Cynthia Van Hulle

Internal Capital Markets and Capital Structure: Bank Versus Internal Debt

We argue that domestic business groups are able to actively optimise the internal/external debt mix across their subsidiaries. Novel to the literature, we use bi-level data (i.e. data from both individual subsidiary financial statements and consolidated group level financial statements) to model the bank and internal debt concentration of non-financial Belgian private business group affiliates. As a benchmark, we construct a size and industry matched sample of non-group affiliated (stand-alone) companies. We find support for a pecking order of internal debt over bank debt at the subsidiary level which leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. The internal debt concentration of a subsidiary is mainly driven by the characteristics of the groups internal capital market. The larger its available resources, the more intra-group debt is used while bank debt financing at the subsidiary level decreases. However, as the groups overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateral assets) to limit moral hazard and dissipative costs. Overall, our results are consistent with the existence of a complex group wide optimisation process of financing costs.

Regulation, taxes and the market for corporate control in Belgium

Abstract This paper examines the effect of regulation and taxation on the characteristics of the merger and acquisition process in Belgium. Regulatory provisions are reflected in the fact that Belgian bidders own large toeholds in the target before they engage in takeover bids. Although these toeholds do not have to be disclosed, bidders do not earn any significant returns as a result of the takeover. It is also found that tax considerations are important when a firm chooses to pay with cash or with shares. Finally, it is found that in negotiated offers, the gain to target firms is negatively related to the toehold of the bidder and positively related to the number of shares controlled by large block holders.

On the nature of European holding groups

This paper offers a new rationale for the emergence of European holding groups and especially for the frequently observed intergroup ownership connections. Large holding groups typically control many of the most important companies in the country where they reside and usually consist of (sometimes many) non-holding firms (i.e., industrial companies and banks) with layers of holding companies on top. The holding firms in these layers often show shared ownership between groups, whereas ownership of the non-holding firms may be shared as well. So far no explanation for these intergroup links has been proposed. This paper offers a rationale for this phenomenon. Specifically, drawing on European corporate law, it is shown that holding structures with intergroup connections develop as a response to the need for a flexible, renegotiation-free cooperation mechanism. This mechanism, which solves a principal-agent problem when decisions are sequential and not fully enforceable, becomes especially important in the face of capital constraints. Finally, the paper also investigates the interaction between holding firms and the frequently used shareholder syndicate contracts.

Do Non-Profit Nursing Homes Separate Governance Roles? The Impact of Size and Ownership Characteristics

Separation between operational responsibilities and those of oversight is an important point of discussion in governance. Novel to the literature, this paper not only offers direct evidence on the degree of separation, but also shows its relationship with size (ceteris paribus efficiency prescribes that large organizations implement more separation) and ownership characteristics of non-profit institutions. Using a sample of Belgian (Flemish) nursing homes, we find that in private nursing homes this separation increases with size while this is not the case in public homes. We document that this lack in flexibility in governance practices explains the micro-monitoring in public institutions. We formulate policy implications and suggest solutions to create more flexibility and likely also better governance.

Option pricing methods: an overview

Abstract This paper aims at giving an overview of option pricing methods. Its stress is on intuition rather than on replicating formulas; furthermore it does not presume pre-knowledge of option pricing. The paper considers the two major classes of option models (discrete and continuous trading) and mimicking and non-mimicking pricing methods.

Aggregate Bankruptcy Rates and the Macroeconomic Environment: Forecasting Systematic Probabilities of Default

Recent empirical research has stressed the importance of economy wide factors in the assessment of default risk, for instance for bond portfolios or portfolios of bank loans. Macroeconomic risk is essentially systematic, as it is difficult to reduce through diversification. Adequate forecasts of the links between macroeconomic factors and default risk, often defined as aggregate credit risk, are therefore important in a large number of risk management applications. This paper considers eleven alternative ways to model the aggregate bankruptcy rate, which is a proxy for aggregate credit risk, on Belgian data for the period 1986- 2002. Based on these models, forecasts of the bankruptcy rates for 2003-2006 are made and compared. Four or five-variable Almon lag models result in the best in-sample fit and have the best forecast performance, but much more straightforward alternatives – such as an ARMA model or a one-variable model based on real GDP growth – do almost equally well. Four or five-variable vector error correction models are shown to have good in-sample fit, but very poor out-of-sample forecasting power. Overall we find that the prediction power of simple models is hard to beat.

