nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒11‒15
nineteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Market finance as a spare tyre? Corporate investment and access to bank credit in Europe By Maurin, Laurent; Andersson, Malin; Rusinova, Desislava
  2. Shareholder Activists and Frictions in the CEO Labor Market By Keusch, Thomas
  3. Dynamics of Managerial Power and CEO Compensation in the Course of Corporate Distress: Evidence from 1992 to 2019 By Sheng Guo; Qiang Kang; Oscar A. Mitnik
  4. The start-up decision under default risk By Nicola Comincioli; Paolo M. Panteghini; Sergio Vergalli
  5. Why Did Small Business Fintech Lending Dry Up during March 2020? By Ben-David, Itzhak; Johnson, Mark J.; Stulz, Rene M.
  6. Venture Capital-backed Firms, Unavoidable Value-destroying Trade Sales, and Fair Value Protections By Nigro, Casimiro Antonio; Stahl, Jörg R.
  7. The usefulness of financial accounting information: evidence from the field By Cascino, Stefano; Clatworthy, Mark A.; Osma, Beatriz Garcia; Gassen, Joachim; Imam, Shahed
  8. Financial Factors, Firm size and Firm Potential By Ferreira, M.; Haber, T.; Rörig, C.
  9. Who Pays a Visit to Brussels? The Firm Value of Cross-Border Political Access to European Commissioners By Biguri, Kizkitza; Stahl, Jörg R.
  10. The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity By Granja, João; Leuz, Christian
  11. The Role of Disclosure in Green Finance By Tröger, Tobias; Steuer, Sebastian
  12. EIF Venture Capital Survey 2021: Market sentiment By Botsari, Antonia; Kiefer, Kilian; Lang, Frank; Legnani, Davide
  13. THE MORE THE BETTER? INFORMATION SHARING AND CREDIT RISK By Irina Iakimenko; Maria Semenova; Eugeny Zimin
  14. Understanding corporate default using Random Forest: The role of accounting and market information By Alessandro Bitetto; Stefano Filomeni; Michele Modina
  15. We Are Alike: Capital Structure of Japanese SMEs Across Prefectures By Huseyin OZTURK; YASUDA Yukihiro
  16. Globally Consistent Creditor Protection, Reallocation, and Productivity By Bian, Bo
  17. Investigating the role of debt advice on borrowers' well-being. An encouragement study on a new sample of over-indebted people in Britain By Fumagalli, Laura; Lynn, Peter; Muñoz-Bugarin, Jair
  18. The effect of formal debt advice on financial management and knowledge: insights from a new longitudinal study in Britain By Fumagalli, Laura; Lynn, Peter; Muñoz-Bugarin, Jair
  19. Shareholders and Stakeholders around the World: The Role of Values, Culture, and Law in Directors' Decisions By Licht, Amir N.; Adams, Renee B.

  1. By: Maurin, Laurent; Andersson, Malin; Rusinova, Desislava
    Abstract: We estimate a FAVAR with Bayesian techniques in order to investigate the impact of loan supply conditions on euro area corporate investment and its financing structure. We identify shocks to overall demand and loan supply with sign and impact restrictions. Although tightened financial conditions have adversely impacted corporate investment during and after the sovereign debt crisis, the resulting impediments in loan supply, illustrated by lower loan volumes and higher spreads, have been partly alleviated by strengthened corporate debt issuance. We show that (1) part of the protracted increase in debt to loan ratio since the crisis reflects bottlenecks in the provision of bank credit and (2) the tightened loan supply has been more adverse for small corporations with limited market access. Overall, our analysis of macro-financial developments suggests the need for policy actions to deepen the European corporate debt market and enhance market access for smaller corporates.
