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on Corporate Finance |
| By: | Maurin, Laurent; Pál, Rozália |
| Abstract: | We use firm-level financial data to illustrate the impact of the COVID-19 crisis under several scenarios. We estimate COVID-19 induced cumulative net revenue losses for EU companies in the range of 5.4 to 10.0% of total assets, depending on the strength of the policy support and length of the normalisation period. The results appear robust to the consideration of sector specific decline in sales and cost-elasticities. The decline in internal financing capacity is likely to reduce investment by 24.3 to 48.5% during the COVID-19 crisis, compared to 19% during the Great Financial Crisis (GFC). Using historical regularities, we then assess the likelihood of such decline by estimating a macro based Bayesian VAR model for which we identify a standard demand shock. We then calibrate the demand shock to generate the computed decline in net revenues associated to the most benign scenario. The comparison between conditional and unconditional projections supports the existence of a tradeoff faced by corporates between investment and leverage. It also suggests that, should the estimated gap in net revenues materialise as the result of the crisis, the decline in corporate investment would likely be within the computed ranges. |
| Keywords: | Corporate investment,leverage,financing structure,firm-level data,Scenarios,calibration,BVAR models,shocks identification,conditional projections |
| JEL: | E22 D92 F34 G31 G32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:202009&r=all |
| By: | Afzali, Haaron (Hanken School of Economics, Helsinki, Finland); Martikainen, Minna (University of Vaasa, Faculty of Business Studies, Vaasa, Finland); Oxelheim, Lars (School of Business and Law, University of Agder, Kristiansand, Norway); Randoy, Trond (School of Business and Law, University of Agder, Kristiansand, Norway) |
| Abstract: | Motivated by agency theory and arguments from linguistic studies, we argue in this paper the internationalization of a firm’s audit committee to be associated with weaker firm-level corporate governance. Based on 2,015 publicly traded European firms from 16 countries over 2000-2018, we find the presence of foreign directors on audit committees to have a significant negative impact on financial reporting quality (FRQ). The effect is found to be weaker in countries with strong investor protection. We find linguistic differences within audit committees an important explanation for the negative influence of foreign directors on FRQ. The results are robust to alternative FRQ measures and model specifications, including difference-in-differences and propensity score matching. While foreign directors on a corporate board may create value for the firm by boosting the advisory capacity of that board, recruiting a foreign director to that firm’s audit committee may compromise the board’s monitoring function and the firm’s FRQ. |
| Keywords: | Reporting Quality; Foreign Directors; Audit Committee; Investor Protection |
| JEL: | F23 G34 K22 M16 M42 |
| Date: | 2020–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1370&r=all |
| By: | Pierluigi Murro (LUISS University); Valentina Peruzzi (LUISS University) |
| Abstract: | Using a unique sample of Italian manufacturing firms, we investigate the impact of relationship lending on firms' use of trade credit. We find that firms with close and long-lasting relationships with their main bank obtain higher amounts of trade credit. This result is robust to alternative definitions of trade credit and relationship lending, and to different estimation techniques. This positive link is especially strong for firms that use to provide soft information to their lenders and for companies with greater abilities to create valuable relationships with business parties. |
| Keywords: | Trade credit; relationship lending; soft information |
| JEL: | D22 G21 G32 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:2006&r=all |
| By: | Juliane Begenau (Stanford GSB and NBER and CEPR); Saki Bigio (UCLA, Visiting Scholar SF Fed & NBER); Jeremy Majerovitz (MIT); Matias Vieyra (Bank of Canada) |
| Abstract: | We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market leverage target that is reached slowly, (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where leverage notions differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals: different accounting rules produce a novel policy tradeoff. |
| Keywords: | Banks, Tobin's Q, Delayed Accounting, Adjustment Costs |
| JEL: | G21 G32 G33 E44 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:171&r=all |
| By: | Avdiu, Besart; Weichenrieder, Alfons J. |
| Abstract: | The paper compares provision of public infrastructure via public-private partnerships (PPPs) with provision under government management. Due to soft budget constraints of government management, PPPs exert more effort and therefore have a cost advantage in building infrastructure. At the same time, hard budget constraints for PPPs introduce a bankruptcy risk and bankruptcy costs. Consequently, if bankruptcy costs are high, PPPs may be less efficient than public management, although this does not result from PPPs' higher interest costs. |
| Keywords: | Public-Private Partnerships,Infrastructure,Financing Costs,Default |
| JEL: | H11 H54 G33 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:295&r=all |
