nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒01‒28
twenty-two papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Family firms and labour productivity: the role of enterprise-level bargaining in the Italian economy By Damiani, Mirella; Pompei, Fabrizio; Ricci, Andrea
  2. Corporate Debt, Firm Size and Financial Fragility in Emerging Markets By Laura Alfaro; Gonzalo Asis; Anusha Chari; Ugo Panizza
  3. Nowhere Else to Go: The Determinants of Bank-Firm Relationship Discontinuations after Bank Mergers By Oliver Rehbein; Santiago Carbo-Valverde
  4. Securities laws and the choice between loans and bonds for highly levered firms By Robert Prilmeier; René M. Stulz
  5. The landscape of corporate venturing in Germany: Insights on corporate venture capitals and corporate accelerators By Haslanger, Patrick
  6. Bank capital buffers in a dynamic model By Mankart, Jochen; Michaelides, Alexander; Pagratis, Spyros
  7. Shareholder risk-taking incentives in the presence of contingent capital By Fatouh, Mahmoud; McMunn, Ayowande
  8. Growth Effects of Corporate Balance Sheet Adjustments in the EU: An Econometric and Model-based Assessment By Romanos Priftis; Anastasia Theofilakou
  9. Banks Risk Taking and Creditors Bargaining Power By Heller, Yuval; Peleg Lazar, Sharon; Raviv, Alon
  10. Trade and credit: revisiting the evidence By Eduardo Gutiérrez; Enrique Moral-Benito
  11. May the force be with you: Exit barriers, governance shocks, and profitability sclerosis in banking By Koetter, Michael; Müller, Carola; Noth, Felix; Fritz, Benedikt
  12. Big data analytics and business failures in data-Rich environments: An organizing framework. By Amankwah-Amoah, Joseph
  13. Founder Involvement in CEO Turnover By Oskar Kowalewski; Aleksandra Majda-Kariozen; Blazej Socha
  14. Family firms, performance-related pay and the great crisis: evidence from the Italian case By Pompei, Fabrizio; Damiani, Mirella; Andrea, Ricci
  15. Corporate Income Taxation, Leverage at Entry, and the Growth of Entrepreneurial Companies By Da Rin, Marco; Di Giacomo, M.; Sembenelli, A.
  16. Financial effects in historic consumption and investment functions By Stockhammer, Engelbert; Bengtsson, Erik
  17. The role of employee incentive pay in the competitiveness of family and non-family firms By Damiani, Mirella; Pompei, Fabrizio; Ricci, Andrea
  18. Incentive-Compatibility, Limited Liability and Costly Liquidation in Financial Contracting By Zhengqing Gui; Ernst-Ludwig von Thadden; Xiaojian Zhao
  19. An analytical approach to crowdinvesting: The impact of marketing and idea stealing on the entrepreneur's decision making By Bethmann, Nicola; Frieden, Matthias
  20. On the choice of CEO duality: Evidence from a mandatory disclosure rule By Goergen, Marc; Limbach, Peter; Scholz-Daneshgari, Meik
  21. Unions, Two-Tier Bargaining and Physical Capital Investment: Theory and Firm-Level Evidence from Italy By Cardullo, Gabriele; Conti, Maurizio; Sulis, Giovanni
  22. Common Ownership in America: 1980-2017 By Matthew Backus; Christopher Conlon; Michael Sinkinson

  1. By: Damiani, Mirella; Pompei, Fabrizio; Ricci, Andrea
    Abstract: We investigate the role of Italian firms in labour productivity performance. We find that family-owned firms have lower labour productivity than their non-family counterparts. In a second step, we estimate the role of firm-level bargaining (FLB) to determine whether family-controlled firms that adopt this type of bargaining may partially close the gap in terms of labour productivity with their non-family competitors. Our results, obtained through IV estimation to control for endogeneity bias, suggest that enterprises under family governance achieve significant labour productivity gains — greater than those achieved by their non-family counterparts — when they adopt firm-level bargaining.
    Keywords: Family firms, corporate governance, labour productivity, firm-level bargaining
    JEL: D24 G32 G34
    Date: 2018–10
  2. By: Laura Alfaro; Gonzalo Asis; Anusha Chari; Ugo Panizza
    Abstract: The post-Global Financial Crisis period shows a surge in corporate leverage in emerging markets and a number of countries with deteriorated corporate financial fragility indicators (Altman’s Z-score). Firm size plays a critical role in the relationship between leverage, firm fragility and exchange rate movements in emerging markets. While the relationship between firm-leverage and distress scores varies over time, the relationship between firm size and corporate vulnerability is relatively time-invariant. All else equal, large firms in emerging markets are more financially vulnerable and also systemically important. Consistent with the granular origins of aggregate fluctuations in Gabaix (2011), idiosyncratic shocks to the sales growth of large firms are positively and significantly correlated with GDP growth in our emerging markets sample. Relatedly, the negative impact of exchange rate shocks has a more acute impact on the sales growth of the more highly levered large firms.
    JEL: F34 G01 G15 G32
    Date: 2019–01
  3. By: Oliver Rehbein; Santiago Carbo-Valverde
    Abstract: The decision to change or terminate a bank-firm relationship has been demonstrated to be crucial for firm performance following bank mergers. We find both competition and the available firm collateral to be important factors in enabling firms to switching banks, instead of dropping their bank relationships. We also provide novel evidence that firms who are able to \textit{add} a bank relationship following a merger exhibit much stronger post-merger performance. Our findings are consistent with the interpretation that bank-mergers cause a reduction in lending to most firms, leading them to search for alternative sources of finance.
    Keywords: bank mergers, relationship banking, competition
    JEL: G21 G34
    Date: 2018–09
  4. By: Robert Prilmeier; René M. Stulz
    Abstract: In contrast to bonds, levered loans do not require SEC registration. We show that this distinction plays an important role in firms’ choice between funding through loans and bonds and helps understand why the market share of cov-lite loans has increased so much. Compared to cov-heavy loans, cov-lite loans are close substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans. SEC-reporting firms that borrow using cov-lite loans are more likely to deregister subsequently. Non-reporting firms are more likely to borrow through highly levered loans than through bonds, even though maturities, amounts, covenants, and ratings are similar between the two sources of funding. As expected from theory, we find that the liquidity advantage of cov-lite loans over cov-heavy loans is highest for non-registered issuers where information asymmetries are greater.
    JEL: D82 G18 G23 G32
    Date: 2019–01
  5. By: Haslanger, Patrick
    Abstract: This paper adds to the literature of external corporate venturing, especially corporate venture capitals (CVCs) and corporate accelerators (CAs) by providing an overview of the German corporate venturing market and by offering first intriguing findings based on a novel and unique hand-collected dataset. It presents insights regarding the set-up, organization and staffing of corporate venturing units, as well as characteristics of start-ups under management. This study distinguishes between the corporate venturing unit's mission, organization, governance and network as well as vehicle leads. Moreover, differences in the characteristics of start-ups supported by corporate venturing units are detected. This work offers unique insights on the German corporate venturing landscape and thereby serves as starting point for future and more elaborate research.
    Keywords: corporate venturing,entrepreneurship,corporate venture capital (CVC),corporate accelerator (CA),Germany
    JEL: G24 L26 M13 O3
    Date: 2019
  6. By: Mankart, Jochen; Michaelides, Alexander; Pagratis, Spyros
    Abstract: We estimate a dynamic structural banking model to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk-weighted capital requirements reduce loan supply and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Tighter leverage requirements, on the other hand, increase lending, preserve bank charter value and incentives to accumulate equity buffers, therefore leading to lower bank failure rates.
    Keywords: Banking,Equity Buffers,Regulatory Interactions
    JEL: E44 G21 G38
    Date: 2018
  7. By: Fatouh, Mahmoud (Bank of England); McMunn, Ayowande (Carmihnac Asset Managers)
    Abstract: This paper presents a model of shareholders’ willingness to exert effort to reduce the likelihood of bank distress, and the implications of the presence of contingent convertible (CoCo) bonds in the liabilities structure of a bank. Consistent with the existing literature, we show that the direction of the wealth transfer at the conversion of CoCo bonds determines their impact on shareholder risk-taking incentives. We also find that ‘anytime’ CoCos (CoCo bonds trigger-able anytime at the discretion of managers) have a minor advantage over regulator CoCo bonds, and that quality of capital requirements can reduce the risk-taking incentives of shareholders. We argue that shareholders can also use manager-specific CoCo bonds to reduce the riskiness of the bank activities. The issuance of such bonds can increase the resilience of individual banks and the whole banking system. Regulators can use restrictions on conversion rates and/or requirements on the quality of capital to address the impact of CoCo bonds issuance on risk-taking incentives.
