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on Corporate Finance |
| By: | Jun Chen; Michael Ewens |
| Abstract: | Although an extensive literature shows that startups are financially constrained and that constraints vary by geography, the source of these constraints is still relatively unknown. We explore intermediary financing constraints, a channel studied in the banking literature, but only indirectly addressed in the venture capital (VC) literature. Our empirical setting is the VC fundraising and startup financing environment around the passage of the Volcker Rule, which restricted banks’ ability to invest in venture capital funds as limited partners (LPs). The rule change disproportionately impacted regions of the U.S. historically lacking in VC financing. We find that a one standard deviation increase in VCs’ exposure to the loss of banks as LPs led to an 18% decline in fund size and about a 10% decrease in the likelihood of raising a follow-on fund. Startups were not completely cushioned from the additional constraints on their VCs: capital raised fell and pre-money valuations declined. Overall, VC financing constraints manifest as fewer, smaller funds that change investment strategy and experience increases in bargaining power. Last, we show that the rule change increased the likelihood startups move out of impacted states, thus exacerbating the geographic disparity in high-growth entrepreneurship. |
| JEL: | G21 G23 G24 K22 L26 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29211&r= |
| By: | Prado, Tiago S. |
| Abstract: | This paper investigates short-term effects of big tech start-up acquisitions on innovation empirically. Innovation research has found a strong positive, causal relationship between VC investment and innovation. Using this insight, we can explore the repercussions of big tech start-up acquisitions on innovation by examining their effects on venture capital (VC) activity. We analyze a very large set of observations of more than 32,000 venture capital deals in more than 170 different segments of the tech industry and almost 400 tech start-up acquisitions made worldwide between 2010 and 2020 by Google, Facebook, Amazon, Apple, and Microsoft. Our results suggest a positive, causal impact of big tech start-up acquisitions on venture capital activity, challenging claims about the creation of "kill zones" for start-ups after acquisitions are made by the big techs. For example, after controlling for other factors that may impact VC activity, like initial public offerings (IPOs) and other mergers and acquisitions (M&As), we found an average increase of 30.7% in the total amount of VC funding towards U.S. based start-ups of the same industry segment in the four quarters following a big tech start-up acquisition. For deals targeting European start-ups, we found an increase of 32.1% in the VC funding in in the first quarter after a big tech start-up acquisition. Finally, our findings show that such positive effects, when existent, persist for a few months only, and so do not seem to have lasting impacts on the innovation incentives in the the start-up ecossystem. Our empirical findings should inform current competition policy discussions on imposing restrictions to acquistions of start-ups by the big techs. |
| Keywords: | kill zone,platform,big tech,venture capital,innovation |
| JEL: | G11 G24 G32 G34 L41 L44 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itsb21:238049&r= |
| By: | Sai Ding; Minjoo Kim; Xiao Zhang |
| Abstract: | The investment-cash flow sensitivity (ICFS) of Chinese listed firms declined during the global financial crisis, which contradicts the conventional financial constraint interpretation of ICFS. We analyze this interesting phenomenon by examining how cash flow uncertainty affects the ways to finance investment in China. We find that ICFS reveals not only the information between investment and cash flow but also the relationship between internal funds and external financing. When internal funds and external financing are complements, cash flow uncertainty decreases ICFS much more than when internal funds and external financing are substitutes. Our results remain robust when we consider the problem of endogeneity and use alternative measures of key variables. Our story is also supported by the sample of US firms, indicating that our new interpretation of ICFS based on cash flow uncertainty and the relationship between internal funds and external financing can apply to the general literature of corporate finance. |
| Keywords: | cash flow uncertainty, financial constraint, debt, cash flow, investment, China |
| JEL: | E22 G31 O16 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2021_16&r= |
| By: | Alejandro Drexler; Thomas B. King |
| Abstract: | When firms approach distress, whether they engage in asset substitution (risk shifting) or rebuild equity (risk management) may depend on their access to capital markets. The property-casualty insurance industry has two features that make it ideal for testing this hypothesis: (1) the main losses for insurers are exogenous events like hurricanes that provide a strong instrument for financial distress; and (2) many insurers are organized as mutual companies, which cannot issue stock. Consistent with the importance of capital constraints, stock companies issue new equity following a negative shock, while mutual companies increase the riskiness of their investment portfolios. |
