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on Corporate Finance |
| By: | Marius Guenzel; Ulrike Malmendier |
| Abstract: | One of the fastest-growing areas of finance research is the study of managerial biases and their implications for firm outcomes. Since the mid-2000s, this strand of behavioral corporate finance has provided theoretical and empirical evidence on the influence of biases in the corporate realm, such as overconfidence, experience effects, and the sunk-cost fallacy. The field has been a leading force in dismantling the argument that traditional economic mechanisms— selection, learning, and market discipline—would suffice to uphold the rational-manager paradigm. Instead, the evidence reveals that behavioral forces exert a significant influence at every stage of a chief executive officer’s (CEO’s) career. First, at the appointment stage, selection does not impede the promotion of behavioral managers. Instead, competitive environments oftentimes promote their advancement, even under value-maximizing selection mechanisms. Second, while at the helm of the company, learning opportunities are limited, since many managerial decisions occur at low frequency, and their causal effects are clouded by self-attribution bias and difficult to disentangle from those of concurrent events. Third, at the dismissal stage, market discipline does not ensure the firing of biased decision-makers as board members themselves are subject to biases in their evaluation of CEOs. By documenting how biases affect even the most educated and influential decision-makers, such as CEOs, the field has generated important insights into the hard-wiring of biases. Biases do not simply stem from a lack of education, nor are they restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations. An important question for future research is how to limit, in each CEO career phase, the adverse effects of managerial biases. Potential approaches include refining selection mechanisms, designing and implementing corporate repairs, and reshaping corporate governance to account not only for incentive misalignments but also for biased decision-making. |
| JEL: | G3 G32 G34 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27635&r=all |
| By: | Ricardo Correa; Linda S. Goldberg |
| Abstract: | Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the costs of bank resolution when organizations fail, the effect of complexity on BHCs' broader risk profile is less well understood. Business, organizational, and geographic complexity can engender explicit trade-offs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The outcomes of such trade-offs may depend on bank governance arrangements. We test these conjectures using data on large U.S. BHCs for the 1996-2018 period. Organizational complexity and geographic scope tend to provide diversification gains and reduce idiosyncratic and liquidity risks while also increasing BHCs' exposure to systematic and systemic risks. Regulatory changes focused on organizational complexity have significantly reduced this type of complexity, leading to a decrease in systemic risk and an increase in liquidity risk among BHCs. While bank governance structures have, in some cases, significantly affected the buildup of BHC complexity, better governance arrangements have not moderated the effects of complexity on risk outcomes. |
| JEL: | G21 G28 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27547&r=all |
| By: | Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen |
| Abstract: | We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank. |
| JEL: | E44 G21 G28 G32 G34 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27537&r=all |
| By: | Amir Kermani; Yueran Ma |
| Abstract: | The specificity of firms' assets affects a wide range of economic issues. We study asset specificity of U.S. non-financial firms using a new dataset on the liquidation recovery rates of all major asset categories across industries. First, we find that non-financial firms' assets are generally highly specific. The average recovery rate (liquidation value over cost net of depreciation) is 35% for plant, property, and equipment (PPE). Second, across industries, physical attributes such as mobility, durability, and standardization account for around 40% of variations in PPE recovery rates. Over time, macroeconomic and industry conditions have the most impact on recovery rates when PPE is not firm-specific. Third, higher asset specificity is associated with less asset sales, greater investment response to uncertainty, and more Q dispersion, consistent with theories of investment irreversibility. Finally, the data suggests that rising intangibles have had a limited impact on firms' liquidation values. |
| JEL: | E22 E32 G31 G33 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27642&r=all |
| By: | Flores Zendejas, Juan |
| Abstract: | This paper analyses the reasons why most Latin American governments frequently defaulted on their debts during the 19th century. Contrary to previous works, which focused on domestic factors, I argue that supply-side factors were equally important. The regulatory framework at the London Stock Exchange impeded defaulting governments from having access to the market. Therefore, the implicit incentive for underwriting banks and governments was to accelerate the negotiations with bondholders, particularly during periods of high liquidity. Frequently, however, the settlements reached were short-lived. In contrast, certain merchant banks opted to delay or refuse a settlement if they judged that the risks of a renewed default were too high. In such cases, even if negotiations were extended, the final agreements were more often respected, allowing governments to improve their repayment record. |
| Keywords: | Sovereign debt, Defaults, Defaults, Underwriting, Financial crises |
| JEL: | N26 F34 G15 N23 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:gnv:wpaper:unige:140134&r=all |
| By: | Antonio Falato; Itay Goldstein; Ali Hortaçsu |