    Keywords: financing structure,small and medium size corporates,size spread,corporate debt issuance,FAVAR model
    JEL: E22 E66 G21
    Date: 2021
  2. By: Keusch, Thomas
    Abstract: Using hand-collected data on CEO appointments during shareholder activism campaigns, this study examines whether shareholder involvement in CEO recruiting affects frictions in CEO hiring decisions. The results indicate that appointments of CEOs who are recruited with shareholder activist influence are followed by more favorable stock market reactions and stronger profitability improvements than CEO appointments that also occur during activism campaigns but without the influence of activists. I find little evidence that shareholder activists increase hiring frictions by facilitating the recruiting of CEOs who will implement myopic corporate policies. Analyses of recruiting process characteristics reveal that activist influence is associated with more resources being dedicated to the CEO search process and with a higher propensity to recruit CEOs from outside the firm. These findings contribute to the CEO labor market literature, which tends to focus on the decision to remove incumbent CEOs but provides limited insights into CEO recruiting.
    Keywords: Executive labor market,corporate governance,shareholder activism
    JEL: G23 G32 G34 M12 M51
    Date: 2021
  3. By: Sheng Guo (Department of Economics, Florida International University); Qiang Kang (Department of Finance, Florida International University); Oscar A. Mitnik (Inter-American Development Bank)
    Abstract: We study the dynamics of two governance constructs, managerial influence over the board of directors and chief executive officer (CEO) compensation, in firms undergoing distress during 1992-2019. Data show a clear trend that governance improves over time, which confounds the inference about the effects of distress on governance. Controlling for the secular changes with a bias-corrected matching estimator, we find that distressed firms reduce managerial board appointments and CEO pay, intensify managerial incentive alignment, and increase CEO turnover. The bulk of CEO compensation changes in distressed firms derives from the performance-related part of compensation, consistent with the "shareholder value" view of CEO compensation.
    Keywords: Corporate distress, Managerial influence, CEO compensation, CEO turnover, Bias-corrected matching estimator
    JEL: G33 G34 J33 J44 M50
    Date: 2021–11
  4. By: Nicola Comincioli (Fondazione Eni Enrico Mattei, Università degli Studi di Brescia); Paolo M. Panteghini (University of Brescia, CESifo); Sergio Vergalli (Fondazione Eni Enrico Mattei, Università degli Studi di Brescia)
    Abstract: This study introduces a real option model to investigate how fiscal policy affects a representative firm's investment decision and to measure its welfare effects. On the one hand, the effects of financial instability on the optimal investment timing and on the probability of default are studied. On the other hand, it is shown how the net present value of an investment project, the tax revenue generated and the welfare are influenced by financial instability. Then, a comparison of welfare effects of tax policy on start-ups, mature and obliged firms is provided. This comparison provides policy-makers a tool to shape their tax systems according to the characteristics of their firms. All presented analyses are supported by numerical simulations, based on realistic data.
    Keywords: Real Options, Business Taxation, Default Risk
    JEL: H25 G33 G38
    Date: 2021–10
  5. By: Ben-David, Itzhak (Ohio State University and NBER); Johnson, Mark J. (Brigham Young University); Stulz, Rene M. (Ohio State University and European Corporate Governance Institute)
