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on Corporate Finance |
| By: | Decaire, Paul H. (Arizona State University); Wittry, Michael D. (Ohio State University) |
| Abstract: | Using detailed project-level data, we document a novel mechanism through which information externalities distort investment. Firms anticipate information spillover from peers’ investment decisions and delay project exercise to learn from their peers’ outcomes. To establish a causal interpretation of our results, we exploit local exogenous variation from the 1800s that shapes the number of peers that a firm can learn from today. The strategic learning incentive is most salient for projects with uncertain profitability, when peers’ underlying assets are similar, and in environments where peers are skilled. Finally, our results suggest that the anticipation of peer information dampens aggregate investment. |
| JEL: | D25 D82 D83 G30 G31 G41 O13 Q15 R14 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-15&r= |
| By: | Hottenrott, Hanna; Berger, Marius |
| JEL: | G24 L26 O25 O31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc21:242383&r= |
| By: | Joëlle Noailly, Roger Smeets |
| Abstract: | Achieving the goals of the Paris Agreement and of climate neutrality by 2050 in the European Union will require mobilizing financial investments towards clean energy innovation. This study examines the role of internal finance (cash flows and cash holdings) and financing constraints for innovation in energy technologies. We construct a dataset for 1,300 European firms combining balance-sheet information and patenting activities in renewable (REN) and fossil-fuel (FF) technologies and estimate the sensitivity of patenting activities to firm’s internal finance. We use count estimation techniques and control for a large set of firm-specific characteristics and market developments in REN and FF technologies. We find that patenting activities of firms specialized in REN innovation are significantly more sensitive to a shock in cash flows than firms specializing in FF innovation. Hence, our results emphasize that innovative firms in clean energy may be particularly vulnerable to financing constraints. We discuss the implications of these results for energy transition policies aiming to redirect finance towards clean energy R&D. |
| Date: | 2021–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:gii:ciesrp:cies_rp_69&r= |
| By: | Matthias Kaldorf (University of Cologne, Center for Macroeconomic Research); Florian Wicknig (University of Cologne, Center for Macroeconomic Research) |
| Abstract: | This paper studies how collateral premia affect the supply and quality of bonds issued by non-financial firms. Banks increase demand for bonds eligible as collateral, to which eligible firms respond by increasing their debt issuance and default risk. We characterize firm responses and aggregate collateral supply in a heterogeneous firm model with collat-eral premia and endogenous default risk. Using a calibration to euro area data, we study the impact of collateral easing, consistent with the ECB’s policy during the 2008 financial crisis and evaluate the quantitative relevance of firm responses. We find that firm responses substantially deteriorate collateral quality and dampen the total increase in collateral sup-ply. Our analysis suggests that an eligibility covenant conditioning eligibility on leverage and current default risk, is a potentially powerful instrument to mitigate the adverse impact of eligibility requirements on collateral quality while maintaining a high level of collateral supply. |
| Keywords: | Eligibility Premia, Corporate Bonds, Firm Heterogeneity, Collateral Policy |
| JEL: | E44 E58 G12 G32 G33 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:123&r= |
| By: | Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez |
| Abstract: | We develop a simple model of relationship lending where lenders have an incentive to evergreen loans by offering better terms to less productive and more indebted firms. We detect such lending distortions using loan-level supervisory data for the United States. Low-capitalized banks systematically distort their risk assessments of firms to window-dress their balance sheets and extend relatively more credit to underreported borrowers. Consistent with our theoretical predictions, these effects are driven by larger outstanding loans and low-productivity firms. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening can affect aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower aggregate productivity. |
| Keywords: | Evergreening; Zombie-Lending; Misallocation; COVID-19 |
| JEL: | E32 E43 E44 E52 E60 G21 G32 |
| Date: | 2021–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:93278&r= |
| By: | Bena, Jan (University of British Columbia); Erel, Isil (Ohio State University and European Corporate Governance Institute); Wang, Daisy (Ohio State University); Weisbach, Michael S. (Ohio State University and European Corporate Governance Institute) |
| Abstract: | Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential holdup 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-13&r= |
| By: | Mattia Guerini (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Philipp Harting; Mauro Napoletano (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po) |
| Abstract: | We develop a model to study the impact of corporate governance on firm investment decisions and industry competition. In the model, governance structure affects the distribution of shares among short- and long-term oriented investors, the robustness of the management regarding pos- sible stockholder interference, and the managerial remuneration scheme. A bargaining process between firm's stakeholders determines the optimal allocation of financial resources between real investments in R&D and financial investments in shares buybacks. We characterize the relation between corporate governance and firm's optimal investment strategy and we study how different governance structures shape technical progress and the degree of competition over the industrial life cycle. Numerical simulations of a calibrated set-up of the model show that pooling together industries characterized by heterogeneous governance structures generate the well-documented inverted-U shaped relation between competition and innovation. |
| Keywords: | governance structure,industry dynamics,competition,technical change |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03374377&r= |
| By: | Lilas Demmou; Guido Franco |
