nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒07‒30
fourteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Optimal Syndication Decision of Corporate Venture Capital and Venture Capital Firms By Frick, Andreas; Maxin, Hannes
  2. Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading By Stefano Colonnello; Matthias Efing; Francesca Zucchi
  3. Family ownership, Workplace Closure and the Recession By Alex Bryson; Harald Dale-Olsen; Trygve Gulbrandsen
  4. Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009 By Philippe BACCHETTA; Ouarda MERROUCHE
  5. Liquidity, Innovation, And Endogenous Growth By Semyon MALAMUD; Francesca ZUCCHI
  6. Corporate Governance of Financial Groups By OECD
  7. What slice of the pie? The corporate bond market boom in emerging economies By Ayala, Diana; Nedeljkovic, Milan; Saborowski, Christian
  8. Runs versus Lemons: Information Disclosure and Fiscal Capacity By Faria-e-Castro, Miguel; Martinez, Joseba; Philippon, Thomas
  9. Agency Conflicts Around the World By Erwan Morellec; Boris Nikolov; Norman Schürhoff
  10. Liquidity Management of Non-Financial Firms : Cash Holdings and Lines of Credit By Yavuz Arslan; Yunus Emrah Bulut; Tayyar Buyukbasaran; Gazi Kabas
  11. Common Ownership, Competition, and Top Management Incentives By Miguel Antón; Florian Ederer; Mireia Giné; Martin Schmalz
  12. Does gender diversity in the boardroom influence Tobin’s Q of Croatian listed firms? By Tomislava Pavic Kramaric; Toni Milun; Ivan Pavic
  13. Trends in credit market arbitrage By Boyarchenko, Nina; Gupta, Pooja; Yen, Jacqueline
  14. Supply chain finance and SMEs: Evidence from international factoring data By Auboin, Marc; Smythe, Harry; Teh, Robert

  1. By: Frick, Andreas; Maxin, Hannes
    Abstract: Venture capital and corporate venture capital firms are driven by high financial returns through the sale of ownership stakes. Additionally, corporate venture capital firms maximize the profits of their parent companies by generating innovation advantage. Despite this, both intermediaries can join syndicates to obtain more information about their potential investments. We examine a model to show the differences between the syndication decisions of these two investor types. We find that corporate venture capital firms finance more projects without a syndicate in comparison with venture capital firms. To reinforce our theoretical results, we conduct a survey about the German private equity market. The empirical evidence support our main theoretical findings.
    Keywords: Corporate venture capital; Venture capital; Syndication; Screening
    JEL: G24 M13
    Date: 2016–07
  2. By: Stefano Colonnello (Otto-von-Guericke Universität Magdeburg; Halle Institute for Economic Research); Matthias Efing (Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)); Francesca Zucchi (Federal Reserve Board)
    Abstract: Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of such debt unbundling crucially hinge on shareholder bargaining power. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiations. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders drop by 7.9%, 7%, and 8.8% compared to other firms.
    Keywords: Debt Decoupling, Empty Creditors, Credit Default Swaps, Shareholder Bargaining Power, Real Effects
    JEL: G32 G33 G34
  3. By: Alex Bryson (University College London, National Institute of Social and Economic Research and Institute for the Study of Labor); Harald Dale-Olsen (Institute for Social Research, Oslo); Trygve Gulbrandsen (Institute for Social Research, Oslo)
    Abstract: Using nationally representative Norwegian data we show family-owned workplaces are less likely to close than observationally similar non-family-owned workplaces. But this changed during the Crisis when the family businesses' closure hazard soared. This hike in 2009 was not related to performance or the observed capital structure. Whereas bad performance has a tendency to kill non-family businesses regardless of the equity level, a need for fresh capital has a tendency to kill family businesses regardless of performance. We conclude that family firms suffered from a lack of credit during the Crisis, something that policy-makers should address before the next economic downturn.
    Keywords: Family ownership; Closure; Financial performance; Debt; Leverage
    JEL: G32 G34 J65
    Date: 2016–04–20
  4. By: Philippe BACCHETTA (University of Lausanne and Swiss Finance Institute); Ouarda MERROUCHE (University of Lausanne and CEPR)
    Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
    Keywords: Money market, swaps, credit crunch, corporate debt, foreign banks
    JEL: G21 G30 E44
  5. By: Semyon MALAMUD (Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute); Francesca ZUCCHI (Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute)
    Abstract: We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.