    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: 2021–08
  6. By: Nigro, Casimiro Antonio; Stahl, Jörg R.
    Abstract: This paper investigates the implications of the fair value protections contemplated by the standard corporate contract (i.e., the standard contract form for which corporate law provides) for the entrepreneur-venture capitalist relationship, focusing, in particular, on unavoidable value-destroying trade sales. First, it demonstrates that the typical entrepreneur-venture capitalist contract does institutionalize the venture capitalist's liquidity needs, allowing, under some circumstances, for counterintuitive instances of contractually-compliant value destruction. Unavoidable value-destroying trade sales are the most tangible example. Next, it argues that fair value protections can prevent the entrepreneur and venture capitalist from allocating the value that these transactions generate as they would want. Then, it shows that the reality of venture capital-backed firms calls for a process of adaptation of the standard corporate contract that has one major step in the deactivation or re-shaping of fair value protections. Finally, it argues that a standard corporate contract aiming to promote social welfare through venture capital should feature flexible fair value protections
    Keywords: Private equity,Venture capital,Start-ups,Entrepreneurship,Innovation,Corporate governance,Private ordering,Drag-along rights,Trade sales,Corporate law,Fair value,Appraisal rights,Law and economics,Law and finance
    JEL: K22 M13
    Date: 2020
  7. By: Cascino, Stefano; Clatworthy, Mark A.; Osma, Beatriz Garcia; Gassen, Joachim; Imam, Shahed
    Abstract: We examine how investment professionals assess the usefulness of financial accounting information depending on their information acquisition objectives and preparers’ earnings management incentives. We conduct a survey experiment based on face-to-face interviews with investment professionals and document two main results. First, we find that, compared with investment professionals assigned a firm valuation objective, those assigned a managerial performance evaluation objective assess accounting information as significantly less useful. Second, we find no systematic evidence that preparers’ earnings management incentives negatively affect investment professionals’ assessments of accounting information usefulness. To elucidate this second finding, we conduct a large-scale follow-up online experiment. Our results continue to offer no support for the effect of earnings management incentives on investment professionals’ assessments of accounting information usefulness, irrespective of preparers’ corporate governance quality. Instead, we find that poor corporate governance, by itself, reduces the usefulness of accounting information to investment professionals.
    Keywords: decision usefulness; financial reporting objectives; earnings management; corporate governance; investment professionals; relevance; representational faithfulness
    JEL: G15 G18 G38 M41
    Date: 2021–02–17
  8. By: Ferreira, M.; Haber, T.; Rörig, C.
    Abstract: Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firm size distribution, account for a larger total asset share compared to standard heterogeneous firms models, and exhibit a higher cyclical sensitivity, conditional on size. In light of these findings we reassess the importance of the firm distribution in shaping aggregate outcomes in the canonical model of heterogeneous firms with financial frictions. We augment the productivity process with ex-ante heterogeneity of firms, allowing us to match the distribution of constrained firms conditional on size. This, together with the fact that constrained firms have a higher capital elasticity, leads to up to four times larger aggregate fluctuations and capital misallocation.
    Keywords: Firm size, business cycle, financial accelerator
    JEL: E62 E22 E23
    Date: 2021–11–03
  9. By: Biguri, Kizkitza; Stahl, Jörg R.
    Abstract: We present novel evidence on the value of cross-border political access. We analyze data on meetings of US multinational enterprises (MNEs) with European Commission (EC) policymakers. Meetings with Commissioners are associated with positive abnormal equity returns. We study channels of value creation through political access in the areas of regulation and taxation. US enterprises with EC meetings are more likely to receive favorable outcomes in their European merger decisions and have lower effective tax rates on foreign income than their peers without meetings. Our results suggest that access to foreign policymakers is of substantial value for MNEs.
    Keywords: Cross-border political access,European Commission,firm value
    JEL: D72 G30
    Date: 2020
  10. By: Granja, João; Leuz, Christian
    Abstract: An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through capital but can also correct deficiencies in bank management and lending practices, leading to more lending and a reallocation of loans.
