nep-cfn New Economics Papers
on Corporate Finance
Issue of 2018‒09‒10
seventeen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Does exchange rate depreciation have contractionary effects on firm-level investment? By Jose Maria Serena; Ricardo Sousa
  2. Financing Ventures By Jeremy Greenwood; Juan Sanchez; Pengfei Han
  3. Repo market functioning: The role of capital regulation By Kotidis, Antonis; Van Horen, Neeltje
  4. Long-Term performance of Corporate Governance in Thailand By Chayakrit Asvathitanont; Nopphon Tangjitprom; Vorapol Socatiyanurak
  5. The Shift from Active to Passive Investing : Potential Risks to Financial Stability? By Kenechukwu E. Anadu; Mathias S. Kruttli; Patrick E. McCabe; Emilio Osambela; Chae Hee Shin
  6. ALM and Credit Risk By Edward Bace
  7. How Do Banks Interact with Fintechs? Forms of Alliances and their Impact on Bank Value By Lars Hornuf; Milan F. Klus; Todor S. Lohwasser; Armin Schwienbacher
  8. Corporate Governance Score and Earnings Quality of Companies Listed in the Stock Exchange of Thailand By Kanibhatti Nitirojntanad
  9. Can Government Intervention Make Firms More Investment-Ready? A Randomized Experiment in the Western Balkans By Cusolito, Ana Paula; Dautovic, Ernest; McKenzie, David J.
  10. Discrimination, Managers, and Firm Performance: Evidence from "Aryanizations" in Nazi Germany* By Huber, Kilian; Lindenthal, Volker; Waldinger, Fabian
  11. Borrower-Specific and Institutional Factors Leading to the Forced or Voluntary Exit of Microfinance Borrowers By Cesar Escalante; Hofner Rusiana
  12. Financing innovation: two models of private equity investment By Laure-Anne Parpaleix; Kevin Levillain; Blanche Segrestin
  13. The Effect of Foreign Cash Holdings on Internal Capital Markets and Firm FInancing By De Simone, Lisa; Lester, Rebecca
  14. Financial Frictions and Export Dynamics in Large Devaluations By David Kohn; Fernando Leibovici; Michal Szkup
  15. Corporate Debt Structure, Precautionary Savings, and Investment Dynamics By Jasmine Xiao
  16. Improving Tax Literacy and Tax Morale of Young Adults By Phillis Alexander; Merima Balavac; Suranjita Mukherjee; Andrew Lymer; David Massey
  17. Information Asymmetry, Financialisation and Financial Access By Asongu, Simplice; Odhiambo, Nicholas

  1. By: Jose Maria Serena (BIS); Ricardo Sousa (ESM)
    Abstract: We assess the conditions under which exchange rate fluctuations are contractionary for firm-level investment. To address this question, we match firm-level balance sheet data with a large dataset of firm-level bonds for about 1,000 firms from 36 emerging market economies over the period 1998–2014. We augment a standard firm-level investment model to control for (country-specific) macroeconomic variables, and interact the effect of an exchange rate depreciation with several dimensions of bond composition, namely: 1) currency of issuance; 2) maturity structure of bonds; and 3) market of issuance. We find that, conditional on the amount of debt issued in foreign currency, an exchange rate depreciation can have a contractionary impact on a firm’s investment spending. We also find that the market of issuance and maturity structure, in particular, when coupled with foreign currency-denominated debt can influence this impact.
    Keywords: Investment, exchange rate, balance sheet, bonds, firm-level data, debt
    JEL: F2 F3 E2 E3
    Date: 2018–02–21
  2. By: Jeremy Greenwood (University of Pennsylvania); Juan Sanchez (Federal Reserve Bank of St. Louis); Pengfei Han (University of Pennsylvania)
    Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of fi nancing, venture capitalists evaluate the viability of startups. If viable, VCs provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rate, failure rate, investment rate, equity shares, and the value of an IPO. Raising capital gains taxation reduces growth and welfare.
    Date: 2018
  3. By: Kotidis, Antonis; Van Horen, Neeltje
    Abstract: This paper shows that the leverage ratio affects repo intermediation for banks and non-bank financial institutions. We exploit a novel regulatory change in the UK to identify an exogenous intensification of the leverage ratio and combine this with supervisory transaction-level data capturing the near-universe of gilt repo trading. Studying adjustments at the dealer-client level and controlling for demand and confounding factors, we find that dealers subject to a more binding leverage ratio reduced liquidity in the repo market. This affected their small but not their large clients. We further document a reduction in frequency of transactions and a worsening of repo pricing, but no adjustment in haircuts or maturities. Finally, we find evidence of market resilience, based on existing, rather than new repo relationships, with foreign, non-constrained dealers stepping in. Overall, our findings help shed light on the impact of Basel III capital regulation on repo markets.
    Keywords: Capital regulation; leverage ratio; non-bank financial institutions; repo market
    JEL: G10 G21 G23
    Date: 2018–07
  4. By: Chayakrit Asvathitanont (Thammasat University); Nopphon Tangjitprom (Assumption University of Thailand); Vorapol Socatiyanurak (National Legislative Assembly of Thailand)
    Abstract: The purpose of this study is to review the impact of the market on Adoption of Corporate Governance in Thailand for a decade during 2003-2017. The study examines the firm-level return in both operations, from ROA & ROE, and equity price return from different level of Corporate Governance rating in comparison to the market-Stock Exchange of Thailand through out the period. The study employs the long-term cross sectional comparison between firms which separate the Corporate Governance Rating firms into four quartile rank as Excellence, Very Good, Good and Poor Corporate Governance Rating. The test of quartile differences indicated that the Excellent level of Corporate Governance firms were performing better in comparison to the Poor level in four measures of returns which are Annual Monthly Return and Annual Holding Period Return, ROE and ROA as well as the TOBINQ.
    Keywords: Corporate Governance, Long Term Performance
    JEL: G34
    Date: 2018–07
  5. By: Kenechukwu E. Anadu; Mathias S. Kruttli; Patrick E. McCabe; Emilio Osambela; Chae Hee Shin
    Abstract: The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift for financial stability through four different channels: (1) effects on investment funds’ liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing some types of risk while diminishing others: The shift has probably reduced liquidity transformation risks, although some passive strategies amplify market volatility, and passive-fund growth is increasing asset-management industry concentration. We find mixed evidence that passive investing is contributing to the comovement of assets. Finally, we use our framework to assess how financial stability risks are likely to evolve if the shift to passive investing continues, noting that some of the repercussions of passive investing ultimately may slow its growth.
    Keywords: Asset management ; Passive investing ; Index investing ; Indexing ; Mutual fund ; Exchange-traded fund ; Leveraged and inverse exchange-traded products ; Financial stability ; Systemic risk ; Market volatility ; Inclusion effects ; Daily rebalancing
    JEL: G10 G11 G20 G23 G32 L1
    Date: 2018–08–28
  6. By: Edward Bace (Middlesex University)
    Abstract: Credit risk is the main risk exposure of the vast majority of banks in any country. It represents a primary risk to the balance sheet. In a financial institution, credit risk management must be the responsibility of the Asset and Liability Committee (ALCO). The recommended operating model is that ALCO has effective authority to monitor, and ultimately approve, all operational aspects that impact the balance sheet.Individual business lines will manage their respective credit risks under the direction of the credit risk committee which also sets the firm-wide policy. Management of credit exposure (at the balance sheet level) is frequently undertaken by the treasury or ALM department, through use of credit derivatives, for example.The nature of ALCO oversight is technical: capital, liquidity, market and non-traded market and other cash flow impacts on the balance sheet. Given this core aspect of ALCO?s role, the need arises to establish a technical sub-committee of ALCO, perhaps called The Balance Sheet Management Committee (BSMCO), chaired by the Treasurer, to review the balance sheet and escalates issues where necessary to ALCO. Membership of BSMCO is at one level below the senior executives (CEO, CFO, CRO) with the exception of the Treasurer.The other recommended technical sub-committee of ALCO is the Product Pricing Committee / Deposit Pricing Committee (PPCO/DPCO). This is a smaller committee whose remit is to ensure that, based on the recommended model, all pricing decisions are made by ALCO. Products in question would be customer deposit products, perhaps extended to customer asset products if deemed necessary. PPCO (or DPCO) has delegated authority to approve specific changes to standard rates for one-off transactions.Given its importance to the balance sheet, ALCO can only undertake its mission effectively if it has final authority on credit risk exposure and credit risk appetite. This means the overall policy of the Credit Risk Committee must fall to ALCO review.ALCO is responsible for through-the-cycle sustainability of the balance sheet. Since credit risk exposure is the main negative impact potential on the balance sheet, ALCO must have oversight of it. This does not mean day-to-day running and minutiae of credit risk origination. It means approval of policies, monitoring of exposure and approval authority on significant transactions and any policy changes. This research presents such recommendations for effective implementations of a bank ALM process.
    Keywords: Asset liability management, treasury, credit risk
    JEL: G21 G32
    Date: 2018–07
  7. By: Lars Hornuf; Milan F. Klus; Todor S. Lohwasser; Armin Schwienbacher
    Abstract: The increasing pervasiveness of technology-driven firms that offer banking services has led to a growing pressure on traditional banks to modernize their core business activities. Banks attempt to confront the challenges of digitalization by cooperating with financial technology firms (fintechs) in various forms. In this paper, we investigate the factors that drive banks to form alliances with fintechs. Furthermore, we analyze whether such bank-fintech alliances affect the market valuation of banks. We provide descriptive evidence on the different forms of alliances occurring in practice. Using hand-collected data covering the largest banks from Canada, France, Germany, and the United Kingdom, we show that banks are significantly more likely to form alliances with fintechs when they pursue a well-defined digital strategy and/or employ a Chief Digital Officer. We evidence that markets react more strongly if digital banks rather than traditional banks announce a bank-fintech alliance. Finally, we find that alliances are most often characterized by a product-related collaboration between the bank and the fintech and that banks most often cooperate with fintechs providing payment services.
    Keywords: fintech, strategic alliance, entrepreneurial finance, financial institutions, banks
    JEL: G21 G23 G34 M13
    Date: 2018
  8. By: Kanibhatti Nitirojntanad (Chulalongkorn University)
    Abstract: The purpose of this study is to examine the relationship between corporate governance score and earnings quality of companies listed in the Stock Exchange of Thailand. This study used secondary data of companies in the Stock Exchange of Thailand in all industrial groups excluding companies in the market for alternative investment, business financial group, as well as the rehabilitation companies. The sample included companies with corporate governance score which corresponding to ?Excellent? and ?Very Good? recognition level in the year 2014 and 2015. The data was analyzed using regression analysis.In this study, the earnings quality is measured in terms of discretionary accruals and standard deviation of net income. The results suggested that corporate governance score was negatively related to discretionary accruals indicating positive relationship between corporate governance score and earnings quality. Corporate governance score was also found positively related to cash flows return to total assets. However, corporate governance score was not found to be significantly related to standard deviation of net income.The results of this study implied that corporate governance scores, based on the recognition level of the National Committee on Corporate Governance, are likely to represent earnings quality of listed companies in the Stock Exchange of Thailand in the context of discretionary accruals and cash flows return to total assets.
    Keywords: corporate governance, corporate governance score, earnings quality, discretionary accurals, cash flows return to total assets
    JEL: M00 G30
    Date: 2018–07
  9. By: Cusolito, Ana Paula; Dautovic, Ernest; McKenzie, David J.
    Abstract: Many innovative start-ups and SMEs have good ideas, but do not have these ideas fine-tuned to the stage where they can attract outside funding. Investment readiness programs attempt to help firms to become ready to attract and accept outside equity funding through a combination of training, mentoring, master classes, and networking. We conduct a five-country randomized experiment in the Western Balkans that works with 346 firms and delivers an investment readiness program to half of these firms, with the control group receiving an inexpensive online program instead. A pitch event was then held for these firms to pitch their ideas to independent judges. The investment readiness program resulted in a 0.3 standard deviation increase in the investment readiness score, with this increase occurring throughout the distribution. Two follow-up surveys show that these judges' scores predict investment readiness and investment outcomes over the subsequent two years. Treated firms attain significantly more media attention, and are 5 percentage points (p.p.) more likely to have made a deal with an outside investor, although this increase is not statistically significant (95 confidence interval of -4.7 p.p., +14.7p.p.).
