nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒09‒30
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment By Xiao, Tim
  2. Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment By Juan Carlos Conesa; Begoña Dominguez
  3. Financialization, Corporate Governance and Employee Pay: A Firm Level Analysis By Margarita Carvalho; João Cerejeira
  4. Ownership structure and the cost of debt : Evidence from the Chinese corporate bond market By Chatterjee, Sris; Gu, Xian; Hasan, Iftekhar; Lu, Haitian
  5. Capital Inflows, Equity Issuance Activity, and Corporate Investment By Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
  6. What firms don't like about bank loans: New evidence from survey data By Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu
  7. Trade and Firm Financing By Paul Bergin; Ling Feng; Ching-Yi Lin
  8. Possibilities of identifying distortion of the calculation basis for the payment of dividend on the basis of accounting By Marcela Hradecká
  9. The antecedents of new R&D collaborations with different partner types: On the dynamics of past R&D collaboration and innovative performance By Rene Belderbos; Victor Gilsing; Boris Lokshin; Martin Carree; Juan Fernández Sastre
  10. Level Leverage decisions and manager characteristics By Margarita Carvalho; João Cerejeira
  11. Performance Effects of Corporate Real Estate Ownership for the Retail Industry By Abraham Park; Maretno Agus Harjoto
  12. Debt and REIT performance: Evidence from Australia By Woon Weng Wong
  13. Corruption and Adverse Selection By Leonidas Koutsougeras; Manuel Santos; Fei Xu

  1. By: Xiao, Tim
    Abstract: This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.
    Keywords: credit value adjustment (CVA),credit risk modeling,financial derivative valuation,collateralization,margin and netting
    JEL: E44 G21 G12 G24 G32 G33 G18 G28
    Date: 2019
  2. By: Juan Carlos Conesa (Stony Brook University); Begoña Dominguez (University of Queensland)
    Abstract: Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an infinitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 per cent at steady state.
    Date: 2019
  3. By: Margarita Carvalho (NIPE, University of Minho); João Cerejeira (Department of Economics/NIPE, University of Minho)
    Abstract: This study explores the link between financialization and employee wages. Using a panel of European banks from Bankscope we test whether banks use leverage strategically in order to refrain wage increases, focusing on the strategic use of banks’ capital structure as a disciplinary mechanism. The results indicate the existence of a negative and significant effect of leverage on average employee wages. In addition, considering that the effects of leverage could depend on individual bank risk, we extend our analysis to distressed banks, using the z-score as a measure to distinguish banks that are more prone to bankruptcy. We also observe that leverage is statistically significant when relating to average wages; however the impact does not differ in magnitude in comparison to non-distressed banks.
    Keywords: Panel data models; Instrumental Variables; Banks; Capital Structure; Wages
    JEL: C23 C26 G21 G32 J30
    Date: 2019
  4. By: Chatterjee, Sris; Gu, Xian; Hasan, Iftekhar; Lu, Haitian
    Abstract: Drawing upon evidence from the Chinese corporate bond market, we study how ownership structure affects the cost of debt for firms. Our results show that state, institutional and foreign ownership formats reduce the cost of debt for firms. The benefits of state ownership are accentuated when the issuer is headquartered in a province with highly developed market institutions, operates in an industry less dominated by the state or during the period after the 2012 anti-corruption reforms. Institutional ownership provides the most benefits in environments with lower levels of marketization, especially for firms with low credit quality. Our evidence sheds light on the nexus of ownership and debt cost in a political economy where state and private firms face productivity and credit frictions. It is also illustrative of how the market environment interacts with corporate ownership in affecting the cost of bond issuance.
    JEL: G12 G18 G32 G34
    Date: 2019–09–19
  5. By: Charles W. Calomiris (Columbia Business School, Hoover Institution, and NBER); Mauricio Larrain (Universidad Catolica de Chile School of Management and Financial Market Commission of Chile); Sergio L. Schmukler (World Bank Research Department)
    Abstract: This paper uses issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. It shows that foreign inflows are strongly correlated with country-level issuance. The relation especially reflects the behavior of large firms. To identify supply-side shocks, capital inflows into each country are instrumented with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented contemporaneous and lagged capital inflows lead large firms to raise new equity, which they use to fund investment.
