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on Corporate Finance |
| By: | Manuelli, Rodolfo E. (Washington University in St. Louis; Federal Reserve Bank of St. Louis); Sanchez, Juan M. (Federal Reserve Bank of St. Louis) |
| Abstract: | We study the endogenous determination of corporate debt maturity in a setting with default risk. We assume that firms must access the bond market and they issue debt with a flexible structure (coupon, face value, and maturity). Initially, the firm is in a low growth/illiquid state that requires debt refinancing if it matures. Since lenders do not refinance projects with positive but small net present value, firms may be forced to default in the first phase. We call this liquidity risk. The technology is such that earnings can switch to a higher (but riskier) level. In this second phase firms have access to the equity market but they may default if this is the best option. We call this strategic default risk. In the model optimal maturity balances these two risks. We show that firms with poor prospects and firms in more unstable industries will choose shorter maturities even if it is feasible to issue longer debt. The model also offers predictions on how asset maturity, asset salability, and leverage influence maturity. Even though our model is extremely stylized we find that the predictions are roughly consistent with the evidence. Moreover, it offers some insights into the factors that determine the structure of the debt. |
| Keywords: | Bonds; Debt; Maturity; Default; Bankruptcy; Leverage; Risk; Liquidity |
| JEL: | G23 G32 G33 |
| Date: | 2018–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-034&r=cfn |
| By: | Christos Alexakis (Rennes School of Business, France); Khamis Al-Yahyaee (Department of Economics and Finance, Sultan Qaboos University, Oman); Emmanuel Mamatzakis (University of Sussex Business School, UK; Rimini Centre for Economic Analysis); Asma Mobarek (Cardiff Business School, Cardiff University, UK); Sabur Mollah (Hull University Business School, University of Hull, UK); Vasileios Pappas (School of Management, University of Kent, UK) |
| Abstract: | In this paper, we examine the impact of corporate governance practices on cost efficiency and financial stability for a sample of Islamic and conventional banks. In our analysis we use a set of corporate governance variables which include, board size, board independence, director gender, board meetings, board attendance, board committees, chair independence and CEO characteristics. The above corporate governance data set was constructed by the study of annual reports and other documents of Islamic banks, and is unique in this field. In our analysis we employ stochastic frontier analysis and panel VAR (PVAR) models in order to quantify long run and short run statistical relationships between operational efficiency of Islamic banks and corporate governance practices. According to our results, Islamic and conventional banks exhibit important differences in the effects of corporate governance practices on cost efficiency and financial stability. Our results warrant caution when Islamic banks select international corporate governance practices. A blind general adoption of corporate governance practices of conventional banks might lead to losses in terms of efficiency of Islamic banks as such adoption of, for example, a third layer of binding practices over and above the already existing ones imposed by the Sharia Board and the Board of Directors may lead to cumbersome business operations. In this respect we believe that our results may be of a certain value to regulators, policy makers and managers of Islamic banks. |
| Keywords: | Islamic banking, corporate governance, stochastic frontier analysis, panel VAR |
| JEL: | G20 G21 G34 D24 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:18-40&r=cfn |
| By: | Heim, Sven; Hueschelrath, Kai; Laitenberger, Ulrich; Spiegel, Yossi |
| Abstract: | There is a growing concern that minority shareholding (MS) in rival firms may facilitate collusion. To examine this concern, we exploit the fact that leniency programs (LPs) are generally recognized as a shock that destabilizes collusive agreements and study the effect that the introduction of an LP has on horizontal MS acquisitions. Using data from 63 countries over the period 1990-2013, we find a large increase in horizontal MS acquisitions in the year in which an LP is introduced, especially in large rivals. The effect is present however only in countries with an effective antitrust enforcement and low levels of corruption and only when the acquisitions involve stakes of 10% - 20%. These results suggest that MS acquisitions may stabilize collusive agreements that were destabilized by the introduction of the LP. |
| Keywords: | cartel stability; Collusion; Leniency Programs; minority shareholdings |
| JEL: | G34 K21 L4 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13327&r=cfn |
| By: | Kalemli-Ozcan, Sebnem |
| Abstract: | We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment. |
| Keywords: | Bank-Sovereign Nexus; debt maturity; Firm Investment; Rollover Risk |
| JEL: | E0 F0 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13336&r=cfn |
