advanced as an explanation of corporate takeovers. Hubris on the part of individual decision makers in bidding firms can explain why bids are made even when a valuation above the current market price represents a positive valuation error. Bidding firms infected by hubris simply pay too much for their targets. The empirical evidence in mergers and tender offers is reconsidered in the hubris context. It is argued that the evidence supports the hubris hypothesis as much as it supports other explanations such as taxes, synergy, and inefficient target management. * The earlier drafts of this paper elicited many comments. It is a pleasure to acknowledge the benefits derived from the generosity of so many colleagues. They corrected several conceptual and substantive errors in the previous draft, directed my attention to other results, and suggested other interpretations of the empirical phenomena. In general, they provided me with an invaluable tutorial on the subject of corporate takeovers. The present draft undoubtedly still contains errors and omissions, but this is due mainly to my inability to distill and convey the collective knowledge of the profession. Among those who helped were C. R. Alexander, Peter Bernstein, Thomas Copeland, Harry DeAngelo, Eugene Fama, Karen Farkas, Michael Firth, Mark Grinblatt, Gregg Jarrell, Bruce Lehmann, Paul Malatesta, Ronald Masulis, David Mayers, John McConnell, Merton Miller, Stephen Ross, Richard Ruback, Sheridan Titman, and, especially, Michael Jensen, Katherine Schipper, Walter A. Smith, Jr., and J. Fred Weston. I also benefited from the comments of the finance workshop participants at the University of Chicago, the University of Michigan, and Dartmouth College, and of the referees.

Property Rights and the Nature of the Firm

1990-12-01

Oliver Hart , John Moore

This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Following Grossman and Hart, we identify … This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Following Grossman and Hart, we identify a firm with the assets that its owners control. We argue that the crucial difference for party 1 between owning a firm (integration) and contracting for a service from another party 2 who owns this firm (nonintegration) is that, under integration, party 1 can selectively fire the workers of the firm (including party 2), whereas under nonintegration he can "fire" (i.e., stop dealing with) only the entire firm: the combination of party 2, the workers, and the firm's assets. We use this idea to study how changes in ownership affect the incentives of employees as well as those of owner-managers. Our framework is broad enough to encompass more general control structures than simple ownership: for example, partnerships and worker and consumer cooperatives all emerge as speical cases.

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Higher market valuation of companies with a small board of directors

1996-02-01

David Yermack

I present evidence consistent with theories that small boards of directors are more effective. Using Tobin's Q as an approximation of market valuation, I find an inverse association between board … I present evidence consistent with theories that small boards of directors are more effective. Using Tobin's Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentives from compensation and the threat of dismissal.

Corporate governance, chief executive officer compensation, and firm performance

1999-03-01

John E. Core , Robert W. Holthausen , David F. Larcker

Abstract We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the … Abstract We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse.

Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500

2003-05-06

Ronald C. Anderson , David M. Reeb

Abstract We investigate the relation between founding‐family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one‐third of the S&P 500 … Abstract We investigate the relation between founding‐family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one‐third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.

Outside directors and CEO turnover

1988-01-01

Michael S. Weisbach

The Determinants of Capital Structure Choice

1988-03-01

Sheridan Titman , Roberto E. Wessels

ABSTRACT This paper analyzes the explanatory power of some of the recent theories of optimal capital structure. The study extends empirical work on capital structure theory in three ways. First, … ABSTRACT This paper analyzes the explanatory power of some of the recent theories of optimal capital structure. The study extends empirical work on capital structure theory in three ways. First, it examines a much broader set of capital structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regard to different types of debt instruments, the authors analyze measures of short‐term, long‐term, and convertible debt rather than an aggregate measure of total debt. Third, the study uses a factor‐analytic technique that mitigates the measurement problems encountered when working with proxy variables.

Disentangling the Incentive and Entrenchment Effects of Large Shareholdings

2002-12-01

Stijn Claessens , Simeon Djankov , Joseph P. H. Fan +1 more

ABSTRACT This article disentangles the incentive and entrenchment effects of large ownership. Using data for 1,301 publicly traded corporations in eight East Asian economies, we find that firm value increases … ABSTRACT This article disentangles the incentive and entrenchment effects of large ownership. Using data for 1,301 publicly traded corporations in eight East Asian economies, we find that firm value increases with the cash‐flow ownership of the largest shareholder, consistent with a positive incentive effect. But firm value falls when the control rights of the largest shareholder exceed its cash‐flow ownership, consistent with an entrenchment effect. Given that concentrated corporate ownership is predominant in most countries, these findings have relevance for corporate governance across the world.

The Theory of Capital Structure

1991-03-01

Milton Harris , Artur Raviv

ABSTRACT This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax‐based theories). For each type of model, a … ABSTRACT This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax‐based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided.

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Dividend Policy, Growth, and the Valuation of Shares

1961-01-01

Merton H. Miller , Franco Modigliani

In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. … In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. We shall begin, in Section I , by examining the effects the effects of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty. Still within this convenient analytical framework we shall go on in Section II and III to consider certain closely related issues that appear to have been responsible for considerable misunderstanding of the role of dividend policy. In particular, Section II will focus on the longstanding debate about what investors really capitalize when they buy shares; and Section III on the much mooted relations between price, the rate of growth of profits, and the rate of dividends per share. Once these fundamentals have been established, we shall proceed in Section IV to drop the assumption of certainty and to see the extent to which the earlier conclusions about dividend policy must be modified. Finally, in Section V , we shall briefly examine the implications for the dividend policy problem of certain kinds of market imperfections.

Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?

1997-02-01

S. N. Kaplan , Luigi Zingales

No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. … No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.

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FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY

1968-09-01

Edward I. Altman

Managerial discretion and optimal financing policies

1990-07-01

René M. Stulz

Large Shareholders and Corporate Control

1986-06-01

Andrei Shleifer , Robert W. Vishny

In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management. We explore a model in which the presence … In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management. We explore a model in which the presence of a large minority shareholder provides a partial solution to this free-rider problem. The model sheds light on the following questions: Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up? How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm? Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?

Enjoying the Quiet Life? Corporate Governance and Managerial Preferences

2003-09-23

Marianne Bertrand , Sendhil Mullainathan

Much of our understanding of corporations builds on the idea that managers, when they are not closely monitored, will pursue goals that are not in shareholders' interests. But what goals … Much of our understanding of corporations builds on the idea that managers, when they are not closely monitored, will pursue goals that are not in shareholders' interests. But what goals would managers pursue? This paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences. We use plant‐level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws. We find that when managers are insulated from takeovers, worker wages (especially those of white‐collar workers) rise. The destruction of old plants falls, but the creation of new plants also falls. Finally, overall productivity and profitability decline in response to these laws. Our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life.

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The Benefits of Lending Relationships: Evidence from Small Business Data

1994-03-01

Mitchell A. Petersen , Raghuram G. Rajan

ABSTRACT This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey … ABSTRACT This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. The primary benefit of building close ties with an institutional creditor is that the availability of financing increases. We find smaller effects on the price of credit. Attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. In sum, relationships are valuable and appear to operate more through quantities rather than prices.

Financing Constraints and Corporate Investment

1988-01-01

Steven M. Fazzari , R. Glenn Hubbard , Bruce C. Petersen +2 more

Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the of or q). An alternative approach … Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the of or q). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a hierarchy, in which internal finance has important cost advantages over external finance. We build on recent research concerning imperfections in markets for equity and debt. This work suggests that some firms do not have sufficient access to external capital markets to enable them to respond to changes in the cost of capital, asset prices, or tax-based investment incentives. To the extent that firms are constrained in their ability to raise funds externally, investment spending may be sensitive to the availability of internal finance. That is, investment may display excess sensitivity to movements in cash flow. In this paper, we work within the q theory of investment, and examine the importance of a financing hierarchy created by capital-market imperfections. Using panel data on individual manufacturing firms, we compare the investment behavior of rapidly growing firms that exhaust all of their internal finance with that of mature firms paying dividends. We find that q values remain very high for significant periods of time for firms paying no dividends, relative to those for mature firms. We also find that investment is more sensitive to cash flow for the group of firms that our model implies is most likely to face external finance constraints. These results are consistent with the augmented model we propose, which takes into account different financing regimes for different groups of firms. Some extensions and implications for public policy are discussed at the end.

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Agency costs of free cash flow, corporate finance, and takeovers

1996-03-29

Michael C. Jensen

Corporate managers are the agents of shareholders; a relationship fraught with conflicting interests. Agency theory, the analysis of such conflicts, is now a major part of the economics literature. The … Corporate managers are the agents of shareholders; a relationship fraught with conflicting interests. Agency theory, the analysis of such conflicts, is now a major part of the economics literature. The payout of cash to shareholders creates major conflicts that have received little attention. Payouts to shareholders reduce the resources under managers' control, thereby reducing managers' power, and making it more likely they will incur the monitoring of the capital markets which occurs when the firm must obtain new capital. Financing projects internally avoids this monitoring and the possibility the funds will be unavailable or available only at high explicit prices.

Investor protection and corporate governance

2000-01-01

Rafael La Porta , Florencio López‐de‐Silanes , Andrei Shleifer +1 more

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The Capital Structure Puzzle

