nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒08‒10
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Riding out of a financial crisis: The joint effect of trust and corporate ownership By Mario Daniele Amore; Mircea Epure
  2. Terrorism Financing, Recruitment and Attacks By Nicola Limodio
  3. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics By Dean Corbae; Pablo D'Erasmo
  4. The Credit Line Channel By Daniel L. Greenwald; John Krainer; Pascal Paul
  5. Where Do Institutional Investors Seek Shelter when Disaster Strikes? Evidence from COVID-19 By Simon Glossner; Pedro Matos; Stefano Ramelli; Alexander F. Wagner
  6. An Assessment of the Stability and Diversity of the Nigerian Financial Service Sector By Adegboro, Opeyemi Oluwole; Orekoya, Samuel; Adekunle, Wasiu
  7. Audit fees and corporate innovation: Auditors' response to corporate innovation By Kim, Hyung-Tae; Lee, Seungwon; Park, Sung-Jin; Lee, Brandon
  8. The Implications of Tail Dependency Measures for Counterparty Credit Risk Pricing By J. C. Arismendi-Zambrano; Vladimir Belitsky; Vinicius Amorim Sobreiro; Herbert Kimura
  9. The Disappearing IPO Puzzle: New Insights from Proprietary U.S. Census Data on Private Firms By Thomas Chemmanur; Jie (Jack) He; Xiao (Shaun) Ren; Tao Shu

  1. By: Mario Daniele Amore; Mircea Epure
    Abstract: We study how generalized trust shapes the ability of firms with different ownership forms to obtain trade financing and perform during a financial crisis. Exploiting geographic variations in trust across Italian regions and the occurrence of the 2008-09 financial crisis in a difference-indifferences setting, we show that generalized trust makes family firms less able to obtain trade financing during the crisis. This finding maps into performance results: trust alleviates the negative effect of a crisis for non-family firms, while it aggravates the negative effect for family firms. This latter result depends crucially on a firm’s corporate governance: trust does not harm family firms whose board is open to non-family directors. Collectively, our findings illustrate how culture interacts with corporate attributes in shaping a firm’s prospects.
    Keywords: trust, trade financing, Family firms, financial crisis, performance
    JEL: G32 G34 Z10
    Date: 2020–07
  2. By: Nicola Limodio
    Abstract: This paper investigates the effect of terrorism financing and recruitment on attacks. A Sharia-compliant institution in Pakistan induces exogenous variation in the funding of terrorist groups through their religious affiliation. I isolate the supply of terrorist attacks by following multiple terrorist groups with different affiliations operating in various cities. Higher terrorism financing, in a given location and period, generates more attacks in the same location and period. This effect increases in recruitment, measured through darkweb data, inputs by two judges and machine-learning. This evidence is consistent with terrorist organizations facing financial frictions to their internal capital market. JEL: G30, H56 Keywords: Terrorism, Finance
    Date: 2020
  3. By: Dean Corbae; Pablo D'Erasmo
    Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a general equilibrium firm dynamics model with endogenous entry and exit to include both bankruptcy options. Finally, we evaluate a bankruptcy policy change similar to one recommended by the American Bankruptcy Institute that amounts to a "fresh start" for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity, as well as long run welfare.
    Keywords: Corporate bankruptcy; Capital structure; Firm dynamics; Capital misallocation
    JEL: G30 G33 E22
    Date: 2020–07–28
  4. By: Daniel L. Greenwald; John Krainer; Pascal Paul
    Abstract: Aggregate bank lending to firms expands following adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening, at odds with canonical models. Using loan-level supervisory data, we show that these dynamics are driven by draws on credit lines by large firms. Banks that experience larger drawdowns restrict term lending more — an externality onto smaller firms. Using a structural model, we show that credit lines are necessary to reproduce the flow of credit toward less constrained firms after adverse shocks. While credit lines increase total credit growth, their redistributive effects exacerbate the fall in investment.
    Keywords: covid-19; Banks; Firms; Credit Lines; Monetary Policy
    JEL: E32 E43 E44 E52 E60 G21 G32
    Date: 2020–07
  5. By: Simon Glossner (University of Virginia - Darden School of Business); Pedro Matos (University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)); Stefano Ramelli (University of Zurich - Department of Banking and Finance); Alexander F. Wagner (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute)
    Abstract: Institutional investors played a crucial role in the COVID-19 market crash. U.S. stocks with higher institutional ownership -- in particular, those held more by active, short-term, and domestic institutions -- performed worse. An analysis of changes in holdings through the first quarter of 2020 reveals that mutual funds, investment advisors, and pension funds favored stocks with strong financials (low debt and high cash), whereas hedge funds sold stocks indiscriminately. None of these institutional investor groups appear to have actively tilted their portfolios toward firms with better environmental and social performance. Data from a large discount brokerage indicate that retail investors acted as liquidity providers. Overall, the results suggest that when a tail risk realizes, institutional investors express a preference for "hard" measures of firm resilience.
