nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒06‒08
twelve papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Financing Firms in Hibernation during the COVID-19 Pandemic By Tatiana Didier; Federico Huneeus; Mauricio Larrain; Sergio L. Schmukler
  2. Foundations of system-wide financial stress testing with heterogeneous institutions By Farmer, J Doyne; Kleinnijenhuis, Alissa M; Nahai-Williamson, Paul; Wetzer, Thom
  3. Implementing stakeholder participation as “egalitarian bidding” – The test of the Kantian pudding is in the institutionalized eating By Federica Alberti; Werner Güth; Hartmut Kliemt; Kei Tsutsui
  4. Pension Funds and Socially-Responsible Investment in Corporate Debt Securities: An Empirical Investigation By Michael McCann
  5. The Inverted-U Relationship Between Credit Access and Productivity Growth By Philippe Aghion; Antonin Bergeaud; Gilbert Cette; Rémy Lecat; Hélène Maghin
  6. Protecting Investors in Equity Crowdfunding: An Empirical Analysis of the Small Investor Protection Act By Maximilian Goethner; Lars Hornuf; Tobias Regner
  7. Financial Access, Governance and the Persistence of Inequality in Africa: Mechanisms and Policy instruments By Vanessa S. Tchamyou
  8. The Federal Reserve's Liquidity Backstops to the Municipal Bond Market during the COVID-19 Pandemic By Bin Wei; Vivian Z. Yue
  9. Disaster Resilience and Asset Prices By Marco Pagano; Christian Wagner; Josef Zechner
  10. Non-alternative collective investment schemes, connectedness and systemic risk By Ramiro Losada; Ricardo Laborda
  11. Women Self-Selection out of the Credit Market in Africa By Morsy, Hanan; El-Shal, Amira; Woldemichael, Andinet
  12. In December Days are Shorter but Loans are Cheaper By Jérémie BERTRAND; Laurent WEILL

  1. By: Tatiana Didier (World Bank); Federico Huneeus (Yale University & Central Bank of Chile); Mauricio Larrain (Financial Market Commission & PUC Chile); Sergio L. Schmukler (World Bank)
    Abstract: The coronavirus (COVID-19) pandemic has halted economic activity worldwide, hurting firms and pushing them toward bankruptcy. This paper provides a unified framework to organize the policy debate related to firm financing during the downturn, centered along four main points. First, the economic crisis triggered by the spread of the virus is radically different from past crises, with important consequences for optimal policy responses. Second, to avoid inefficient bankruptcies and long-term detrimental effects, it is important to preserve firms' relationships with key stakeholders, like workers, suppliers, customers, and creditors. Third, firms can benefit from “hibernating," using the minimum bare cash necessary to withstand the pandemic, while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock such as this pandemic. Financial sector policies can help increase the provision of credit, while posing difficult choices and trade-offs.
    Keywords: Cash crush, Coronavirus, Credit risk, Financial policies, Firm relationships
    JEL: G21 G28 G32 G33 G38 I18
    Date: 2020–05
  2. By: Farmer, J Doyne (Institute for New Economic Thinking, University of Oxford,); Kleinnijenhuis, Alissa M (Institute for New Economic Thinking, University of Oxford, UK and MIT Sloan School of Management, Massachusetts Institute of Technology,); Nahai-Williamson, Paul (Bank of England); Wetzer, Thom (Faculty of Law, University of Oxford)
    Abstract: We propose a structural framework for the development of system-wide financial stress tests with multiple interacting contagion, amplification channels and heterogeneous financial institutions. This framework conceptualises financial systems through the lens of five building blocks: financial institutions, contracts, markets, constraints, and behaviour. Using this framework, we implement a system-wide stress test for the European financial system. We obtain three key findings. First, the financial system may be stable or unstable for a given microprudential stress test outcome, depending on the system’s shock-amplifying tendency. Second, the ‘usability’ of banks’ capital buffers (the willingness of banks to use buffers to absorb losses) is of great consequence to systemic resilience. Third, there is a risk that the size of capital buffers needed to limit systemic risk could be severely underestimated if calibrated in the absence of system-wide approaches.
    Keywords: Systemic risk; stress testing; financial contagion; financial institutions; capital requirements; macroprudential policy
    JEL: C63 G17 G21 G23 G28
    Date: 2020–05–14
  3. By: Federica Alberti (University of Portsmouth); Werner Güth (LUISS Guido Carli and Max Planck Institute for Research on Collective Goods); Hartmut Kliemt (Justus-Liebig-Universitaet Giessen); Kei Tsutsui (University of Bath)
    Abstract: Stakeholder conceptions of corporate governance tend to address managers and owners of companies as benevolent despots who follow ethical appeals to respect all stakeholders equally. Avoiding the benevolent despot assumption we axiomatically specify how “stakeholder participation as ‘egalitarian bidding’ ” could conceivably be used to implement the values underlying stakeholder conceptions as procedures of corporate governance. We do not claim that stakeholder theorists have to concur with our proposed operationalization of their ideals. Yet those who do not accept participatory ‘egalitarian bidding’ should come up with some alternative operationalization of “equal (Kantian) respect” or admit that their theories are non-operational.
