nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒09‒05
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Indicators used in setting the countercyclical capital buffer By Kalatie, Simo; Laakkonen, Helinä; Tölö, Eero
  2. Bank Ownership Structure, SME Lending and Local Credit Markets By Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski, Oskar; Kozlowski, Lukasz
  3. The Value of Corporate Citizenship: Protection By Dylan Minor
  4. Credit Growth and Capital Requirements: Binding or Not? By C. LABONNE; G. LAMÉ
  5. Credit Access after Consumer Bankruptcy Filing: New Evidence By Jagtiani, Julapa; Li, Wenli
  6. Bank Capital Requirements: A Quantitative Analysis By Nguyen, Thien Tung
  7. Startups, Financing and Geography– Findings from a survey By Bjuggren, Per-Olof; Elmoznino Laufer, Michel
  8. What happened to profitability? Shocks, challenges and perspectives for euro area banks By Cheng, Gong; Mevis, Dirk
  9. Interfund lending in mutual fund families: Role of internal capital markets By Agarwal, Vikas; Zhao, Haibei
  10. Do Private Equity Funds Benefit from their Relationships with Financial Advisors in M&A Transactions? By Morkoetter, Stefan; Wetzer, Thomas
  11. Tick Size: Theory and Evidence By Werner, Ingrid M.; Wen, Yuanji; Rindi, Barbara; Consonni, Francesco; Buti, Sabrina
  12. Puzzle of Corporate Diversification Efficiency in Bric Countries By Svetlana Grigorieva; Georgii Gorbatov
  13. Do U.S. Firms Hold More Cash? By Pinkowitz, Lee; Stulz, Rene M.; Williamson, Rohan

  1. By: Kalatie, Simo (Bank of Finland); Laakkonen, Helinä (Bank of Finland); Tölö, Eero (Bank of Finland, Financial Stability and Statistics Department)
    Abstract: According to EU legislation, the national authorities should use the principle of 'guided discretion' in setting the countercyclical capital buffer (CCB), which increases banks' resilience against systemic risk associated with periods of excessive credit growth. This means that the decision should be based on signals from a pre-determined set of early warning indicators, but that there should also be room for discretion, as there is always uncertainty associated with the use of early warning indicators. The European Systemic Risk Board (ESRB) recommends that the authorities use the deviation of the credit-to-GDP ratio from its long term trend value (credit-to-GDP gap) as the primary indicator in setting the CCB. In addition, designated authorities should use in their decision making indicators that measure private sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on an empirical analysis of data on EU countries and a large assortment of potential indicators, we propose a set of suitable early warning indicators for each of these categories.
    Keywords: countercyclical capital buffer; macroprudential policy; early warning indicators
    JEL: G01 G28
    Date: 2015–03–16
  2. By: Hasan, Iftekhar (Fordham University and Bank of Finland); Jackowicz, Krzysztof (Kozminski University); Kowalewski, Oskar (Institute of Economics, Polish Academy of Sciences); Kozlowski, Lukasz (Bank BGZ BNP Paribas SA)
    Abstract: In this paper, by employing a novel approach, we study the relationship between bank type and small-business lending in a post-transition country. Using a unique dataset on bank branches and firm-level data, we find that local cooperative banks lend more to small businesses than do large domestic banks and foreign-owned banks, even when controlling for the financial situation of the cooperative banks. Additionally, our results suggest that cooperative banks provide loans to small businesses at lower costs than foreign-owned banks or large domestic banks. Finally, we show that small and medium-sized firms perform better in counties with a large number of cooperative banks than in counties dominated by foreignowned banks or large domestic banks. Our results are important from a policy perspective, as they show that foreign bank entry and industry consolidation may raise valid concerns for small firms in developing countries.
    JEL: G21 G28
    Date: 2014–08
  3. By: Dylan Minor (Harvard Business School, Strategy Unit)
    Abstract: We explore the notion that corporate citizenship, as obtained through Corporate Social Responsibility (CSR), is used by managers to protect firm value, helping their firm better withstand negative business shocks. We formally explore two parallel mechanisms for such protection .one of building moral capital (CSR Contributions) and another of improving investor posteriors (CSR Investments). We find some theoretical and empirical support for both of these, but in different settings. In particular, we find that firms with higher CSR Investments enjoy an average of $1 billion of saved firm value upon an adverse event. In contrast, CSR Contribution firms lose value (on average) upon an event, possibly due to disingenuous contributions. Meanwhile, due to managerial moral hazard, firms with high levels of CSR Contributions face adverse events more often, whereas those with high levels of CSR Investments face them less often.
