|
on Corporate Finance |
| By: | Allen, Franklin; Carletti, Elena; Grinstein, Yaniv |
| Abstract: | The relationship between changes in GDP and unemployment during the 2008 financial crisis differed significantly from previous experiences and across countries. We study firm-level decisions in France, Germany, Japan, the UK, and the US. We find significant differences between the response of US and non-US firms. US firms significantly decreased their production costs relative to firms in other countries. They have also reduced debt, reduced dividend payout, and increased their cash holdings compared to firms in other countries. The differences are, in general, explained by differences in financial leverage. However, financial leverage does not explain differences between production decisions in German and U.S. firms and between Japanese and US firms. We argue that differences in firm governance between US firms and firms in Germany and Japan drive these responses. US firms are more prone to cut labor costs and reduce leverage compared to German firms and Japanese firms in order to achieve larger profits and a larger cash-cushion in the short-run. |
| Keywords: | corporate governance; firm-level decisions; Okun's law |
| JEL: | E30 G01 G32 G34 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12568&r=cfn |
| By: | Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic) |
| Abstract: | Banks in the Czech Republic maintain their regulatory capital ratios well above the level required by their regulator. This paper discusses the main reasons for this capital surplus and analyses the impact of additional capital requirements stemming from capital buffers and Pillar 2 add-ons on the capital ratios of banks holding such extra capital. The results provide evidence that banks shrink their capital surplus in response to higher capital requirements. A substantial portion of this adjustment seems to be delivered through changes in average risk weights. For this and other reasons, it is desirable to regularly assess whether the evolution and current level of risk weights give rise to any risk of underestimating the necessary level of capital. |
| Keywords: | Banks, capital requirements, capital surplus, panel data, partial adjustment model |
| JEL: | G21 G28 G32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2017_28&r=cfn |
| By: | Clark, Ephraim; Qiao, Zhuo; Wong, Wing-Keung |
| Abstract: | Investor behavior towards risk lies at the heart of economic decision making in general and modern investment theory and practice in particular. This paper uses both the mean-variance (MV) criterion and stochastic dominance (SD) procedures to analyze the preferences for four of the most widely studied investor types in the Taiwan stock and stock index futures market. We find that risk averters (concave utility function) prefer spot to futures, whereas risk seekers (convex utility function) prefer futures to spot. Our findings also show that investors with S-shaped utility functions prefer spot (futures) to futures (spot) when markets move upward (downward). Finally, our results imply that investors with reverse S-shaped utility functions prefer futures (spot) to spot (futures) when markets move upward (downward). These results are robust with respect to sub-periods, spot returns including dividends and diversification. Although we do not check whether risk averters, risk seekers, and investors with S-shaped and reverse Sshaped utility functions actually exist in the market, we do show that their existence is plausible. The implications of our findings on market efficiency and the existence of arbitrage opportunities are also discussed in this study. |
| Keywords: | stochastic dominance; risk aversion; risk seeking; prospect theory; behavioral economics; stock index futures; |
| JEL: | C14 G12 G15 |
| Date: | 2017–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82888&r=cfn |
| By: | Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin |
| Abstract: | This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature: First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments. |
| Keywords: | Financial intermediation; capital accumulation; banking crisis; macroeconomic shocks; business cycles; bust-boom cycles; managing recoveries |
| JEL: | E21 E32 G21 G28 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32399&r=cfn |
| By: | Bing Xu (Banco de España) |
| Abstract: | By allowing large classes of movable asstes to be used as collateral, the Property Law reform transformed the secured transactions in China. Difference-in-differences test show fi rms operating with ex-ante more movable assets expand access to bank credit and prolong debt maturity. However, the reform does not seem to improve the effi ciency of credit allocation, as debt capacity of ex-ante low quality fi rms expands the most following the reform. Credit expansion also does not lead to better fi rm performance. These findings are not driven by confounding factors such as improvements in creditor and property rights protection. Our results also cannot be explained by other important reforms which were introduced around the same time as the introduction of the Property Law. These include anti-tunneling and split-share reforms and amendments to the corporate tax structure in China. We conduct explicit robustness tests for these other reforms and hence contribute to the empirical literature on the reform process in China with new findings. |
| Keywords: | Collateral, movable assets, leverage, property law |
| JEL: | G21 G28 G32 K22 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1750&r=cfn |
| By: | Tho Pham (School of Management, Swansea University); Oleksandr Talavera (School of Management, Swansea University); Andriy Tsapin (National Bank of Ukraine; National University of Ostroh Academy) |
| Abstract: | We use the geopolitical conflict in eastern Ukraine as a negative shock to bank assets and examine the shock's impact on the banking sector. We find banks were more severely affected by the conflict if they had more loans outstanding in the conflict areas before the shock. These banks, consequently, are more likely to experience an increase in troubled assets and a reduction in credit supply. Further analysis offers evidence of the "flight to headquarters" effect in credit allocation wherein more affected banks cut lending by a greater amount in markets located farther from headquarters. |
