nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒08‒20
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Investment of financially distressed firms: The role of trade credit By Ferrando, Annalisa; Wolski, Marcin
  2. Government Guarantees and the Valuation of American Banks By Andrew G. Atkeson; Adrien d'Avernas; Andrea L. Eisfeldt; Pierre-Olivier Weill
  3. Is Equity Crowdfunding a Good Tool for Social Enterprises? By Stefano Cosma; Alessandro G. Grasso; Francesco Pagliacci; Alessia Pedrazzoli
  4. Does Protectionist Anti-Takeover Legislation Lead to Managerial Entrenchment? By Marc Frattaroli
  5. Dynamic Leverage Targets By Filippo Ippolito; Stefano Sacchetto; Roberto Steri
  6. Fundamental Risk and Capital Structure By Jakub Hajda
  7. Trust in Lending By Richard T. Thakor; Robert C. Merton
  8. A Term Structure Model for Dividends and Interest Rates By Damir Filipović; Sander Willems
  9. Liquidation, fire sales, and acquirers' private information By Michi Nishihara; Takashi Shibata
  10. How Does Financial Market Evaluate Business Models? Evidence From European Banks By Stefano Cosma; Riccardo Ferretti; Elisabetta Gualandri; Andrea Landi; Valeria Venturelli
  11. Market-Book Ratios of European Banks: What Does Explain the Structural Fall? By Riccardo Ferretti; Giovanni Gallo; Andrea Landi; Valeria Venturelli

  1. By: Ferrando, Annalisa; Wolski, Marcin
    Abstract: We study the relationship between net trade credit and firms' investment levels, focusing on financially distressed firms. First, we introduce a theoretical model to predict the role played by net trade credit as a coordination device differentiating firms by their degree of financial distress. Then, we test these predictions by using a large panel of more than 10 million firms in 23 EU countries over the period 2004-2014. Our main result is that, whereby net trade credit has an overall negative impact on capital formation due to liquidity effects, the effect is less pronounced for firms that are in financial difficulties. The main explanation is that through capital expenditures distressed companies try to maintain vital business relations with their customers in order to participate in the final profits via trade credit repayments.
    Keywords: trade credit,investment,financial constraints,distressed firms
    JEL: E22 G20 G30
    Date: 2018
  2. By: Andrew G. Atkeson; Adrien d'Avernas; Andrea L. Eisfeldt; Pierre-Olivier Weill
    Abstract: Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.
    JEL: G18 G2 G21 G28 G32 G33 G38
    Date: 2018–06
  3. By: Stefano Cosma; Alessandro G. Grasso; Francesco Pagliacci; Alessia Pedrazzoli
    Abstract: Equity crowdfunding is an emerging financing tool that can help social start-ups and firms to bring people and resources together around a project. This paper focuses on equity crowdfunding. We look at this as a complementary financing channel useful for promoting innovation and social change by paring down the traditional features of financial investment. Our unique dataset regards all the Italian Equity Crowdfunding campaigns launched by different platforms on the Italian equity crowdfunding market from 2013 to 2018. Our aim is twofold: a) to describe some characteristics of the Italian Equity crowdfunding market; b) to describe the characteristics of the social firms which have had recourse to equity crowdfunding, in order to investigate which factors influence the campaign’s success. The results suggest that social firms’ investment offerings are not different from those of non-social ones, but so far, the Italian equity crowdfunding market does not seem suitable for supporting the financial needs of this type of firm, on the side of either investors or firms.
    Keywords: equity crowdfunding; sustainability; social enterprises; entrepreneurial finance
    JEL: G23 G24
    Date: 2018–02
  4. By: Marc Frattaroli (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)
    Abstract: I study a protectionist anti-takeover law introduced in 2014 that covers a subset of all firms in the economy. The law had a negative impact on shareholder value and substantially reduced affected firms' likelihood of becoming a takeover target. There is no evidence that management of those firms subsequently altered firm policies in its interest. Investment, employment, wages, profitability, financial leverage and distributions to shareholders remain unchanged. The share of annual CEO compensation consisting of equity instruments increased by 9.4 percentage points, suggesting that boards reacted to the loss in monitoring by the takeover market by increasing the pay-for-performance sensitivity.
    Keywords: Protectionism, Anti-Takeover Legislation, Corporate Governance, Mergers and Acquisitions, Executive Compensation, Free Cash Flow Problem
    JEL: F52 G34 G38
    Date: 2017–08
  5. By: Filippo Ippolito (Universitat Pompeu Fabra, Barcelona Graduate School of Economics, and Centre for Economic Policy Research (CEPR)); Stefano Sacchetto (IESE Business School); Roberto Steri (University of Lausanne and Swiss Finance Institute)
    Abstract: Through the lens of a dynamic trade-off model of capital structure, we reconcile active capital structure rebalancing and slow average adjustment speeds towards target leverage, both of which have been documented by empirical studies. In the model, firms optimally adjust leverage towards a dynamic target, which is firm specific and responds to evolving firm characteristics and investment opportunities. In the presence of investment frictions and capital market imperfections, firms close only partially the gap that separates their current leverage from their target. Thus, targets are relatively less stable than leverage itself. By means of structural estimation, we show that there is convergence towards dynamic targets in the real data, at faster speed the larger the gap from the target. Over horizons ranging from five to thirty years, targets are roughly twenty to forty percent more volatile than leverage. Adjustment speeds exhibit significant heterogeneity across firms and time, and partial adjustment models that assume constant speed largely underestimate average speeds.
    Keywords: target leverage, dynamic leverage adjustments, leverage stability
    JEL: G30 G32
    Date: 2017–11
  6. By: Jakub Hajda (University of Lausanne and Swiss Finance Institute)
    Abstract: I develop a dynamic capital structure model to examine how the nature of risk affects firm’s debt policy. In the model, firm’s fundamental risk, captured by its cash flow process, consists of transitory and persistent parts with markedly different dynamics. The model explains the observed dispersion in the risk-leverage relationship. Firms with similar total volatility adopt distinctive debt policies when the composition of their risk differs and issue less debt when their cash flows are more persistent to preserve debt capacity needed to fund investment. The model also provides rationale why the observable dispersion in cash flow persistence is low, which is at odds with the large degree of heterogeneity in other firm characteristics, as well as why persistence and leverage are weakly related in the data.
    Keywords: dynamic capital structure, fundamental risk, transitory and persistent shocks, leverage-risk trade-off
    JEL: G31 G32
    Date: 2017–11
  7. By: Richard T. Thakor; Robert C. Merton
    Abstract: We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature—it is more difficult to gain it than to lose it.
    JEL: E44 E51 E52 G21 G23 G28 H12 H81
    Date: 2018–06
  8. By: Damir Filipović (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Sander Willems (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)
    Abstract: Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend futures options, and Euro Stoxx 50 index options.
    Keywords: Dividend derivatives, interest rates, polynomial jump-diffusion, term structure, moment-based option pricing
    JEL: C32 G12 G13
    Date: 2017–08
  9. By: Michi Nishihara (Graduate School of Economics, Osaka University); Takashi Shibata (Graduate School of Management, Tokyo Metropolitan University)
    Abstract: We develop a dynamic model in which a distressed firm optimizes an exit choice be- tween sell-out and default as well as its timing. We assume that the distressed firm is not informed about the acquirer's asset valuation. We show that the firm delays liquidation to decrease the acquirer's information rent. Notably, the firm can change the exit choice from sell-out to default when the screening cost is high. In this case, shareholders declare default regardless of the acquirer's valuation, which provides the acquirer the maximum information rent. Together with bankruptcy costs, the maximal information rent lowers the sales price and debt recovery. This mechanism can explain many empirical findings about fire sales and acquirers' excess gains. Higher volatility, leverage, and asymmetric information increase the likelihood of a fire sale, but higher bankruptcy costs could play a positive role in preventing a fire sale. With asymmetric information, the firm can reduce debt issuance to avoid the risk of a fire sale.
    Keywords: real options; screening game; fire sale; M&A; intertemporal price discrimi- nation.
    JEL: D82 G13 G33
    Date: 2017–08
  10. By: Stefano Cosma; Riccardo Ferretti; Elisabetta Gualandri; Andrea Landi; Valeria Venturelli
    Abstract: This paper investigates the way in which the financial market defines and evaluates different business models/business mix, using a sample of listed European banking groups, with a total asset value greater than 50 billion US$, for the period 2006-2015. The main results suggest that non-interest components foster market valuation and that financial market seems to associate a better risk-return trade-off to non-banking fees compared to the banking ones. This evidence enables us to identify 3 clusters of European banking groups based on the main components of income. These findings have strategic implications both for bank managers, regulators and supervisors due to the impact of the crisis on banking business, bank profitability and riskiness and the new challenges they entail.
    Keywords: banking strategies; business mix; market-to book value; panel data; cluster analysis
    JEL: G20 G21
    Date: 2017–05
  11. By: Riccardo Ferretti; Giovanni Gallo; Andrea Landi; Valeria Venturelli
    Abstract: In the years since the outbreak of the crisis, financial markets have persistently reduced the market value of European banks, as consequence of macroeconomic, regulatory and structural factors. Even if these factors affected the whole European banking industry, differences characterized market evaluation of banks along country, size and business mix profiles. Following the extant literature on bank market valuation, our paper tests for the difference between market to book ratios of the large European banks, using three blocks of indicators typically affecting the banks’ market value. To verify our research question, we first regress the market to book ratio over performance measures and risk indicators. Then, we verify whether bank business size and composition affect bank market valuation. Lastly we evaluate the relevance of country context variables, by considering both macroeconomic and banking structure indicators. Our panel consists of all large publicly traded bank holding companies at European level. Large publicly traded banks are all listed banks with consolidated assets exceeding 50 billion euro in 2015. The results highlight that the market considers the fundamental variables (current performance and volatility) as the main factors affecting the evaluation process. Furthermore a significant share of variability in banks’ market-book values is explained by country context variables.
    Keywords: market-to book value; country context; business mix; size; panel data; Shapley decomposition
    JEL: G20 G21
    Date: 2018–01

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