| Keywords: | Risk shifting; insurance; reinsurance; capital structure |
| JEL: | G22 G32 |
| Date: | 2021–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:93018&r= |
| By: | Rishabh, Kumar (University of Basel) |
| Abstract: | Banks all over the world show interest in acting as venture capitalists. In this paper, I argue that banks offer venture capital (VC) financing along with traditional (collateralized) loans in response to the natural constraints of the hidden information that they face. Innovative entrepreneurs pursue new technology that promises high return but runs a high risk of failure. The more innovative entrepreneurs also have higher reservation utility. This interaction between type-dependent returns and reservation utility creates a situation where collateral alone is not sufficient to screen entrepreneurs, and the uninformed bank needs an additional screening device. VC fulfils that role. |
| Keywords: | Bank, Venture Capital, Collateral, Debt, Screening |
| JEL: | G21 G24 D86 |
| Date: | 2021–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2021/09&r= |
| By: | Itzhak Ben-David; Mark J. Johnson; René M. Stulz |
| Abstract: | With the onset of the COVID-19 crisis in March 2020, small business lending through fintech lenders collapsed. We explore the reasons for the market shutdown using detailed data about loan applications, offers, and take-up from a major small business fintech credit platform. We document that while the number of loan applications increased sharply early in March 2020, the supply of credit collapsed as online lenders dropped from the platform and the likelihood of applicants receiving loan offers fell precipitously. Our analysis shows that the drying up of the loan supply is most consistent with fintech lenders becoming financially constrained and losing their ability to fund new loans. |
| JEL: | G11 G21 G33 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29205&r= |
| By: | Kim, Mee Jung (Sejong University); Lee, Kyung Min (George Mason University); Earle, John S. (George Mason University) |
| Abstract: | We estimate the impact of the Community Reinvestment Act (CRA) on small business lending in lower-income neighborhoods. Using 2004-2016 panel data on census tracts, we apply a combined regression discontinuity and fixed effect method. We find that the number of small business loans increases by about 3 to 4 percent and the total dollar amount of small business loans by about 6 to 10 percent in tracts becoming treated by the CRA. The results are robust along many dimensions and suggest that the CRA has a positive impact on access to finance for small businesses in lower income areas. |
| Keywords: | financial constraints, small business lending, community reinvestment act, lower income neighborhood |
| JEL: | G28 G21 R58 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14681&r= |
| By: | Krammer, Sorin |
| Abstract: | The COVID-19 pandemic has significantly impacted businesses worldwide by lowering demand, impeding operations, stressing supply chains, and limiting access to finance. Yet we still lack an understanding of how firms can successfully adapt to this disruption. We examine this issue theoretically by combining arguments around dynamic capabilities and managerial cognition and developing several hypotheses concerning firm innovation, knowledge sources, management practices, and gender issues in relation to firms’ adaptation to this crisis. We test these assertions using data from two rounds of surveys involving more than 11,000 firms from 28 countries both before and after COVID-19 was officially declared a global crisis. Our results provide prima facie evidence that innovators, in particular those who are younger (i.e. start-ups) and those who rely on internal sources of knowledge, are more likely to adapt to COVID-19 than non-innovators. Our results suggest that firms with better management practices have also greater ability to adapt. We did not find systematic gender differences upon examining firms managed by women versus men. Following these findings, we set out several implications for research and policy. |
| Keywords: | COVID-19; Crisis; Innovation; Adaptation; Knowledge Sources; Management practices; Start-ups; Gender inequality |
| JEL: | F61 F62 M21 O3 |
| Date: | 2021–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109485&r= |
| By: | Khalfallah, Fatma; Necib, Adel |
| Abstract: | The main objective of this research is to study the impact of bank credit risk on performance. The empirical tests were carried out on panel data of firms belonging to the Tunisian banking sector institutions. To answer this research problem, we have analyzed in a first chapter the link between risk and financial performance. Then, based on financial theories, we formulated a set of hypotheses related to the influence of Investment, bank size, presence of women and board independence on performance. The results of the empirical tests indicate that risk has a positive effect on performance. Conversely, the empirical tests show that bank size and dual function had negative effects on performance. Finally, the results of the tests on bank risk are mixed depending on the characteristics of the board of directors. |