| Keywords: | geopolitical shock, credit allocation, asset quality, flight to headquarters, difference-in-differences |
| JEL: | G01 G21 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:01/2018&r=cfn |
| By: | Scheuplein, Christoph; Kahl, Julian |
| Abstract: | Over the past decade, new types of business incubation have been developed. One particularly prominent example is company builders, which use their own resources to build up companies, establishing numerous companies in a series. In doing so, this investor type facilitates internal and external business ideas. It offers a new or-ganizational solution that combines both the innovative capacity of founders and the financial resources of a large company with the desire for long-term employment and corporate affiliation. This article examines the economic impact of company builders in Germany compared with other venture capital (VC) investor types on the basis of employment trends in the portfolio companies from 2011 to 2015. It is shown that company builders promote more dynamic employment growth than do other types of investors. This finding suggests that this type of investor is particular-ly well positioned to take advantage of the institutional deficiency in the German VC market. The results are also discussed in the context of the growth of the Berlin-based VC and start-up ecosystem. |
| Keywords: | venture capital; company builder; incubation; employment; Germany |
| JEL: | G24 L22 M13 R12 |
| Date: | 2017–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82733&r=cfn |
| By: | Florian LEON (CREA, Université du Luxembourg) |
| Abstract: | This paper investigates whether long-term finance affects the firm entry across the world. We construct a new database on short-term and long-term credit provided by commercial banks to the private sector in 85 countries over the period 1995-2014. We then analyze whether dif- ferences in entrepreneurship are correlated with the provision of short-term and long-term bank credit. Data on entrepreneurship are extracted from two frequently used databases: the Global Entrepreneurship Monitoring dataset and Entrepreneurship Database, each of which captures different aspects of firm creation. Econometric results indicate that long-term credit does not stimulate the firm entry. On the contrary, we find that short-term credit exerts a positive im- pact at each stage of firm creation from activity birth to registration. Our findings are robust to a battery of sensitivity tests, including additional control variables, alternative dependent variables, alternative sample, and changes in econometric specification. Our findings suggest that better provision of short-term credit allows entrepreneurs to apply for a formal loan instead of relying exclusively on informal loans or internal funds, contrary to long-term loans. |
| Keywords: | Long-term finance; banks; entrepreneurship; credit constraints |
| JEL: | G21 L26 O16 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:18-01&r=cfn |
| By: | Décamps, Jean-Paul; Villeneuve, Stéphane |
| Abstract: | We study a corporate finance dynamic contracting model in which the firm's growth rate fluctuates and is impacted by the unobservable effort exercised by the manager. We show that the principal's problem takes the form of a two-dimensional Markovian control problem. We prove regularity properties of the value function that are instrumental in the construction of the optimal contract that implements full effort, which we derive explicitly. These regularity results appear in some recent economic studies but with heuristic proofs that do not clarify the importance of the regularity of the value function at the boundaries. |
| Keywords: | Principal-agent problem; two-dimensional control problem; regularity properties |
| JEL: | G30 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32397&r=cfn |
| By: | Jun Sakamoto (Graduate School of Economics, Osaka University) |
| Abstract: | This paper analyzes the impact of the disclosure on the equity premium. We also investigate whether or not the effect of the disclosure on the premium depends on market uncertainty. We obtain the following empirical results. In the case that the market uncertainty is low, the equity premium and the level of disclosure have the insignificant negative relationship. In contrast, when the market uncertainty is high, the negative relationship between the level of the disclosure and the equity premium is strongly supported. |
| Keywords: | Disclosure, Risk premium, Fama-French 3factor model |
| JEL: | G12 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1711r&r=cfn |
| By: | Sergio Mayordomo (Banco de España); María Rodríguez-Moreno (Banco de España) |
| Abstract: | The introduction of the SME Supporting Factor (SF) allows banks to reduce capital requirements for credit risk on exposures to SME. This means that banks can free up capital resources that can be redeployed in the form of new loans. Our study documents that the SF alleviates credit rationing for medium-sized firms that are eligible for the application of the SF but not for micro/small firms. These results suggest that European banks were aware of this policy measure and optimized both their regulatory capital and their credit exposures by granting loans to the medium-sized firms, which are safer than micro/small firms. |
| Keywords: | SME, credit access, supporting factor, bank lending |
| JEL: | E51 E58 G21 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1746&r=cfn |
| By: | Josh Lerner; Amit Seru |
| Abstract: | Patents and citations are powerful tools for understanding innovative activity inside the firm, and are increasingly use in corporate finance research. But due to the complexities of patent data collection and the changing spatial and industry composition of innovative firms, biases may be introduced. We highlight several patent-level biases induced by truncation of reported patent awards and citations, affecting estimates of time trends and patterns across technology classes and regions. We then introduce measures of patent and citation biases. When aggregated at the firm level, these survive popular methods of adjustment and are correlated with firm-level characteristics. We show that these issues can lead to problematic – and ex ante predictable – inferences, using several examples from prominent streams of finance literature that use patent data. We suggest a number of concrete steps that researchers can employ to avoid biased inferences. |