| Abstract: | In the decade following the financial crisis of 2008, investment funds in corporate bond markets became prominent market players and generated concerns of financial fragility. The COVID-19 crisis provides an opportunity to inspect their resilience in a major stress event. Using daily microdata, we document major outflows in these funds during this period, far greater than anything they experienced in past events. Large outflows were sustained over several weeks and were widespread across funds. Inspecting the role of sources of fragility, we show that both the illiquidity of fund assets and the vulnerability to fire sales were important factors in explaining outflows in this episode. The exposure to sectors most hurt by the COVID-19 crisis was also important. Two policy announcements by the Federal Reserve about extraordinary direct interventions in corporate-bond markets seem to have played an important role in calming down the panic and reversing the outflows. |
| JEL: | G01 G1 G23 G38 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27559&r=all |
| By: | Robert P. Bartlett III; Adair Morse |
| Abstract: | Using unique City of Oakland data during COVID-19, we document that small business survival capabilities vary by firm size as a function of revenue resiliency, labor flexibility, and committed costs. Nonemployer businesses rely on low cost structures to survive 73% declines in own-store foot traffic. Microbusinesses (1-to-5 employees) depend on 14% greater revenue resiliency. Enterprises (6-to-50 employees) have twice-as-much labor flexibility, but face 11%-to-22% higher residual closure risk from committed costs. Finally, inconsistent with the spirit of Chetty-Friedman-Hendren-Sterner (2020) and Granja-Makridis-Yannelis-Zwick (2020), PPP application success increased medium-run survival probability by 20.5%, but only for microbusinesses, arguing for size-targeting of policies. |
| JEL: | E61 G38 H32 J65 L26 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27629&r=all |
| By: | Baumöhl, Eduard; Bouri, Elie; Hoang, Thi-Hong-Van; Shahzad, Syed Jawad Hussain; Výrost, Tomáš |
| Abstract: | Over the last few decades, large banks worldwide have become more interconnected. As a result, the failure of one can trigger the failure of many. In finance, this phenomenon is often known as financial contagion, which can act like a domino effect. In this paper, we show an unprecedented increase in bank interconnectedness during the outbreak of the Covid-19 pandemic. We measure how extreme negative stock market returns from one bank can spill over to the other banks within the network. Our contribution relies on the establishment of a new systemic risk index based on the cross-quantilogram approach of Han et al. (2016). The results indicate that the systemic risk and the density of the spillover network among 83 banks in 24 countries have never been as high as during the Covid-19 pandemic – much higher than during the 2008 global financial crisis. Furthermore, we find that US banks are the most important risk transmitters, and Asian banks are the most important risk receivers. In contrast, European banks were strong risk transmitters during the European sovereign debt crisis. These findings may help investors, portfolio managers and policymakers adapt their investment strategies and macroprudential policies in this context of uncertainty. |
| Keywords: | Systemic risk,Banks,Covid-19 pandemic,Cross-quantilogram,Financial networks |
| JEL: | G01 G15 G21 G28 C21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:222580&r=all |
| By: | Amir Kermani; Yueran Ma |
| Abstract: | We study the nature of debt among US non-financial firms and its determinants. One approach of debt enforcement lends against the liquidation value of discrete assets (such as fixed assets or working capital). Another approach lends against the going-concern value of the business. Using a new dataset on the liquidation value of different types of assets as well as the going-concern value of distressed firms across major industries, we present several findings. First, non-financial firms have limited liquidation values from fixed assets and working capital, which sum to around 23% of book assets for the average firm. Second, firms with lower liquidation values have more loans with monitoring and tighter performance covenants. Third, lower liquidation values are associated with higher interest rates, but only for debt against discrete assets. We finally present a model that matches the main findings, which demonstrates how covenants and control right institutions facilitate borrowing well beyond liquidation values. |
| JEL: | G32 G33 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27641&r=all |
| By: | Sanchez, Melissa; Karimi, Matin; Elmalawany, Omar |
| Abstract: | With a growing population of one hundred twenty-six million (World Bank, 2018), Mexico is accountable for one hundred thirty-one thousand metric tons of CO2 emissions annually, which makes the country 13th largest producer of fossil-fuel CO2 emissions (Boden et al., 2017). Moreover, Mexico's plastic waste is also predicted to be twenty million tons annually (Lira, 2019). This shows that an increasing level of CO2 emission and plastic waste will impede the achievement of three vital Sustainable Development Goals (SDGs) such as Climate Action (SDG13), Life on Land (SDG15), and Life under the Sea (SDG14). To achieve these three essential SGDs, Mexico's government should encourage and support green startups that are introducing environmentally friendly alternatives for the existing means of production and consumption. |
| Keywords: | Green Finance, Green Startup, Green Startup in Mexico, Mexico Green Initiatives, Seed capital, Crowdfunding, Green Startup Incubators, Green Startup Accelerators |
| JEL: | G15 G21 G28 G32 O44 Q01 Q21 Q28 |
| Date: | 2020–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102347&r=all |
| By: | Stefano CLÃ’; Marco FRIGERIO; Daniela VANDONE |
