Internal equity financing and the performance of multinational subsidiaries in emerging economies

We examine the internal equity financing of the multinational subsidiary which retains and reinvests its own earnings. Internal equity financing is a type of firm-specific advantage (FSA) along with other traditional FSAs in innovation, research and development, brands and management skills. It also reflects subsidiary-level financial management decision-making. Here we test the contributions of internal equity financing and subsidiary-level financial management decision-making to subsidiary performance, using original survey data from British multinational subsidiaries in six emerging countries in the South East Asia region. Our first finding is that internal equity financing acts as an FSA to improve subsidiary performance. Our second finding is that over 90% of financing sources (including capital investment by the parent firms) in the British subsidiaries come from internal funding. Our third finding is that subsidiary-level financial management decision-making has a statistically significant positive impact on subsidiary performance. Our findings advance the theoretical, empirical and managerial analysis of subsidiary performance in emerging economies.

Financial liberalization and dynamics of firm-level financing and investment decisions in the Southeast Asian countries

This thesis examines the dynamics of firm-level financing and investment decisions for six Southeast Asian countries. The study provides empirical evidence on the impacts of changes in the firm-level financing decisions during the period of financial liberalization by considering the debt and equity financing decisions of a set of non-financial firms. The empirical results show that firms in Indonesia, Pakistan, and South Korea have relatively faster speed of adjustment than other Southeast Asian countries to attain optimal debt and equity ratios in response to banking sector and stock market liberalization. In addition, contrary to widely held belief that firms adjust their financial ratios to industry levels, the results indicate that industry factors do not significantly impact on the speed of capital structure adjustments. This study also shows that non-linear estimation methods are more appropriate than linear estimation methods for capturing changes in capital structure. The empirical results also show that international stock market integration of these countries has significantly reduced the equity risk premium as well as the firm-level cost of equity capital. Thus stock market liberalization is associated with a decrease in the cost of equity capital of the firms. Developments in the securities markets infrastructure have also reduced the cost of equity capital. However, with increased integration there is the possibility of capital outflows from the emerging markets, which might reverse the pattern of decrease in cost of capital in these markets.

Private equity and the flight of the phoenix four - the collapse of MG Rover in the UK

This paper explores the nature of the co-called ‘private equity business model’ (PEBM) and assesses its shortcomings, using the illustrative example of the role of private equity in structuring the finance and subsequent collapse of MG Rover, as the automotive industry has been a significant destination for private equity financing. The paper outlines the nature of the PEBM. It then details how the PEBM extracts value, before stressing how this can affect workers in a portfolio business. We argue that the emergence of the PEBM changes the basis of competitive rules in organizations and the running of erstwhile going concerns, necessitating a need for further regulation—particularly, how to secure wider stakeholder oversight without reducing the efficiency of PEBM concerns.

A Influência da teoria da agência na estrutura de capital na indústria do calçado

apresentado ao Instituto de Contabilidade e Administração do Porto para a Dissertação de Mestrado para obtenção do grau de Mestre em Contabilidade e Finanças sob orientação do Mestre Adalmiro Álvaro Malheiro de Castro Andrade Pereira

Response : A defensible and workable approach to the income tax treatment of financial instruments

It is a privilege to have the opportunity to respond to the comments on my monograph1 provided by Mark Gergen, Glenn May, and Gordon Longhouse. Their comments, which are inevitably coloured by their very different perspectives, reflect the considerable expertise that each one of them has in the area of the income taxation of financial instruments. Indeed, it is with some hesitation that I offer a response in defence of various portions of the analysis presented in my monograph in support of some pretty modest proposals in this extremely difficult area of income tax law. Although I spent considerable time exploring some necessary first principles and their implications for the design of a system for the income taxation of financial instruments, I made several concessions to certain practical constraints that led me to support, in some measure, the status quo reflected in certain of the existing literature, as well as the legislation in a select group of countries. On the assumption that many readers may be unfamiliar with the monograph, I propose to respond by outlining much of my analysis in the monograph and the proposals that are the logical outcome. Throughout the outline, I will highlight and respond to what I see as the important points of difference emphasized by Gergen, May, and Longhouse.

