nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒10‒12
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The COVID-19 Shock and Equity Shortfall: Firm-level Evidence from Italy By Elena Carletti; Tommaso Oliviero; Marco Pagano; Loriana Pelizzon
  2. The Impact of Business Group Affiliation and Country-Level Institutions on Corporate Governance of Emerging Market Firms By Hearn, Bruce; Oxelheim, Lars; Randoy, Trond
  3. The Pandemonics of Informal Credit Markets By Filipe Correia; António Martins
  5. Effects of interest rate caps on microcredit: evidence from a natural experiment in Bolivia By María José Roa; Alejandra Villegas; Ignacio Garrón
  6. Clean Energy Innovation and the Influence of Venture Capitalists' Social Capital By Till Fust
  7. Financial Distress and the Role of Management in Micro and Small-Sized Firms By Alexandre, Fernando; Cruz, Sara; Portela, Miguel
  8. To securitize or to price credit risk? By Danny McGowan; Huyen Nguyen
  9. Machine learning sentiment analysis, Covid-19 news and stock market reactions By Costola, Michele; Nofer, Michael; Hinz, Oliver; Pelizzon, Loriana
  10. On the Risk of Using a Firm-Level Approach to Identify Relevant Markets By Timo Autio; Jorge Padilla; Salvatore Piccolo; Pekka Sääskilahti; Lotta Väänänen

  1. By: Elena Carletti; Tommaso Oliviero; Marco Pagano; Loriana Pelizzon
    Abstract: We forecast the drop in profits and the equity shortfall triggered by the COVID-19 lockdown, using a representative sample of 80,972 Italian firms. A 3-month lockdown entails an aggregate yearly drop in profits of about 10% of GDP and results in financial distress for 17% of the sample firms, employing 8.8% of the sample employees. Distress is more frequent for small and medium-sized enterprises, for firms with high pre-COVID-19 leverage, and those belonging to the Manufacturing and Wholesale Trading sectors. Listed companies are less likely to enter distress, while there is no clear correlation between distress rates and family firm ownership.
    Keywords: COVID-19, pandemics, losses, distress, equity, recapitalization.
    JEL: G01 G32 G33
    Date: 2020–10
  2. By: Hearn, Bruce (University of Bradford); Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Randoy, Trond (School of Business and Law)
    Abstract: This study outlines how the corporate governance of emerging market firms is influenced by corporate affiliation and institutional embeddedness. We argue that the stronger the business group affiliation, the less likely is the emerging market firm to adopt shareholder value-enhancing corporate governance and that this relationship is moderated by institutional quality and tribalism. Based on189 initial public offerings (IPOs) from 22 African countries between 2000 and 2016, we find a significant negative relationship between business group ownership and IPO firms’ quality of corporate governance. We also find this relationship to be significantly negatively moderated by country-level institutional quality and positively by indigenous tribalism. The result adds to the understanding of barriers toa convergence towards one uniform global corporate governance model.
    Keywords: Corporate Governance Practice; Africa; Emerging Economies; IPO; Business Groups
    JEL: G23 G38 M12 M14 M16
    Date: 2020–09–30
  3. By: Filipe Correia; António Martins
    Abstract: Credit markets are at the core of any economic crisis, and informal loans are largely under studied. We collect a dataset on an online informal lending community to study the impact that the 2020 pandemic crisis had on informal credit markets. We find that these informal loans are short duration, expensive and that borrowers and lenders exhibit some sense of community. Our results suggest that the financial hardship imposed by stay athome orders is perceived as persistent, and borrowers expect lower future income, hencereducing loan demand. Moreover, loans directly associated with the pandemic are more likely to be transacted by newcomers to this market, and mentioning the pandemic in a loan request lowers the chance that it originates a loan. The absence of an increase of violations ofcommunity rules and the reduction in promised repayment time highlights the importance of informal credit communities in hard times.
    Keywords: informal credit, online lending, pandemic, non-pharmaceutical interventions
    JEL: G21
    Date: 2020–09
  4. By: Giovanni Scarano
    Abstract: The share of surplus devoted to direct investment in capital goods by big corporations also depends on their corporate savings decisions, which are closely connected not only to the features of corporate governance and the forms of competition, but also to the possibilities of holding liquid financial assets bearing high returns. Financial globalization, multiplying the potential range of financial instruments available to big corporations’ portfolios and creating new ways to access the high profits produced in the emergent markets, can contribute to change the portfolio composition. The paper deals with some contributions that analyse the effects of financial globalization on portfolio management and investment decisions in big corporations, seeking to determine how they may be playing a major role in timing the rhythms of real investment. The main objective is to understand whether these models can account for the tendency to put growing shares of social surplus into speculative channels.
    Keywords: Investment theory, Corporate Savings, Capital Movements, Financialisation, Financial Crises
    JEL: B51 E11 E12 E32 F23 G35
    Date: 2020–09
  5. By: María José Roa (Investigadora del Instituto de Investigaciones Económicas y Sociales Francisco de Vitoria); Alejandra Villegas (Investigadora de Universidad Iberoamericana Ciudad de México); Ignacio Garrón (Consultor indpendiente)
    Abstract: This paper evaluates the imposition of caps on microcredit lending rates through directed credit policies for productive sectors. This financial inclusion intervention provides a unique quasi-experiment, allowing to estimate its causal effect following a difference-in-differences analysis. Our results suggest that the imposition of interest rate ceilings negatively affected the portfolio balance of new microcredits and loans to SMEs granted by MFIs. Particularly, we find robust results indicating that the balance of the microcredit and SME loans portfolio granted by MFIs, relative to the company portfolio granted by banks, decreased by 26.1% for an average MFI for the period 2011-2018.
