nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒07‒02
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Determinants of Growth in the Information and Communication Technology (ICT) Industry: A Firm-Level Analysis By Giorgio Canarella; Stephen M. Miller
  2. Static and Dynamic Indicators in the Analysis of Internal Sources of Companies’ Investments Financing By Bukvić, Rajko; Pavlović, Radica; Gajić, Aleksandar
  3. Asymmetries in the Firm's Use of Debt to Changing Market Values By Ferris, Stephen; Hanousek, Jan; Shamshur, Anastasiya; Tresl, Jiri
  4. Assessing Systemic Risk of the European Insurance Industry By Elia Berdin; Matteo Sottocornola
  5. Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy By Raffaele Santioni; Fabio Schiantarelli; Philip E. Strahan
  6. Large Firm Dynamics and Secular Stagnation: Evidence from Japan and the U.S. By Yoshihiko Hogen; Ko Miura; Koji Takahashi
  7. Credit guarantee schemes for SME lending in Western Europe By Chatzouz, Moustafa; Gereben, Áron; Lang, Frank; Torfs, Wouter
  8. Valuation of an R&D project with three types of uncertainty By Michi Nishihara
  9. Uncertainty and the Cost of Bank vs. Bond Finance By Grimme, Christian
  10. Equity versus Bail-in Debt in Banking: An Agency Perspective By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier
  11. Uses and Misuses of Arbitrage in Financial Theory, and a Suggested Alternative By García Iborra, Rafael; Howden, David

  1. By: Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas)
    Abstract: Why do some firms grow faster than others? This question has become the focus of a large number of empirical studies in industrial organization, strategic management, and entrepreneurship since the publications of Gibrat (1931) and Penrose (1959). Using an unbalanced panel data set of 85 U.S. information and communication technology (ICT) firms that survived over the period from 1990 to 2013, we examine the effect of firm size, agency costs, R&D investments, capital structure, profitability, and the Great Recession of 2007-2009 on firm growth. Adopting the two-step, system, generalized-method-of-moments estimator for linear dynamic panel models (Blundell and Bond, 1998), we document that growth in the ICT industry is not stochastic, as predicted by Gibrat (1931), but driven by systematic factors. We find compelling evidence that in the ICT industry: (i) firm growth exhibits positive persistence, which endorses the controversial "success-breeds-success" evolutionary hypothesis; (ii) agency costs and financial leverage exert a negative effect on firm growth; (iii) R&D investment and financial performance generate a positive effect on firm growth; (iv) the Great Recession (2007-2009) produced a negative effect on firm growth; (v) a nonlinear, inverted U-shaped relationship exists between firm size and firm growth; and (vi) Gibrat’s law does not hold. Our findings remain robust to transformations using first differences and forward orthogonal deviations as well as principal components reductions. These results are new to the literature, since the dynamics of firm growth has not been documented at the ICT industry level. Noteworthy policy implications emerge because the growth dynamics of the ICT industry move this sector toward more concentration and less competition.
    Keywords: ICT industry; Agency costs; Firm growth; Panel data; system-GMM
    JEL: G21 G28 G32 G34
    Date: 2017–06
  2. By: Bukvić, Rajko; Pavlović, Radica; Gajić, Aleksandar
    Abstract: The Republic of Serbia is characterized by an unsatisfactory macroeconomic environment. Under the conditions of an evident shortage of liquid assets, the financial capital has moved from real to the financial sector, which led companies to over-indebtedness and shutdown of their own capacities. Therefore, capital investments largely depend on internal financing sources and the ability of companies to internally generate funds for investments. In this regard, an emphasis is placed on the difference in the assessment of the company’s investment capacity based on internal financing sources, which are measured using static and dynamic indicators in order to prove the necessity of applying dynamic coefficients, which are unfortunately not present in our domestic practice. The paper examines and proves the advantages of the use of the dynamic approach for such analyses using the example of energy sector, which is one of the most important branches in Serbian economy.
    Keywords: dynamic and static coefficients, dynamic analysis, investments, financing, sources, dispersion analysis
    JEL: E22 G17 G31 G32 M40 M49
    Date: 2017
  3. By: Ferris, Stephen; Hanousek, Jan; Shamshur, Anastasiya; Tresl, Jiri
    Abstract: Using a large sample of U.S. firms over the period, 1984 to 2013, this study examines the relation between market and book leverage ratios. Unlike Welch (2004) who contends that changes in market leverage do not induce adjustments in book leverage, we find an asymmetric effect. That is, firms adjust their book leverage relative to market leverage only when the changes in market leverage are due to increases in the value of the firm's equity. No adjustment is observed when firm equity values decrease. We observe a number of interesting differences between those firms that make large and small capital structure adjustments in response to changing equity prices. Our results are consistent with Barclay, Morellec and Smith (2006) who argue that the optimal level of debt decreases in the presence of corporate growth options.
    Keywords: market leverage; book leverage; capital structure; adjustment speed
    JEL: C23 G32
    Date: 2017–06
  4. By: Elia Berdin; Matteo Sottocornola (EIOPA)
    Abstract: This paper investigates the systemic relevance of the insurance industry. We do it by analysing the systemic contribution of the insurance industry vis-á-vis other industries by applying three measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, to three groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. Our evidence suggests that the insurance industry shows i) a persistent systemic relevance over time, ii) it plays a subordinate role in causing systemic risk compared to banks. In addition, iii) we do not find clear evidence on the higher systemic relevance of SIFI insurers compared to non-SIFIs.
