The Journal of Finance

Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

Published: 1/12/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12439  |  Cited by: 107

EMILY BREZA, ANDRES LIBERMAN

We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

Entrenchment and Severance Pay in Optimal Governance Structures

Published: 3/21/2003,  Volume: 58,  Issue: 2  |  DOI: 10.1111/1540-6261.00536  |  Cited by: 325

Andres Almazan, Javier Suarez

This paper explores how motivating an incumbent CEO to undertake actions that improve the effectiveness of his management interacts with the firm's policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEO's compensation package and on the CEO's influence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation.

A Macrofinance View of U.S. Sovereign CDS Premiums

Published: 6/9/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12948  |  Cited by: 63

MIKHAIL CHERNOV, LUKAS SCHMID, ANDRES SCHNEIDER

Premiums on U.S. sovereign credit default swaps (CDS) have risen to persistently elevated levels since the financial crisis. We examine whether these premiums reflect the probability of a fiscal default—a state in which a balanced budget can no longer be restored by raising taxes or eroding the real value of debt by increasing inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stances jointly endogenously determine nominal debt, taxes, inflation, and growth. We show that the CDS premiums reflect the endogenous risk‐adjusted probabilities of fiscal default. The calibrated model is consistent with elevated levels of CDS premiums but leaves dynamic implications quantitatively unresolved.

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

Published: 8/18/2017,  Volume: 72,  Issue: 5  |  DOI: 10.1111/jofi.12526  |  Cited by: 14

ANDRES ALMAZAN, ZHAOHUI CHEN, SHERIDAN TITMAN

This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Published: 5/9/2008,  Volume: 63,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2008.01361.x  |  Cited by: 72

ANDRES ALMAZAN, SANJAY BANERJI, ADOLFO DE MOTTA

We provide a theory of informal communication—cheap talk—between firms and capital markets that incorporates the role of agency conflicts between managers and shareholders. The analysis suggests that a policy of discretionary disclosure that encourages managers to attract the market's attention when the firm is substantially undervalued can create shareholder value. The theory also relates the credibility of managerial announcements to the use of stock‐based compensation, the presence of informed trading, and the liquidity of the stock. Our results are consistent with the existence of positive announcement effects produced by apparently innocuous corporate events (e.g., stock dividends, name changes).

Financial Structure, Acquisition Opportunities, and Firm Locations

Published: 3/19/2010,  Volume: 65,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01543.x  |  Cited by: 192

ANDRES ALMAZAN, ADOLFO DE MOTTA, SHERIDAN TITMAN, VAHAP UYSAL

This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high‐tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions.