nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒03‒05
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Credit constraints, firms investment and growth evidence from survey data By Miguel García-Posada Gómez
  2. Heterogeneous Effects of Credit Constraints on SMEs’ Employment: Evidence from the Great Recession By Cornille, David; Rycx, François; Tojerow, Ilan
  3. Unionization, Cash, and Leverage By Schmalz, Martin
  4. Essays on stakeholder relations and firm value By Barkó, Tamás
  5. Activism and Takeovers By Burkart, Mike; Lee, Samuel
  6. On the Option Effects of Short-Time Work Arrangements By Huisman, Kuno; Thijssen, J.J.J.
  7. Threatening to Buy: Private Equity Buyouts and Antitrust Policy By Norbäck, Pehr-Johan; Persson, Lars; Tåg, Joacim
  8. Beyond Common Equity - The Influence of Secondary Capital on Bank Insolvency Risk By Thomas Conlon; John Cotter; Philip Molyneux
  9. Disagreement and Security Design By Ortner, Juan; Schmalz, Martin

  1. By: Miguel García-Posada Gómez (European Central Bank and Banco de España)
    Abstract: We assess the impact of credit constraints on investment, inventories and other working capital and firm growth with a large panel of small and medium-sized enterprises from 12 European countries for the period 2014-2016. The data come from the Survey on the access to finance of enterprises (SAFE), a survey that is especially designed to analyse the problems in the access to external finance of European SMEs. The key identification challenge is a potential reverse-causality bias, as firms with poor investment and growth opportunities may have a higher probability of being credit constrained. We implement several strategies to overcome this obstacle: proxies for investment opportunities, lagged regressors, random effects and instrumental variables. Our findings suggest that credit constraints, both in bank financing and other financing (e.g. trade credit), have strong negative effects on investment in fixed assets, while the impact on firm growth and working capital is less robust.
    Keywords: investment, firm growth, working capital, ordered probit, instrumental variables
    JEL: G30 G31 G32
    Date: 2018–02
  2. By: Cornille, David; Rycx, François; Tojerow, Ilan
    Abstract: This paper takes advantage of access to detailed matched bank-firm data to investigate whether and how employment decisions of SMEs have been affected by credit constraints in the wake of the Great Recession. Variability in banks’ financial health following the 2008 crisis is used as an exogenous determinant of firms’ access to credit. Findings, relative to the Belgian economy, clearly highlight that credit matters. They show that SMEs borrowing money from pre-crisis financially less healthy banks were significantly more likely to be affected by a credit constraint and, in turn, to adjust their labour input downwards than pre-crisis clients of more healthy banks. These results are robust across types of loan applications that were denied credit, i.e. applications to finance working capital, debt or new investments. Yet, estimates also show that credit constraints have been essentially detrimental for employment among SMEs experiencing a negative demand shock or facing strong product market competition. In terms of human resources management, credit constraints are not only found to foster employment adjustment at the extensive margin but also to increase the use of temporary layoff allowances for economic reasons. This outcome supports the hypothesis that short-time compensation programmes contribute to save jobs during recessions.
    Keywords: SMEs,banks’ financial health,credit constraints,employment,short-time compensation programmes,Great Recession,matched bank-firm data
    JEL: C35 C36 D22 G01 G21 J21 J23
    Date: 2018
  3. By: Schmalz, Martin
    Abstract: What is the effect of unionization on corporate financial policies? The average unionized firm responds with lower cash and higher leverage to a unionization election than the average firm escaping unionization. However, using a regression discontinuity design I find that the causal effect of unionization is close to zero on average, but heterogeneous across firms. For the subset of large and financially unconstrained firms, the causal effect is positive on leverage and negative on cash; the opposite is true for small and financially constrained firms. These results help reconcile controversially discussed views on how corporate finance and labor interact.
    Keywords: Capital Structure; cash; Labor Adjustment Costs; Regression Discontinuity; Risk management; Unionization
    JEL: G32 J50
    Date: 2018–01
  4. By: Barkó, Tamás (Tilburg University, School of Economics and Management)
    Abstract: This doctoral dissertation consists of three chapters on stakeholder relationships and firm value. The first chapter examines whether corporate social responsibility affects the relative pricing of equity and debt. The chapter shows that responsible firms have lower credit risk, and an arbitrage strategy exploiting short-term variations in credit and equity prices is also improved by taking corporate social responsibility into account. The second chapter turns to analyzing investor activism promoting corporate social responsibility. The chapter shows that activists can induce meaningful changes in targeted firms, and they can also increase their portfolio value through these actions. The last chapter studies firms’ propensity to commit fraud, and stock market reactions to revealed fraud. The main finding of this chapter is that markets heavily penalize fraud, even alleged wrongdoing is followed by large negative returns. Fraudulent companies subsequently readjust their longterm operations and follow a more conservative business plan.