    Keywords: entrepreneurship; equity investment; Innovation; Investment readiness; randomized controlled trial.; start-ups
    JEL: L26 M13 M2 O12
    Date: 2018–08
  10. By: Huber, Kilian; Lindenthal, Volker; Waldinger, Fabian
    Abstract: We study whether antisemitic discrimination in Nazi Germany had economic effects. Specifically, we investigate how the forced removal of Jewish managers affected large German firms. We collect new data from historical sources on the characteristics of senior managers, stock prices, dividends, and returns on assets for firms listed on the Berlin Stock Exchange. After the removal of the Jewish managers, the senior managers at affected firms had fewer university degrees, less experience, and fewer connections to other firms. The loss of Jewish managers significantly and persistently reduced the stock prices of affected firms for at least 10 years after the Nazis came to power. We find particularly strong reductions for firms where the removal of the Jewish managers led to large decreases in managerial connections to other firms and in the number of university-educated managers. Dividend payments and returns on assets also declined. A back-of-the-envelope calculation suggests that the aggregate market valuation of firms listed in Berlin fell by 1.78 percent of German GNP. These findings imply that discrimination can lead to significant economic losses and that individual managers can be key to the success of firms.
    Keywords: "Aryanizations"; discrimination; firms; Managers; Nazi Germany
    JEL: G30 J7 J71 N24 N34 N8
    Date: 2018–07
  11. By: Cesar Escalante (University of Georgia); Hofner Rusiana (University of Georgia)
    Abstract: Microfinance borrowers tend to have no properties to offer as loan security (collateral) as they are poor and low-income, and thus would constitute a considerable risk to lenders once they default. MFIs, therefore, have to device a system to ensure that loan defaults are as low as possible in order to maintain their financial sustainability, without which they would resort to higher interest rates that would only defeat the original intent of their microfinance lending philosophy.This paper seeks to identify factors that affect the voluntary exits or forced eviction of Philippine borrowers from microfinance lending networks focusing on indicators that are (a)internal to the borrowers? personal circumstances and business operating environments; and(b)those that capture the microfinance institutions? loan delivery operations. The analysis will analyze data compiled by the Social Enterprise Development Partnerships, Inc. (SEDPI) on micro-insurance borrowers in the Philippines from 2000 to 2010. Econometric analysis will employ Heckman selection techniques to determine significant determinants of either the forced eviction or the voluntary exit of MFI borrowers. Two versions of the Heckman equation system will be developed. The first version defines the selection equation to select MFI borrower observations who were forced to leave the program (FORCED=1; VOLUNTARY=0) for the outcome equation that identifies significant factors behind such MFI action. The second version?s selection equation focuses on the voluntary borrower exits (VOLUNTARY=1; FORCED=0) so that the outcome equation will determine significant factors behind such borrowers? decisions. Explanatory variables will capture personal, business, Centre-related, and macroeconomic factors. Expected results will shed light on how sudden changes in personal circumstances of certain borrowers (physical and economic), business viability issues (often associated with macroeconomic conditions), and institutional factors affecting borrower servicing and other borrower-lender relationship issues may lead to either the MFIs? decision to evict certain borrowers or individual borrowers voluntarily deciding to exit from the MFI lending system. This study offers important implications on achieving a proper balance of financial sustainability and social outreach goals of microfinance operations. This balancing of goals has been a difficult challenge for most MFIs globally. The Philippine microfinance experience may help shed light on possible remedies to this elusive balancing goal.
    Keywords: microfinance, forced exit, voluntary exit, financial sustainability, loan repayment, loan delivery
    JEL: D19 G21 L26
    Date: 2018–07
  12. By: Laure-Anne Parpaleix (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Kevin Levillain (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Blanche Segrestin (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The ability to adapt to fast-paced business change has become critical to firms' competitiveness. Thus, it requires firms to continuously innovate. Extensive research efforts have been conducted to understand the drivers behind a firm's capacity to constantly innovate. If significant advance has been made in the fields of innovation management and design theory, there is still a need for research in finance to integrate these developments. Especially in clarifying the relationship between private equity investment and corporate innovation. Thus, this paper specifically aims at exploring new investment models in private equity to support the development of firm's sustained innovation capabilities. Based on a literature review exploring the existing private equity investment practices and their potential links with innovation, we highlight the main model used by private equity. We show that this model cannot account for the two design regimes (extracted from design theories) required to support innovation capabilities. Therefore, we build a second hypothetical model that could complement the first one to do so. We then conduct an empirical study to assess whether actual private equity funds' practices reflect the use of this second hypothetical model, and if so to refine it. From a managerial point of view, this research contributes to shape new valuation approaches and post-investment strategies that better foster invested firm's innovation capabilities, among which R&D activities.