    Keywords: Interest rate ceilings, financial inclusion, credit access, microcredit loans, small and medium enterprises loans .
    JEL: G18 G28 G38
    Date: 2020–09
  6. By: Till Fust
    Abstract: This study contributes to the understanding of the enabling role that venture capitalists can play in bringing new innovative technologies to market, with a focus on clean energy technologies. Applying the structural model introduced by Sorensen (2007) that allows to control for a potential sorting bias, I estimate the influence of venture capital investor's social capital on startups' funding and exit performance, with social capital de ned as the investors' eigencentrality and constraint within the network of investors. Looking at startups' first venture capital funding rounds in California between 2001 and 2019, this study finds a positive and significant influence of the lead investor's eigencentrality on the funding amount raised and the exit probability of the firm. Furthermore, a less constrained lead investor also increases the chance of the startup's eventual exit. But no differentiated effect for cleantech startups compared to other industries is found.
    Keywords: Venture Capitalists;CleanEnergy; Clean Technologies; Startups; Capital Funding; Cleantech startup
    JEL: O14 O33 Q41 Q42
    Date: 2020–09–29
  7. By: Alexandre, Fernando (University of Minho); Cruz, Sara (University of Minho); Portela, Miguel (University of Minho)
    Abstract: In this paper, we focus on managerial characteristics of micro and small-sized firms. Using linked employer-employee data on the Portuguese economy for the 2010-2018 period, we estimate the impact of management teams' human capital on the probability of firms becoming financially distressed and on their subsequent recovery. Our estimates show that the relevance of management teams' formal education on the probability of firms becoming financially distressed depends on firms' size and the type of education. We show that management teams' formal education and tenure reduces the probability of micro and small-sized firms becoming financially distressed and increases the probability of their subsequent recovery. The estimates also suggest that those impacts are stronger for micro and small-sized firms. Additionally, our results show that functional experience previously acquired in other firms, namely in foreign-owned and in exporting firms and in the area of finance, may reduce the probability of micro firms becoming financially distressed. On the other hand, previous functional experience in other firms seems to have a strong and highly significant impact on increasing the odds of recovery of financially distressed firms. We conclude that policies that induce an improvement in the managerial human capital of micro and small-sized firms have significant scope to improve their financial condition, reducing the likelihood of firms entering a state of financial distress.
    Keywords: financial distress, human capital, firm performance
    JEL: G32 J24 L25
    Date: 2020–09
  8. By: Danny McGowan (University of Birmingham); Huyen Nguyen (Halle Institute for Economic Research (IWH), and Friedrich Schiller University Jena)
    Abstract: We evaluate if lenders price or securitize mortgages to mitigate credit risk. Exploiting exogenous variation in regional credit risk created by differences in foreclosure law along US state borders, we find that financial institutions respond to the law in heterogeneous ways. In the agency market where Government Sponsored Enterprises (GSEs) provide implicit loan guarantees, lenders transfer credit risk using securitization and do not price credit risk into mortgage contracts. In the non-agency market, where there is no such guarantee, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate about the design of loan guarantees, the common interest rate policy, and show that underpricing regional credit risk leads to an increase in the GSEs’ debt holdings by $79.5 billion per annum, exposing taxpayers to preventable losses in the housingmarket.
    Keywords: loan pricing, securitization, credit risk, GSEs
    JEL: G21 G28 K11
    Date: 2020–09–11
  9. By: Costola, Michele; Nofer, Michael; Hinz, Oliver; Pelizzon, Loriana
    Abstract: The possibility to investigate the impact of news on stock prices has observed a strong evolution thanks to the recent use of natural language processing (NLP) in finance and economics. In this paper, we investigate COVID-19 news, elaborated with the "Natural Language Toolkit" that uses machine learning models to extract the news' sentiment. We consider the period from January till June 2020 and analyze 203,886 online articles that deal with the pandemic and that were published on three platforms:, and Our findings show that there is a significant and positive relationship between sentiment score and market returns. This result indicates that an increase (decrease) in the sentiment score implies a rise in positive (negative) news and corresponds to positive (negative) market returns. We also find that the variance of the sentiments and the volume of the news sources for Reuters and MarketWatch, respectively, are negatively associated to market returns indicating that an increase of the uncertainty of the sentiment and an increase in the arrival of news have an adverse impact on the stock market.
    Keywords: COVID-19 news,Sentiment Analysis,Stock Markets
    JEL: G10 G14 G15
    Date: 2020
  10. By: Timo Autio (Compass Lexecon); Jorge Padilla (Compass Lexecon); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF); Pekka Sääskilahti (Compass Lexecon); Lotta Väänänen (Compass Lexecon)
    Abstract: In a recent influential paper Coate et al. (2020) have criticized the standard firm-level approach to market definition in merger review. They argue why a market-level approach to critical loss is more appropriate than a firm-level critical loss analysis. Their conclusion is that under certain plausible demand scenarios - i.e., non-linearity of demand functions - a diversion-based firm-level analysis could easily reach the wrong answer on market definition. We extend their analysis by showing that in standard environments used by the most recent theoretical and empirical academic work on merger analysis (namely CES and logit demand functions), a firm level approach actually leads to an excessively narrow market definition as opposed to a market-level approach, thereby increasing the risk of type I errors.
    Keywords: Critical Loss Analysis, Firm- and Market-level approach, Mergers, Non-linear Demand.
    JEL: D43 G34 L4 L13
    Date: 2020–09–26

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