nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒03‒08
twelve papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Disrupted lending relationship and borrower's strategic default: evidence from the tourism industry during the Greek economic crisis By Panagiotis Avramidis; Ioannis Asimakopoulos; Dimitris Malliaropulos
  2. The pitfalls of pledgeable cash flows : soft budget constraints, zombie lending and under-investment By Bernhardt, Dan; Koufopoulos, Kostas; Trigilia, Giulio
  3. Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes By Atul Gupta; Sabrina T. Howell; Constantine Yannelis; Abhinav Gupta
  4. Spanish non-financial corporations’ liquidity needs and solvency after the covid-19 shock By Roberto Blanco; Sergio Mayordomo; Álvaro Menéndez; Maristela Mulino
  5. Firm Profits and Government Activity: An Empirical Investigation By Petar Jolakoski; Branimir Jovanovic; Joana Madjoska; Viktor Stojkoski; Dragan Tevdovski
  6. External financial dependence and firms' crisis performance across Europe By Eppinger, Peter S.; Neugebauer, Katja
  7. It's not time to make a change: Sovereign fragility and the corporate credit risk By Fornari, Fabio; Zaghini, Andrea
  8. Corporate Social Responsibility and Corporate Governance: A cognitive approach By Rania Béji; Ouidad Yousfi; Abdelwahed Omri
  9. Promoting from the poor in competitive lending markets with adverse selection By Bernhardt, Dan; Koufopoulos, Kostas; Trigilia, Giulio
  10. On the origin of systemic risk By Montagna, Mattia; Torri, Gabriele; Covi, Giovanni
  11. Syndication networks and company survival: Evidence from European venture-capital deals By Christopoulos, Dimitris; Köppl, Stefan; Köppl-Turyna, Monika
  12. The COVID-19 insolvency gap: First-round effects of policy responses on SMEs By Dörr, Julian Oliver; Murmann, Simona; Licht, Georg

  1. By: Panagiotis Avramidis (Alba Graduate Business School, The American College of Greece); Ioannis Asimakopoulos (Bank of Greece); Dimitris Malliaropulos (Bank of Greece and University of Piraeus)
    Abstract: Using a sample of bank loans to firms operating in the tourism industry for the period 2010-2015, and regional variation of tourism activities to identify the strategic defaulted firms, we examine the impact of Greek banks consolidation on the firms’ payment behavior. We show that a merger-induced impairment of the lending relationship is related to a higher likelihood of strategic default by the target bank’s borrowers. In contrast, mergers with a limited impact on the lending relationship have no effect on the probability of strategic default of target bank’s borrowers. The results highlight the importance of relationship lending benefits in strategic default decisions. Our findings are robust to the alternative interpretation of soft budget constraints.
    Keywords: Bank consolidation; strategic default; lending relationship.
    JEL: G21 G32 G33
    Date: 2021–01
  2. By: Bernhardt, Dan (University of Illinois and University of Warwick); Koufopoulos, Kostas (University of York); Trigilia, Giulio (University of Rochester)
    Abstract: We show that when borrowers are privately informed about their creditworthiness and lenders have a soft budget constraint, efficient investment requires a limit on the fraction of a firm's cash flows that can be pledged to outsiders. That is, pledgeability should neither be too low nor too high. An increase in pledgeability, or, more broadly, creditor rights, can either promote re-investment in zombie firms, which increases other firms' cost of capital, or it can lead to inesufficient underinvestment, depending on the composition of equilibrium credit demand. Thus, greater pledgeability can reduce net social surplus, and even trigger a Pareto loss. JEL Classification: G21 ; G32 ; G33 ; G38
    Keywords: Pledgeability ; Investment efficiency ; Soft budget constraint ; Asymmetric information ; Collateral ; Zombie lending ; Under-investment
    Date: 2021
  3. By: Atul Gupta; Sabrina T. Howell; Constantine Yannelis; Abhinav Gupta
    Abstract: The past two decades have seen a rapid increase in Private Equity (PE) investment in healthcare, a sector in which intensive government subsidy and market frictions could lead high-powered for-profit incentives to be misaligned with the social goal of affordable, quality care. This paper studies the effects of PE ownership on patient welfare at nursing homes. With administrative patient-level data, we use a within-facility differences-in-differences design to address non-random targeting of facilities. We use an instrumental variables strategy to control for the selection of patients into nursing homes. Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying 20,150 lives lost due to PE ownership over our twelve-year sample period. This is accompanied by declines in other measures of patient well-being, such as lower mobility, while taxpayer spending per patient episode increases by 11%. We observe operational changes that help to explain these effects, including declines in nursing staff and compliance with standards. Finally, we document a systematic shift in operating costs post-acquisition toward non-patient care items such as monitoring fees, interest, and lease payments.
