nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒05‒17
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Policy Uncertainty and Cash Dynamics By Tut, Daniel
  2. All You Need Is Cash: Corporate Cash Holdings and Investment after the Global Financial Crisis By Andreas Joseph; Christiane Kneer; Neeltje van Horen
  3. Private equity buyouts, credit constraints, and firm exports By Paul Lavery; Jose-Maria Serena; Marina-Eliza Spaliara; Serafeim Tsoukas
  4. Managing Financial Expertise By Asano, Koji
  5. Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises By Peydró, José Luis; Polo, Andrea; Sette, Enrico
  6. Credit Constraints, Labor Productivity and the Role of Regional Institutions: Evidence from Manufacturing Firms in Europe By Brezzi, Monica; Ganau, Roberto; Maslauskaite, Kristina; Rodríguez-Pose, Andrés
  7. Zombies at large? Corporate debt overhang and the macroeconomy By Jordá, Óscar; Kornejew, Martin; Schularick, Moritz; Taylor, Alan M.
  8. Are Bigger Banks Better? Firm-Level Evidence from Germany By Kilian Huber
  9. The Complementarity between Signal Informativeness and Monitoring By Chaigneau, Pierre; Sahuguet, Nicolas
  10. Driving Innovations, Leveraging Technology in Indian Business Ecosystem By Joffi Thomas; Dinesh Tiwari
  11. Organizational Structure and Investment Strategy By Lóránth, Gyöngyi; Morrison, Alan; Zeng, Jing
  12. COVID-19’s impact on the financial health of Canadian businesses: An initial assessment By Timothy Grieder; Mikael Khan; Juan Ortega; Callie Symmers
  13. Firms' resilience to financial constraints: The role of trade credit By Isaac Marcelin; Daniel Brink; Wei Sun
  14. Work from home amenability and venture capital financing during COVID-19 By Jagriti Srivastava; Balagopal Gopalakrishnan
  15. Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis By Emily Johnston-Ross; Song Ma; Manju Puri
  16. Why Have CEO Pay Levels Become Less Diverse? By Jochem, Torsten; Ormazabal, Gaizka; Rajamani, Anjana

  1. By: Tut, Daniel
    Abstract: Why and when do firms deviate from target cash? And why do we observe imperfect adjustment of cash? We postulate and provide evidence that policy uncertainty induces financing frictions and adjustment costs which decelerate the speed of adjustment (SOA) of cash toward target. We find that the effects of policy uncertainty on SOA are higher for firms that operate below target cash than for firms that operate above target cash. Our results suggest that under policy uncertainty shocks, firms deviate from target cash as the expected benefit of deviation is greater than the expected value of approaching the target.
    Keywords: Cash, Adjustment Speed, Adjustment Costs, Financing frictions, Economic Policy uncertainty
    JEL: G30 G31 G32 G35
    Date: 2021–04–20
  2. By: Andreas Joseph; Christiane Kneer; Neeltje van Horen
    Abstract: Cash holdings at the onset of a financial crisis are a key determinant of investment by SMEs not only during the crisis but also during the recovery period. Cash-rich SMEs could maintain their capital stock during the global financial crisis, while cash-poor rivals reduced theirs. This gave cash-rich SMEs a competitive advantage during the recovery, resulting in a persistent and growing investment gap. The amplification effect was present for SMEs with both volatile and stable cash holdings and was particularly pronounced for younger and smaller firms. Competition dynamics and borrowing constraints seem to drive this amplification effect.
    Keywords: SMEs, investment, cash holdings, financial crisis, misallocation
    JEL: D22 E32 E44 G32
    Date: 2021
  3. By: Paul Lavery; Jose-Maria Serena; Marina-Eliza Spaliara; Serafeim Tsoukas
    Abstract: We analyse the impact of private equity buyouts on firm exports, on a panel of UK non-financial firms over 2004-2017. Using difference-in-differences estimations, we show that private equity ownership increases the probability of exporting, the value of exports, and the export to sales ratio. We further show that the positive impact of private equity ownership on exports holds only after private-to-private buyouts, or acquisitions of small or young target firms. Our findings suggest that private equity investors mitigate the credit constraints faced by their portfolio companies, hence boosting their exports.
