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Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints, Quarterly (1997)

by Steven N Kaplan, Luigi Zingales
Venue:Journal of Economics
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THE FINANCIAL ACCELERATOR IN A QUANTITATIVE BUSINESS CYCLE FRAMEWORK

by Ben S. Bernanke, Mark Gertler, Simon Gilchrist , 1999
"... ..."
Abstract - Cited by 1633 (28 self) - Add to MetaCart
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Corporate governance and equity prices

by Paul Gompers, Joy Ishii, Andrew Metrick - Quarterly Journal of Economics , 2003
"... Shareholder rights vary across �rms. Using the incidence of 24 governance rules, we construct a “Governance Index ” to proxy for the level of shareholder rights at about 1500 large �rms during the 1990s. An investment strategy that bought �rms in the lowest decile of the index (strongest rights) and ..."
Abstract - Cited by 378 (3 self) - Add to MetaCart
Shareholder rights vary across �rms. Using the incidence of 24 governance rules, we construct a “Governance Index ” to proxy for the level of shareholder rights at about 1500 large �rms during the 1990s. An investment strategy that bought �rms in the lowest decile of the index (strongest rights) and sold �rms 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 �nd that �rms with stronger shareholder rights had higher �rm value, higher pro�ts, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. I.

MANAGING WITH STYLE: THE EFFECT OF MANAGERS ON FIRM POLICIES

by Marianne Bertrand, Antoinette Schoar , 2003
"... This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corpora ..."
Abstract - Cited by 251 (7 self) - Add to MetaCart
This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corporate decisions. A significant extent of the heterogeneity in investment, financial and organizational practices of firms can be explained by the presence of manager fixed effects. We identify specific patterns in managerial decision making that appear to indicate general differences in “style” across managers. Moreover, we show that management style is significantly related to manager fixed effects in performance and that managers with higher performance fixed effects receive higher compensation and are more likely to be found in better governed firms. In a final step, we tie back these findings to observable managerial characteristics. We find that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies.

The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future

by Allen N. Berger, Rebecca S. Demsetz, Philip E. Strahan - JOURNAL OF BANKING AND FINANCE , 1999
"... This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The ev ..."
Abstract - Cited by 247 (12 self) - Add to MetaCart
This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The evidence is consistent with increases in market power from some types of consolidation; improvements in profit efficiency and diversification of risks, but little or no cost efficiency improvements on average; relatively little effect on the availability of services to small customers; potential improvements in payments system efficiency; and potential costs on the financial system from increasing systemic risk or expanding the financial safety net.
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...l condition can affect investment, although the reason why condition matters is less clear (Fazzari, Hubbard and Petersen 1988, Froot and Stein 1991, Hoshi, Kashyap, and Sharfstein 1991, Lamont 1996, =-=Kaplan and Zingales 1997-=-). One possibility is that external finance is more costly than internally generated funds, so firms may invest in more positive net present value projects when they are flush with cash. It is also po...

Testing the pecking order theory of capital structure

by Murray Z. Frank , Vidhan K. Goyal , 2003
"... We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecki ..."
Abstract - Cited by 247 (5 self) - Add to MetaCart
We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.

Who makes acquisitions? CEO overconfidence and the market’s reaction

by Ulrike Malmendier , Geoffrey Tate , 2007
"... Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predi ..."
Abstract - Cited by 222 (12 self) - Add to MetaCart
Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs' personal overinvestment in their company and their press portrayal. We find that the odds of making an acquisition are 65 % higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (–90 basis points) is significantly more negative than for non-overconfident CEOs (–12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.