    JEL: G30 G32 G39
    Date: 2015–08
  4. By: C. LABONNE (Autorité de contrôle prudentiel et de résolution); G. LAMÉ (Insee)
    Abstract: This paper examines the sensitivity of non-financial corporate lending to banks' capital ratio and their supervisory capital requirements. We use a unique database for the French banking sector between 2003 and 2011 combining confidential bank-level Bank Lending Survey answers with the discretionary capital requirements set by the supervisory authority. We find that on average, more capital means an acceleration of credit. But the elasticity of lending to capital depends on the intensity of the supervisory capital constraint. More supervisory capital-constrained banks tend to have a credit growth that is less sensitive to the capital ratio. Our results also show a similar effect for non-performing loans. When banks are constrained, credit growth is all the more sensitive to this type of assets as their share rises. However, both aforementioned effects weaken close to the supervisory minimum capital requirement.
    Keywords: Bank Lending, Bank Regulation, Capital
    JEL: G21 G28 G32
    Date: 2014
  5. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Li, Wenli (Federal Reserve Bank of Philadelphia)
    Abstract: This paper uses a unique data set to shed new light on credit availability to consumer bankruptcy filers. In particular, our data allow us to distinguish between Chapter 7 and Chapter 13 bankruptcy filings, to observe changes in credit demand and credit supply explicitly, and to differentiate existing and new credit accounts. The paper has four main findings. First, despite speedy recovery in their risk scores after bankruptcy filing, most filers have much reduced access to credit in terms of credit limits, and the impact seems to be long lasting (well beyond the discharge date). Second, the reduction in credit access stems mainly from the supply side as consumer inquiries recover significantly after the filing, while credit limits remain low. Third, new lenders do not treat Chapter 13 filers more favorably than Chapter 7 filers. In fact, Chapter 13 filers are much less likely to receive new credit cards than Chapter 7 filers even after controlling for borrower characteristics and local economic environment. Finally, we find that Chapter 13 filers overall end up with a slightly larger credit limit amount than Chapter 7 filers (both after the filing and after discharge) because they are able to maintain more of their old credit from before bankruptcy filing. Our results casts doubt on the effectiveness of the current bankruptcy system in providing relief to bankruptcy filers and especially its recent push to get debtors into Chapter 13.
    JEL: G01 G02 G28 K35
    Date: 2014–08
  6. By: Nguyen, Thien Tung (OH State University)
    Abstract: This paper examines the welfare implications of bank capital requirements in a general equilibrium model in which a dynamic banking sector endogenously determines aggregate growth. Due to government bailouts, banks engage in risk-shifting, thereby depressing investment efficiency; furthermore, they over-lever, causing fragility in the financial sector. Capital regulation can address these distortions and has a first-order effect on both growth and welfare. In the model, the optimal level of minimum Tier 1 capital requirement is 8%, greater than that prescribed by both Basel II and III. Increasing bank capital requirements can produce welfare gains greater than 1% of lifetime consumption.
    JEL: G21 G28
    Date: 2014–01
  7. By: Bjuggren, Per-Olof (The Ratio institute and Jönköping School of Economics.); Elmoznino Laufer, Michel (The Ratio institute)
    Abstract: This paper investigates the importance of bank loans for the financing of startups and how location matters for expansion plans and financing. We will show that there has not been sufficient attention paid to legal form when distinguishing between the external and internal financing of startups. The focus will be on the corporate form of business and the implications of this legal form for what can be considered external financing. In the analysis of how location matters, we will draw upon the literature about agglomeration and knowledge spillovers. The two main questions posed are: How does the corporate form matter for what can be considered the external financing of startups, and how does location matter for expansion plans and financing? To provide empirical answers to these questions, both survey data and registry data have been used. The survey data are from a questionnaire sent out to startups listed in the files of the Swedish Jobs and Society Foundation. We looked at corporations founded during the period 2009-2013 that family firms in terms of ownership structure. The survey indicated that bank loans are rare and had to be backed up with personal assets used as collateral and personal guarantees of repayment for the majority of the firms who had used bank loans. Essentially, the entrepreneur personally takes most of the business risk. Bank loans have, to a large extent, the character of internal financing. Combining registry data with the qualitative data from the survey, we used regression analysis to further study differences due to location. The regression analysis showed that the degree of urbanization matters for plans for expansion. In the three most urbanized areas, the startup firms had plans to expand their business both at home and abroad. In the other urbanized areas, the focus was on expansion at home.
    Keywords: startups; bank loans; asymmetric information; the corporate form of business; agglomeration; functional region
    JEL: G21 G32 L26 M13 R12 R58
    Date: 2015–06–12
  8. By: Cheng, Gong; Mevis, Dirk
    Abstract: This paper uses a newly constructed dataset including financial statement information of 311 banks in the euro area to analyse the evolution of bank profitability before and after the Global Financial Crisis and the subsequent European crisis. We first document the general trends in the changes in banks' profitability with a particular focus on country and bank heterogeneity. We find that the profitability of banks in different parts of the monetary union was hit by multiple shocks of different nature. Based on this, we then propose an econometric analysis of the drivers behind the evolution of bank profitability by discriminating factors relative to macroeconomic conditions, bank funding and portfolio structures, and new banking regulations in the euro area.
