nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒06‒15
eighteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Managerial ability, financial performance and goodwill impairment: A moderated mediation analysis By Huang, Qiubin; Xiong, Mengyuan; Xiao, Ming
  2. The provision of long-term credit and firm growth By Florian Leon
  3. The COVID-19 Shock and Equity Shortfall: Firm-level Evidence from Italy By Elena Carletti; Tommaso Oliviero; Marco Pagano; Loriana Pelizzon; Marti G. Subrahmanyam
  4. Can Cash Be a Ventilator for Firms Suffering from COVID-19? Evidence from Stock Market in Japan By Kohei Aono; Keiichi Hori
  5. Determinants of firm investment: Evidence from Slovenian firm-level data By Lenarčič, Črt; Papadopoulos, Georgios
  6. Firm Acquisitions by Family Firms: a Mixed Gamble Approach By Katrin Hussinger; Abdul-Basit Issah
  7. CEO Succession and New-Firm Performance: Does Successor Origin Matter? By Masatoshi Kato; Yuji Honjo
  8. Political Beta By Raymond Fisman; April Knill; Sergey Mityakov; Margarita Portnykh
  9. The Impact of Financial Sanctions: The Case of Iran 2011-2016 By Saeed Ghasseminejad; Mohammad R. Jahan-Parvar
  10. Bank Lending in the Knowledge Economy By Giovanni Dell'Ariccia; Dalida Kadyrzhanova; Camelia Minoiu; Lev Ratnovski
  11. Rational Finance Approach to Behavioral Option Pricing By Jiexin Dai; Abootaleb Shirvani; Frank J. Fabozzi
  12. Household Credit and Growth: International Evidence By Florian Léon
  13. Equity Financing Risk By Mamdouh Medhat; Berardino Palazzo
  14. Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation By Sabrina T. Howell; Josh Lerner; Ramana Nanda; Richard R. Townsend
  15. Environmental Disclosures Effect on Cost of Capital Structure Financing of the Nigerian Listed Companies By Magaji Abba; Muhammad Auwal Kabir; Abdulkadir Abubakar
  16. Debt De-risking By Jannic Cutura; Gianpaolo Parise; Andreas Schrimpf
  17. The Month-of-the-Year Effect in Corporate Lending By Jérémie BERTRAND; Aurore BURIETZ; Laurent WEILL
  18. Financial Access, Governance and the Persistence of Inequality in Africa: Mechanisms and Policy instruments By Vanessa S. Tchamyou

  1. By: Huang, Qiubin; Xiong, Mengyuan; Xiao, Ming
    Abstract: This paper examines whether and how managerial ability affects the likelihood of goodwill impairment of Chinese publicly listed companies over the period 2007-2017. We document a negative relationship between goodwill impairment and managerial ability, and uncover the mediation effect of corporate financial performance. Moreover, we find that the mediation effect is moderated by firms’ earnings smoothing motivation and state ownership. The results suggest that when a company has the motivation to smooth earnings or is owned by the government, higher managerial ability of the company does not necessarily reduce the likelihood of goodwill impairment. The findings have important implications for investors and regulators.
    Keywords: Goodwill impairment; Managerial ability; Financial performance; Moderated mediation
    JEL: G32 G34 M41
    Date: 2020–05–11
  2. By: Florian Leon (CREA, Université du Luxembourg)
    Abstract: This paper investigates whether a higher level of long-term credit provision affects the growth of small and young firms. Firm-level data from more than 20,000 firms in 62 countries are combined with a new hand-collected database on short-term and long-term credit provided to the private sector. Using a difference-in-difference framework, our results indicate that, contrary to short-term credit, long-term credit does not stimulate growth of small and young firms. This finding is, at least partially, explained by the differential impact of short-term and long-term credit provision on small and young firms' access to credit. While the provision of short-term credit alleviates credit constraints faced by small and young firms, a larger provision of long- term bank loans has an opposite impact. Our findings are in line with the hypothesis that an increase of long-term credit provision reects a lender's choice to provide more financing to existing clients (intensive margin) to the detriment of firms without previous access to finance (extensive margin).
