nep-cfn New Economics Papers
on Corporate Finance
Issue of 2019‒12‒02
twenty-one papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Bank credit, liquidity and firm-level investment: are recessions different? By Ines Buono; Sara Formai
  2. Adverse Selection and Credit Certificates: Evidence from a P2P Platform By Hu, Maggie Rong; Li, Xiaoyang; Shi, Yang
  3. Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads By Benzoni, Luca; Garlappi, Lorenzo; Goldstein, Robert S.
  4. Nonbank Lending By Sergey Chernenko; Isil Erel; Robert Prilmeier
  5. Gender and Corporate Success: An Empirical Analysis of Gender-Based Corporate Performance on a Sample of Asian Small and Medium-Sized Enterprises By Taghizadeh-Hesary, Farhad; Yoshino, Naoyuki; Fukuda, Lisa
  6. Unproductive Debt and the Impairment of the Real Economy By Savvakis C. Savvides
  7. Leverage over the Firm Life Cycle, Firm Growth, and Aggregate Fluctuations By Dinlersoz, Emin M.; Kalemli-Ozcan, Sebnem; Hyatt, Henry; Penciakova, Veronika
  8. Challenges in Implementing the Credit Guarantee Scheme for Small and Medium-Sized Enterprises: The Case of Viet Nam By Dang, Le Ngoc; Chuc, Anh Tu
  9. Ownership structure and governance of the Italian firms: new evidence and effects on firm performance By Audinga Baltrunaite; Elisa Brodi; Sauro Mocetti
  10. Owners, external managers, and industrial relations in German establishments By Kölling, Arnd; Schnabel, Claus
  11. What is the Investment Loss due to Uncertainty? By Theodore Panagiotidis; Panagiotis Printzis
  12. Does Intergenerational Mobility Increase Corporate Profits? By James F. Albertus; Michael Smolyansky
  13. An Overconfident CEO VS A Rational Board: The Tale About Bank Risk-Taking By Anastasia Stepanova; Anastasia Suraeva
  14. Upwind sailors. Financial profile of innovative Italian firms during the double-dip recession By Daniele Pianeselli
  15. Do Local Bank Branches Reduce SME Credit Constraints? Evidence from Public-Private Bank Interaction By Gustafsson, Anders; Manduchi, Agostino; Stephan, Andreas
  16. Urban agglomerations and firm access to credit By Amanda Carmignani; Guido de Blasio; Cristina Demma; Alessio D'Ignazio
  17. The impact of international financial institutions on small and medium enterprises: The case of EIB lending in Central and Eastern Europe By Gereben, Áron; Rop, Anton; Petriček, Matic; Winkler, Adalbert
  18. Liquidity Risk and Funding Cost By Alexander Bechtel; Angelo Ranaldo; Jan Wrampelmeyer
  19. OTC discount By de Roure, Calebe; Mönch, Emanuel; Pelizzon, Loriana; Schneider, Michael
  20. Early Individual Stakeholders, First Venture Capital Investment, and Exit in the UK Startup Ecosystem By Albert Banal-Estañol; Inés Macho-Stadler; Jonás Nieto-Postigo; David Pérez-Castrillo
  21. Financial development and FDI inflows in China By Khan, Hameed; Khan, Umair

  1. By: Ines Buono (Bank of Italy); Sara Formai (Bank of Italy)
    Abstract: How do bank credit supply shocks affect firms' investment decisions? We use time-varying data on Italian firms and banks to disentangle shocks to the credit supply using bank mergers and acquisitions as an instrumental variable. We find that credit constraints can hamper the ability of firms to invest. Moreover, while firms normally tend to use liquidity as a substitute for bank credit, they do not do so during recessions, a fact that amplifies the cutback on productive investment following a bank credit supply shock.