    Keywords: Insurance, Systemic Risk, financial stability
    JEL: G22 G28 E27
    Date: 2015–12
  5. By: Raffaele Santioni; Fabio Schiantarelli; Philip E. Strahan
    Abstract: Italy’s economic and banking systems have been under stress in the wake of the Global Financial Crisis and Euro Crisis. Firms in business groups have been more likely to survive this challenging environment, compared to unaffiliated firms. Better performance stems from access to an internal capital market, and the survival value of groups increases, inter alia, with group-wide cash flow. We show that actual internal capital transfers increase during the crisis, and these transfers move funds from cash-rich to cash-poor firms and also to those with more favorable investment opportunities. The ability to borrow externally provides additional funds that are shared across group affiliated firms. Our results highlight the benefits of internal capital markets when external capital markets are tight or distressed.
    JEL: G01 G21 G3
    Date: 2017–06
  6. By: Yoshihiko Hogen (Bank of Japan); Ko Miura (Bank of Japan); Koji Takahashi (Bank of Japan)
    Abstract: Focusing on the recent secular stagnation debate, this paper examines the role of large firm dynamics as determinants of productivity fluctuations. We first show that idiosyncratic shocks to large firms as well as entry, exit, and reallocation effects account for 30 to 40 percent of productivity fluctuations in Japan and the U.S. Second, since the mid-2000s, the slowdown in large foreign firm entry into the U.S. has led to a decline in business dynamics and downward pressures on productivity growth. Third, we identify demand and supply shocks by matching idiosyncratic large-firm shocks in the granular residual (Gabaix, 2011) and changes in sectoral inflation rates and show that the prolonged slowdown in productivity growth in Japan and the U.S. was mostly driven by supply shocks. Overall, our results support the supply-side views of Gordon (2012, 2015, 2016) in the secular stagnation debate.
    Keywords: Granular Hypothesis; Entry-Exit; Productivity Growth; Secular Stagnation
    JEL: E13 E23 E32 D21
    Date: 2017–06–21
  7. By: Chatzouz, Moustafa; Gereben, Áron; Lang, Frank; Torfs, Wouter
    Abstract: This report discusses the activity of credit guarantee schemes (CGSs) in Western Europe and presents an analysis based on a novel survey, conducted by the European Investment Bank (EIB) Group , among 18 credit guarantee organisations in 13 countries and 33 banks operating in 17 countries. The report aims at providing a deeper insight into the driving motives and operational mechanisms of CGSs, and the financial intermediaries that use them. The current publication is a successor of an earlier report, published in 2014 by the European Bank Coordination "Vienna Initiative" Working Group on CGSs (EBCI, 2014), which provides a comprehensive overview on the use of CGSs for Small- and Medium-sized Enterprise (SME) lending in Central, Eastern and South-Eastern Europe (CESEE).
    Date: 2017
  8. By: Michi Nishihara (Graduate School of Economics, Osaka University)
    Abstract: This paper develops an R&D decision-making model in the real options framework. The model is generic enough to capture three types of uncertainty in an R&D project, namely, uncertainty of research duration and costs, market value of technology, and a competitor fs technology development. I derive analytical solutions, which help practitioners and researchers to evaluate various cases of R&D investment. Further, by analyzing the model with a wide range of parameter values, I reveal the following effects of the three types of uncertainty on R&D investment: Higher uncertainty of research duration and costs, unlike market value uncertainty, speeds up investment, especially combined with a higher risk of competition. The investment timing can be U-shaped in the strength of competition because of the trade-off between the preemptive investment effect and the decreased project value effect. These results can account for empirical findings about the uncertainty-investment relation in industries with high R&D intensity and severe competition.
    Keywords: Capital budgeting; Decision analysis; Risk; R&D; Real options
    JEL: G31 G33
    Date: 2017–06
  9. By: Grimme, Christian
    Abstract: How does heightened uncertainty affect the costs of raising finance through the bond market and through bank loans? Empirically, I find that a rise in uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This new stylized fact can be explained in a model with costly state verification and a special informational role for banks. In contrast to bond investors, banks acquire additional costly information about borrowers in times of uncertainty in order to reduce uncertainty. Having this information, the lending relationship becomes more valuable to the bank, resulting in a lower lending rate so that the relationship is not put at risk. The cost of bond finance increases because bond investors demand to be compensated for the increased risk of firm default. These findings suggest that the adverse effects of uncertainty are mitigated for firms that rely on bank finance as long as banks are highly capitalized.
    Keywords: Uncertainty Shocks, Financial Frictions, Relationship Banking, Bank Loan Rate Setting, Information Acquisition
    JEL: E32 E43 E44 G21
    Date: 2017–06–23
  10. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier
    Abstract: We examine the optimal size and composition of banks' total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin.
    Keywords: agency problems; bail-in debt; Bank Regulation; loss absorbing capacity; risk shifting
    JEL: G21 G28 G32
    Date: 2017–06
  11. By: García Iborra, Rafael; Howden, David
    Abstract: Despite being a mainstay of modern economic theory, the simple concept of arbitrage is sorely misused. In this paper we overview such instances, and offer an alternative definition. Most applications of arbitrage use it as a general equilibrating tendency irrespective of whether the outcome is certain. Alternatively, it can be used in a rather “loose” manner to apply to inter-temporal scenarios or situations involving multiple (though similar) goods. To accommodate some of these instances we redefine the concept as any case where “one or more assets are simultaneously exchanged, locking in a monetary profit with certainty at the time of trading, even if it cannot be certain as to the magnitude of such profit.” We outline the scenarios where this revised definition matters, not least of which is constricting the use of arbitrage to its proper domain within the context of entrepreneurship as a cause of price formation.
    Keywords: price theory, entrepreneurship, arbitrage, equilibrium
    JEL: D5 D8 D9 G0
    Date: 2016

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