nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒05‒04
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Important Factors Determining Fintech Loan Default: Evidence from the LendingClub Consumer Platform By Christophe Croux; Julapa Jagtiani; Tarunsai Korivi; Milos Vulanovic
  2. Mutual funds' performance: the role of distribution networks and bank affiliation By Giorgio Albareto; Andrea Cardillo; Andrea Hamaui; Giuseppe Marinelli
  3. International bank lending and corporate debt structure By José María Serena Garralda; Serafeim Tsoukas
  4. On-site inspecting zombie lending By Diana Bonfim; Geraldo Cerqueiro; Hans Degryse; Steven Ongena
  5. Are business angel-backed companies truly different? a comparative analysis of the financial structure By Julien Salin; Nadine Levratto
  6. Relationship lending and employment decisions in firms' bad times By Pierluigi Murro; Tommaso Oliviero; Alberto Zazzaro
  7. Firms’ listings: what is new? Italy versus the main European stock exchanges By Paolo Finaldi Russo; Fabio Parlapiano; Daniele Pianeselli; Ilaria Supino
  8. The determinants of corporate governance disclosure level in the integrated reporting context By Vitolla, Filippo; Raimo, Nicola; Rubino, Michele
  9. SMEs’ direct and indirect access to public guarantees: an evaluation of regional regulations By Luciano Lavecchia; Luigi Leva; David Loschiavo
  10. Post-crisis international financial regulatory reforms: a primer By Claudio Borio; Marc Farag; Nikola Tarashev
  11. Asset Level Heterogeneity, Competition and Export Incentives: The Role of Credit Rationing By Sugata Marjit; Moushakhi Ray
  12. Classical Option Pricing and Some Steps Further By Olkhov, Victor
  13. Refining Understanding of Corporate Failure through a Topological Data Analysis Mapping of Altman's Z-Score Model By Wanling Qiu; Simon Rudkin; Pawel Dlotko
  14. A Simple Method for Extracting the Probability of Default from American Put Option Prices By Bo Young Chang, Greg Orosi; Greg Orosi
  15. A test of the Modigliani-Miller theorem, dividend policy and algorithmic arbitrage in experimental asset markets By Tibor Neugebauer; Jason Shachat; Wiebke Szymczak
  16. Financing constraints and employers' investment in training By Brunello, Giorgio; Gereben, Áron; Weiss, Christoph; Wruuck, Patricia
  17. Financing Firms in Hibernation During the COVID-19 Pandemic By Didier Brandao,Tatiana; Huneeus,Federico; Larrain,Mauricio; Schmukler,Sergio L.
  18. Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations By Craig Doidge; G. Andrew Karolyi; René M. Stulz

  1. By: Christophe Croux; Julapa Jagtiani; Tarunsai Korivi; Milos Vulanovic
    Abstract: This study examines key default determinants of fintech loans, using loan-level data from the LendingClub consumer platform during 2007–2018. We identify a robust set of contractual loan characteristics, borrower characteristics, and macroeconomic variables that are important in determining default. We find an important role of alternative data in determining loan default, even after controlling for the obvious risk characteristics and the local economic factors. The results are robust to different empirical approaches. We also find that homeownership and occupation are important factors in determining default. Lenders, however, are required to demonstrate that these factors do not result in any unfair credit decisions. In addition, we find that personal loans used for medical financing or small business financing are more risky than other personal loans, holding the same characteristics of the borrowers. Government support through various public-private programs could potentially make funding more accessible to those in need of medical services and small businesses without imposing excessive risk to small peer-to-peer (P2P) investors.
