Corporate Risk-Taking in Privatized Firms: International Evidence on the Role of State and Foreign Owners

Using a unique database of 190 newly privatized firms from 36 countries, we investigate the impact of shareholders’ identify on corporate risk-taking behavior. We find strong and robust evidence that state (foreign) ownership is negatively (positively) related to corporate risk-taking. Moreover, we find that these relations depend on the level of government extraction. Our results suggest that relinquishment of government control, openness to foreign investment, and improvement of country-level governance institutions are key factors in the success of privatization reform.Privatization, risk-taking, corporate governance

Policy Uncertainty and Loan Loss Provisions in the Banking Industry

Policy uncertainty is an increasingly important issue facing many economies. In this paper, we examine how banks accrue for loan losses in response to policy uncertainty (PU) and the implications of these accruals in terms of actual loan losses and future liquidity creation. Consistent with banks recognizing more loan losses in anticipation of PU’s depressive effects, we document a contemporaneous positive association between PU and loan loss accruals. This positive association is more pronounced for banks with a riskier loan portfolio and that have a history of lower loan loss reserves. We also find that banks making more loan loss provisions in times of higher PU have significantly higher future loan charge-offs and lower future liquidity creation. Overall, our paper highlights that PU affects the loan loss accruals of banks and that these accruals reflect rational expectations about PU’s depressive effects on the economy

The Effect of Timely Loan Loss Recognition in the Banking System on Firms’ Debt Structure

In this paper, we examine how the system under which banks record loan losses, specifically, the timeliness of loan loss recognition, affects borrowers’ debt structure. Using data from 55 countries, we find that more timely loan loss recognition reduces firms’ reliance on bank debt relative to public debt. This result reflects an equilibrium in which firms in an economy rely less on bank debt when there are greater lending constraints and more borrower monitoring in a more timely loan loss accounting regime. Consistent with such a regime resulting in tighter loan conditions, we find an even lower use of bank debt in countries with stringent bank supervision and among financially constrained and opaque firms. Overall, our study offers new insight into the real effects of banks’ accounting on firms’ debt structure when firms can choose alternative debt providers

Corporate Risk-Taking in Privatized Firms: International Evidence on the Role of State and Foreign Owners

Using a unique database of 190 newly privatized firms from 36 countries, we investigate the impact of shareholders’ identify on corporate risk-taking behavior. We find strong and robust evidence that state (foreign) ownership is negatively (positively) related to corporate risk-taking. Moreover, we find that these relations depend on the level of government extraction. Our results suggest that relinquishment of government control, openness to foreign investment, and improvement of country-level governance institutions are key factors in the success of privatization reform

Corporate Disclosure in Response to Monetary Policy Changes

This paper examines how monetary policy changes affect corporate disclosure. The increase in the federal funds rate may incentivize firms to increase disclosure so as to counteract the shock of the increased cost of capital. Alternatively, firms may decrease their disclosure in expectation of lowered external financing needs. By examining the earnings guidance of publicly listed firms from 1995 to 2009, we find that an increase in the federal funds rate induces more corporate disclosure. The cross-sectional tests show that the effect of monetary policy changes is stronger when monetary policy change is more persistent or when firms have more external financing needs or more growth opportunities. Finally, we find that firms decrease their disclosure level in response to the announcements of unconventional expansionary monetary policies introduced between 2008 and 2015. Overall, our paper provides new insight into how firms respond to macroeconomic policy changes by changing their disclosure strategy

Corporate Ownership Structure and the Cash Flow Sensitivity of Cash

This article examines the effects of excess control rights of the controlling shareholder and the presence of multiple large shareholders on financial constraints, proxied by cash flow sensitivity of cash. Using a unique data set of 745 French listed firms during 1998—2013, the results show that firms have high cash flow sensitivity of cash when the controlling shareholder’s control rights exceed its cash-flow ownership. This sensitivity decreases, however, with the contestability of the controlling owner’s power. Taken together, these findings provide empirical support to the argument that firms experiencing excess control rights face considerable financial constraints that are lowered in the presence of high control contestability

Political connections of newly privatized firms

We investigate the extent of political connections in newly privatized firms. Using a sample of 245 privatized firms headquartered in 27 developing and 14 developed countries over the period 1980 to 2002, we find that 87 firms have a politician or an ex-politician on their board of directors. Politically-connected firms are generally incorporated in major cities, are highly leveraged, and operate in regulated sectors. The likelihood of observing political connections in these firms is positively related to government residual ownership, and negatively related to foreign ownership. Political fractionalization and tenure, as well as judicial independence are also key explanatory variables. Finally, politically-connected firms exhibit a poor accounting performance compared to their non-connected counterparts.Privatization Political connection Characteristics Performance

How does asset redeployability affect stock price crash risk?

How does a firm\u27s asset redeployability affect its future stock price crash risk? Asset redeployability, which refers to the ease of selling corporate assets, allows managers to opportunistically exploit asset transactions to manage earnings to hoard bad news, thereby increasing future crash risk. Using a large sample of US firms, we find that firms with higher asset redeployability are more likely to experience a future stock price crash. We further find that this positive association is stronger for firms experiencing greater internal and external pressure to manage earnings. Our study highlights that relying on redeployable assets to orchestrate earnings undermines shareholders\u27 interests, particularly when internal and external pressures incentivize upward earnings management