A trava bancária na recuperação judicial e o seu impacto nas formas de financiamento da empresa: uma análise através da teoria do “common pool assets” de Thomas H. Jackson

O objeto de estudo do presente trabalho é a Trava Bancária, mecanismo jurídico previsto no art. 49, § 3º da Lei de Falências e Recuperação Judicial de Empresas - LRF, por meio do qual dívidas contraídas pelas empresas junto às instituições financeiras são garantidas pela alienação fiduciária dos seus recebíveis. Serão analisadas as peculiaridades desse tipo de garantia fiduciária e, em especial, a prerrogativa que os credores detentores desse tipo de garantia possuem dentro dos procedimento de recuperação judicial de empresas, de não precisarem submeter seus créditos aos procedimentos concursais. Será feita uma análise para demonstrar que a manutenção da trava bancária diminui o valor de going concern da empresa em recuperação, pois a criação de um tipo de credor que é blindado quanto aos efeitos da recuperação judicial impede que essa mantenha-se como um procedimento concursal coletivo e compulsório, requisitos que são essenciais para incentivar os credores da empresa a trabalharem de forma conjunta, mantendo o valor de going concern da empresa recuperanda, com o objetivo de recuperar a empresa e saldarem seus créditos. Tem-se como objetivo demonstrar que, a existência da trava bancária na recuperação judicial, pode afetar negativamente o acesso das empresas ao financiamento por equity. Isto porque, os acionistas das empresas são os últimos da fila de credores a receberem caso a empresa entre em recuperação judicial, e, portanto, acredita-se que, ao saberem que existe um mecanismo que poderá inviabilizar a recuperação judicial das empresas em crise, atrapalhando sua geração de valor de going concern, é possível que investidores desistam de investir em empresas financiadas por dívidas garantidas pela alienação fiduciária de seus recebíveis, passando a ser essa uma variável levada em consideração quando da realização dos procedimentos de valuation para compra de participação acionária em empresas. Os pressupostos teóricos que serão utilizados para embasar a premissa de que a trava bancária gera impacto negativo no valor de going concern das empreas em crise, dificultando seu processo de recuperação, serão extraídos e elaborados a partir da Teoria da Common Pool Assets do autor norte-americano, Thomas H. Jackson. A relevância deste trabalho decorre da importância que o procedimento de recuperação judicial apresenta para as empresas em crise e para os seus credores, bem como a importância que esse tipo de procedimento adquiriu no País. Com efeito, desde a entrada em vigor da LRF no ordenamento jurídico brasileiro em 2005, cerca de 4 mil companhias já pediram recuperação judicial. Além disso, o trabalho mostra-se relevante por abordar questão relativa às formas de financiamento das empresas, assunto que tem reflexo no Custo Brasil e impacto direto no desenvolvimento da economia brasileiro.

A new approach to development banking in Jamaica

Includes bibliography

Thin Capitalization Rules and Entrepreneurial Capital Structure Decisions

Tax planners often choose debt over equity financing. As this has led to increased corporate debt financing, many countries have introduced thin capitalization rules to secure their tax revenues. In a general capital structure model we analyze if thin capitalization rules affect dividend and financing decisions, and whether they can partially explain why corporations receive both debt and equity capital. We model the Belgian, German and Italian rules as examples. We find that the so-called Miller equilibrium and definite financing effects depend significantly on the underlying tax system. Further, our results are useful for the treasury to decide what thin capitalization type to implement.

