nep-cfn New Economics Papers
on Corporate Finance
Issue of 2020‒10‒26
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Syndicated bank lending and rating downgrades: Do sovereign ceiling policies really matter? By Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
  2. Firm-bank “Odd Couples” and trade credit: Evidence from Italian SMEs By Jérémie BERTRAND; Pierluigi MURRO
  3. Capital Regulations and the Management of Credit Commitments during Crisis Times By Pelzl, Paul; Valderrama, Maria Teresa
  4. Cultural Proximity and the Formation of Lending Relationships By Accetturo, Antonio; Barboni, Giorgia; Cascarano, Michele; Garcia-Appendini, Emilia
  5. Peer Effects on Firm Dividend Policies in Taiwan By Lee, King Fuei
  6. The Impact of CCC and WC on The Profitability of KMI-30 INDEX By Riaz, Samina; Iqbal, Athar; Khan, Muhammad Irfan
  7. Corporate Debt, Rentiers' Portfolio Dynamics, Instability and Growth: A neo-Kaleckian Perspective By Parui, Pintu
  8. Institutions, Financial Development, and Small Business Survival: Evidence from European Emerging Markets By Ichiro Iwasaki; Evzen Kocenda; Yoshisada Shida
  9. The Effects of COVID-19 on U.S. Small Businesses: Evidence from Owners, Managers, and Employees By Georgij Alekseev; Safaa Amer; Manasa Gopal; Theresa Kuchler; JW Schneider; Johannes Stroebel; Nils Wernerfelt
  10. Financial distress and the role of management in micro and small-sized firms By Fernando Alexandre; Sara Cruz; Miguel Portela
  11. The Dark Side of the Bank Levy By Marcin BORSUK; Oskar KOWALEWSKI; Jianping QI
  12. Factor Adjustments and Liquidity Management: Evidence from Japan's Two Lost Decades and Financial Crises By Hirokazu Mizobata; Hiroshi Teruyama
  13. A q Theory of Internal Capital Markets By Min Dai; Xavier Giroud; Wei Jiang; Neng Wang

  1. By: Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
    Abstract: We examine the effect of firm credit rating downgrades on the pricing and structure of syndicated bank loans following rating downgrades in the firms’ countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionally adverse impact on the bounded firms’ borrowing costs relative to other domestic firms following their sovereign’s rating downgrade. Moreover, the loans extended tend to be more concentrated and funded by fewer lead arrangers. Forming borrowing relationships with local- as well as foreign-banks and maintaining financial strength ameliorates bounded firms’ bank financing costs.
    Keywords: Credit ratings, Sovereign ceiling, Bank credit, Relationship lending, Foreign-currency lending, Firm credit constraints
    JEL: F34 G21 G24 G28 G32 H63
    Date: 2020–07
  2. By: Jérémie BERTRAND (IESEG School of Management, Finance Department 3, rue de la digue, 59000 Lille - France); Pierluigi MURRO (LUISS University, Department of Business and Managemen, Viale Romania, 32 00197 Rome – Italy)
    Abstract: We analyze the use of trade credit as a substitute for relationship lending credit when firms cannot otherwise obtain such credit. Using a sample of SMEs from the Survey of Italian Manufacturing Firms, we show that when opaque firms seeking relationship credit encounter transactional banks, they use a greater portion of trade credit. This findings suggest that opaque firms substitute their missing relationship credit with trade credit, because trade creditors are more able to evaluate soft information. The results depend on firm characteristics, the nature of the bank, and the size of the firms’ banking pool.
    Keywords: Banks, Lending Technologies, Small Business, Trade Credit
    JEL: G21 L14 L22
    Date: 2020–10
  3. By: Pelzl, Paul (Dept. of Business and Management Science, Norwegian School of Economics); Valderrama, Maria Teresa (Oesterreichische Nationalbank)
    Abstract: Drawdowns on credit commitments by firms reduce a bank’s capital buffer. Exploiting Austrian credit register data and the 2008-09 financial crisis as exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank’s capital position, we further find that also larger liquidity problems induce banks to cut such commitments. These results show that banks manage both capital and liquidity risk posed by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity insurance to firms exactly when they need it most.