    Keywords: Corporate investments, financing constraints, Mergers and Acquisitions
    JEL: G01 G31 G32
    Date: 2019–10
  2. By: Hu, Maggie Rong (Asian Development Bank Institute); Li, Xiaoyang (Asian Development Bank Institute); Shi, Yang (Asian Development Bank Institute)
    Abstract: Certificates are widely used as a signaling mechanism to mitigate adverse selection when information is asymmetric. To reduce information asymmetry between lenders and borrowers, Chinese peer-to-peer (P2P) lending platforms encourage borrowers to obtain various kinds of credit certificates. As P2P markets continue to develop, it is plausible that certification may play a pivotal role in ensuring investment efficiency. We perform the first empirical investigation of this issue, using unique data from Renrendai, one of the People’s Republic of China’s largest P2P lending platforms. We find that surprisingly, loans with more credit certificates experience a higher rate of delinquency and default. However, lenders remain attracted by higher certificates despite lower loan performance ex post, which results in distorted capital allocation and reduced investment inefficiency. Overall, we document a setting where credit certificates fail to serve as an accurate signal due to their costless nature, where poor-quality borrowers use more certificates to boost their credit profiles and improve their funding success. Possible explanations for this phenomenon include differences in marginal benefit of certificates for different borrower types, bounded rationality, cognitive simplification, and borrower myopia.
    Keywords: P2P lending; credit allocation; adverse selection; certificate; bounded rationality; cognitive simplification
    JEL: G10 G20 G21 G23
    Date: 2019–04–11
  3. By: Benzoni, Luca (Federal Reserve Bank of Chicago); Garlappi, Lorenzo (University of British Columbia, School of Business); Goldstein, Robert S. (University of Minnesota)
    Abstract: We propose a tractable model of a firm’s dynamic debt and equity issuance policies in the presence of asymmetric information. Because “investment-grade” firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the “asymmetric information channel” can generate jumps to default (from the creditors’ perspective) only for those "high-yield" firms that have exhausted their ability to borrow. Thus, our model deepens the “credit spread puzzle” for investment-grade firms.
    Keywords: Credit spreads; Capital structure; Corporate Default; Debt; Jumps to Default; Investments
    JEL: G12 G32 G33
    Date: 2019–09–02
  4. By: Sergey Chernenko; Isil Erel; Robert Prilmeier
    Abstract: We provide novel systematic evidence on the extent and terms of direct lending by nonbank financial institutions, and explore whether banks are still special in lending to informationally opaque firms. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, we show that nonbank lending is widespread, with 32% of all loans being extended by nonbanks. Nonbank borrowers are less profitable, more levered, and more volatile than bank borrowers. Firms with a small negative EBITDA are 34% more likely to borrow from a nonbank than firms with a small positive EBITDA. While nonbank lenders are less likely to monitor by including financial covenants, they are more likely to align incentives through the use of warrants. Controlling for firm and loan characteristics, nonbank loans carry 190 basis points higher interest rates. Overall, our results provide evidence of market segmentation in the commercial loan market, where bank and nonbank lenders utilize different lending techniques and cater to different types of borrowers.
    JEL: G21 G23 G30 G32
    Date: 2019–11
  5. By: Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute); Fukuda, Lisa (Asian Development Bank Institute)
    Abstract: Within a patriarchal society, women are placed in a precarious societal positioning that leads to a prevalence of gender inequality in education, financial literacy, and access to finance. In the context of Asia, where small and medium-sized enterprises (SMEs) are the backbone of most Asian economies and the financial sector is dominated by banks, women in entrepreneurship are susceptible to facing greater credit constraints relative to their male counterparts, which can compromise their corporate performance. We investigate whether there is a significant association between gender and success or failure of SMEs. Using a statistical analysis technique (principal component analysis) and running econometrics regressions on a random sample of 1,492 exporter SMEs from Iran, the research answers the question: is it plausible to conclude that female-owned SMEs are bound for lower corporate performance relative to those of male counterparts? Empirical results show that indeed, despite showing a good leverage status, female-owned SMEs perform lower relative to male counterparts as they have a higher default ratio and lower profitability, liquidity, and coverage. We provide policy suggestions, such as establishment of credit guarantee funds for easing the female-owned SMEs’ access to finance in Asia. Implementation of supportive policies for female-owned SMEs will have significant contribution to economic growth, employment, and ultimately, to gender equality.
