nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒02‒03
twelve papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data By Youngju Kim; Seohyun Lee; Hyunjoon Lim
  2. Corporate governance research in Nigeria: a review By Ozili, Peterson K
  3. Financial constraints and intangible investments. Do innovative and non-innovative firms differ? By Sandro Montresor; Antonio Vezzani
  4. Impact of IFRS 9 on the cost of funding of banks in Europe By Fatouh, Mahmoud; Bock, Robert; Ouenniche, Jamal
  5. Using Revenue Sharing for Higher Risk and Return Business Ventures in Microfinance: An Experimental Study By Jeremy Clark; John Spraggon
  7. Forward Guidance and Corporate Lending By Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
  8. Firm or bank weakness? Access to finance since the European sovereign debt crisis By Corbisiero, Giuseppe; Faccia, Donata
  9. The big-city bias in access to finance: evidence from firm perceptions in almost 100 countries By Lee, Neil; Luca, Davide
  10. Corporate Governance, Noise Trading and Liquidity of Stocks By Jianhao Su
  11. Alternative Financing Instruments for African Economies By Jane Mpapalika
  12. Precautionary Saving in a Financially-Constrained Firm By Andrew B. Abel; Stavros Panageas

  1. By: Youngju Kim (Bank of Korea); Seohyun Lee (The International Monetary Fund and Bank of Korea); Hyunjoon Lim (Bank of Korea)
    Abstract: This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the negative effect of uncertainty on bank loans. In addition, we find that the negative effect is stronger for relatively larger firms or financially unconstrained firms with low leverage or financial slack, once credit supply is controlled for. We confirm the same results in the analysis of firm investment, suggesting that high uncertainty may transmit to investment and bank loans mainly through the real options effects.
    Keywords: Firm-level uncertainty, Bank loan, Investment
    JEL: D84 E22
    Date: 2019–11–06
  2. By: Ozili, Peterson K
    Abstract: This paper analyzes the state of corporate governance (CG) research in Nigeria. It consolidates the literature to identify the current state of CG research in Nigeria and to identity opportunities for future research in the literature. Among other things, the review show that the Board of directors (BOD) is the most explored corporate governance mechanism in the Nigerian corporate governance literature. Secondly, most studies focus on some governance mechanisms but ignore other governance mechanisms in firms. Thirdly, there is some consensus that the corporate governance failures in Nigeria is caused by multiplicity of factors mainly, lack of political will by the government to enforce corporate governance laws, deliberate refusal to comply with existing CG laws by politically connected firms, weak compliance by firms, weak enforcement by regulators, and conflicting codes in the country’s corporate governance codes. Also, the review shows that current CG studies do not systematically build on previous Nigerian CG studies which indicates a lack of direction in the Nigerian corporate governance literature. Regarding methodology, the findings reveal that most Nigerian CG studies are merely experimenting different methods of analysis without necessarily advancing the literature in a significant way. These findings have implications.
    Keywords: Corporate governance, Nigeria, Africa, firm performance, ownership structure, Board size, gender diversity, bank profitability, tobin Q, audit committee
    JEL: A1 A12 G2 G3 G34 G38 M12 M2 M20
    Date: 2020–01–19
  3. By: Sandro Montresor (School of Advanced Studies, Gran Sasso Science Institute); Antonio Vezzani (Roma Tre University)
    Abstract: We investigate the extent to which financial constraints hamper the firms’ investment in intangibles. Drawing on the extant literature, we maintain that a distinction should be kept between innovators and non-innovators. Moreover, we argue that such a distinction should be investigated along the whole spectrum of intangibles firms invest and by addressing the risks of reverse causality and simultaneity bias in the relationship. Through an original quasi-panel extension of a recent European Innobarometer survey, we estimate two sets of recursive bivariate probit models – for innovative and non-innovative firms’ investments – from which interesting results emerge. Financial barriers hamper the investment of both kinds of firms only for R&D, design, and organisation and business processes. With respect to other intangibles, instead, financial barriers act only on innovators (or non-innovators) or are even absent. Furthermore, the hampering role of financial barriers distributes differently across different intangibles between innovators and non-innovators.
    Keywords: &D, intangibles, innovation, financial barriers.
    JEL: O30 O32 O33
    Date: 2019–12
  4. By: Fatouh, Mahmoud (Bank of England and University of Essex); Bock, Robert (University of Edinburgh); Ouenniche, Jamal (University of Edinburgh)
    Abstract: On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland. We confirm the existence of low-risk anomaly for banks’ equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.
