Department of Finance

Projects

• Project 2016 - 2020 Charlotte Østergaard (project manager) Capital structure and entrepreneurial wealth

  This project studies the interdependence between entrepreneurs' portfolios and the capital structure decisions of the firms they own using Norwegian registry data. Do more wealthy owners have firms with  higher leverage?  Do more diversified owners have firms with  higher leverage? Do these relations depend on the concentration of ownership? Are they different in owner-managed firms or family firms?

• Project 2016 - 2019 Samuli Knüpfer (project manager) The Impact of Managerial Biases on Firm Performance and Policies

  Do managers' behavioral biases influence corporate outcomes? We use a large sample of CEOs and firms, combined with measures of a number of behavioral biases, to study the impact of managerial biases on corporate performance and policies.

• Project 2014 - 2018 Øyvind Norli (project manager) Acquirer Termination Fee and Stock Market Feedback

  The various versions of the market efficiency hypothesis state that security prices reflect available information. This view is consistent with a mechanism where information is processed by traders and that their trading activities in turn embed this information into prices. The traditional view is that the process through which prices gets informative ends here. A recent literature has investigated the possibility that corporate managers pay attention to stock prices and adjust their corporate decision in accordance with what they learn. When managerial decisions is affected by prices, there will be a feedback loop between prices and decisions that may impact the degree of market efficiency. Edmans and Goldstein (2011) argue that feedback between prices and decisions may deter speculators from trading on private information. In a merger setting, the intuition for their argument is simple. If speculators have negative information about a potential merger transaction, they will short the buyer. But, if the managers of the buyer listen to the market, they will realize that the deal is bad and cancel the transaction. This leaves the speculators with a loosing short position. Thus, the speculators will be reluctant to short the stock in the first place. The outcome is that bidder price does not reflect as much negative information as is available to speculators. In other words, markets are not informationally efficient.

  The main contribution of the proposed research is to provide empirical evidence on the existence of the feedback mechanism studied in Edmans and Goldstein (2011). Using a sample of merger announcements, we plan to compare the information content of post announcement stock prices for bidders committed to pay an termination fee with the corresponding measure for bidders without such commitment. Bidders for which it is more costly to cancel the transaction is less likely to cancel. Consequently, speculators are more likely to trade on their negative information and prices should be more informative. Edmans and Goldstein (2011) show that bidder cancellation cost will have such an effect and mention bidder termination fee as an example of cancellation costs.

• Project 2014 - 2017 Dagfinn Rime (project manager), Anna Lindhal, Adrien Verdelhan, Maik Schmeling, Lucio Sarno Do foreign exchange markets serve their customers well?

  This project aims to bring together several unique data sets in order to closer analyze the conditions under which the customers trade. Such analysis requires high frequency data, with a keen eye for the micro-details of the market. The implications will however be all but micro:

  (i) As the fix-scandal has unraveled, regulators has started considering alternatives for regulating the FX market, and lawyers has started preparing law-suits unparalleled in the history of the FX markets. A deep and thorough analysis of the determination of the fix-price is in urgently needed for all parties;

  (ii) For the non-bank financial firms and non-financial corporations that trade for more than USD 3000 billion a day according to the latest BIS-survey, learning if the prices they trade on and the transaction cost they pay are fair prices is of obvious importance; and finally,

  (iii) A deeper understanding of the customer segment of the market may inform the academic literature on the functioning of the FX market.

  There are in particular three data sets that are crucial for conducting the intended projects: (i) High-frequency data on exchange rates and transactions, from late 1990s and covering several currencies, from the Reuters trading platform D2000-2. These data will be made available from the interbank market. (ii) The daily statistics collected by Norges Bank on the transactions of several aggregated customers groups in the kronemarket. (iii) High-frequency data on individual customer trades in the Swedish krone market, made available by Anna Lindahl at the Sveriges Riksbank

• Project 2014 - 2017 Geir Høidal Bjønnes (project manager) FX Market Microstructure: Liquidity and information in the era of electronic trading

  The main goal for this project is to produce 3 articles of high quality that provide key insights to academica and policy makers on how FX markets function in the new environment of high frequency trading, as seen from the data of a large european dealer bank.

  The data set covers information about all FX trading by the bank over a period of 68 days in 2012. The data includes information on every single trade, trading platforms, counterparts etc. The data set is more detailed than data utilized in the existing literature and thus allow us to test new hypothesis.

