Halit Gonenc

Family Control and Financing Decisions

This study uses a comprehensive European dataset to investigate the role of family control in corporate financing decisions during the period 1998-2008. We find that family firms have a preference for debt financing, a non-control-diluting security, and are more reluctant than non-family firms to raise capital through equity offerings. We also find that credit markets are prone to provide long-term debt to family firms, indicating that they view their investment decisions as less risky. In fact, our empirical results demonstrate that family firms invest less than non-family firms in high-risk, research and development (R&D) projects, but not in low-risk, fixed-asset capital expenditure (CAPEX) projects, suggesting that fear of control loss in family firms deters risk-taking. Overall, our findings reveal that the external financing (and investment) decisions of family firms are in greater (lesser) conflict with the interests of minority shareholders (bondholders).

Pecking Order Behavior in Emerging Markets

This paper examines the validity of the pecking order hypothesis in 23 emerging market countries. Emerging market countries would appear to be an ideal setting for the pecking order hypothesis to hold because of the presence of strong asymmetric information issues and agency costs. We observe, however, little support for the pecking order hypothesis as the primary financing theory for all emerging market firms. Firms in these countries finance their deficit mainly with equity, the opposite of what would be expected under this hypothesis. However, we do find support for the pecking order for firms in emerging market countries that suffer the most from either asymmetric information issues and/or agency costs. Our findings are consistent with the idea that the environment the firm operates in influences the financial decisions the firm makes.

Business Groups and Internal Capital Markets

We compare the performance of firms affiliated with diversified business groups with the performance of unaffiliated firms in Turkey, an emerging market. We address the question of whether group-affiliated firms create internal capital markets or control large cash flows. Our findings indicate that group affiliation improves a firms accounting performance, but not stock market performance. Deviation of cash-flow rights from voting rights has a negative but insignificant effect on accounting performance, but a significant effect on market performance. We also find that a firms accounting, but not stock market, performance increases with the level of group diversification. Our results show that internal capital markets play an important role for the existence of business groups in an emerging market context.

Firm internationalization and capital structure in developing countries: The role of financial development

We investigate the relationship between internationalization and the level of debt financing for more than 18,000 firm/year observations from thirty-one developing countries in the period 1991-2006. We argue that this relationship can be affected by both country-level and firm-level factors. The results show that in developing countries with relatively higher financial development, firm internationalization corresponds with a greater level of debt when firms have more growth opportunities (which also indicate a higher level of asymmetric information). This evidence suggests that relatively developed financial markets in developing countries at least partially mitigate the effect of asymmetric information and decrease the agency cost of debt for firms with higher levels of internationalization.

How do business group firms utilize internal capital markets

Purpose - The purpose of this study is to provide evidence for how business group firms transfer financial resources among affiliated firms by examining the differences in the level of debt financing and the choices of new equity financing between group affiliated and non-affiliated firms in an emerging market, Turkey. The role of affiliated banks for internal capital market transactions is also to be examined. Design/methodology/approach - Univarite analysis and simple pooled OLS regression analysis are performed to examine the role of group affiliation on the level of several debt financing measures. Additionally, a Logit regression analysis is used to analyze the behavior of affiliated firms in their equity financing decisions by issuing new shares. Findings - Group affiliated firms transfer funds in the group by using transactions such as trade debt, and issuing cash rights and bonus shares. The affiliated firms – especially with a bank in the group – support their higher growth with new equity issues in the forms of cash rights and bonus shares along with higher trade debt. Moreover, non-affiliated firms utilize a higher percentage of debt to shareholders, while affiliated firms without a bank utilize a higher financial debt. These findings are consistent with the idea that the role of the group bank is very important in financing choices of affiliated firms. Research limitations/implications - This paper provides direct measures of external and internal funds by focusing on new equity issues and debt structure, which can be applied in different economic environments, rather than using indirect measures or not readily available datasets such as connected party transactions. Originality/value - The paper provides additional evidence to assess the efficiency of the use of internal capital markets. Moreover, the role of group affiliated banks among affiliated firms has not yet been extensively addressed in the literature and an examination of this issue leads to a better understanding of their roles in diversified business groups.

