nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒01‒14
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Debt overhang and investment efficiency By Barbiero, Francesca; Popov, Alexander; Wolski, Marcin
  2. Bank Leverage, Welfare, and Regulation By Anat R. Admati; Martin F. Hellwig
  3. Policy uncertainty and investment in Spain. By Daniel Dejuán; Corinna Ghirelli
  4. Culture and collateral requirements: Evidence from developing countries By Panagiota Papadimitri; Fotios Pasiouras; Menelaos Tasiou
  5. Does board gender diversity influence firm profitability? A control function approach By Rey Dang; L’Hocine Houanti; Krishna Reddy; Michel Simioni
  6. CDS index options in Markov chain models By Herbetsson, Alexander
  7. Capital accumulation and corporate portfolio choice between liquidity holdings and financialisation By Giovanni Scarano
  8. Gender-Diversity, Financial Performance and Cash Holding in Family Firms By Salehudin Eka Saputra Alrasidi, ST
  9. The innovation debt penalty: cost of debt, loan default, and the effects of a public loan guarantee on high-tech firms By Cowling, Marc; Ughetto, Elisa; Lee, Neil
  10. Capital Policy on Firm's Profitability: A Case of the Thai Agro and Food Industry By Sareeya WICHITSATHIAN
  11. Three-Factor and Five-Factor Models: Implementation of Fama and French Model on Market Overreaction Conditions By Ferikawita M. Sembiring

  1. By: Barbiero, Francesca; Popov, Alexander; Wolski, Marcin
    Abstract: Using a pan-European data set of 8.5 million firms, this paper finds that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is already excessive, if it is dominated by short maturities, and during systemic banking crises. The results are consistent with theories of the disciplining role of debt, as well as with models highlighting the negative link between agency problems at firms and banks and investment efficiency.
    Keywords: Investment effciency,Debt overhang,Banking crises
    JEL: E22 E44 G21 H63
    Date: 2018
  2. By: Anat R. Admati (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: We take issue with claims that the funding mix of banks, which makes them fragile and crisis-prone, is efficient because it reflects special liquidity benefits of bank debt. Even aside from neglecting the systemic damage to the economy that banks’ distress and default cause, such claims are invalid because banks have multiple small creditors and are unable to commit effectively to their overall funding mix and investment strategy ex ante. The resulting market outcomes under laissez-faire are inefficient and involve excessive borrowing, with default risks that jeopardize the purported liquidity benefits. Contrary to claims in the literature that “equity is expensive” and that regulation requiring more equity in the funding mix entails costs to society, such regulation actually helps create useful commitment for banks to avoid the inefficiently high borrowing that comes under laissez-faire. Effective regulation is beneficial even without considering systemic risk; if such regulation also reduces systemic risk, the benefits are even larger.
    Keywords: Liquidity in banking, leverage in banking, banking regulation, capital structure, capital regulations, agency costs, commitment, contracting, maturity rat race, leverage ratchet effect, Basel
    JEL: D53 D61 G01 G18 G21 G24 G28 G32 G38 H81 K23
    Date: 2018–11
  3. By: Daniel Dejuán (Banco de España); Corinna Ghirelli (Banco de España)
    Abstract: The aim of this paper is to investigate the effect of policy uncertainty on firms’ investment decisions. We focus on Spain for the period 1998-2014. To measure policy-related uncertainty, we use a new macroeconomic indicator constructed for this country. We find strong evidence that policy uncertainty reduces corporate investment. Furthermore, the heterogeneous results suggest that the adverse effect of policy uncertainty is particularly relevant for highly vulnerable firms. In particular, non-exporting firms, small and medium enterprises, as well as firms in poorer financial condition are shown to decrease investment significantly more than their counterparts. Overall, these results are consistent with the hypotheses that policy-related uncertainty reduces corporate investment through increases in precautionary savings or to worsening of credit conditions.
    Keywords: corporate investment, policy uncertainty, financial frictions.