    JEL: G3 G32 G34 G38 I1 I18
    Date: 2021–02
  4. By: Roberto Blanco (Banco de España); Sergio Mayordomo (Banco de España); Álvaro Menéndez (Banco de España); Maristela Mulino (Banco de España)
    Abstract: The COVID-19 pandemic is exerting an unprecedented adverse impact on economic activity and, in particular, on firms’ income. In some cases this means firms’ income is insufficient to meet payments to which they have committed. This article presents the results of an exercise simulating Spanish non-financial corporations’ liquidity needs for the four quarters of this year. The needs derive both from the possible shortfalls caused by developments in operating activity, and from investments in fixed assets and debt repayments. According to the results, these liquidity needs, between April and December, might exceed €230 billion. It is estimated that, through the public guarantee programmes for lending to firms, almost three-quarters of this shortfall might be covered. To finance the remainder, companies could use their liquidity buffers and/or resort to new debt without public guarantee. In this respect, it should be borne in mind that, in recent months, firms with better access to credit have managed to raise a high volume of funds without resorting to public guarantees. Further, despite the unprecedented fall in business turnover, it is estimated that a significant percentage of companies (more than 40%) would be able to withstand this situation without undergoing a deterioration in their financial position. However, at the remaining companies, the fall-off in activity would have led to significant increases in their level of financial vulnerability, more sharply within the SME segment and especially among the firms in the sectors most affected by the pandemic, such as tourism and leisure, motor vehicles, and transport and storage.
    Keywords: COVID-19, firms’ liquidity needs, credit, guarantees, insolvency risk
    JEL: E51 E52 G21
    Date: 2020–08
  5. By: Petar Jolakoski; Branimir Jovanovic (The Vienna Institute for International Economic Studies, wiiw); Joana Madjoska; Viktor Stojkoski; Dragan Tevdovski
    Abstract: If firm profits rise to a level far above than what would have been earned in a competitive economy, this might give the firms market power, which might in turn influence the activity of the government. In this paper, we perform a detailed empirical study on the potential effects of firm profits and markups on government size and effectiveness. Using data on 30 European countries for a period of 17 years and an instrumental variables approach, we find that there exists a robust relationship between firm gains and the activity of the state, in the sense that higher firm profits reduce government size and effectiveness. Even in a group of developed countries, such as the European countries, firm power may affect state activity.
    Keywords: firm profits, government size, government effectiveness
    JEL: C23 H11 H50
    Date: 2021–02
  6. By: Eppinger, Peter S.; Neugebauer, Katja
    Abstract: How do financial market conditions affect real economic performance? Empirical investigations of this question have often relied on measures of external financial dependence (EFD) that are constructed using U.S. data and applied to other countries under the assumption of a stable industry ranking across countries. This paper exploits unique, comparable survey data from seven European countries to show that correlations of EFD across countries are weak, casting some doubt on this assumption. We then use the novel survey-based EFD index to show that the global financial crisis had a disproportionately negative impact on the real performance of financially dependent firms. Further investigations highlight the importance of supply chains in propagating the credit shock.
    Keywords: External financial dependence,financial constraints,financial crisis,firm performance
    JEL: G10 G30 L25 F14 G01 D22
    Date: 2021
  7. By: Fornari, Fabio; Zaghini, Andrea
    Abstract: Relying on a perspective borrowed from monetary policy announcements and introducing an econometric twist in the traditional event study analysis, we doc- ument the existence of an "event risk transfer", namely a significant credit risk transmission from the sovereign to the corporate sector after a sovereign rating downgrade. We find that after the delivery of the downgrade, corporate CDS spreads rise by 36% per annum and there is a widespread contagion across coun- tries, in particular among those which were most exposed to the sovereign debt crisis. This effect exists on top of the standard relation between sovereign and corporate credit risk.
    Keywords: sovereign rating,corporate credit risk,CDS spreads
    JEL: G15 G32 G38
    Date: 2021
  8. By: Rania Béji (UM - Université de Montpellier, MRM - Montpellier Research in Management - UM - Université de Montpellier - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM1 - Université Montpellier 1 - UPVD - Université de Perpignan Via Domitia - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVM - Université Paul-Valéry - Montpellier 3); Ouidad Yousfi (UM - Université de Montpellier, MRM - Montpellier Research in Management - UM - Université de Montpellier - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM1 - Université Montpellier 1 - UPVD - Université de Perpignan Via Domitia - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVM - Université Paul-Valéry - Montpellier 3); Abdelwahed Omri (Université de Tunis)
    Abstract: This chapter aims to critically review the existing literature on the relationship between corporate social responsibility (CSR) and corporate governance features. Drawn on management and corporate governance theories, we develop a theoretical model that makes explicit the links between board diversity, CSR committees' attributes, CSR and financial performance. Particularly, we show that focusing on the cognitive and demographic characteristics of board members could provide more insights on the link between corporate governance and CSR. We also highlight how the functioning and the composition of CSR committees, could be valuable to better understand the relationship between corporate governance and CSR.