| Abstract: | This paper explores the role of Development Financial Institutions (DFIs) in supporting innovation by facilitating the access to finance for start-ups and high-growth small and medium enterprises. After having mapped the population of DFIs in Europe, we benchmark their portfolio of equity deals to those of other European financial institutions (venture capital and private equity). We build a unique sample of European 12,437 Mergers and Aquisitions within the 2008–2017 period and for each target company we match the related patenting and economic data. We obtain a dataset of 80,713 yearly observations which allows us to empirically analyse the pre and post-deal patenting activity of companies targeted by both DFIs and other financial institutions. Our findings show that the target company patenting performance improves after receiving the support of financial institutions, and this effect is on average higher when DFIs participate to the equity deal. We also find that partnerships among DFIs and other financial institutions are associated with the best patenting performance of the target companies. These results are confirmed when a propensity score matching technique is adopted to address biases associated to the potential endogenous selection of the target company. |
| Keywords: | Development banking;Development Financial Institutions;public-private partnership; equitydeals; patenting activity; financial support to innovation |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2020_10.rdf&r=all |
| By: | Benjamin Balsmeier; Lee Fleming; Matt Marx; Seungryul Ryan Shin |
| Abstract: | To what extent does high-growth entrepreneurship depend on skilled human capital? We estimate the impact of the inflow of inventors into a region on the founding of high-growth firms, instrumenting mobility with the county-level share of millions of inventor surnames in the 1940 U.S. Census. Inventor immigration increases county-level high-growth entrepreneurship; estimates range from 29-55 immigrating inventors for each new high-growth firm, depending on the region and model. We also find a smaller but significant negative effect of inventor arrival on entrepreneurship in nearby counties. |
| JEL: | J24 J61 L26 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27605&r=all |
| By: | Sungmin An; Anna Kovner; Stephan Luck |
| Abstract: | The COVID-19 pandemic has caused significant economic disruptions among U.S. corporations. In this post, we study the preliminary impact of these disruptions on the cash flow and leverage of public U.S. corporations using public filings through April 2020. We find that the pandemic had a negative impact on cash flow while also reducing corporations’ interest expenses. However, the cash flow shock far outpaced the benefits of lower interest payments, especially in industries that were disproportionately levered. Looking ahead, we find that a sizable share of U.S. corporations have interest expense greater than cash flow, raising concerns about the ability of those corporations to endure further liquidity shocks. |
| Keywords: | COVID-19; bank leverage; corporate debt |
| JEL: | I18 G24 |
| Date: | 2020–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:88528&r=all |
| By: | Andre Speit; Paul Voss |
| Abstract: | This paper examines the effect of vote trading on shareholder activism and corporate governance. We show that vote trading enables hostile activism because voting rights trade at inefficiently low prices even when the activist’s motives are transparent. Our results explain empirical findings of low vote prices (Christofferson et al. 2007) and inefficient outcomes (Hu & Black 2006). Though an activist with superior information can facilitate information transmission through vote trading, traditional activist intervention techniques provide the same information transmission without the downsides inherent in vote trading. Our analysis of potential policy measures suggests that adopting simple majority rules and excluding bought votes offer the most promising intervention avenues. |
| Keywords: | blockholder, decoupling techniques, empty voting, hostile activism, share-holder activism, vote trading |
| JEL: | G32 G34 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_200&r=all |
| By: | Söhnke M. Bartram; Mark Grinblatt; Yoshio Nozawa |
| Abstract: | We study the role played by “bond book-to-market” ratios in U.S. corporate bond pricing. Controlling for numerous risk factors tied to default and priced asset risk, including yield-to-maturity, we find that the ratio of a corporate bond’s book value to its market price strongly predicts the bond’s future return. The quintile of bonds with the highest book-to-market ratios outperforms the quintile with the lowest ratios by more than 3% per year, other things equal. Additional evidence on signal delay, scope of signal efficacy, and factor risk rejects the thesis that the corporate bond market is perfectly informationally efficient, although significant positive alpha spreads are erased by transaction costs. |
| JEL: | G1 G11 G12 G14 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27655&r=all |
| By: | Kraemer-Eis, Helmut; Botsari, Antonia; Lang, Frank; Pal, Kristian; Pavlova, Elitsa; Signore, Simone; Torfs, Wouter |
| Abstract: | This paper provides unique insights into the impact of the COVID-19 crisis on the European private equity (PE) and venture capital (VC) ecosystem. It achieves this purpose in two ways. By exploiting the recent survey wave of EIF's signature BA/VC/PE MM survey series, which was launched just prior to the COVID-19 outbreak in Europe, we are able to gauge how the pandemic changed the sentiment among European fund managers. This qualitative exercise is complemented by the results from a simple time series model that simulates the potential impact of the COVID-19 pandemic on the European PE and VC markets. Our analysis provides evidence that the European PE/VC ecosystem faces unprecedented challenges in the aftermath of the COVID-19 pandemic. A strong policy response in support of the PE/VC markets is imperative, to which EIF will be an indispensable contributor. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eifwps:202064&r=all |