    Keywords: economics of gender; small and medium-sized enterprises; corporate performance of SMEs; financial literacy gap; access to finance; gender inequality; financial inclusion
    JEL: G21 G32 J16
    Date: 2019–03–26
  6. By: Savvakis C. Savvides (Visiting Lecturer, John Deutsch Institute for the Study of Economic Policy, Queen’s University, Canada)
    Abstract: This paper discusses some of the issues and causes of modern-day failing economies. Unproductive debt and the “liberalisation” of financial services are identified to be the main reasons why the real economies of many developed countries are experiencing financial crises and are seriously threatened with recession. It highlights that the main driver that is preventing the efficient allocation of economic resources into productive uses, which enhance economic and social welfare, is the concentration of money and power. In addition, the elusive pursuit of return without risk inevitably leads to the transfer of existing wealth through a failing banking system which collaborates with hedge funds and global wealth management groups who seek low risk and high returns for the benefit of their wealthy clients. The end result is a gross misallocation of economic resources and lack of funding for new capital investment. Because of wasteful lending, commercial banks find themselves increasingly constrained by a balance sheet fatigue as a direct consequence of the resulting excessive levels of private debt. Hence, they resort to selling their loans to hedge funds and asset management companies. The paper points out that availability of funding does not create wealth unless it is directed towards economically viable projects. Moreover, it is argued that the conditions conducive to economic development hardly exist in highly indebted countries. Conversely, wasteful finance inevitably brings about financial crises and recessions. It is therefore imperative for governments to intervene and take corrective action to reduce debt and to stimulate domestic demand. It is also argued that there is no real return without risk. The promise of a return without risk leads financial intermediaries to direct funding towards the purchase of existing assets rather than being invested back in the real economy.
    Keywords: Economic development, repayment capability, project evaluation, corporate lending, credit risk.
    JEL: D61 G17 G21 G32 G33 H43
    Date: 2019–10
  7. By: Dinlersoz, Emin M. (U.S. Census Bureau); Kalemli-Ozcan, Sebnem (University of Maryland); Hyatt, Henry (U.S. Census Bureau); Penciakova, Veronika (Federal Reserve Bank of Atlanta)
    Abstract: We study the leverage of U.S. firms over their life cycles and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new dataset that combines private and public firms’ balance sheets with firm-level data from U.S. Census Bureau’s Longitudinal Business Database for the period 2005–12. Public and private firms exhibit different leverage dynamics over their life cycles. Firm age and size are systematically related to leverage for private firms but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession and that this deleveraging is associated with a reduction in firm revenue and employment growth. Exploiting sectoral variation, we find that the leverage dynamics of firms is also relevant for aggregate fluctuations.
    Keywords: leverage; firm dynamics; firm growth; firm life-cycle; financial constraints; borrowing limits; short-term debt; aggregate shocks
    JEL: E23 G32
    Date: 2019–11–01
  8. By: Dang, Le Ngoc (Asian Development Bank Institute); Chuc, Anh Tu (Asian Development Bank Institute)
    Abstract: Access to credit is still one of the greatest obstacles to the growth of small and medium-sized enterprises (SMEs) in Viet Nam. To date, only 39% of SMEs have bank loans. To cater to SMEs’ need for financial sources, especially formal sources such as the banking system, the Vietnamese government has implemented a large number of supporting programs, including the credit guarantee scheme (CGS) for SMEs, which it established in 2001. Through collecting, synthesizing, and analyzing data, we aim to study the challenges involved in implementing CGSs for SMEs as well as the causes of their poor performance. The fundamental reasons we find include the strict and impractical conditions for issuing credit guaranteed loans; the lack of adequate professional competence of staff involved in the credit guaranteeing task; the fragmented relationship between the credit institution and the CGS; and the lack of a credit database platform that facilitates access to finance for SMEs by providing comprehensive and reliable creditworthiness.