    Keywords: capital flows, corporate financing, emerging markets, domestic investors, foreign investors, use of funds
    JEL: F23 F32 G11 G15 G31
    Date: 2019–07
  6. By: Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu
    Abstract: We use the association between non-financial firms and their banks, an information available in the European Investment Bank Investment Survey (EIBIS), to disentangle the effects of borrowers' and lenders' financial weakness on the satisfaction with the loan contracted. The dataset matches survey data of non-financial firms about their satisfaction with bank lending with their financial data and the financial data of their banks. We find evidence of both demand and supply factors determining firm satisfaction with bank loan financing: non-financial firms with weaker finances and those financed by weaker banks are less satisfied with their bank financing. We also find that the impact of supply factors differs across regions within the EU: the effect of bank's financial weakness on borrower satisfaction is not significant in core countries but is in periphery countries.
    Keywords: financial constraints,bank lending,survey data,bank-firm matching,satisfaction with bank loans,bank weakness,EU regions
    JEL: E44 G01 G32 L25
    Date: 2019
  7. By: Paul Bergin; Ling Feng; Ching-Yi Lin
    Abstract: This paper studies how financial frictions pose a barrier to export entry by altering the firm’s long-term capital structure, and thereby affecting the ability to finance sunk entry costs. Our focus on long-term firm financing stands in contrast with the emphasis in recent trade literature on the financing of short-term working capital as a barrier to export entry. We provide evidence that U.S. firms engaged in export tend to have leverage ratios higher than non-exporting firms in terms of long-term debt, but not in terms of short-term debt. To explain this fact and understand its implications, we marry a corporate finance model of capital structure, featuring an endogenous choice between equity and long-term debt financing, with a trade model featuring heterogeneous firms. The model of optimal capital structure indicates that in the long run, exporting firms will prioritize reducing the cost of long-term capital, used to pay sunk costs, over relaxing a short-term working capital constraint, which could be used to scale up production.
    JEL: F4
    Date: 2019–09
  8. By: Marcela Hradecká (Department of Accounting and Finances, Faculty of Economics, University of South Bohemia In České Budějovice)
    Abstract: Financial earning from dividends and profit shares are important income for the owners. From the business corporation perspective is the setting of dividend policy important for keeping the financial stability and solvency of the corporation. The most important indicator of the financial performance of the corporation is the profit reached. Czech accounting rules allow to account some revenue and expenses of on the basis of estimates so that all expenses and revenue are accounted in the period which is related in matter and time. These items are often a means for creative distortion of the economic result with the aim to reach the required level of covenants that lead to payment of benefits, directors rewards and annuals rewards for the management and also for the overvaluating of the economic result as one of the variables for the calculation base for the payment of dividends. Current legislation for setting the calculation base for the payment of dividends is not satisfactory and does not protect against disproportional outflow of financial means in the form of dividends for the owners. The paper concentrates on the possibility of identifying the distortion of the calculation base for the payment of dividends and on the proposal of a modification of the calculation base for the payment of dividends which would respect the legal right of the owners but also protect the financial stability of the business corporation and ensure its growth during its existence and to limit the outflow of money abroad. Key words: calculation base for the payment of dividends, net profit, payment ratio, modified reporting, NTEDP (net total earning for dividend payments), tests of profitability and own capital, accounting.
    Keywords: calculation base for the payment of dividends, net profit, payment ratio, modified reporting, NTEDP (net total earning for dividend payments), tests of profitability and own capital, accounting
    JEL: G30 G32 M41 M42
    Date: 2019–09
  9. By: Rene Belderbos; Victor Gilsing; Boris Lokshin; Martin Carree; Juan Fernández Sastre
    Abstract: We examine firms’ propensity to adapt their R&D collaboration portfolio by establishing new types of R&D collaboration with different kinds of partners (suppliers, customers, competitors and universities & public research institutions). We argue that existing R&D collaboration with one of the two value chain partners (suppliers or customers) is associated with the formation of new R&D collaboration with the other value chain partner to ensure temporal alignment in innovation within the value chain. In contrast, issues related to governance and unintended knowledge spillovers suggest that ‘horizontal’ R&D collaboration with competitors only spurs R&D collaboration with other partner types if such competitor R&D collaboration has been discontinued earlier (‘delayed temporal alignment’). We posit that persistent prior R&D collaboration with institutional partners is an antecedent to the establishment of new R&D collaboration with industrial partners, and that discontinuation of a particular type of R&D collaboration is likely to lead to a restart of such R&D collaborative effort. Strong prior innovative performance is expected to increase the probability that firms establish R&D collaborations with new partner types, except for R&D collaboration with competitors, since the most innovative firms may fear leakage of proprietary knowledge to rivals. We find broad support for these predictions in a large panel of Spanish innovating firms (2004-2011). Our findings highlight that it is not just the configuration of R&D collaborations with existing partner types that predicts tie formation with new partner types, but also the intertemporal pattern of prior R&D collaboration and managerial discretion provided by past innovation success.