    Keywords: crowdfunding; lasso selection methods; peer-to-peer lending; household finance; machine learning; financial innovation; big data; P2P/marketplace lending
    JEL: G21 D14 D10 G29 G20
    Date: 2020–04–16
  2. By: Giorgio Albareto (Bank of Italy); Andrea Cardillo (Bank of Italy); Andrea Hamaui (Harvard University); Giuseppe Marinelli (Bank of Italy)
    Abstract: The paper investigates how the characteristics of the distribution network and the affiliation to a banking group affect mutual funds performance exploiting a unique dataset with extremely detailed information on funds’ portfolios and bank-issuer relationships for the period 2006-2017. We find that bank-affiliated mutual funds underperform independent ones. The structure of the distribution channels is a key-factor affecting mutual funds' performance: when bank platforms become by far the prevalent channel for the distribution of funds’ shares, asset management companies are captured by banks. As for bank affiliation, results show a positive bias of bank-controlled mutual funds towards securities issued by their own banking group clients (of the lending and investment banking divisions) and by institutions belonging to their own banking group; this last bias is exacerbated for mutual funds belonging to undercapitalized banking groups. The structure of the distribution channels explains two thirds of bank-affiliated mutual funds underperformance, whereas investment biases explain one fourth of the observed differential in returns with independent mutual funds.
    Keywords: mutual funds, mutual funds performance, distribution networks, conflict of interest
    JEL: G23 G21 G11 G32
    Date: 2020–04
  3. By: José María Serena Garralda; Serafeim Tsoukas
    Abstract: Using a cross-country sample of bank-dependent public firms we study the international spillovers of a change in banking regulation on corporate borrowing. For identification we examine how US firms' liabilities vis-à-vis banks, non-bank lenders and bond markets evolve after an increase in capital requirements implemented by the European Banking Authority (EBA) in 2011. We find that US firms experience a reduction in credit lines but not in term loans from EU banks. In addition, US firms are able to compensate for the reduction in credit lines from EU banks by securing liquidity facilities from US non-bank financial institutions, without increasing borrowing from corporate bond markets. These results suggest that diversified domestic loan markets, with both banks and non-bank financial institutions providing loans to corporations, can help overcome cuts in cross-border bank funding.
    Keywords: credit lines, term loans, bank capital requirements, firm-level data, non-bank financial intermediaries
    JEL: G21 G32 F32 F34
    Date: 2020–04
  4. By: Diana Bonfim; Geraldo Cerqueiro; Hans Degryse; Steven Ongena
    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.
    JEL: G21 G32
    Date: 2020
  5. By: Julien Salin; Nadine Levratto
    Abstract: Through a new eye on corporate finance theories of small firms and of business angel financing determinants, this paper reconsiders the impact of Business Angels on financial structure of backed firms using matching method and a unique individual dataset of French companies over the 2009-2015 period. It shows that the signal effect of Business angel investment, improving access to external finance from another investor is limited. This paper contributes to the corporate finance literature by investigating on the validity of principal corporate finance theories. It also brings insight to the understanding of value added of BA on backed firms.
    Keywords: Keywords: Business angels, Financial Structure, Informal venture capital, Matching techniques
    JEL: G24 L25 L26 M13 O16
    Date: 2020
  6. By: Pierluigi Murro (LUISS-Guido Carli University.); Tommaso Oliviero (University of Naples Federico II and CSEF); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR)
    Abstract: Using firm-level survey information, we investigate whether relationship lending affects firms' employment decisions when they experience negative shocks on sales. We find that firms maintaining long-lasting relationships with their main bank show a significantly lower sensitivity of employment growth rate to shocks in sales. This result is robust to measurement issues and to an instrumental variable strategy, and is stronger for young, small, human-capital-intensive firms. Our findings indicate that relationship lending acts as an insurance for firms' employees against adverse sales fluctuations, especially for firms whose internal workforce is more valuable and is thus substitutable at larger costs.