    Keywords: Capital Regulations; Credit Commitments; Financial Crisis
    JEL: E51 G01 G21 G28 G32
    Date: 2020–10–15
  4. By: Accetturo, Antonio (Economic Research Unit, Trento, Bank of Italy); Barboni, Giorgia (University of Warwick, Warwick Business School and CAGE); Cascarano, Michele (Economic Research Unit, Trento, Bank of Italy); Garcia-Appendini, Emilia (Department of Banking and Finance, University of Zurich)
    Abstract: We use credit registry data from the population of loans granted to firms in a region hosting two different cultural groups to study the role of culture in the formation of lending relationships. We find a large predominance of lending relationships involving banks and firms of the same culture, particularly among small, young, and opaque firms. Loans to same-culture firms are larger, require less collateral, and default less often than loans to different-culture firms. Our results suggest that cultural proximity reduces information asymmetries by providing a source of soft information that complements the one stemming from close or lengthy relationships.
    Keywords: Cultural proximity; Asymmetric information; Soft information; Lending relationships JEL Classification: G21, G30, Z1
    Date: 2020
  5. By: Lee, King Fuei
    Abstract: With the dividend-paying culture increasingly taking hold in corporate Taiwan, this paper investigates the effects of industry peers on the corporate dividend policies in the country. By employing the instrument variable technique, we find strong evidence that the payout policies of Taiwanese firms are positively influenced by the policies of their industry peers. This peer influence tends to be stronger for companies operating in industries with lower product competition and higher information uncertainty, indicating that firms imitate the dividend policies of their peers for information-based reasons. Younger, smaller and harder-to-value companies are also more likely to mimic their larger, older and easier-to-value peers. Our findings are robust to alternative definitions of control variables, instrument variable and industry classifications.
    Keywords: Dividend policy, Peers effect, Taiwan
    JEL: G3 G35
    Date: 2018–12
  6. By: Riaz, Samina; Iqbal, Athar; Khan, Muhammad Irfan
    Abstract: This research purpose is to investigate the impact of WC and CCC on prosperity of the companies, listed in KMI-30 Index. For this research data was gathered from firm’s annual reports. Data of 30companies listed in KMI-30 Index was collected over the period of 2010 till 2014. Data was collected to check significance of ROE, Tobins’Q, and ROA. To analyze these variables regression analysis was used to measure the impact on dependent variable through independent variables. The study concluded that cash conversion cycle and debt to assets ratio were most significant variable on the dependent variables i.e. ROA, Tobins’Q and ROE. It was recommended to the companies of listed in the KMI-30 to maintain the CCC at their minimum level or in lines with the industry norms, so they can avoid the liquidity problem along with the reduce the shortfall of cash requirement which were needed to smoothly run the operations of the companies.
    Keywords: KMI-30, Tobin’s Q, ROA, ROE, WC, CCC
    JEL: G17 G3 M41
    Date: 2019–01–10
  7. By: Parui, Pintu
    Abstract: Considering a stock-flow consistent neo-Kaleckian macro-model, along with firms' debt dynamics, in the long-run, we incorporate portfolio dynamics of rentiers and investigate the possibility of multiple equilibria and dynamic stability of the economy. Both the debt-led and the debt-burdened demand and growth regimes are possible. We find share buybacks, under certain conditions, not only may lead to the deterioration of the equilibrium rate of capital accumulation in the long-run but may potentially destabilize the entire economy. A strictly regulated financial market is desirable, as otherwise, the economy may lose its stability and produces the limit cycles.
    Keywords: Capital Accumulation, Kaleckian Model, Stock-flow Consistency, Instability, Limit Cycle
    JEL: C62 E12 E32 E44 O41
    Date: 2020–09–11
  8. By: Ichiro Iwasaki (Institute of Economic Research, Hitotsubashi University, Tokyo, Japan); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic; CESifo, Munich, IOS, Regensburg); Yoshisada Shida (Economic Research Institute for Northeast Asia (ERINA), Niigata, Japan)
    Abstract: In this paper, we traced the survival status of 94,401 small businesses in 17 European emerging markets from 2007–2017 and empirically examined the determinants of their survival, focusing on institutional quality and financial development. We found that institutional quality and the level of financial development exhibit statistically significant and economically meaningful impacts on the survival probability of the SMEs being researched. The evidence holds even when we control for a set of firm-level characteristics such as ownership structure, financial performance, firm size, and age. The findings are also uniform across industries and country groups and robust beyond the difference in assumption of hazard distribution, firm size, region, and time period.
