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on Corporate Finance |
| By: | Régis BLAZY (LaRGE Research Center, Université de Strasbourg); Aziza LETAIEF |
| Abstract: | Bankruptcy is an essential screening mechanism for developing economies. This paper focuses on the way bankruptcy is managed in Tunisia, a country characterized by the importance of its banking sector. We hand collected data on a set of Tunisian firms that went bankrupt between 1995-2009. We gathered original and unique information on the firms’ characteristics, the causes of default, the values of assets, the structure of claims, the recovery rates, and the bankruptcy costs. We use this information to answer several questions (those questions being investigated both directly, and by controlling for any risk of selection bias): 1) are the Tunisian bankruptcy procedures able to generate high total recoveries? 2) Are the secured creditors (mostly banks) well-enough protected under bankruptcy? 3) Do the secured creditors influence the choice between liquidation and reorganization? 4) To what extent the recoveries of the secured creditors compete (or not) with the ones of the other classes of creditors? We find that the Tunisian reorganization procedures are able to generate substantial recoveries, but those are mainly captured by the preferential claims (employees and public claims). This is coherent with the authorities’ willingness to improve social protection, but this raises concerns as the Tunisian firms are mainly financed by bankers. Our analysis shows that the secured creditors are poorly protected under bankruptcy: they rank almost last in the priority order of repayment, and their recovery rate is similar to one of the unsecured creditors. We also find that the rather high level of recovery rate is mainly attributable to the reorganization procedures. We finally find that the court’s choice between reorganization and liquidation is not influenced by the structure of claims. Thus, in Tunisia, the creditors are losing hand once bankruptcy is triggered. The likely consequences on development are twofold: first, higher risks of capital misallocation and of credit rationing; second, stronger incentives for the banks to prioritize informal workouts. |
| Keywords: | Bankruptcy; Development; Secured creditors; Heckman selection model; Tunisia. |
| JEL: | G33 K22 O16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2015-08&r=all |
| By: | Klaus Adam; Albert Marcet; Sebastian Merkel; Johannes Beutel |
| Abstract: | We present a stock market model that quantitatively replicates the joint behavior of stock prices, trading volume and investor expectations. Stock prices in the model occasionally display belief-driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors. Although gains from trade arise only from subjective belief differences, introducing Â…financial transactions taxes (FTTs) remains undesirable. While FTTs reduce the size and length of boom-bust cycles, they increase the likelihood of such cycles, thereby overall return volatility and wealth redistribution. Contingent FTTs, which are levied only above a certain price threshold, give rise to problems of equilibrium multiplicity and non-existence. |
| Keywords: | Â…nancial transactions tax, Tobin tax, asset price booms |
| JEL: | G12 D84 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:840&r=all |
| By: | Meredith A. Crowley and Huasheng Song |
| Abstract: | We examine the stock market performance of publicly-listed Chinese firms in the solar panel industry over 2012 and 2013 in response to announcements of new import restrictions by the European Union and domestic policy changes by the Chinese government. Using daily stock market prices from the Shanghai-Shenzhen, New York and Hong Kong markets, we calculate abnormal returns to several policy changes affecting solar panels produced in China. We find, consistent with the Melitz (2003) model, that larger, more export-oriented firms experienced larger stock market losses in the wake of European trade restriction announcements. We further show that European trade policy had a larger negative effect on Chinese private sector firms relative to state owned enterprises. Finally, we use a two stage least squares estimation technique to show that firms listed on US markets are more responsive to news events than those listed in China and Hong Kong. |
| Keywords: | Chinese exports, antidumping, solar panels, event study |
| JEL: | F12 F13 G10 G14 |
| Date: | 2015–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1529&r=all |
| By: | Valentina Peruzzi (Universit… Politecnica delle Marche, Dipartimento di Scienze economiche e sociali) |