    Keywords: employment, relationship banking, insurance
    JEL: G32 G38 H53 J65
    Date: 2020–04
  7. By: Paolo Finaldi Russo (Bank of Italy); Fabio Parlapiano (Bank of Italy); Daniele Pianeselli (Bank of Italy); Ilaria Supino (Bank of Italy)
    Abstract: Over the last decade and a half non-financial corporations’ (NFCs) listings have displayed a heterogeneous pattern across European countries. The number of listed NFCs has increased in Italy and Spain, while it has declined in Germany, France and the United Kingdom. In Italy, the increase in the number of listed firms has been driven by SMEs’ listings, leaving the stock market small by international standards. We break down the size gap of the Italian equity market (with respect to its European peers) into the share of listed companies and their relative size. We show that the lower share of listed NFCs in Italy accounts for the gap with France and the UK, while the smaller size of Italian public firms has a crucial bearing on the differences with Germany and Spain. Counterfactual exercises provide evidence that there is limited room to bridge these gaps, as the structure of the Italian economy leans towards small enterprises. Policy measures aimed at fostering SMEs’ propensity to go public may be more effective in promoting the further development of the Italian stock exchange.
    Keywords: Capital markets, stock market, IPOs, SMEs listings
    JEL: G1 G3
    Date: 2020–04
  8. By: Vitolla, Filippo; Raimo, Nicola; Rubino, Michele
    Abstract: In recent years, the analysis of corporate governance aspects is becoming a central element for understanding corporate dynamics and represents a clear indicator of investor confidence in the decisions taken by the management and board of listed firms. For this reason, corporate governance disclosure is receiving more and more attention from both a professional and academic point of view. The advent of integrated reporting represents a new tool for disclosing information relating to corporate governance. The goal of this study is to investigate the factors that can influence the level of corporate governance disclosure within the integrated reports. The analysis, conducted on a sample of 73 international firms, shows a positive effect of the firm size, firm profitability and audit quality. To our knowledge, this is the first study that analyses corporate governance disclosure level in the integrated reporting context
    Keywords: corporate governance,disclosure,integrated reporting,information quality
    Date: 2020
  9. By: Luciano Lavecchia (Bank of Italy); Luigi Leva (Bank of Italy); David Loschiavo (Bank of Italy)
    Abstract: The Italian public guarantee scheme (Fondo di garanzia - FDG) is the main tool supporting SMEs’ access to credit. This work evaluates the impact of the regional laws limiting the FDG’s operations to loans guaranteed by mutual guarantee institutions. To this end, we exploit the regulations’ discontinuities that occurred in some Italian regions that have either abolished or introduced such a restriction. We study the effects of the regulation changes in a difference-in-differences setting where treated firms are located in regime switching regions and control firms are in neighbouring regions. We find that constraining access to the FDG’s publicly funded collateral to counter-guarantee schemes hampered SMEs’ access to finance overall. Removing the restriction increased both the number of firms with access to the FDG’s guarantees and the total size of the loans granted to treated SMEs of any size. Moreover, the relative cost of credit improved for treated firms. Conversely, the introduction of the restriction to counter-guarantees had mostly negative effects on the number, size and cost of loans granted to treated firms.
    Keywords: access to credit, public guarantees, mutual guarantee institutions
    JEL: H81 G21
    Date: 2020–04
  10. By: Claudio Borio; Marc Farag; Nikola Tarashev
    Abstract: This paper reviews post-crisis financial regulatory reforms, examines how they fit together and identifies open issues. Specifically, it takes stock of the salient new features of bank and CCP international standards within a unified analytical framework. The key notion in this framework is "shock-absorbing capacity", which is higher when (i) there is less exposure to the losses that a shock generates and (ii) there are more resources to absorb such losses. How do the reforms strengthen this capacity, individually and as a package? Which areas merit further attention? We argue that, given the political economy pressures and technical obstacles that the reforms have faced, as well as the inherent uncertainty about the reforms' effects, it is important to maintain a conservative regulatory approach. A higher cost of balance sheet space is a healthy side effect of the backstops underpinning such an approach.