| Abstract: | The paper analyses the role of loan guarantee programmes following the COVID-19 outbreak in alleviating firm distress as well as their broader impacts on productivity via reallocation, relying on a simulation model and econometric estimations. The simulation exercise relies on a simple cash-flow accounting model, a large dataset reporting balance sheets of firms located in 14 countries and granular data on the magnitude of the COVID-19 shock. Our findings suggest that i) the COVID-19 shock had the potential to seriously distort market selection; and ii) policy actions corrected up to 30% of the inefficiency of market selection in the short-term, shielding many high productive firms from distress and supporting zombie firms only to a limited extent. The econometric exercise, based on historical data and standard models of dynamic allocative efficiency, examines how loan guarantees may shape the efficiency through which resources are allocated across firms of different productivity levels over the medium-term. Results suggest that, over the 2007-2018 period, increases in large-scale loan guarantee schemes were associated with weaker reallocation of credit and labour from low to high productivity firms. However, these effects are found to be more benign in intangible-intensive sectors and even positive for smaller scale programmes. Overall, engineering an effective exit strategy from these schemes, preserving their benefits while reducing their drawbacks through a gradual and state contingent phasing out, is critical to foster the recovery of the corporate sector. Further, monitoring debt overhang risks and facilitating firms’ entry and digital diffusion are relevant complementary challenges to address once COVID-19 related support is withdrawn. |
| Keywords: | COVID-19, liquidity, loan guarantees, productivity, reallocation |
| JEL: | D22 D24 H81 J38 O47 |
| Date: | 2021–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1687-en&r= |
| By: | Ben-David, Itzhak (Ohio State University and NBER); Kim, Byungwook (Ohio State University); Moussawi, Hala (Stanford Graduate School of Business); Roulstone, Darren T. (Ohio State University) |
| Abstract: | Hard-to-value stocks provide opportunities for managers to exploit their informational advantage through trading on their firms' and their own personal accounts. In contrast to the prediction that such transactions reflect private information about future events, they are contrarian and heavily depend on past returns. Corporate transactions in hard-to-value stocks outperform those in easy-to-value stocks in the early part of our sample, but this difference disappears after 2002, coinciding with a general decline in the profitability of stock market anomalies. Our evidence is consistent with managers' perception of mispricing, rather than private information, being a key motivator of their transactions. |
| JEL: | G12 G14 G23 G32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-16&r= |
| By: | Marc Flandreau (University of Pennsylvania); Stefano Pietrosanti (Bank of Italy); Carlotta E. Schuster (UNCTAD) |
| Abstract: | This paper explores the reasons why sovereign borrowers post collateral. Such behavior is paradoxical because conventional interpretations of collateral stress repossession of the assets pledged as the key to securing lenders against information asymmetries and moral hazard. However, repossession is generally difficult in the case of sovereign debt and in some cases impossible. Nevertheless, such sovereign `hypothecations` have a long history and are again becoming very popular today in developing countries. To explain sovereign collateralization, we emphasize an informational channel. Posting collateral produces information on opaque borrowers by displaying borrowers` behavior and resources. We support this interpretation by examining the hypothecation `mania` of 1849-1875, when sovereigns borrowing in the London Stock Exchange pledged all kinds of intangible revenues. Yet, at that time, sovereign immunity fully protected both sovereigns and their assets and possessions. Still, we show that hypothecations significantly decreased the cost of sovereign debt. To explain how, we stress the pledges` role in documenting sovereigns` wealth and the management of revenue streams. Based on an exhaustive library of bond prospectuses collected from primary sources, matched with a panel of sovereign bond yields and an innovative measure of sovereign fiscal transparency, we show that collateral minutely described in debt covenants served to document and monitor sovereign resources and development prospects. Encasing this information in contracts written by lawyers served to certify the quality of the resulting data disclosure process, explaining investors` readiness to pay a premium. |
| Keywords: | Collateral, Information, Sovereign debt, Informal enforcement, Financial innovation, Contract innovation |
| JEL: | N20 G24 K12 K33 H63 |
| Date: | 2021–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp167&r= |
| By: | David Kohn; Fernando Leibovici; Michal Szkup |
| Abstract: | This paper reviews recent studies on the impact of financial frictions on international trade. We first present evidence on the relation between measures of access to external finance and export decisions. We then present an analytical framework to analyze the impact of financial frictions on firms' export decisions. Finally, we review recent applications of this framework to investigate the impact of financial frictions on international trade dynamics across firms, industries, and in the aggregate. We discuss related empirical, theoretical, and quantitative studies throughout. |
| Keywords: | financial frictions; international trade; credit constraints; export decisions |
| JEL: | F1 F4 |
| Date: | 2021–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:93275&r= |
| By: | Michele Fioretti (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper shows that a firm's objectives can extend beyond profit maximization. I use data from a for-profit firm offering charity auctions of celebrities belongings whose donations affect both revenues and costs. Comparing actual donations with the profit-maximizing benchmark indicates that the firm donates in excess of profitmaximization. I provide additional evidence pointing to donations as a further objective of the firm. Also, donations do not substantially increase willingness to pay, indicating that demand cannot explain expenditures in CSR. My results shed light on the functioning of benefit corporations and open questions on the competitive conduct of non-profit maximizing companies. |
| Keywords: | Objectives of the firm,Corporate Social Responsibility,Donations,Structural Estimation,Externalities |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03393065&r= |