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on Corporate Finance |
| By: | Akcigit, Ufuk (University of Chicago); Dinlersoz, Emin M. (U.S. Census Bureau); Greenwood, Jeremy (University of Pennsylvania); Penciakova, Veronika (Federal Reserve Bank of Atlanta) |
| Abstract: | Venture capital (VC) and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and initial patent quality than non-VC-backed ones. VC backing increases a startup's likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth. |
| Keywords: | venture capital; assortative matching; endogenous growth; IPO; management; mergers and acquisitions; research and development; startups; synergies; taxation; patents |
| JEL: | E13 E22 G24 L26 O16 O31 O40 |
| Date: | 2019–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2019-17&r=all |
| By: | Boyarchenko, Nina (Federal Reserve Bank of New York); Mueller, Philippe (Warwick Business School) |
| Abstract: | Productive firms can access credit markets directly by issuing corporate bonds or by borrowing through financial intermediaries. In this paper, we study the cyclical properties of corporate credit provision through these two types of debt instruments in major advanced economies. We argue that the cyclicality of corporate credit is closely related to the cyclicality of the types of financial intermediaries active in the provision of credit. When a debt instrument is held by institutions that manage their balance sheets through debt issuance, credit provision through that instrument is procyclical. But when a debt instrument is held by institutions that manage their balance sheets through equity issuance, credit provision through that instrument is countercyclical. We show that cross-country differences in the cyclicality of corporate credit can be ascribed to differences in the composition of the aggregate financial sector, and not to differences in the balance sheet management practices of each type of financial intermediary. |
| Keywords: | intermediated credit; leverage cycles; corporate bonds |
| JEL: | G21 G22 G23 G32 |
| Date: | 2019–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:895&r=all |
| By: | Berlin, Mitchell (Federal Reserve Bank of Philadelphia); Nini, Gregory P. (Federal Reserve Bank of Philadelphia); Yu, Edison (Federal Reserve Bank of Philadelphia) |
| Abstract: | We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants—so-called covenant-lite loans—borrowing firms’ revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis. |
| Keywords: | covenant; cov-lite; institutional loans; control rights; credit agreements |
| JEL: | G21 G23 G29 |
| Date: | 2019–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:19-41&r=all |
| By: | Piet Eichholtz (Maastricht University); NAGIHAN MIMIROGLU (Maastricht University); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Erkan Yönder (John Molson School of Business, Concordia University) |
| Abstract: | The composition of lenders has changed dramatically since the crisis, and non-bank lenders have become important players in the commercial mortgage{backed securities (CMBS) markets. Comparing banks to non-bank lenders, we investigate whether the geographical distance between lenders, borrowers and their properties is reflected in the pricing of US mortgages that were included in US CMBS pools during the 2000 to 2017 period. We find that a doubling in bank borrower distance is associated with a 2.5 basis point increase in the spread, and that this effect is more pronounced if the loan is collateralized by a riskier property. Geographical distance does not seem to have any effect on the loan spread for mortgages granted by non-bank lenders. The difference in loan pricing across originator types (even after controlling for key mortgage and property characteristics) suggests banks and non-bank lenders have different incentives, lending technologies, and/or different types of borrowers. |
| Keywords: | CMBS, non{bank lending, geographical distance, asymmetric information, loan spread. |
| JEL: | G21 G32 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1958&r=all |
| By: | Babina, Tania (Columbia University); Ma, Wenting (University of Massachusetts Amherst); Moser, Christian (Federal Reserve Bank of Minneapolis); Ouimet, Paige P. (University of North Carolina at Chapel Hill); Zarutskie, Rebecca (Board of Governors of the Federal Reserve System) |
| Abstract: | Why do young firms pay less? Using confidential microdata from the US Census Bureau, we find lower earnings among workers at young firms. However, we argue that such measurement is likely subject to worker and firm selection. Exploiting the two-sided panel nature of the data to control for relevant dimensions of worker and firm heterogeneity, we uncover a positive and significant young-firm pay premium. Furthermore, we show that worker selection at firm birth is related to future firm dynamics, including survival and growth. We tie our empirical findings to a simple model of pay, employment, and dynamics of young firms. |
| Keywords: | Young-firm pay premium; Selection; Worker and firm heterogeneity; Firm dynamics; Startups |
| JEL: | D22 E24 J30 J31 M13 |
| Date: | 2019–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:0021&r=all |
| By: | Daniel Baksa (Institute for Capacity Development, International Monetary Fund and Central European University); Istvan Konya (Institute of Economics, Centre for Economic and Regional Studies, and University of Pécs and Central European University) |