    Keywords: bank regulation, CCPs, asset managers, macroprudential
    JEL: G21 G23 G28
    Date: 2020–04
  11. By: Sugata Marjit; Moushakhi Ray
    Abstract: Firm heterogeneity is mostly discussed in the literature from the viewpoint of productivity differential. In contrast this paper recognizes wealth heterogeneity as an important factor that results in firm heterogeneity. The issue of wealth heterogeneity and export incentive through credit market imperfection over the life cycle of a firm remains largely unaddressed in the literature. This paper studies the dynamics of wealth heterogeneity and export incentive of credit rationed firms through asset building. The theoretical and empirical results indicate that an increase in the initial level of competition implies greater export incentive. However, over the life cycle of a firm, the role of competition is impacted by the intensity of capital accumulation and the initial level of wealth. Greater local competition before the entry of firms in the export market hurts export incentive by limiting cash flows and asset build up. Thus low profits due to competition allows firms to look for export opportunities but lower cash flows hurt such incentives.
    Keywords: export incentive, credit market imperfections, technology, competition, asset level heterogeneity
    JEL: F10 F14 G10 G20
    Date: 2020
  12. By: Olkhov, Victor
    Abstract: This paper modifies single assumption in the base of classical option pricing model and derives further extensions for the Black-Scholes-Merton equation. We regard the price as the ratio of the cost and the volume of market transaction and apply classical assumptions on stochastic Brownian motion not to the price but to the cost and the volume. This simple replacement leads to 2-dimensional BSM-like equation with two constant volatilities. We argue that decisions on the cost and the volume of market transactions are made under agents expectations. Random perturbations of expectations impact the market transactions and through them induce stochastic behavior of the underlying price. We derive BSM-like equation driven by Brownian motion of agents expectations. Agents expectations can be based on option trading data. We show how such expectations can lead to nonlinear BSM-like equations. Further we show that the Heston stochastic volatility option pricing model can be applied to our approximations and as example derive 3-dimensional BSM-like equation that describes option pricing with stochastic cost volatility and constant volume volatility. Diversity of BSM-like equations with 2 – 5 or more dimensions emphasizes complexity of option pricing problem. Such variety states the problem of reasonable balance between the accuracy of asset and option price description and the complexity of the equations under consideration. We hope that some of BSM-like equations derived in this paper may be useful for further development of assets and option market modeling.
    Keywords: Option Pricing; Black-Scholes-Merton Equations; Stochastic Volatility; Market Transactions; Expectations; Nonlinear equations
    JEL: G1 G12 G17
    Date: 2020–04–27
  13. By: Wanling Qiu; Simon Rudkin; Pawel Dlotko
    Abstract: Corporate failure resonates widely leaving practitioners searching for understanding of default risk. Managers seek to steer away from trouble, credit providers to avoid risky loans and investors to mitigate losses. Applying Topological Data Analysis tools this paper explores whether failing firms from the United States organise neatly along the five predictors of default proposed by the Z-score models. Firms are represented as a point cloud in a five dimensional space, one axis for each predictor. Visualising that cloud using Ball Mapper reveals failing firms are not often neighbours. As new modelling approaches vie to better predict firm failure, often using black boxes to deliver potentially over-fitting models, a timely reminder is sounded on the importance of evidencing the identification process. Value is added to the understanding of where in the parameter space failure occurs, and how firms might act to move away from financial distress. Further, lenders may find opportunity amongst subsets of firms that are traditionally considered to be in danger of bankruptcy but actually sit in characteristic spaces where failure has not occurred.
    Date: 2020–04
  14. By: Bo Young Chang, Greg Orosi; Greg Orosi
    Abstract: In this paper, we present a novel method to extract the risk-neutral probability of default of a firm from American put option prices. Building on the idea of a default corridor proposed in Carr and Wu (2011), we derive a parsimonious closed-form formula for American put option prices from which the probability of default can be inferred. The proposed method is easy to implement and helps overcome the main limitation of the method used in Carr and Wu (2011), which relies on the price of one deep-out-of-the-money put option. Our empirical results are based on seven large U.S. firms for the period 2002 to 2010. These results show that, in some cases, the option-implied probability of default can provide a more accurate estimate of default probability, compared to the estimates implied from credit default swap spreads.
