nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒08‒30
fifteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Corporate debt booms, financial constraints and the investment nexus By Albuquerque, Bruno
  2. Effect of Share Capital on Financial Growth of Non-Financial Firms Listed at the Nairobi Securities Exchange By David Haritone Shikumo
  3. Financial Structure and Growth of Pension Funds in Kenya By OMOLLO, HAROLD; OLWENY, TOBIAS; OLUOCH, OLUOCH; WAMATANDA, JOSHUA
  4. The Determinants of Electricity Constraints by Firms in Developing Countries By Elizabeth Asiedu; Theophile T. Azomahou; Neepa B. Gaekwa; Mahamady Ouedraogo
  5. The Indian manufacturing sector: finance, investment and performance of firms. By Agarwal, Manmohan; Azim, Rumi
  6. Corporate stress and bank nonperforming loans: Evidence from Pakistan By M. Ali Choudhary; Anil K. Jain
  7. The challenge of performance in the governance of local authorities in Morocco: Issues and perspectives By Eddie Nebie; Elmoukhtar Tbitbi
  8. Regulatory Costs of Being Public: Evidence from Bunching Estimation By Michael Ewens; Kairong Xiao; Ting Xu
  9. Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents By Jan Bena; Isil Erel; Daisy Wang; Michael S. Weisbach
  10. Acquisition experience and director remuneration By Addis Gedefaw Birhanu; Philipp Geiler; Luc Renneboog; Yang Zhao
  11. Loan-to-Value Caps, Bank Lending, and Spillover to General-Purpose Loans By Selva Bahar Baziki; Tanju Capacioglu
  12. Foundations of system-wide financial stress testing with heterogeneous institutions By Farmer, J. Doyne; Kleinnijenhuis, Alissa; Nahai-Williamson, Paul; Wetzer, Thom
  13. Global Banking and Firm Financing: A Double Adverse Selection Channel of International Transmission By Leslie Sheng Shen
  14. Does financial inclusion reduce non-performing loans and loan loss provisions? By Ozili, Peterson Kitakogelu; Adamu, Ahmed
  15. Finance, Governance and Inclusive Education in Sub-Saharan Africa By Simplice A. Asongu; Nicholas M. Odhiambo

  1. By: Albuquerque, Bruno (Bank of England)
    Abstract: Does corporate debt overhang affect investment over the medium term? To uncover this association, I measure debt overhang with a concept of debt accumulation or debt boom, and combine leverage with liquid assets to capture financial constraints. Using a large US firm-level panel over 1985 Q1–2019 Q1, I find that debt overhang leads financially vulnerable firms to cut permanently back on investment: a 10 percentage point increase in the three-year change in the leverage ratio is associated with lower investment growth of 5 percentage points after five years compared to the most resilient firms. I also find that vulnerable firms experience weaker intangible capital growth in the aftermath of debt booms. Finally, I find that general equilibrium effects dominate, stressing the risk that firm-specific debt booms in a subset of firms may spill over to the rest of the economy.
    Keywords: Corporate debt booms; firm investment; financial constraints; local projections
    JEL: D22 E22 E32 G32
    Date: 2021–08–13
  2. By: David Haritone Shikumo
    Abstract: Purpose: A significant number of the non-financial firms listed at the Nairobi Securities Exchange (NSE) have been experiencing declining financial performance which deters investors from investing in such firms. The lenders are also not willing to lend to such firms. As such, the firms struggle to raise funds for their operations. Prudent financing decisions can lead to financial growth of the firm. The purpose of this study is to assess the effect of Share capital on financial growth of Non-financial firms listed at the Nairobi Securities Exchange. Financial firms were excluded because of their specific sector characteristics and stringent regulatory framework. The study is guided by Market Timing Theory and Theory of Growth of the Firm. Methodology: Explanatory research design was adopted. The target population of the study comprised of 45 non-financial firms listed at NSE for a period of ten years from 2008 to 2017. The study conducted both descriptive statistics analysis and panel data analysis. Findings: The result indicates that, share capital explains 32.73% and 11.62% of variations in financial growth as measure by growth in earnings per share and growth in market capitalization respectively. Share capital positively and significantly influences financial growth as measured by both growth in earnings per share and growth in market capitalization. Implications: The study recommends for the Non-financial firms to utilize equity financing as a way of raising capital for major expansions, asset growth or acquisitions which may require heavy funding. In this way, firms will be assured of improved performance as well as high financial growth. The study also recommends for substantial firm financing through equity. Value: Equity financing is important to any firm, if the proceeds are used to invest in projects which eventually bring growth to the firm.