    Keywords: Innovation, Cash management, Financial constraints, Endogenous growth, Creative destruction
    JEL: D21 G31 G32 G35 L11
  6. By: OECD
    Abstract: Companies today, in particular banks, insurance companies and other financial institutions, increasingly operate their businesses in a group structure. These financial groups have a growing presence in markets worldwide and the economy as a whole. To do business effectively and efficiently in group structures, corporate groups should be managed in a holistic and integrated manner, in much the same way as an enterprise. Good governance of corporate groups should not therefore be very different from that of a corporation with many departments and branches. Nonetheless, the idiosyncratic risks that group structures bring about may require particular attention be paid to the governance of corporate groups. Such risks include the complexity of group structures and responsibilities among member companies in a multi-layered ownership structure across borders. The legal status of subsidiary companies, which is different from departments or branches of a corporation, should be respected. The governance of corporate groups needs to address inherent issues such as the dilemma of subsidiary boards’ loyalty to the interests of the subsidiary versus the broader interests of the group, and the risks associated with related party transactions. In the case of financial groups, particular consideration should be given to the interests of depositors and insurance policyholders of each financial subsidiary. Financial regulation increasingly establishes requirements for the governance responsibilities of the boards of financial subsidiaries, while emphasising the overall responsibility of the ultimate parents of financial groups.
    Keywords: financial regulation, corporate governance, corporate groups, financial groups, group structure
    JEL: G30 G32 G34 G38
    Date: 2016–07–28
  7. By: Ayala, Diana; Nedeljkovic, Milan; Saborowski, Christian
    Abstract: ​This paper studies the determinants of shifts in debt composition among emerging market non-financial corporates. We show that institutions and macro fundamentals create an enabling environment for bond market development. During the recent boom episode, however, global cyclical factors accounted for most of the variation of bond shares in total corporate debt. The sensitivity to global factors appears to vary with relative bond market size rather than local fundamentals. Foreign bank linkages help explain why bond markets increasingly substituted for banks in channeling liquidity to EMs. Our results highlight the risk of capital flow reversal in EMs that benefited from the upturn in the global financial cycle mostly due to their liquid markets rather than strong fundamentals.
    Keywords: bond markets, capital flows, emerging markets
    JEL: F30 G15 G20 G30
    Date: 2016–06–21
  8. By: Faria-e-Castro, Miguel; Martinez, Joseba; Philippon, Thomas
    Abstract: We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the risk of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.
    JEL: E5 E6 G1 G2
    Date: 2016–07
  9. By: Erwan Morellec (EPFL and Swiss Finance Institute); Boris Nikolov (EPFL, University of Lausanne and Swiss Finance Institute); Norman Schürhoff (EPFL, University of Lausanne and Swiss Finance Institute)
    Abstract: We use a dynamic model of financing decisions to quantify agency conflicts across legal and institutional environments and decompose their effects into wealth transfers among stakeholders and value losses from policy distortions. Our estimates show that agency costs are large and vary widely across and within countries. Legal origin and provisions for investor protection affect agency costs, but they are more relevant for curtailing governance excesses than guarding the typical firm. Agency costs split about equally into wealth transfers and value losses from policy distortions, the latter being larger where ownership is dispersed. Incentive misalignment captures 60% of country variation in leverage.
    Keywords: Capital structure, agency conflicts, corporate governance, structural estimation
    JEL: G32 G34
  10. By: Yavuz Arslan; Yunus Emrah Bulut; Tayyar Buyukbasaran; Gazi Kabas
    Abstract: With a novel dataset of over two thousand firms covering 2006-2012 period, this study examines liquidity management of non-financial firms in Turkey. We find the following results: First, cash holdings and lines of credits are complementary if the profits are low or cash holdings are small, while they become substitutes if profits are high or cash holdings are large. Second, firms with more available funds (cash plus unused credit lines) invest more than the others; moreover, given the same amount of available funds, those firms which hold more cash make more investment. Third, firms with small cash holdings prefer unused credit lines to cash when they get more profitable; whereas firms with large cash holdings prefer cash to unused credit lines when they get more profitable. Fourth, we find evidence of nonlinearities regarding the determinants of cash holdings and credit limits. Finally, our analysis also includes the effects of aggregate financial uncertainty on liquidity management, and it discriminates between holdings of local currency denominated and foreign currency denominated credit limits. Our study is the first one to examine liquidity management of firms in an emerging economy, and bears some critical differences with the findings of earlier studies.
