nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒05‒03
nine papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Ancestors, inter-generational transmission of attitudes, and corporate performance: Evidence from the Italian Mass Migration By Florio, Erminia; Manfredonia, Stefano
  2. Financial Consolidation and the Cyclicality of Corporate Financing By Minetti, Raoul; Moreland, Timothy; Kokas, Sotirios
  3. Investment and financing perspectives for a solar photovoltaic project By Marchioni, Andrea; Magni, Carlo Alberto; Baschieri, Davide
  4. Credit Supply Shocks and Household Defaults By Mikhail Mamonov; Anna Pestova
  5. The Impact of Fintech Startups on Financial Institutions' Performance and Default Risk By Christian Haddad; Lars Hornuf
  6. Selling Dreams: Endogenous Optimism in Lending Markets By Bridet, Luc; Schwardmann, Peter
  7. Three Decades of International Financial Crises: What Have We Learned and What Still Needs to be Done? By Buckley , Ross; Avgouleas, Emilios; Arner , Douglas
  8. Government responses, business continuity, and management sentiment: Impact on debt financing during COVID-19 By Gopalakrishnan, Balagopal; Jacob, Joshy; Mohapatra, Sanket
  9. Circular economy, banks and other financial institutions: what’s in it for them? By Ozili, Peterson K

  1. By: Florio, Erminia; Manfredonia, Stefano
    Abstract: We study the effect of the attitudes of a CEO's ancestors on firm performance. To do so, we collect detailed information on emigrants from Italian municipalities during the Age of Mass Migration (1892-1924) from Ellis Island ships lists and use emigration experience as a proxy for ancestors' risk propensity. We adopt an epidemiological approach complemented with an instrumental variables strategy and find that Italian firms managed by a CEO that belongs to a family with past emigration experience tend to perform better and to be more productive. In line with an inter-generational transmission of attitudes hypothesis, we show a positive relationship between the emigration experience of a CEO's ancestors and alternative measures of corporate risk-taking. The attitudes of a CEO's ancestors have as well consequences on firm solvency and on the cost of capital.
    Keywords: Emigration,Attitudes,Corporate Performance,Mass Migration
    JEL: G30 M14 Z1
    Date: 2021
  2. By: Minetti, Raoul (Michigan State University, Department of Economics); Moreland, Timothy (Michigan State University, Department of Economics); Kokas, Sotirios (Essex Business School, University of Essex)
    Abstract: We study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for U.S. firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium-sized publicly-traded firms. Using matched firm-bank data, we provide evidence that bank consolidation contributed to this change. We rationalize these findings in a general equilibrium business cycle model. After bank consolidation, the weakening in firms' bargaining power and relational ties with banks enhances firms' precautionary demand for liquidity and equity issuance incentives following positive shocks. The change in financing behavior increases investment and employment sensitivity to aggregate productivity shocks.
    Keywords: Financial frictions; business cycles; nancial structure; credit shocks
    JEL: E22 E32 E44 G32
    Date: 2021–04–06
  3. By: Marchioni, Andrea; Magni, Carlo Alberto; Baschieri, Davide
    Abstract: In this work we illustrate a simple logical framework serving the purpose of measuring value creation in a real-life solar photovoltaic project, funded with a lease contract, a loan contract and internal financing (i.e., withdrawal from liquid assets). We use the projected accounting data to compute the value created. We assess the project from both an investment perspective (operating assets and liquid assets) and a financing perspective (debt and equity). Furthermore, focusing on value creation for equityholders, we calculate the expected contribution on shareholders’ wealth increase of operating and financing activity. In particular, we highlight the role of the distribution policy in financial modeling by describing the strict logical connections between estimated data and financial decisions.
    Keywords: photovoltaic solar energy; project evaluation; net present value; distribution policy
    JEL: C60 C63 C67 G00 G30 G31 G32 G35 M41 O13
    Date: 2020–11–12
  4. By: Mikhail Mamonov; Anna Pestova
    Abstract: Are disruptions of the mortgage market a consequence of financial imbalances accumulated in the past? In this paper, we study the effects of positive and negative credit supply (CS) shocks on subsequent household defaults on debt over the last four decades in U.S. states. We apply sign restrictions within a VAR framework to isolate state-level CS shocks, and identify that 1984 and 2004 were the years of systemic, countrywide, positive CS shocks whereas 1989 and 2009 brought systemic negative shocks. Further, by employing a difference-in-differences framework, we find that both positive and negative CS shocks lead to greater household defaults in the future if they also increase mortgage-to-income ratios. We show that the CS shock-induced (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices facilitate the accumulation of default risks. Our results indicate that positive CS shocks occurred in 1984 did not raise household defaults by more in more exposed states compared to less exposed states because the shocks increased both future income and mortgage debt, while not affecting mortgage-to-income ratios. In contrast, the 1989, 2004 and 2009 CS shocks increased mortgage-to-income ratios in subsequent years, thereby raising debt delinquencies and household defaults. These results provide further empirical evidence to theories of endogenous credit cycles.