    Keywords: bank, profit, return on asset, bank regulation, bank business model
    JEL: G21 G28 G33 L25
    Date: 2015–08–17
  9. By: Agarwal, Vikas; Zhao, Haibei
    Abstract: Although the 1940 Act restricts interfund lending (i.e., a fund lending to other funds belonging to the same mutual fund family), fund families can obtain permission from the regulators to set up interfund lending programs. We analyze the determinants and consequences of such programs. We find that heterogeneity in portfolio liquidity and investor flows across funds, investment restrictions placed on funds, and monitoring mechanisms together determine the applications to the program. We document several consequences for funds after they participate in the program. First, funds with better governance perform better. Second, funds reduce their cash holdings, increase their investments in illiquid assets, hold more concentrated portfolios, and take greater idiosyncratic risk. Third, investors in participating funds exhibit less run-like behavior.
    Keywords: funding liquidity,fund families,internal capital markets,risk taking,fund performance
    JEL: G18 G23 G32
    Date: 2015
  10. By: Morkoetter, Stefan; Wetzer, Thomas
    Abstract: We link acquirer-advisor relationship information of 53,552 M&A transactions with pricing information of 11,438 deals and show that private equity funds pay, on average, less for their portfolio companies when target advisors have worked for them on the buy-side in past transactions. This effect is mainly driven by larger PE firms with a high level of deal activity and increases with the number of past buy-side transactions. Strategic acquirers do not benefit from these previous relationships. Close relationships with their own financial advisors in turn do not pay-off for both strategic and PE-related acquirers.
    Keywords: Private Equity, Mergers and Acquisitions, Financial Advisors, Take-over Premiums
    JEL: G15 G24 G32 G34
    Date: 2015–08
  11. By: Werner, Ingrid M. (OH State University); Wen, Yuanji (University of Western Australia); Rindi, Barbara (Bocconi University); Consonni, Francesco (Bocconi University); Buti, Sabrina (University of Toronto)
    Abstract: We model a public limit order book where rational traders decide whether to demand or supply liquidity, and where liquidity builds endogenously. The model predicts that a reduction of the tick size will cause spreads and welfare to deteriorate for illiquid but improve for liquid books. We find empirical support for these predictions based on European and U.S. data. The model also generates predictions for volume, but we find less empirical support for these predictions which we attribute to opportunistic High-Frequency-Traders selectively entering the market.
    JEL: G10 G12 G14 G18 G20
    Date: 2015–03
  12. By: Svetlana Grigorieva (National Research University Higher School); Georgii Gorbatov (National Research University Higher School)
    Abstract: Researchers have long tried to define the impact of corporate diversification on firm value. Academic papers mainly concentrate on the effects of corporate diversification in mature markets while its consequences in emerging capital markets are less explored. This article presents the results of an empirical analysis of corporate diversification strategies of a sample of companies from BRIC countries that expanded via acquisitions during 2000–2013. We contribute to the existing literature by examining the effects of corporate diversification on firm value during the pre- and post-crisis periods. In line with other studies, we distinguish between related and unrelated diversification and in contrast to them we single out and separately analyze horizontal, conglomerate and vertical acquisitions. Based on a sample of 319 deals initiated by companies from BRIC countries, we found positive (3.32% and 9.01%) and statistically significant cumulative abnormal returns for conglomerate acquisitions during the pre- and post-crisis periods, correspondingly. We also found that the market reacts positively and statistically significant to the announcements of horizontal and vertical integration only during the pre-crisis period.
    Keywords: corporate diversification, firm value, conglomerate acquisitions, vertical integration, emerging capital markets
    JEL: G14 G34 L25
    Date: 2015
  13. By: Pinkowitz, Lee (Georgetown University); Stulz, Rene M. (OH State University and ECGI, Brussels); Williamson, Rohan (Georgetown University)
    Abstract: Using medians, U.S. firms do not hold more cash than similar foreign firms, irrespective of whether the foreign firms come from countries with good investor protection or not. With means, they do. The means, in contrast to the medians, are affected by U.S. multinationals. U.S. multinationals with high R&D expenditures hold 38.7% more cash than comparable foreign firms, but there is evidence that these high cash holdings may result more from high R&D expenditures than from multinationality. The crisis leaves only small traces in the recent cash holdings of firms. Firms throughout the world decreased their cash holdings during the crisis and replenished their cash holdings afterwards as expected with the precautionary motive for cash holdings. However, U.S. firms hold more cash than firms from countries where the stock market fell less during the crisis. There is no evidence that the determinants of cash holdings changed from before the crisis to after the crisis.
    JEL: F23 G32
    Date: 2014–04

This nep-cfn issue is ©2015 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.