| By: | Brei, Michael; Ferri, Giovanni; Gambacorta, Leonardo |
| Abstract: | This paper empirically investigates the link between financial structure and income inequality. Using data for a panel of 97 economies over the period 1989-2012, we find that the relationship is not monotonic. Up to a point, more finance reduces income inequality. Beyond that point, inequality rises if finance is expanded via market-based financing, while it does not when finance grows via bank lending. These findings concur with a well-established literature indicating that deeper financial systems help reduce poverty and inequality in developing countries, but also with recent evidence of rising inequality in various financially advanced economies. |
| Keywords: | banks; Finance; financial markets; inequality |
| JEL: | D63 G10 G21 O15 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13330&r=cfn |
| By: | Degryse, Hans; Karapetyan, Artashes; Karmakar, Sudipto |
| Abstract: | We study the impact of higher capital requirements on banks' decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lending more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level dataset covering all corporate loans in Portugal, we identify a novel channel of higher capital requirements: relative to the control group, treated banks require loans to be collateralized more often after the shock, but less so for relationship borrowers. This applies in particular for collateral that saves more on regulatory capital. |
| Keywords: | Capital requirements; Collateral; Lending Technology; relationship lending |
| JEL: | G21 G28 G32 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13331&r=cfn |
| By: | Pierluigi Murro (LUISS University); Valentina Peruzzi (University of Trento) |
| Abstract: | The aim of this paper is to investigate whether different credit institutions, and in particular cooperative banks, have a different impact on the reduction of income inequalities. By analyzing Italian local credit markets, i.e. Italian provinces, over the period 2001-2011, we find that cooperative banks’ diffusion significantly reduces income inequality. This finding is robust to different measures of income inequality, different proxies of local banking structure (cooperative banks branches, popular banks branches, commercial banks branches), and different estimation techniques. When we study the channel of influence, we find that the diffusion of cooperative banks is particularly relevant for income distribution where loans to families and firms are larger, bank-firm relationships are tighter and the number of new firms over incumbent is larger. |
| Keywords: | Cooperative banks, income inequality, financial development. |
| JEL: | G21 G38 O15 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1804&r=cfn |
| By: | Diana Filipa Cruz Costa (Faculdade de Economia do Porto); Samuel Cruz Alves Pereira (Faculdade de Economia do Porto); Elísio Fernando Moreira Brandão (Faculdade de Economia do Porto) |
| Abstract: | Costs are an important component for businesses as they affect the results and hence the firm position. Therefore, to understand how they vary with changes in output and what factors influence them is fundamental, not only for managers, but for all agents related to organizations. The traditional theory predicts the existence of two types of costs, the variables and the fixed ones. However, an alternative hypothesis has emerged that accounts for an empirical phenomenon, the "cost stickiness", and later the "anti-stickiness", in which the behaviour of costs is based on discretionary management decisions, under different circumstances. In this paper, we show that the operating costs of Euro Area companies are sticky, since in the face of a positive change in sales costs increase more than decrease when sales fall by the same amount. In addition, we have documented that this phenomenon is reinforced in countries where labour law is more rigid and those whose intervention by the Troika has been necessary, because these two aspects increase the adjustment costs. |
| Keywords: | cost behaviour, stickiness, anti-stickiness, deliberate resource commitment, adjustment costs |
| JEL: | J30 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:609&r=cfn |
| By: | Elisabeth Kempf; Margarita Tsoutsoura |
| Abstract: | Partisan bias affects the decisions of financial analysts. Using a novel hand-collected dataset that links credit rating analysts to party affiliations from voter registration records, we show that analysts who are not affiliated with the U.S. President's party are more likely to downward-adjust corporate credit ratings. Our identification approach compares analysts with different party affiliations covering the same firm at the same point in time, ensuring that differences in the fundamentals of rated firms cannot explain the results. The effect is more pronounced in periods of high partisan conflict and for analysts who vote frequently. Our results suggest that partisan bias and political polarization create distortions in the cost of capital of U.S. firms. |
| JEL: | G14 G24 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25292&r=cfn |
