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on Corporate Finance |
| By: | Thomas Geelen (Copenhagen Business School - Department of Finance; Danish Finance Institute); Erwan Morellec (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Natalia Rostova (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute) |
| Abstract: | Lending relationships matter for firm financing. In a model of debt dynamics, we study how lending relationships are formed and how they impact leverage and debt maturity choices. In the model, lending relationships evolve through repeated interactions between firms and debt investors. Stronger lending relationships lead firms to adopt higher leverage ratios, issue longer term debt, and raise funds from non-relationship lenders when relationship quality is sufficiently high. The maturity of debt contracts issued to non-relationship investors is higher than that of relationship investors. Negative shocks to relationship lenders drastically affect the financing choices of firms with intermediate relationship quality. |
| Keywords: | relationship lending, capital structure, debt maturity, default |
| JEL: | G20 G32 G33 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2146&r= |
| By: | Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Sara Pinoli (Bank of Italy); Paola Rossi (Bank of Italy); Alessandro Scopelliti (European Central Bank (ECB) - Directorate General Economics; University of Zurich - Department of Banking and Finance) |
| Abstract: | We study the effects of diversifying funding sources on the financing conditions for firms. We exploit a regulatory reform that took place in Italy in 2012, i.e. the introduction of ‘minibonds’, which opened a new market-based funding opportunity for unlisted firms. Using the Italian Credit Register, we investigate the impact of minibond issuance on bank credit conditions for issuer firms, both at the firm-bank and firm level. We compare new loans granted to issuer firms with new loans concurrently granted to similar non-issuer firms. We find that issuer firms obtain lower interest rates on bank loans of the same maturity than non-issuer firms do, suggesting an improvement in their bargaining power with banks. In addition, issuer firms reduce the amount of used bank credit but increase the overall amount of available external funds, pointing to a substitution with bank credit and to a diversification of corporate funding sources. Studying their ex-post performance, we find that issuer firms expand their total assets and fixed assets, and also raise their leverage. |
| Keywords: | bank credit, capital markets, minibonds, loan pricing, SME finance |
| JEL: | G21 G23 G32 G38 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2155&r= |
| By: | Abdul Halim, Asyraf |
| Abstract: | A Shariah compliant firm faces a trade-off between keeping their Shariah compliancy versus having their long-term debt to assets or market-capitalisation ratio above 30%, when they operate within a market with little or no access to a liquid Islamic debt market. On the other hand, Proposition 1 of Modigliani & Miller (1963) posits that interest tax shield benefits, derived from long-term debt, reduce the hypothetical firm’s investment cut-off rate and therefore provide extra value for the firm. Facing a ceiling value on their long-term debt to assets or market-capitalisation ratio, Shariah compliant firms therefore should be unable to fully enjoy lower interest tax shield benefits, and consequently, lower investment cut-off rate vis-à-vis their conventional counterparts. Subsequently, any samples of Shariah compliant firms formed within a market without access to a liquid Islamic debt market should demonstrate a consistent tendency towards a specific set corporate financial behaviour due to the consistently higher than average investment cut-off rate. This paper extends the theoretical work of Modigliani & Miller (1963) to, firstly, demonstrate how a higher-than-average investment cut-off rate is a natural consequence of the debt ratio screening incorporated within the contemporary Shariah Stock Screening Methodology for a Shariah compliant firm that is devoid of access to a liquid Islamic debt market. Next, the paper outlines (with supporting empirical stylised facts) the subsequent corporate financial characteristics that samples of Shariah compliant firms are more skewed towards. The paper finds that Shariah compliant firm faces a theoretical floor limit to their investment-cut off rate, implying that the average Shariah compliant firm may find that lesser projects pass their internal rate of return vis-à-vis the projects of a similar conventional firm. Consequently, samples of Shariah compliant firms consistently show the following corporate financial characteristics; above-average size, larger marginal change in size and profitability in response to a given marginal change in investments, low book-to-market ratio and lower investment rates, when compared to a sample of conventional firms. |
| Keywords: | Shariah Stock Screening Methodologies, Shariah Debt Ratio Screening, Investment cut-off rate, Corporate Financial Behaviour |
| JEL: | G30 G31 G32 |
| Date: | 2021–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109019&r= |
| By: | Stjepan Srhoj; Dejan Kovac; Jacob Shapiro; Randall Filer |
