nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒04‒02
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Financial Flexibility and Corporate Cash PolicyAbstract: Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on firms¡¯ cash policies. We find strong evidence that increases in debt capacity lead to smaller corporate cash reserves and declines in the marginal value of cash holdings. We further find that the decrease in cash holdings is more pronounced in firms with higher hedging needs, greater investment opportunities, financial constraints, better corporate governance and lower local real estate price volatility. By Tao Chen; Jarrad Harford; Chen Lin
  2. Capital depreciation and the underdetermination of rate of return: A unifying perspective By Magni, Carlo Alberto
  3. Did the Basel Process of Capital Regulation Enhance the Resiliency of European Banks? By Gehrig, Thomas; Iannino, Maria Chiara
  4. Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets By Irina Balteanu; Aitor Erce
  5. Measuring the Systemic Risk in Interfirm Transaction Networks By Hazama, Makoto; Uesugi, Iichiro
  6. Firm Growth Dynamics and Financial Constraints: Evidence from Serbian Firms By Milos Markovic; Michael Stemmer
  7. Leveraged Buyouts : A Survey of the Literature By Renneboog, Luc; Vansteenkiste, Cara

  1. By: Tao Chen (Nanyang Technological University); Jarrad Harford (University of Washington); Chen Lin (The University of Hong Kong)
    Keywords: Financial Flexibility; Collateral Value; Cash Policy; Real Estate Prices
    JEL: G32 G31 R30
    Date: 2017–03
  2. By: Magni, Carlo Alberto
    Abstract: This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPV-consistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project’s cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project’s capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domain-specific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.
    Keywords: Investment decision, project appraisal, rate of return, depreciation, capital, net present value, AIRR, mean.
    JEL: C0 G0 G1 G11 G22 G3 G31 G32 G35 M2 M41 N0
    Date: 2016–12
  3. By: Gehrig, Thomas; Iannino, Maria Chiara
    Abstract: This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest institutions. In the second part we analyse the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not (yet) brought about a significant increase in the safety and soundness of the European banking system. Finally, low interest rates affect considerably to the contribution to systemic risk across the whole spectrum of banks.
    Keywords: capital shortfall; internal risk models; quantile regressions; resilience; systemic risk
    JEL: B26 E58 G21 G28 H12 N24
    Date: 2017–03
  4. By: Irina Balteanu (Bank of Spain); Aitor Erce (ESM)
    Abstract: We analyze the mechanisms through which bank and sovereign distress feed into each other, using a large sample of emerging market economies over three decades. After defining “twin crises” as events where bank crises and sovereign defaults combine, and further distinguishing between those bank crises that end up in sovereign defaults and vice-versa, we study what differentiates “single” and “twin” events. Using an event analysis methodology, we document systematic differences between “single” and “twin” crises across various dimensions. We show that many of the regularities often associated with either “bank” or “debt” crises are present in twin events only. We further show that “twin” crises themselves are heterogeneous events: the proper time sequence of crises that compose “twin” episodes is important for understanding these events. Guided by these facts, we use discrete-variable econometric techniques to assess the main channels of distress transmission between crises. We find that balance sheet interconnections, credit dynamics, financial openness and economic growth are important drivers of twin crises. Our results inform the flourishing theoretical literature on the mechanisms surrounding feedback loops of sovereign and bank stress.
    Keywords: Banking Crises, Sovereign Defaults, Feedback Loops, Balance Sheets
    JEL: E44 F34 G01 H63
    Date: 2017–02–15
  5. By: Hazama, Makoto; Uesugi, Iichiro
    Abstract: Using a unique and massive data set that contains information on interfirm transaction relationships, this study examines default propagation in trade credit networks and provides direct and systematic evidence of the existence and relevance of such default propagation. Not only do we implement simulations in order to detect prospective defaulters, we also estimate the probabilities of actual firm bankruptcies and compare the predicted defaults and actual defaults. We find, first, that an economically sizable number of firms are predicted to fail when their customers default on their trade debt. Second, these prospective defaulters are indeed more likely to go bankrupt than other firms. Third, firms that have abundant external sources of financing or whose transaction partners have such abundant sources are less likely to go bankrupt even when they are predicted to default. This provides evidence for the existence and relevance of firms – called “deep pockets” by Kiyotaki and Moore (1997) – that can act as shock absorbers.
    Keywords: interfirm networks, trade credit, default propagation
    JEL: E32 G21 G32 G33
    Date: 2017–02
  6. By: Milos Markovic (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Michael Stemmer (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Using a unique dataset of unlisted Serbian firms during the period between 2005 and 2012, we analyze the impact of internal financial constraints on firm growth with respect to several firm-level characteristics. We also assess potential effects created by the 2008-2009 Global Financial Crisis. To do so, we rely on panel data models, which estimate via GMM cash flow sensitivities of firm growth, following the dynamic specification of Guariglia et al. (2011). Controlling for investment opportunities, our results show that Serbian firms face high financial constraints and exhibit generally a high reliance on retained earnings for firm growth. We do not find evidence for a crisis effect, potentially due to ex ante accumulated internal funds. Conventional firm characteristics such as age, size or overall performance largely determine the dependency on cash for firm growth. Moreover, foreign-owned companies seem to escape the financing gap by tapping other resources. A comparison with Belgian firms contrasts our results with an advanced country setting.
    Keywords: Financial constraints,firm growth,transition countries,dynamic panel data,GMM
    Date: 2017–02
  7. By: Renneboog, Luc (Tilburg University, Center For Economic Research); Vansteenkiste, Cara (Tilburg University, Center For Economic Research)
    Abstract: This paper provides an exhaustive literature review of the motives for public-to-private LBO transactions. First, the paper develops the theoretical framework for the potential sources of value creation from going private: a distinction is made between the reduction in agency costs, stakeholder wealth transfers, tax benefits, transaction costs savings, takeover defense strategies, and corporate undervaluation. The paper then reviews and summarizes whether and how these theories have been empirically verified in the four different strands of literature in LBO research. These strands of literature are categorized by phase in the LBO transaction: Intent (of a buyout), Impact (of the LBO on the various stakeholders), Process (of restructuring after the leveraged buyout) and Duration (of retaining the private status). Then, the paper shows that in the first half of the 2000s, a public-to-private LBO wave re-emerged in the US, UK and Continental Europe, whose value vastly exceeded that of the 1980s US LBO wave. Finally, the paper provides suggestions for further research.
    Keywords: publit-to-private transactions; going-private deals; private equitiy; management buyout; leveraged buyout; management buy-in; MBO; LBO; reverse LBO
    JEL: G3 G32 G34 G38
    Date: 2017

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