1984-07-01

Stewart C. Myers

Stewart C. Myers President of American Finance Association 1983 This paper's title is intended to remind you of Fischer Black's well-known note on “The Dividend Puzzle,” which he closed by … Stewart C. Myers President of American Finance Association 1983 This paper's title is intended to remind you of Fischer Black's well-known note on “The Dividend Puzzle,” which he closed by saying, “What should the corporation do about dividend policy? We don't know.” 6 I will start by asking, “How do firms choose their capital structures?” Again, the answer is, “We don't know.” The capital structure puzzle is tougher than the dividend one. We know quite a bit about dividend policy. John Lintner's model of how firms set dividends 20 dates back to 1956, and it still seems to work. We know stock prices respond to unanticipated dividend changes, so it is clear that dividends have information content—this observation dates back at least to Miller and Modigliani (MM) in 1961 28. We do not know whether high dividend yield increases the expected rate of return demanded by investors, as adding taxes to the MM proof of dividend irrelevance suggests, but financial economists are at least hammering away at this issue. By contrast, we know very little about capital structure. We do not know how firms choose the debt, equity or hybrid securities they issue. We have only recently discovered that capital structure changes convey information to investors. There has been little if any research testing whether the relationship between financial leverage and investors' required return is as the pure MM theory predicts. In general, we have inadequate understanding of corporate financing behavior, and of how that behavior affects security returns. I do not want to sound too pessimistic or discouraged. We have accumulated many helpful insights into capital structure choice, starting with the most important one, MM's No Magic in Leverage Theorem (Proposition I) 31. We have thought long and hard about what these insights imply for optimal capital structure. Many of us have translated these theories, or stories, of optimal capital structure into more or less definite advice to managers. But our theories don't seem to explain actual financing behavior, and it seems presumptuous to advise firms on optimal capital structure when we are so far from explaining actual decisions. I have done more than my share of writing on optimal capital structure, so I take this opportunity to make amends, and to try to push research in some new directions. A static tradeoff framework, in which the firm is viewed as setting a target debt-to-value ratio and gradually moving towards it, in much the same way that a firm adjusts dividends to move towards a target payout ratio. An old-fashioned pecking order framework, in which the firm prefers internal to external financing, and debt to equity if it issues securities. In the pure pecking order theory, the firm has no well-defined target debt-to-value ratio. Recent theoretical work has breathed new life into the pecking order framework. I will argue that this theory performs at least as well as the static tradeoff theory in explaining what we know about actual financing choices and their average impacts on stock prices. I have arbitrarily, and probably unfairly, excluded “managerial” theories which might explain firms' capital structure choices.1 I have chosen not to consider models which cut the umbilical cord that ties managers' acts to stockholders' interests. I am also sidestepping Miller's idea of “neutral mutation.”2 He suggests that firms fall into some financing patterns or habits which have no material effect on firm value. The habits may make managers feel better, and since they do no harm, no one cares to stop or change them. Thus someone who identifies these habits and uses them to predict financing behavior would not be explaining anything important. The neutral mutations idea is important as a warning. Given time and imagination, economists can usually invent some model that assigns apparent economic rationality to any random event. But taking neutral mutation as a strict null hypothesis makes the game of research too tough to play. If an economist identifies costs of various financing strategies, obtains independent evidence that the costs are really there, and then builds a model based on these costs which explains firms' financing behavior, then some progress has been made, even if it proves difficult to demonstrate that, say, a type A financing strategy gives higher firm value than a type B. (In fact, we would never see type B if all firms follow value-maximizing strategies.) There is another reason for not immediately embracing neutral mutations: we know investors are interested in the firm's financing choices, because stock prices change when the choices are announced. The change might be explained as an “information effect” having nothing to do with financing per se—but again, it is a bit too easy to wait until the results of an event study are in, and then to think of an information story to explain them. On the other hand, if one starts by assuming that managers have special information, builds a model of how that information changes financing choices, and predicts which choices will be interpreted by investors as good or bad news, then some progress has been made. So this paper is designed as a one-on-one competition of the static tradeoff and pecking-order stories. If neither story explains actual behavior, the neutral mutations story will be there faithfully waiting. A firm's optimal debt ratio is usually viewed as determined by a tradeoff of the costs and benefits of borrowing, holding the firm's assets and investment plans constant. The firm is portrayed as balancing the value of interest tax shields against various costs of bankruptcy or financial embarassment. Of course, there is controversy about how valuable the tax shields are, and which, if any, of the costs of financial embarassment are material, but these disagreements give only variations on a theme. The firm is supposed to substitute debt for equity, or equity for debt, until the value of the firm is maximized. Thus the debt-equity tradeoff is as illustrated in Fig. 1. Costs of adjustment. If there were no costs of adjustment, and the static tradeoff theory is correct, then each firm's observed debt-to-value ratio should be its optimal ratio. However, there must be costs, and therefore lags, in adjusting to the optimum. Firms can not immediately offset the random events that bump them away from the optimum, so there should be some cross-sectional dispersion of actual debt ratios across a sample of firms having the same target ratio. The static-tradeoff theory of capital structure. Large adjustment costs could possibly explain the observed wide variation in actual debt ratios, since firms would be forced into long excursions away from their optimal ratios. But there is nothing in the usual static tradeoff stories suggesting that adjustment costs are a first-order concern—in fact, they are rarely mentioned. Invoking them without modelling them is a cop-out. Any cross-sectional test of financing behavior should specify whether firms' debt ratios differ because they have different optimal ratios or because their actual ratios diverge from optimal ones. It is easy to get the two cases mixed up. For example, think of the early cross-sectional studies which attempted to test MM's Proposition I. These studies tried to find out whether differences in leverage affected the market value of the firm (or the market capitalization rate for its operating income). With hindsight, we can quickly see the problem: if adjustment costs are small, and each firm in the sample is at, or close to its optimum, then the in-sample dispersion of debt ratios must reflect differences in risk or in other variables affecting optimal capital structure. But then MM's Proposition I cannot be tested unless the effects of risk and other variables on firm value can be adjusted for. By now we have learned from experience how hard it is to hold “other things constant” in cross-sectional regressions. Of course, one way to make sense of these tests is to assume that adjustment costs are small, but managers don't know, or don't care, what the optimal debt ratio is, and thus do not stay close to it. The researcher then assumes some (usually unspecified) “managerial” theory of capital structure choice. This may be a convenient assumption for a cross-sectional test of MM's Proposition I, but not very helpful if the object is to understand financing behavior.3 But suppose we don't take this “managerial” fork. Then if adjustment costs are small, and firms stay near their target debt ratios, I find it hard to understand the observed diversity of capital structures across firms that seem similar in a static tradeoff framework. If adjustment costs are large, so that some firms take extended excursions away from their targets, then we ought to give less attention to refining our static tradeoff stories and relatively more to understanding what the adjustment costs are, why they are so important, and how rational managers would respond to them. But I am getting ahead of my story. On to debt and taxes. Debt and taxes. Miller's famous “Debt and Taxes” paper 27 cut us loose from the extreme implications of the original MM theory, which made interest tax shields so valuable that we could not explain why all firms were not awash in debt. Miller described an equilibrium of aggregate supply and demand for corporate debt, in which personal income taxes paid by the marginal investor in corporate debt just offset the corporate tax saving. However, since the equilibrium only determines aggregates, debt policy should not matter for any single taxpaying firm. Thus Miller's model allows us to explain the dispersion of actual debt policies without having to introduce non-value-maximizing managers.4 Trouble is, this explanation works only if we assume that all firms face approximately the same marginal tax rate, and that is an assumption we can immediately reject. The extensive trading of depreciation tax shields and investment tax credits, through financial leases and other devices, proves that plenty of firms face low marginal rates.5 Given significant differences in effective marginal tax rates, and given that the static tradeoff theory works, we would expect to find a strong tax effect in any cross-sectional test, regardless of whose theory of debt and taxes you believe. Figure 2 plots the net tax gain from corporate borrowing against the expected realizable tax shield from a future deduction of one dollar of interest paid. For some firms this number is 46 cents, or close to it. At the other extreme, there are firms with large unused loss carryforwards which pay no immediate taxes. An extra dollar of interest paid by these firms would create only a potential future deduction, usable when and if the firm earns enough to work off prior carryforwards. The expected realizable tax shield is positive but small. Also, there are firms paying taxes today which cannot be sure they will do so in the future. Such a firm values expected future interest tax shields at somewhere between zero and the full statutory rate. In the “corrected” MM theory 28 any tax-paying corporation gains by borrowing; the greater the marginal tax rate, the greater the gain. This gives the top line in the figure. In Miller's theory, the personal income taxes on interest payments would exactly offset the corporate interest tax shield, provided that the firm pays the full statutory tax rate. However, any firm paying a lower rate would see a net loss to corporate borrowing and a net gain to lending. This gives the bottom line. There are also compromise theories, advanced by D'Angelo and Masulis 12, Modigliani 30 and others, indicated by the middle dashed line in the figure. The compromise theories are appealing because they seem less extreme than either the MM or Miller theories. But regardless of which theory holds, the slope of the line is always positive. The difference between (1) the tax advantage of borrowing to firms facing the full statutory rate, and (2) the tax advantage of lending (or at least not borrowing) to firms with large tax loss carryforwards, is exactly the same as in the “extreme” theories. Thus, although the theories tell different stories about aggregate supply and demand of corporate debt, they make essentially the same predictions about which firms borrow more or less than average. The net tax gain to corporate borrowing. So the tax side of the static tradeoff theory predicts that IBM should borrow more than Bethlehem Steel, other things equal, and that General Motors' debt-to-value ratio should be more than Chrysler's. Costs of financial distress. Costs of financial distress include the legal and administrative costs of bankruptcy, as well as the subtler agency, moral hazard, monitoring and contracting costs which can erode firm value even if formal default is avoided. We know these costs exist, although we may debate their magnitude. For example, there is no satisfactory explanation of debt covenants unless agency costs and moral hazard problems are recognized. The literature on costs of financial distress supports two qualitative statements about financing behavior.6 Risky firms ought to borrow less, other things equal. Here “risk” would be defined as the variance rate of the market value of the firm's assets. The higher the variance rate, the greater the probability of default on any given package of debt claims. Since costs of financial distress are caused by threatened or actual default, safe firms ought to be able to borrow more before expected costs of financial distress offset the tax advantages of borrowing. Firms holding tangible assets-in-place having active second-hand markets will borrow less than firms holding specialized, intangible assets or valuable growth opportunities. The expected cost of financial distress depends not just on the probability of trouble, but the value lost if trouble comes. Specialized, intangible assets or growth opportunities are more likely to lose value in financial distress. Firms prefer internal finance. They adapt their target dividend payout ratios to their investment opportunities, although dividends are sticky and target payout ratios are only gradually adjusted to shifts in the extent of valuable investment opportunities. Sticky dividend policies, plus unpredictable fluctuations in profitability and investment opportunities, mean that internally-generated cash flow may be more or less than investment outlays. If it is less, the firm first draws down its cash balance or marketable securities portfolio.7 If external finance is required, firms issue the safest security first. That is, they start with debt, then possibly hybrid securities such as convertible bonds, then perhaps equity as a last resort. In this story, there is no well-defined target debt-equity mix, because there are two kinds of equity, internal and external, one at the top of the pecking order and one at the bottom. Each firm's observed debt ratio reflects its cumulative requirements for external finance. The pecking order literature. The pecking order hypothesis is hardly new.8 For example, it comes through loud and clear in Donaldson's 1961 study of the financing practices of a sample of large corporations. He observed 13 that “Management strongly favored internal generation as a source of new funds even to the exclusion of external funds except for occasional unavoidable ‘bulges’ in the need for funds.” These bulges were not generally met by cutting dividends: Reducing the “customary cash dividend payment… was unthinkable to most managements except as a defensive measure in a period of extreme financial distress” (p. 70). Given that external finance was needed, managers rarely thought of issuing stock: Though few companies would go so far as to rule out a sale of common under any circumstances, the large majority had not had such a sale in the past 20 years and did not anticipate one in the foreseeable future. This was particularly remarkable in view of the very high Price-Earnings ratios of recent years. Several financial officers showed that they were well aware that this had been a good time to sell common, but the reluctance still persisted. (pp. 57–58). Of course, the pecking order hypothesis can be quickly rejected if we require it to explain everything. There are plenty of examples of firms issuing stock when they could issue investment-grade debt. But when one looks at aggregates, the heavy reliance on internal finance and debt is clear. For all non-financial corporations over the decade 1973–1982, internally generated cash covered, on average, 62 percent of capital expenditures, including investment in inventory and other current assets. The bulk of required external financing came from borrowing. Net new stock issues were never more than 6 percent of external financing.9 Anyone innocent of modern finance who looked at these statistics would find the pecking order idea entirely plausible, at least as a description of typical behavior. Writers on “managerial capitalism” have interpreted firms' reliance on internal finance as a byproduct of the separation of ownership and control: professional managers avoid relying on external finance because it would subject them to the discipline of the capital market.10 Donaldson's 1969 book was not primarily about managerial capitalism, but he nevertheless observed that the financing decisions of the firms he studied were not directed towards maximizing shareholder wealth, and that scholars attempting to explain those decisions would have to start by recognizing the “managerial view” of corporate finance. 14 This conclusion is natural given the state of finance theory in the 1960s. Today, it is not so obvious that financing by a pecking order goes against shareholders' interests. External financing with asymmetric information. I used to ignore the pecking order story because I could think of no theoretical foundation for it that would fit in with the theory of modern finance. An argument could be made for internal financing to avoid issue costs, and if external finance is needed, for debt to avoid the still higher costs of equity. But issue costs in themselves do not seem large enough to override the costs and benefits of leverage emphasized in the static tradeoff story. However, recent work based on asymmetric information gives predictions roughly in line with the pecking order theory. The following brief exposition is based on a forthcoming joint paper by me and Nicholas Majluf 34, although I will here boil down that paper's argument to absolute essentials. Suppose the firm has to raise N dollars in order to undertake some potentially valuable investment opportunity. Let y be this opportunity's net present value (NPV) and x be what the firm will be worth if the opportunity is passed by. The firm's manager knows what x and y are, but investors in capital markets do not: they see only a joint distribution of possible values ( x ~ , y ~ ). The information asymmetry is taken as given. Aside from the information asymmetry, capital markets are perfect and semi-strong form efficient. MM's Proposition I holds in the sense that the stock of debt relative to real assets is irrelevant if information available to investors is held constant. The benefit to raising N dollars by a security issue is y, the NPV of the firm's investment opportunity. There is also a possible cost: the firm may have to sell the securities for less than they are really worth. Suppose the firm issues stock with an aggregate market value, when issued, of N. (I will consider debt issues in a moment.) However, the manager knows the shares are really worth N 1 . That is, N 1 is what the new shares will be worth, other things equal, when investors acquire the manager's special knowledge. Majluf and I discuss several possible objectives managers might pursue in this situation. The one we think makes the most sense is maximizing the “true,” or “intrinsic” value of the firm's existing shares. That is, the manager worries about the value of the “old” shareholders' stake in the firm. Moreover, investors know the manager will do this. In particular, the “new” investors who purchase any stock issue will assume that the manager is not on their side, and will rationally adjust the price they are willing to pay. If the manager's inside information is unfavorable, ΔN is negative and the firm will always issue, even if the only good use for the funds raised is to put them in the bank—a zero-NPV investment.11 If the inside information is favorable, however, the firm may pass up a positive-NPV investment opportunity rather than issue undervalued shares. Thus, given N, x and y, and given that stock is issued, the greater the price per share, the less value is given up to new stockholders, and the less ΔN is. The cost of relying on external financing. We usually think of the cost of external finance as administrative and underwriting costs, and in some cases underpricing of the new securities. Asymmetric information creates the possibility of a different sort of cost: the possibility that the firm will choose not to issue, and will therefore pass up a positive-NPV investment. This cost is avoided if the firm can retain enough internally-generated cash to cover its positive-NPV opportunities. The advantages of debt over equity issues. If the firm does seek external funds, it is better off issuing debt than equity securities. The general rule is, “Issue safe securities before risky ones.” This second point is worth explaining further. Remember that the firm issues and invests if y, the NPV of its investment opportunity, is greater than or equal to ΔN, the amount by which the new shares are undervalued ( if Δ N > 0 ) or overvalued ( if Δ N < 0 ) . For example, suppose the investment requires N = $ 10 million, but in order to raise that amount the firm must issue shares that are really worth $12 million. It will go ahead only if project NPV is at least $2 million. If it is worth only $1.5 million, the firm refuses to raise the money for it; the intrinsic overall value of the firm is reduced by $1.5 million, but the old shareholders are $0.5 million better off. The manager could have avoided this problem by building up the firm's cash reserves—but that is hindsight. The only thing he can do now is to redesign the security issue to reduce ΔN. For example, if ΔN could be cut to $0.5 million, the investment project could be financed without diluting the true value of existing shares. The way to reduce ΔN is to issue the safest possible securities—strictly speaking, securities whose future value changes least when the manager's inside information is revealed to the market. Of course, ΔN is endogenous, so it is loose talk to speak of the manager controlling it. However, there are reasonable cases in which the absolute value of ΔN is always less for debt than for equity. For example, if the firm can issue default-risk free debt, ΔN is zero, and the firm never passes up a valuable investment opportunity. Thus, the ability to issue default-risk free debt is as good as cash in the bank. Even if default risk is introduced, the absolute value of ΔN will be less for debt than for equity if we make the customary assumptions of option pricing models.13 Thus, if the manager has favorable information ( Δ N > 0 ) , it is better to issue debt than equity. This example assumes that new shares or risky debt would be underpriced. What if the managers' inside information is unfavorable, so that any risky security issue would be overpriced? In this case, wouldn't the firm want to make ΔN as large as possible, to take maximum advantage of new investors? If so, stock would seem better than debt (and warrants better still). The decision rule seems to be, “Issue debt when investors undervalue the firm, and equity, or some other risky security, when they overvalue it.” The trouble with this strategy is obvious once you put yourself in investors' shoes. If you know the firm will issue equity only when it is overpriced, and debt otherwise, you will refuse to buy equity unless the firm has already exhausted its “debt capacity”—that is, unless the firm has issued so much debt already that it would face substantial additional costs in issuing more. Thus investors would effectively force the firm to follow a pecking order. Now this is clearly too extreme. The model just presented would need lots of fleshing out before it could fully capture actual behavior. I have presented it just to show how models based on asymmetric information can predict the two central ideas of the pecking order story: first, the preference for internal finance, and, second, the preference for debt over equity if external financing is sought. I will now list what we know about financing behavior and try to make sense of this knowledge in terms of the two hypotheses sketched above. I begin with five facts about financing behavior, and then offer a few generalizations from weaker statistical evidence or personal observation. Of course even “facts” based on apparently good statistics have been known to melt away under further examination, so read with caution. Internal vs. external equity. Aggregate investment outlays are predominantly financed by debt issues and internally-generated funds. New stock issues play a relatively small part. Moreover, as Donaldson has observed, this is what many managers say they are trying to do. This fact is what suggested the pecking order hypothesis in the first place. However, it might also be explained in a static tradeoff theory by adding significant transaction costs of equity issues and noting the favorable tax treatment of capital gains relative to dividends. This would make external equity relatively expensive. It would explain why companies keep target dividend payouts low enough to avoid having to make regular stock issues.14 It would also explain why a firm whose debt ratio soars above target does not immediately issue stock, buy back debt, and re-establish a more moderate debt-to-value ratio. Thus firms might take extended excursions above their debt targets. (Note, however, that the static tradeoff hypothesis as usually presented rarely mentions this kind of adjustment cost.) But the out-of-pocket costs of repurchasing shares seems fairly small. It is thus hard to explain extended excursions below a firm's debt target by an augmented static tradeoff theory—the firm could quickly issue debt and buy back shares. Moreover, if personal income taxes are important in explaining firms' apparent preferences for internal equity, then it's difficult to explain why external equity is not strongly negative—that is, why most firms haven't gradually moved to materially lower target payout ratios and used the released cash to repurchase shares. Timing of security issues. Firms apparently try to “time” stock issues when security prices are “high.” Given that they seek external finance, they are more likely to issue stock (rather than debt) after stock prices have risen than after they have fallen. For example, past stock price movements were one of the best-performing variables in Marsh's study 22 of British firms' choices between new debt and new equity issues. Taggart 39 and others15 have found similar behavior in the United States. This fact is embarassing to static tradeoff advocates. If firm value rises, the debt-to-value ratio falls, and firms ought to issue debt, not equity, to rebalance their capital structures. The fact is equally embarassing to the pecking order hypothesis. There is no reason to believe that the manager's inside information is systematically more favorable when stock prices are “high.” Even if there were such a tendency, investors would have learned it by now, and would interpret the firm's issue decision accordingly. There is no way firms can systematically take advantage of purchasers of new equity in a rational expectations equilibrium. Borrowing against intangibles and growth opportunities. Firms holding valuable intangible assets or growth opportunities tend to borrow less than firms holding mostly tangible assets. For example, Long and Malitz 21 found a significant negative relationship between rates of investment in advertising and research and development (R & D) and the level of borrowing. They also found a significant positive relationship between the rate of capital expenditure (in fixed plant and equipment) and the level of borrowing. Williamson 41 reached the same conclusion by a different route. His proxy for a firm's intangibles and growth opportunities was the difference between the market value of its debt and equity securities and the replacement cost of its tangible assets. The higher this proxy, he found, the less the firm's debt-to-value ratio. There is plenty of indirect evidence indicating that the level of borrowing is determined not just by the value and risk of the firm's assets, but also by the type of assets it holds. For example, without this distinction, the static tradeoff theory would specify all target debt ratios in terms of market, not book values. Since many firms have market values far in excess of book values (even if those book values are restated in current dollars), we ought to see at least a few such firms operating comfortably at very high book debt ratios—and of course we do not. This fact begins to make sense, however, as soon as we realize that book values reflect assets-in-place (tangible assets and working capital). Market values reflect intangibles and growth opportunities as well as assets-in-place. Thus, firms do not set target book debt ratios because accountants certify the books. Book asset values are proxies for the values of assets in place.16 Exchange offers. Masulis 23, 24 has shown that stock prices rise, on average, when a firm offers