    JEL: D80 E22 G18 G31 G38
    Date: 2018–12
  4. By: Panagiota Papadimitri (Portsmouth Business School); Fotios Pasiouras (Montpellier Business School); Menelaos Tasiou (Portsmouth Business School)
    Abstract: We study the relationship between culture and the use of collateral in corporate borrow- ing. Using a dataset of over 14,000 firms from 70 transition and developing countries, we find evidence that the likelihood to pledge collateral is lower in countries with higher un- certainty avoidance and corporate ethical behavior. In contrast, long-term orientation and individualism enhance the likelihood to use collateral. These results hold when using sub- samples and further controls for various firm and country-specific attributes. Additional analysis reveals that culture influences not only the likelihood to pledge collateral but also its type (movable versus non-movable) and its value relative to the value of the loan.
    Keywords: Culture, Ethics, Collateral
    JEL: G21 G32
    Date: 2019–01–09
  5. By: Rey Dang (LaRGE Research Center, Université de Strasbourg); L’Hocine Houanti; Krishna Reddy; Michel Simioni
    Abstract: We investigate the relation between board gender diversity and firm profitability using the control function (CF) approach recently suggested by Wooldridge (2015). The CF method takes account of the problem of endogenous explanatory variables that have potential to bias the results. Using a sample of firms that made up the S&P 500 over the period 2004-2015, we find that the presence of women on corporate boards (measured either by the percentage of female directors on corporate boards or the Blau index of heterogeneity) has a positive and significant (at the 1% level) effect on firm profitability (measured by the return on assets). We compare our results to more traditional approaches (such as pooled OLS or the fixed-effects model). Through this study, we shed light on the effect of women on corporate boards on firm performance, as it is still a controversial issue (Post and Byron, 2015).
    Keywords: Women, board of directors, econometrics, control function, firm performance.
    JEL: G30 G34 J1
    Date: 2019
  6. By: Herbetsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We study CDS index options in a credit risk model where the defaults times have intensities which are driven by a finite-state Markov chain representing the underlying economy. In this setting we derive compact computationally tractable formulas for the CDS index spread and the price of a CDS index option. In particular, the evaluation of the CDS index option is handled by translating the Cox-framework into a bivariate Markov chain. Due to the potentially very large, but extremely sparse matrices obtained in this reformulating, special treatment is needed to efficiently compute the matrix exponential arising from the Kolmogorov Equation. We provide details of these computational methods as well as numerical results. The finite-state Markov chain model is calibrated to data with perfect fits, and several numerical studies are performed. In particular we show that under same exogenous circumstances, the CDS index options prices in the Markov chain framework can be close to or sometimes larger than prices in models which assume that the CDS index spreads follows a log-normal process. We also study the different default risk components in the option prices generated by the Markov model, an investigation which is difficult to do in models where the CDS index spreads follows a log-normal process.
    Keywords: Credit risk; CDS index; CDS index options; intensity-based models; dependence modelling; Markov chains; matrix-analytical methods; numerical methods
    JEL: C02 C63 G13 G32 G33
    Date: 2019–01–07
  7. By: Giovanni Scarano
    Abstract: Most models of investment decisions utilised in macroeconomic models take free or perfect competition as explicit or implicit assumption. However, the oligopolistic structure of most real markets lead to corporate strategic behaviours that can produce very different results. Strategic decisions, connected with agency problems, can play a major role in producing financialisation and timing the rhythms of real investment. The paper deals with both mainstream and heterodox contributions that analyse the effects of corporate governance and strategic behaviours on portfolio management and investment decisions in big corporations, seeking to determine how these effects might play a major role in producing growing liquidity holdings and financialisation. The main objective is to understand whether these models can explain the tendency to place growing shares of social surplus in speculative financial channels, thereby contributing to long-term real stagnation.
    Keywords: Investment theory, Interest Rate, Corporate Savings, Financialisation,Financial Crises
    JEL: B51 E11 E12 E32 G35
    Date: 2019–01
  8. By: Salehudin Eka Saputra Alrasidi, ST (Faculty of Economics & Business, Telkom University, Indonesia Author-2-Name: Farida Titik Kristanti, S. E. M. Si Author-2-Workplace-Name: Faculty of Economics & Business, Telkom University, Indonesia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - This research aims to determine the presence of partial effects on gender-diversity and financial performance variables on the cash holding of family firms on the Indonesian Stock Exchange included in the Kompas100 index. Methodology/Technique - The approach used in this research was causal associative testing using a panel data regression with a General Least Square (GLS) method using six independent variables: size, growth opportunity, dividend, return on assets, leverage, and gender diversity. Meanwhile, cash holding acts as a dependent variable. Findings - The results of the research show that the independent variables of leverage have significantly negative relationships on cash holding on the Kompas100 index of Indonesia in the period of 2013-2016. Contrary to this, return on asset has a significantly positive relationship with cash holding. Novelty - Gender diversity is an important variable of boardroom; this paper reveals the impact of gender diversity and performance on family holding firms. These results can be used to assess the performance and fundamentals of a firm.