Credit default swap spread and succession events

Purpose - Credit default swap (CDS) spreads may not represent the accurate credit risk levels (asymmetric spread behavior) of assets with the initiation of corporate events, such as merger, spin-off or other similar events in which one entity succeeds to the obligations of another entity. The International Swaps and Derivatives Association (ISDA) succession language for the definition of succession events misleads the CDS market participants to determine CDS spreads. The purpose of this paper is to provide a conceptual framework for the relationship between the ISDA succession language and CDS spreads in order to clarify the factors behind the asymmetric spread behavior around several corporate activities. Design/methodology/approach - The authors develop a conceptual driver model to establish a link between company characteristics and succession issues. Then, a succession model to evaluate the risk levels occurring with succession issues is designed. Findings - The ISDA succession language has an influence on CDS spreads around corporate events. The explanatory approach provides the foundation for the understanding of the relationships between succession issues caused by several corporate events, involving particularly restructuring, refinancing and/or guarantee risk, and CDS spreads. Combination of the driver model and the succession model helps to assess the potential influence of succession events on CDS spreads. Research limitations/implications - Market participants should take into consideration the effects of the ISDA succession language on CDS spreads around succession of CDS. Originality/value - Prior research related to the CDS has always focused on the economic determinants of CDS spreads. This paper is the first attempt to explain the relationship between the ISDA succession language and CDS spreads.

The asset growth effect and investor protection in emerging markets: The role of the global financial crisis

ABSTRACT The previous evidence shows that firms experience lower returns after a period with higher growth in assets. Two alternative explanations have been raised to explain this effect: mispricing and optimal investment. This study examines this effect in 26 emerging markets over the period of 2005–2013 with a special attention to the recent global financial crisis. We find a stronger asset growth effect during the crisis years relative to other years. This effect is stronger in firms with small or medium stock turnover ratio and firms operating in industries with low R&D intensity. We also investigate the heterogeneity across countries and find that a stronger asset growth effect during the crisis years exists only for emerging markets with low protection of shareholders and creditors. We argue that this evidence is in line with the mispricing hypothesis.

Channels of cash savings: international evidence

Purpose - – The purpose of this paper is to examine cash savings from six potential sources of cash: net equity issues, net debt issues, internally generated cash flows, asset sales, changes in short-term debt, and changes in net working capital. Design/methodology/approach - – The authors use both fixed effects and dynamic panel-data estimations to examine cash savings by using a sample of firms from 72 countries for the period 1991-2010. Findings - – The authors observe that net equity issue is the largest source of new funds while cash savings rates are highest for asset sales, changes in net working capital, and net equity issues. Constrained firms have higher total savings rates than unconstrained companies. The authors also find that savings rates are positively related to whether firms perform R & - D, multinational status, and protection for creditors and investors. Originality/value - – The results suggest that firms usually use multiple channels when they increase their savings as opposed to relying only on one channel.

Corporate Financing and Investment Decisions in the Renewable Energy Sector

Increasing investments in renewable energy (RE) are expected to contribute to the growth of the energy sector as a whole, and thus to general economic growth. Recent research indicates that increasing investments in RE has several potential benefits such as achieving sustainable economic recovery from the financial crisis, ensuring a country’s energy security, and fighting climate change and environmental pollution. Apart from public support in the form of energy policies and mechanisms such as governmental grants and subsidies, the growth of the RE sector largely depends on private external financing. This chapter analyzes the corporate financing and investment activities of RE companies by focusing on firm-level and country-level factors. An investor protection perspective is taken when choosing the country-level factors, since the type of external financing obtained by companies is largely driven by outside investors’ willingness to supply it. Given the growth opportunities of firms, the evidence indicates the importance of the relationship between debt level and investment.

Private Acquisition Gains: A Contingent Claims Explanation

This paper studies announcement returns of Western European acquisitions of private and public targets. It uses a contingent claims perspective to offer a new explanation for the difference in abnormal returns between acquirers of private and public targets. In this context, an acquisition is analogous to buying a call option and the value of the acquirer increases with uncertainty about its growth prospects (options). We test this idea by studying the relation between announcement returns and acquirers characteristics that proxy for the existence of growth options. Consistent with the contingent claims hypothesis, the private acquisition gains are associated with the combined effects of growth options (having higher runup before the acquisition announcement) with low level of leverage (near-all equity capital) and with uncertainty (measured by age and analyst coverage of acquirers).