| Abstract: | We study the role of productivity convergence and financial conditions in the recent growth experience of Hungary. We build a stochastic, small-open economy growth model with productivity convergence, capital accumulation and external borrowing. Using empirically identified processes for productivity and the external interest premium, we simulate the effects of two unexpected, permanent changes on Hungarian growth. The first change is the sharp productivity slowdown starting in 2006, and the second is the tightening of external financial conditions starting in 2009. Simulating our model, we show that the empirically identified productivity and interest premium processes - along with the two unexpected permanent changes and regular i.i.d. productivity and interest premium innovations – capture the main medium-run dynamics of the Hungarian economy both before and after the global financial crisis. Running counterfactuals, we also find that the observed slowdown in GDP per capita growth was mostly driven by productivity, while the tightening of external financing conditions is important to understand investment behavior and the net foreign asset position. |
| Keywords: | economic growth, convergence, productivity, interest premium, Hungary |
| JEL: | E13 E22 F43 O47 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1916&r=all |
| By: | Angelo D'Andrea; Nicola Limodio |
| Abstract: | This paper provides empirical evidence on the effect of high-speed internet on financial technology and banking in Africa. Our test combines data on 551 banks and 28,171 firms with the staggered arrival of fibre-optic submarine cables in Africa. High-speed internet promoted private-sector lending by banks, and credit and sales by firms. These results are consistent with an extensive adoption of financial technologies, like real-time gross settlement systems (RTGS), lowering transaction costs in African interbank markets. We find that liquidity management considerably changed for banks being weak interbank users prior to high-speed internet. In fact, such banks lowered their internal liquidity hoarding by 10%, increased interbank transactions by 40% and expanded lending by 37%. Analogously, firms in countries with weak pre-existing interbank markets presented stronger effects at the cable arrival. These results are consistent with high-speed internet promoting financial technology adoption, liquidity and credit. |
| Keywords: | Fintech, Banking, Investment, Financial Development |
| JEL: | G2 G21 O16 O12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp19124&r=all |
| By: | Lin, Chen (The University of Hong Kong - Faculty of Business and Economics); Schmid, Thomas (The University of Hong Kong - Faculty of Business and Economics); Weisbach, Michael S. (Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)) |
| Abstract: | Extreme temperatures lead to large fluctuations in electricity demand and wholesale prices of electricity, which in turn affects the optimal production process for firms to use. Using a large international sample of planned power plant projects, we measure the way that electric utilities’ investment decisions depend on the frequency of extreme temperatures. We find that they invest more in regions with more extreme temperatures. These investments are mostly in flexible gas and oil-fired power plants that can easily adjust their output to improve their operating flexibility. Our results suggest that climate change is becoming a meaningful factor affecting firms’ behavior. |
| JEL: | G30 G31 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2019-26&r=all |
| By: | Delle Monache, Davide (Bank of Italy); Petrella, Ivan (University of Warwick); Venditti, Fabrizio (European Central Bank) |
| Abstract: | In this paper we develop a general framework to analyze state space models with timevarying system matrices, where time variation is driven by the score of the conditional likelihood. We derive a new filter that allows for the simultaneous estimation of the state vector and of the time-varying matrices. We use this method to study the timevarying relationship between the price dividend ratio, expected stock returns and expected dividend growth in the US since 1880. We find a significant increase in the long-run equilibrium value of the price dividend ratio over time, associated with a fall in the longrun expected rate of return on stocks. The latter can be attributed mainly to a decrease in the natural rate of interest, as the long-run risk premium has only slightly fallen. |
| Keywords: | state space models ; time-varying parameters ; score-driven models ; equity premium ; present-value models ; |
| JEL: | C32 C51 E44 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wrkemf:29&r=all |
| By: | Hall, Arden (Federal Reserve Bank of Philadelphia); Maingi, Ramain Quinn (New York University) |
| Abstract: | Borrowers terminate residential mortgages for a variety of reasons. Prepayments and defaults have always been distinguishable, and researchers have recently distinguished between prepayments involving a move and other prepayments. But these categories still combine distinct decisions. For example, a borrower may refinance to obtain a lower interest rate or to borrow a larger amount. By matching mortgage servicing and credit bureau records, we are able to distinguish among several motivations for prepayment: simple refinancing, cash-out refinancing, mortgage payoff, and move. Using multinomial logit to estimate a competing hazard model for these types of prepayments plus default, we demonstrate that these outcomes are distinct, with some outcomes showing quite different relationships to standard predictive variables, such as refinance incentive, credit score, and loan-to-value ratio, than in models that combine outcomes. The implication of these findings is that models that aggregate prepayment types do not adequately describe borrower motivations. |
| Keywords: | mortgage finance; prepayment; default; nested logit model |
| JEL: | D12 R21 |
| Date: | 2019–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:19-39&r=all |
| By: | Federico Carril-Caccia (University of Deusto (Spain).); Juliette Milgram Baleix (University of Granada (Spain).); Jordi Paniagua (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).) |