The relationship between hospital financial performance and information technology integration strategy selection

In light of the new healthcare regulations, hospitals are increasingly reevaluating their IT integration strategies to meet expanded healthcare information exchange requirements. Nevertheless, hospital executives do not have all the information they need to differentiate between the available strategies and recognize what may better fit their organizational needs. ^ In the interest of providing the desired information, this study explored the relationships between hospital financial performance, integration strategy selection, and strategy change. The integration strategies examined – applied as binary logistic regression dependent variables and in the order from most to least integrated – were Single-Vendor (SV), Best-of-Suite (BoS), and Best-of-Breed (BoB). In addition, the financial measurements adopted as independent variables for the models were two administrative labor efficiency and six industry standard financial ratios designed to provide a broad proxy of hospital financial performance. Furthermore, descriptive statistical analyses were carried out to evaluate recent trends in hospital integration strategy change. Overall six research questions were proposed for this study. ^ The first research question sought to answer if financial performance was related to the selection of integration strategies. The next questions, however, explored whether hospitals were more likely to change strategies or remain the same when there was no external stimulus to change, and if they did change, they would prefer strategies closer to the existing ones. These were followed by a question that inquired if financial performance was also related to strategy change. Nevertheless, rounding up the questions, the last two probed if the new Health Information Technology for Economic and Clinical Health (HITECH) Act had any impact on the frequency and direction of strategy change. ^ The results confirmed that financial performance is related to both IT integration strategy selection and strategy change, while concurred with prior studies that suggested hospital and environmental characteristics are associated factors as well. Specifically this study noted that the most integrated SV strategy is related to increased administrative labor efficiency and the hybrid BoS strategy is associated with improved financial health (based on operating margin and equity financing ratios). On the other hand, no financial indicators were found to be related to the least integrated BoB strategy, except for short-term liquidity (current ratio) when involving strategy change. ^ Ultimately, this study concluded that when making IT integration strategy decisions hospitals closely follow the resource dependence view of minimizing uncertainty. As each integration strategy may favor certain organizational characteristics, hospitals traditionally preferred not to make strategy changes and when they did, they selected strategies that were more closely related to the existing ones. However, as new regulations further heighten revenue uncertainty while require increased information integration, moving forward, as evidence already suggests a growing trend of organizations shifting towards more integrated strategies, hospitals may be more limited in their strategy selection choices.^

Supporting Access to Finance by SMEs: Mapping the initiatives in five EU countries. ECMI Research Report No. 9, April 2014

This paper maps the initiatives to support access to finance for small- and medium-sized enterprises (SMEs) that were available at national level in 2012 in the five biggest European economies (Germany, France, the UK, Italy and Spain). This mapping distinguishes initiatives promoted and financed primarily through public resources from those developed independently by the market. A second breakdown is proposed for those sources of finance with different targets, i.e. whether the target is debt financing (typically bank loans at favourable conditions, public guarantees on loans, etc.) or equity financing (typically venture capital funds, tax incentives on equity investments, etc.). A broad set of initiatives has been implemented to close the funding gap of SMEs in these five countries. The total amount of public spending for SMEs, however, has remained well below 1% of GDP. Public subsidisation of bank loans has been by far the most diffused type of intervention. Despite the fact that this strategy might prove to be effective in the short term, it fails to address long-term sustainability issues via a more diversified set of financing tools.

Formalization of the informal venture capital market - Business angel networks and syndicates

Business angels are natural persons who provide equity financing for young enterprises and gain ownership in them. They are usually anonym investors and they operate in the background of the companies. Their important feature is that over the funding of the enterprises based on their business experiences they can contribute to the success of the companies with their special expertise and with strategic support. As a result of the asymmetric information between the angels and the companies their matching is difficult (Becsky-Nagy – Fazekas 2015), and the fact, that angel investors prefer anonymity makes it harder for entrepreneurs to obtain informal venture capital. The primary aim of the different type of business angel organizations and networks is to alleviate this matching process with intermediation between the two parties. The role of these organizations is increasing in the informal venture capital market compared to the individually operating angels. The recognition of their economic importance led many governments to support them. There were also public initiations that aimed the establishment of these intermediary organizations that led to the institutionalization of business angels. This study via the characterization of business angels focuses on the progress of these informational intermediaries and their ways of development with regards to the international trends and the current situation of Hungarian business angels and angel networks.