| By: | Gulcan Yildirim Gungor; Tuba Pelin Sumer |
| Abstract: | [EN] This note aims to estimate credit riskiness of the corporate sector in Turkey with alternative methods for January 2007 -March 2019 period. Initially, probability of default is calculated by option pricing method for the listed companies and the relationship with non-performing loan (NPL) ratio is examined. In the one-year period following the increase (decrease) in the probability of default, a similar upward (downward) movement is observed in the corporate NPL ratio of the banking sector. Since the option pricing method focuses on relatively large scale companies listed on the stock exchange, credit riskiness is also calculated using NPL additions and commercial loan interest rates to increase the comprehensiveness of the study and include financials of the relatively small scale firms (SMEs). Although the sample size and assumptions differ, credit risk indicators estimated by alternative methods move together.Therefore, the credit riskiness indicators estimated with high frequency market data is important for monitoring the financial fragilities of corporate sector and their reflections on asset quality of the banking sector. [TR] Bu calismada, Turkiye’de faaliyet gosteren reel sektor firmalarinin kredi riskliligi alternatif yontemlerle Ocak 2007-Mart 2019 donemi icin tahmin edilmektedir. Oncelikle opsiyon fiyatlama yontemiyle borsaya kote firmalar icin temerrut olasiligi hesaplanmakta ve firma kredisi tahsili gecikmis alacak (TGA) oraniyla arasindaki iliski incelenmektedir. Analiz sonuclarina gore reel sektorun temerrut olasiligindaki artisi (azalisi) izleyen bir yillik surecte bankacilik sektoru TGA oraninda da benzer bir yukari (asagi) yonlu hareket oldugu gorulmektedir. Opsiyon fiyatlama yonteminde borsaya kote gorece buyuk olcekli firmalara odaklanildigi icin, temsil kuvvetini arttirmak ve nispeten kucuk olcekli firmalarin finansal gelismelerini de analize dahil etmek amaciyla kredi riskliligi, TGA ilaveleri ve ticari kredi faiz oranlari kullanilarak da hesaplanmaktadir. Kapsanan orneklem ve varsayimlar farkli olsa da alternatif yontemlerle hesaplanan kredi riski gostergelerinin beraber hareket ettigi gorulmektedir. Dolayisiyla, yuksek frekanstaki piyasa verileri kullanilarak hesaplanan kredi riskliligi gostergelerinin, gecikmeli finansal tabloveri akisina sahip reel kesim firmalarinin finansal kirilganliklarinin izlenmesi ve bankacilik sektoru aktif kalitesine yansimasi icin onemli bir gosterge oldugu degerlendirilmektedir. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:econot:2017&r=all |
| By: | Gang, Ira N.; Natarajan, Rajesh Raj; Sen, Kunal |
| Abstract: | How does informal economic activity respond to increased financial inclusion? Does it become more entrepreneurial? Does access to new financing options change the gender configuration of informal economic activity and, if so, in what ways and what directions? We take advantage of nationwide data collected in 2010/11 and 2015/16 by India's National Sample Survey Office on unorganized (informal) enterprises. This period was one of rapid expansion of banking availability aimed particularly at the unbanked, under-banked, and women. We find strong empirical evidence supporting the crucial role of financial access in promoting entrepreneurship among informal sector firms in India. Our results are robust to alternative specifications and alternative measures of financial constraints using an approach combining propensity score matching and difference-in-differences. However, we do not find conclusive evidence that increased financial inclusion leads to a higher likelihood of women becoming entrepreneurs than men in the informal sector. |
| Keywords: | entrepreneurship,financial constraints,gender,informal sector,difference-indifferences,India |
| JEL: | O12 G28 L26 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:708&r=all |
| By: | Rodríguez-Pose, Andrés; Ganau, Roberto; Maslauskaite, Kristina; Brezzi, Monica |
| Abstract: | This paper examines the relationship between credit constraints - proxied by the investment-to-cash flow sensitivity – and firm-level economic performance - defined in terms of labor productivity – during the period 2009-2016, using a sample of 22,380 manufacturing firms from 11 European countries. It also assesses how regional institutional quality affects productivity at the level of the firm both directly and indirectly. The empirical results highlight that credit rationing is rife and represents a serious barrier for improvements in firm-level productivity and that this effect is far greater for micro and small than for larger firms. Moreover, high-quality regional institutions foster productivity and help mitigate the negative credit constraints-labor productivity relationship that limits the economic performance of European firms. Dealing with the European productivity conundrum thus requires greater attention to existing credit constraints for micro and small firms, although in many areas of Europe access to credit will become more effective if institutional quality is improved. |
| Keywords: | credit constraints; labor productivity; manufacturing firms; regional institutions; cross-country analysis; Europe |
| JEL: | C23 D24 G32 H41 R12 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:107500&r=all |
| By: | Barbora Stepankova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic) |