    Date: 2018
  5. By: Burkart, Mike; Lee, Samuel
    Abstract: At the core of agency problems in widely held firms is a dual coordination failure: Dispersed shareholders neither share in the cost of governance interventions (ex post free riding) nor sell shares unless the price at least matches the expected value improvement (ex ante free riding). Whether to confront the free-rider problem in its ex post or ex ante variant amounts to the choice between activism and takeovers. For small toeholds, the returns to these governance mechanisms have inverse comparative statics, and though less efficient, activism is more profitable when the potential value improvement is large. Activists are most effective when, instead of restructuring firms themselves, they broker takeovers. Such takeover activism is Pareto-improving and should earn superior returns, in part because it must pay more than what could be earned by free-riding on a tender offer instead.
    Keywords: blockholders; Free-rider problem; hedge fund activism; M&A; market for corporate control; takeover activism; tender offers
    JEL: G23 G34
    Date: 2018–01
  6. By: Huisman, Kuno (Tilburg University, Center For Economic Research); Thijssen, J.J.J. (Tilburg University, Center For Economic Research)
    Abstract: We analyse the short term work (STW) regulations that several OECD countries introduced after the 2007 financial crisis. We view these measures as a collection of real options and study the dynamic effect of STW on the endogenous liquidation decision of the firm. While STW delays a firm’s liquidation, it is not necessarily welfare enhancing. Moreover, it turns out that firms use STW too long. We show (numerically) that providers of capital benefit more than employees from STW. Benefits for employees can even be negative. A typical Nordic policy performs better than a typical Anglo-Saxon policy for all stakeholders.
    Keywords: temporary unemployment; real options; dynamic cost-benefit analysis
    JEL: G33 G38 H53
    Date: 2018
  7. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: Private equity firms (PE firms) have become common owners of established firms in concentrated markets. We show that the threat of a PE acquisition can trigger incumbent mergers in an otherwise mergerstable industry. This can help antitrust authorities maximize consumer surplus because previously privately unprofitable – but consumer surplus-enhancing – mergers now take place. We thus predict that merger waves among incumbents should follow the development of a local PE industry.
    Keywords: Antitrust policy; Mergers and acquisitions; Private equity; Temporary ownership
    JEL: G32 G34 L13 L22 L40
    Date: 2018–02–06
  8. By: Thomas Conlon (University College Dublin); John Cotter (University College Dublin); Philip Molyneux (University of Sharjah)
    Abstract: Banks adhere to strict rules regarding the quantity of regulatory capital held, but have some flexibility as to its composition. In this paper, we examine bank insolvency risk (distance to default) for listed North American and European banks over the period 2002-2014, focusing on sensitivity to capital other than common equity. Decomposing tier 1 capital into equity and non-core components reveals a heretofore unidentified variation in risk reduction capacity. Greater non-core tier 1 capital is associated with increased insolvency risk for larger and more diversified banks, impairing the risk reducing capacity of aggregate tier 1 capital. Overall tier 2 capital is not linked with insolvency risk, although a conflicting relationship is isolated conditional on the level of total regulatory capital held. Finally, the association between risk and capital is weakened when the latter is defined relative to risk-weighted assets.
    Keywords: Regulatory Capital, Bank Risk, Regulatory Capital Arbitrage, Tier 1, Tier 2
    JEL: G21 G28 G32
    Date: 2018–02–19
  9. By: Ortner, Juan; Schmalz, Martin
    Abstract: We study optimal security design when the issuer and market participants agree to disagree about the characteristics of the asset to be securitized. We show that pooling assets can be optimal because it mitigates the effects of disagreement between issuer and investors, whereas tranching a cash-flow stream allows the issuer to exploit disagreement between investors. Interestingly, pooling and tranching can be complements. The optimality of debt with or without call provisions can be derived as a special case. In a model with multiple financing rounds, convertible securities naturally emerge to finance highly skewed ventures.
    Keywords: behavioral finance; disagreement; Optimism; overconfidence; pooling; security design; tranching
    JEL: D84 D86 G30 G32
    Date: 2018–01

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