    Date: 2021–08
    Abstract: Financial structure choice and its impact on growth remains a great dilemma to all stakeholders. Whereas several studies have been done on this subject, more is yet to be established so as to ascertain the validity of the relationship between the financial structure and growth while factoring in an appropriate moderating variable like firm size in Kenya. The study investigates the confluence of financial structure and growth of pension funds management organizations in Kenya while considering confounding studies supporting, disagreeing and undecided views of other scholars. This study highlighted several empirical evidences, literature review, objectives and the research hypotheses. The study employed causal research design with secondary panel data from the financial statements of 49 pension firm organizations carefully identified according to Krejcie and Morgan (1970) table retrieved from a population of 68 registered pension scheme managers in Kenya as at December 31st 2018. Data was retrieved from the retirement benefit authority records for the period December 2009-2018.Model specifications linking both the Independent, dependent and the error term was applied together with statistical and diagnostic tests. The effect of financial structure on pension funds is not significant across all firms. It is also concluded that highly geared firms have significant relationship with equity returns and insignificant relationship with asset returns. In addition, highly geared firms tend to have high profitability and that the nature of the industry also determines the effect of financial structure on their growth.
    Keywords: Capital Structure, Financial Performance, Financial Structure, Speed of Adjustment Working Capital Management, Short Term Debt, Long Term Debts, External Equity Internal Equity
    JEL: G3
    Date: 2021–07–08
  4. By: Elizabeth Asiedu (Department of Economics, University of Kansas); Theophile T. Azomahou (African Economic Research Consortium); Neepa B. Gaekwa (State University of New York at Fredonia); Mahamady Ouedraogo (Universite Clermont-Auvergne, CNRS, CERDI)
    Abstract: We employ survey data for 108 developing countries over the period 2006-2017 and estimate an ordered probit model to determine the firm and country characteristics that affect the probability that a firm is energy poor - i.e., the firm will report that electricity is an obstacle to the firm's operations. We find that firms that experienced power outages and firms in the manufacturing industry are more likely to be energy poor. In contrast, majority-owned government firms and older firms are less likely to be energy poor. The gender of the firm owner and the size of the firm are not correlated with firm energy poverty. Among firms that experienced power outages, firm energy poverty increases with the frequency as well as the duration of outages. We also find that firms that operate in countries with weak institutions and in countries where residents have limited access to electricity are more likely to be energy poor.
    Keywords: Constraints, Electricity, Energy Poverty, Firms, Institution
    JEL: D22 O12 L20
    Date: 2021–06
  5. By: Agarwal, Manmohan (Centre for International Trade and Development, Jawaharlal Nehru University); Azim, Rumi (Centre for International Trade and Development, Jawaharlal Nehru University)
    Abstract: The paper tests the hypothesis that financial stress caused the stagnation in the manufacturing sector, using firm level data on a sample of 804 large, mid, and small cap manufacturing firms for 15 years from 2005 to 2019. We analyse the trend in the financial indicators and estimate dynamic panel data regression using a two-step GMM method. We do not find substantial for financial stress to be a major determinant of the investment slowdown in these firms. Our results support the Pecking order theory, particularly for larger firms. In addition, we find that the declining growth in sales is a major determinant in explaining the slowdown in fixed investments and profits. For small cap firms, the size of the firms also matters. We therefore suggest that measures to increase demand can help in reviving the sales growth of firms and thereby private investments and profits.
    Keywords: Capital structure ; Investment ; Profitability ; Manufacturing ; India
    Date: 2021–08
  6. By: M. Ali Choudhary; Anil K. Jain
    Abstract: Using detailed administrative Pakistani credit registry data, we show that banks with low leverage ratios are both significantly slower and less likely to recognize a loan as nonperforming than other banks that lend to the same firm. Moreover, we find suggestive evidence that this lack of recognition impedes loan curing, with banks with low leverage ratios reporting significantly higher final default rates than other banks for the same borrower (even after controlling for differences in loan terms). Our empirical findings are consistent with the theoretical prediction that classifying a nonperforming loan is more expensive for banks with less capital.
