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on Corporate Finance |
| By: | David Solo (Diversified Credit Investments, LLC); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology); Florian Ulmann (ETH Zurich) |
| Abstract: | Based on the insight that risk exposure as quantified in the consumption based asset pricing model (CCAPM) is linearly proportional to the cash flow growth rate, we introduce a discounted cash flow model with a time-varying expected return structure matching the implicitly assumed risk exposure at each future point in time in the valuation model, i.e. the assumed cash flow growth rate process. This reduces the range of reasonable valuations outcomes to useful levels, given that the linearly proportional term structures of potential cash flow growth rates and equity risk premia are complementary, offsetting variables in a discounted cash flow pricing model. In the same manner we elaborate a time-varying internal cost of capital (ICC) model that reflects the implied risk exposure at each future point in time and thus has a clear interpretation as an expected return process. This time-varying ICC model is superior to the constant ICC model in a Fama-MacBeth regression setting to predict future realised returns. And using the expected return of the time varying ICC model as control in a Fama-MacBeth regression of the profitability, the investment and the value factor, both the profitability and the value factor become insignificant in explaining future realised returns. The superiority and economic significance of the time-varying ICC model is further con firmed in a trading strategy with yearly rebalancing. |
| Keywords: | Internal Cost of Capital, consumption based asset pricing model, cash flow growth, equity risk premium, implied risk, Fama-MacBeth regression, time-varying risk premium, trading strategy |
| JEL: | C20 C53 G11 G12 O16 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2124&r=all |
| By: | Alexander Schramm; Alexander Schwemmer; Jan Schymik |
| Abstract: | We study how managerial incentives affect the allocation of capital inside firms. To identify the effect of incentives on investment decisions we use a within-firm estimator that exploits variation across capital goods and a US accounting reform as an exogenous shock to managers' short-termist incentives. Our evidence shows that capital (mis)allocation within firms can be amplified by short-termist incentives. More short-term incentives cause a shift in investment expenditures away from durables towards more short-lived capital goods, effectively shortening the durability of firms' capital stocks. To study the economic implications of this within-firm misallocation channel, we then build a model of firm investments with incentive frictions that we calibrate to the US economy. We show that even moderate increases in short-termist incentives, such as those around the accounting reform, may cause substantial inefficiencies. These inefficiencies lead to large within-firm spreads in the marginal products of capital goods, causing long-run declines in output and real wages. |
| Keywords: | Corporate investment; Firm dynamics; Capital reallocation; Short-term incentives |
| JEL: | E22 G31 D24 D25 L23 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_260&r=all |
| By: | Massimiliano Affinito (Bank of Italy); Giorgio Meucci (Bank of Italy) |
| Abstract: | Unlikely to pay loans (UTPs) are non-performing loans (NPLs) that have a non-zero probability of returning to the performing state. This paper draws on Italian Central Credit Register data on the entire population of Italian UTP firms from 2005 to 2019, matched with firm and bank balance sheet data, to detect the characteristics of UTP firms that have returned to the performing state. During the crises, even in the most acute phases, the share of UTP firms returning to the performing state has never been negligible. This suggests that the analysis of the factors most closely related to the return of UTP firms to the performing state could also provide policy guidance during the pandemic. Our results show that the factors that have a stronger statistical and economic correlation with the probability of a UTP firm recovering are (negatively) its size and the absolute value of its debt, and (positively) its capital. Results are strongly heterogeneous over time and across economic sectors and Italian regions. Lending bank characteristics matter, but less than firm characteristics. |
| Keywords: | non-performing loans, firm distress, firm recovery |
| JEL: | G21 G33 C23 C24 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_601_21&r=all |
| By: | Woo Jin Choi (Korea Development Institute); Ju Hyun Pyun (Korea University Business School); Youngjin Yun (Bank of Korea) |
| Abstract: | We match non-financial firms in Korea with their main banks for the period over 2003-2017 to examine whether and how corporate investments are affected by changes in international reserves. We first show that firm investment is negatively associated with international reserves. By tracing the public securities used for sterilization, we further show that investment of a non-financial firm reduces if its main bank increases public securities holdings in accordance with reserve accumulation. Massive supply of sterilization securities shifts banks’ balance sheet composition and adversely affects investments, especially for financially constrained firms. |
| Keywords: | FX reserves, sterilized intervention, firm investment, bank balance sheet |
| JEL: | C23 E22 E58 F21 F31 |
| Date: | 2020–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2020_027&r=all |
| By: | Claire Giordano (Bank of Italy); Marco Marinucci (Bank of Italy); Andrea Silvestrini (Bank of Italy) |
| Abstract: | While there is a vast macroeconomic literature that singles out the main drivers of capital accumulation in advanced economies during and after the global financial and sovereign debt crises' recessionary phase, there is much less research seeking to identify both models and variables that possess out-of-sample forecasting ability for gross fixed capital formation. Moreover, micro-founded variables are scarcely employed in macroeconomic forecasting of real investment. We fill this gap by considering a battery of univariate and multivariate time-series models to forecast investment of non-financial corporations in Italy, an interesting case-study due to its steep downturn during the two afore-mentioned crises. We find that a vector error correction model augmented with firm survey-based variables accounting for business confidence, demand uncertainty and financing constraints generally outperforms the autoregressive benchmark and a series of competing multivariate time-series models in various, alternative, evaluation samples that take into account the impact of both the global financial crisis and the sovereign debt crisis on forecast accuracy. |
| Keywords: | Real investment, forecasting evaluation, firm survey data, vector error correction model |
| JEL: | C32 C52 E22 E27 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_596_21&r=all |