    Keywords: credit for SMEs; Vietnamese business environment; SMEs in Viet Nam
    JEL: E51 G23 G28 H81
    Date: 2019–04–08
  9. By: Audinga Baltrunaite (Bank of Italy); Elisa Brodi (Bank of Italy); Sauro Mocetti (Bank of Italy)
    Abstract: The paper examines the evolution of the ownership structures and governance of Italian firms, from the second half of the 2000s to the present, with a triple objective. First, it provides an up-to-date, census-based, descriptive analysis of the ownership structure and governance of Italian firms. Second, it examines the effects of the reduction of entry costs on firm demography and the characteristics of those entering the market. Third, it shows the correlations between institutional context, governance structures and company performance.
    Keywords: ownership structure, governance, family firms, firm performance
    JEL: G32 G34 G38
    Date: 2019–10
  10. By: Kölling, Arnd; Schnabel, Claus
    Abstract: Using data from the representative IAB Establishment Panel in Germany and estimating a panel probit model with fixed effects, this paper finds a negative relationship between the existence of owner-management in an establishment and the probabilities of having a works council or a collective bargaining agreement. We show that family firms which are solely, partially or not managed by the owners significantly differ in the presence of works councils and collective bargaining agreements. The probabilities of having works councils and collective agreements increase substantially if just some of the managers do not belong to the owner family. We argue that these differences cannot simply be attributed to an aversion of the owners against co-determination and unions but require taking account of the notion of socio-emotional wealth prevalent in family firms. In addition, our results support the idea that external managers mainly act as agents rather than stewards in family firms.
    Keywords: industrial relations,co-determination,works council,collective agreement,family firm,Germany
    JEL: J53 M54 G32
    Date: 2019
  11. By: Theodore Panagiotidis (University of Macedonia); Panagiotis Printzis
    Abstract: We investigate the effect of uncertainty on investment. We employ a unique dataset of 25000 Greek firms’ balance sheets for 14 years covering the period before and after the eurozone crisis. A dynamic factor model is employed to proxy uncertainty. The investment performance of 14 sectors is examined within a dynamic investment model. Robust GMM estimates of the investment rate model reveal a high degree of heterogeneity among these sectors. Overall uncertainty affects negatively investment performance and this effect substantially increased in the years of crisis. Agriculture and Mining are the least affected and the most affected ones include Manufacturing, Real Estate and Hotels. Focusing on the response of investment to uncertainty, it emerges that (relative) smaller firms are affected more compared to larger ones.
    Keywords: Greek firms, Uncertainty, Volatility, GMM, Panel data
    JEL: C23 D22 D81 D92 G31
    Date: 2019–08
  12. By: James F. Albertus; Michael Smolyansky
    Abstract: We find that firms located in areas with higher intergenerational mobility are more profitable. Building off the work of Chetty and Hendren (2018a and 2018b)—who provide measures of intergenerational mobility for all commuting zones (essentially, metropolitan areas) within the U.S.—we are the first to show the positive association between intergenerational mobility and corporate profitability. Our regressions compare firms in the same industry at the same point in time and fully control for time-varying state-level shocks. As such, our findings cannot be explained by either differences in industry composition across localities or by variation in state-level economic conditions; nor can our results be explained by differences in firm characteristics or by local economic conditions. Rather, we argue that our findings are best explained by intergenerational mobility influencing human capital formation. Areas with higher mobility do a better job in unlocking their residents’ innate talents, which in turn is associated with improved performance by locally headquartered firms. In essence, our results uncover a positive link between greater equality of opportunity and increased corporate profitability.