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The market for corporate control

1983-04-01

Michael C. Jensen , Richard S. Ruback

The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

1993-07-01

Michael C. Jensen

ABSTRACT Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As … ABSTRACT Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

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Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers

1986-01-01

Michael C. Jensen

The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially … The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.

New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index

2010-03-01

Charles J. Hadlock , Joshua R. Pierce

Journal Article New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index Get access Charles J. Hadlock, Charles J. Hadlock Search for other works by this author on: Oxford … Journal Article New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index Get access Charles J. Hadlock, Charles J. Hadlock Search for other works by this author on: Oxford Academic Google Scholar Joshua R. Pierce Joshua R. Pierce Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 23, Issue 5, May 2010, Pages 1909–1940, https://doi.org/10.1093/rfs/hhq009 Published: 01 March 2010

The separation of ownership and control in East Asian Corporations

2000-01-01

Stijn Claessens , Simeon Djankov , Larry H.P. Lang

The ultimate ownership of Western European corporations

2002-08-26

Mara Faccio , Larry H.P. Lang

A Survey of Corporate Governance

1997-06-01

Andrei Shleifer , Robert W. Vishny

ABSTRACT This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. ABSTRACT This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

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Law and Finance

1998-12-01

Rafael La Porta , Florencio López‐de‐Silanes , Andrei Shleifer +1 more

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that … This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common‐law countries generally have the strongest, and frenchcivillaw countries the weakest, legal protections of investors, with German‐and scandinavin‐civil‐law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negativelyrelated to investor protections, consistent with the hypothesis that small, diversified share‐holders are unlikely to be important in countries that fail to protect their rights.