    Keywords: Private equity buyouts; exporting; credit constraints; transactions
    JEL: G34 G32
    Date: 2021–05
  4. By: Asano, Koji
    Abstract: We study credit markets in which lenders can invest in financial expertise to reduce the cost of acquiring information about underlying collateral. If the pledgeability of corporate income is low, information acquisition enhances liquidity, but lenders reduce expertise acquisition because of the hold-up problem. By contrast, if the pledgeability is high, information acquisition reduces liquidity so that lenders can extract rents from firms by investing in financial expertise and creating fear of illiquidity. Optimal policy involves subsidizing investment in financial expertise when the pledgeability is low and taxing investment in financial expertise when the pledgeability is high.
    Keywords: financial expertise, collateral, information acquisition, liquidity
    JEL: D82 G20
    Date: 2021–05–10
  5. 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 â?? based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value â?? 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: bank capital; concentration risk; COVID-19; held to maturity; interbank funding; risk shifting; risk weights; trading book; uncertainty
    JEL: G01 G21 G28
    Date: 2020–11
  6. By: Brezzi, Monica; Ganau, Roberto; Maslauskaite, Kristina; Rodríguez-Pose, Andrés
    Abstract: This paper examines the relationship between credit constraints â?? proxied by the investment-to-cash flow sensitivity â?? and firm-level economic performance â?? defined in terms of labor productivity â?? 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; Cross-Country Analysis; Europe; labor productivity; Manufacturing firms; Regional Institutions
    JEL: C23 D24 G32 H41 R12
    Date: 2020–11
  7. By: Jordá, Óscar; Kornejew, Martin; Schularick, Moritz; Taylor, Alan M.
    Abstract: With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy's tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.
    Keywords: business cycles; Corporate Debt; local projections
    JEL: E44 G32 G33 N20
    Date: 2020–12
  8. By: Kilian Huber
    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.
    JEL: E24 E44 G21 G28 L11 L25 N14 N24 N84
    Date: 2021–05
  9. By: Chaigneau, Pierre; Sahuguet, Nicolas
    Abstract: When assessing managerial ability, a firm can rely on two sources of information: a signal of firm value, such as earnings, and monitoring. We show that a more informative signal can surprisingly increase the value of monitoring. This happens if a more informative signal makes some signal realizations more ambiguous indicators of managerial ability, or if the signal leads to negative belief updating on managerial ability yet does not trigger termination. Then, termination decisions will paradoxically rely less on the signal when it is more informative. In private equity owned firms, the model predicts that monitoring intensity is increasing in signal informativeness conditional on a bad performance. These firms can fall into a "bad governance trap" such that a less informative signal is compounded by worse monitoring upon a bad performance.
    Keywords: board monitoring; corporate governance system; governance complementarity; hard and soft information
    Date: 2021–01
  10. By: Joffi Thomas (Indian Institute of Management Kozhikode); Dinesh Tiwari (Broadpeak Capital Advisors)
    Abstract: Emergence of a Vibrant Innovation Ecosystem: Rapid penetration of digital technologies over the last two decades has ushered in business innovations in both incumbent firms and in startups. By the end of 2020, India found its place among the top four countries with a vibrant startup ecosystem with 36 unicorns. Confluence of Enabling Factors: A confluence of enabling factors of technology, talent, capital and supportive policy environment has led to the growth of the start-ups through the introduction phase (2006-2010), early growth phase (2011-2015) and accelerated growth phase (2016-2020). Growth of Indian Start-up Ecosystem: Venture capital investments of $ 19.85 B went into 3,442 firms funding innovations during 2006-2020. The investment of $3.9 B in 2006-2010 grew by 65% to $6.4 B in 2011-2015 period and further by 48% to $9.5 B in 2016-2020 period. Ecommerce and Fintech sectors received larger share of the investments contributing 11 of the 36 unicorns.Accelerating Innovation led Economic Growth: An enabling environment to further accelerate innovation led growth requires continuous focus on key enabling factors: (a) Technology-ensuring affordable digital technology access to rural population, adoption of deep technologies across start-ups (b) Talent - designing innovative mechanisms to attract and support talented entrepreneurs (c) Capital - accelerating investment flows by triggering investment-innovation-investor returns spirals in multiple sectors and (d) Policy Support-formulating proactive supportive policies with a fifteen year and five year planning horizon focussed on all round development of the rural economy leveraging novel technologies; providing institutional support to exploit global market opportunities involving industry and academe.
