nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒07‒12
twelve papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Private equity and bank capital requirements: Evidence from European firms By Marina-Eliza Spaliara; Serafeim Tsoukas; Paul Lavery
  2. Financial distress and the role of management in micro and small-sized firms By Fernando Alexandre; Sara Cruz; Miguel Portela
  3. Determinants of financing constraints By Anabela Marques Santos; Michele Cincera
  4. "Firm Growth, Financial Constraints, andPolicy-Based Finance" By Timothy E. Dore; Tetsuji Okazaki; Ken Onishi; Naoki Wakamori
  5. Liquidity or Capital? The Impacts of Easing Credit Constraints in Rural Mexico By Aparicio, Gabriela; Bobic, Vida; De Olloqui, Fernando; Carmen, María; Diez, Fernández; Gerardino, Maria Paula; Mitnik, Oscar A.; Macedo, Sebastian Vargas
  6. Competing for Stock Market Feedback By Caio Machado; Ana Elisa Pereira
  7. Results of a Firm Survey after the Spread of COVID-19 in Japan (Japanese) By UESUGI Iichiro; ONO Arito; HONDA Tomohito; ARAKI Shota; UCHIDA Hirofumi; ONOZUKA Yuki; KAWAGUCHI Daiji; TSURUTA Daisuke; FUKANUMA Hikaru; HOSONO Kaoru; MIYAKAWA Daisuke; YASUDA Yukihiro; YAMORI Nobuyoshi
  8. Institutional Investors, Climate Policy Risk, and Directed Innovation By Marie-Theres Schickfus von; Marie-Theres von Schickfus
  9. CEO Compensation: Evidence from the Field By Alex Edmans; Tom Gosling; Dirk Jenter
  10. Is Corporate Credit Risk Propagated to Employees? By Filipe Correia; Gustavo S. Cortes; Thiago C. Silva
  11. A liquidity risk early warning indicator for Italian banks: a machine learning approach By Maria Ludovica Drudi; Stefano Nobili
  12. Not your average firm: a quantile regression approach to the firm level investment By Doguhan Sundal

  1. By: Marina-Eliza Spaliara; Serafeim Tsoukas; Paul Lavery
    Abstract: Using firm-level data from 16 euro-area countries over 2008-2014, we investigate how the growth and investment of bank-affiliated private equity-backed companies evolve after the European Banking Authority (EBA) increases capital requirements for their parent banks. We find that portfolio companies connected to affected banks reduce their investment, asset growth, and employment growth following the capital exercise. We further show that the effect is stronger for companies likely to face financial constraints. Finally, the findings indicate that the negative effect of the capital exercise is muted when the private equity sponsor is more experienced.
    Keywords: Private equity buyouts; bank capital requirements; financial constraints; company performance
    JEL: G32 G34
    Date: 2021–06
  2. By: Fernando Alexandre; Sara Cruz; Miguel Portela
    Abstract: In this paper, we focus on the managerial characteristics of micro and small-sized firms. Using linked employer-employee data on the Portuguese economy for the 2010-2018 period, we estimate the impact of management teams’ human capital on the probability of firms becoming financially distressed and their subsequent recovery. Our estimates show that the relevance of management teams’ formal education on the probability of firms becoming financially distressed depends on firms’ size and the type of education. We show that management teams’ formal education and tenure reduce the probability of micro and small-sized firms becoming financially distressed and increases the probability of their subsequent recovery. The estimates also suggest that those impacts are stronger for micro and small-sized firms. Additionally, our results show that functional experience previously acquired in other firms, namely in foreign-owned and in exporting firms and in the area of finance, may reduce the probability of micro firms becoming financially distressed. On the other hand, previous functional experience in other firms seems to have a strong and highly significant impact on increasing the odds of recovery of financially distressed firms. We conclude that policies that induce an improvement in the managerial human capital of micro and small-sized firms have significant scope to improve their financial condition, enhancing the economy’s resilience against shocks.
    Keywords: Financial distress, firm performance, human capital
    JEL: G32 J24 L25
    Date: 2021–07–08
  3. By: Anabela Marques Santos; Michele Cincera
    Abstract: Using a recursive bivariate probit model and survey data covering the period 2014–2018, the present paper aims to assess which factors in the financial market (supply side) have a higher impact on firms’ likelihood to be financially constrained. The results show that after controlling for potential endogenous bias due to unobservable firm characteristics, being an innovative firm increases the probability of being financially constrained between 21 and 32%. The nature of the innovation strategy also seems to influence the severity of financing constraints. For financially constrained firms, the main factors that limit future financing for growth ambitions are the lack of collateral, bureaucracy, and too high a price. Findings also indicate that measures to facilitate equity investments and making existing public measures easier are the most important factors for future financing while tax incentives only play a minor role.