| Abstract: | The aim of this paper is to investigate whether the conclusion reached by previous studies (Andres, 2011; Pindado et al., 2011) about the benecial effect of family control on investment-cash flow sensitivity may be extended to the category of small and medium-sized enterprises. Small unlisted firms are more likely to face financing constraints than their listed counterparts: they face more asymmetric information problems and strictly adhere to the pecking order theory, therefore strongly preferring internal capital to external debt and equity issues. Family control, in this context, may further exacerbate the relevance of internal generated cash flow for investment purposes by amplifying agency conflicts between (i) controlling and minority shareholders, and (ii) owners and external investors. Moreover, due to families' desire to pass a financially stable company onto future generations, family businesses may be less willing to rely on too much external debt and capital. Both this facts may be further exacerbated by highly concentrated ownership structure and family management. Hence, I test the following hypotheses: (H1) Family ownership increases investment-cash flow sensitivity in SMEs; (H2) The higher investment-cash flow sensitivity of family businesses, as compared to non-family ones, is mainly due to the presence of family CEOs and concentrated ownership; (H3) Investment-cash flow sensitivity is a good proxy for SMEs financing constraints. By employing panel data methodology and estimating the empirical model through the Generalized Method of Moments (GMM), I strongly confirm all these hypotheses. |
| Keywords: | Family firms, financing constraints, investment policy, investment-cash flow sensitivity |
| JEL: | G31 G32 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:112&r=all |
| By: | Flannery, Mark J. (Securities and Exchange Commission); Hirtle, Beverly (Federal Reserve Bank of New York); Kovner, Anna (Federal Reserve Bank of New York) |
| Abstract: | We find evidence that the Federal Reserve stress tests (CCAR and DFAST) produce information about the stress-tested firms as well as other, non-stress-tested banking companies. Although standard event studies do not always show abnormal returns for the stress-tested sample on average, we argue that such tests are ill-suited for this sort of information event. Using a different empirical approach, we show that around stress test announcement dates, the absolute value of the cumulative abnormal returns (|CAR|) of stress-tested bank holding companies averages almost 3 percent. Cumulative abnormal trading volumes are more than 1 percentage point higher than a market model would predict. Absolute value abnormal returns and volumes are higher for more levered and riskier firms. We explore several theoretical hypotheses outlined in Goldstein and Sapra (2014) but find no evidence of negative welfare costs associated with the disclosure of stress test results. |
| Keywords: | stress test; bank capital; event study |
| JEL: | G14 G21 G28 |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:744&r=all |
| By: | Bluwstein, Kristina; Canova, Fabio |
| Abstract: | The effects that European Central Bank unconventional monetary policy measures have on nine European countries not adopting the Euro are examined with a novel Bayesian mixed frequency Structural Vector Autoregressive technique. The technique accounts for the fact that macro, monetary and financial data have different frequencies. Unconventional monetary policy disturbances generate important domestic fluctuations. The wealth, the risk, and the portfolio rebalancing channels matter for international propagation; the credit channel does not. International spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. A comparison with conventional monetary policy disturbances and with announcement surprises is provided. |
| Keywords: | Bayesian Mixed Frequency SVAR; Financial Spillovers; International Transmission; Unconventional Monetary Policy |
| JEL: | C11 C32 E52 F42 G15 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10856&r=all |
| By: | Grothe, Magdalena; Meyler, Aidan |
| Abstract: | This paper analyses the predictive power of market-based and survey-based inflation expectations for actual inflation. We use the data on inflation swaps and the forecasts from the Survey of Professional Forecasters for the euro area and United States. The results show that both, market-based and survey-based measures have a non-negligible predictive power for inflation developments, as compared to statistical benchmark models. Therefore, for horizons of one and two years ahead, market-based and survey-based inflation expectations actually convey information on future inflation developments. |
| Keywords: | inflation expectations; inflation forecasting; inflation swap markets; market-based inflation expectations; Survey of Professional Forecasters; survey-based inflation expectations; |
| JEL: | E31 E37 G13 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66982&r=all |
| By: | Andrew Maredza |