    Date: 2021–03
  11. By: Lóránth, Gyöngyi; Morrison, Alan; Zeng, Jing
    Abstract: We show that a firm can use its organizational structure to commit to an investment strategy. The firmdelegates sequential search and project management tasks to a manager. Ex post, the firm turns away projects that generate high project management rent. However, because the expectation of such rent serves to defray the manager's search cost, investment might be optimal ex ante. A leveraged subsidiary mitigates this time-inconsistency problem by creating ex post risk-shifting incentives that counteract underinvestment. Subsidiaries are more valuable for projects with costly search, intermediate management costs, and returns that are uncorrelated with the existing business.
    Keywords: branch; multinational business; Organizational structure; subsidiary
    JEL: G32 G34 L22
    Date: 2021–01
  12. By: Timothy Grieder; Mikael Khan; Juan Ortega; Callie Symmers
    Abstract: Despite COVID-19 challenges, bold policy measures in Canada have helped businesses manage cash flow pressures and kept insolvency filings low. But the impact of the pandemic has been uneven, and the financial health of some firms may further deteriorate over the next year.
    Keywords: Coronavirus disease (COVID-19); Credit and credit aggregates; Financial stability; Firm dynamics; Recent economic and financial developments; Sectoral balance sheet
    JEL: G38
    Date: 2021–05
  13. By: Isaac Marcelin; Daniel Brink; Wei Sun
    Abstract: We study the role of trade credit in enhancing the resilience of financially constrained firms from 2010 to 2017. Implicit borrowing in trade finance allows financially constrained firms to bridge the financing gap, expand employment by 8.26 per cent, and increase average firm profits significantly. Trade finance suppliers, not financially constrained firms, experience a surge of 7.99 per cent in the average rate of sales growth.
    Keywords: Financial constraints, trade credit, Employment, Growth, Firm profitability, Corporate finance
    Date: 2021
  14. By: Jagriti Srivastava (Indian Institute of Management Kozhikode); Balagopal Gopalakrishnan (Indian Institute of Management Kozhikode)
    Abstract: This paper examines the impact of COVID-19 on venture capital financing of firms. We find a significant shift in the profile of firms that obtain venture capital financing during the pandemic-induced economic crisis. Firms in industries that are more amenable to work from home obtain greater amounts of financing. Growthstage firms operating in amenable industries are able to obtain higher financing than early-stage firms. The higher financing obtained by firms in amenable industries is driven by venture capital funds focused on the domestic market. Additionally, the higher financing is obtained from a single venture capital investor rather than a consortia of investors. Taken together, the preference of venture capital funds indicate a less risk-averse behaviour in financing firms amenable to remote working. The findings of our study using monthly firm-level data provide insights on venture capital financing during the pandemic.Length: 43 pages
    Keywords: COVID-19; Venture capital; financing; work from home
    Date: 2021–04
  15. By: Emily Johnston-Ross; Song Ma; Manju Puri
    Abstract: This paper investigates the role of private equity (PE) in failed bank resolutions after the 2008 financial crisis, using proprietary FDIC failed bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors had a positive role in stabilizing the financial system through their involvement in failed bank resolution.
    JEL: E65 G18 G21
    Date: 2021–05
  16. By: Jochem, Torsten; Ormazabal, Gaizka; Rajamani, Anjana
    Abstract: We document that, over the last decade, the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and industry-size groups. We ï¬ nd evidence consistent with one potential explanation for this pattern; reciprocal benchmarking (i.e., ï¬ rms are more likely to include each other in the disclosed set of peers used to benchmark pay levels). We also ï¬ nd empirical support for three factors contributing to the increase in reciprocal benchmarking; the mandatory disclosure of compensation peer groups, say on pay, and proxy advisory inï¬?uence. Finally, we ï¬ nd that reciprocal benchmarking has meaningful consequences on managerial behavior; it reduces risk-taking by weakening external tournament incentives.
    Keywords: Clustering of executive pay; competitive benchmarking; pay disclosure; pay diversity; pay transparency; tournament incentives
    JEL: G3 G34 G38 M12 M52
    Date: 2020–12

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