    Keywords: IFRS 9; low-risk anomaly; cost of funding; cost of equity; leverage; expected loss model; asset beta
    JEL: D92 G21 G28 G31 L51
    Date: 2020–01–16
  5. By: Jeremy Clark (University of Canterbury); John Spraggon
    Abstract: We report a group liability microfinance lab experiment that tests a mechanism to raise repayment rates among borrowers whose business plans carry higher exogenous risk and return. The mechanism is optional revenue sharing among the group of borrowers, agreed to before their individual business outcomes are realized and loan repayment decisions are made. Such revenue sharing makes loan repayment optimal under more business outcome states, thus increasing the expected benefit to each borrower of repayment to qualify for future loans. We further test the effect of allowing the borrowers to renege on revenue sharing agreements after learning their business outcomes, prior to making their loan repayment decisions. Our results illustrate the problem that exogenously higher risk/return borrowing groups achieve lower loan repayment rates than lower risk/return borrowing groups. We then find that introducing optional revenue sharing significantly increases the high risk borrowers’ repayment rates, but that most of this gain is lost when successful borrowers can renege on revenue sharing agreements.
    Keywords: Microfinance; Revenue sharing; Profit sharing; Risk; Adverse selection
    JEL: G21 O16 O17 O43
    Date: 2020–01–01
  6. By: Paramita, Ratna
    Abstract: This study aimed to examine the effect of conservatism on equity valuation with corporate governance variable as moderating variable.The study was conducted on 365 manufacturing companies that meet the criteria of observations in 2011 to 2015. The variables used in this research is accounting consevatism as independent variables, corporate governance as moderating variable and equity valuation as dependen variable. The board of directors and manajerial ownership in this article as a proxy of corporate governance. Studies show conservatism affect the equity valuation. The higher the level of conservatism that increasingly reflects the reality of the financial statements and this would be a good response from investors. Board of commisioners and managerial ownership does not strengthen the influence of conservatism on equity valuation. Manejerial ownership in manufacturing companies does not affect the management to apply accounting conservatism.
    Date: 2018–01–16
  7. By: Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
    Abstract: We suggest that forward guidance, via “binding” the central bank’s actions and creating associated expectations, fundamentally affects bank-lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Moreover, banks more easily initiate new lending relationships with lower spreads, and the loan syndicates are less concentrated.
    Keywords: Forward guidance; Monetary policy transmission; Bank lending; Corporate loans; Loan spreads; Syndicate structure; Bank-firm relationships
    JEL: E43 E52 E58 G21
    Date: 2020–01–15
  8. By: Corbisiero, Giuseppe; Faccia, Donata
    Abstract: This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers’ and lenders’ characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area. JEL Classification: E44, F36, G01, G21
    Keywords: bank lending, credit crunch, credit supply, European sovereign debt crisis
    Date: 2020–01
  9. By: Lee, Neil; Luca, Davide
    Abstract: There is mounting evidence in the developed world to suggest that there is geographical variation in access to finance. At the same time, there is a growing interest in the advantages of major cities in emerging economies in providing better access to services. Yet there is little evidence on spatial variation in access to finance in the developing world. In this article, we address this gap. We propose that one important function of big cities is to provide better credit markets, but that-as countries develop-this 'big city bias' is likely to decline. We test these hypotheses using data on over 80,000 firms in 97 countries and provide new evidence that firms in large cities-with more than 1 million inhabitants-are less likely to perceive access to capital as a constraint. However, this big-city bias in access to finance declines as countries develop.
    Keywords: access to finance; urbanisation; credit markets; cities; firm financing
    JEL: G10 O16 R51
    Date: 2019–01–01
  10. By: Jianhao Su
    Abstract: Our main task is to study the effect of corporate governance on the market liquidity of listed companies' stocks. We establish a theoretical model that contains the heterogeneity of investors' beliefs to explain the mechanisms by which corporate governance improves liquidity of the corporate stocks. In this process we found that the existence of noise traders who are semi-informed in the market is an important condition for corporate governance to have the effect of improving liquidity of the stocks. We further find that the strength of this effect is affected by the degree of noise traders' participation in market transactions. Our model reveals that corporate governance and the degree of noise traders' participation in transactions have a synergistic effect on improving the liquidity of the stocks.
    Date: 2020–01
  11. By: Jane Mpapalika
    Abstract: This paper investigates the alternative financing instruments that can be used to hedge sovereign risks and finance development in African countries. Many heavily indebted countries are exposed to external risks especially the exchange rate shocks due to limited use of hedging instruments. We propose alternative financing instruments to minimize sovereign risks and the cost of debt. Our paper uses the standard model for pricing options, the Black-Scholes model to determine the fair value of options. The findings show that barrier options have an added advantage over plain vanilla options because of its knock-ins and knock-outs features hence they are the most affordable to use. An important aspect of the effective debt management policies should be on developing local bond market to access alternative financing instruments in the world capital market.
    JEL: G23
    Date: 2020–01–20
  12. By: Andrew B. Abel; Stavros Panageas
    Abstract: For a firm that cannot raise external funds, cash on hand serves as precautionary saving. We derive a closed-form expression for the target level of cash on hand in the presence of persistent cash flows. Contrary to conventional wisdom, a mean-preserving increase in the volatility of cash flow can decrease this target. Over the set of admissible parameter values the average impact of volatility on the target is zero. Endogenous selection, reflecting termination of firms that run out of cash, leads to a positive average impact of volatility on the target level of cash, consistent with empirical findings.
    JEL: E2 E21 G3 G35
    Date: 2020–01

This nep-cfn issue is ©2020 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.
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