| By: | Anabela Marques Santos |
| Abstract: | Using public support as the baseline, the aim of the Ph.D. thesis is firstly to assess its effectiveness in alleviating firms’ financing constraints (Chapter 2) and in enhancing the innovation-growth linkage (Chapter 5), in comparison with other financing sources. Secondly, the research undertaken also explores public policy effectiveness in two periods of time: ex-ante and ex-post analysis. In the former, effectiveness is assessed according to whether the characteristics of the project selected for the subsidy are in line with the policy targets (Chapter 3). In turn, the ex-post analysis assesses firms’ effectiveness in achieving the planned goal and the sustainability of the achieved outcomes (Chapter 4). Chapter 2 provides evidence that, in addition to a guarantee for loans, measures to facilitate equity investments and making existing public measures easier to obtain could be considered as the main solutions for future financing. Tax incentives for financially constrained firms are revealed to be the least important factor. Chapter 3 aims to understand which kinds of projects are selected for an innovation subsidy and if the characteristics of the project selected are in line with the policy target. The results show the selection process seems to be particularly effective in meeting the goals as regards the amount of investment, as well as the expected effect on enhanced internationalization and productivity. Nevertheless, the study also reveals some failures in the selection process, namely in terms of the intensity of the project’s contribution to growth. Chapter 4 assess firm performance after project implementation. Results show that subsidized firms reached targets linked with employment level and sales more easily than labour productivity and value creation. Chapter 5 reveals that equity financing has a greater effect on the strategic decision to innovate and the highest output additionality on firm turnover growth. Grants have a more moderate effect on innovation and firm growth (both turnover and employment). |
| Keywords: | Innovation; Financing; Venture capital; Public support |
| Date: | 2018–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/277460&r=cfn |
| By: | Andrea Mc Namara (National University of Ireland); Pierluigi Murro (LUISS University Author-Name: Sheila O'Donohoe; Waterford Institute of Technology) |
| Abstract: | We examine the influence of countries lending infrastructure on credit rationing for European SMEs. This lending infrastructure is comprised of countries information, legal, judicial, bankruptcy, social and regulatory environments. Using a sample of 13,957 SMEs from eleven European countries, we find that SMEs in countries in which there is greater information sharing, fewer legal rights, a more efficient judicial system and less efficient bankruptcy system are less likely to be credit rationed. Moreover, an efficient bankruptcy regime is more important for larger and more risky firms in reducing the likehood of they being credit rationed. Equally the impact of banks regulatory regime varies across firm riskiness; a stricter regime results in a greater likehood of credit rationing for more risky or finally weaker firms in contrast to stronger firms where less regulation sees more rationing. |
| Keywords: | SMEs, Lending Infrastracture, Credit Constraints. |
| JEL: | G20 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1803&r=cfn |
| By: | Clement Moyo (Department of Economics, Nelson Mandela University); Pierre Le Roux (Department of Economics, Nelson Mandela University) |
| Abstract: | The issue of financial reforms and financial development has received considerable attention over the recent past. A number of recent studies conclude that financial development may hinder economic growth. Therefore, to shed light on this negative relationship, this study investigates whether financial liberalisation and financial development increase the likelihood financial crises in SADC countries. The logit model is employed for the analysis using data for the period 1990 to 2015. The results showed that financial liberalisation captured by real interest rates and capital account openness reduces the likelihood of financial crises. On the other hand, financial development represented by bank credit, increases the incidence of financial crises. Therefore, financial liberalisation may increase the likelihood of financial crises indirectly through financial development. The study recommends that a sound regulatory and supervisory framework be established as well as institutional quality raised to curb the effect of financial development on the incidence of financial crises. |
| Keywords: | Financial liberalisation, financial crises, financial development, logit model. |
| JEL: | C23 E60 G01 G21 G28 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:mnd:wpaper:1835&r=cfn |
| By: | Chang, T.; Takahashi, D. |