    Keywords: Credit markets; Banks; Corporate debt; Evergreening; Nonperforming loans
    JEL: G21 G33
    Date: 2021–08–20
  7. By: Eddie Nebie (UCD - Université Chouaib Doukkali); Elmoukhtar Tbitbi (UH2MC - Université Hassan II [Casablanca])
    Abstract: Empirical studies have shown that board characteristics influence the choice of capital structure in listed and unlisted companies. This paper aims to add to the existing literature on corporate governance and capital structure decisions in listed companies in Morocco by examining the relationship between board characteristics and capital structure. The paper uses a panel of data from 53 Moroccan nonfinancial listed companies from 2015 to 2019. In order to properly examine this relationship, correlation analysis and multiple linear regression (OLS) are performed between the dependent and independent variables. This study found that the percentage of female board members, the size of the board of directors as well as company-specific variables such as asset tangibility and company size have a significant influence on capital structure decisions. However, the empirical results of the relationships are only statistically significant in the case of board size and the proportion of women on the board. While the presence of independent directors and CEO duality show no effect on capital structure. It is clear from the study that corporate governance structures influence the financing decisions of listed Moroccan firms. However, this study has limitations that could lead to future research in terms of choice of variables and statistical method.
    Abstract: Des études empiriques ont montré que les caractéristiques du conseil d'administration influencent le choix de la structure du capital des sociétés cotées et non cotées. Cet article vise à enrichir la littérature existante sur la gouvernance d'entreprise et les décisions relatives à la structure du capital dans les sociétés cotées en bourse au Maroc en examinant la relation entre les caractéristiques du conseil d'administration et la structure du capital. Le document utilise un panel de données de 53 sociétés non financières marocaines cotées en bourse, soit 424 observations, de 2015 à 2019. Afin d'examiner correctement cette relation, une analyse de corrélation et une régression linéaire multiple (MCO) sont réalisées entre les variables. Cette étude a montré que le pourcentage de femmes membre du conseil d'administration, la taille du conseil d'administration ainsi que les variables propres aux entreprises, telles que la tangibilité des actifs et la taille de l'entreprise, ont une influence significative sur les décisions relatives à la structure du capital. Toutefois, les résultats empiriques des relations ne sont statistiquement significatifs que dans le cas de la taille du conseil d'administration et de la proportion de femmes dans le conseil d'administration. Tandis que la présence des administrateurs indépendants et la dualité du PDG ne présentent aucun effet sur la structure du capital. Il ressort clairement de l'étude que les structures de gouvernance d'entreprise influencent les décisions de financement des entreprises marocaines cotées. Cependant, cette étude présente des limites qui pourraient conduire à des recherches futures en termes de choix de variables et méthode statistique.
    Keywords: Performance,Territorial management,Governance,Territorial communities,Management territorial,Gouvernance,Collectivités territoriales
    Date: 2021
  8. By: Michael Ewens; Kairong Xiao; Ting Xu
    Abstract: The increased burden of disclosure and governance regulations is often cited as a key reason for the significant decline in the number of publicly-listed companies in the U.S. We explore the connection between regulatory costs and the number of listed firms by exploiting a regulatory quirk: many rules trigger when a firm’s public float exceeds a threshold. Consistent with firms seeking to avoid costly regulation, we document significant bunching around multiple regulatory thresholds introduced from 1992 to 2012. We present a revealed preference estimation strategy that uses this behavior to quantify regulatory costs. Our estimates show that various disclosure and internal governance rules lead to a total compliance cost of 4.1% of the market capitalization for a median U.S. public firm. Regulatory costs have a greater impact on private firms’ IPO decisions than on public firms’ going private decisions. However, heightened regulatory costs only explain a small fraction of the decline in the number of public firms.
    JEL: G28 G32 K22
    Date: 2021–08
  9. By: Jan Bena; Isil Erel; Daisy Wang; Michael S. Weisbach
    Abstract: Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential hold- up problems. Such contracting difficulties have long been argued to be an important reason for acquisitions. To evaluate the extent to which this motivation leads to mergers, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the mergers. We find that patents of inventors from target firms become 28.9% to 46.8% more specific to those of acquirers’ inventors following completed mergers, benchmarked against patents filed by targets and a group of counterfactual acquirers. This pattern is stronger for vertical mergers that are likely to require specialized investments. There is no change in the specificity of patents for mergers that are announced but not consummated. Overall, we provide empirical evidence that contracting issues in motivating specialized investment can be a motive for acquisitions.
    JEL: G34 L14 L22
    Date: 2021–08
  10. By: Addis Gedefaw Birhanu (emlyon business school); Philipp Geiler; Luc Renneboog; Yang Zhao
    Abstract: We investigate whether acquisition experience of executive and non-executive directors is priced in their remuneration contracts. Acquisition experience generates a contractual premium, and the relative size of this premium is higher for non-executive directors than for executives. Only a director's track record related to past successful acquisitions is priced. Acquisition experience of a director is not remunerated if this type of experience is already abundantly present in the firm through the firm's past acquisition record (substitution effect). We verify the results by examining potential endogeneity concerns, by analyzing a broad set of measures of acquisition experience (such as industry-specific, broad or international experience, experience on a target's board), and by ruling out alternative explanations (such as a director's general skills level or reputation, the CEO's power and delegation attitude, and the firm's corporate governance quality).