    Date: 2017–10
  10. By: Margarita Carvalho (NIPE, University of Minho); João Cerejeira (Department of Economics/NIPE, University of Minho)
    Abstract: This study assess how manager’s characteristics may influence leverage decisions. Using data from European banks, the results show that younger managers are risk-prone and less conservative in leverage decisions. Moreover, it is observed that for higher levels of leverage more experienced managers tend to increase leverage. This is also true for managers with a longer tenure as they may bring their personal preferences towards risk and in this sense they will be more able to increase leverage. However, this effect differs according to the level of leverage at the manager’s appointment date. The inclusion of the decision horizon seems to validate the idea that a short-term managerial horizon enhances the self-interested behaviour of the manager and this may be reflected on capital structure decisions.
    Keywords: Quantile Regression; Banks; Capital Structure; Manager’s characteristics
    JEL: C21 G21 G32
    Date: 2019
  11. By: Abraham Park; Maretno Agus Harjoto
    Abstract: This paper is an exploratory study into the performance effects of corporate real estate (CRE) ownership for retail companies in the US. In the recent years, many brick-and-mortar retail stores have announced massive closings (as announced in 2018, 142 Sears locations will be closed, while Toys “R” Us filed for bankruptcy and announced shutting down all 800 locations). These struggles, along with the rise of e-commerce, signal significant changes in the CRE strategies for retail firms going forward. According to Gibson and Barkham (2001), CRE is closely linked to the business strategy of companies in the retail sector. As retail companies seek to assemble valuable CRE portfolios that can generate sustainable competitive advantages, inferior or inefficient locations can significantly undermine their long-term financial performance. On one hand, portfolio theory suggests that if real estate assets have a different risk profile than that of the operating business, then CRE ownership has the potential to provide diversification benefit to firms with high levels of property holdings. On the other hand, Tuzel (2010) has asserted that real estate risk is systematic, and CRE investment is riskier than investment in other types of capital for the firm due to slow depreciation of real estate. Therefore, firms with high real estate holdings are hurt more during recessions (Tuzel, 2010). For these reasons, CRE ownership has the potential to significantly impact the performance of retail companies.
    Keywords: Corporate real estate ownership; Performance Effects; Retail real estate
    JEL: R3
    Date: 2019–01–01
  12. By: Woon Weng Wong
    Abstract: Firms finance operations in one of three ways: retained earnings, debt or the issuance of equity. The Australian REIT sector experienced phenomenal growth in the early 2000s outperforming the ASX200 as funds borrowed aggressively to fuel expansion. However, the sector collapsed during the financial crisis of 2007-09 which was due in part by its heavy reliance on debt and increased exposure to financial risk. Since then, the sector has recovered under a low interest environment while capital structures have been reconfigured through a combination of debt retirement and equity raisings.This study aims to explore the relationship between debt and the performance of the REIT sector in Australia which is important as over AUD114bn are currently invested in the property sector via superannuation funds (pension funds) representing approximately 8 percent of total holdings.Utilising panel data from the Australian market over a 20 year period spanning multiple economic cycles, REIT performance was found to have an inverse relationship to leverage even after controlling for factors such as market risk, inflation and economic growth. The adverse effects are further compounded with increasingly higher levels of gearing. Additionally funds with low interest coverage ability and insufficient free cash flows also exhibit greater exposure to gearing risk.
    Keywords: capital asset pricing; Capital Structure; Corporate finance; REITs; securitised property
    JEL: R3
    Date: 2019–01–01
  13. By: Leonidas Koutsougeras (The University of Manchester); Manuel Santos (University of Miami); Fei Xu (Département d'économie (ECON))
    Abstract: It is well known that in the presence of asymmetric information, adverse selection has detrimental effects on possible exchanges. We go a step further, and present a game-theoretic setup in which under such adverse selection effects there are uncertain benefits for bribing unknown players’ types (e.g., individuals, committees, or companies). A policy maker may then want to design indirect anti-corruption policies based on triggering failures for bribery attempts. In our stylized framework, we get a complete unraveling of bribes. This result can be extended to more complex environments under fairly mild conditions on players’ payoff functions.
    Keywords: Corruption; Bribe; Adverse Selection
    JEL: D73 D82 D86
    Date: 2019–09

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.