| Abstract: | Bankruptcy restructuring procedures are used in most legal systems to decide the fate of businesses facing financial hardship. We study how bargaining failures in such procedures impact the economic performance of participating firms in the context of Croatia, which introduced a "pre-bankruptcy settlement" (PBS) process in the wake of the Great Recession of 2007 - 2009. Local institutions left over from the communist era provide annual financial statements for both sides of more than 180,000 debtor-creditor pairs, enabling us to address selection into failed negotiations by matching a rich set of creditor and debtor characteristics. Failures to settle at the PBS stage due to idiosyncratic bargaining problems, which effectively delays entry into the standard bankruptcy procedure, leads to a lower rate of survival among debtors as well as reduced employment, revenue, and profits. We also track how bargaining failures diffuse through the network of creditors, finding a significant negative effect on small creditors, but not others. Our results highlight the impact of delay and the importance of structuring bankruptcy procedures to rapidly resolve uncertainty about firms' future prospects. |
| Keywords: | bankruptcy, insolvency, liquidation, restructuring |
| JEL: | G33 G34 D02 L38 P37 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2021-23&r= |
| By: | Gündüz, Yalin; Pelizzon, Loriana; Schneider, Michael; Subrahmanyam, Marti G. |
| Abstract: | We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full posttrade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a subset of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities. |
| Keywords: | Corporate Bonds,WpHG,Liquidity,Transparency,OTC markets |
| JEL: | G15 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:212021&r= |
| By: | Ruiz-García, J. C. |
| Abstract: | How do financial frictions affect firm dynamics, allocation of resources across firms, and aggregate productivity and output? Is the nature of productivity shocks that firms face primary for the effects of financial frictions? I first use a comprehensive dataset of Spanish firms from 1999 to 2014 to estimate non-parametrically the firm productivity dynamics. I find that the productivity process is non-linear, as persistence and shock variability depend on past productivity, and productivity shocks are non-Gaussian. These dynamics differ from the ones implied by a standard AR(1) process, commonly used in the firm dynamics literature. I then build a model of firm dynamics with financial frictions in which productivity shocks are non-linear and non-Gaussian. The model is consistent with a host of evidence on firm dynamics, financial frictions, and firms’ financial behaviour. In the model economy, financial frictions affect the firm life cycle. Without financial frictions, the size of an entrant firm will be three times larger. Furthermore, profit accumulation, which allows firms to overcome financial frictions, is slow, and it only speeds up when firms are mature. As a consequence, the average exiting firm is smaller than it would be without financial frictions. The aggregate consequences of financial frictions are significant. They result in misallocation of capital and reduce aggregate productivity by 16%. This figure is only 8% if productivity dynamics evolve according to a standard AR(1) process. |
| Keywords: | Firm Dynamics, Non-Linear Productivity Process, Financial Frictions, Misallocation |
| JEL: | E22 G32 O16 |
| Date: | 2021–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2157&r= |
| By: | Bureau Benjamin,; Duquerroy Anne,; Giorgi Julien,; Lé Mathias,; Scott Suzanne,; Vinas Frédéric |
| Abstract: | Using rich granular data for over 645 000 French firms in 2020, this paper builds a micro-simulation model to assess the impact of the Covid-19 crisis on corporate liquidity. Going beyond the aggregate picture, we document that while net debt has been fairly stable at the macroeconomic level, individual heterogeneity is widespread. Significant dispersion in changes in net debt prevails both between and within industries, before as well as after public support. We show that the probability to experience a negative liquidity shock - as well as the intensity of this shock - are negatively correlated with the initial credit quality of the firm (based on Banque de France internal ratings). Our model also finds that public support dampens significantly the impact of Covid on the dispersion of liquidity shocks and brings back the distribution of liquidity shocks closer to its pre-crisis path but with fatter tails. |
| Keywords: | Covid-19; Micro-simulation; Non-financial Corporations; Cash Holding; Debt |
| JEL: | D22 G32 G38 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:824&r= |
| By: | USHIJIMA Tatsuo |
| Abstract: | Diversified firms differ considerably in the efficiency of their internal capital markets (ICMs), through which scarce capital is allocated across alternative growth opportunities. This study highlights the role of firm age in generating this heterogeneity. Consistent with the hypothesis that organizational aging increases the rigidity of capital allocation, our analysis of Japanese firms identifies a strong inverse association between ICM efficiency and firm age. This correlation is robust to controlling for covariates suggested by alternative explanations such as agency problems and the individual aging of managers. Moreover, the correlation is substantially weakened when a firm is drastically reorganized. These results suggest that the liability of aging (age-based organizational rigidity) significantly affects intrafirm resource mobility, which is crucial for a firm's ability to respond to external changes. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:21065&r= |