| By: | Santiago Barraza (ESCP Business School); Martín A. Rossi (Universidad de San Andres); Christian A. Ruzzier (Universidad de San Andres) |
| Abstract: | We exploit a unique natural experiment (the nationalization of Argentina’s pension system) that yields exogenous variation in new political connections (i.e., connections that were not desired) at the firm level to provide an assessment of their effect on firm value, arguably free from endogeneity and sample-selection concerns. We find that political connections have a large negative effect on the value of connected firms, but only when, on top of becoming a shareholder, the government has the right to place directors on the board. This effect cannot be explained by liquidity or risk, suggesting connections might be operating through cash flows. |
| Keywords: | Political connections, corporate governance, boards, grabbing hand, nationalization, firm value, government ownership, rent seeking |
| JEL: | G32 G34 H11 H13 O16 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:149&r=all |
| By: | Delis, Manthos; Iosifidi, Maria; Hasan, Iftekhar; Tsoumas, Chris |
| Abstract: | We contend that economic preferences over risk-taking in different subnational regions worldwide affect fundamental aspects of firms’ corporate financing, namely financing costs and capital structure. We study this hypothesis, by hand-matching firms’ regions worldwide with the corresponding regional economic risk-taking preferences. Our baseline results show that credit and bond pricing increase with higher risk-taking preferences, whereas such preferences yield lower ratios of book leverage and short-term debt. We backup our baseline results with an instrumental variables approach, which is based on the premise that high-yield agricultural societies in the pre-industrial era exhibit low risk-taking preferences. |
| Keywords: | Economic preferences; Risk-taking; Financing costs; Loan spreads; Bond spreads; Capital structure |
| JEL: | G21 G32 Z13 |
| Date: | 2021–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:106321&r=all |
| By: | Fauzi, Samrony Eka; , Sudjono; Saluy, Ahmad Badawi; Institute of Research, Asian |
| Abstract: | This study aims to compare the best bankruptcy prediction models between Altman, Springate, Zmijewski and Grover models against companies listed on the Indonesian stock exchange in the telecommunications sub-sector for the 2014-2019 period. The purposive sampling method is used to obtain a sample of companies with the following criteria: Companies listed on the Indonesian stock exchange, the telecommunications sub-sector, the company has conducted an IPO in 2010, the company is obedient in reporting annual reports from 2014 - 2019 and the company is free from delisting issues. There are 4 companies that meet the purposive sampling criteria, namely PT. Telkom TBK, PT. Indosat TBK. PT. XL Axiata TBK and PT. Smartfren TBK. The data used in this research is secondary panel data. The results showed that only PT. Telkom which is in a healthy financial condition. Meanwhile, PT. Indosat, PT. XL Axiata and PT. Smartfren is consistently in an unhealthy condition based on the analysis of the Altman and Springate models. The calculation of Zmijewski's model and Grover's model gave inconsistent results. Comparative testing of the four bankruptcy analysis models resulted in the Altman, Springate and Grover models recording accurate results but Altman modelling is the best because it is an accurate, consistent, and tested model both descriptively and statistically. |
| Date: | 2021–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:2kjv6&r=all |
| By: | WASHIMI Kazuaki (Bank of Japan) |
| Abstract: | With the declining birthrate and ageing population and a decline in the working age population in Japan, Japanese firms face the need to strengthen innovation including the digital domain. Expectations are particularly high for startups as they play a vital role in creating innovative technology. In recent years, there have been a number of initiatives such as expediting patent examinations and introducing an open innovation tax incentive in Japan. It is expected that venture capital (VC) funds will play a pivotal role in providing financing for growth so that startups can continue research and development. On the other hand, due in part to data constraints, there has been limited research on startup innovation on a comprehensive scale and virtually no earlier literature on the impact of VC investments on innovation by portfolio companies in Japan. This paper summarizes those two issues with a focus on the number of patent applications as a proxy for innovation, and it also discusses challenges that lie ahead. First, taking a look at patent applications by startups, around 40 percent of startups have applied for a patent—albeit with significant variation across firms—which appears a much higher proportion than existing firms. An estimate of the impact of VC investments on innovation suggests that in about 60 percent of cases, the number of patent applications by portfolio companies significantly increased compared to a control group. While care should be taken in interpreting those studies as the results vary from firm to firm, these successful cases reflect the possibility that financing and management support including intellectual property management from VC funds could have contributed to an increase in patent applications. Challenges ahead include: (1) expanding investments in VC funds by institutional investors; (2) increasing opportunities for startups to go public in a way that encourages sustainable growth; and (3) establishing intellectual property strategies while maintaining and developing professional human resources in relevant areas. |
| Keywords: | Venture Capital; Innovation; Synthetic Control; Bayesian Structural Time Series |
| JEL: | G24 M13 O3 |
| Date: | 2021–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojron:ron210312a&r=all |
| By: | Lach, Saul; Neeman, Zvika; Schankerman, Mark |
| Abstract: | We study how to design an optimal government loan program for risky R&D projects with positive externalities. With adverse selection, the optimal government contract involves a high interest rate but nearly zero co-financing by the entrepreneur. This contrasts sharply with observed loan schemes. With adverse selection and moral hazard, allowing for two levels of effort by the entrepreneur, the optimal policy consists of a menu of at most two contracts, one with high interest and zero self-financing, and a second with a lower interest plus co-financing. Calibrated simulations assess welfare gains from the optimal policy, observed loan programs, and a direct subsidy to private venture capital firms. The gains vary with the size of the externalities, cost of public funds, and effectiveness of the private VC industry. |
| Keywords: | Mechanism design; Innovation; R&D; Entrepreneurship; Additionality; Government finance; Venture capital |
| JEL: | E6 F3 G3 |
| Date: | 2020–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:105873&r=all |