    Keywords: household finance; banking; credit supply; financial instability; mortgage; difference-in-differences; VARs, U.S. states; PSID; CEX;
    JEL: C34 G21 G33
    Date: 2021–03
  5. By: Christian Haddad; Lars Hornuf
    Abstract: We study the impact fintech startups have on the performance and the default risk of traditional financial institutions. We find a positive relationship between fintech startup formations and incumbent institutions’ performance for the period from 2005 to 2018 and a large sample of financial institutions from 87 countries. We further analyze the link between fintech startup formations and the default risk of traditional financial institutions. Fintech startup formations decreases stock return volatility of incumbent institutions and decreases the systemic risk exposure of financial institutions. Our findings indicate that the development of fintech startups should be monitored very closely by legislators and financial supervisory authorities, because fintechs not only have a positive effect on the financial sector’s performance, but can also improve financial stability relative to the status quo.
    Keywords: fintech, bank performance, default risk, financial stability
    JEL: K00 L26 O30
    Date: 2021
  6. By: Bridet, Luc (University of St Andrews); Schwardmann, Peter (LMU Munich)
    Abstract: We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders’ contract design shapes these benefits and costs. The model yields three key results. First, the borrower’s motivated cognition increases her material welfare, regardless of whether or not she ends up being optimistic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high.
    Keywords: optimal expectations; motivated cognition; wishful thinking; financial crisis; lending markets; screening;
    JEL: D86 D82 G33
    Date: 2020–04–28
  7. By: Buckley , Ross (University of New South Wales); Avgouleas, Emilios (University of Edinburgh); Arner , Douglas (University of Hong Kong)
    Abstract: Fragility that periodically erupts into a full-blown financial crisis appears to be an integral feature of market-based financial systems in spite of the emergence of sophisticated risk management tools and regulatory systems. If anything, the increased frequency of modern crises underscores how difficult it is to diversify away systemic risk and that perceptions of perfectly stable financial systems are normally flawed, even if the source of the next crisis remains well concealed to the expert eye. Although it is impossible to forecast a financial crisis with a high degree of accuracy and certainty, earlier crises always leave lessons useful in preparation for future crises, from whatever source. It is thus clear that the best way to deal with preventing and addressing major financial crises is to build the defenses of the financial system, including effective institutions, while at the same time trying to identify potential sources of crisis. We should take every opportunity to learn and work to build stronger and more effective financial systems. This paper compares and contrasts the three major crises of the past 3 decades, both to distill the lessons to be learned from them and to identify what more can be done to strengthen our financial systems. As the world addresses the financial impact of the COVID-19 pandemic, the centrality of these lessons is clear.
    Keywords: Asian financial crisis; COVID-19 crisis; eurozone debt crisis; financial stability; global financial crisis; systemic risk
    JEL: F31 F34 G01 G32
    Date: 2020–06–19
  8. By: Gopalakrishnan, Balagopal; Jacob, Joshy; Mohapatra, Sanket
    Abstract: We examine how the government responses, amenability to remote working, and managerial outlook associated with COVID-19 influence debt financing by firms around the world. We find that the propensity and the amount of loan financing by firms is higher with greater stringency of lockdowns. Firms’ debt raising during the pandemic is also influenced by the work-from-home amenability of industries. We find that firms with greater reliance on customer interaction have a higher propensity for debt financing at the onset of the pandemic, indicative of their heightened need for liquidity. The propensity for bond financing is higher for firms that have a higher degree of exposure to the pandemic. In contrast, firms that hold a positive sentiment about the impact of the pandemic are less likely to raise debt financing. Our key results are largely robust to the effects of quantitative easing by the major central banks. The study deepens the understanding of the heterogeneous impact of the pandemic on debt financing on account of various country-, industry-, and firm-level factors.
    Date: 2021–04–23
  9. By: Ozili, Peterson K
    Abstract: In this paper, I highlight the benefit of the circular economy to banks and other financial institutions. The paper uses discourse analysis methodology to present an overview of the circular economy concept and the benefit of the circular economy to banks and other financial institutions. The findings show that some benefit of the circular economy to banks include: (i) greater loan diversification opportunities, (ii) promotes responsible and sustainable banking, (iii) increased lending to circular clients and the recycling sector which means more profit for banks, and (iv) correcting the bad perception about banks in society. Some benefit of the circular economy to other financial institutions include: (i) issuance of special insurance policies for reused products; (ii) greater sustainability-adjusted return on investment; (iii) greater funding to microfinance institutions; and (iv) more opportunities for collaborative funding to circular businesses. This study contributes to the scant literature that examine the role of the finance industry in the circular economy.
    Keywords: circular economy, linear economy, banks, financial institutions, criticism, sustainability, climate change, waste, insurance, sustainable finance, sustainable banking, hedge funds, microfinance institutions
    JEL: G02 G21 G22 G23 G24 G29 Q01 Q20 Q32 Q54 Q56
    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.