| Abstract: | Since the 2007 sub-prime financial crisis, world bank capital ratios have increased. In this paper, we investigate the impact of increased bank capital requirements introduced under the Basel Accord framework on the costs of intermediation. We attempt to answer this central question by running panel regressions using 2001 – 2012 annual bank-level data for ten banks constituting inter alia the four largest South African banks. We conclude that high capital requirements are associated with increased costs of intermediation. Our fixed effects estimations show that a one percent increase in capital requirements lead on average to a range of 12 – 14 basis points increase in the cost of intermediation during our period of analysis. We also find evidence that the Basel II capital requirements effected from 1 January 2008 contributed to increased cost of intermediation by an average 7 basis points for the period 2008 – 2012. We therefore caution that while maintaining adequate capital levels is crucial for obvious reasons, there is need for supervisory authorities to ensure that such regulation is effective and well-balanced to guarantee safety and stability of the sector without endangering the ability of the banks to service the economy. |
| Keywords: | Bank performance, bank capital, Basel accord, Capital adequacy ratio, Financial Regulation, Intermediation costs |
| JEL: | C33 G21 G28 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:541&r=all |
| By: | Margherita Bottero (Bank of Italy); Simone Lenzu (University of Chicago); Filippo Mezzanotti (Harvard University) |
| Abstract: | We study the impact of sovereign market tensions on the real economy through the bank lending channel. Using a large matched bank-firm panel data set that tracks credit relations in Italy over the period 2009-2011, we show that the Greek bailout in the spring of 2010 had a negative impact on the riskiness of government securities held in the portfolio of financial intermediaries, which in turn led to a tightening in credit supply to firms. Firms, especially riskier ones, were unable to smooth out the credit shortage. We estimate that the shock to sovereign bonds led, via the lending channel, to a drop in aggregate bank lending to corporations of almost 2 percent over the subsequent year which translated in a reduction of investment by smaller firms. |
| Keywords: | sovereign debt, bank lending channel, lending supply, real effects, firm investment |
| JEL: | E51 G21 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1032_15&r=all |
| By: | Gu, Xian; Kowalewski, Oskar |
| Abstract: | We examine whether investor protection affects capital markets in terms of the development of corporate bond markets versus that of equity markets. Using a dataset of 42 countries, we show that in countries with stronger creditor rights, corporate bond markets are more developed than equity markets. In opposition, we find only weak evidence that in countries with stronger shareholder protection, equity markets are more developed than corporate bond markets. Additionally, we find that the effects of financial reforms on capital markets are strongly dependent on the strength of investor protections in a given country and information disclosure. |
| Keywords: | bond market, equity market, law, financial reform, information disclosure, crisis |
| JEL: | G10 G2 G20 G28 |
| Date: | 2015–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67022&r=all |
| By: | Nuri Ersahin; Rustom M. Irani |
| Abstract: | We examine the impact of real estate collateral values on corporate employment. Our empirical strategy exploits regional variation in local real estate price growth, firm-level data on real estate holdings, as well as establishment-level data on employment and the location of firms' operations from the U.S. Census Bureau. Over the period from 1993 until 2006, we show that a typical U.S. publicly-traded firm increases employment expenditures by $0.10 per $1 increase in collateral. We show this additional hiring is funded through debt issues and the effects are stronger for firms likely to be financially constrained. These firms increase employment at establishments outside of their core industry focus and away from the location of real estate holdings, leading to regional spillover effects. We document how shocks to collateral values influence labor allocation within firms and how these effects show up in the aggregate. |
| Keywords: | Financial Constraints; Collateral Lending Channel; Employment |
| JEL: | D22 D24 E44 G31 G32 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:15-30&r=all |
| By: | Juan S. Lemus-Esquivel; Carlos A. Quicazán-Moreno; Jorge L. Hurtado-Guarín; Angélica Lizarazo-Cuéllar |
| Abstract: | This paper has as main objective to build a composite metric of financial soundness for the private corporate sector in Colombia. Instead of relying on the individual and sometimes restrictive financial ratio analysis approach, the purpose of this document is to provide a single metric aimed at measuring the financial health of firms. Said metric, the financial soundness index, is derived by employing the cross-section approach of principal component analysis. For the time period of 2000-2013, the results allow to identify which industries have a weak, strong or similar balance sheet performance relative to that observed for the private corporate sector as a whole. Furthermore for firms that are debtors of the Colombian financial system, validation tests on the index confirm the apparent relationship between accounting data and the credit risk perception of and materialization for financial intermediaries. |