    Keywords: European Union; Financing; Innovation
    Date: 2021–05–01
  4. By: Timothy E. Dore (Federal Reserve Board); Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Ken Onishi (Federal Reserve Board); Naoki Wakamori (Faculty of Economics, The University of Tokyo)
    Abstract: We study how government loan programs affect the growth of small businesses by examin-ing a unique policy-based small business lending program in Japan. Combining the loan-level program data with a financial statement database, we find that small business bor-rowers increase employment and asset levels after receiving the loan and that these effectspersist for several years. Differences in debt levels are persistent over time, cash holdings ofloan recipients fall in the long run, and the effects on asset levels are larger in magnitudethan those on employment. In addition, the effects are larger in magnitude for firms iden-tified as financially constrained. These results suggest that the government loan programis successful in relaxing binding financial constraints for small businesses that participatein the program.
    Date: 2021–05
  5. By: Aparicio, Gabriela (IDB Invest); Bobic, Vida (George Washington University); De Olloqui, Fernando (Inter-American Development Bank); Carmen, María (Inter-American Development Bank); Diez, Fernández (Inter-American Development Bank); Gerardino, Maria Paula (Inter-American Development Bank); Mitnik, Oscar A. (Inter-American Development Bank); Macedo, Sebastian Vargas (Inter-American Development Bank)
    Abstract: This paper evaluates the effectiveness of easing credit constraints for rural producers in Mexico through loans provided by a national public development finance institution (DFI). In contrast to most of the existing literature, the study focuses on the effect of medium-sized loans over a two- to four-year time horizon. This paper looks at the effects of such loans on production and investment decisions, input use, and yields. Using a multiple treatment methodology, it explores the differential impacts of providing liquidity for working capital versus providing credit for investments in fixed assets. It finds that loans increased the likelihood that producers grow and sell certain key annual crops, in particular among recipients of working capital loans. It also finds significant effects on production value and sales (per hectare), with similar impacts for recipients of both types of loans, with gains in yields driven by changes in labor quality and more intensive use of key inputs. There is no evidence of significant effects on the purchase of large machinery, but there are impacts on the acquisition of cattle. Overall, the results reported in this paper suggest that lack of liquidity is at least as important as lack of funding for new investment in capital for rural producers in Mexico. Producers benefit from easing their credit constraints, regardless of the type of loan used for that purpose.
    Keywords: agricultural finance, credit constraints, development finance institutions, investment capital, working capital
    JEL: G21 O13 O16 Q14
    Date: 2021–06
  6. By: Caio Machado; Ana Elisa Pereira
    Abstract: We study how firms compete to attract informed trading when financial markets provide information to decision makers. Firms increase managerial risk taking to compete for market information, leading to a rat race in which firms overinvest in a (failed) attempt to increase their own stock informativeness. Efficiency gains of learning from the market may be eliminated: There is always an equilibrium where financial markets provide useful information, but are completely ignored by decision makers. Moreover, in any equilibrium firms react too little to market activity. Our results highlight that critically different outcomes arise when firms interact in integrated financial markets.
    Date: 2020
  7. By: UESUGI Iichiro; ONO Arito; HONDA Tomohito; ARAKI Shota; UCHIDA Hirofumi; ONOZUKA Yuki; KAWAGUCHI Daiji; TSURUTA Daisuke; FUKANUMA Hikaru; HOSONO Kaoru; MIYAKAWA Daisuke; YASUDA Yukihiro; YAMORI Nobuyoshi
    Abstract: This paper reports results of a survey on firms, most of which are SMEs, under the spread of COVIDovid-19 in Japan. The survey was implemented by RIETI in November 2020 and about 5,000 corporations responded. The survey questionnaire covers the following issues: types of shocks to and responses by firms, firm behaviors following the onset of the COVID-19 crisis including real activities (working from home, capital investment, transaction relationships with customers, suppliers, and banks, and business inheritance) and financial activities (new loans, debt restructuring, cash holdings, and commitment lines); use of financial assistance measures provided by the government; use of business continuity plans; and the impact of subjective uncertainty on firm performance. This paper also focuses on the subject firms that responded to the three RIETI surveys implemented in the years 2008, 2009, and 2014, and compares the current COVID-19 crisis with the Global Financial Crisis in several respects, including the impacts of crises on firm management, access to new loans, renegotiations of contract terms for existing loans, and use of financial assistance measures by the government.
