nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒08‒24
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Capital Market Financing and Firm Growth By Tatiana Didier; Ross Levine; Ruth Llovet Montanes; Sergio L. Schmukler
  2. Bankruptcy Risk among Indonesian Stock Exchange Listed Companies By Zuliani Dalimunthe
  3. The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration By Satyajit Chatterjee; Burcu Eyigungor
  4. The Role of Assets In Place: Loss of Market Exclusivity and Investment By Matthew J. Higgins; Mathias J. Kronlund; Ji Min Park; Joshua Pollet
  5. Testing the Theory of Common Stock Ownership By Lysle Boller; Fiona Scott Morton
  6. Real Options: Capital Investment Appraisal; Estimating the Market Price of Risk and Application to the Valuation of a New Business By Rashid, Muhammad Mustafa
  7. The impact of the IRB approach on the relationship between the cost of credit for public companies and financial market conditions By Raffaele Gallo
  8. The Sensitivity of Cash Savings to the Cost of Capital By Viral V. Acharya; Soku Byoun; Zhaoxia Xu
  9. A Fast and Parsimonious Way to Estimate the Implied Rate of Return on Equity By Sanna, Dario
  10. The Effect of Ownership Structure, Cash Holding and Tax Avoidance on Income Smoothing By Nico Alexander
  11. Collateral Re-use, Liquidity and Financial Stability By Matteo Accornero

  1. By: Tatiana Didier (World Bank); Ross Levine (University of California at Berkeley, NBER); Ruth Llovet Montanes (World Bank); Sergio L. Schmukler (World Bank)
    Abstract: This paper studies whether there is a connection between finance and growth at the firm level. It employs a new dataset of 150,165 equity and bond issuances around the world, matched with income and balance sheet data for 62,653 listed firms in 65 countries over 1990-2016. Three main patterns emerge from the analyses. First, firms that choose to issue in capital markets use the funds raised to grow by enhancing their productive capabilities, increasing their tangible and intangible capital and the number of employees. Growth accelerates as firms raise funds. Second, the faster growth is more pronounced among firms that are more likely to face tighter financing constraints, namely, small, young, and high-R&D firms. Third, capital market issuances are associated with faster growth among firms located in countries with more developed capital markets relative to banks. Capital markets are also comparatively effective at allowing financially constrained firms to raise capital.
    Keywords: bond markets, capital market development, capital raising, equity markets, financial structure, firm dynamics, firm financing, firm size
    JEL: F65 G10 G31 G32 L25 O10 O16 O40
    Date: 2020–08
  2. By: Zuliani Dalimunthe (Universitas Indonesia, Faculty of Economics and Business, 16424, Indonesia Author-2-Name: Anton Setiawan Author-2-Workplace-Name: Universitas Indonesia, Faculty of Economics and Business, 16424, Indonesia Author-3-Name: Eko Rizkianto Author-3-Workplace-Name: Universitas Indonesia, Faculty of Economics and Business, 16424, Indonesia Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - This research analyses whether there was a change in bankruptcy risk of companies in Indonesia for the period between 2015–2018, during the first presidency period of Joko Widodo, when Indonesia experienced tremendous dynamic economic, political and technological change. Previous research generally discusses the predictability of bankruptcy models, whereas this study analyses how the dynamics of the bankruptcy risk of companies in Indonesia using the most widely known and recognized models.Methodology/Technique – We employed a Wilcoxon-rank test to evaluate whether there are differences in the bankruptcy risk of companies year to year for the overall company and for each sector. We evaluated 154 companies listed on the Indonesian Stock Exchange.Findings – We found that the number of companies categorized in the bankruptcy zone increased every year and almost doubled during the studied time period (49 companies in 2013 compared to 90 companies in 2018). Novelty – The analysis shows that there is a significant number of companies that experienced bankruptcy risk each year, except for the periods between 2013 to 2014 and 2016 to 2017. On average, when we look at more detail for sectors and each year, the results show statistically significant increasing bankruptcy risk in all sectors except the transportation sector. Type of Paper - Empirical.
    Keywords: Bankruptcy Risk; Corporate Bankruptcy Prediction; Altman Z-score; Wilcoxon Rank-test; Indonesia.
    JEL: G32 G33 E66
    Date: 2019–12–31
  3. By: Satyajit Chatterjee; Burcu Eyigungor
    Abstract: Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash flow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have a lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of sales.
    Keywords: Startup rates; leverage; firm dynamics
    JEL: E22 E43 E44 G32 G33 G34
    Date: 2020–07–30
  4. By: Matthew J. Higgins; Mathias J. Kronlund; Ji Min Park; Joshua Pollet
    Abstract: We utilize a novel identification strategy to analyze the impact of assets in place on firms' decisions for future projects. We exploit the context in the pharmaceutical industry, where the loss of market exclusivity for a branded drug can be used to separate the impact of cash flows generated by a firm's current assets in place from the characteristics of its future investment opportunities. We first show that around the exclusivity losses in our sample of large drugs, the affected firms' profitability drops significantly. The timing of this profitability decrease was predetermined many years ago, and therefore, arguably independent of current investment opportunities. Nevertheless, we find that R&D spending drops by approximately 25% over two years following the loss of exclusivity of these pre-existing drugs. We also find that stock repurchases and cash balances decline significantly. Our findings do not support the predictions of traditional capital budgeting, but are more consistent with the pecking order theory. These results further point to a lack of long-term lifecycle management that could mitigate the effect of predictable negative shocks to cash flows.