    Keywords: Stakeholder conceptions of management, interpersonal equal respect, corporate governance, intrinsic motivation, procedural fairness
    JEL: D44 D63 D82 G34 J50
    Date: 2020–05–18
  4. By: Michael McCann
    Abstract: This paper examines the extent of socially-responsible investment conducted by pension funds in corporate debt securities. Behavioural theories of the firms suggest a link between corporate social responsibility and business risk, particularly over the longer-term. Therefore, institutions such as pension funds with a longer-term investment horizon should be more likely to engage in socially-responsible investment compared to investment funds with a short-term horizon. Using data on the holdings by pension funds and investment funds of debt securities issued by North American and European companies, we investigate whether there are any differences in the treatment of corporate social performance by these different institutional groups in their holdings of corporate debt securities. Our results show no significant difference in the corporate social performance of the borrowers whose securities both pension funds and investment funds hold. In addition, our findings indicate that both investment groups reflect broader environmental, social and governance factors in their debt market investments with corporate social performance having a significant impact on credit spreads for securities. However, pension funds place greater weight on social and environmental factors compared to investment funds when pricing debt securities. Our analysis demonstrates that financial flows in debt markets are influenced by social and environmental factors and that pension funds are a key conduit. Consequently, capital allocation decisions by pension funds could play an important role in changing corporate behaviour to achieve more sustainable outcomes.
    Keywords: Pension Funds, Responsible Investment, Capital Markets, Corporate Social Responsibility
    JEL: G2
    Date: 2020–05
  5. By: Philippe Aghion (Harvard University [Cambridge]); Antonin Bergeaud (PSE - Paris School of Economics); Gilbert Cette (Centre de recherche de la Banque de France - Banque de France, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Rémy Lecat (Centre de recherche de la Banque de France - Banque de France); Hélène Maghin
    Abstract: We identify two counteracting effects of credit access on productivity growth: on the one hand, better access to credit makes it easier for entrepreneurs to innovate; on the other hand, better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. We first develop a simple model of firm dynamics and innovation‐based growth with credit constraints, where the above two counteracting effects generate an inverted‐U relationship between credit access and productivity growth. Then we test our theory on a comprehensive French manufacturing firm‐level dataset. We first show evidence of an inverted‐U relationship between credit constraints and productivity growth when we aggregate our data at the sectoral level. We then move to firm‐level analysis, and show that incumbent firms with easier access to credit experience higher productivity growth, but that they also experience lower exit rates, particularly the least productive firms among them. To support these findings, we exploit the 2012 Eurosystem's Additional Credit Claims programme as a quasi‐experiment that generated an exogenous extra supply of credits for a subset of incumbent firms.
    Keywords: credit constraint,firms,growth,interest rate,productivity
    Date: 2019–01
  6. By: Maximilian Goethner (Friedrich Schiller University Jena); Lars Hornuf (University of Bremen, and Max Planck Institute for Innovation and Competition, Munich); Tobias Regner (Friedrich Schiller University Jena)
    Abstract: During the past decade, equity crowdfunding (ECF) has emerged as an alternative funding channel for startup firms. In Germany, the Small Investor Protection Act became binding in July 2015, with the legislative goal to protect investors engaging in this new asset class. Since then, investors pledging more than 1,000 EUR now must self-report their income and wealth. Investing more than 10,000 EUR in a single ECF issuer is only possible through a corporate entity. We examine how the Small Investor Protection Act has affected investor behavior at Companisto, Germany’s largest ECF portal for startup firms. The results show that after the new law became binding, sophisticated investors invest less on average while casual investors invest more. Moreover, the signaling capacity of large investments has disappeared.
    Keywords: Equity crowdfunding, Crowdinvesting, Investor protection
    JEL: E22 G18 G38 K22 L26
    Date: 2020–05–29
  7. By: Vanessa S. Tchamyou (Yaounde, Cameroon)
    Abstract: The aim of this paper is to investigate policy instruments by which the persistence of inequality is affected through financial development channels in 48 African countries for the period 1996 – 2014. Financial dynamic channels of depth (money supply and liquid liabilities), efficiency (at banking and financial system levels), activity (from banking and financial system perspectives) and stability are used. Political (“voice and accountability” and political stability), economic (government effectiveness and regulation quality) and institutional (rule of law and corruption-control) governance policy instruments are also involved. The empirical evidence is based on the Generalised Method of Moments (GMM). The results show that financial depth and financial stability are the best channels of reducing inequality. Moreover, the relevance of these financial channels is significantly apparent when policy instruments are exclusively governance variables. The comparative relevance of governance dynamics in the persistence of inequality is discussed. The study responds to two recent policy and scholarly challenges, notably: the persistence of inequality in Africa and the relevance of governance in addressing income inequality by means of financial access.
