nep-cfn New Economics Papers
on Corporate Finance
Issue of 2016‒10‒23
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Prestige and loan pricing By Muermann, Alexander; Rauter, Thomas
  2. Market liquidity after the financial crisis By Adrian, Tobias; Fleming, Michael J.; Vogt, Erik
  3. Interdependencies between Leverage and Capital Ratios in the Central and Eastern European Banks By Janda, Karel; Kravtsov, Oleg
  4. Initial Public Offerings and the Firm Location By Giulia Baschieri; Andrea Carosi; Stefano Mengoli
  5. Regulation, tax and capital structure: evidence from administrative data on Italian banks By Steve Bond; Kyung Yeon Ham; Giorgia Maffini; Andrea Nobili; Giacomo Ricotti
  6. The role of bank credit allocation: Evidence from the Spanish economy By Marko Petrovic; Andrea Teglio; Simone Alfarano
  7. Interdependencies between Leverage and Capital Ratios in the Banking Sector of the Czech Republic By Janda, Karel; Kravtsov, Oleg
  8. Leverage and Risk Weighted Capital Requirements By Gambacorta, Leonardo; Karmakar, Sudipto
  9. Predicting bankruptcy in European e-commerce sector By Janda, Karel; Moreira, David

  1. By: Muermann, Alexander; Rauter, Thomas
    Abstract: We find that prestigious companies pay lower spreads and upfront fees on their loans despite the fact that prestige does not predict default risk over the life of the loan. Using survey data on firm-level prestige, we show that a one standard deviation increase in prestige reduces loan spreads by 6.18% per year and upfront fees by 22.86%. We identify causal effects (i) using fraud by industry peers as an instrument for borrower prestige and (ii) exploiting a regression discontinuity around rank 100 of the prestige survey. Banks that lend to prestigious firms attract more business afterwards compared to otherwise similar institutions. Moreover, the effect of prestige on upfront fees is particularly strong for new bank relationships. Our findings suggest that prestigious firms receive cheaper funding because the associated lending relationship helps banks establish valuable credentials they use to compete for future borrowers.
    Keywords: Loan Pricing,Firm Prestige,Bank Incentives
    JEL: G21 G30 G32
    Date: 2016
  2. By: Adrian, Tobias (Federal Reserve Bank of New York); Fleming, Michael J. (Federal Reserve Bank of New York); Vogt, Erik (Federal Reserve Bank of New York)
    Abstract: This paper examines market liquidity in the post-crisis era, in light of concerns that regulatory changes might have reduced banks’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including a discussion of regulations and their potential effect on dealer balance sheets and market making, but also considering plausible alternative drivers of market liquidity. Using both high- and low-frequency data on U.S. Treasury securities and corporate bonds, we then investigate empirically whether liquidity has in fact deteriorated, and we review market behavior around three key post-crisis events. Overall, our findings, and those of recent papers we survey, do not suggest a significant decline in bond market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity.
    Keywords: liquidity; market making; Treasury market; corporate bonds; regulation
    JEL: G12 G21 G28
    Date: 2016–10–19
  3. By: Janda, Karel; Kravtsov, Oleg
    Abstract: In this paper we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Central and Eastern Europe (CEE) and particularly in the Czech Republic. In the empirical study, we applied a data sample of 198 major banks operating in seven countries across the CEE region over the period 2007-2014. The data of the Czech banking sector confirms stronger capital ratios and an overall solid leverage level with only few historical observations being lower than the regulatory guidelines. By analyzing the components of ratios, we conclude that the Czech banks during the last seven years are focusing more on the optimization of risk weighted assets and structuring portfolios with lower risks. We propose an empirical model that allows to test how the leverage ratios and its variables respond to the changes in the cycle. Our analysis across financial institutions in the CEE region shows that the leverage in normal times is strongly related to capital ratio. The statistic evidences on the risk profile and strategy as measured by risk proxy in the model are pointing out on incentives of the banks to manage actively their balance sheet and reduce the riskiness of their portfolios in adverse economic conditions.
    Keywords: Leverage ratio, capital ratio, Basel III, Czech Republic, CEE
    JEL: G21 G32
    Date: 2016–10–13
  4. By: Giulia Baschieri (Dept. of Management, Università Ca' Foscari Venice); Andrea Carosi (Dept. of Economics and Business, University of Sassari); Stefano Mengoli (Dept. of Management, University of Bologna)
    Abstract: .
    Keywords: IPO, Going Public Decision, Underpricing, Long-run Under-performance, Firm Location.
