Cross-country variations in capital structures: The role of bankruptcy codes
TL;DR: In this paper, the authors investigate the impact of bankruptcy codes on firms' capital-structure choices and develop a theoretical model to identify how firm characteristics may interact with the bankruptcy code in determining optimal capital structures.
About: This article is published in Journal of Financial Intermediation.The article was published on 2011-01-01 and is currently open access. It has received 85 citations till now. The article focuses on the topics: Bankruptcy & Liquidation value.
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TL;DR: In this paper, the authors proposed that stronger creditor rights in bankruptcy affect corporate investment choice by reducing corporate risk-taking, and they found that strong creditor rights induce greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk.
388 citations
TL;DR: This article analyzed the link between creditor rights and firms' investment policies and found that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance.
Abstract: We analyze the link between creditor rights and firms’ investment policies, proposing that stronger creditor rights in bankruptcy reduce corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance. In countries with strong creditor rights, firms also have lower cash flow risk and lower leverage, and there is greater propensity of firms with low-recovery assets to acquire targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, and are observed in time-series analysis around changes in creditor rights. Our results question the value of strong creditor rights as they have an adverse effect on firms by inhibiting management from undertaking risky investments.
374 citations
TL;DR: The authors compare the dividend policies of publicly-and privately-held firms in order to identify the forces shaping corporate dividends, and shed light on the behavior of privately held companies, showing that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time.
Abstract: We compare the dividend policies of publicly- and privately-held firms in order to help identify the forces shaping corporate dividends, and shed light on the behavior of privately-held companies. We show that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time. Public firms pay relatively higher dividends that tend to be more sensitive to changes in investment opportunities than otherwise similar private firms. Ultimately, ownership structure and incentives play key roles in shaping dividend policies.
369 citations
TL;DR: In this article, the authors investigate how firms respond to strengthening of creditor rights by examining their financial decisions following a securitization reform in India and find that the reform led to a reduction in secured debt, total debt, debt maturity, and asset growth.
Abstract: We investigate how firms respond to strengthening of creditor rights by examining their financial decisions following a securitization reform in India. We find that the reform led to a reduction in secured debt, total debt, debt maturity, and asset growth, and an increase in liquidity hoarding by firms. Moreover, the effects are more pronounced for firms that have a higher proportion of tangible assets because these firms are more affected by the secured transactions law. These results suggest that strengthening of creditor rights introduces a liquidation bias and documents how firms alter their debt structures to contract around it.
293 citations
TL;DR: The authors compare the dividend policies of publicly and privately held firms in order to identify the forces shaping corporate dividends and shed light on the behavior of privately held companies, showing that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time.
Abstract: We compare the dividend policies of publicly and privately held firms in order to help identify the forces shaping corporate dividends, and shed light on the behavior of privately held companies. We show that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time. Public firms pay relatively higher dividends that tend to be more sensitive to changes in investment opportunities than otherwise similar private firms. Ultimately, ownership structure and incentives play key roles in shaping dividend policies. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
283 citations
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TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.
49,666 citations
TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Abstract: This paper tests the relationship between average return and risk for New York Stock Exchange common stocks. The theoretical basis of the tests is the "two-parameter" portfolio model and models of market equilibrium derived from the two-parameter portfolio model. We cannot reject the hypothesis of these models that the pricing of common stocks reflects the attempts of risk-averse investors to hold portfolios that are "efficient" in terms of expected value and dispersion of return. Moreover, the observed "fair game" properties of the coefficients and residuals of the risk-return regressions are consistent with an "efficient capital market"--that is, a market where prices of securities
14,171 citations
TL;DR: In this paper, the authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries and 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.
Abstract: 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.
5,127 citations
TL;DR: This paper decompose the conventional measure of evaluation bias into several components and find that bias due to selection on unobservables, commonly called selection bias in econometrics, is empirically less important than other components, although it is still a sizeable fraction of the estimated programme impact.
Abstract: This paper considers whether it is possible to devise a nonexperimental procedure for evaluating a prototypical job training programme. Using rich nonexperimental data, we examine the performance of a two-stage evaluation methodology that (a) estimates the probability that a person participates in a programme and (b) uses the estimated probability in extensions of the classical method of matching. We decompose the conventional measure of programme evaluation bias into several components and find that bias due to selection on unobservables, commonly called selection bias in econometrics, is empirically less important than other components, although it is still a sizeable fraction of the estimated programme impact. Matching methods applied to comparison groups located in the same labour markets as participants and administered the same questionnaire eliminate much of the bias as conventionally measured, but the remaining bias is a considerable fraction of experimentally-determined programme impact estimates. We test and reject the identifying assumptions that justify the classical method of matching. We present a nonparametric conditional difference-in-differences extension of the method of matching that is consistent with the classical index-sufficient sample selection model and is not rejected by our tests of identifying assumptions. This estimator is effective in eliminating bias, especially when it is due to temporally-invariant omitted variables.
5,069 citations
TL;DR: In this article, a rigorous distribution theory for kernel-based matching is presented, and the method of matching is extended to more general conditions than the ones assumed in the statistical literature on the topic.
Abstract: This paper develops the method of matching as an econometric evaluation estimator. A rigorous distribution theory for kernel-based matching is presented. The method of matching is extended to more general conditions than the ones assumed in the statistical literature on the topic. We focus on the method of propensity score matching and show that it is not necessarily better, in the sense of reducing the variance of the resulting estimator, to use the propensity score method even if propensity score is known. We extend the statistical literature on the propensity score by considering the case when it is estimated both parametrically and nonparametrically. We examine the benefits of separability and exclusion restrictions in improving the efficiency of the estimator. Our methods also apply to the econometric selection bias estimator. Matching is a widely-used method of evaluation. It is based on the intuitively attractive idea of contrasting the outcomes of programme participants (denoted Y1) with the outcomes of "comparable" nonparticipants (denoted Y0). Differences in the outcomes between the two groups are attributed to the programme. Let 1 and 11 denote the set of indices for nonparticipants and participants, respectively. The following framework describes conventional matching methods as well as the smoothed versions of these methods analysed in this paper. To estimate a treatment effect for each treated person iecI, outcome Yli is compared to an average of the outcomes Yoj for matched persons je10 in the untreated sample. Matches are constructed on the basis of observed characteristics X in Rd. Typically, when the observed characteristics of an untreated person are closer to those of the treated person ieI1, using a specific distance measure, the untreated person gets a higher weight in constructing the match. The estimated gain for each person i in the treated sample is
3,861 citations