    Keywords: small business; institutions; financial development; survival analysis; European emerging markets
    JEL: C14 D02 D22 G33 M21
    Date: 2020–10
  9. By: Georgij Alekseev; Safaa Amer; Manasa Gopal; Theresa Kuchler; JW Schneider; Johannes Stroebel; Nils Wernerfelt
    Abstract: We analyze a large-scale survey of owners, managers, and employees of small businesses in the United States to understand the effects of the early stages of the COVID-19 pandemic on those businesses. The survey was fielded in late April 2020 among Facebook business page administrators, frequent sellers on Facebook’s e-commerce platform Marketplace, and the general Facebook user population. We observe more than 66,000 responses covering most sectors of the economy, including many businesses that had stopped operating due to the pandemic. The survey asks 136 questions covering topics such as changes in business operations and employment, changes in financing patterns, and the interaction of household and business responsibilities. We characterize the adjustments implemented to survive the pandemic and explore the key challenges to continue operating or to re-open. We show how these patterns differ across industry, firm size, owner gender, and other firm characteristics.
    Keywords: small businesses, COVID-19, working from home, small business finance
    JEL: E30 L26 M13
    Date: 2020
  10. By: Fernando Alexandre (University of Minho and NIPE); Sara Cruz (University of Minho and NIPE); Miguel Portela (University of Minho, NIPE and IZA, Bonn)
    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, enhancing the resilience of the economy against shocks.
    Keywords: Financial distress; human capital; firm performance
    JEL: G32 J24 L25
    Date: 2020
  11. By: Marcin BORSUK (European Central Bank, Frankfurt, Germany); Oskar KOWALEWSKI (IESEG School of Management & LEM-CNRS 9221); Jianping QI (Muma College of Business, University of South Florida, Tampa, USA)
    Abstract: We examine the consequences of imposing a high tax levy on bank assets. Employing unique supervisory bank-level data, we exploit different channels through which the new tax may impair the stability of the banking sector. We find that following the introduction of the levy, banks increase the cost of loans and decrease their overall availability to the real economy. We also document that changes in banks’ loan portfolios are strongly related to bank-specific profitability and capital adequacy ratios. Furthermore, our evidence supports the view that banks engage in risk shifting by increasing the risk level of their loan portfolios, attempting to recover from the lower return on equity as the tax reduces their overall profits.
    JEL: G21 H22 L13
    Date: 2020–08
  12. By: Hirokazu Mizobata (Faculty of Economics, Kansai University); Hiroshi Teruyama (Institute of Economic Research, Kyoto University)
    Abstract: To reveal the cause of Japan's recent weak physical investment, this study estimates and compares the Euler equations for physical investment, R&D investment, and employment. We construct an unbalanced panel from Japanese firms' microdata from 1994 to 2014. The estimation results suggest that firms face weak financial constraints in the sense that their borrowing amount is not restricted, but their internal funds are insufficient.To address such constraints, firms first allocate their cash flows and cash reserves to buffer their employment and then incur R&D investment rather than protect physical investment. We suggest the following reason for this result: employment and R&D investment are more productive and/or impose larger adjustment costs than physical investment, and thus, firms prioritize the stabilization of employment and R&D over funding physical investment. This study also shows that young, small-sized, and manufacturing firms are likely to suffer from weak financial constraints. Furthermore, even during financial crises, firms rely only on internal funding and are not restricted by external funding in the same way as they are during usual times.
    Keywords: physical investment, research and development investment, employment, adjustment cost, financial constraint, Euler equation
    JEL: G31 G32
    Date: 2020–10
  13. By: Min Dai; Xavier Giroud; Wei Jiang; Neng Wang
    Abstract: We propose a tractable model of dynamic investment, division sales (spinoffs), financing, and risk management for a multi-division firm that faces costly external finance. The model highlights the importance of considering the intertwined nature of the different policies. Our main results are as follows: (1) risk management considerations prescribe the allocation of resources based not only on the divisions' productivity -- as in standard models of ''winner picking'' -- but also their risk; (2) firms may choose to voluntarily spin off productive divisions to increase liquidity; (3) diversification can reduce firm value especially in low liquidity states, as it increases the cost of a spinoff and hampers liquidity management; (4) with corporate socialism, liquidity is less valuable since it is less costly to replenish the firm's liquidity through a spinoff; and (5) division-level investment is set such that the ratio between marginal q and the marginal cost of investing in each division equals the marginal value of cash.
    JEL: D92 G3 L25
    Date: 2020–10

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