• Project 2014 - 2015 Richard Priestley (project manager) Quantitative Equilibrium Impacts of Short - Sale and Leverage Constraints

• Project 2014 Paul Ehling (project manager) Capital and ownership structure and the survival of new firms

  Using semi-parametric and parametric proportional hazards models and an accelerated life model, we study whether and for how long initial capital structure and start-up ownership structure matter for survival and whether and how significantly a firm's ability to adjust its capital structure and its ownership structure affect survival. Further, we propose to study the impact of incumbents' financial health, especially cash holdings, and ownership structure on survival rates of new firms.

• Project 2013 - 2016 Ilan Cooper (project manager), Richard Priestley The cost of capital for unlisted firms

  Assessing the cost of capital for the purpose of capital budgeting is one of the most important tasks facing managers. For non-listed firms this normally entails estimating betas of comparable, traded, firms and using the implied cost of capital in their capital budgeting decisions.

  There are two, potentially severe, problems in the existing methods of estimating the cost of capital. First, if markets are inefficient, beta estimates can be biased due to stock mispricing. Consequently, estimates of firms’ cost of capital will be distorted, leading to inefficient resource allocation both within firms and across firms. Second, assessing the cost of capital for non-listed firms through estimating betas of listed, comparable, firms is a problem because their corporate governance structures are very different.

  As ownership is substantially more dispersed within listed firms, they could face agency conflicts between managers and shareholders not present within non-listed firms. One consequence of the agency conflicts within listed firms could be overinvestment or underinvestment. To the extent that overinvestment or underinvestment changes the risk profile of firms, applying beta estimates of listed firms to private firm project valuation may be inappropriate.  

  In this project we propose using an approximation for stock returns by estimating the rate of return on physical (real) investment. Relatively recent academic research has shown that investment rates of return correspond closely with stock returns under reasonable assumptions about technology and adjustment costs of investment. Therefore, obtaining the investment rates of returns for a firm and measuring its covariance with the aggregate investment rate of return should provide an investment return beta that can be used to calculate a firm’s cost of equity capital.

  There are two clear advantages of this approach. First, it is less subject to biases resulting from stock security mispricing. Second, by estimating the investment betas of non-listed firms directly from the investments of non-listed firms, we can obtain better cost of capital measures for private firms that are unaffected by the types of agency conflicts that affect listed firms.  

• Active project 2012 - now Janis Berzins (project manager), Øyvind Bøhren, Leon Bogdan Stacescu Owner Illiquidity and Firm Behavior: Financial and Real Effects of the Personal Wealth Tax on Private Firms

  We address the role of dividends as a liquidity provider for the firm’s owners. Our key to uncovering the relationship between owner illiquidity and firm payout is the wealth tax levied on the owner’s stock, i.e., the owner’s share of the firm’s equity and other personal equity. This tax bill needs to be financed by the owner’s liquid assets, which may be difficult when the tax bill is high relative to the owner’s liquid assets and when the law changes.

  Our basic idea is that the higher this ratio of wealth tax to owner’s liquid assets, the more the owner wants the firm to pay high dividends. We expect this illiquidity-induced dividend effect to be particularly strong in firms controlled by families who have invested heavily in firms where the family’s share of the firm’s equity is large relative to the family’s liquid assets and personal equity. Since such firms are mostly non-listed and may allow for considerable private benefits, financing the wealth tax by selling shares in the firm may be very costly unless the control premium can be recovered when the shares are sold.

• Project 2012 - 2016 Charlotte Østergaard (project manager) Are knowledge intensive firms more vulnerable to financial crisis? Evidence from Norway

  Which firms get hit more in a recession? The answer to this question is highly important for the speed of recovery or maybe even for future levels of output if firms with growth-options are hit relatively harder than other firms. We attempt to answer this question using Norwegian data on firms' financing during the recent financial crisis.

• Project 2011 - 2017 Øyvind Norli (project manager), B. Espen Eckbo, Karin S. Thorburn Who initiates corporate takeovers?

  The presumption in the takeover literature is that the transaction is initiated by a bidder: the bidder moves first and the target board responds. However, based on SEC filings of completed takeovers of publicly traded targets over the period 1996-2006, we show that the bidder initiated the takeover process in only 40% of the cases, while the target initiated 40% of the time. The remaining 20% represent mostly joint initiations ("mergers of equals") and target shareholders activists.

