nep-cfn New Economics Papers
on Corporate Finance
Issue of 2017‒07‒09
eight papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Corporate Debt Overhang in Croatia: Micro Assessment and Macro Implications By Ana Martinis; Igor Ljubaj
  2. CDS and credit: Testing the small bang theory of the financial universe with micro data By Gündüz, Yalin; Ongena, Steven; Tümer-Alkan, Günseli; Yu, Yuejuan
  3. Board Quotas and Director-Firm Matching By Ferreira, Daniel; Ginglinger, Edith; Laguna, Marie-Aude; Skalli, Yasmine
  4. The decline of solvency contagion risk By Bardoscia, Marco; Barucca, Paolo; Brinley Codd, Adam; Hill, John
  5. The Credit Card Act and Consumer Finance Company Lending By Gregory E. Elliehausen; Simona Hannon
  6. New firms’ bankruptcy: does local banking market matter? By Giuseppe Arcuri; Maurizio La Rocca; Nadine Levratto
  7. What determines firms' credit to access in the absence of effective economic institutions: Evidence from China By Fu, Tong
  8. Taxes and the Location of Targets By Arulampalam, Wiji; Devereux, Michael; Liberini, Federica

  1. By: Ana Martinis (The Croatian National Bank, Croatia); Igor Ljubaj (The Croatian National Bank, Croatia)
    Abstract: High corporate sector leverage has often been highlighted as one of the major impediments to economic recovery. We conduct a debt sustainability analysis for Croatian corporates based on firm-level data. The analysis shows that around one third of the corporate debt in Croatia is unsustainable, thus pointing to sizeable deleveraging needs. By relating the estimated firm-level debt overhang indicator with investment activity, we find that over-indebted firms have reduced their investment to a greater extent than those without debt overhang. This especially holds among exporters and domestically owned private companies, whose higher sensitivity to unsustainable debt probably explains why they are less debt burdened. Our paper contributes to the existing literature by showing that, in the case of Croatia, the estimated firm-level debt sustainability thresholds, unlike the aggregate thresholds, capture the asymmetrically negative effect of debt overhang on investment. The estimated size and impact of the debt overhang in Croatia warrant policy engagement that would include more efficient bankruptcy procedures, swifter balance sheet clean-up supported by specific tax treatments, enhanced restructuring of unsustainably indebted state-owned companies as well as a comprehensive policy strategy for improving business climate and competitiveness.
    Keywords: corporate debt, investment, debt overhang, deleveraging, crisis, Croatia
    JEL: D22 E22 F34 G31
    Date: 2017–06
  2. By: Gündüz, Yalin; Ongena, Steven; Tümer-Alkan, Günseli; Yu, Yuejuan
    Abstract: Does hedging motivate CDS trading and does that affect the availability of credit? To answer these questions we couple comprehensive bank-firm level CDS trading data from the Depository Trust and Clearing Corporation with the German credit register containing bilateral bank-firm credit exposures. We find that following the Small Bang in the European CDS market, extant credit relationships with riskier firms increase banks' CDS trading and hedging of these firms. Properly hedged banks holding more CDS contracts of riskier firms supply relatively more credit to these firms. Our results are overall stronger for firm CDSs experiencing larger improvements in liquidity.
    Keywords: credit default swaps,credit exposure,hedging,bank lending,Depository Trust and Clearing Corporation (DTCC)
    JEL: G21
    Date: 2017
  3. By: Ferreira, Daniel; Ginglinger, Edith; Laguna, Marie-Aude; Skalli, Yasmine
    Abstract: We study the impact of board gender quotas on the labor market for corporate directors. We find that the annual rate of turnover of female directors falls by about a third following the introduction of a quota in France in 2011. This decline in turnover is more pronounced for new appointments induced by the quota, and for appointments made by firms that regularly hire directors who are members of the French business elite. By contrast, the quota has no effect on male director turnover. The evidence suggests that, by changing the director search technology used by firms, the French quota has improved the stability of director-firm matches.
    Keywords: Corporate Boards; corporate governance; Gender Quotas; labor markets; Matching; Turnover
    JEL: G34 G38 J63 J70
    Date: 2017–06
  4. By: Bardoscia, Marco (Bank of England); Barucca, Paolo (University of Zurich, London Institute for Mathematical Science, IMT Lucca); Brinley Codd, Adam (Bank of England); Hill, John (Bank of England)
    Abstract: We study solvency contagion risk in the UK banking system from 2008 to 2015. We develop a model that not only accounts for losses transmitted after banks default, but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change. We apply our model to a unique data set of real UK interbank exposures. We show that risks due to solvency contagion decrease markedly from the peak of the crisis to the present, to the point of becoming negligible. By decomposing the change in losses into two main contributions — the increase in banks’ capital and the decrease in interbank exposures — we are able to pinpoint the main driver in each year. In some cases we observe that an increase in aggregate capital is associated with a positive contribution to losses. This suggests that the distribution of capital among banks is also important.