    Keywords: Asset Pricing; Financial markets; Market structure and pricing
    JEL: G1 G13 G3 G33
    Date: 2020–04
  15. By: Tibor Neugebauer (University of Luxumbourg); Jason Shachat (Durham University and Wuhan University); Wiebke Szymczak (University of Hamburg)
    Abstract: Modigliani and Miller showed that the market value of the company is in- dependent of its capital structure, and suggested that dividend policy makes no di erence to this law of one price. We experimentally test the MM theorem in a complete market with two simultaneously traded assets, employing two experimental treatment variations. The first variation involves the dividend stream. According to this variation the dividend payout order is either identi- cal or independent. The second variation involves the market participation, or not, of an algorithmic arbitrageur. We find that Modigliani-Miller's law of one price can be supported on average with or without arbitrageur when dividends are identical. The law of one price breaks down when dividend payout order is independent unless the arbitrageur keeps the asset prices in balance.
    Keywords: Modigliani-Miller, arbitrage, dividends, experiment, asset market
    JEL: C92 G32 G35
    Date: 2020
  16. By: Brunello, Giorgio; Gereben, Áron; Weiss, Christoph; Wruuck, Patricia
    Abstract: Using a representative sample of European firms, this paper studies whether and to what extent financing constraints affect employers' decisions to invest in employee training. It combines survey data on investment activities with administrative data on financial statements to develop an index of financing constraints. It estimates that a 10 percent increase in this index reduces investment in training as a share of fixed assets by 2.9 to 4.5 percent and investment in training per employee by 1.8 to 2.5 percent. The paper documents that lower investment in training reduces productivity, and show that firms facing tighter financing constraints cut back the investment in training and tangible assets less than investment in R&D and software and data.
    Keywords: training,financing constraints,Europe
    JEL: J24
    Date: 2020
  17. By: Didier Brandao,Tatiana; Huneeus,Federico; Larrain,Mauricio; Schmukler,Sergio L.
    Abstract: The coronavirus (COVID-19) pandemic has imposed a heavy toll on economies worldwide, nearly halting economic activity. Although most firms should be viable when economic activity resumes, cash flows have collapsed, possibly triggering inefficient bankruptcies with long-term detrimental effects. Firms'valuable relationships with workers, suppliers, customers, governments, and creditors could be broken. Hibernation could slow the economy until the pandemic is brought under control and preserve those vital relationships for a quicker recovery. If all stakeholdersshare the burden of economic inactivity, firms are more likely to survive. Financing could help cover firms'reduced operational costs until the pandemic subdues. But financial systems are not well equipped to handle this type of exogenous and synchronized systemic shock. Governments could work with the financial sector to keep firms afloat, enabling forbearance as needed and absorbing part of the firms'increased credit risk, by implementing policies with proper incentives to keep firms viable.
    Keywords: Financial Crisis Management&Restructuring,Health Care Services Industry,Public Health Promotion,Financial Structures,Energy and Environment,Energy Demand,Energy and Mining
    Date: 2020–04–13
  18. By: Craig Doidge; G. Andrew Karolyi; René M. Stulz
    Abstract: For the last two decades, non-US firms have lower valuations than similar US firms. We study the evolution of this valuation gap to assess whether financial markets are less integrated after the 2008 global financial crisis (GFC). The valuation gap for firms from developed markets increases by 31% after the GFC – a reversal in financial globalization – while the gap for firms from emerging markets (excluding China) stays stable. There is no evidence of greater segmentation for non-US firms cross-listed on major US exchanges and the typical valuation premium of such firms relative to domestic counterparts stays unchanged. However, the number of such firms shrinks sharply, so that the importance of US cross-listings as a mechanism for market integration diminishes.
    JEL: F21 F65 G10 G15 G34
    Date: 2020–04

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