    Date: 2021–06
  8. By: Marie-Theres Schickfus von; Marie-Theres von Schickfus
    Abstract: The tightening of climate policies may cause technologies based on fossil fuels to lose value compared to “green” technologies. For firms with significant fossil-based knowledge, this implies that their firm (market) value is at risk. This technological risk is also relevant for financial market actors, in particular institutional investors following long-term investment strategies. Measuring technological knowledge using patent data at the firm level, this paper uses a dynamic patent count data model and explores whether institutional investors address technological transition risk via engagement activities. Despite robust evidence for a positive influence of institutional investors on overall innovation, no evidence can be found that institutional ownership is associated with a change in the direction of innovation.
    Keywords: Green innovation, climate policy, green finance, climate risk, institutional investors
    JEL: Q55 G23 O34
    Date: 2021
  9. By: Alex Edmans; Tom Gosling; Dirk Jenter
    Abstract: We survey directors and investors on the objectives, constraints, and determinants of CEO pay. 67% of directors would sacrifice shareholder value to avoid controversy on CEO pay, implying they face significant constraints other than participation and incentive compatibility. These constraints lead to lower pay levels and more one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Respondents view intrinsic motivation and reputation as stronger motivators than incentive pay. They believe pay matters to CEOs not to finance consumption, but because it affects perceptions of fairness. The need to fairly recognize the CEO’s contribution explains why flow pay responds to performance, even though CEOs’ equity holdings already provide substantial consumption incentives, and why peer firm pay matters beyond retention concerns. Fairness also matters to investors, with shareholder returns an important reference point. This causes CEO pay to be affected by external risks, in contrast to optimal risk sharing.
    Keywords: executive compensation, contract theory, CEO incentives, fairness, survey
    JEL: G34 G38 M12 M52
    Date: 2021
  10. By: Filipe Correia; Gustavo S. Cortes; Thiago C. Silva
    Abstract: Using an administrative credit registry for individuals merged with matched employer-employee data, we investigate whether a firm’s credit risk affects its employees’ access to credit. We find that employees of companies that suffer credit rating downgrades have access to 20 percent less credit and face 10 percent higher interest rates compared with similar employees of non-downgraded firms. Workers from downgraded firms are also 5 p.p. more likely to default on loans than employees from unaffected firms. These adverse financial effects have real consequences, with employees cutting consumption by 9 percent following downgrades of their employers. Our results suggest that banks process information on the financial health of employers when pricing consumer credit.
    Date: 2021–06
  11. By: Maria Ludovica Drudi (Bank of Italy); Stefano Nobili (Bank of Italy)
    Abstract: The paper develops an early warning system to identify banks that could face liquidity crises. To obtain a robust system for measuring banks’ liquidity vulnerabilities, we compare the predictive performance of three models – logistic LASSO, random forest and Extreme Gradient Boosting – and of their combination. Using a comprehensive dataset of liquidity crisis events between December 2014 and January 2020, our early warning models’ signals are calibrated according to the policymaker's preferences between type I and II errors. Unlike most of the literature, which focuses on default risk and typically proposes a forecast horizon ranging from 4 to 6 quarters, we analyse liquidity risk and we consider a 3-month forecast horizon. The key finding is that combining different estimation procedures improves model performance and yields accurate out-of-sample predictions. The results show that the combined models achieve an extremely low percentage of false negatives, lower than the values usually reported in the literature, while at the same time limiting the number of false positives.
    Keywords: banking crisis, early warning models, liquidity risk, lender of last resort, machine learning
    JEL: C52 C53 G21 E58
    Date: 2021–06
  12. By: Doguhan Sundal
    Abstract: The large majority of the work published on firm investment is done in the neoclassical frame of a rational optimizing firm attempting to achieve optimal size. While this frame addresses one important consideration in firm investment, it has two important shortcomings that this paper will address. First, it doesn’t have a clear interpretation of how the cash-flows are affecting the firm investment decisions. Second, the standard approach operates on an “average firm,” which in fact is significantly different from a firm with modal investment behavior. This study employs a Bayesian quantile regression model that yields two significant results. First concerning the relative responsiveness of these two neglected factors, it determines that the firms with higher investment rates have higher responsiveness to the valuation ratio and lower responsiveness to the profit rate. Second and of broader political economic note, it finds a decline in the responsiveness of firm investment to these factors that is consistent with the widely discussed macroeconomic “secular stagnation” of the US economy, and within that consistency, that the decline varies across sectors, and is more pronounced in firms with higher investment rates.
    Keywords: Tobin’s Q; Investment Rate; Profit Rate; Finance Constraint; Secular Stagnation; Bayesian Econometrics; Bayesian Quantile Regression JEL Classification: D22; D24; E12; E22; G11
    Date: 2021

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