    Keywords: Risk-taking; CoCo bonds; anytime CoCos; quality of capital requirements; additional Tier 1 capital (AT1); bank manager compensation packages; compensation policy.
    JEL: D81 G21 G28 G30
    Date: 2019–01–18
  8. By: Romanos Priftis; Anastasia Theofilakou
    Abstract: This paper investigates the impact of active balance sheet adjustments in the non-financial corporate sector on economic growth in the EU. We first jointly model firms' ability to reduce their balance sheet imbalances and a growth equation in an instrumental variables (IV) panel context. This enables us to explicitly consider the contemporaneous interaction between corporate balance sheet adjustment and growth, which can otherwise bias inference. Our main findings inter alia suggest that: i) periods of active corporate deleveraging are associated on average with lower output growth compared to periods when no adjustment takes place, and ii) a decline in corporate debt overhang supports output growth. To explore the deleveraging mechanism qualitatively we then employ a banking variant of the Commission's QUEST model and show that following a deleveraging shock, triggered by a tightening of firms' collateral constraints, the effects on investment and GDP are negative in the short-run. In the medium run once corporate debt has been reduced the effects fade away allowing the economy to recover. In the long run the effects are largely neutral suggesting that the source of investment financing, be it financial intermediaries or the stock market, does not seem to matter.
    JEL: C3 E21 G2
    Date: 2018–01
  9. By: Heller, Yuval; Peleg Lazar, Sharon; Raviv, Alon
    Abstract: We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebt-holders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events, but can lead to higher levels of risk, depending on the relative bargaining power, (2) does not change the level of risk-shifting when side payments are possible, and (3) may yield the surprising result that risk-shifting increases with tighter regulatory control.
    Keywords: Risk-taking, asset risk, financial institutions, stress test, leverage, bargaining
    JEL: G21 G28
    Date: 2019–01–10
  10. By: Eduardo Gutiérrez (Banco de España); Enrique Moral-Benito (Banco de España)
    Abstract: This paper explores the effects of bank lending shocks on export behavior of Spanish firms. For that purpose, we combine Balance of Payments data on exports at the firmproduct-destination level with a matched bank-firm dataset incorporating information on the universe of corporate loans from 2002 to 2013. Armed with this dataset, we identify bankyear specific credit supply shocks following Amiti and Weinstein (2018) and estimate their impact on firms’ exports at the product-destination level. According to our estimates, credit supply shocks have sizable effects on both the intensive margin (amount exported) and the extensive margin of trade (decision to export).
    Keywords: credit shocks, exports, firm level data
    JEL: F10 F30 F40 G15 G21 G32
    Date: 2019–01
  11. By: Koetter, Michael; Müller, Carola; Noth, Felix; Fritz, Benedikt
    Abstract: We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of governmen-owned banks: the unification of counties. County mergers lead to enforced governmen-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
    Keywords: political frictions,governance,excess capacity,banking,market exit
    JEL: G21 G29 O16
    Date: 2018
  12. By: Amankwah-Amoah, Joseph
    Abstract: In view of the burgeoning scholarly works on big data and big data analytical capabilities, there remains limited research on how different access to big data and different big data analytic capabilities possessed by firms can generate diverse conditions leading to business failure. To fill this gap in the existing literature, an integrated framework was developed that entailed two approaches to big data as an asset (i.e. threshold resource and distinctive resource) and two types of competences in big data analytics (i.e. threshold competence and distinctive/core competence). The analysis provides insights into how ordinary big data analytic capability and mere possession of big data are more likely to create conditions for business failure. The study extends the existing streams of research by shedding light on decisions and processes in facilitating or hampering firms’ ability to harness big data to mitigate the cause of business failures. The analysis led to the categorisation of a number of fruitful avenues for research on data-driven approaches to business failure.