Second Quarter 2016: Slowdown for Large Hotels Continues; Small Hotels Have Now Slowed as Well

Our Standardized Unexpected Price (SUP) metric continues to show a decline in the price of large hotels, and now also the price of small hotels has eased—even though hotel transaction volume has increased. Although debt and equity financing for hotels remain relatively inexpensive, we are concerned that the total volatility of hotel returns is greater relative to the return volatility for other commercial real estate. If this trend continues, lenders will eventually start to tighten hotel lending standards. Our early warning indicators all continue to suggest that the downward trend in hotel prices should continue into the next quarter. This is report number 19 of the index series.

Third Quarter 2016: Hotels Exhibit Positive Momentum

Our Standardized Unexpected Price (SUP) metric showed an uptick in the price of large hotels during the third quarter of 2016, with a continued decline in the price of small hotels. Although debt and equity financing for hotels were still relatively inexpensive during this quarter, we remain concerned that the increasing relative riskiness of hotels compared to other commercial real estate suggests that lenders will eventually start to tighten hotel lending standards if this trend continues. Our early warning indicators continue to suggest an eventual downward trend in large hotel prices. This is report number 20 of the index series.

Empirical studies on share issuance and repurchase decisions

Financial constraints influence corporate policies of firms, including both investment decisions and external financing policies. The relevance of this phenomenon has become more pronounced during and after the recent financial crisis in 2007/2008. In addition to raising costs of external financing, the effects of financial crisis limited the availability of external financing which had implications for employment, investment, sale of assets, and tech spending. This thesis provides a comprehensive analysis of the effects of financial constraints on share issuance and repurchases decisions. Financial constraints comprise both internal constraints reflecting the demand for external financing and external financial constraints that relate to the supply of external financing. The study also examines both operating performance and stock market reactions associated with equity issuance methods. The first empirical chapter explores the simultaneous effects of financial constraints and market timing on share issuance decisions. Internal financing constraints limit firms’ ability to issue overvalued equity. On the other hand, financial crisis and low market liquidity (external financial constraints) restrict availability of equity financing and consequently increase the costs of external financing. Therefore, the study explores the extent to which internal and external financing constraints limit market timing of equity issues. This study finds that financial constraints play a significant role in whether firms time their equity issues when the shares are overvalued. The conclusion is that financially constrained firms issue overvalued equity when the external equity market or the general economic conditions are favourable. During recessionary periods, costs of external finance increase such that financially constrained firms are less likely to issue overvalued equity. Only unconstrained firms are more likely to issue overvalued equity even during crisis. Similarly, small firms that need cash flows to finance growth projects are less likely to access external equity financing during period of significant economic recessions. Moreover, constrained firms have low average stock returns compared to unconstrained firms, especially when they issue overvalued equity. The second chapter examines the operating performance and stock returns associated with equity issuance methods. Firms in the UK can issue equity through rights issues, open offers, and private placement. This study argues that alternative equity issuance methods are associated with a different level of operating performance and long-term stock returns. Firms using private placement are associated with poor operating performance. However, rights issues are found empirically to be associated with higher operating performance and less negative long-term stock returns after issuance in comparison to counterpart firms that issue private placements and open offers. Thus, rights issuing firms perform better than open offers and private placement because the favourable operating performance at the time of issuance generates subsequent positive long-run stock price response. Right issuing firms are of better quality and outperform firms that adopt open offers and private placement. In the third empirical chapter, the study explores the levered share repurchase of internally financially unconstrained firms. Unconstrained firms are expected to repurchase their shares using internal funds rather than through external borrowings. However, evidence shows that levered share repurchases are common among unconstrained firms. These firms display this repurchase behaviour when they have bond ratings or investment grade ratings that allow them to obtain cheap external debt financing. It is found that internally financially unconstrained firms borrow to finance their share repurchase when they invest more. Levered repurchase firms are associated with less positive abnormal returns than unlevered repurchase firms. For the levered repurchase sample, high investing firms are associated with more positive long-run abnormal stock returns than low investing firms. It appears the market underreact to the levered repurchase in the short-run regardless of the level of investments. These findings indicate that market reactions reflect both undervaluation and signaling hypotheses of positive information associated with share repurchase. As the firms undertake capital investments, they generate future cash flows, limit the effects of leverage on financial distress and ultimately reduce the risk of the equity capital.