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on Corporate Finance |
| By: | Acharya, Viral V.; Almeida, Heitor; Amihud, Yakov; Liu, Ping |
| Abstract: | We propose that firms face two potential defaults: Financial default on their debt obli- gations and operational default such as a failure to deliver on obligations to customers. Hence, financially constrained firms substitute between saving cash for financial hedg- ing to mitigate financial default risk, and spending on operational hedging, which mitigates operational default risk. Whereas corporate financial hedging increases in leverage, operational hedging declines in leverage. This results in a positive relation- ship between operational spread (markup) and financial leverage or credit risk, which is stronger for financially constrained firms.We present empirical evidence supporting this relationship. |
| Keywords: | Financial constraints; financial default; liquidity; operational default; resilience; Risk management |
| JEL: | G31 G32 G33 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15885&r= |
| By: | Kuzmina, Olga |
| Abstract: | Exploiting the variation in labor-market programs in Spain, I show that the use of flexible (shorter and cheaper-to-fire) employment contracts increases a firm's debt capacity. A thought experiment of prohibiting an average firm from hiring workers on flexible contracts suggests that such a firm should reduce its debt-to-capital ratio by 7%. I further nail down the employment flexibility mechanism behind this effect, which works through reductions of the firm's operating leverage and the fixity of its costs. I use specific institutional features to separate this explanation from differences in wages or labor bargaining power. I show that the effects are stronger for firms suffering most in bankruptcy and that in downturns, firms downsize using flexible labor, implying that the employment-contract structure is a significant component of operating flexibility and expected default costs. Finally, employment flexibility increases firm value for firms that benefit most from operating leverage reductions and depend more on external financing. The results demonstrate how management can use heterogenous labor contracts to improve firm outcomes. Most broadly, the results emphasize the importance of studying operating strategy and organizational structure as integral determinants of the financing decisions of firms and highlight the complementarities between CEOs' and CFOs' decision-making. |
| Keywords: | Capital Structure; Fixed-term contracts; Operating flexibility; Operating Leverage |
| JEL: | D22 G32 J41 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15819&r= |
| By: | De Marco, Filippo; Sauvagnat, Julien; Sette, Enrico |
| Abstract: | We study how lenders respond to excessive optimism in the corporate sector. Our identification relies on plausibly exogenous variation in optimism across areas in Italy. We document that firms in optimistic areas hold favorable views about their own business, and that they are more likely to default on their debt. Banks are more likely to deny credit to firms in optimistic areas, but only for loans that cannot be easily collateralized. Our findings provide empirical support for the theoretical prediction that banks' collateral provision reduces the efficiency of the credit market when the corporate sector is prone to excessive optimism. |
| Keywords: | borrower default; business expectations; collateral requirements; loan applications; Optimism |
| JEL: | G21 G41 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15785&r= |
| By: | Jessica Bai; Shai Bernstein; Abhishek Dev; Josh Lerner |
| Abstract: | This paper examines how government funding programs geared towards early-stage companies interact with private capital markets. Using hand-collected data on 755 government programs worldwide, we find that governments’ allocations to such funding programs have been comparable to global venture capital disbursements in the past decade. Government programs were more frequent in periods with more private venture activity, a relationship that was stronger in nations with better public governance. The programs’ structures often relied on the local private sector. The private sector’s involvement was greater when government programs targeted earlier-stage companies and when rankings of government effectiveness were higher. We find that such government funding programs increased local innovation, particularly when the programs focused on early-stage ventures or collaborated with the private sector. These findings are most consistent with the explanation that the reliance on private capital markets enabled governments to mitigate investment frictions and improve capital allocation. |
| JEL: | G24 H81 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28744&r= |
| By: | Huber, Kilian |
| Abstract: | The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers. |
| Keywords: | Bank Regulation; Bank size; Economies of Scale; financial regulation; Firm Employment; German History; Large Firms; Manager Compensation; Too Big To Fail |
| JEL: | E24 E44 G21 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15769&r= |
| By: | Lang, Valentin; Mihalyi, David; Presbitero, Andrea |