    Keywords: Credit Lines, Cash holdings, Liquidity Management
    JEL: G31 G32
    Date: 2016
  11. By: Miguel Antón (IESE Business School, Universidad de Navarra); Florian Ederer (Cowles Foundation, Yale University); Mireia Giné (IESE Business School, Universidad de Navarra); Martin Schmalz (University of Michigan)
    Abstract: Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.
    Keywords: Common ownership, competition, CEO pay, management incentives, governance
    JEL: D21 G30 G32 J31 J41
    Date: 2016–07
  12. By: Tomislava Pavic Kramaric (University of Split - University Department for Professional Studies); Toni Milun (Algebra University College); Ivan Pavic (University of Split - Faculty of Economics)
    Abstract: Gender diversity has attracted attention of scientists and practitioners of different fields. Despite the efforts and progress that has been made towards achieving gender equality in the workplace this has remained the weak point especially in the context of management and supervisory board positions. Therefore, the authors wanted to investigate whether this is true for Croatian listed companies. The hypotheses that women in leading positions has a positive impact on performance Croatian listed companies is tested using Tobin’s Q indicator for the year 2014 whereas explanatory variables comprise different corporate governance variables such as Shannon index, Blau index, gender of the president of the management and supervisory board, share of women etc. The analysis is performed by using different empirical research methods including linear regression. The main findings are that women acting as the presidents of the management board positively influence performance. Moreover, having more women in the management board also has beneficial effects on financial success of the firm.
    Keywords: Tobin’s Q; gender diversity; board of directors
    JEL: G00 G19 G30
  13. By: Boyarchenko, Nina (Federal Reserve Bank of New York); Gupta, Pooja (Federal Reserve Bank of New York); Yen, Jacqueline (Federal Reserve Bank of New York)
    Abstract: Market participants and policymakers alike were surprised by the large, prolonged dislocations in credit market arbitrage trades during the second half of 2015 and the first quarter of 2016. In this paper, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by some market participants, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period but limited evidence of asset managers changing their positioning in derivative products. While we cannot quantify the contribution of these two channels to the overall spreads, the relative changes in idiosyncratic risk levels and in asset managers’ derivatives positions appear small relative to the post-crisis increase in cost of capital. We present the mechanics of the CDS-bond arbitrage trade, tracing its impact on a stylized dealer balance sheet and the return-on-equity (ROE) calculation. We find that, given current levels of regulatory leverage, the CDS-bond basis would need to be 87 basis points more negative relative to pre-crisis levels to achieve the same ROE target.
    Keywords: CDS basis; capital requirements; M-CAPM
    JEL: G10 G23 G28
    Date: 2016–07–01
  14. By: Auboin, Marc; Smythe, Harry; Teh, Robert
    Abstract: The unbundling of trade across regions offers unique opportunities for SMEs to integrate into global trade notably through their involvement into supply-chains. With supply-chains shifting and expanding into new regions of the world, the challenge for SMEs to accessing financing remains an important one; in many developing and emerging market economies, the capacity of the local financial sector to support new traders is limited. Moreover, after the financial crisis, several global banks have "retrenched", for various reasons. In this context, supply-chain finance arrangements, and other alternative forms of financing such as through factoring, have proven increasingly popular among traders. This paper shows that factoring has a positive effect in allowing SMEs to access international trade, in countries in which it is available. Factoring also appears to be employed by firms involved in global supply chains. We employ for the first time data on factoring from Factor Chain International (FCI), the most extensive dataset on factoring available at the moment, for the period of 2008-2015. Using an instrumentation strategy we identify a strong, stable effect of factoring on SMEs access to capital for some of the main traders in the world.
    Keywords: trade credit,financial crisis,trade
    JEL: F13 F34 G21 G23
    Date: 2016

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