    Keywords: Intergenerational mobility ; Corporate profitability ; Human capital
    JEL: G30 G32 J24 J62 R10
    Date: 2019–11–20
  13. By: Anastasia Stepanova (National Research University Higher School of Economics); Anastasia Suraeva (National Research University Higher School of Economics)
    Abstract: Bank risk-taking behavior is of significant interest for researches and policy makers because financial failures due to excessive risk in this sector can have severe consequences for the bank’s numerous stakeholders and for the macroeconomic system overall. A growing literature investigates the main factors contributing to “well above average” risk. In particular, this study explains risk strategies in firms taking into account the bounded rationality of corporate governance agents. On a panel dataset of 110 listed US banks in the period of 2011-2016 empirical evidence is provided that excessive risk-taking in banks arises from the cognitive bias of the overconfidence of CEO decision-making. The study also presents how the impact of an overconfident CEO on risk-taking is affected considering the interaction of CEO overconfidence with the board of directors. It was revealed that the CEO's positive influence on risk is moderated if the board is an effective monitoring mechanism with the presence of independent directors who are experts in the financial sphere
    Keywords: bank risk-taking, CEO overconfidence, board of directors, behavioral finance, behavioral biases
    JEL: G21 G39
    Date: 2019
  14. By: Daniele Pianeselli (Bank of Italy)
    Abstract: We examine the issue of patents of Italian non-financial firms over the period 2008– 2012, during which the Italian economy was hit by two almost consecutive recessions. We classify firms according to their patenting activity, taking into consideration their financial characteristics. We find that innovation is concentrated in the manufacturing sector, where very few large firms maintain a persistent level of inventive capacity. Firms increased their average patenting slightly during the crisis compared to the period 2003–2007. Since Italian innovating firms are large and mature, a higher cash flow and a lower indebtedness allow them to fund patent-generating activity using internal resources. Moreover, innovating firms grow faster than non-innovating ones, even during recessions.
    Keywords: innovation, crisis, financial profile, Italian firms
    JEL: G01 G30 O30
    Date: 2019–10
  15. By: Gustafsson, Anders (Research Institute of Industrial Economics (IFN)); Manduchi, Agostino (Jönköping International Business School); Stephan, Andreas (Jönköping International Business School)
    Abstract: In the past few decades, commercial banks have substantially reduced the number of their branch offices. We address the question of whether or not the increased distance from the lenders correspondingly faced by many small and medium sized enterprises (SMEs) translates into a lower volume of loans. We use a unique dataset on loans from a state owned Swedish bank designed to support credit-constrained SMEs and interact their loan portfolio with the number of nearby commercial bank offices at the firm level along with an IV strategy to account for endogeneity. The estimation results strongly indicate that a larger number of local bank offices increases the local credit supply, and decreases the credit constraints of nearby SMEs.
    Keywords: Credit constraints; Relationship banking; State owned bank; Small business
    JEL: G28 H81 L26 L52 O38
    Date: 2019–11–20
  16. By: Amanda Carmignani (Bank of Italy); Guido de Blasio (Bank of Italy); Cristina Demma (Bank of Italy); Alessio D'Ignazio (Bank of Italy)
    Abstract: The paper investigates whether firms have better access to bank credit in areas with a larger degree of urbanization. It uses bank-firm data drawn from the Credit Register maintained at the Bank of Italy to devise an indicator of ease of access to credit. The paper proposes an instrumental variable strategy that uses as instruments past population density and urbanization driven by considerations of political economy. The results show that urbanization affects access to credit positively for construction firms, whose collateral greatly benefits from thicker real estate markets. No impact is found for service and manufacturing firms.
    Keywords: surbanization, access to credit
    JEL: G21 R11 R51
    Date: 2019–06
  17. By: Gereben, Áron; Rop, Anton; Petriček, Matic; Winkler, Adalbert
    Abstract: Does IFI funding provide support to SMEs receiving such funding? We assess the impact of funding by the European Investment Bank (EIB) on the performance of 5,223 SMEs in eight countries of Central and Eastern Europe (CEE) during 2008-2014. Our results, derived from propensity score matching and difference-in-difference estimation exercises, indicate that EIB lending has a positive effect on employment, revenues and profitability. This positive effect holds irrespective of the economy entering a prolonged crisis or a seeing a recovery in the years following EIB funding. Overall, our results provide support to the view that IFI funding makes a difference in a period characterized by financial and economic turmoil.