    JEL: G10 G14 G32 G24
    Date: 2016–10
  5. By: Steve Bond (University of Oxford); Kyung Yeon Ham (University of Oxford); Giorgia Maffini (University of Oxford); Andrea Nobili (Associazione Bancaria Italiana); Giacomo Ricotti (Bank of Italy)
    Abstract: This paper explores the effect of taxation on the capital structure of banks. For identification, we exploit exogenous regional variations in the rate of the Italian tax on productive activities (IRAP) using administrative, confidential data on regional banks provided by the Bank of Italy (1998-2011). We find that IRAP rate changes do not always lead to a change in banks’ leverage: banks close to the regulatory constraints do not change their leverage when tax rates change. This holds true for both tax cuts and tax hikes. Among less constrained entities, the leverage of smaller banks is more responsive to changes in tax rates than that of larger banks. Overall, the tax system has little effect on the capital structure of banks, especially for larger and possibly more systemically important institutions; regulatory constraints instead seem to be a first-order determinant. Our findings cast doubt on the role of the tax system as a cause or tool for addressing the negative externalities of excessive leverage in the banking system.
    Keywords: capital structure, debt, regulation, corporate tax, banks
    JEL: G21 G32 G38 H25 H32
    Date: 2016–10
  6. By: Marko Petrovic (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain); Andrea Teglio (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain); Simone Alfarano (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: This paper investigates the determinants of bank credit allocation in Spain from 1999 to 2014, studying in particular the relation between bank credit and total assets in firms balance sheets. The main finding of the paper is that the allocation of bank credit to firms is strongly affected by firms’ size. We show that the amount of bank credit accumulated by a company is more that proportional than its total assets. This leaded in Spain to a notable concentration of bank credit in the hands of the biggest companies of the country. We also find that during the Spanish boom, from 1999 to 2007, bank credit sharply shifted from manufacturing to construction industry and in particular to the biggest companies of the last sector. In the same period, the concentration of bank credit continuously raised, reaching its peak in conjunction with the crisis of 2008. This process increased the leverage of big firms (especially in the construction sector), many of which defaulted during the crisis. The estimation of parametric and semiparametric selection models confirms our findings. Overall, paper’s results raise queries about the correct channelling of bank credit into the economy and about its consequences.
    Keywords: Firms Size, Bank Credit, Loans, Distributions, Credit Allocation, Selection Model
    JEL: G21 L11 C24
    Date: 2016
  7. By: Janda, Karel; Kravtsov, Oleg
    Abstract: In this paper we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Czech Republic. We identify the potential binding constraints from regulatory limits and analyze the interactions among leverage and capital ratios over the country’s economic cycle (during the period 2007-2014). The historical data confirm stronger capital ratios of the banks and an overall solid leverage level with only 5% of the total historical observations being lower than the regulatory recommendations. By analyzing the components of ratios, we conclude that the banks are focusing more on the optimization of risk weighted assets. Strong co-movement patterns between leverage and assets point to the active management of leverage as a means of expanding and contracting the size of balance sheets and maximizing the utility of the capital. The analysis of correlation patterns among the variables indicates that the total assets (and exposure) in contrast to Tier 1 capital are the main contributors to the cyclical movements in the leverage. The leverage and the total assets also demonstrate a weak correlation with GDP, but a strong co-movement with loans to the private sector.
    Keywords: Leverage ratio, capital ratio, Basel III, Czech Republic
    JEL: G30
    Date: 2016–10–11
  8. By: Gambacorta, Leonardo; Karmakar, Sudipto
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a bank’s Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios.
    Keywords: Bank Capital Buffers; leverage; regulation; Risk-Weighted Assets
    JEL: G21 G28 G32
    Date: 2016–10
  9. By: Janda, Karel; Moreira, David
    Abstract: In the current competitive and uncertain e-commerce environment, businesses have the need to predict in advance their likelihood of falling into bankruptcy. The central focus of this paper is to statistically model through different approaches the bankruptcy probability of e-commerce companies in Europe. The authors examine the econometric techniques twostep cluster, logistic regression, discriminant analysis, data mining tree, and roc curves to correctly classify these companies into bankrupt and not bankrupt. The paper finds evidences about the current credit underwriting inexperience among several financial institutions. The classification approaches included in this paper may be applied in real working practice whether by credit underwriters or by business decision makers. The research was developed using financial and accounting information available in the Bureau Van Dijk database. The paper suggests further analytical developments in the field of predictive bankruptcies, and recommends improvements on the credit evaluation scorecards such as the inclusion of advanced online metrics to increase the accuracy of the creditworthiness evaluation of an e-commerce company.
    Keywords: e-commerce, Europe, bankruptcy, econometrics, prediction
    JEL: G33
    Date: 2016–10–11

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