    Keywords: Cash Holding; Dividend; Gender Diversity; Growth Opportunity; Leverage; Return on Assets; Size.
    JEL: M40 M41 M49
    Date: 2018–12–10
  9. By: Cowling, Marc; Ughetto, Elisa; Lee, Neil
    Abstract: High-technology firms per se are perceived to be more risky than other, more conventional, firms. It follows that financial institutions will take this into account when designing loan contracts, and that this will manifest itself in more costly debt. In this paper we empirically test whether the provision of a government loan guarantee fundamentally changes the way lenders price debt to high-tech firms. Further, we also examine whether there are differential loan price effects of a public guarantee depending on the nature of the firms themselves and the nature of the economic and innovation environment that surrounds them. Using a large UK dataset of 29,266 guarantee backed loans we find that there is a high-tech risk premium which is justified by higher default, but, in general, that this premium is altered significantly when a public guarantee is provided for all firms. Further, all these loan price effects differ on precise spatial economic and innovation attributes.
    Keywords: cost of debt; high-tech firms; public loan guarantee scheme; loan default
    JEL: G21 G28
    Date: 2018–02–01
  10. By: Sareeya WICHITSATHIAN (Institute of Social Technology, Suranaree University of Technology, Thailand Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - The objectives of this research include: (1) to identify working capital investment policy and working capital financing policy, (2) to study the effect of working capital investment policy on profitability, and (3) to study the effect of working capital financing policy on profitability. Methodology/Technique - 41 firms in the agro-food industry listed on the Stock Exchange of Thailand are examined in this study. Secondary data was collected and analyzed within a 5-year period between 2013-2017. Findings - The results show that the most frequently employed working capital investment policy is the aggressive approach (46.30%), and the most frequently employed financial policy is the moderate approach (82.90%). According to the inferential statistics, it is concluded that: (1) profitability is significantly affected by the choice of working capital investment policy and a moderate investment policy results in the greatest profitability, and (2) profitability is not affected by the choice of working capital financing policy. Novelty - As a result, firms should focus on the selection of a moderate working capital investment policy when seeking to maximize profits. On the other hand, any type of working capital financing policy (aggressive, conservative, or moderate approach) is appropriate.
    Keywords: Working Capital Policy; Profitability; Agro and Food Industry; Thailand.
    JEL: M10 M40 M41
    Date: 2018–12–11
  11. By: Ferikawita M. Sembiring (Jenderal Achmad Yani University, Bandung Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - Previous research by this author has stated that the market overreaction phenomenon occurs in the Indonesian capital market and the CAPM (Capital Asset Pricing Model) is able to explain portfolio returns. However, CAPM is still debated along with the emergence of the other asset pricing models, such as the multifactor model proposed by Fama and French. The aim of this research is to test the ability of that model to explain the returns of portfolios formed under market overreaction conditions. Methodology/Technique - The data used in this study is the same as that of the previous research, which includes winner and loser portfolio data formed in market overreaction conditions, particularly on the Indonesian Stock Exchange, between July 2005 and December 2015. The multifactor models used include a three-factor model consisting of the factors of market, firm size, firm value, and a five-factor model with the added factors of profitability and investment. To obtain more accurate results, GARCH econometric models were also used in addition to standard test models for obtaining unbiased results. Findings - This research concludes that market factors (Rm-Rf), firm size (SMB), and firm value (HML), are able to explain the winner and loser portfolio returns well. However, when the factors of profitability (RMW) and investment (CMA) are added into the three-factor model, the RMW and CMA explained the returns negatively and inconsistently when the GARCH model is implemented. Novelty – These results imply that the three-factor model is more accurate than the five-factor model, contrary to the previous findings of Fama and French.
    Keywords: Fama and French Model; Five-factor Model; Market Overreaction; Three-factor Model; Portfolio.
    JEL: G11 G12 G14
    Date: 2018–12–11

This nep-cfn issue is ©2019 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.