  Being a first-mover in the takeover game affects bargaining power. In this project proposal we suggest to investigate how bidding strategies and bid outcomes depend on the initiating party. Our hypotheses are:

  1. Target-initiated takeovers involve early-stage auction (prior to the first public bid), which in turn lead to greater average takeover premiums.
  2. The low incident of bidder-initiated takeovers is a response to the widespread deployment of costly takeover defenses.
  3. Targets initiating a takeover tend to have small board size, high degree of director independence, low anti-takeover provisions, and high pay-performance incentives.

• Project 2011 - 2016 Leon Bogdan Stacescu (project manager) Ownership, taxes, and dividends

  Our project looks at the interaction between firm ownership, its payout policy and the taxes that have to be paid by the firm and its investors. We use the Norwegian tax reform of 2006 to identify the connections between these three aspects and clarify agency issues between shareholders.

  The tax reform increased taxation for dividends and capital gains paid to individual investors, but did not do the same at the intercorporate level. Our main hypothesis is that the observed switch from direct to indirect investment following the tax reform was also used to deal with agency issued within the firm and allow the payment of relatively high dividends at a low tax cost.

• Project 2010 - 2016 Øyvind Bøhren (project manager), Janis Berzins, Leon Bogdan Stacescu Why do firms pay dividends?

  Starting out with the current puzzles in the international research literature, our project reconsiders the determinants of cash payout to stockholders in an environment which is particularly well suited for this purpose.

  First, we address both public and private firms, which is very unusual in the literature. This allows us to analyze two firm types which differ widely in terms of major dividend determinants, i.e., information asymmetry, agency costs, stock liquidity, and financial constraints. Including private firms in the sample also allows us to better understand a firm type which has been ignored in the finance literature, despite our finding that it represents four times more employment, four times more sales, and twice as much assets as public firms.

  Second, we observe the full ownership, board, management. and family structures of every firm, which allows for an unusually close study of how dividend policy interacts with corporate governance mechanisms. Third, we will choose sample firms in which the tax system has a neutral effect, both regarding dividends vs. capital gains and dividends vs. wages. This means we can ignore complicating interactions between taxes and other dividend determinants, which has been a problem in the literature, particularly in the US.

  Fourth, our data set is considerably wider, deeper, and more accurate than what has been available internationally in the past. We study the population of Norwegian public and private firms with limited liability over the period 1994-2007. This represents almost 80,000 active firms with consistent, publicly audited data per year, which also allows us to account for all kinds of interactions between dividends and tunneling.

  Finally, we account for potential endogeneity between dividends, investment, and financing, which is particularly important in privte firms.

• Project 2009 - 2016 Leon Bogdan Stacescu (project manager), Øyvind Bøhren, Janis Berzins Why do firms pay dividends? The secrets of private firms

  Although dividend policy is an established area of research, there are few solid conclusions and many unanswered questions. We aim to examine theories whose empirical record is mixed or very thin, using the unexplored universe of private firms.

  There are many important features of private firms that enable us to push beyond the limits of existing knowledge. The more concentrated ownership structure of private firms allows us to examine the role of dividend policy when its role as a signal to equity investors is minimal. The wide cross-sectional variation in shareholder involvement as directors and officers enables us to test how dividends interact with the separation between ownership and control. The same variability allows us to examine the role of dividend policy in the conflict between majority and minority shareholders, using unusually detailed data on ownership and families. The stronger financial constraint of small firms means we can more carefully explore the role of dividends in the firm’s overall cash management. This is important, since the relationship between cash flow, cash reserves, and investment has been a matter of intense debate, with dividend policy often taken as an exogenous variable.

  We can test a range of alternative predictions. Do financially constrained firms pay lower dividends to please creditors and shelter investments? Do they hold on to stable dividend payments in order to establish a reputation with prospective equity investors and to smooth their owners’ consumption? Do they hoard cash, or do they adjust their investment and dividend payments to the available cash flow? Is cash management and dividend policy different in private firms due to stronger bank dependence?

  Key questions: Do private firms have a different dividend policy than comparable public firms? What is the role of dividends in conflicts between shareholders and managers, between majority and minority shareholders, and between debtholders and shareholders? How do dividends interact with the cash management and investment policy of private firms?

• Project 2009 - 2015 Charlotte Østergaard (project manager), Bent E. Sørensen, Amir Sasson Dividend smoothing, ownership structure, and bank relations: Evidence from nonlisted Norwegian firms

  Key questions: Is the effect of bank relationship on income smoothing related to firm characteristics? What is the relationship between smoothing, bank relationships and ownership structure?