    Keywords: Long-term finance; firm growth; financial development; credit constraints
    JEL: G21 L25 O16
    Date: 2019
  3. By: Elena Carletti (Università Bocconi and CEPR); Tommaso Oliviero (Università di Napoli Federico II and CSEF); Marco Pagano (Università di Napoli Federico II, CSEF and EEIF); Loriana Pelizzon (SAFE, Goethe University Frankfurt and Università di Venezia Ca' Foscari); Marti G. Subrahmanyam (Stern School of Business, New York University)
    Abstract: This paper estimates the drop in profits and the equity shortfall triggered by the COVID-19 shock and the subsequent lockdown, using a representative sample of 80,972 Italian firms. We find that a 3-month lockdown entails an aggregate yearly drop in profits of €170 billion, with an implied equity erosion of €117 billion for the whole sample, and €31 billion for firms that became distressed, i.e., ended up with negative book value after the shock. As a consequence of these losses, about 17% of the sample firms, whose employees account for 8.8% of total employment in the sample (about 800 thousand employees), become distressed. Small and medium-sized enterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% of medium-sized ones becoming distressed, against 6.4% of large firms. The equity shortfall and the extent of distress are concentrated in the Manufacturing and Wholesale Trading sectors and in the North of Italy. Since many firms predicted to become distressed due to the shock had fragile balance sheets even prior to the COVID-19 shock, restoring their equity to their pre-crisis levels may not suffice to ensure their long-term solvency.
    Keywords: COVID-19, pandemics, losses, distress, equity, recapitalization.
    JEL: G01 G32 G33
    Date: 2020–05–28
  4. By: Kohei Aono (College of Economics, Ritsumeikan University); Keiichi Hori (School of Economics, Kwansei Gakuin University)
    Abstract: This paper explores how cash can mitigate adverse COVID-19 shocks to firms using an event-study methodology and the financial data from firms listed on the Tokyo Stock Exchange. We find that firms with more cash, less debt, and larger scale suffered less from the pandemic during the entire event window. We also find that the pandemic reduced the value of future investment opportunities the firms might invest in. Finally, we show that the variations in stock returns reflecting firm-specific factors become relatively smaller than that induced by market returns as cash holdings increase.
    Keywords: COVID-19, cash holdings, stock returns, event study, precautionary demand.
    JEL: G14 G32
    Date: 2020–05
  5. By: Lenarčič, Črt; Papadopoulos, Georgios
    Abstract: This paper examines the role of corporate balance sheet positions in determining Slovenian firms' investment behaviour. The analysis is based on the theoretical framework of the financial accelerator which suggests that firms' financial positions influence their real behaviour. The underlying hypotheses of the financial accelerator are tested, namely its asymmetric effect during crises and in respect to firms' size. In addition, the existence of differences in the relationship between the balance sheet variables and investment across various sectors is examined. The results indicate that indeed balance sheet strength is an important determinant of Slovenian firms' investment behaviour. Moreover, this relationship is affected by a firm's size but the effect of the crisis or its sectoral specialization do not seem to materially affect it.
    Keywords: Firm investment; financial accelerator; firm-level data
    JEL: C33 D22 E22
    Date: 2020–04–18
  6. By: Katrin Hussinger (CREA, Université du Luxembourg); Abdul-Basit Issah (LBG Open Innovation in Science Center, Vienna, Austria)
    Abstract: This study elucidates the mixed gamble confronting family firms when considering a related firm acquisition. The socioemotional and financial wealth trade-off associated with related firm acquisitions as well as their long-term horizon turns family firms more likely to undertake a related acquisition than non-family firms, especially when they are performing above their aspiration level. Post-merger performance pattern confirm that family firms are able to create long-term value "through these acquisitions and by doing so they surpass non-family firms. These findings stand in " contrast to commonly used behavioural agency predictions, but can be reconciled with theory through a mixed gambles’ lens.
    Keywords: Firm acquisitions; related firm acquisitions; mixed gamble; aspiration level, socioemotional wealth, value creation
    JEL: G34 L10 L20 M20
    Date: 2019
  7. By: Masatoshi Kato (School of Economics, Kwansei Gakuin University); Yuji Honjo (Faculty of Commerce, Chuo University)
    Abstract: This study explores the impact of chief executive officer (CEO) succession on new-firm performance, using a sample of Japanese firms founded during the period 2003–2010. When controlling for firm- and CEO-specific characteristics, we find that new firms with experience in CEO succession are more likely to increase sales than those without it. The results also reveal that CEO succession influences sales growth among new firms, but not employment growth. Moreover, based on successor origin, we classify the types of CEO succession, such as inside, outside, and family succession. The results reveal that both insider and outsider succession influences sales growth, while family succession does not.
