nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒01‒08
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. External financing constraints and firm's innovative activities during the financial crisis By Giebel, Marek; Kraft, Kornelius
  2. Stock price related financial fragility and growth patterns By Aßmuth, Pascal
  3. Corporate leverage in EMEs: did the global financial crisis change the determinants? By Snehal S Herwadkar
  4. The Information Content of Dividends: Safer Profits, Not Higher Profits By Roni Michaely; Stefano Rossi; Michael Weber
  5. Credit Risk Transfer and Bank Insolvency Risk By Maarten van Oordt
  6. Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality By Vojislav Maksimovic; Gordon M. Phillips; Liu Yang
  7. Overlapping Networks of Credit and Control By David Buchuk; Borja Larrain; Mounu Prem; Francisco Urzúa I

  1. By: Giebel, Marek; Kraft, Kornelius
    Abstract: We investigate the effect of individual banks' liquidity shocks during the recent financial crisis of 2008/2009 on the innovation activities of their business customers. Individual banks' liquidity shocks are identified by the degree of interbank market usage. We use a difference-in-differences approach to identify the effect of interbank reliance during the crisis on total innovation expenditures in comparison to the periods before. Our results imply that those firms which have a business relation to a bank with higher interbank market reliance reduce their innovation activities during the financial crisis to a higher degree than other firms.
    Keywords: financial crisis,financial constraints of banks,financing of innovation,innovation activity
    JEL: G01 G21 G30 O16 O30 O31
    Date: 2017
  2. By: Aßmuth, Pascal
    Abstract: The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. The author examines trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm's creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. He asks to which extent a channel may contribute to the stock price-output relation when there is mutual feedback. A model à la Delli Gatti et al. (A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility, 2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank's equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners' influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision ofmanagers they act more prudently and this fosters growth.
    Keywords: heterogeneous agents models,financial fragility,stock prices,business cycles
    JEL: E32 G30 C63
    Date: 2017
  3. By: Snehal S Herwadkar
    Abstract: This paper evaluates whether the GFC was instrumental in changing the determinants of corporate leverage in EMEs. This issue is addressed using a panel-GMM framework and quantile analysis with a database comprising more than 2,000 firms in 10 EMEs over a 19-year period. We find that, post-GFC, global financial market and macroeconomic conditions facilitated build-up of corporate leverage. Specifically, global factors, such as the growth of world GDP and the FED shadow rate, have assumed centre stage as determinants of leverage in EMEs. At the same time, some traditional drivers, such as domestic growth and firm-specific factors, have become less important.
    Keywords: dynamic capital structure, corporate leverage, emerging market economies, global financial crisis
    JEL: G30 G32
    Date: 2017–12
  4. By: Roni Michaely; Stefano Rossi; Michael Weber
    Abstract: Contrary to the central prediction of signaling models, changes in profits do not empirically follow changes in dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits. Using the Campbell (1991) decomposition, we are able to estimate expected cash flows from data on stock returns. Consistent with our model’s predictions, cash-flow volatility changes in the opposite direction from that of dividend changes and larger changes in volatility come with larger announcement returns. We find similar results for share repurchases. Crucially, the data supports the prediction - unique to our model - that the cost of the signal is foregone investment opportunities. We conclude that payout policy conveys information about future cash flow volatility. Our methodology can be applied more generally to overcoming empirical problems in testing theories of corporate financing.
    Keywords: dividends, payout policy, cash flow volatility, signaling model
    JEL: G35
    Date: 2017
  5. By: Maarten van Oordt
    Abstract: The present paper shows that, everything else equal, some transactions to transfer portfolio credit risk to third-party investors increase the insolvency risk of banks. This is particularly likely if a bank sells the senior tranche and retains a sufficiently large first-loss position. The results do not rely on banks increasing leverage after the risk transfer, nor on banks taking on new risks, although these could aggravate the effect. High leverage and concentrated business models increase the vulnerability to the mechanism. These results are useful for risk managers and banking regulation. The literature on credit risk transfers and information asymmetries generally tends to advocate the retention of ‘information-sensitive’ first-loss positions. The present study shows that, under certain conditions, such an approach may harm financial stability, and thus calls for further reflection on the structure of securitization transactions and portfolio insurance.
    Keywords: Credit risk management, Financial Institutions, Financial stability
    JEL: G21 G28 G32
    Date: 2017
  6. By: Vojislav Maksimovic; Gordon M. Phillips; Liu Yang
    Abstract: Using U.S. Census data, we track firms at birth and compare the growth pattern of IPO firms and their matched always-private counterparts over their life cycle. Firms that are larger at birth with faster initial growth are more likely to attain a larger size and to subsequently go public. We estimate a model to predict the propensity to become public (“public quality”) using initial conditions. Firms in the top percentile of public quality grow 29 times larger than the remaining firms fifteen years later if they actually become public and 14 times larger if they stay private, showing a large selection effect for IPO status. Public firms respond more to demand shocks after their IPO and are more productive than their matched private counterparts. This effect is stronger in industries that are capital intensive and dependent on external financing. Overall, initial conditions predict firm growth trajectories, selection into public status and responsiveness to demand shocks. We find no evidence of public market myopia when matching by initial conditions.
    JEL: G3 G32 L2 L20 L22 L25 L26
    Date: 2017–12
  7. By: David Buchuk; Borja Larrain; Mounu Prem; Francisco Urzúa I
    Abstract: Business groups are networks of firms connected by ownership links. We study the reaction of these networks to the 2008-9 crisis using a unique dataset of Chilean intra-group loans. Internal credit increases swiftly during the crisis. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Like pure intermediaries, central firms keep net lending relatively constant. Central firms do not experience a significant fall in profitability relative to the average group firm, although receivers of intra-group loans perform significantly better. Our results show that control rights are essential for credit intermediation at times of distress.
    Keywords: Business groups, networks, centrality, internal capital markets.
    JEL: G32
    Date: 2017–11–30

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