    Keywords: big data analytics; technology; innovation management; big data; business failure
    JEL: L1 L2
    Date: 2019–01–01
  13. By: Oskar Kowalewski (IESEG School of Management (LEM-CNRS-UMR 9221)); Aleksandra Majda-Kariozen (Faculty of Management, University of Lodz); Blazej Socha (Faculty of Management, University of Lodz)
    Abstract: We study the role of a company founder in its internal governance. Using a sample of 484 CEO turnovers for 2000–2015, we establish that CEOs are fired for poor performance. However, the likelihood of a poor-performing founder-CEO being fired is lower than that of an outsider CEO. Moreover,having a founder as a member of the executive or supervisory board decreasesthe likelihood that a CEO will be dismissed for poor performance. Similarly,founder ownership may have the same effect on CEO turnover. Finally, being a founder does not guarantee a poor-performing CEO a chairman position after being fired.
    Keywords: Founder involvement; CEO turnover; Corporate governance; Firm performance
    Date: 2019–01
  14. By: Pompei, Fabrizio; Damiani, Mirella; Andrea, Ricci
    Abstract: This article analyses how Italian family firms (FFs) have acted during the global great crisis in comparison to their nonfamily counterparts using a sample of almost 4500 firms for 2007 and 2010. We study whether family control affects labor productivity, labor costs, and competitiveness and how family and nonfamily firm (NFFs) have responded to the great crisis. Furthermore, we test whether the adoption of performance-related pay (PRP) for employees offers an efficacious strategy to mitigate the effects of the crisis. Quantile regression techniques have been used to test the heterogeneous role of PRP, and its possible endogeneity has been taken into account in the empirical investigation. After the outbreak of the crisis, the distance in terms of the competitiveness of FFs in relation to their nonfamily counterparts increased. However, we also find that FFs may take advantage of the adoption of incentive schemes, such as PRP, to encourage commitment and motivation from their employees more than NFFs do. The positive role of PRP on labor productivity, coupled with a moderate influence of these schemes on wage premiums, enables them to regain competitiveness. In addition, for FFs located in industrial districts in which social rules prevail on formal rules, the adoption of PRP has exerted additional positive effects under hostile pressures, such as those characterizing the strong global crisis.
    Keywords: Family firms, performance-related pay, quantile regressions, productivity
    JEL: D24 G32 J33
    Date: 2018–12–06
  15. By: Da Rin, Marco (Tilburg University, Center For Economic Research); Di Giacomo, M.; Sembenelli, A.
    Abstract: We study whether corporate income taxation affects the long-term growth of newly incorporated companies through its effect on their choice of leverage at entry. We first document the distribution of initial leverage, which is persistent over several years. We then find that a decrease in corporate income taxation leads to a sizeable decrease in leverage at entry. This effect on initial conditions has long-term effects: an inverted-U relationship exists between leverage at entry and long-term corporate growth, conditional on survival. These effects are economically sizeable, and stronger in countries with better creditor rights and more transparent financial transactions.
    Keywords: Corporate income taxation; capital structure; entrepreneurial finance; corporate growth
    JEL: G32 H25 L25 L26
    Date: 2018
  16. By: Stockhammer, Engelbert (King's College London); Bengtsson, Erik (Department of Economic History, Lund University)
    Abstract: The global financial crisis has highlighted the importance of financial factors on economic performance. Most of the existing research analyses the post-World War 2 experience, and especially the 1980s onwards. This paper investigates the effects of stock prices, real estate prices and debt on consumption and investment expenditures by estimating consumption and investment equations for long historic datasets with about 100 years of data for Britain, France, Norway and Sweden. We find positive debt effects on consumption in three of four countries, but no consistent effects of share prices and house prices. We find positive effects of share prices on investment in all four countries. Effects are stronger in more market-based Britain than in more state-oriented France. For France, Sweden and Norway we find some evidence that effects of financial variables were weaker in the postwar period 1945-80. These findings suggest that the institutional context matters for how financial variables affect economic activity.
    Keywords: wealth effects; asset prices; consumption; investment; macroeconomic history
    JEL: E10 E21 E22 G10 N10 N14
    Date: 2019–01–14
  17. By: Damiani, Mirella; Pompei, Fabrizio; Ricci, Andrea
    Abstract: Insufficient attention has been paid to the different roles of wage incentives in the competitiveness of family and non-family firms. This paper addresses this issue and uses a sample of listed and non-listed Italian firms for 2007 and 2010 to show that family firms that adopt incentive wages obtain greater gains in competitiveness with respect to non-family firms. Unlike what occurs in non-family firms, the efficiency enhancing effect of incentive wages more than compensates for the premiums paid to employees and enables family firms to achieve significant gains in terms of competitiveness.