    Keywords: CEO succession; Growth; Insider succession; Outsider succession; New firm; Successor origin.
    JEL: M13 L25
    Date: 2020–05
  8. By: Raymond Fisman (Boston University); April Knill (Florida State University); Sergey Mityakov (Florida State University); Margarita Portnykh (Carnegie Mellon University)
    Abstract: Using a framework akin to portfolio theory in asset pricing, we introduce the concept of “political beta†to model firm-level export diversification in response to global political risk. The main implication of our model is that a firm is less responsive to changes in political relations with a destination market when that country contributes less to (has lower political beta) or even hedges against (has negative political beta) the firm’s total political risk. This result follows the diversification logic of portfolio theory, in which an investor values a given asset depending on the asset’s comovement with his/her overall investment portfolio. We find patterns consistent with our model using disaggregated Russian firm-by-destination-country data during 1999-2011: trade is positively correlated with political relations, though the effect is far weaker for trading partners whose political relations with Russia are relatively uncorrelated with those of other partners in a firm’s export portfolio. Our results highlight the importance of viewing firms’ political relations as an undiversifiable source of risk, and more generally points to the value of modeling firms’ treatment of risks as a portfolio diversification problem.
    Keywords: Political Risk, Asset Pricing Theory; Portfolio Theory; Exports; Diversification
    JEL: F14 F23 F51 G11 G32
    Date: 2020–03
  9. By: Saeed Ghasseminejad; Mohammad R. Jahan-Parvar
    Abstract: This study provides a detailed analysis of the impact of financial sanctions on publicly traded companies. We consider the effect of imposing and lifting sanctions on the target country's traded equities and examine the differences in the reaction of politically connected firms and those without such connections. The paper focuses on Iran due to (1) its sizable financial markets, (2) imposition of sanctions of varying severity and duration on private and state-owned companies, (3) the significant presence of politically connected firms in the stock market, and (4) the unique event of the 2015 nuclear deal, resulting in fairly rapid lifting of a sizable portion of imposed sanctions. We find that sanctions affect politically connected firms more than ordinary firms, have lasting negative effects on profitability ratios, and that politically connected firms stock prices bounce back more slowly after removal of sanctions. Firms targeted by financial sanctions decrease their leverage and increase their cash holding to manage their perceived increase in risk profile.
    Keywords: National security; Financial sanctions; Political connections; Event study; Capital structure; Iran
    JEL: D74 F51 G32 G39 H56
    Date: 2020–05–26
  10. By: Giovanni Dell'Ariccia; Dalida Kadyrzhanova; Camelia Minoiu; Lev Ratnovski
    Abstract: We study the composition of bank loan portfolios during the transition of the real sector to a knowledge economy where firms increasingly use intangible capital. Exploiting heterogeneity in bank exposure to the compositional shift from tangible to intangible capital, we show that exposed banks curtail commercial lending and reallocate lending to other assets, such as mortgages. We estimate that the substantial growth in intangible capital since the mid-1980s explains around 30% of the secular decline in the share of commercial lending in banks' loan portfolios. We provide suggestive evidence that this reallocation increased the riskiness of banks' mortgage lending.
    Keywords: Bank lending; Corporate intangible capital; Real estate loans; Commercial loans
    JEL: E22 E44 G21
    Date: 2020–05–22
  11. By: Jiexin Dai; Abootaleb Shirvani; Frank J. Fabozzi
    Abstract: When pricing options, there may be different views on the instantaneous mean return of the underlying price process. According to Black (1972), where there exist heterogeneous views on the instantaneous mean return, this will result in arbitrage opportunities. Behavioral finance proponents argue that such heterogenous views are likely to occur and this will not impact option pricing models proposed by rational dynamic asset pricing theory and will not give rise to volatility smiles. To rectify this, a leading advocate of behavioral finance has proposed a behavioral option pricing model. As there may be unexplored links between the behavioral and rational approaches to option pricing, in this paper we revisit Shefrin (2008) option pricing model as an example and suggest one approach to modify this behavioral finance option pricing formula to be consistent with rational dynamic asset pricing theory by introducing arbitrage transaction costs which offset the gains from arbitrage trades.