| Abstract: | Can debt moratoria help countries weather negative shocks? We study the bond market effects of an official debt service suspension endorsed by the international community during the Covid-19 pandemic. Using daily data on sovereign bond spreads and synthetic control methods, we show that countries eligible for official debt relief experience a larger decline in borrowing costs compared to similar, ineligible countries. This decline is stronger for countries that receive a larger relief, suggesting that the effect works through liquidity provision. By contrast, the results do not support the concern that official debt relief could generate stigma on financial markets. |
| Keywords: | Debt Relief; Debt Service Suspension Initiative; developing countries; Sovereign bond spreads; Sovereign debt |
| JEL: | F34 H63 O23 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15832&r= |
| By: | Core, Fabrizio; De Marco, Filippo |
| Abstract: | This paper investigates whether the private sector can efficiently allocate public funds during a crisis. Using loan-level data, we exploit the unique features of the Italian public guarantee scheme during Covid-19 to study lenders' incentives to distribute government guaranteed credit. Our results indicate that two key bank characteristics facilitated loan disbursement: size and information technology. These factors are important because of the high volume of online applications and low interest margins on guaranteed lending. Pre-existing relationships matter for the allocation of guaranteed credit, as banks lend more in their core markets and where they have a larger share of local branches. |
| Keywords: | COVID-19; Information Technology; Lending relationships; liquidity constraints; public guarantees |
| JEL: | G21 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15799&r= |
| By: | Paul Gertler; Brett Green; Catherine Wolfram |
| Abstract: | A new form of secured lending utilizing “digital collateral” has recently emerged, most prominently in low and middle income countries. Digital collateral relies on “lockout” technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. We find that securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect and find that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to a school-fee loan significantly increases school enrollment and school-related expenditures without detrimental effects to households’ balance sheet. |
| JEL: | G20 I22 O16 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28724&r= |
| By: | Kohei Aono (College of Economics, Ritsumeikan University); Keiichi Hori (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper explores how cash mitigates predictable and unpredictable adverse cash flow shocks to firms using the financial data of Japanese firms. We find that (i) cash has no value after the predicted shock regardless of the severity of the financial constraint, (ii) after the unpredicted shock, the value of cash for the financially constrained firms is larger than that for the unconstrained firms, and (iii) the value of cash is similar between the two shocks for the unconstrained firms, while the value is larger when the unpredicted shock occurs than when the predicted shock occurs for the constrained firms. |
| Keywords: | consumption tax hike, COVID-19, cash holdings, financial constraint, event study. |
| JEL: | G14 G32 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:214-2&r= |
| By: | Stefano Clò; Enrico Marvasi; Giorgio Ricchiuti |
| Abstract: | Using a database of more than 100,000 M\&As, we study the internationalization of State-Owned Enterprises (SOEs) in the 21st century, and the underlying firm-level and country-level drivers. Meaningful differences are found - compared to private enterprises and across various types of SOEs as well - along many dimensions, including the time trend, the geographical-sectoral coverage, and firms' proprietary structure. Majority-owned SOEs are more focused on domestic markets, while State-Invested Enterprises and government-backed financial institutions are more internationalized. SOEs' internationalization has been less affected by the Great Financial Crisis, it is less sensitive to geographical and cultural proximity, it involves countries with a lower institutional quality and which are more peripheral in the world trade network. |
| Keywords: | Internationalization, State-Owned Enterprises, cross-border M\&As, Trade Network |
| JEL: | F2 L22 L33 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2021_06.rdf&r= |
| By: | Ufuk Akcigit; Unal Seven; Ibrahim Yarba; Fatih Yilmaz |
| Abstract: | This paper studies the firm-level short-term impact of one of the largest credit guarantee programs in the world recently implemented in Turkey. Using a combination of firm-level administrative databases of tax registry, credit registry, and the credit guarantee fund (CGF) registry, we analyze the characteristics of the CGF supported firms and the program’s impact on their employment, sales, and credit default probability. We find that the CGF program on average had a positive impact on the performance of treated firms, where the CGF supported firms were able to increase their employment by 17 percent, sales by 70 percent and reduce their credit default probability by 0.6 percentage point relative to their matched-control group. Evaluating our estimation results at variable averages shows that every 1 million TL credit generated via the CGF program preserved 2.7 extra employment and stimulated about 3 million TL in sales. We also observe an overall increase in firm indebtedness, which may adversely affect firms’ financial health in the long-run. Moreover, our findings reveal that the program impact is heterogeneous across firm size and sector groups. We use this heterogeneity to perform counter-factual policy exercises indicating that redesigning the program with such priorities can bring substantial efficiency gains. |