Earnings management and investor protection: an international comparison

2003-05-13

Christian Leuz , Dhananjay Nanda , Peter D. Wysocki

Corporate Ownership Around the World

1999-04-01

Rafael La Porta , Florencio López‐de‐Silanes , Andrei Shleifer

ABSTRACT We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with … ABSTRACT We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.

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The theory and practice of corporate finance: evidence from the field

2001-05-01

John R. Graham , Campbell R. Harvey

Women in the boardroom and their impact on governance and performance☆

2009-08-05

Renée B. Adams , Daniel Ferreira

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How do family ownership, control and management affect firm value?

2005-11-03

Belén Villalonga , Raphael Amit

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The Regulation of Entry

2002-02-01

Simeon Djankov , Rafael La Porta , Florencio López‐de‐Silanes +1 more

We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up … We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.

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Corporate financing and investment decisions when firms have information that investors do not have

1984-06-01

Stewart C. Myers , Nicholas S. Majluf

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Market Timing and Capital Structure

2002-02-01

Malcolm Baker , Jeffrey Wurgler

ABSTRACT It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity … ABSTRACT It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

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Investor Protection and Corporate Valuation

2002-06-01

Rafael La Porta , Florencio López‐de‐Silanes , Andrei Shleifer +1 more

ABSTRACT We present a model of the effects of legal protection of minority shareholders and of cash‐flow ownership by a controlling shareholder on the valuation of firms. We then test … ABSTRACT We present a model of the effects of legal protection of minority shareholders and of cash‐flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cash‐flow ownership by the controlling shareholder.

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Law, finance, and economic growth in China

2005-04-02

Fred H. Allen , Jun Qian , Meijun Qian

The determinants and implications of corporate cash holdings

1999-04-01

Tim C. Opler

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What Do We Know about Capital Structure? Some Evidence from International Data

1995-12-01

Raghuram G. Rajan , Luigi Zingales

We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar … We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the United States, are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

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Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches

2008-06-03

Mitchell A. Petersen

Journal Article Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches Get access Mitchell A. Petersen Mitchell A. Petersen Search for other works by this author on: Oxford Academic … Journal Article Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches Get access Mitchell A. Petersen Mitchell A. Petersen Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 22, Issue 1, January 2009, Pages 435–480, https://doi.org/10.1093/rfs/hhn053 Published: 03 June 2008

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Performance Pay and Top-Management Incentives

1990-04-01

Michael C. Jensen , Kevin J. Murphy

Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. Although … Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of their firm's stock, and ownership levels have declined over the past 50 years. We hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis.

Corporate Governance and Equity Prices

2003-02-01

Paul A. Gompers , Joy Ishii , Andrew Metrick

Shareholder rights vary across firms. Using the incidence of 24 governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms … Shareholder rights vary across firms. Using the incidence of 24 governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.

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Corporate Governance and Risk Management in Improving Company Performance: A Literature Review Study

2025-06-25

Gebrina Noviliani , Saparila Worokinasih , Nur Imamah | KnE Social Sciences

This research analyzes the interplay of corporate governance (CG), risk management (RM), and their combined impact on firm performance. As businesses operate in increasingly complex environments, the role of governance … This research analyzes the interplay of corporate governance (CG), risk management (RM), and their combined impact on firm performance. As businesses operate in increasingly complex environments, the role of governance and managing risks becomes crucial in ensuring long-term stability and growth. By employing a systematic literature review (SLR) approach, the research investigates relevant journal articles published between 2014 and 2024. The data were sourced from Scopus and Web of Science, using a structured search strategy according to the block-building method to classify search terms. A total of 572 articles were initially selected, and after further screening, 13 key studies were reviewed in-depth. The findings reveal a growing academic focus on the significance of CG and RM in enhancing firm performance. Specifically, the research highlights that companies with strong governance frameworks and effective RM strategies tend to perform better, both in financial terms and sustainability metrics. Moreover, the study identifies certain gaps in existing literature, particularly regarding the integration of sustainability practices and information technology (IT) into RM frameworks. These gaps suggest potential directions for future research to explore more comprehensive approaches in CG and RM, especially in the context of rapidly evolving global business environments. The study underscores the importance of continuous improvement in these areas to drive firm success and resilience.

Determinants of dividend policy in BRICS-T countries

2025-06-25

Ömer Serkan GÜLAL , Levent Çıtak | Nevşehir Hacı Bektaş Veli Üniversitesi SBE Dergisi

This study investigates the drivers that influence dividend policies in BRICS-T countries, including Brazil, Russia, India, China, South Africa, and Turkey as a potential new member to BRICS, from 2008 … This study investigates the drivers that influence dividend policies in BRICS-T countries, including Brazil, Russia, India, China, South Africa, and Turkey as a potential new member to BRICS, from 2008 to 2018. By employing the Driscoll-Kraay panel data estimator, paper examines the effects of variables including profitability, risk, growth opportunities, leverage, size, and liquidity on dividend policies at firm level. The sample comprises 296 non-financial sector companies chosen from the BRICS-T economies. The findings show that firm profitability and firm size have a positive effect on dividend payout, while debt level, firm risk and growth opportunities have a negative effect on dividend payouts. These results confirm the signal effect and the life cycle theory for the specified markets. The study aims to fill the gap in the literature. about the drivers of dividend policy and provides a framework for how firm and market characteristics shape dividend decisions in the BRICS-T countries. Furthermore, we highlight the importance of firm-specific dynamics in understanding dividend behavior, providing insights for policymakers and investors operating in these emerging economies.

Corporate Governance in Two Decades: A Bibliometric and Citation Network Analysis

2025-06-25

Muhаmmаd Sаifi , Intan Lifinda Ayuning Putri , Langgeng Setyono +2 more | KnE Social Sciences

This study presents a comprehensive bibliometric and citation network analysis of corporate governance literature spanning two decades, from 2004 to 2024. Utilizing the Scopus database, the research employs advanced analytical … This study presents a comprehensive bibliometric and citation network analysis of corporate governance literature spanning two decades, from 2004 to 2024. Utilizing the Scopus database, the research employs advanced analytical tools such as R-Bibliometrix and VOSviewer to systematically analyze and visualize the scientific literature on corporate governance. The primary aim is to identify the most influential authors, institutions, and countries in the field, while also uncovering key themes and trends that have shaped the discourse over the past 20 years. This research contributes significantly to the understanding of the corporate governance landscape by providing a thorough overview of the existing literature, highlighting gaps for future research, and offering valuable insights into the field’s evolution. Furthermore, it demonstrates the effectiveness of bibliometric and network analysis tools in revealing the complex interconnections within academic discussions on corporate governance. As such, this study serves as a valuable resource for researchers, policymakers, and practitioners interested in the development and future direction of corporate governance.

Exploring Stock Returns Volatility of Select NSE – Listed Diversified Sector Companies: An Empirical Study

2025-06-24

Siddhartha Saha , Tapas Kumar Tripathy | International Journal of Global Research Innovations & Technology (IJGRIT).

Global financial meltdowns have massive shock on different sectors as well as on scripts returns. The study empirically examines the stock returns volatility of selected NSE-listed diversified sector companies to … Global financial meltdowns have massive shock on different sectors as well as on scripts returns. The study empirically examines the stock returns volatility of selected NSE-listed diversified sector companies to assess their risk exposure and market behavior based on time series dataset taking into consideration of daily closing adjusted stock price from 2001-02 to 2015-16. The application of GARCH, T-GARCH and E-GARCH models provides the evidence of the persistence of time varying asymmetric volatility. The findings reveal significant variations in stock return volatility among diversified firms, influenced by market conditions, and firm-specific factors due to recent global financial meltdown which is originated from US sub-prime crisis. The study also explores the effect captured by different models show that negative shocks have significant effect on conditional volatility.

ROLE OF RISK RETURN TRADE-OFF ON LONG TERM INVESTMENT DECISIONS BY RETAIL INVESTORS: AN EMPIRICALSTUDY

2025-06-24

Shivangi Ameriya | Journal of Informatics Education and Research

Recent studies in empirical finance have shown that, anticipated excess returns on stocks and bonds, real interest rates, and levels of risk change over time in patterns that can often, … Recent studies in empirical finance have shown that, anticipated excess returns on stocks and bonds, real interest rates, and levels of risk change over time in patterns that can often, be predicted. Moreover, these trends usually continue for extended periods. Through this research work, we tend to introduce an empirical model designed to capture these intricate patterns while remaining straight forward to use in real-world scenarios. We also examine what this model means for asset allocation decisions. Shifts in investment opportunities can impact the balance between risk and return for bonds, stocks, and cash over different time horizons, leading to what is known as a "term structure of the risk-return trade-off.” This paper explores how changing investment opportunities affect risk over various time horizons. We also present an empirical study that effectively reflects the intricate patterns of expected returns and risk, while remaining practical and easy to implement. While the concept is strongly supported in theory, real-world evidence has shown mixed results this analysis is especially relevant for retail investors looking to understand international investment dynamics. A study survey was conducted among 213 retail investors to know the role of risk-return trade-offs on long-term investment decisions by retail investors and concluded that risk-return trade-offs in the long term play a crucial and significant role in investment decisions.

Does Size Determine Financial Performance of Advertising and Marketing Companies? Evidence from Western Europe on SDGs

2025-06-24

Тетяна Завалій , Iryna Zhyhlei , Олена Івашко +1 more | Sustainability

The relationship between firm size and the financial performance of advertising and marketing companies remains understudied in the academic literature, including in the regional context. Using a panel data methodology, … The relationship between firm size and the financial performance of advertising and marketing companies remains understudied in the academic literature, including in the regional context. Using a panel data methodology, this study analyzes the impact of three proxies for firm size (total assets, number of employees, and sales) on the financial performance (return on assets and profit margin) of the 500 most profitable advertising and marketing companies from 16 Western European countries over the period 2019–2023. Weighted least squares regression analysis revealed statistically significant negative effects of all three proxies for firm size on financial performance, with the strongest negative effects on total assets on return on assets and sales on profit margin, which is similar to return on sales. Empirical data confirm the inverse relationship between total assets and their profitability; this indicates the advantages of resource-optimized business models with high management flexibility and effective use of intellectual capital compared to material-intensive structures. The inverse relationship between the number of employees and financial performance is due to higher operating personnel costs and the difficulty of effectively managing human resources as the number of employees increases. Increased sales negatively affect profit margins, demonstrating a decrease in the efficiency of converting revenue into profits as operations expand. These findings are important for developing effective financial management strategies and making investment decisions in the industry under study. The research contributes to SDGs 8, 9, and 12 by demonstrating how resource-optimized structures with higher management flexibility and effective use of intellectual capital can outperform material-intensive structures in the advertising and marketing industry.