    Date: 2020–05
  12. By: Florian Léon (CREA, Université du Luxembourg)
    Abstract: This paper has two main objectives. First, it attempts to distinguish the effects of house- hold and enterprise credit on economic growth for a large sample of developing and developed countries. Second, it investigates the channels through which household credit affects economic growth. To do so, a new database covering 143 countries over the period 1995-2014 is employed. Econometric results show that household credit has a negative effect on growth, while business credit has a positive, albeit non significant, impact on growth. The literature provide two possi- ble explanations to justify the negative effect of household credit. On the one hand, household credit expansion can induce more financial fragility. On the other hand, the negative impact of household credit could be explained by its effect on saving behaviors. Results provide some evidence indicating that the negative effect of household credit is more driven by the latter than the former.
    Keywords: Financial development; Household credit; Growth; Savings.
    JEL: E44 G21 O16
    Date: 2019
  13. By: Mamdouh Medhat; Berardino Palazzo
    Abstract: A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity financing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a significant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones related to R&D expenditures and cash-based operating profitability.
    Keywords: Equity returns; R&D; Factor models; Equity issuances; Financing constraints
    JEL: G12 G31 G35
    Date: 2020–05–20
  14. By: Sabrina T. Howell; Josh Lerner; Ramana Nanda; Richard R. Townsend
    Abstract: Although late-stage venture capital (VC) activity did not change dramatically in the first two months after the COVID-19 pandemic reached the U.S., early-stage VC activity declined by 38%. The particular sensitivity of early-stage VC investment to market conditions—which we show to be common across recessions spanning four decades from 1976 to 2017—raises questions about the pro-cyclicality of VC and its implications for innovation, especially in light of the common narrative that VC is relatively insulated from public markets. We find that the implications for innovation are not benign: innovation conducted by VC-backed firms in recessions is less highly cited, less original, less general, and less closely related to fundamental science. These effects are more pronounced for startups financed by early-stage venture funds. Given the important role that VC plays in financing breakthrough innovations in the economy, our findings have implications for the broader discussion on the nature of innovation across business cycles
    JEL: G24 O31
    Date: 2020–05
  15. By: Magaji Abba (Faculty of Management Sciences, A.T.B.U. Bauchi); Muhammad Auwal Kabir (Faculty of Social and Management Sciences, Bauchi State University, Gadau); Abdulkadir Abubakar (Faculty of Social and Management Sciences, Bauchi State University, Gadau)
    Abstract: The paper examined the relationship between environmental disclosure and cost of capital structure financing of the Nigerian listed companies. This is due to a concern about the environmental behaviour of the companies that result in stakeholders? interest in environmental disclosure. Though the disclosure is voluntary (to a certain extent) its inadequacy creates information asymmetric and risk that affect the cost of capital structure financing. The study was on listed Nigerian companies whose activities have an environmental repercussion. Where the data was gathered from content analysis of the companies? annual reports. A regression analysis based on the pool, 2SLS and 3SLS were made to improve the robustness of the results. It provides evidence in support of companies? stakeholders? engagement through disclosure to manage the cost of capital structure financing. The disclosure level effect on the cost of capital structure will help curtailed negative environmental activities of the companies. However, the sample size is small due to the limited number of publically listed companies in the Nigerian. Additionally, the data is cross-sectional which may not be stable over time and across industries level. Recommend for further study that will look into financial stakeholders? perception about the environmental disclosure and its value relevance in financing decision.
    Keywords: Environmental Disclosure; Information Asymmetric; Disclosure Quality; Cost of Capital Structure Financing; Nigerian Listed Companies
    JEL: M41 Q56 E22
    Date: 2020–02
  16. By: Jannic Cutura; Gianpaolo Parise; Andreas Schrimpf
    Abstract: We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.
    Keywords: corporate bond funds, bond market liquidity, asset managers, risk-taking, competitive pressures
    JEL: G11 G23 G32 E43
    Date: 2020–06
  17. By: Jérémie BERTRAND (IESEG School of Management); Aurore BURIETZ (IESEG School of Management & LEM-CNRS 9221); Laurent WEILL (EM Strasbourg Business School, University of Strasbourg)
    Abstract: We investigate the existence of calendar effect in corporate lending decisions. We show that the loan amount granted by banks significantly varies across months. We find a positive effect of quarter-end and year-end months on the loan amount. We attribute these effects to trade loading behavior, according to which banks would inflate granted loans at the end of the quarter and the year to hit financial targets
    Keywords: calendar effect, corporate loans, trade loading.
    JEL: G21
    Date: 2020–05
  18. 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

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