    Keywords: Financial networks; systemic risk; financial contagion; macroprudential policy; stress testing
    JEL: D85 G01 G12 G21 G28 G33 G38
    Date: 2017–06–30
  5. By: Gregory E. Elliehausen; Simona Hannon
    Abstract: The Credit Card Accountability and Disclosure Act (CARD Act) of 2009 restricted several risk management practices of credit card issuers. Using a quasi-experimental design with credit bureau data on consumer lending, we find evidence consistent with the hypothesis that the act’s restrictions on risk management practices contributed to a large decline in bank card holding by higher risk, nonprime consumers but had little effect on prime consumers. Looking at consumer finance loans, historically a source of credit for higher risk consumers, we find greater reliance on such loans by nonprime consumers in states with high consumer finance rate ceilings following the CARD Act than by nonprime consumers in states with low rate ceilings or by prime consumers. That nonprime consumers in states with high consumer finance rate ceilings relied more heavily on consumer finance loans suggests that consumer finance loans were a substitute for subprime credit cards for risky consum ers when rate ceilings permit such loans to be profitable. Consumer finance loans would not be available to many higher risk, nonprime consumers in low rate states because such loans would be unprofitable, and prime consumers would not need consumer finance loans because other, less expensive types of credit would generally be available to them.
    Keywords: CARD Act ; Consumer credit ; Credit cards ; Credit supply ; Household finance ; Personal loans ; Subprime credit
    JEL: G21 G23 G28
    Date: 2017–06–29
  6. By: Giuseppe Arcuri; Maurizio La Rocca; Nadine Levratto
    Abstract: This paper investigates the role of local context, with regard to the effect of local financial development and banking concentration, on a new firm’s probability of bankruptcy. Our empirical setting is based on the Logit Multilevel Model that better allows the treatment of data referring to different levels of aggregation (firm and local variables) applied to new firms located in Italian provinces. We find that a higher level of financial development in a province decreases the likelihood of a new firm’s bankruptcy. This result is robust considering a 2SLS regression in which we use instruments for the local financial development and for the concentration of bank branches. In addition, our estimations suggest that the effect of local financial development and bank concentration is shaped by size. Local financial development is particularly significant for small start-ups, which traditionally suffer from great difficulty in accessing credit, whereas local banking concentration reduces the probability of bankruptcy for large, new firms.
    Keywords: Probability of bankruptcy, new firms, multilevel model, local banking structure
    JEL: C26 C30 M13 R11
    Date: 2017
  7. By: Fu, Tong
    Abstract: The existing literature suggests that economic institutions determine the allocation of resources for economic growth. As an important counterexample, although China has one of the world's fastest-growing economies, its legal and financial systems are underdeveloped. With evidence from China, the author confirms that government intervention positively and causally determines firms' access to credit. He further provides evidence that government intervention enables firms' profit through facilitating access to credit. This evidence confirms that the mechanism of government intervention allows firms' access to credit and then enables the firms to obtain relatively large profit. Ultimately, this paper reveals that, in the absence of effective economic institutions, government intervention channels the allocation of capital.
    Keywords: access to credit,government intervention,mediation effect
    JEL: O17 G21 G28 C51
    Date: 2017
  8. By: Arulampalam, Wiji (Department of Economics, University og Warwick); Devereux, Michael (Centre for Business Taxation, University of Oxford); Liberini, Federica (Economic Institute, ETH Zürich)
    Abstract: We use firm-level data to investigate the impact of taxes on the international location of targets in M&A allowing for heterogeneous responses by companies. The statutory tax rate in the target country is found to have a negative impact on the probability of an acquisition in that country. In addition, the estimated size of the effect is found to depend on whether (i) acquirer is a domestic or a multinational enterprise; (ii) the acquisition is domestic or cross-border; and (iii) the acquirer's country has a worldwide or territorial tax system
    Keywords: Multinational enterprises; cross-border expansion; target choice; corporation income tax; mixed logit
    JEL: C25 G34 H25 H32
    Date: 2017–02–28

This nep-cfn issue is ©2017 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.