The dark side of earnings pressure: the case of firms’ collaborative innovation

2025-06-24

Ge Ren , Ping Zeng , Xi Zhong | Industry and Innovation

Institutional investors’ limited attention and corporate investment efficiency: evidence from China

2025-06-24

Yiyun Zhao | Asia-Pacific Journal of Accounting & Economics

Determinants and consequences of COVID-19 vaccine mandates

2025-06-24

Jack Badger , Justin Short | Journal of Accounting and Public Policy

Board composition, executive compensation, and capital structure: panel evidence from India

2025-06-24

Mohit Pathak , Arti Chandani , Prashant Ubarhande +1 more | International Journal of Disclosure and Governance

Assessing the Impact of Dividend Policy on Firm’s Value: Empirical Review of Three Manufacturing Companies in Nigeria

2025-06-24

B. Odufisan , Olusola Adekunle , Olalekan Akinrinola | African Journal of Accounting and Financial Research

This study examines the impact of dividend policy on firm value in selected manufacturing firms in Nigeria. Using secondary data obtained from the annual reports of Nestle Nigeria Plc, Cadbury … This study examines the impact of dividend policy on firm value in selected manufacturing firms in Nigeria. Using secondary data obtained from the annual reports of Nestle Nigeria Plc, Cadbury Nigeria Plc, and Guinness Nigeria Plc from 2019 to 2023, the study employes panel data regression analysis to analyse the relationship between dividend policy proxies, such as dividend payout ratio, retention ratio, and dividend per share, and firm value measured by market price per share. The Hausman test was conducted to determine the appropriate regression model. Findings revealed that dividend payout ratio has an insignificant effect (Prob. F-Stat = 0.762692) on market price per share since the p-value was greater than 5% level of significance. Additionally, the retention ratio has a significant effect (Prob. F-Stat = 0.000000) on the market price per share since the p-value was less than 5% level of significance. Also, dividend per share has an insignificant effect (Prob. F-Stat = 0.919624) on market price per share since the p-value was greater than 5% level of significance. The study recommended that manufacturing firms adopt a balanced dividend policy to enhance investors’ confidence while ensuring financial stability and growth, and corporate managers should consider reinvestment opportunities alongside dividend payments to maximize shareholder wealth.

Boardroom Stewardship: Exploring Director Compensation, Integrity, and Social Responsibility

2025-06-24

Suntharee Lhaopadchan , Pattarake Sarajoti , Sirimon Treepongkaruna | Corporate Social Responsibility and Environmental Management

ABSTRACT Relying on data from Thai listed firms over the period of 2015–2020, we explore the effect of outside director compensation on corporate social responsibility (CSR) and integrity, as measured … ABSTRACT Relying on data from Thai listed firms over the period of 2015–2020, we explore the effect of outside director compensation on corporate social responsibility (CSR) and integrity, as measured by the Anti‐Corruption in Practice (ACRP) indicator, which captures the extent to which firms implement and disclose anti‐corruption measures. We find a statistically significant positive impact of outside director compensation on both CSR and ACRP in all models, while inside director compensation has an opposite impact with statistical significance in some models. Consistent with the stewardship hypothesis, highly compensated outside directors provide stronger oversight and better balance stakeholder interests, contributing to enhanced integrity and CSR outcomes. A one standard deviation increase in the pay for independent (non‐executive) directors increases CSR and ACRP by 17.85% (11.76%) and 14.65% (13.11%), respectively. In contrast, higher compensation for inside directors is associated with behavior aligned with the agency hypothesis. Our findings are robust after addressing endogeneity using panel fixed effects and two‐stage least squares regression approaches.

On the Relationship Between Financial Distress and ESG Scores

2025-06-24

Christian Lohmann , Steffen Möllenhoff , Sebastian Lehner | Corporate Social Responsibility and Environmental Management

ABSTRACT This empirical study analyzes the relationship between a company's financial distress obtained from a bankruptcy prediction model and ESG scores from Refinitiv, MSCI, ESG Book, and Moody's ESG. Applying … ABSTRACT This empirical study analyzes the relationship between a company's financial distress obtained from a bankruptcy prediction model and ESG scores from Refinitiv, MSCI, ESG Book, and Moody's ESG. Applying a nonparametric regression technique on panel data of listed US companies for 2003–2022 reveals a pronounced and statistically significant U‐shaped relationship between financial distress and ESG scores. Financially distressed companies exhibit high ESG scores. Further empirical analysis shows that the most plausible interpretation is that companies anticipate their upcoming financial distress and intensify ESG‐supporting disclosures to manage their ESG scores upward. The empirical results underline the importance of including the financial health of a company in ESG assessments. Only by taking into account both the ESG performance and the financial sustainability of a company is it possible to assess responsible corporate governance.

Interplay of Institutional Ownership and Negative Media Coverage on Firms’ High‐Investment Human Resource Management Systems

2025-06-24

Kaifeng Jiang , Wei Shi , Xin Wen | Personnel Psychology

ABSTRACT We respond to calls for research on the antecedents of human resource management (HRM) systems by exploring the main effects of institutional ownership and the moderating role of negative … ABSTRACT We respond to calls for research on the antecedents of human resource management (HRM) systems by exploring the main effects of institutional ownership and the moderating role of negative media coverage. Drawing upon resource dependence theory, we propose that a firm's dedicated institutional ownership is positively related to its use of high‐investment HRM systems. Conversely, transient institutional ownership is negatively associated with such use. Additionally, we theorize that negative media coverage related to labor and employment issues weakens both the positive relationship of dedicated institutional ownership and the negative relationship of transient institutional ownership with high‐investment HRM systems. Using longitudinal archival data on a sample of US‐listed firms from 2007 to 2017 ( N = 5727 firm‐year observations), we found support for a positive relationship between dedicated institutional ownership and high‐investment HRM systems as well as the role of negative media coverage in weakening the positive relationship of dedicated institutional ownership and the negative relationship of transient institutional ownership with high‐investment HRM systems. Our paper advances research on antecedents of HRM systems by highlighting the roles of external stakeholders in affecting firms’ HRM systems. It also contributes to resource dependence theory by showing how firms manage their dependencies on multiple stakeholders. Our findings provide implications for both practitioners and policymakers.

Thomas Clarke, Wafa Khlif, and Coral Ingley (eds): Elgar encyclopedia of corporate governance Edward Elgar publishing, 2024

2025-06-24

Laura F. Spira | Journal of Management & Governance

Stop Where it Should Stop: Board Faultlines, Stakeholder Supervision and Greenwashing Behaviors of Firms

2025-06-23

Xuejiao Ma , Xiaojun Ma , Fei Wei +2 more | Journal of Business Ethics

Dividend announcements and share price dynamics: new evidence from Saudi-listed companies using event study approach

2025-06-23

Layla Abaalkhail , Thomas McCluskey , David Power | Frontiers in Applied Mathematics and Statistics

Although a considerable number of empirical studies have been conducted in developed markets to examine dividend signaling effects, very few comparable studies have been carried out in the Saudi market … Although a considerable number of empirical studies have been conducted in developed markets to examine dividend signaling effects, very few comparable studies have been carried out in the Saudi market context. This study deeply investigates how the Saudi exchange market may have reacted to dividend news during an eight-year study period from a total sample of 280 dividend announcements made by 99 Saudi-listed companies. Results demonstrate that a company’s share price reacts to the announcement of a cash dividend during the event window. Besides, findings reveal a significant positive reaction in the share price at the time of the announcement of an increase in the dividend payment level. Furthermore, results demonstrate that the abnormal return is negative but not significantly different from zero at the time of the announcement of a decrease in the dividend payment level. Likewise, findings show that the shareholders earn just normal returns on the announcement day and that the abnormal return is not statistically different from zero for the dividend, not change group. The findings suggest potential information leakage before dividend announcements, raising concerns about insider trading. This highlights the need for stronger regulatory oversight and stricter disclosure enforcement. Companies should also use alternative communication channels to improve transparency and consider corporate social responsibility initiatives to signal their quality to investors.

Market competition, resource allocation and corporate ESG performance

2025-06-23

Changqing Li , Li Yu | Eurasian Economic Review

The Impact of Financial Management on the Performance of Listed Companies on the Vietnamese Stock Market

2025-06-23

D. Thanh | Deleted Journal

This study examines the internal and external factors that shape corporate culture in Vietnamese small and medium-sized enterprises (SMEs). Drawing on established theoretical frameworks – including Schein’s organizational culture model, … This study examines the internal and external factors that shape corporate culture in Vietnamese small and medium-sized enterprises (SMEs). Drawing on established theoretical frameworks – including Schein’s organizational culture model, Hofstede’s cultural dimensions, and the Competing Values Framework – we develop a conceptual model linking leadership, organizational values, internal communications, and external environmental influences to corporate culture. A quantitative survey was simulated for 300 employees and managers in Vietnamese SMEs, and data were analyzed using structural equation modeling (SEM). The results suggest that internal factors such as leadership style, clarity of vision/mission, and open communication have a significant positive impact on corporate culture strength and type. Among external factors, national cultural context (e.g. high collectivism and power distance in Vietnam) and market environment dynamics also influence corporate culture, albeit more indirectly. Notably, leadership’s role emerged as the strongest determinant of corporate culture (standardized β ≈ 0.35, p < 0.001), reinforcing the idea that founders and top managers imprint core values and norms. External factors like competitive pressure showed a moderate effect (β ≈ 0.20, p < 0.01), indicating that adapting to market changes is also crucial. These findings highlight the interplay between internal leadership-driven forces and the broader socio-cultural context in shaping SME cultures. The study contributes to literature on organizational culture in developing economies and offers practical implications: Vietnamese SME leaders should actively cultivate supportive, adaptive cultures, and policymakers should continue promoting initiatives (such as the national “Vietnamese Business Culture Criteria”) to foster healthy corporate culture. Implications for theory and practice are discussed, emphasizing that a strong, adaptable corporate culture can enhance knowledge sharing, employee commitment, and overall SME performance in Vietnam’s dynamic economy.