    Keywords: Corporate Social Responsibility,Corporate Governance,Diversity,CSR committees,Corporate Social Responsibility Performance,Financial Performance
    Date: 2020–10–14
  9. By: Bernhardt, Dan (University of Illinois and University of Warwick); Koufopoulos, Kostas (University of York); Trigilia, Giulio (University of Rochester)
    Abstract: We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of `soft' information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing. JEL Classification: D82 ; D86
    Keywords: Adverse selection ; positive profits ; collateral ; free entry ; market breakdown ; credit markets
    Date: 2021
  10. By: Montagna, Mattia (European Central Bank); Torri, Gabriele (University of Bergamo); Covi, Giovanni (Bank of England)
    Abstract: Systemic risk in the banking sector is usually associated with long periods of economic downturn and very large social costs. On one hand, shocks coming from correlated exposures towards the real economy may induce correlation in banks’ default probabilities thereby increasing the likelihood for systemic tail events like the 2008 Great Financial Crisis. On the other hand, financial contagion also plays an important role in generating large-scale market failures, amplifying the initial shocks coming from the real economy. To study the sources of these rare phenomena, we propose a new definition of systemic risk (ie the probability of a large number of banks going into distress simultaneously) and thus we develop a multilayer microstructural model to study empirically the determinants of systemic risk. The model is then calibrated on the most comprehensive granular dataset for the euro-area banking sector, capturing roughly 96% or €23.2 trillion of euro-area banks’ total assets over the period 2014–2018. The outputs of the model decompose and quantify the sources of systemic risk showing that correlated economic shocks, financial contagion mechanisms, and their interaction are the main sources of systemic events. The results obtained with the simulation engine resemble common market-based systemic risk indicators and empirically corroborate findings from existing literature. This framework gives regulators and central bankers a tool to study systemic risk and its developments, pointing out that systemic events and banks’ idiosyncratic defaults have different drivers, hence implying different policy responses.
    Keywords: Systemic risk; financial contagion; microstructural models
    JEL: D85 G17 G33 L14
    Date: 2021–01–29
  11. By: Christopoulos, Dimitris; Köppl, Stefan; Köppl-Turyna, Monika
    Abstract: We look at syndication in the venture capital industry. Investments conducted by syndicates are believed to have better chances of being successful, measured by the survival probability of portfolio companies or by successful exits. Using a novel and large dataset, covering several countries, our analysis shows that strong network ties of investors are associated with success of portfolio companies in Europe. We also show that there are differences in the association of network centrality with survival between different financing rounds, the former being more important in early-stage investments. Finally, we show a strong association of network ties of investors with sales growth of portfolio companies, before and after the deal.
    Keywords: Venture Capital,Networks,Europe,Investment Syndication
    JEL: G11 G24 M13
    Date: 2021
  12. By: Dörr, Julian Oliver; Murmann, Simona; Licht, Georg
    Abstract: COVID-19 placed a special role to fiscal policy in rescuing companies short of liquidity from insolvency. In the first months of the crisis, SMEs as the backbone of Europe's real economy benefited from large and mainly indiscriminate aid measures. Avoiding business failures in a whatever it takes fashion contrasts, however, with the cleansing mechanism of economic crises: a mechanism which forces unviable firms out of the market, thereby reallocating resources efficiently. By focusing on firms' pre-crisis financial standing, we estimate the extent to which the policy response induced an insolvency gap and analyze whether the gap is characterized by firms which had already struggled before the pandemic. With the policy measures being focused on smaller firms, we also examine whether this insolvency gap differs with respect to firm size. Based on credit rating and insolvency data for the near universe of actively rated German firms, our results suggest that the policy reponse to COVID-19 has triggered a backlog of insolvencies in Germany that is particularly pronounced among financially weak, small firms, having potential long term implications on economic recovery.
    Keywords: COVID-19 policy response,Corporate bankruptcy,Cleansing e ect,SMEs
    JEL: C83 G33 H12 O38
    Date: 2021

This nep-cfn issue is ©2021 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.