| JEL: | G30 O34 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24053&r=cfn |
| By: | Joseph Hughes (Rutgers University); Choon-Geol Moon (Hanyang University) |
| Abstract: | We develop a novel technique to decompose banks’ ratio of nonperforming loans to total loans into three components: first, a minimum ratio that represents best-practice lending given the volume and composition of a bank’s loans, the average contractual interest rate charged on these loans, and market conditions such as the average GDP growth rate and market concentration; second, a ratio, the difference between the bank’s observed ratio of nonperforming loans, adjusted for statistical noise, and the best-practice minimum ratio, that represents the bank’s proficiency at loan making; third, a statistical noise. The best-practice ratio of nonperforming loans, the ratio a bank would experience if it were fully efficient at credit-risk evaluation and loan monitoring, represents the inherent credit risk of the loan portfolio and is estimated by a stochastic frontier technique. We apply the technique to 2013 data on top-tier U.S. bank holding companies which we divide into five size groups. The largest banks with consolidated assets exceeding $250 billion experience the highest ratio of nonperformance among the five groups. Moreover, the inherent credit risk of their lending is the highest among the five groups. On the other hand, their inefficiency at lending is one of the lowest among the five. Thus, the high ratio of nonperformance of the largest financial institutions appears to result from lending to riskier borrowers, not inefficiency at lending. Small community banks under $1 billion also exhibit higher inherent credit risk than all other size groups except the largest banks. In contrast, their loan-making inefficiency is highest among the five size groups. Restricting the sample to publicly traded bank holding companies and gauging financial performance by market value, we find the ratio of nonperforming loans to total loans is on average negatively related to financial performance except at the largest banks. When nonperformance, adjusted for statistical noise, is decomposed into inherent credit risk and lending inefficiency, taking more inherent credit risk enhances market value at many more large banks while lending inefficiency is negatively related to market value at all banks. Market discipline appears to reward riskier lending at large banks and discourage lending inefficiency at all banks. |
| Keywords: | commercial banking, credit risk, nonperforming loans, lending efficiency |
| JEL: | G21 L25 C58 |
| Date: | 2018–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201802&r=cfn |
| By: | Mert Demirer (MIT); Umut Gokcen (Koc University); Kamil Yilmaz (Koc University) |
| Abstract: | We apply the Diebold and Yilmaz (2014) methodology to daily stock prices of the largest 40 U.S. financial institutions to construct a volatility connectedness index. We then estimate the contemporaneous return sensitivity of every non-financial U.S. company to this index. We find that there is a large statistically significant difference between the returns of firms with positive and negative exposures to financial connectedness. The four-factor alpha of a strategy that goes long in the bottom decile and short in the top decile of stocks sorted on their connectedness betas is roughly 15% per annum. Bivariate portfolio tests reveal that abnormal returns are robust to market beta, size, book-to-market ratio, momentum, debt, illiquidity, and idiosyncratic volatility. Abnormal returns are asymmetric; they are primarily driven by firms whose returns covary negatively with the index. These firms tend to be young and small, with poor past performance and low credit quality. |
| Keywords: | Cross-section of returns, Anomalies, Financial connectedness, Vector autoregressions. |
| JEL: | G12 G21 C32 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1803&r=cfn |
| By: | Miller, Sam (Bank of England); Sowerbutts, Rhiannon (Bank of England) |
| Abstract: | Since the 2007–09 crisis, tougher bank liquidity regulation has been imposed which aims to ensure banks can survive a severe funding stress. Critics of this regulation suggest that it raises the cost of maturity transformation and reduces productive lending. In this paper we build a bank run model with a unique equilibrium where solvent banks can fail due to illiquidity. We endogenise banks’ funding costs as a function of their liquid asset holdings and show how they are negatively related to liquidity, therefore offsetting some of the costs from higher liquidity requirements. We find evidence for this relationship using post-crisis data for US banks, implying that liquidity requirements may be less costly than previously thought. |
| Keywords: | Bank runs; global games; liquidity |
| JEL: | G21 G28 |
| Date: | 2018–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0707&r=cfn |
| By: | Melcangi, Davide |
| Abstract: | Can the macroeconomic effects of credit supply shocks be large even in an economy in which the share of credit-constrained firms is small? I address this question using a model with firm heterogeneity, in which the interaction between real and financial frictions gives rise to precautionary cash holdings. Using UK firm-level balance sheet data, I show that firms hoarded cash relative to their assets during the last recession, and cash-intensive firms cut their workforces by less. A quantitative version of the model, disciplined by these data, generates similar dynamics in response to a tightening of firms’ credit conditions. The simulated economy experiences a sizeable fall in aggregate employment and prolonged substitution from capital to cash. Most of the aggregate dynamics are driven by unconstrained firms, pre-emptively responding to changes in credit conditions, in anticipation of future idiosyncratic productivity shocks. The model’s ability to generate predictions in line with the data crucially relies on this precautionary channel. |
| Keywords: | financial frictions; precautionary savings; employment; heterogeneous firms |
| JEL: | E44 G32 L25 |
| Date: | 2016–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86237&r=cfn |