nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒04‒06
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. On-Site Inspecting Zombie Lending By Diana Bonfim; Geraldo Cerqueiro; Hans Degryse; Steven Ongena
  2. Identifying Empty Creditors with a Shock and Micro-Data By Hans Degryse; Yalin Gündüz; Kuchulain O'Flynn; Steven Ongena
  3. Market structure, common ownership and coordinated manager compensation By Neus, Werner; Stadler, Manfred; Unsorg, Maximiliane
  4. Can Direct Innovation Subsidies Relax SMEs' Credit Constraints? By Raphaël Chiappini; Samira Demaria; Benjamin Montmartin; Sophie Pommet
  5. The Impact of Economic Institutions on Finance Sector:Evidence from China By Li, Zhao
  6. Does a Local Bias Exist in Equity Crowdfunding? By Lars Hornuf; Matthias Schmitt; Eliza Stenzhorn
  7. The Risk of Caution: Evidence from an R&D Experiment By Richard Carson; Joshua S. Graff Zivin; Jordan Louviere; Sally Sadoff; Jeffrey G. Shrader Jr
  8. What Matters in Funding: The Value of Research Coherence and Alignment in Evaluators' Decisions By Charles Ayoubi; Sandra Barbosu; Michele Pezzoni; Fabiana Visentin
  9. Heterogeneous effects of credit constraints on SMEs’ employment: Evidence from the European sovereign debt crisis By David Cornille; François Rycx; Ilan Tojerow
  10. Exports of Spanish manufacturing firms and financial constraints By Juan A. Máñez Castillejo; Oscar Vicente-Chirivella
  11. FinTech credit: a critical review of empirical research By Nicola Branzoli; Ilaria Supino

  1. By: Diana Bonfim (Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics); Geraldo Cerqueiro (Catolica-Lisbon SBE); Hans Degryse (KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: Banks may have incentives to continue lending to “zombie” firms in order to avoid or delay the recognition of credit losses. In spite of growing regulatory pressure, there is evidence that “zombie lending” remains widespread, even in developed countries. We exploit information on a unique series of authoritative on-site inspections of bank credit portfolios in Portugal to investigate how such inspections affect banks’ future lending decisions. We find that following an inspection a bank becomes up to 9 percentage points less likely to refinance a firm with negative equity, implying a halving of the unconditional refinancing probability. Hence, banks structurally change their lending decisions following on-site inspections, suggesting that – even in the age of reg-tech – supervisory “reg-leg” can remain a potent tool to tackle zombie lending.
    Keywords: zombie lending, bank supervision
    JEL: G21 G32
    Date: 2020–02
  2. By: Hans Degryse (KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)); Yalin Gündüz (Deutsche Bundesbank); Kuchulain O'Flynn (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors'' as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany, that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for firms with CDS traded on them drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Further, we find that firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained, and that are liquidity constrained recognise the empty creditor effect to a larger extent. Furthermore, banks' business models affect the degree to which they recognise the empty creditor effect. Where banks that monitor their creditors less and that earn a smaller portion of their income from interest activities, recognise the empty creditor effect to a larger extent.
    Keywords: Empty creditors, default, bankruptcy, credit default swaps, micro-data
    JEL: G21 G33 G38
    Date: 2020–02
  3. By: Neus, Werner; Stadler, Manfred; Unsorg, Maximiliane
    Abstract: We study oligopolistic competition in product markets where the firms' quantity decisions are delegated to managers. Some firms are commonly owned by shareholders such as index funds whereas the other firms are owned by independent shareholders. Under such an asymmetric ownership structure, the common owners have an incentive to coordinate when designing the manager compensation schemes. This implicit collusion induces a less aggressive output behavior by the coordinated firms and a more aggressive behavior by the noncoordinated firms. The profits of the noncoordinated firms are increasing in the number of coordinated firms. The profits of the coordinated firms exceed the profits without coordination if at least 80 % of the firms are commonly owned - an astonishing resemblance to the merger literature.