Modelling the non-linear effects of ownership structure on total productivity growth of firms: a threshold panel regression and Malmquist approach

2025-06-23

Masoumeh Azimi , Mehdi Fathabadi , Abdolreza Talaneh +2 more | International Journal of Productivity and Performance Management

Purpose This study aims to assess the non-linear effects of state and major shareholder ownership on the total productivity (TFP) growth of 36 companies listed on Iran’s Stock Exchange over … Purpose This study aims to assess the non-linear effects of state and major shareholder ownership on the total productivity (TFP) growth of 36 companies listed on Iran’s Stock Exchange over the period from 2017 to 2023. Design/methodology/approach The Malmquist index was employed to estimate TFP growth, which it dicomposed into two components: efficiency and technical change. Subsequently, the state and major shareholder ownership effects on TFP growth were evaluated using a threshold panel regression approach. Findings The results revealed that the TFP growth was 0.3%. Efficiency change contributed positively with a growth rate of 1.9%, while technical change exhibited a negative growth rate of 1.6%. The growth rate of net efficiency change was 2.3% which is the main driver of efficiency improvement, whereas growth rate of scale efficiency was −0.4%. The threshold panel regression results indicated that both state and major shareholder ownership a have negative and non-linear effect on TFP growth. The state ownership threshold level is 16.9%. When state ownership is below this threshold, its effect on TFP growth is more pronounced than when ownership exceeds this level. Similarly, the major shareholder ownership threshold level is 62%, suggesting that the negative effect on TFP growth is less than when major shareholder ownership is below this level. Social implications Researchers can use the Global Malmquist-Luenberger Productivity Index to assess environmental productivity. Originality/value The study contributes to find state and major shareholder threshold level by using threshold panel regression approach.

GEÇERLİ PARA BİRİMİNİN DOĞRU BELİRLENMESİNİN ÖNEMİ: FİNANSAL RASYOLAR KULLANILARAK BİR ÜRETİM İŞLETMESİ UYGULAMASI

2025-06-23

Çağla Demir Pali | Journal of Research in Business

Türkiye’de faaliyet gösteren işletmeler muhasebe kayıtlarını Türk Lirası (“TL”) cinsinden yapmakla yükümlü olup çeşitli resmî kurumlara olan bildirimlerini de TL olarak yapmaktadırlar. Ancak işletmelerin yerel para birimi dışındaki döviz cinslerinden … Türkiye’de faaliyet gösteren işletmeler muhasebe kayıtlarını Türk Lirası (“TL”) cinsinden yapmakla yükümlü olup çeşitli resmî kurumlara olan bildirimlerini de TL olarak yapmaktadırlar. Ancak işletmelerin yerel para birimi dışındaki döviz cinslerinden de işlem yapmalarının bir sonucu olarak farklı döviz cinslerinin finansal tablolara yansıması söz konusu olmaktadır. Türkiye Muhasebe Standartları/Türkiye Finansal Raporlama Standartları’nı (“TMS/TFRS”) uygulayan ve yerel para birimi cinsi dışındaki bir döviz cinsini yoğun kullanan işletmeler, TMS 21 Kur Değişiminin Etkileri’ni de dikkate alarak işletme için “geçerli para birimi”ni belirlemekle ve finansal tablolarını bu para biriminden hazırlamakla yükümlüdürler. “İşletmenin faaliyet gösterdiği temel ekonomik çevrenin para birimi” olarak tanımlanan geçerli para birimi işletme faaliyetlerinin yoğun olarak hangi döviz cinsinden gerçekleştiğine dayanır. Bu çalışmada Türkiye’de faaliyet gösteren ve geçerli para birimi Euro olan bir işletmenin karlılık, likidite ve borç ödeme gücü oranları hem TL hem de Euro cinsinden finansal tabloları kullanılarak hesaplanmış ve sonuçlar karşılaştırılmıştır. Gelir tablosu kalemleri kullanılarak hesaplanan oranların dönem içerisinde gerçekleşen döviz cinsi işlemlerden kaynaklanan kambiyo karları ve zararları dolayısıyla iki para biriminde farklı sonuçlar verdiği tespit edilmiştir. Bu karların ve zararların kümülatif etkisini taşıyan özkaynaklar kalemi de benzer şekilde iki para biriminde farklı sonuçlar verdiğinden, özkaynaklar kullanılarak hesaplanan oranların da farklılaştığı görülmüştür. Bilanço unsurlarının TL’den Euro’ya çevriminde parasal ve parasal olmayan kalem ayrımı yapılması ve parasal kalemler dönemsonu kuru kullanılarak Euro’ya çevrilirken, parasal olmayan kalemlerin tarihi kurla çevrilmesinden dolayı, oranlarda kullanılan kalemlerin parasal veya parasal olmayan olmasına göre sonuçlar değişmektedir. Sadece parasal kalemlerden (ya da az oranda parasal olmayan kalem yer alan) tutarlardan elde edilen oranlar iki para birimi arasında farklılaşmazken, tarihi kurlar kullanılarak çevrimi yapılan unsurların kullanıldığı oranlarda farklılaşma olduğu bulgular arasındadır.

Information Transparency of Firm Financing

2025-06-23

Antoine Noël , Sun Hongfei | Journal of money credit and banking

Abstract We propose a theory on information transparency of optimal financial contracts. Our model nests adverse selection and agency cost. There exists a unique perfect Bayesian equilibrium with novel features: … Abstract We propose a theory on information transparency of optimal financial contracts. Our model nests adverse selection and agency cost. There exists a unique perfect Bayesian equilibrium with novel features: First, three types of optimal contracts can arise endogenously, that is, equity, transparent debt, and opaque debt. The former two require firms to take on a costly verification technology while opaque debt does not. Second, the unique equilibrium is either pooling on opaque debt, or mixing with transparent and opaque financing. Third, firms with sufficiently high quality and intermediate levels of internal funds find it optimal to use a transparent contract.

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Factors Affecting Lending Patterns in Scheduled Commercial Banks under the CGTSME Scheme: An Empirical Study Integrating the Theory of Planned Behaviour

2025-06-23

Saumya Trivedi , Alpana Srivastava , Satyendra Singh | International Review of Management and Marketing

This study presented a dataset analysis focused on understanding the factors that had influenced lending patterns in scheduled commercial banks under the Credit Guarantee Fund Trust for Micro and Small … This study presented a dataset analysis focused on understanding the factors that had influenced lending patterns in scheduled commercial banks under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTSME) Scheme. The empirical study integrated the Theory of Planned Behaviour to provide insights into the behavioural determinants that had shaped lending decisions within this specific context. The objective of this research had been to collect and analyze data to identify key factors that had influenced lending patterns and to assess the knowledge and perceived financial risk associated with the CGTSME Scheme. The survey period spanned a specific timeframe, during which data had been collected from a selected sample of banks in these cities. The collected dataset had been employed techniques such as descriptive analysis, correlation analysis, and regression analysis. These analyses had provided valuable insights into the relationships between variables and had shed light on the key factors that had shaped lending patterns in scheduled commercial banks operating under the CGTSME Scheme in the cities of Lucknow, Sitapur, Barabanki, Hardoi, and Kanpur.

Does board diversity influence corporate SDG disclosure in an emerging economy?

2025-06-23

Eko Budi Santoso , Maria Assumpta Evi Marlina , Auditia Setiobudi | South African Journal of Business Management

Purpose: This research investigates the impact of board of director diversity on a company’s disclosure of Sustainable Development Goals (SDGs). The term board diversity encompasses a range of characteristics, including … Purpose: This research investigates the impact of board of director diversity on a company’s disclosure of Sustainable Development Goals (SDGs). The term board diversity encompasses a range of characteristics, including but not limited to nationality, gender, age, tenure, educational level and financial expertise. Design/methodology/approach: A sample was drawn from the non-financial sector of Indonesian listed companies over the period 2021–2023, and included only those companies that had issued sustainability reports in accordance with the Global Reporting Initiative (GRI) standards. The hypothesis was tested using ordinary least squares with fixed effects and robust standard errors. Findings/results: The results indicate that overall board diversity significantly impacts the disclosure of SDGs. Further analysis demonstrates that diversity in terms of age, educational level and financial expertise enhances this disclosure. In contrast, diversity in terms of nationality, gender and tenure does not have the same impact. The results are coherent when the SDGs are categorised according to their respective pillars. Practical implications: This research provides insights for companies to prioritise diversity in age, education and financial expertise when selecting board members. This strategy can enhance SDG disclosure transparency and strengthen the company’s reputation with investors and stakeholders. Originality/value: The literature on the relationship between board diversity and corporate SDG disclosure is limited. This study contributes by highlighting the importance of prioritising diversity in age, education and financial expertise when selecting board members.

Do board diversity influence capital structure decisions? A use of GMM and RLS estimator

2025-06-23

Muhammad Abubakr Naeem , Shoukat Ali , Asim Mehboob +2 more | Corporate Governance

Purpose Pakistan’s economy faces challenges of capital structure (CS), such as high debt levels, economic instability, regulatory changes and industry issues. These issues can be resolved through an effective governance … Purpose Pakistan’s economy faces challenges of capital structure (CS), such as high debt levels, economic instability, regulatory changes and industry issues. These issues can be resolved through an effective governance structure. So, the purpose of this study is to investigate the impact of diversity in the board of directors of firms on CS. Design/methodology/approach Board diversity (BD) is measured through the women’s board member ratio, foreign directors’ ratio and board independence, while CS is measured through the total debt ratio. Secondary data is collected from annual reports of 190 listed firms at the Pakistan Stock Exchange from 2019 to 2023. The generalized method of moments is used for analyses, while for robustness, the robust least squares method is used. Findings The study found a significant negative effect of BD on CS. Findings are aligned with agency theory, resource dependency theory and stakeholder theories because this study suggests that BD, through mechanisms such as improved monitoring and reduced agency issues, can lead to more careful financial decisions, including lower dependence on debt. Practical implications This study extends distinct practical implications to stakeholders. It improves the recognition of how BD affects CS in developing economies. Policymakers and business managers, through effective corporate governance (CG) frameworks, lower the risk of default in firms by encouraging more diverse and independent boards. Originality/value It is a pioneer study conducted on the impact of diversity in the board on the CS and based on CG codes 2017 and 2019.

Recovery of Lost Premiums in Failed Mergers

2025-06-23

Maziar Peihani | Alberta Law Review

This article discusses lost premium provisions, often referred to as Con Ed provisions. The article examines the main variants of these provisions and considers how they may conflict with established … This article discusses lost premium provisions, often referred to as Con Ed provisions. The article examines the main variants of these provisions and considers how they may conflict with established doctrines in contract and corporate law, potentially rendering them unenforceable. In response, the article evaluates a range of proposed solutions, including incorporating lost premiums into contractual damages, designing reverse termination fees, appointing the company or stockholders as agents to recover lost premiums, and pursuing legislative reform. The article argues that although courts’ reluctance to enforce lost premium provisions has surprised transactional lawyers and scholars, this hesitation is principled, grounded in both doctrinal and normative concerns. To help courts navigate the challenges surrounding lost premium recovery more coherently, the article proposes a two-stage framework for evaluating these provisions. Finally, the article contends that the difficulties arise not only from the provisions themselves but also from the remedies pursued. Each proposed solution addresses specific challenges, yet each also encounters limitations or introduces new complications.