| Abstract: | The objective of this study is to analyze and compare the valuation of farmer participation in the farmland leasing market and the custom-farming services market. This study analyzes surveys on 301 rice farmers in Taiwan in 2014 using the contingent valuation method to analyze the willingness to pay and willingness to accept of both markets. The empirical analysis indicated that factors of greater significance causing reduced the WTA for lending farmland, which can reduce supply in the farmland-leasing market include the expectation of farmland diversion, and the existence of transaction costs in the farmland lending market. The analysis also indicates that an increase in the WTA price for lending farmland was a primary factor for the increase in the WTP for custom-farming services, which indicates that the vibrant growth of the custom-farming services market in Taiwan is affected by the WTA farmland lending. The findings show that development of the custom-farming services market cannot be expected to lead to greater farmland liquidation. Acknowledgement : |
| Keywords: | Land Economics/Use |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277426&r=cfn |
| By: | Chiorazzo, Vincenzo; D'Apice, Vincenzo; DeYoung, Robert; Morelli, Pierluigi |
| Abstract: | We test whether small US commercial banks that use a traditional business model are more likely to survive than non-traditional banks during both good and bad economic climates. Our concept of bank survival is derived from Stigler (1958) and includes any bank that does not fail or is not acquired. We define traditional banking by four hallmark characteristics: Relationship loans, core deposit funding, revenue streams from traditional banking services, and physical bank branches. Banks that adhered more closely to this business strategy were an estimated 8 to 13 percentage points more likely to survive from 1997 through 2012 compared to other small banks using less traditional business strategies. This survival advantage approximately doubled during the financial crisis period. |
| Keywords: | bank business model; financial crisis; survivorship |
| JEL: | G01 G21 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90296&r=cfn |
| By: | Jian Jia; Ginger Zhe Jin; Liad Wagman |
| Abstract: | The General Data Protection Regulation (GDPR) came into effect in the European Union in May 2018. We study its short-run impact on investment in new and emerging technology firms. Our findings indicate negative post-GDPR effects on EU ventures, relative to their US counterparts. The negative effects manifest in the overall dollar amounts raised across funding deals, the number of deals, and the dollar amount raised per individual deal. |
| JEL: | D43 D8 L13 L15 L5 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25248&r=cfn |
| By: | Vanessa S. Tchamyou (University of Antwerp, Belgium); Guido Erreygers (University of Antwerp, Belgium); Danny Cassimon (University of Antwerp, Belgium) |
| Abstract: | This study investigates the role of information and communication technology (ICT) on income inequality through financial development dynamics of depth (money supply and liquid liabilities), efficiency (at banking and financial system levels), activity (from banking and financial system perspectives) and size, in 48 African countries for the period 1996 to 2014. The empirical evidence is based on Generalised Method of Moments. While both financial depth and size are established to reduce inequality contingent on ICT, only the effect of financial depth in reducing inequality is robust to the inclusion of time invariant variables to the set of strictly exogenous variables. We extend the analysis by decomposing financial depth into its components, namely: formal, informal, semi-formal and non-formal financial sectors. The findings based on this extension show that ICT reduces income inequality through formal financial sector development and financial sector formalisation as opposed to informal financial sector development and financial sector informalisation. The study contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of addressing post-2015 Sustainable Development Goals (SDGs) inequality challenges by means of ICT and financial access. |
| Keywords: | Inequality; ICT; Financial development; Africa. |
| JEL: | I30 L96 O16 O55 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:afe:wpaper:18/002&r=cfn |
| By: | Jurjen (J.J.A.) Kamphorst (Erasmus University Rotterdam); Ewa (E.) Mendys-Kamphorst (CEG); Bastian (B.) Westbrock (Utrecht University) |
| Abstract: | According to standard economic wisdom, fixed costs should not matter for pricing decisions. However, outside economics, it is widely accepted that firms need to increase their prices after a fixed cost rise. In this note, we show that a liquidity-constrained firm that maximizes lifetime profits should increase its price after a fixed cost increase, if future profits depend positively on current sales. The reason is that then the optimal price is lower than the one that maximizes the current profit. Because the higher cost necessitates higher current profits to avoid bankruptcy, the firm needs to increase its price. |
| Keywords: | fixed costs; sunk costs; brand loyalty; switching costs; pricing |
| JEL: | D42 L11 |
| Date: | 2018–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20180095&r=cfn |