| Keywords: | ROA, ROE, Performance, Tunisian Bank, Risk, Corporate Governance |
| JEL: | M10 |
| Date: | 2020–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109506&r= |
| By: | Castro-Iragorri, C; Ramírez, J; Vélez, S |
| Abstract: | We provide an overview of decentralized protocols like Compound and Aave that offer collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance (DeFi) ecosystem. Using publicly available information on rates, supply and borrow activity, and accounts we analyze different elements of the protocols. In particular, we estimate ex-post margins that give a comprehensive account of the cost of financial intermediation. We find that ex-post margins considering all markets are 1% and lower for stablecoin markets. In addition, we estimate quarterly indicators regarding solvency, asset quality, earnings and market risk similar to the ones used in traditional banking. This provides a first look at the use of these metrics and a comparison between the similarities and challenges to our understanding of financial intermediation in these protocols based on tools used for traditional banking. |
| Keywords: | Decentralized finance, Compound, Aave, collateralize loans, intermediation margins, camels |
| JEL: | C63 C80 E51 G21 G23 G51 O16 O33 |
| Date: | 2021–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:019420&r= |
| By: | Radoslaw Trojanek; Micha Guszak; Pawel Kufel; Justyna Tanas; Maria Trojanek |
| Abstract: | This study investigates the convergence of 18 regional housing markets in Poland using quarterly data from 2000 to 2019. The objective of the paper is twofold. First, we test whether the house prices in Poland are converging over time and identify convergence clubs. Second, we compare the housing market convergence before and after the 2008 financial crisis. The test results suggest that there is little evidence of overall convergence. We identified two major convergence clubs in Poland formed during the study period (2000–2019). The results differed when we considered subperiods (2000–2007 and 2007–2019). In both subperiods, we identified four clubs and some divergent housing markets. The paper fills the gap in knowledge on the convergence of regional housing markets within an emerging economy setting. Little is known about this phenomenon in Eastern European Countries with their unique institutional framework. Additionally, we address differences in house price convergence before, and after the financial crisis, a topic often overlooked in other empirical studies. |
| Keywords: | club convergence; housing market; Housing Prices |
| JEL: | R3 |
| Date: | 2021–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2021_186&r= |
| By: | Cadman, Richard; Curram, Stephan; Exelby, David |
| Abstract: | European regulators of electronic communications markets are under an obligation to pursue widespread access to, and take up of, very high capacity networks, defined as being gigabit capable. Whilst there is an existing body of literature about the relationship between individual regulations and their effect on investment, less research has been conducted that places investment decisions within the market-wide broadband system. This paper seeks to address that gap by developing a generic System Dynamics model and understanding the path specific countries have taken through that model. The paper highlights a number of drivers of investment, organised around the three elements of the net present value equation: capital, net cash flow and cost of capital. It then develops a high level model before identifying the path to investment found in Ireland and Spain. The paper concludes that determinants of investment in VHCNs are path dependent and thus there is no universal strategy that will work for all countries. Competition is always an important determinant but how firms respond to competition is a function of local circumstances and legacies. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itsb21:238013&r= |
| By: | Marc Blatter (Swiss National Bank); Andreas Fuster (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)) |
| Abstract: | This paper analyzes efficiency and profitability in the Swiss banking sector over the period 1997- 2019. We find strong evidence for scale economies: for most banks in the sample, efficiency and profitability increase with bank size. Using an instrumental variables strategy for a subset of geographically restrained banks, we find that the effect of size on efficiency and profitability is likely causal. Scale economies have been more pronounced since 2010 than in the years prior to the global financial crisis. There is little evidence for scale economies for the largest (systemically important) banks; their relatively lower efficiency and lower profitability appear driven by certain aspects of their business model. Our results further indicate that good capitalization and high efficiency and profitability are compatible. |
| Keywords: | Bank efficiency, profitability, economies of scale, financial regulation |
| JEL: | G21 G28 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2161&r= |