Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Effects of Corporate Finance on Firm Risk-taking and Performance: Theory and Evidence

Contents:

Author Info

  • Toshihiro Okada

    ()
    (School of Economics, Kwansei Gakuin University)

  • Kohei Daido

    ()
    (School of Economics, Kwansei Gakuin University)

Abstract

Some firms may exhibit better operating performance than others because they undertake riskier projects: risk-return tradeoff. We develop a model to examine the effects of financial contracts on a firmfs choice between safer (lower risk, lower return) and riskier (higher risk, higher return) projects. The model shows that, assuming a competitive capital market (i.e., financiers with no monopoly power), three types of financial contracts (rollover loans, non-rollover loans, and new share issues) can each be an equilibrium contract, depending on conditions. While firms undertake griskierh projects when using non-rollover loans or new share issues, firms undertake gsaferh projects when using rollover loans. The model emphasizes the role of rollover loans (with passive monitoring) as a potential disciplinary device to suppress a firmfs risk-taking. The model generates several predictions about the determinants of a firmfs risk-taking and its performance. One key prediction of the model is that (risk-neutral) firms with closer bank relationships are more likely to use rollover loans and undertake gsaferh projects, even with a contestable capital market. We find novel empirical support for the modelfs predictions.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://192.218.163.163/RePEc/pdf/kgdp45.pdf
File Function: First version, 2009
Download Restriction: no

Bibliographic Info

Paper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 45.

as in new window
Length: 39 pages
Date of creation: May 2009
Date of revision: May 2009
Handle: RePEc:kgu:wpaper:45

Contact details of provider:
Postal: 1-155 Uegahara Ichiban-cho, Nishinomiya, Hyogo 662-8501
Phone: +81-(0)798-546496
Fax: +81-(0)798-510944
Web page: http://www-econ.kwansei.ac.jp/~econ/index_e.html
More information through EDIRC

Related research

Keywords: corporate finance; corporate governance; firm risk-taking; firm performance; loan rollover;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Grinstein, Yaniv, 2006. "The disciplinary role of debt and equity contracts: Theory and tests," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 419-443, October.
  2. Kose John & Lubomir Litov & Bernard Yeung, 2008. "Corporate Governance and Risk-Taking," Journal of Finance, American Finance Association, vol. 63(4), pages 1679-1728, 08.
  3. Gorton, Gary & Kahn, James, 2000. "The Design of Bank Loan Contracts," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 331-64.
  4. David E. Weinstein & Yishay Yafeh, 1998. "On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan," Journal of Finance, American Finance Association, vol. 53(2), pages 635-672, 04.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:kgu:wpaper:45. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Toshihiro Okada).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.