The Impact of a Stock Listing on the Determinants of Firm Performance

Research on the question of what makes firms perform well has shown that product market competition, financial pressure and ownership or ownership identity are important performance drivers. Recently the issue of whether or not their impact is influenced by environmental or contextual characteristics has received increasing attention. In this paper we test, on a sample of Belgian firms, whether performance drivers behave differently in a non-quoted environment as compared to a quoted one. Our main result is that the impact of competition, financial pressure and family control does indeed depend upon whether the firm is quoted or not. Overall, for nonquoted companies the performance drivers do not enhance performance and in mostcases are even detrimental. For quoted companies however the results are just the opposite. We find that this difference in driver functioning explains the better performance of quoted firms vis-a-vis their private peers.

Bookbuilding and share pre-allocation in IPOs

Publisher Summary Since the second half of the 1990s, initial public offerings (IPOs) in Continental Europe have increasingly used bookbuilding to market their shares. During this process, a special role is assigned to institutional investors, who frequently – but not always – are pre-allocated a fraction of the offering. This chapter empirically investigates the driving forces behind bookbuilding and share pre-allocation in IPOs. Using data on Belgian IPOs, it found that firms using the stock market as a financing vehicle are more likely to use bookbuilding and pre-allocate shares at the time of IPO. These decisions are not influenced by investor sentiment, as measured by the historical stock market return. However, information asymmetries are a major determinant of bookbuilding, whereas agency and monitoring considerations only influence the pre-allocation decision. Specifically, the firms where initial owners retain a large stake in the company post-IPO are less inclined to pre-assign a fraction of the offering to retail and institutional investors. Whereas, if post-IPO ownership by initial shareholders is smaller and the stock market is used as a financing vehicle, firms are more likely to pre-allocate shares at the time of IPO. Finally, the results demonstrates that underpricing is larger with bookbuilding whereas, preallocating shares reduces underpricing and enhance post-IPO stock liquidity.

Employment protection legislation and SME performance

This article examines the effect of employment protection legislation (EPL) on small and medium-sized enterprise (SME) performance. Rather than relying on country-specific proxies for EPL, as is common in the literature, we compute firm-specific measures of a firm’s exposure to EPL by using a panel dataset of 13,112 Belgian SMEs for the period between 2000 and 2009. The empirical results show that firms perform better when faced with lower hiring and firing costs through the use of more blue-collar labour contracts. The evidence showing improved performance by firms that attempt to achieve greater flexibility by hiring more temporary workers is limited.

Capital Structure Adjustments in Private Business Group Companies

The literature on capital structure dynamics assumes that companies trade-off the advantages of a leverage adjustment and its costs. In general, private companies are assumed to face relatively large adjustment costs, and should have lower financing flexibility. However, we argue that an important class of private companies -- business group affiliates -- may face relatively low adjustment costs because of their access to both internal and external capital markets and the beneficial reputation effects of belonging to a group. Our empirical results show significant differences in the composition of the capital structure and the leverage adjustment process between affiliates of private Belgian business groups and comparable stand‐alone companies. Group affiliates have higher levels of leverage, and adjust their capital structure more frequently than stand‐alones. Our evidence suggests that the flexibility in group companies’ capital structure is not solely driven by the use of internal leverage: group affiliates more frequently adjust their external leverage as well, unless the group is in poor financial health, in which case the affiliates’ probability of attracting external leverage is severely reduced.