| Keywords: | firms’ financial soundness, principal component analysis, financial ratios, composite indices, financial stability. |
| JEL: | L25 G30 G32 C3 |
| Date: | 2015–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:013415&r=all |
| By: | Adeline Pelletier (London School of Economics (LSE) in London) |
| Abstract: | The banking sector in East Africa has evolved considerably over the last 10-15 years with the regional expansion of African banks, coupled with financial innovations and regulatory changes. As a result, the banking landscape is marked by the co-existence of several types of banks: global banks from developed countries, emerging banks (mainly from Asian countries), foreign regional African banks and domestic African banks. Given the difficulty of access to credit experienced by SMEs, in a context of low transparency and information on borrowers, the expansion of regional African banks could have an important impact on the financial and economic development of the region. Indeed, if these regional banks are better able to evaluate SME credit risk than global banks, they might offer more loans to SMEs, thus fostering a sector which is the backbone of East African economies. In a constrained institutional setting, with a large unbanked population and little information available on borrowers, how do foreign and domestic banks screen and monitor borrowers? To what extent do regional African banks’ lending practices and perception of the business environment differ from that of domestic African banks and of global banks? What is the impact of the regional expansion of African banks on SME financing? |
| Keywords: | Finance, Kenya, Development |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01205271&r=all |
| By: | CHOI, Jay Pil; STEFANADIS, Christodoulos |
| Abstract: | We formalize the idea that a financial conglomerate may utilize commercial banking activities to cross-subsidize investment banking through bundled offers. The investment banking sector entails supra-normal profits due to incentive problems with security underwriting. Universal banks may aim to capture (some of) those profits by providing discounts on commercial loans. This practice has an adverse effect on commercial banks’ monitoring incentives, encouraging the pursuit of private rents by entrepreneurs. It also leads to lower underwriting fees and a lower probability of successful public offerings. The social welfare effects of universal banking can be either positive or negative. |
| Keywords: | universal banking, moral hazard, monitoring, cross subsidy, bundled offer |
| JEL: | G21 L10 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-8&r=all |
| By: | Mariana Mazzucato (SPRU (Science Policy Research Unit), School of Business, Management & Economics, University of Sussex, Brighton, BN1 9SL, U.K.); Caetano Penna (SPRU (Science Policy Research Unit), School of Business, Management & Economics, University of Sussex, Brighton, BN1 9SL, U.K.; Institute of Economics, Federal University of Rio de Janeiro, Brazil) |
| Abstract: | This paper focuses on the rise of state investment banks (SIBs) as lead funders of mission-oriented innovation in various countries’ agendas regarding smart (innovation-led) growth, and not just fixers of ‘market failures’. The market failure justification for public finance fails to capture the active mission-oriented role that such banks are playing in shaping and creating markets, rather than just fixing them. In tackling innovation priorities and shaping new markets, these banks are developing new financial tools that also help to reform the financial system from within, addressing issues of short-termism and financialisation. This paper documents and analyses the roles of such banks, building on the Neo-Schumpeterian work on mission-oriented policies (that is, policies that aim to address societal issues or challenges). The paper presents a rich analytical description of mission-oriented investments in two of the leading SIBs: Brazil’s BNDES and Germany’s KfW. We discuss the directionality of the investments, the various tools used, and the lessons to be learned for evaluating these tools outside of a market failure framework. |
| Keywords: | State investment banks, mission-oriented policy, societal challenges, public finance, financialisation, innovation |
| JEL: | G20 O16 O38 L52 P16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:sru:ssewps:2015-26&r=all |
| By: | Nadeþda Siòenko (Bank of Latvia); Olga Lielkalne (Bank of Latvia) |