| Abstract: | The present work assesses the impact of terrorism suffered by a country directly and by neighbour countries on the capacity of attracting greenfield investment. To this end, we estimate a theoretical consistent structural gravity equation which accounts for most known estimation biases: “home bias”, endogeneity and multilateral resistance. We exploit a dataset which covers domestic and foreign investment of 162 countries during 2003-2016 in both extensive and intensive margins. Our methodological strategy allows us to identify the effect of a country-specific time-varying characteristic (terrorism), while controlling for time-varying multilateral resistance. Relative to domestic firm creation, results show that terrorism refrains more the number of greenfield projects. Then, our study highlights that foreign investors are reluctant to invest in a country or in a region affected by terrorism. Though, our results also evidence that good governance appears as an effective tool to counterbalance this damage. |
| Keywords: | Home bias, gravity equation, terrorism, FDI, greenfield investments, institutions |
| JEL: | C23 F21 F23 O17 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1913&r=all |
| By: | Abootaleb Shirvani; Svetlozar T. Rachev; Frank J. Fabozzi |
| Abstract: | In this paper, we address one of the main puzzles in finance observed in the stock market by proponents of behavioral finance: the stock predictability puzzle. We offer a statistical model within the context of rational finance which can be used without relying on behavioral finance assumptions to model the predictability of stock returns. We incorporate the predictability of stock returns into the well-known Black-Scholes option pricing formula. Empirically, we analyze the option and spot trader's market predictability of stock prices by defining a forward-looking measure which we call "implied excess predictability". The empirical results indicate the effect of option trader's predictability of stock returns on the price of stock options is an increasing function of moneyness, while this effect is decreasing for spot traders. These empirical results indicate potential asymmetric predictability of stock prices by spot and option traders. We show in pricing options with the strike price significantly higher or lower than the stock price, the predictability of the underlying stock's return should be incorporated into the option pricing formula. In pricing options that have moneyness close to one, stock return predictability is not incorporated into the option pricing model because stock return predictability is the same for both types of traders. In other words, spot traders and option traders are equally informed about the future value of the stock market in this case. Comparing different volatility measures, we find that the difference between implied and realized variances or variance risk premium can potentially be used as a stock return predictor. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1911.02194&r=all |
| By: | Christophe Chorro (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Fanirisoa Rahantamialisoa Hasinavonizaka Zazaravaka (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, University of Ca’ Foscari [Venice, Italy]) |
| Abstract: | In this paper, we discuss the pricing performances of a large collection of GARCH models by questioning the global synergy between the choice of the affine/non-affine GARCH specification, the use of competing alternatives to the Gaussian distribution, the selection of an appropriate pricing kernel and the choice of different estimation strategies based on several sets of financial information. Furthermore, the study answers an important question in relation to the correlation between the performance of a pricing scheme and its ability to forecast VIX dynamics. VIX analysis clearly appears as a parsimonious first-stage filter to discard the worst GARCH option pricing models. |
| Keywords: | GARCH option pricing models,GARCH implied VIX,estimation strategies,non-monotonic stochastic discount factors |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02323959&r=all |
| By: | Bose, Udichibarna; Mallick, Sushanta; Tsoukas, Serafeim |
| Abstract: | Financial reforms have been found to be highly important in promoting aggregate productivity. Yet, the linkage between access to finance, firm-level productivity, and exporting performance has been overlooked in the literature. We fill this gap using a rich dataset of 11,612 Indian firms over the period 1988-2014 to study the impact of a unique financial policy intervention on firm performance. We document a significant effect of capital-account liberalization through the lens of an export-oriented policy initiative on firms’ productivity and consequently on their exporting activity. Finally, the beneficial effect of the policy change is more pronounced for financially vulnerable firms, as measured by high debt dependence and low levels of liquidity. |
| Keywords: | Productivity; Exporting; Financing; FX market liberalization |
| Date: | 2019–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:esy:uefcwp:25847&r=all |
| By: | Michael Kurz; Stefanie Kleimeier |
| Abstract: | Following the 2008 financial crisis, policy makers considered regulations that restrict banks' activities which were motivated by concerns that banks use central bank borrowing, government guarantees, or subsidies to fund securities trading instead of lending to the real economy. Using a global sample of 132 major banks from 2003 to 2016, we find that banks' securities trading is indeed associated with decreased loan supply. Effects are stronger for domestic lending markets, during crisis periods, and in countries with deeper financial markets. However, corporate capital expenditures and employment growth are unaffected, suggesting that policy makers' concerns are only partly justified. |
| Keywords: | Credit Supply; Proprietary Trading; International Lending; Banking; Corporate Loans |
| JEL: | G01 G21 G28 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:657&r=all |