    Keywords: International financial institutions,SMEs,impact,financial crisis
    JEL: G01 H81 L25
    Date: 2019
  18. By: Alexander Bechtel; Angelo Ranaldo; Jan Wrampelmeyer
    Abstract: We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Borrowers with high liquidity risk are willing to pay a markup to lock in their funding, independent of risk premiums demanded by lenders. We test the channel using unique trade-by-trade data and reveal systematic an persistent differences in borrowers' funding liquidity risk that lead to systematic and persistent heterogeneity in funding costs. Our results have important implications for financial stability, the transmission of monetary policy, and banks' asset and liability management
    Keywords: Funding liquidity risk, short-term interest rates, risk premiums, funding costs, interbank market
    JEL: G12 G18 G21 E43 E52 D40
    Date: 2019–05
  19. By: de Roure, Calebe; Mönch, Emanuel; Pelizzon, Loriana; Schneider, Michael
    Abstract: We study price dispersion and venue choice in the interdealer market for German sovereign bonds, where an exchange and over-the-counter segments coexist. We show that 85% of OTC traded prices are favorable with respect to exchange quotes, indicating the prevalence of an OTC discount. This discount is sizeable and driven by both search and information frictions. More than 75% of volume is transacted via interdealer brokers in trades that are larger, have less price impact, and less discount than comparable bilateral OTC trades. Dealers trade on the exchange for immediacy, highlighting the complementary roles played by the different segments.
    Keywords: Market Microstructure,Hybrid Markets,Venue Choice,Interdealer Brokerage,Fixed-Income,OTC Markets,Intermediation Frictions,Search Frictions,Information Frictions
    JEL: D4 D47 G1 G14 G24
    Date: 2019
  20. By: Albert Banal-Estañol; Inés Macho-Stadler; Jonás Nieto-Postigo; David Pérez-Castrillo
    Abstract: This paper analyzes the effects of the individual stakeholders in the early stages of a startup on the perfomance and eventual success of the startup. We show first how the "quantity" and "quality" of founders, directors and individual investors affect the first VC investment, in terms of the type, quantity and quality of the first VC investors. Subsequently, we show that the characteristics of the early stakeholders also affect eventual startup exit and success, both directly as well as indirectly, through the first VC investment. Thus some of the effects that may have been attributed to VC investors should in fact be attributed to the individual stakeholders. As a result, one may draw wrong conclusions about the effects of first VC investment if the pre-institutional features are not included in the analysis.
    Keywords: startups, venture capital, founders, individual investors
    JEL: M13 G32 G24
    Date: 2019–11
  21. By: Khan, Hameed; Khan, Umair
    Abstract: In this paper, the authors revisit the nexus of financial development and FDI inflows in Chinese perspective, incorporating the vital role of institutional quality and other important variables in this paradigm. Using ARDL bound testing and VECM procedures, they establish causality by exploiting variations in financial development and FDI. To unmask the shortcomings in the previous literature, the authors use a composite index of financial development, recently developed by the IMF, since it provides a more fine-grained analysis. The results show that there is a long-run relationship between FDI and financial development. Bidirectional causality is confirmed by using VECM. The inclusion of control variables, e.g., institutional quality, transport infrastructure, per capita GDP, trade openness, domestic investment, natural resources rent, is robust in the analysis. The positive role of financial development in FDI inflows is of utmost importance for policymakers and the Chinese government. Several policy implications are given in this study.
    Keywords: financial development,FDI,ARDL,liberalization,capital market,money market
    JEL: C22 F23 F38 G21 G32 O17
    Date: 2019

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