| Abstract: | The Discussion Paper analyses a risk cobweb diagram employed as an additional analytical tool for monitoring and assessing financial stability risks in Latvia. The aim of the risk cobweb diagram is to depict the most important financial stability risks across specified risk categories and the direction of their changes in a single chart. The risk cobweb diagram and the dynamics of the index corresponding to each risk category and its components make it possible to visualise and analyse development of external and domestic macrofinancial risks and vulnerability changes of the banking sector in Latvia by assessing the credit risk of non-financial corporations and households, profitability and solvency risks of credit institutions, as well as funding and liquidity risks. The Discussion Paper gives the overview of the use of the risk cobweb diagram and its methodology in other countries. It also outlines the process of the development of such a diagram in Latvia and describes selected risk categories an indicators. The Discussion Paper concludes that the results of the back-testing of the risk cobweb diagram have been adequate. In 2008 and 2009, the risk category assessments of the risk cobweb diagram signalled threats to financial stability, while risk category indices and their components allowed the identification of the areas where accumulation and materialisation of financial stability risks occurred. Keywords: financial stability, risk cobweb diagram, risk categories, monitoring of financial system stability, assessment of financial system stabilityThe Discussion Paper analyses a risk cobweb diagram employed as an additional analytical tool for monitoring and assessing financial stability risks in Latvia. The aim of the risk cobweb diagram is to depict the most important financial stability risks across specified risk categories and the direction of their changes in a single chart. The risk cobweb diagram and the dynamics of the index corresponding to each risk category and its components make it possible to visualise and analyse development of external and domestic macrofinancial risks and vulnerability changes of the banking sector in Latvia by assessing the credit risk of non-financial corporations and households, profitability and solvency risks of credit institutions, as well as funding and liquidity risks. The Discussion Paper gives the overview of the use of the risk cobweb diagram and its methodology in other countries. It also outlines the process of the development of such a diagram in Latvia and describes selected risk categories and indicators. The Discussion Paper concludes that the results of the back-testing of the risk cobweb diagram have been adequate. In 2008 and 2009, the risk category assessments of the risk cobweb diagram signalled threats to financial stability, while risk category indices and their components allowed the identification of the areas where accumulation and materialisation of financial stability risks occurred. Keywords: financial stability, risk cobweb diagram, risk categories, monitoring of financial system stability, assessment of financial system stability. |
| Keywords: | assessment of financial system stability, financial stability, monitoring of financial system stability, risk categories, risk cobweb diagram |
| JEL: | E32 E44 E58 G10 |
| Date: | 2015–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:dpaper:201501&r=all |
| By: | Finocchiaro, Daria (Research Department, Central Bank of Sweden); Lombardo, Giovanni (Bank for International Settlements); Mendicino, Caterina (European Central Bank); Weil, Philippe (Université Libre de Bruxelles) |
| Abstract: | This paper revisits the equilibrium and welfare effects of long-run inflation in the presence of distortionary taxes and financial constraints. Expected inflation interacts with corporate taxation through the deductibility of i) capital expenditures at historical value and ii) interest payments on debt. Through the first channel, inflation increases firms’ taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate negatively, relaxes firms’ financial constraints and stimulates investment. We show that, in the presence of collateralized debt, the second effect dominates. Therefore, in contrast to earlier literature, we find that when the tax code creates an advantage of debt financing, a positive rate of long-run inflation is beneficial in terms of welfare as it mitigates the financial distortion and spurs capital accumulation. |
| Keywords: | optimalmonetary policy; Friedman rule; credit frictions; tax benefits of debt |
| JEL: | E31 E43 E44 E52 G32 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0311&r=all |
| By: | Antoniou, Constantinos (University of Warwick); Harrison, Glenn (Georgia State University, CEAR); Lau, Morten (Copenhagen Business School); Read, Daniel (University of Warwick) |
| Abstract: | We design an experiment to test the hypothesis that, in violation of Bayes Rule, some people respond more forcefully to the strength of information than to its weight. We provide incentives to motivate effort, use naturally occurring information, and control for risk attitude. We find that the strength-weight bias affects expectations, but that its magnitude is significantly lower than originally reported. Controls for non-linear utility further reduce the bias. Our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations. |
| Keywords: | behavioral biases, market efficiency, experimental finance |
| JEL: | D81 D84 G11 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9387&r=all |