nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒02‒17
fourteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Corporate investment and the exchange rate: The financial channel By Ryan Niladri Banerjee; Boris Hofmann; Aaron Mehrotra
  2. The business angel portfolio under the European Angels Fund: An empirical analysis By Gvetadze, Salome; Pal, Kristian; Torfs, Wouter
  3. Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services By Paul M. Guest; Marco Nerino
  4. Factor shares and the rise in corporate net lending By Jan Behringer
  5. Agency Theory and Bank Governance: A Study of the Effectiveness of CEO's Remuneration for Risk Taking By Gérard Mondello; Nissaf Ben Ayed
  6. Crossing the credit channel: credit spreads and firm heterogeneity By Anderson, Gareth; Cesa-Bianchi, Ambrogio
  7. Case Analysis: Enron; Ethics, Social Responsibility, and Ethical Accounting as Inferior Goods? By Rashid, Muhammad Mustafa
  8. Social Responsibility and Firm's Objectives By Michele Fioretti
  9. Entrepreneurial Access to Finance in the US By Inessa Love
  10. Investment behavior and firms' financial performance: A comparative analysis using firm-level data from the wine industry By Claudiu Albulescu
  11. Tax-induced earnings management and book-tax conformity: International evidence from unconsolidated accounts By Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
  12. How Do Credits Dollarize? The Role of Firm’s Natural Hedges, Banks’ Core and Non-Core Liabilities By Fatih Yilmaz
  13. Enterprising women in Southern Africa: When does land ownership matter? By Brixiová, Zuzana; Kangoye, Thierry; Tregenna, Fiona
  14. Venture Capital Contracts By Ewens, Michael; Gorbenko, Alexander; Korteweg, Arthur

  1. By: Ryan Niladri Banerjee; Boris Hofmann; Aaron Mehrotra
    Abstract: Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
    Keywords: corporate investment, emerging markets, exchange rates, financial channel, financial constraints
    JEL: E22 F31 F41 O16
    Date: 2020–02
  2. By: Gvetadze, Salome; Pal, Kristian; Torfs, Wouter
    Abstract: This paper analyses the Business Angel (BA) portfolio of the European Angels Fund (EAF), an initiative of the European Investment Fund, which engages in co-investment relationships with experienced business angels across Europe. It uses EIF's proprietary database to shed light on a specific subset of the European BA sector. The first section covers the basic characteristics of EAF's BAs and draws comparisons with existing studies wherever possible. In addition, it provides a basic description of EAF's investment portfolio, outlining the geographical distribution of its portfolio companies and the sector in which they are active. The next section focusses on BAs' investment practices. For example, we take a closer look at the geographical and sectoral investment strategies, and investigate aspects related to investment timing. We also examine the innovative capacity of the investees, by analysing patenting activity during the first years of the EAF program. Finally, a brief descriptive analysis provides an overview of the post-investment growth patterns experienced by EAF's investee companies.
    Keywords: EIF,business angels,venture capital,equity financing
    JEL: G24 G38 L25
    Date: 2020
  3. By: Paul M. Guest; Marco Nerino
    Abstract: This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of – 1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.
    Keywords: Corporate Governance Ratings; Information Intermediaries; Event Study; Information Content; Institutional Shareholder Services
    JEL: G14 G24 G34
    Date: 2019–12
  4. By: Jan Behringer
    Abstract: The corporate sector has turned from a net borrowing position to a net lending position in many advanced countries over the past decades. This phenomenon is rather unusual as the corporate sector had historically borrowed funds from other sectors in the economy. In this paper, we analyze how changes in the distribution of income between wages and profits have affected corporate net lending in a sample of 40 countries for the period 1990-2016. A consistent finding is that an increase (decrease) in the corporate profit share leads to an increase (decrease) in corporate net lending, controlling for other corporate net lending determinants. We disentangle the effects of the profit share on corporate saving and investment and explore a number of alternative explanations of our results, including changes in the cost of capital, shifts in the composition of industrial sectors, the growing importance of intangible capital, and a temporary crisis phenomenon. We conclude that factor shares are an important driver of macroeconomic trends and that the rise in corporate profits has contributed considerably to the improvement in the corporate net lending positions across countries.