CEO overconfidence and corporate investment

by Ulrike Malmendier, Geoffrey Tate - Journal of Finance , 2005
"... We explore behavioral explanations for sub-optimal corporate investment decisions. Focusing on the sensitivity of investment to cash flow, we argue that personal characteristics of chief executive officers, in particular overconfidence, can account for this widespread and persistent investment disto ..."
Abstract - Cited by 219 (10 self) - Add to MetaCart
We explore behavioral explanations for sub-optimal corporate investment decisions. Focusing on the sensitivity of investment to cash flow, we argue that personal characteristics of chief executive officers, in particular overconfidence, can account for this widespread and persistent investment distortion. Overconfident CEOs overestimate the quality of their investment projects and view external finance as unduly costly. As a result, they invest more when they have internal funds at their disposal. We test the overconfidence hypothesis, using data on personal portfolio and corporate investment decisions of CEOs in Forbes 500 companies. We classify CEOs as overconfident if they repeatedly fail to exercise options that are highly in the money, or if they habitually acquire stock of their own company. The main result is that investment is significantly more responsive to cash flow if the CEO displays overconfidence. In addition, we identify personal characteristics other than overconfidence (education, employment background, cohort, military service, and status in the company) that strongly affect the correlation between investment and cash flow. We are indebted to Brian Hall and David Yermack for providing us with the data. We are very grateful to Jeremy Stein for his invaluable support and comments. We also would like to thank Philippe Aghion, George

Financial Development and Financing Constraints: International Evidence from the Structural Investment Model.

by Inessa Love, Laarni Bulan, Charles Calomiris, Raymond Fisman, Ann Harrison, Charles Himmelberg, Robert Hodrick, Glenn Hubbard, Margaret Mcmillan, Xavier Sala-i-martin, Toni Whited, Catherine T. Macarthur Foundation , 2001
"... This paper provides a micro-level evidence that financial development impacts growth by reducing financing constraints that would otherwise restrict efficient firm investment. I estimate a structural model based on the Euler equation for investment using firm-level data from 40 countries. I find a s ..."
Abstract - Cited by 198 (12 self) - Add to MetaCart
This paper provides a micro-level evidence that financial development impacts growth by reducing financing constraints that would otherwise restrict efficient firm investment. I estimate a structural model based on the Euler equation for investment using firm-level data from 40 countries. I find a strong negative relationship between the extent of financial market development, and the sensitivity of investment to availability of internal funds (a proxy for financing constraints). I also consider size effect, business cycles and legal environment as plausible alternative explanations and find the results to be robust in all cases.

When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms

by Malcolm Baker, Jeremy C. Stein, Jeffrey Wurgler
"... We use a simple model to outline the conditions under which corporate investment is sensitive to non-fundamental movements in stock prices. The key prediction is that stock prices have a stronger impact on the investment of “equity dependent ” firms – firms that need external equity to finance margi ..."
Abstract - Cited by 195 (14 self) - Add to MetaCart
We use a simple model to outline the conditions under which corporate investment is sensitive to non-fundamental movements in stock prices. The key prediction is that stock prices have a stronger impact on the investment of “equity dependent ” firms – firms that need external equity to finance marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales [1997], we find support for this hypothesis. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile.

How Costly is External Financing? Evidence from a Structural Estimation

by Christopher A. Hennessy, Toni M. Whited - Journal of Finance , 2007
"... This paper applies simulated method of moments to a dynamic structural model to infer the magnitude of external financing costs. The model features endogenous investment, cash distributions, leverage, and default. The corporation faces taxation, costly bankruptcy, and linear-quadratic equity flotati ..."
Abstract - Cited by 189 (20 self) - Add to MetaCart
This paper applies simulated method of moments to a dynamic structural model to infer the magnitude of external financing costs. The model features endogenous investment, cash distributions, leverage, and default. The corporation faces taxation, costly bankruptcy, and linear-quadratic equity flotation costs. For large firms, parameter estimates imply marginal equity flotation costs starting at 5.0%, and bankruptcy costs equal to 8.4 % of capital. For small firms, marginal equity flotation costs start at 10.7%, and bankruptcy costs equal 15.1 % of capital. Estimated financing frictions are also higher for low-dividend firms and those identified as constrained by the Cleary and Whited-Wu indexes. In simulated data many commonly used proxies for financing constraints decrease when we increase financing cost parameters.
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