    Keywords: Common ownership,index funds,shareholder coordination,manager com-pensation
    JEL: G32 L22 M52
    Date: 2020
  4. By: Raphaël Chiappini (Université de Bordeaux; LAREFI); Samira Demaria (Université Côte d'Azur, France; GREDEG CNRS); Benjamin Montmartin (SKEMA Business School; Université Côte d'Azur, France); Sophie Pommet (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: Credit constraints hamper the ability of SMEs to undertake innovative activities. Promoting access to external funding for SMEs represents therefore an important challenge for policymakers. This paper investigates whether innovation subsidies provided by the French public investment bank to SMEs have translated into better access to bank and other external financing through an indirect certification effect. We exploit a unique database covering the period 2000-2010 to construct a quasi-natural experiment and evaluate the causal impact of these subsidies on SMEs' financial constraints. If we find a significant improvement in the access to bank financing for subsidized firms, the effect is heterogeneous and mainly concentrated on small firms operating in high-tech sectors. Moreover, such public support does not seem to improve the access to other external sources of financing which can be explained by the low development risk-capital markets in France.
    Keywords: Credit constraints, innovation policy, certification effect, Mahalanobis distance matching, difference-in difference
    JEL: O33 O38
    Date: 2020–03
  5. By: Li, Zhao
    Abstract: This paper studies how economic institutions affect private firm sectors capital accumulation through finance sector and operation objectives of different ownership firms in socialist market economy with Chinese characteristics, which extended the neo-classical economic growth method. Based on above framework, this paper finds that economic institutions were the main factors affecting the efficiency of capital allocation between private sector and stated-owned sector. Compared with stated-owned sector, economic institutions lead private sector to a decrease in loans and government subsidies through finance sector, and an increase in its production costs. Our evidence suggests that private firms take efforts to improve economic institutions as a substitute for political capital.
    Keywords: Economic institutions, ownership discrimination, Capital allocation, Economic growth
    JEL: P3
    Date: 2019–11–09
  6. By: Lars Hornuf; Matthias Schmitt; Eliza Stenzhorn
    Abstract: We use hand-collected data of 20,460 investment decisions and two distinct portals to analyze whether investors in equity crowdfunding direct their investments to local firms. In line with agency theory, the results suggest that investors exhibit a local bias, even when we control for family and friends. In addition to the regular crowd, our sample includes angel-like investors, who invest considerable amounts and exhibit a larger local bias. Well-diversified investors are less likely to suffer from this behavioral anomaly. The data further show that portal design is important for attracting investors more prone to having a local bias. Overall, we find that investors who direct their investments to local firms more often pick start-ups that run into insolvency or are dissolved, which indicates that local investments in equity crowdfunding constitute a behavioral anomaly rather and a rational preference. Here again, however, portal design plays a crucial role.
    Keywords: equity crowdfunding, crowdinvesting, local bias, individual investor behavior, entrepreneurial finance
    JEL: G11 G24 K22 M13
    Date: 2020
  7. By: Richard Carson; Joshua S. Graff Zivin; Jordan Louviere; Sally Sadoff; Jeffrey G. Shrader Jr
    Abstract: Innovation is important for firm performance and broader economic growth. But breakthrough innovations necessarily require greater risk-taking than more incremental approaches. To understand how managers respond to uncertainty when making research and development decisions, we conducted three experiments with master’s degree students in a program focused on the intersection of business and technology. Study participants were asked to choose whether to fund hypothetical research projects using a process that mirrors real-world research and development funding decisions. The experiments provided financial rewards that disproportionately encouraged the choice of higher-risk projects. Despite these incentives, most participants chose lower-risk projects at the expense of projects more likely to generate a large payoff. We also elicited participants’ personal risk preferences and found that decision-makers who are more tolerant of risk were more likely to fund breakthrough projects. The results suggest that the risk preferences of managers in charge of research investments may have an oversized effect on the rate of breakthrough innovation and the profitability of firms.