    Keywords: Corporate saving, investment, income distribution, cost of capital
    JEL: E21 E22 E25 G30
    Date: 2020
  5. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS); Nissaf Ben Ayed (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: This article studies the links between governance and risk-taking in banks. For the agency theory, when information are asymmetric, the disciplinary mechanisms of governance have a moderating effect on the remuneration policy and, consequently, the managers' choice concerning the balance between assets' revenue and risk. The following model shows that: i) The presence of effective disciplinary mechanisms does not reduce the latitude of managers to award themselves a high level of wages; ii) This binds the control of risk-taking through remuneration structures. Remuneration is not a determining factor in explaining risk-taking. iii) Contrary to the agency theory's teaching, excessive risk-taking is not induced by asymmetric information.
    Keywords: Agency theory, Bank governance, information asymmetry, CEO's remuneration, bank risk
    JEL: G2 G2 G24 G3 G34
    Date: 2020–02
  6. By: Anderson, Gareth (Bank of England); Cesa-Bianchi, Ambrogio (Bank of England, CFM and CEPR)
    Abstract: We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms’ expected default — the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.
    Keywords: Monetary policy; heterogeneity; credit spreads; excess bond premium; credit channel; financial accelerator; event-study; identification
    JEL: E44 F44 G15
    Date: 2020–02–07
  7. By: Rashid, Muhammad Mustafa
    Abstract: In 2001 soon after the Asian Crises of 1997-1998, the Dotcom Bubble, 9/11, the Enron crises triggered a fraud crisis in Wall Street that impacted the market to the core. Since then scandals such as the Lehman Brothers and WorldCom in 2007-2008 and the Great Recession have surpassed it, Enron still remains one of the most important cases of fraudulent accounting. In 2000’s even though the financial industry had become highly regulated, deregulation of the energy industry allowed companies to place bets on future prices. At the peak of the dotcom bubble Enron was named as a star innovator but when the dotcom bubble burst, Enron’s plan to build high speed internet did not flourish and investors started to realize losses. Furthermore, the financial losses of the operations were hid using the market to market accounting technique instead of book value and using special purpose entities to hide debt. The root cause that was identified as a company with a toxic corporate culture focused on officer compensation rather than social responsibility and hence faulty leadership. Is it possible then that; ethical accounting practices, social responsibility and ethics all become inferior goods as income rises in an ‘irrationally exuberant’ era?
    Keywords: Keywords: Enron (ENE, ENRN), Dotcom Bubble, Accounting Fraud, Deregulation, Speculation, Corporate Culture, Social Responsibility, Government Intervention, Risk Management, Consumer Behavior, Energy Markets
    JEL: G32 H12 K32 K4 M1 M12 M14 M4 N0
    Date: 2020–01–19
  8. By: Michele Fioretti (Département d'économie)
    Abstract: This paper shows that a firm’s objectives can extend beyond profit maximization. I use data from a for-profit firm offering charity auctions of celebrities belongings whose donations affect both revenues and costs. Comparing actual donations with the profit-maximizing benchmark indicates that the firm donates in excess of profitmaximization. I provide additional evidence pointing to donations as a further objective of the firm. Also, donations do not substantially increase willingness to pay, indicating that demand cannot explain expenditures in CSR. My results shed light on the functioning of benefit corporations and open questions on the competitive conduct of non-profit maximizing companies.
    Keywords: Objectives of the firm; Corporate Social Responsibility; Donations; Structural Estimation; Externalities
    JEL: L21 D64 C14
    Date: 2020–01
  9. By: Inessa Love (University of Hawaii at Manoa)
    Abstract: We present a critical assessment of the literature on entrepreneurial access to finance in the US. We present a comprehensive list of sources of finance that entrepreneurs use to start and grow their businesses and evaluate available research on each source. We also discuss different categories of entrepreneurs and identify underserved segments of the population. We perform a meta-analysis of available research on the actual use of different sources of funds and we perform an analysis of citations in the entrepreneurial literature. We conclude that there is a misalignment between the popularity of topics in the literature and the prevalence of different sources of funds. Finally, we identify gaps in existing literature, i.e. what sources of finance don’t have as much research available, and suggest avenues for future research.
