nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒06‒25
six papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics By Dean Corbae; Pablo D'Erasmo
  2. What You See Is Not What You Get, Always! A Distorted but True View of Company Financials when Distressed By Cakir, Murat
  3. Debt concentration and performance of European firms By Caterina Giannetti
  4. Bank CEO inside debt and loan contracting By Chen Liu, Yan Wendy Wu
  5. Financial Frictions, Underinvestment, and Investment Composition; Evidence from Indian Corporates By Sonali Das; Volodymyr Tulin
  6. Financial Frictions and Export Dynamics in Large Devaluations By Kohn, David; Leibovici, Fernando; Szkup, Michal

  1. By: Dean Corbae; Pablo D'Erasmo
    Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a firm dynamics model with endogenous entry and exit to include both bankruptcy options in a general equilibrium environment. Finally, we evaluate a bankruptcy policy change recommended by the American Bankruptcy Institute that amounts to a “fresh start” for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity (allocative efficiency rises by 2.58%) and welfare (rises by 0.54%).
    JEL: E22 G32 G33
    Date: 2017–06
  2. By: Cakir, Murat
    Abstract: Corporate failures and dismantling have become more and more widespread after the late 2007-2008 global crisis and individual as well as bulk numbers of cases are almost many as since the Great Depression. In another study , I had discussed the importance of the roles of non-financial firms in concert with the households in this crisis. The liquidation value of “the distressed firm”, as the case may be, depending on what type, as well as the determination of financial and operational distresses, becomes a crucial part of the supervisory process, if the firm does not recover from any of those. Therefore, going back to good old college days, to refresh our memories of what the value of a firm if distressed was, deemed necessary and I have devised this exercise to show what I understand of the liquidation value of a firm as such.
    Keywords: Corporate failure, financial distress, operational distress, liquidation value
    JEL: E58 G28 M41 M42
    Date: 2017–06–19
  3. By: Caterina Giannetti
    Abstract: This paper investigates the level of debt specialization across European firms relying on a cross-country comparable sample of manufacturing firms. We find a non-linear relationship between firm debt specialization (i.e. composition of the various types of debt) and firm size and age. In line with previous evidence for US firms, we observe that small and young firms have a more concentrated debt structure (i.e. they rely on few types of debt). Relying on quasi-experimental setting, we also find that firms having a diversified debt structure are less likely to experience a severe reduction in turnover.Creation-Date: 2016-01-01
    Keywords: Debt concentration, European firm financing, Generalized propensity score.
    JEL: C24 G31
  4. By: Chen Liu, Yan Wendy Wu (Wilfrid Laurier University)
    Abstract: Contrary to the theoretical prediction that CEOs with large debt-based compensation take lower levels of risk, we find that banks with higher CEO inside debt compensation extend syndicated loans with smaller number of lenders, lower spread, less covenant, and higher maturity. Using two-stage selection models, we reconciled these seemingly counter intuitive results of inside debt leads to less conservative loan contracting terms by incorporating banks selection effect. We find that the mechanism of inside debt limit bank risk-taking in loan contracting is through making loans to safer borrowers in the first place, but not through tighter loan terms. These results are consistent and robust to instrumental variables and structure models that control for the endogeneity of relationships.
    Keywords: Inside debt, Loan contracting, Bank Executive, CEO Compensation, risk-taking, syndicated loans
    JEL: G21 G28 G38 J48 M52
    Date: 2017–04–01
  5. By: Sonali Das; Volodymyr Tulin
    Abstract: This paper studies private investment in India against the backdrop of a significant investment decline over the past decade. We analyze the potential causes of weaker investment at the firm level, using both firm-level financial statements and a novel dataset on firms’ investment project decisions, and find that financial frictions have played a role in the slowdown. Firms with higher financial leverage invest less, as do firms with lower earnings relative to their interest expenses. Consistent with the notion of credit constraints leading to pro-cyclical investment, we also find that firms with higher leverage are (i) less likely to undertake new investment projects, (ii) less likely to complete investment projects once begun, and (iii) undertake shorter-term investment projects.
    Date: 2017–06–08
  6. By: Kohn, David (Universidad Cat´olica de Chile); Leibovici, Fernando (Federal Reserve Bank of St. Louis); Szkup, Michal (University of British Columbia)
    Abstract: We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms, where firms face financing constraints and debt can be denominated in foreign units. We find that these channels can explain only a small fraction of the dynamics of exports observed in the data. While these frictions distort production and investment decisions, they affect exports significantly less since firms reallocate sales across markets in response to real exchange rate changes. We document the importance of this mechanism using plant-level data.
    Keywords: Financial frictions; large devaluations; export dynamics; balance-sheet effects.
    JEL: F1 F4 G32
    Date: 2017–05–01

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