| Abstract: | Some financial institutions can use internally developed credit risk models to determine their capital requirements. At the same time, the regulatory framework governing such models allows institutions to implement diverse rating systems with no specified penalty for poor model performance. To what extent the resulting model risk { potential for equivalent models to deliver inconsistent outcomes { is prevalent in the economy is largely unknown. We use a unique dataset of 4.9 million probability of default estimates provided by 28 global IRB banks, covering the January 2016 to June 2020 period, to assess the degree of variance in credit risk estimates provided by multiple banks for a single entity. In line with the prior literature, we find that there is a substantial variance in outcomes and that it decreases with the amount of available information about the assessed entity. However, we further show that the level of variance is highly dependent on the entity type, its industry and locations of the entity and contributing banks; banks report a higher deviation from the mean credit risk for foreign entities. Further, we conclude that a considerable part of the variance is systematic, especially for fund models. Finally, utilising the latest available data, we show the massive impact of the COVID-19 pandemic on dispersion of credit estimates. |
| Keywords: | Banking, Credit Risk, Bank Regulation |
| JEL: | C12 G21 G32 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2020_44&r=all |
| By: | Ari Van Assche (HEC Montreal) |
| Abstract: | Located at the heart of global value chains (GVCs), intangibles are documented to have a high and rising value capture, and to depend on both agglomeration economies and global connectedness for their performance. In this paper, we study how the distinct nature of intangibles require countries to develop novel policy prescriptions to attract intangible-intensive activities and to increase the value capture of these activities. We suggest that such GVC-oriented policies fall into three categories: Attractiveness policies that aim to strengthen the appeal of a location for intangible activities; Buzz policies that intend to strengthen the local production and innovation ecosystem; and Connectedness policies that aspire to strengthen the local ecosystem’s connections to other locations. Together, they constitute the ABCs of GVC-oriented policies. |
| Keywords: | Innovation, Intangible capital, Investment policy, Trade policy |
| JEL: | E22 F23 F68 |
| Date: | 2020–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:oec:traaab:242-en&r=all |
| By: | Nicola Borri (LUISS University); Giorgio Di Giorgio (LUISS University) |
| Abstract: | This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the Covid-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector. |
| Keywords: | CoVaR, systemic risk, Covid-19, banking regulation |
| JEL: | G01 G18 G21 G38 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:2005&r=all |
| By: | José-Luis Peydró; Andrea Polo; Enrico Sette |
| Abstract: | We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis. |
| Keywords: | risk shifting, financial crises, securities, bank capital, interbank funding, concentration risk, uncertainty, risk weights, available for sale, held to maturity, trading book, COVID-19 |
| JEL: | G01 G21 G28 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1219&r=all |
| By: | Peydró, José-Luis; Polo, Andrea; Sette, Enrico |
| Abstract: | We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis. |
| Keywords: | risk shifting,financial crises,securities,bank capital,interbank funding,concentration risk,uncertainty,risk weights,available for sale,held to maturity,trading book,COVID-19 |
| JEL: | G01 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:226219&r=all |
| By: | Yusuke Oh (Bank of Japan); Koji Takahashi (Bank of Japan) |
| Abstract: | We investigate innovation dynamics in Japanese listed firms by calculating an indicator for the accumulation of innovation based on patent citations, the gcitation stock. h The calculated citation stock has decreased since the mid-2000s, which implies that the pace of innovation accumulation at Japanese listed firms has slowed. Using the citation stock, we show that an increase in a firm fs citation stock contributes to its productivity growth and that the citation stock provides information on whether research and development (R&D) leads to innovation that cannot be captured by focusing on the amount of R&D investment alone. In addition, we find that while higher R&D investment is associated with new innovation, the efficiency of R&D investment in Japan has decreased in recent years. Such a decrease in the efficiency of R&D investment has been reported not only for Japanese firms but also for a wide range of fields around the world, so that firms and research institutions are attempting to maintain the pace of innovation by increasing the number of researchers and research spending. For Japan, where it is difficult to increase the number of researchers due to the declining population, it is important to improve the quality of research through various efforts such as increasing the diversity of researchers. |
| Keywords: | productivity; patent data; innovation; R&D |
| JEL: | O31 E23 D24 |
| Date: | 2020–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp20e07&r=all |