    Keywords: Cash holdings, Coronavirus, Corporate debt, COVID-19, ESG, Event study, Financial crisis, Institutional ownership, Leverage, Pandemic, Retail investors, Robinhood, SARS-CoV-2, Tail risk
    JEL: G01 G12 G14 G32 F14
    Date: 2020–07
  6. By: Adegboro, Opeyemi Oluwole; Orekoya, Samuel; Adekunle, Wasiu
    Abstract: In recent times, policy makers have considered the financial sector as a vital factor for growth and development in a country. So many research efforts to address the resilience and well-being of the financial system have stressed the importance of diversity in the financial system. This study assesses the stability and diversity of the financial service sector in Nigeria. The study employed the use of data from Nigeria’s commercial banks’ financial report and the Central Bank of Nigeria (CBN) statistical bulletin for the period of 13years (2005:Q1 – 2017:Q4). The study adopted the Auto Regressive Distributed Lag Estimation technique to determine the long run and short run dynamics of the variable employed and the Hirshman Herfindahl Concentration Index for financial stability and diversity respectively. These analyses provided several findings such as a negative relationship between stability and total bank asset as a result of weak corporate governance among the regulatory bodies, a positive relationship between stability and loan asset, a positive insignificant relationship between stability and Real Gross Domestic Product due to poor level of financial coverage among the entire populace and finally the analysis reveals a fairly diversified financial system. The study recommends a strict supervisory and monitoring framework from both the Asset Management Company of Nigeria (AMCON) and the Central Bank of Nigeria (CBN) in the acquisition of the asset from the commercial banks. More so, the monetary authority should direct the commercial banks to give out loans with moderate interest rate and also control the inflationary pressures that might be posed as a result of the low interest rate through other instruments and finally in order to improve diversity in the financial system, the financial institutions particularly the commercial bank should fully inculcate the global idea of financial technology to deliver better financial service through technology solutions and also keep itself abreast of the pace of development in foreign countries financial service sector as this will gear them towards delivering better and innovative service to Nigerians.
    Keywords: Financial Stability, Financial Diversity, Z Score Total Bank Asset and Loan Asset
    JEL: G1 G14 G17 G21 G28
    Date: 2019–11–13
  7. By: Kim, Hyung-Tae; Lee, Seungwon; Park, Sung-Jin; Lee, Brandon
    Abstract: We investigate the extent to which a client’s innovative effort affects the level of audit effort and whether the innovative-effort efficiency can attenuate the demand for greater audit effort associated with a client’s risky research-and-development (R&D) investments. We find that a client firm’s strategic emphasis on corporate innovations may require greater audit effort, but the efficiency of a firm’s innovative effort can attenuate the demand for heightened audit effort against risky, innovative efforts. Findings suggest that the external auditor does not always discourage corporate innovation as the efficiency of a firm’s innovation may lower the client business risk perceived by an auditor.
    Keywords: Corporate innovation; Auditors; Research and development; Risk management
    JEL: M42 O32
    Date: 2019–05–27
  8. By: J. C. Arismendi-Zambrano (Department of Economics, Finance and Accounting, Maynooth University, Ireland & ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading, United Kingdom.); Vladimir Belitsky (cUniversity of São Paulo, Institute of Mathematics and Statistics, Department of Statistic, São Paulo, 05508–090, Brazil.); Vinicius Amorim Sobreiro (University of Brasília, Department of Management, Campus Darcy Ribeiro, Brasília, 70910–900, Brazil.); Herbert Kimura (University of Brasília, Department of Management, Campus Darcy Ribeiro, Brasília, 70910–900, Brazil.)
    Abstract: This paper investigates the counterparty credit risk of interest rate swaps positions using the credit valuation adjustment (CVA) measure, and examines the potential dependency relationships between the probability of default (PD) and exposure at default (EAD). We empirically tested, using interest rate swaption implied market volatilities, three tail dependency models: a Basel III Committee independent model, a Gaussian copula dependent model, and a Wrong Way Risk (WWR) with copula dependency approach. The results show that the CVA underestimation when using a Gaussian copula for modelling the dependence of PD and EAD is about 51%–362% compared to using WWR, and the underestimation between using the standardised Basel independent model and using the Gaussian copula is about 527%–1609%, including the period of the 2007/2008 crisis. This has important implications for regulators, financial institutions, and credit risk managers when calculating counterparty risk.
    Keywords: Credit risk, Counterparty Credit Risk, Credit Value Adjustment, Dependency of credit risk components, Pricing swaps.
    JEL: G10 G13 G33
    Date: 2020
  9. By: Thomas Chemmanur; Jie (Jack) He; Xiao (Shaun) Ren; Tao Shu
    Abstract: The U.S. equity markets have experienced a remarkable decline in IPOs since 2000, both in terms of smaller IPO volume and entrepreneurial firms’ greater tendency to exit through acquisitions rather than IPOs. Using proprietary U.S. Census data on private firms, we conduct a comprehensive analysis of the above two notable trends and provide several new insights. First, we find that the dramatic reduction in U.S. IPOs is not due to a weaker economy that is unable to produce enough “exit eligible” private firms: in fact, the average total factor productivity (TFP) of private firms is slightly higher post-2000 compared to pre-2000. Second, we do not find evidence supporting the conventional wisdom that the disappearing IPO puzzle is mainly driven by the decline in IPO propensity among small private firms. Third, we do not find a significant change in the characteristics of private firms exiting through acquisitions from pre- to post-2000. Fourth, the decline in IPO propensity persists even after we account for the changing characteristics of private firms over time. Fifth, we show that the difference in TFP between IPO firms and acquired firms (and between IPO firms and firms remaining private) went up considerably post-2000 compared to pre-2000. Finally, venture-capital-backed (VC-backed) IPO firms have significantly lower postexit long-term TFP than matched VC-backed private firms in the post-2000 era relative to the pre- 2000 era, while this pattern is absent among IPO and matched private firms without VC backing. Overall, our results strongly support the explanations based on standalone public firms’ greater sensitivity to product market competition and entrepreneurial firms’ access to more abundant private equity financing in the post-2000 era. We find mixed evidence regarding the explanations based on the smaller net financial benefits of being standalone public firms or the increased need for confidentiality after 2000.
    Keywords: IPOs, Exit Choices, Disappearing IPOs, Private Equity, Weak Economy, Product Market Competition
    JEL: G32 G34 G24
    Date: 2020–06

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