    Keywords: Finance; Governance; Inequality; Modelling; Africa
    JEL: O16 O10 I30 C50 O55
    Date: 2020–01
  8. By: Bin Wei; Vivian Z. Yue
    Abstract: The COVID-19 pandemic has caused tremendous hardship all over the world. In response, the Federal Reserve has moved quickly and aggressively to support the economy in the United States. In this article, we present some initial evidence for the effectiveness of some of the facilities in calming the municipal bond market, particularly the short-term variable-rate demand obligation (VRDO) market. We discuss the important role of liquidity backstops in mitigating runs and stabilizing financial markets in general based on insights from our study on the runs on VRDO and auction-rate securities (ARS) in 2008 during the financial crisis.
    Keywords: municipal bond; COVID-19 pandemic; liquidity backstops
    JEL: G10 G20 G21
    Date: 2020–05–28
  9. By: Marco Pagano (Università di Napoli Federico II, CSEF, EEIF, CEPR and ECGI); Christian Wagner (WU Vienna University of Economics and Business and Vienna Graduate School of Finance (VGSF)); Josef Zechner (WU Vienna University of Economics and Business, Vienna Graduate School of Finance (VGSF) and CEPR)
    Abstract: This paper investigates whether security markets price the effect of social distancing on firms' operations. We document that firms that are more resilient to social distancing significantly outperformed those with lower resilience during the COVID-19 outbreak, even after controlling for the standard risk factors. Similar cross-sectional return differentials already emerged before the COVID- 19 crisis: the 2014-19 cumulative return differential between more and less resilient firms is of similar size as during the outbreak, suggesting growing awareness of pandemic risk well in advance of its materialization. Finally, we use stock option prices to infer the market's return expectations after the onset of the pandemic: even at a two-year horizon, stocks of more pandemic-resilient firms are expected to yield significantly lower returns than less resilient ones, reflecting their lower exposure to disaster risk. Hence, going forward, markets appear to price exposure to a new risk factor, namely, pandemic risk.
    Keywords: asset pricing, rare disasters, social distance, resilience, pandemics.
    JEL: G01 G11 G12 G13 G14 Q51 Q54
    Date: 2020–05–18
  10. By: Ramiro Losada; Ricardo Laborda
    Abstract: This paper analyses the connectedness among non-alternative collective investment schemes and with their underlying securities markets. The results show that non-alternative collective investment schemes should not be taken as important in terms of propa-gation of shocks and they may play a limited role from a systemic point view, an outcome that may be confirmed by the second main result of the paper. There is not a long run relationship (cointegration) between the connectedness from non-alternative collective schemes with their underlying markets and the financial systemic risk. On the other hand, in the short run, the way that a negative shock in the financial systemic risk causes an increase in the level of connectedness is shown although the opposite cannot be said; a negative shock in the level of connectedness does not cause a rise in the measure of the financial systemic risk.
    Keywords: Connectedness, investment schemes, UCITS, securities markets, systemic risk
    JEL: G23 G18 C53
    Date: 2020
  11. By: Morsy, Hanan; El-Shal, Amira; Woldemichael, Andinet
    Abstract: Women are disproportionately disadvantaged in access to finance in Africa. While supply-side detriments, such as high interest rates and collateral requirements, are well documented in the literature, little is understood about how demand-side factors contribute to the observed gender gap in access to finance. This paper provides the first empirical evidence on how women managers’ perception about their creditworthiness contributes to the large gender gap in Africa, particularly in the Northern region. One of the innovations of the paper is introducing a theoretical model using the credit market framework with imperfect and asymmetric information to explain what may drive loan applicants to self-select. We use firm-level data for 47 African countries from the World Bank Enterprise Survey. We find that women entrepreneurs in Africa, in general, and in North Africa, in particular, are more likely to self-select themselves out of the credit market due to low perceived creditworthiness compared to their men counterparts. The results also suggest that the observed self-selection behavior is not a response mechanism to current discriminatory lending practices by the banks. The results are robust to different empirical specifications. The findings will inform policies towards greater financial inclusion of women in the region.
    Keywords: Gender Inequality; Access to Finance; Perception of Creditworthiness; Discrimination;Imperfect Information; Africa; North Africa.
    JEL: D1 D22 D8 G02
    Date: 2019–07
  12. By: Jérémie BERTRAND (IESEG School of Management); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: This study analyzes the month-of-the-year effect on lending decisions. Using data from a large US peer-to-peer lender, we perform regressions of loan acceptance and loan spread on month dummy variables, including a large set of borrower and loan control variables. We find evidence of a month-of-the-year effect on loan acceptance and loan pricing. December is the best month to ask for a loan, with the highest chance of acceptance and the lowest spread. Loan applications have the lowest chance of acceptance in January while loan pricing is highest in August and September. We test the potential explanations of the calendar anomalies and find some support for trade loading, such that granted loans might be inflated at the end of the quarter to hit quarterly targets.
    Keywords: Fintech, calendar anomalies, loan.
    JEL: G21
    Date: 2020

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