An overview of debt renegotiations in Brazilian publicly listed firms for the period from 2010 to 2021

2025-06-23

João Paulo Augusto Eça , Tatiana Albanez , Maurício Ribeiro do Valle | Revista de Contabilidade e Organizações

As renegociações de dívidas desempenham um papel fundamental na manutenção dos contratos entre credores e devedores. Contudo, pouco se sabe sobre as características destas renegociações, especialmente em contextos económicos emergentes. … As renegociações de dívidas desempenham um papel fundamental na manutenção dos contratos entre credores e devedores. Contudo, pouco se sabe sobre as características destas renegociações, especialmente em contextos económicos emergentes. A pesquisa sobre renegociação é importante, especialmente em contextos de economias emergentes como o Brasil. A elevada assimetria de informação, a baixa proteção dos direitos do credor e a dificuldade na execução da dívida, características dessas economias, fazem da renegociação um instrumento fundamental na relação contratual entre devedor e credor. Portanto, nosso objetivo foi analisar de forma abrangente as renegociações de dívidas dentro de uma economia emergente, mais especificamente o Brasil. A base de dados foi preparada manualmente a partir da leitura de mais de 3.000 notas às demonstrações financeiras, considerando todas as empresas listadas na bolsa de valores brasileira “B3” em 2021. Analisamos dados de 12 anos (2010 a 2021). Este estudo revelou maior concentração de renegociações de dívidas focadas em covenants (waivers) e prorrogações de prazo. Além disso, a maior parte das renegociações ocorre no quarto trimestre, com concentração relevante durante a pandemia de Covid-19 (2020 e 2021). Os bancos privados responderam por aproximadamente 45% das renegociações, enquanto o crédito no mercado de capitais representou quase 40%. Notavelmente, as empresas em boas condições financeiras tendem a renegociar menos as suas dívidas.

Dissecting corporate tournaments: Multilayered structures and firm performance

2025-06-21

Sang Hoon Ahn , Jeong‐Hoon Hyun , Kentaro Koga +1 more | Contemporary Accounting Research

Abstract This study examines the association between firm performance and promotion incentives (i.e., the product of vertical pay disparity and promotion probability) in multilayer corporate tournaments using a unique data … Abstract This study examines the association between firm performance and promotion incentives (i.e., the product of vertical pay disparity and promotion probability) in multilayer corporate tournaments using a unique data set of Korean public firms. We dissect the corporate tournament into layers and separately examine their association with firm performance while also accounting for the role of promotion probability. We find that (1) upper‐layer, rather than lower‐layer, tournaments are the main drivers of the positive association between vertical pay disparity and firm performance and (2) this association becomes stronger with higher promotion probability, consistent with tournament theory, but only in the upper layer. These results are more pronounced in settings where tournament incentives are plausibly more important, such as those characterized by high labor productivity and high average tenure. Our study draws a comprehensive picture of the corporate tournaments that simultaneously accounts for various factors that previous studies have examined only in isolation.

Do companies care about the manifestations of climate risk? Evidence from corporate cash holdings

2025-06-21

Huang Zhen , Nan Yu | Asia-Pacific Journal of Accounting & Economics

Employee ownership and promotive voice: the roles of psychological ownership and perceived alignment of interests

2025-06-21

Dylan A. Cooper , Tony Fang , Vincent Wan | Journal of Organizational Effectiveness People and Performance

Purpose We compare two prominent explanations of employee ownership’s influence on pro-organizational behaviors—psychological ownership and alignment of financial interests—by testing the effects of employee stock ownership plans (ESOPs) and current … Purpose We compare two prominent explanations of employee ownership’s influence on pro-organizational behaviors—psychological ownership and alignment of financial interests—by testing the effects of employee stock ownership plans (ESOPs) and current profit sharing on promotive voice. ESOPs give employees an ownership stake through granting shares to a trust. Current profit sharing gives employees a portion of profits as a cash payment. To differentiate between the mechanisms, we propose that employee decision influence moderates only the relationship between ESOPs and psychological ownership. Design/methodology/approach Using a National Bureau of Economic Research dataset of employees of 14 USA companies with shared capitalism practices, we conducted a path-analysis of a moderated multiple-mediation regression model using the PROCESS macro. Our sample included 16,557 participants. Findings Psychological ownership partially transmits the effects of ESOP participation and current profit sharing on promotive voice. Employee decision influence strengthens the relationship between ESOP participation and psychological ownership. Perceived alignment of interests does not mediate the relationships between employee ownership and promotive voice. Practical implications Employee ownership increases promotive voice. ESOPs must be combined with employee decision influence to produce psychological ownership. Offering current profit sharing with ESOPs is related to additional psychological ownership and voice. Originality/value In a single model, we test the most prominent explanations for the effects of employee ownership on pro-organizational behavior, in the context of two of the most common forms of employee ownership.

CEO power and post-merger performance in the UK: the moderating effects of corporate governance mechanisms

2025-06-20

Sanjukta Brahma , Agyenim Boateng , Sardar Ahmad +1 more | Review of Quantitative Finance and Accounting

Abstract This study examines the effects of Chief Executive Officer (CEO) power and the moderating role of corporate governance mechanisms on mergers and acquisitions (M&A) performance. Our results indicate that … Abstract This study examines the effects of Chief Executive Officer (CEO) power and the moderating role of corporate governance mechanisms on mergers and acquisitions (M&A) performance. Our results indicate that CEO power is negatively associated with post-merger performance. Further tests show that corporate governance mechanisms, namely—board size, board independence, and board gender diversity—moderate the negative effects of CEO power on M&A performance. These results imply that internal corporate governance mechanisms may be effective in curtailing CEO power but do not curb it completely. The results are robust across alternative model specifications and alternative measures of post-merger performance.

Does earnings management mediate board composition - firms environmental, social, and governance performance relationship

2025-06-20

Dhouha Bouaziz , Anis Jarboui , Nada Dammak Ben Hlima | International Journal of Managerial and Financial Accounting

The impact of ESG rating divergence on stock price delays: evidence from China

2025-06-20

Panpan Feng , Jiangwu Pang , Lili Xu | Asia-Pacific Journal of Accounting & Economics

Emerging capital market distortions, capital bias and total factor productivity in China

2025-06-20

Chang Shu , Yuanlin Hu | RAIRO - Operations Research

This paper is based on the theory of emerging capital theory of Professor Luo Fukai of Ocean University of China, hoping to further demonstrate this theory from the perspective of … This paper is based on the theory of emerging capital theory of Professor Luo Fukai of Ocean University of China, hoping to further demonstrate this theory from the perspective of the promotion of capital distortion to productivity. Most of the current economic research believes that distortions in factor markets have a negative impact. In this paper, the concept of capital bias is introduced and the positive effect of capital factor distortions on the total factor productivity of enterprises is demonstrated. The TFP will increase by 3.89 % when the enterprise's emerging capital distortion increases by 1 %, as demonstrated in the results. When the traditional capital distortion of the enterprise increases by 1 percent, the TFP of the enterprise will increase by 9.51 percent. The impact of capital factor market distortion on TFP is influenced by regional and industrial characteristics. According to the counterfactual theory, enterprises' TFP awards increase by 10% to 20% after correcting the market distortion of capital elements. The distortions of both basic emerging capitals and traditional capitals are somewhat similar.

Capital structure and financial distress in China’s real estate sector: a perspective from sales tournament

2025-06-20

Edward Chan , Eddie C.M. Hui , Jianfu Shen +1 more | Humanities and Social Sciences Communications

Interplay between cash holdings, carbon performance, and board dynamics in GCC

2025-06-20

Tahir Akhtar , Habib Hussain Khan , Shoaib Khan +2 more | International Journal of Emerging Markets

Purpose The purpose of this study is to examine the impact of firms’ cash holdings on carbon dioxide (CO2) emissions in the Gulf Cooperation Council region and to explore how … Purpose The purpose of this study is to examine the impact of firms’ cash holdings on carbon dioxide (CO2) emissions in the Gulf Cooperation Council region and to explore how board characteristics can moderate the environmental impact of cash reserves, thereby fostering sustainability in corporate cash management practices. Design/methodology/approach The study analyses a sample of 1126 firm-year observations from GCC countries over the period 2010–2022. It applies the fixed effect, the generalized method of moments (GMM), propensity score matching (PSM), and various carbon emission metrics to ensure robustness and address potential endogeneity. Findings The findings show that larger cash reserves in the firms increase CO2 emissions, indicating less ecologically friendly use of liquid assets from the management. However, board attributes such as a larger board size, a two-tier board structure, and external-consultants help reduce this impact. In contrast, chief executive officer board-membership and auditor-independence-rotation tend to amplify the relationship, while board-membership-limits show mixed results. Originality/value This research underscores the role of governance mechanisms, particularly board characteristics, in mitigating the environmental impact of cash reserves. It offers key evidence to refine corporate governance policies supporting sustainability. Policymakers are encouraged to promote two-tier board structures and engage external-consultants to better align cash management with environmental objectives and foster sustainable business practices.

Product Market Threats and Leases

2025-06-20

Douglas J. Fairhurst , Tae‐Nyun Kim , Pil‐Seng Lee +1 more | Financial Management

ABSTRACT We document robust evidence of increased corporate leasing in the presence of product market threats. This finding is robust to a battery of tests exploiting plausibly exogenous variation in … ABSTRACT We document robust evidence of increased corporate leasing in the presence of product market threats. This finding is robust to a battery of tests exploiting plausibly exogenous variation in product market threats to address the potentially endogenous nature of leasing and product markets, including Chinese import penetration, the granting of normal trade relations to China by the United States, excess entry into product markets in the 1990s, and deregulation of the telecommunications industry. The effects are pronounced for financially constrained firms and firms that are more likely to face costly investment reversals. A limited supply of leased capital limits leasing but amplifies precautionary cash holdings in the presence of competition. In additional analysis, we find that increased leasing correlates to a diminished impact of product market threats on firm performance. Collectively, the evidence suggests that leases provide an alternative to cash holdings to mitigate the negative effects of product market threats.