    JEL: D8 G11 O3
    Date: 2020–03
  8. By: Charles Ayoubi (Ecole Polytechnique Fédérale de Lausanne); Sandra Barbosu (Alfred P. Sloan Foundation); Michele Pezzoni (Université Côte d'Azur, CNRS, GREDEG, France); Fabiana Visentin (Maastricht University; UNU-MERIT)
    Abstract: Entrepreneurs, managers, and scientists participate in competitive selection processes to obtain resources. The project they propose is a crucial aspect of their success. In this paper, we focus on the selection of scientists applying for academic funding by submitting a research proposal. We argue that two core dimensions of the research proposal affect the probability of funding success: its coherence with the applicant's previous work, and its alignment with subjects of general interest for the scientific community. Employing a neural network algorithm, we analyze the text of 2,494 research proposals for a prestigious fellowship awarded to promising early-stage North American researchers. We find field-specific heterogeneity in the committees' evaluation. In life sciences and chemistry, evaluators value the research proposal's coherence and alignment, while in physics, evaluators weight more bibliometric indicators. Our results can be extended beyond the academic context to managerial implications in cases such as entrepreneurs and managers, submitting project proposals to investors.
    Keywords: Research trajectories, research funding, coherence, alignment
    JEL: I23 O38
    Date: 2020–03
  9. By: David Cornille; François Rycx; Ilan Tojerow
    Abstract: This paper takes advantage of access to detailed matched bank-firm data to investigate whether and how employment decisions of SMEs have been affected by credit constraints during the European sovereign debt crisis. Variability in banks’ financial health following the 2008 crisis is used as an exogenous determinant of firms’ access to credit. Findings, relative to the Belgian economy, clearly highlight that credit matters. They show that SMEs borrowing money from pre-crisis financially less healthy banks were significantly more likely to be affected by a credit constraint and, in turn, to adjust their labour input downwards than pre-crisis clients of more healthy banks. These results are robust across types of loan applications that were denied credit, i.e. applications to finance working capital, debt or new investments. Yet, estimates also show that credit constraints have been essentially detrimental for employment among SMEs experiencing a negative demand shock or facing strong product market competition. In terms of human resources management, credit constraints are not only found to foster employment adjustment at the extensive margin but also to increase the use of temporary layoff allowances for economic reasons. This outcome supports the hypothesis that short-time compensation programmes contribute to save jobs during recessions.
    Keywords: Banks’ financial health; Credit constraints; Employment; European sovereign debt crisis; Short-time compensation programmes
    Date: 2019–04–01
  10. By: Juan A. Máñez Castillejo (Universitat de València and ERICES); Oscar Vicente-Chirivella (Universitat de València)
    Abstract: We investigate the role of financial constraints on firms’ exporting behaviour, including firms’ export decision, export intensity, firms starting to export decision and exports persistence. Our financial constraints variable is a synthetic variable that summarises information on different dimensions such as total assets, profitability, liquidity, solvency, repaying ability and (new in this type of analyses) the cost of external financing. Using data on Spanish manufacturing for the period 1992-2014, we find evidence supporting that financial health is relevant to explain SMEs exporting decisions and starting to export decisions but not those of large firms. Financial health does not seem to affect large firms’ export intensity and the results of the impact of financial health on SMEs export intensity are not conclusive. Nevertheless, financial health is a determinant of export persistence of large firms and SMEs.
    Date: 2019–12
  11. By: Nicola Branzoli (Bank of Italy); Ilaria Supino (Bank of Italy)
    Abstract: FinTech credit has attracted significant attention from academics and policymakers in recent years. Given its growing importance, in this paper we provide an overview of the empirical research on FinTech credit to households and non-financial corporations (NFCs). We focus on three broad topics: i) the factors supporting the development of innovative business models for credit intermediation, such as marketplace lending; ii) the benefits of new credit risk assessment data and methods; iii) the implications of these innovations for access to credit. Three main messages emerge from the literature. First, the growth of lenders with innovative business models is mainly driven by the degree of local economic development and of competition in the banking sector. Second, new data and methods can improve traditional credit risk models because they are particularly helpful in screening opaque borrowers, such as those with scant credit history. Third, FinTech borrowers generally lack (or have limited) access to finance and tend to be riskier than traditional bank borrowers.
    Keywords: artificial intelligence, credit, digital technologies, FinTech, marketplace lending
    JEL: G21 G22 G23 G24
    Date: 2020–03

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