| Keywords: | Credit guarantee schemes, SME lending, Impact analysis |
| JEL: | G21 G3 L25 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2110&r= |
| By: | Gottardi, Piero; Maurin, Vincent; Monnet, Cyril |
| Abstract: | We present a model of secured credit chains in which the circulation of risky collateral generates fragility. An intermediary stands between a borrower and a financier. The intermediary borrows to finance her own investment opportunity, subject to a moral hazard problem, and in addition, can intermediate funds. She will only do so if she can repledge to the financier the collateral pledged by the borrower. We show that when the repledged collateral is sufficiently risky and the loan that it secures is recourse, the circulation of collateral generates fragility in the chain, by undermining the intermediary's incentives. The arrival of news about the value of the repledged collateral further increases fragility. This fragility channel of collateral re-use generates a premium for safe or opaque collateral. The environment considered in our model applies to various situations, such as trade credit chains, securitization and repo markets. |
| Keywords: | Collateral; Credit chains; fragility; intermediation; Secured Lending |
| JEL: | G23 G30 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15757&r= |
| By: | Asongu, Simplice; Nnanna, Joseph; Tchamyou, Vanessa |
| Abstract: | The study extends the debate on finance versus institutions and measurement of property rights institutions. We assess the relationships between various components of property rights institutions and private investment, notably: political, economic and institutional governances. Comparative concurrent relationships of financial dynamics of depth, efficiency, activity and size are also investigated. The findings provide support for the quality of institutions as a better positive correlate of private investment than financial intermediary development. The interaction of finance and governance is not significant in potentially promoting private investment, perhaps due to substantially documented surplus liquidity issues in African financial institutions. The empirical evidence is based on 53 African countries for the period 1996-2010. Policy measures are discussed for reducing financial deposits, increasing financial activity and hence, improving financial efficiency. |
| Keywords: | Finance; Institutions; Investment: Property Rights; Africa |
| JEL: | E02 G20 G24 O55 P14 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107498&r= |
| By: | de Haas, Ralph; Martin, Ralf; Muûls, Mirabelle; Schweiger, Helena |
| Abstract: | We use data on 11,233 firms across 22 emerging markets to analyse how credit constraints and low-quality firm management inhibit corporate investment in green technologies. For identification, we exploit quasi-exogenous variation in local credit conditions and in exposure to weather shocks. Our results suggest that both financial frictions and managerial constraints slow down firm investment in more energy efficient and less polluting technologies. Complementary analysis of data from the European Pollutant Release and Transfer Register (E-PRTR) corroborates some of this evidence by revealing that in areas where banks deleveraged more after the global financial crisis, industrial facilities reduced their carbon emissions by less. On aggregate this kept local emissions 15% above the level they would have been in the absence of financial frictions. |
| Keywords: | CO2 emissions; energy efficiency; Financial Frictions; Management Practices |
| JEL: | D22 G32 L20 L23 Q52 Q53 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15886&r= |
| By: | Barber, Brad; Jiang, Wei; Morse, Adair; Puri, Manju; Tookes, Heather; Werner, Ingrid M |
| Abstract: | How has COVID-19 impacted faculty productivity? Does it differ by characteristics such as gender and family structure? To answer these questions, we conduct a survey of American Finance Association (AFA) members. Overall, faculty respondents report lower research productivity with less time allocated to research and more time allocated to teaching. There is also heterogeneity: 14.5% of respondents report an increase in productivity. We find the negative effects on research productivity are particularly large for women and faculty with young children regardless of gender. Thus, the pandemic has the effect of widening the gender gap for women and creates a "family gap" in productivity for both men and women with young children. Lower research productivity for faculty with young children is explained, to a large extent, by increased time spent on childcare. Our results suggest the need for deliberate policy to factor in these underlying mechanisms. We caution that a one-size-fits-all tenure-clock extension can have unintended negative consequences of increasing disparity. |
| Keywords: | academic finance profession; COVID-19; Family structure; Gender; Pandemic; Research productivity; Tenure |
| JEL: | A22 A23 G0 I23 J13 J16 J22 J24 J44 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15636&r= |