Climate change risk, investor sentiment, and the performance of new entrant firms

2025-06-19

Shima Amini , Sofia Johan , Eilnaz Kashefi‐Pour +1 more | Small Business Economics

The Determinant of Firm Value in Asean Market: Esg Initiatives as Intervening Variable

2025-06-19

Maria Safitri , Harjum Muharam , Irene Rini Demi Pangestuti | Journal of Posthumanism

This study investigates the impact of leverage, cash flow, and firm size on firm value in the ASEAN market, with Environmental, Social, and Governance (ESG) initiatives acting as a mediating … This study investigates the impact of leverage, cash flow, and firm size on firm value in the ASEAN market, with Environmental, Social, and Governance (ESG) initiatives acting as a mediating variable. Drawing on stakeholder and signaling theories, the study develops a conceptual framework that integrates both financial and non-financial factors in determining firm value. Using panel data from 50 non-financial companies listed on ASEAN stock exchanges between 2019 and 2023, the study employs Structural Equation Modeling using Partial Least Squares (SEM-PLS) to analyze both direct and indirect relationships. The results show that leverage, cash flow, and firm size all have significant and positive effects on firm value. Among these, firm size exerts the strongest direct influence. In addition to their direct effects, these variables also significantly affect ESG initiatives. ESG initiatives themselves have a significant positive impact on firm value, reinforcing their strategic importance in enhancing corporate reputation and stakeholder trust. Importantly, ESG initiatives are found to mediate the relationship between financial indicators and firm value, with firm size again showing the strongest indirect effect through ESG. These findings suggest that ESG practices not only complement financial performance but also enhance the value-creation process in firms operating within the ASEAN region. This study contributes to the growing body of literature on sustainable finance by providing empirical evidence of the mediating role of ESG initiatives in linking financial strategy to firm value. The results have practical implications for corporate managers and policymakers aiming to align financial and sustainability goals.

Winning Teams or Winning Pay? The Impact of Team Allocation on Fund Manager Compensation and Careers

2025-06-19

Lu Han , Galit Ben Naim , Stanislav Sokolinski | Journal of Financial and Quantitative Analysis

Investor Alignment in Divestment Decisions and Firm Behavior: Evidence from Publicly Disclosed Exclusion Lists

2025-06-19

Nicolas Rudolf , He Yuan | European Accounting Review

The effects of government debt on corporate borrowing in developing economies: evidence from Africa

2025-06-19

Gönül Çolak , Theogene Habimana , Timo Korkeamäki | Journal of International Business Studies

Abstract Many African economies face high debt levels, yet local firms have unique growth opportunities requiring external financing. We examine whether government borrowing constrains corporate financing in Africa and how … Abstract Many African economies face high debt levels, yet local firms have unique growth opportunities requiring external financing. We examine whether government borrowing constrains corporate financing in Africa and how these effects differ by debt source. Using a manually collected dataset from 29 African countries (2000–2019), we uncover financing patterns that challenge conventional theories. In sharp contrast to firms in developed markets, we find that African firms experience a “crowding-in” effect when governments borrow externally, enhancing their access to debt. In contrast, domestic government borrowing induces the typical crowding-out effect, where government borrowing reduces corporate access to debt. The crowding-in phenomenon is most evident among publicly listed firms, particularly those cross-listed on foreign exchanges (the multinationals). The effect strengthens in countries with higher Eurobond market activity and intensifies following sovereign credit downgrades, underscoring the sovereign ceiling’s constraint on corporate borrowing. Our findings contribute significantly to international business literature by revealing how African debt markets function differently, highlighting unique financing challenges faced by African multinational enterprises, and demonstrating that economic principles established in developed markets cannot be universally applied to emerging economies. These insights are crucial for designing effective policies to support corporate growth in Africa.

Will Negative Textual Tone of Initial Profit Offering (IPO) Prospectus Affect Price Stabilisation? Evidence from Hong Kong

2025-06-18

Morong Xu , Zamri Ahmad | Asian Academy of Management Journal of Accounting and Finance

Initial Public Offerings (IPOs) are featured with information asymmetry and aftermarket price volatility. The IPO prospectus can be a proper channel for issuing companies to convey information to underwriters and … Initial Public Offerings (IPOs) are featured with information asymmetry and aftermarket price volatility. The IPO prospectus can be a proper channel for issuing companies to convey information to underwriters and investors during IPO events, and potentially influence the level of information asymmetry and stock price volatility. We examine the association between the textual tone of IPO prospectus and price stabilisation in Hong Kong stock market from 2004 to 2021. Using a large sample of 1,185 IPOs, we find empirical evidence showing a positive relationship between price stabilisation and the negative textual tone in prospectus. This finding suggests that when more negative textual tone is implied in IPO prospectus, underwriters will stabilise more. Our results consider possible endogenous issues and perform a battery of robustness tests.

Impact of corporate governance and social responsibility on credit risk

2025-06-18

Aws AlHares | Frontiers in Sustainability

This study measures the effects of corporate governance (CG) and corporate social responsibility (CSR) on bank risk. The data were collected from DataStream from 2010 to 2021 from the World … This study measures the effects of corporate governance (CG) and corporate social responsibility (CSR) on bank risk. The data were collected from DataStream from 2010 to 2021 from the World Development Indicators. The analysis in this study utilized the fixed effects model, where multiple parameters were found to be negatively associated with credit risk, such as board independence, board size, and board meetings. By contrast, ownership concentration can positively affect bank credit risk. Additionally, applying CSR can decrease credit risk. Finally, this study sheds light on the implementation of governance, which leads to a reduction in credit risk. Our findings have significant policy implications for credit risk management in the banking sector, emphasizing that a one-size-fits-all approach is inadequate. Governance practices effective in one context may not produce the same outcomes in another. The evidence suggests that banks in emerging economies are making meaningful strides in establishing and strengthening effective governance frameworks.

Sermaye Yapısının Finansal Sürdürülebilirliğe Etkisi: Borsa İstanbul’da Bir Uygulama

2025-06-18

Metehan Kurt , İlker SAKINÇ | Politik Ekonomik Kuram

Bu çalışmanın amacı, Borsa İstanbul (BİST) İmalat Sanayi'nde faaliyet gösteren şirketlerin sermaye yapılarının finansal sürdürülebilirlik üzerindeki etkilerini analiz etmektir. Çalışma, imalat sektöründeki şirketlerin sürdürülebilir büyüme oranı (SGR) ve içsel büyüme … Bu çalışmanın amacı, Borsa İstanbul (BİST) İmalat Sanayi'nde faaliyet gösteren şirketlerin sermaye yapılarının finansal sürdürülebilirlik üzerindeki etkilerini analiz etmektir. Çalışma, imalat sektöründeki şirketlerin sürdürülebilir büyüme oranı (SGR) ve içsel büyüme oranı (IGR) ile sermaye yapıları arasındaki ilişkiyi ele almaktadır. Araştırma verisi, 2010-2021 döneminde halka açık olan 113 imalat sanayi firmasına ait finansal göstergelerden oluşmaktadır. Çalışmada dinamik panel veri analizi yöntemi olan GMM (Genelleştirilmiş Momentler Metodu) kullanılmıştır. Bulgular, yüksek borç oranlarının firmaların SGR ve IGR üzerindeki etkisinin negatif olduğunu ifade etmektedir. Diğer bir deyişle, borçlanmanın uzun vadeli büyüme performansını sınırladığını göstermektedir. Ayrıca, büyük ölçekli firmaların ölçek ekonomileri sayesinde sürdürülebilir büyüme oranlarını daha yüksek seviyelerde koruyabildiği bulunmuştur. Firmanın yaşı ile büyüme performansı arasında istatistiksel olarak anlamlı bir ilişki saptanamamıştır. Çalışma, imalat sektörü firmaları için optimal sermaye yapısının belirlenmesinde politika yapıcılar ile firma yöneticilerine yol gösterici olma potansiyeli taşımaktadır. Bu çerçevede, borç ve özkaynak arasındaki stratejik dengeleme kararlarının uzun vadeli büyümeyi destekleyecek şekilde yapılması gerektiği önerilmektedir.

The Nonmonotonic Investment–Cash Flow Sensitivity and Business Life Cycle: Evidence from An Emerging Market

2025-06-18

An Thai , Le Hong Ngoc Ha | Asian Academy of Management Journal of Accounting and Finance

This article aims to investigate the non-linear correlation between investment and cash flow. Drawing on a sample of 669 Vietnamese publicly listed firms from 2010 to 2021, the study tests … This article aims to investigate the non-linear correlation between investment and cash flow. Drawing on a sample of 669 Vietnamese publicly listed firms from 2010 to 2021, the study tests two hypotheses concerning the investment–cash flow relationship, employing a two-step system-GMM approach. The sensitivity of investment to cash flow is examined across different financial scenarios and business stages. The results demonstrate a U-shaped investment-cash flow relationship, which consistently holds across various firms’ financial positions and ownership structures. Interestingly, this pattern is absent under the influence of the COVID-19 pandemic. When considering the business life cycle, the results indicate that while companies in the introduction and expansion phases exhibit the inverted U-shaped sensitivity, those in the maturity and decline stages display a U-pattern. These outcomes enrich the existing corporate literature and offer significant practical insights for investors, firm managers, and policy-setting parties, particularly within the emerging market context.

IPO Underpricing Factors: Technology and Non-Technology Sectors in Terms of Information Asymmetry and Retention of Control Theories

2025-06-18

A. A. Galich , A. G. Mirzoyan | Finance Theory and Practice

This study investigates the relationship between the underpricing of company stocks in initial public offerings (IPOs) and the key factors associated with two dominant theories: information asymmetry and retention of … This study investigates the relationship between the underpricing of company stocks in initial public offerings (IPOs) and the key factors associated with two dominant theories: information asymmetry and retention of control. The main objective of the study is to determine which factors considered by the two theories affect stock underpricing in the technology and non-technology sectors. Multiple regression models are used to identify the significant factors of underpricing for each sector, and the adjusted coefficient of determination is used to compare the explanatory power of the models of each theory. The sample includes 321 IPOs launched between 2000 and 2020 on the leading US exchanges NYSE and NASDAQ. The results show that in the technology sector, the significant predictors of underpricing are research and development (R&D) costs, the age of the company at the time of going public, and the Roll-up strategy. In the nontechnology sector, the key underpricing factors are the proportion of publicly traded shares and the age of the company. It is concluded that the theory of information asymmetry demonstrates the greatest explanatory power in the context of the technological sector, which indicates the significant influence of information barriers on the formation of market prices. At the same time, in the non-technology sector, the predictive power of regression models was significantly lower, which indicates the need for further search and analysis of additional factors affecting the undervaluation of shares in this sector. Thus, this study contributes to a deeper understanding of IPO undervaluation mechanisms, emphasizing the importance of taking into account the specifics of different industry segments when analyzing and forecasting market processes.

Customers' Pessimistic Disclosure and Corporate Innovation: The Role of Government‐Background Principal Customers

2025-06-18

Lulu Di , Chen Hua , Sun Yuan | Accounting and Finance

ABSTRACT We investigate the relation between pessimistic disclosure of principal customers and corporate innovation and how such relation varies with the presence of government‐background customers. Empirical analyses show that when … ABSTRACT We investigate the relation between pessimistic disclosure of principal customers and corporate innovation and how such relation varies with the presence of government‐background customers. Empirical analyses show that when the tone of principal customers' annual reports is more pessimistic, focal companies will invest less in R&D. Cross‐sectionally, the relationship is stronger when focal companies offer more trade credit or are financially constrained or when customers are at higher default risk. However, it is mitigated when customers are geographically closer or more stable in the supply chains. Such a relationship is driven by focal companies with government‐background principal customers.