    JEL: D92 G31 G32 G35 L65 O30
    Date: 2020–07
  5. By: Lysle Boller; Fiona Scott Morton
    Abstract: We test if an increase in common ownership changes future expected profits with an event study method. We collect instances of a stock entering the S&P 500 index and identify its product market competitors. We measure the change in institutional and common ownership (with product market rivals) and find that entering stocks experience a significant increase in both. We measure the stock returns of the entrant's product market rivals upon the entry news. We find that increases in common ownership (driven by the whole vector of ownership similarity) cause increases in stock returns, consistent with a hypothesis that common ownership raises profits.
    JEL: G14 G34 L4 L41
    Date: 2020–07
  6. By: Rashid, Muhammad Mustafa
    Abstract: The risk-neutral valuation approach to evaluating an investment avoids the need to estimate risk-adjusted discount rates, but it does require the market price of risk parameters for all stochastic variables. When historical data is available on a particular variable, its market price of risk can be estimated using the capital asset pricing model.
    Keywords: Real Options, Capital Investment Appraisal, Market Price of Risk, New Business Valuation, Internet Companies, Amazon
    JEL: G3 G31 G32 M10 N0 N8 N82
    Date: 2020–03–19
  7. By: Raffaele Gallo (Bank of Italy, Directorate General for Economics, Statistics and Research.)
    Abstract: This paper examines whether the regulatory approach adopted by banks to calculate capital requirements has a different impact on the loan rates for public and private companies when financial market conditions change. Using Italian data for the period 2008-18, the analysis documents that the adoption of the internal ratings-based (IRB) approach has led to a significantly greater sensitivity of the loan rates applied to public companies to financial market conditions, proxied by the VSTOXX index. For credit granted by IRB banks, being public is associated with a significant loan cost advantage when the level of financial instability is low. However, when VSTOXX rises, public companies experience a greater increase in loan rates than private firms; the effect is determined mostly by less capitalized IRB banks. In contrast, for credit granted by banks that adopt the standardized approach (SA), public borrowers do not benefit from a significant loan cost advantage compared with private ones, and a change in financial market conditions has a similar impact on loan rates for both types of companies.
    Keywords: credit risk regulation, public firm, financial stability, interest rates, bank credit
    JEL: G01 G20 G21 G32
    Date: 2020–07
  8. By: Viral V. Acharya; Soku Byoun; Zhaoxia Xu
    Abstract: We show theoretically and empirically that in the presence of a time-varying cost of capital (COC), firms have a hedging motive to reduce the overall COC over time by saving cash when COC is relatively low. The sensitivity of cash savings to COC is especially pronounced with respect to the cost of equity and for firms with greater correlation between COC and financing needs for future investments. Both financially constrained and unconstrained firms respond to low COC by saving cash out of external capital issuance in excess of current financial needs.
    JEL: G32 G35
    Date: 2020–07
  9. By: Sanna, Dario
    Abstract: I propose a fast and parsimonious way to estimate the implied rate of return on common equity of single stocks and indexes, resulting from the combination of two easily computable ratios.
    Keywords: Earnings Yield, Implied Cost of Equity, Price Earnings Ratio, Quadratic Roe Ratio, Roe Discount Model
    JEL: G12 G32 G35
    Date: 2020–07–01
  10. By: Nico Alexander (Trisakti School of Management, Kyai tapa No. 20, 11440, Jakarta, Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - This study aims to undertake an empirical study of the influence of ownership structure, cash holding, and tax avoidance on income smoothing. Methodology/Technique – Ownership structure in this research is measured by public ownership and managerial ownership. The population of this research are manufacturing companies listed on the Indonesian Stock Exchange (IDX) between 2015-2017 and there are 50 companies that meet the criteria and serve as the research sample. The sample selection in this study uses purposive sampling and the hypotheses were tested using binary logistics. Findings – The results of this study show that managerial ownership and public ownership, cash holding by companies and tax avoidance do not have influence on income smoothing. These results show that managerial ownership and public ownership do not affect income smoothing because there are same interest, to improve their wealth. Similarly, neither how much cash is held by a company nor tax avoidance behavior effect income smoothing. Type of Paper - Empirical.
    Keywords: Income Smoothing; Ownership Structure; Cash Holding; Tax Avoidance.
    JEL: G23 G28
    Date: 2019–12–31
  11. By: Matteo Accornero (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: This work provides a model where the repercussions on financial stability of collateral re-use in repo contracts can be analysed and assessed. In the model, the rationale for repo contracts is the arbitrage activity of a leveraged hedge fund, which is profitably financed by a dealer bank. Repo contracts, in connection with collateral re-use, lubricate both the credit and the financial system, increasing the financial operators’ profits and improving equilibrium rates and volumes. At the same time, they amplify the leverage of the whole economy, making it vulnerable to shocks. Introducing a default risk for the hedge fund, the proposed model identifies diverging effects of collateral re-use on financial stability. In states with low dealer bank profitability, the increase in collateral re-use renders a sound dealer bank management style the profit maximising strategy. Where an unsound balance sheet expansion is highly profitable, the increase in collateral re-use provides destabilising incentives to the dealer bank.
    Keywords: repo markets, collateral re-use, rehypothecation, systemic risk
    JEL: E58 G01 G21 G23
    Date: 2020–05

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