    Keywords: Directors,M&A,Takeovers,Mergers,remuneration contracting,Compensation,Experience,Human capital,skills
    Date: 2021–05–11
  11. By: Selva Bahar Baziki; Tanju Capacioglu
    Abstract: This paper studies the effect of the introduction of and a subsequent easing in residential credit loan-to-value (LTV) ratio caps on bank lending and borrowers' loan usage with a unique and comprehensive bank-linked individual credit data set in a large emerging economy. We first show that following the introduction of an LTV cap, banks that were previously lending at rates above the limit have reduced residential lending, as targeted by the policy. We find that banks change their balance sheet composition as a response, replacing the reduction in residential lending with higher commercial loans and general-purpose loans issued to new residential borrowers.
    Keywords: Loan to value ratio, Credit risk, Housing loans, General-purpose loans, Credit spillover
    JEL: G21 G28 E51 E58 G20
    Date: 2021
  12. By: Farmer, J. Doyne; Kleinnijenhuis, Alissa; Nahai-Williamson, Paul; Wetzer, Thom
    Abstract: We propose a structural framework for the development of system-wide financial stress tests with multiple interacting contagion, amplification channels and heterogeneous financial institutions. This framework conceptualises financial systems through the lens of five building blocks: financial institutions, contracts, markets, constraints, and behaviour. Using this framework, we implement a system-wide stress test for the European financial system. We obtain three key findings. First, the financial system may be stable or unstable for a given microprudential stress test outcome, depending on the system's shock-amplifying tendency. Second, the 'usability' of banks' capital buffers (the willingness of banks to use buffers to absorb losses) is of great consequence to systemic resilience. Third, there is a risk that the size of capital buffers needed to limit systemic risk could be severely underestimated if calibrated in the absence of system-wide approaches.
    Keywords: Systemic risk, stress testing, financial contagion, financial institutions, capital requirements, macroprudential policy
    JEL: G17 G21 G23 G28 C63
    Date: 2020–05
  13. By: Leslie Sheng Shen
    Abstract: This paper proposes a "double adverse selection channel" of international transmission. It shows, theoretically and empirically, that financial systems with both global and local banks exhibit double adverse selection in credit allocation across firms. Global (local) banks have a comparative advantage in extracting information on global (local) risk, and this double information asymmetry creates a segmented credit market where each bank lends to the worst firms in terms of the unobserved risk factor. Given a bank funding (e.g., monetary policy) shock, double adverse selection affects firm financing at the extensive and price margins, generating spillover and amplification effects across countries.
    Keywords: Adverse selection; Global banking; Information asymmetry; International transmission; Monetary policy
    JEL: G21 F30
    Date: 2021–08–10
  14. By: Ozili, Peterson Kitakogelu; Adamu, Ahmed
    Abstract: We examine whether countries that have high levels of financial inclusion have fewer non-performing loans and loan loss provisions in their banking sectors. The fixed effect panel regression methodology was used to analyse the effect of financial inclusion on bank non-performing loans and loan loss provisions. Using data from 48 countries, we find that greater formal account ownership is associated with high non-performing loans. Bank loan loss provisions are fewer in countries that have high levels of financial inclusion only when financial inclusion is achieved through the combined use of formal account ownership, bank branch supply and ATM supply. Also, non-performing loans are fewer in countries that experience economic boom and high levels of financial inclusion.
    Keywords: financial inclusion, non-performing loans, loan loss provisions, financial stability, bank stability, ATM, formal account ownership, credit risk, access to finance.
    JEL: G00 G20 G21 G23 G28 G29 O31
    Date: 2021–08
  15. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This research assesses the importance of credit access in modulating governance for gender inclusive education in 42 countries in Sub-Saharan Africa with data spanning the period 2004-2014. The Generalized Method of Moments is employed as empirical strategy. The following findings are established. First, credit access modulates government effectiveness and the rule of law to induce positive net effects on inclusive “primary and secondary education†. Second, credit access also moderates political stability and the rule of law for overall net positive effects on inclusive secondary education. Third, credit access complements government effectiveness to engender an overall positive impact on inclusive tertiary education. Policy implications are discussed with emphasis on Sustainable Development Goals.
    Keywords: Finance; Governance; Sub-Saharan Africa; Sustainable Development
    JEL: I28 I30 G20 O16 O55
    Date: 2020–01

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