    Date: 2018–07–02
  13. By: De Simone, Lisa (Stanford University); Lester, Rebecca (Stanford University)
    Abstract: Prior literature demonstrates that firms should use internal capital before accessing costly external finance. However, prior to 2018, the U.S. repatriation tax imposed an internal capital market friction on U.S. multinational firms (MNCs), thereby motivating companies to retain cash offshore. We quantify the extent to which U.S. MNCs used domestic financing rather than incur the repatriation tax to meet domestic cash needs. We find that firms with high tax-induced foreign cash have approximately 3.0 percent higher domestic liabilities relative to other MNCs, equivalent to $138.4 million more of domestic debt per firm, or approximately $89.9-$129.0 billion in aggregate. We also show that this effect occurs primarily for the subset of firms financing shareholder payouts, with weaker evidence for financing domestic M&A and R&D activity. The evidence informs expectations of responses to the recent U.S. tax law by quantifying the extent that firms will likely reduce domestic debt with repatriated funds as opposed to the intended responses of increasing domestic investment and employment.
    JEL: F23 G32 G35 H25 M40
    Date: 2018–07
  14. By: David Kohn (Universidad Catolica de Chile); Fernando Leibovici (Federal Reserve Bank of St. Louis); Michal Szkup (The University of British Columbia)
    Abstract: We study the role of financial frictions and balance-sheet effects in account- ing for the dynamics of aggregate exports, output, and investment in large devaluations. We investigate a small open economy with heterogeneous firms and endogenous export decisions, in which firms face financing constraints and debt can be denominated in foreign units. We find that these channels can explain only a small fraction of the dynamics of exports observed in the data since financially-constrained exporters increase exports by reallocating sales across markets. We show analytically the role of this mechanism on exports adjustment and document its importance using plant-level data.
    Date: 2018
  15. By: Jasmine Xiao (University of Notre Dame)
    Abstract: This paper documents two facts on the Great Recession. First, public firms that switched from bank finance to bond finance actually experienced a slower recovery in investment, despite having no shortage of credit compared to those that did not switch. Second, their debt substitution was accompanied by a substantial increase in cash holdings. As firms substitute toward bonds when bank lending is impaired, they lose the ability to restructure debt to avoid default. Debt substitution thus strengthens firms’ precautionary incentive to simultaneously increase cash holdings at the expense of investment, as they optimally trade-off growth against self-insurance. Model simulations suggest that this “precautionary savings” channel can account for a substantial fraction of the decline in aggregate investment in the recent recession. I show that embedding balance sheet adjustment in a business-cycle model improves the model’s amplification, and helps to disentangle shocks to credit demand from shocks to credit supply.
    Date: 2018
  16. By: Phillis Alexander (Department of Accounting, Finance and Economics, Bournemouth University); Merima Balavac (Univerzitiet u Sarajevu); Suranjita Mukherjee (Department of Accounting, Finance and Economics, Bournemouth University); Andrew Lymer (University of Birmingham); David Massey (University of Central Lancashire)
    Abstract: This research considers socio-demographic influences and the impact enhancements to financial and tax literacy may have on young adults’ tax morale. It also considers the subjects’ perceptions of tax compliance and tax administration. The results show that gender, tax tuition, and employment experience influence tax morale. Most of the 377 students surveyed thought the UK tax system is fair, but complex with personal tax rates that are too high. The majority also believe that a significant number of taxpayers cheat by paying less than they legally owe. The research shows the positive impact of focused tax tuition on university students in raising financial and tax literacy as well as an appreciation for public finance. While the researchers were unable to conclude enhanced literacy resulted in enhanced tax morale in this study, the results nevertheless demonstrated marginal improvements in this regard, thus warranting further research into causation. The researchers make several recommendations for further initiatives and enhancements to existing programmes in taxpayer education focused on young people before they leave school and enter the job market.
    Keywords: Income Tax; Tax Morale; Tax Law; Taxability; Tax Compliance
    JEL: K34
    Date: 2018–08
  17. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: This study investigates whether information sharing channels that are meant to reduce information asymmetry have led to an increase in financial access. The study employs a Generalised Method of Moments technique using data from 53 African countries during the period from 2004-2011 to examine this linkage. Information sharing channels are theoretically designed to promote the formal financial sector and discourage the informal financial sector. The study uses two information sharing channels: private credit bureaus and public credit registries. The study found that both information sharing channels have a positive and significant impact on financial access. The study also found that public credit registries complement the formal financial sector to promote financial access. The policy implications are discussed.
    Keywords: Information asymmetry; Financialisation; Financial Access; Africa
    JEL: G20 G29 L96 O40 O55
    Date: 2018–01

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