    Keywords: Gender entrepreneurship, access to finance, venture capital
    JEL: L26 G32
    Date: 2020–01
  10. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper assesses the role of financial performance in explaining firms' investment dynamics in the wine industry from the three European Union (EU) largest producers. The wine sector deserves special attention to investigate firms' investment behavior given the high competition imposed by the latecomers. More precisely, we investigate how the capitalization, liquidity and profitability influence the investment dynamics using firm-level data from the wine industry from France (331 firms), Italy (335) firms and Spain (442) firms. We use data from 2007 to 2014, drawing a comparison between these countries, and relying on difference-and system-GMM estimators. Specifically, the impact of profitability is positive and significant, while the capitalization has a significant and negative impact on the investment dynamics only in France and Spain. The influence of the liquidity ratio is negative and significant only in the case of Spain. Therefore, we notice different investment strategies for wine companies located in the largest producer countries. It appears that these findings are in general robust to different specifications of liquidity and profitability ratios, and to the different estimators we use.
    Keywords: firm investment,financial performance,wine industry,comparative analysis
    Date: 2020–01–27
  11. By: Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
    Abstract: We quantify the degree of tax-induced earnings management associated with statutory tax rates and examine whether greater book-tax conformity alters this particular type of earnings management. We first validate a new empirical approach for examining tax-induced earnings management using European unconsolidated financial and ownership information over 2005-2013. We provide robust evidence of significant tax-induced earnings management in both domestic and multinational firms. In particular, the results suggest that a 10 percentage point increase in the corporate tax rate relates to an 8.2 percent decrease in pre-tax book income. We then document that firms in countries with greater book-tax conformity engage in additional tax-induced earnings management. This is important given that it contrasts with prior literature, which does not find an effect for book-tax conforming transactions with a change in conformity.
    Keywords: tax-induced earnings management,book-tax conformity,conforming tax avoidance
    JEL: H25 H26 M41
    Date: 2020
  12. By: Fatih Yilmaz
    Abstract: We show that firms' natural hedges (e.g., export revenues) and banks' foreign currency (FX) liabilities strongly dollarize credits. In particular, banks' non-core FX liabilities (e.g., syndications) in average feed credit dollarization almost three times more than their core FX liabilities (e.g., deposits). More importantly, these channels are affected differently by local and global macroeconomic conditions.
    Keywords: Credit dollarization, Liability dollarization, Deposit dollarization
    JEL: G21 G32
    Date: 2020
  13. By: Brixiová, Zuzana; Kangoye, Thierry; Tregenna, Fiona
    Abstract: Limited access to finance is one of the major barriers for women entrepreneurs in Africa. This paper presents a model of start-ups in which firms’ sales and profits depend on their productivity and access to credit. However, due to the lack of collateral assets such as land, female entrepreneurs have more constrained access to credit than do men. Testing the model on data from the World Bank Enterprise Surveys in Eswatini, Lesotho, and Zimbabwe, we find land ownership to be important for female entrepreneurial performance in terms of sales levels. This finding suggests that the small Southern African economies would benefit from removing obstacles to women’s land tenure and enabling financial institutions to lend against movable collateral. While land ownership is linked with higher sales levels, it seems less critical for sales growth and innovation where access to short term loans for working capital seems to be key.
    Keywords: entrepreneurial sales,innovation,credit,land,gender,Africa
    JEL: G21 L26 D24 O17
    Date: 2020
  14. By: Ewens, Michael (California Institute of Technology); Gorbenko, Alexander; Korteweg, Arthur
    Abstract: We estimate the impact of venture capital (VC) contract terms on startup outcomes and the split of value between the entrepreneur and investor, accounting for endogenous selection via a novel dynamic search and matching model. The estimation uses a new, large data set of first financing rounds of startup companies. Consistent with efficient contracting theories, there is an optimal equity split between agents that maximizes the probability of success. However, VCs use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes startup values. Better VCs still benefit the startup and the entrepreneur, due to their positive value creation. Counterfactual exercises show that eliminating certain contract terms benefits entrepreneurs and enables low-quality entrepreneurs to finance their startups more quickly, increasing the number of deals in the market. Lowering search frictions shifts the bargaining power to VCs and benefits them at the expense of entrepreneurs. The results show that selection of agents into deals is a first-order factor to take into account in studies of contracting.
    Date: 2019–07–17

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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