    Keywords: Family firms Performance-related pay Labour productivity Wages Competitiveness
    JEL: D24 G32 J33
    Date: 2018–11–15
  18. By: Zhengqing Gui; Ernst-Ludwig von Thadden; Xiaojian Zhao
    Abstract: We characterize an optimal financial contract when the firm’s realized cash flow is unobservable to the investor and the firm’s collateral can only be liquidated partially by resorting to the services of a costly third party. An optimal contract may exhibit a piecewise structure and vary with the liquidation cost and the firm’s actual liquidity shortage. Partial liquidation and wholesale transfers of collateral can coexist in an optimal contract. In contrast to part of the literature, the incentive-compatibility constraint incorporates the firm’s limited liability, and may be slack at the optimum. Allowing the firm to overcome an ex-post liquidity shortage by borrowing surreptitiously from a third party may reduce the firm’s ex-ante expected utility.
    Keywords: Financial contracting, incentive-compatibility, limited liability, indivisible collateral, costly liquidation
    JEL: D86 G33
    Date: 2018–12
  19. By: Bethmann, Nicola; Frieden, Matthias
    Abstract: In a game theoretical setting, this paper studies the entrepreneur's decision making by using a new financing opportunity referred to as crowdinvesting. In this model, the entrepreneur can collect money and advertise his innovative idea. However, crowdinvesting carries the risk of being copied by a potential competitor. Faced with this trade-off, the entrepreneur strategically diminishes his marketing activity under certain circumstances to remain the monopolist in the market. In the second part, we compare crowdinvesting with two alternative financing opportunities, banks and venture capital. We show that crowdinvesting, often mentioned as a financing instrument for drastic innovations, is generally not appropriate for these ideas because the danger of being copied is too high for the entrepreneur.
    Keywords: Crowdinvesting; equity crowdfunding; entrepreneurship; advertising; idea stealing
    JEL: D21 G32 L26 M13 O13
    Date: 2019–01
  20. By: Goergen, Marc; Limbach, Peter; Scholz-Daneshgari, Meik
    Abstract: We adopt a novel approach to explain why firms opt for or against CEO duality and the value implications of this choice. Exploiting the 2009 amendments to Regulation S-K, we provide unique evidence on the first-time disclosure of the reasons firms state for combining (separating) the roles of CEO and chairman. The stated reasons support both agency theory and organization theory. They are more numerous and comprise more words, including more positive words, for firms with duality. Examining the announcement returns to firms' disclosures, we find that investors evaluate the main reasons for CEO duality by considering the firm's characteristics.
    Keywords: CEO Duality,Board of Directors,Firm Valuation,Regulation S-K,Textual Analysis
    JEL: G14 G34 G38
    Date: 2018
  21. By: Cardullo, Gabriele (University of Genova); Conti, Maurizio (University of Genova); Sulis, Giovanni (University of Cagliari)
    Abstract: In this paper we present a search and matching model in which firms invest in sunk capital equipment. By comparing two wage setting scenarios, we show that a two-tier bargaining scheme, where a fraction of the salary is negotiated at firm level, raises the amount of investment per worker in the economy compared to a one-tier bargaining scheme, in which earnings are entirely negotiated at sectoral level. The model's main result is consistent with the positive correlation between investment per worker and the presence of a two-tier bargaining agreement that we find in a representative sample of Italian firms.
    Keywords: unions, investment, hold-up, two-tier bargaining, control function
    JEL: J51 J64 E22
    Date: 2018–11
  22. By: Matthew Backus; Christopher Conlon; Michael Sinkinson
    Abstract: When competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms. We propose a structurally consistent and scaleable approach to the measurement of this phenomenon for the universe of S&P 500 firms between 1980 and 2017. Over this period, the incentives implied by the common ownership hypothesis have grown dramatically. Contrary to popular intuition, this is not primarily associated with the rise of BlackRock and Van- guard: instead, the trend in the time series is driven by a broader rise in diversified investment strategies, of which these firms are only the most recent incarnation. In the cross-section, there is substantial variation that can be traced, both in the theory and the data, to observable firm characteristics – particularly the share of the firm held by retail investors. Finally, we show how common ownership can theoretically give rise to incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the “widely held firm.”
    JEL: G34 L0 L13 L21
    Date: 2019–01

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