    Keywords: Bank regulation,Enforcement,Loan losses,Aggregate outcomes,Prudential oversight,Business lending,Entry and exit
    JEL: E44 E51 G21 G28 G31 G38 K22 K23 L51 M41 M48
    Date: 2020
  11. By: Tröger, Tobias; Steuer, Sebastian
    Abstract: We study the design features of disclosure regulations that seek to trigger the green transition of the global economy and ask whether such regulatory interventions are likely to bring about sufficient market discipline to achieve socially optimal climate targets. We categorize the transparency obligations stipulated in green finance regulation as either compelling the standardized disclosure of raw data, or providing quality labels that signal desirable green characteristics of investment products based on a uniform methodology. Both categories of transparency requirements can be imposed at activity, issuer, and portfolio level. Finance theory and empirical evidence suggest that investors may prefer "green" over "dirty" assets for both financial and non-financial reasons and may thus demand higher returns from environmentally-harmful investment opportunities. However, the market discipline that this negative cost of capital effect exerts on "dirty" issuers is potentially attenuated by countervailing investor interests and does not automatically lead to socially optimal outcomes. Mandatory disclosure obligations and their (public) enforcement can play an important role in green finance strategies. They prevent an underproduction of the standardized high-quality information that investors need in order to allocate capital according to their preferences. However, the rationale behind regulatory intervention is not equally strong for all categories and all levels of "green" disclosure obligations. Corporate governance problems and other agency conflicts in intermediated investment chains do not represent a categorical impediment for green finance strategies. However, the many forces that may prevent markets from achieving socially optimal equilibria render disclosure-centered green finance legislation a second best to more direct forms of regulatory intervention like global carbon taxation and emissions trading schemes. Inherently transnational market-based green finance concepts can play a supporting role in sustainable transition, which is particularly important as long as first-best solutions remain politically unavailable.
    Keywords: green finance,sustainable finance,ESG,mandatory disclosure,taxonomies,benchmarks,labels,asset pricing,market discipline,climate change,climate risk
    JEL: D4 D6 G1 G3 G4 K2
    Date: 2021
  12. By: Botsari, Antonia; Kiefer, Kilian; Lang, Frank; Legnani, Davide
    Abstract: The EIF VC Survey, the EIF Private Equity Mid-Market Survey, and the EIF Business Angels Survey (the largest combined regular survey exercises among GPs and Business Angels on a pan-European level) provide an opportunity to retrieve unique market insights. This publication is based on the results of the 2021 EIF VC Survey. The paper focuses on the market sentiment and the impact of COVID-19. The study looks at the current situation, developments in the recent past and expectations for the future. The main results are summarised and compared over time. The publication provides a valuable picture of the developments and the market situation in 2021 as well as an outlook for the near future.
    Date: 2021
  13. By: Irina Iakimenko (National Research University Higher School of Economics); Maria Semenova (National Research University Higher School of Economics); Eugeny Zimin (National Research University Higher School of Economics)
    Abstract: Correctly estimating borrower credit risk is a task of particular and growing importance for banks all around the globe. Formal information sharing mechanisms are aimed to reduce information asymmetry in the credit markets and to enhance the precision of those estimates. In the literature, however, whether more, and more detailed, borrower information shared by credit bureaus and credit registries is always associated with higher quality bank credit portfolios and lower credit risk is not completely unambiguous. More credit information disclosed by information intermediaries tends to result in a weaker disciplinary effect of credit history, which means higher credit risk. The accuracy of assessing the creditworthiness of borrowers grows due to an increase in the predictive power of scoring models, which leads to a reduction in credit risk. In this paper, we make a first attempt to examine the nonlinearity of this effect. We study the relationship between the depth of credit information disclosed and the stability of the banking sector in terms of credit risk. Based on data on 80 countries for 2004–2015, we show that the relationship between disclosure and credit risk is non-linear: we observe the lowest levels of credit risk at the minimum and maximum levels of disclosure. We analyze the influence of national institutional quality and financial development on the nature of the relationship. We show that credit risk decreases with increasing amounts of disclosure by credit bureaus and credit registers in well-developed financial markets and in a high-quality institutional environment.
    Keywords: Credit risk, Credit bureau, Credit registry, Bank, Information sharing
    JEL: G21 G28
    Date: 2021
  14. By: Alessandro Bitetto (University of Pavia); Stefano Filomeni (University of Essex); Michele Modina (University of Molise)
    Abstract: Recent evidence highlights the importance of hybrid credit scoring models to evaluate borrowers’ creditworthiness. However, the current hybrid models neglect to consider the role of public-peer market information in addition to accounting information on default prediction. This paper aims to fill this gap in the literature by providing novel evidence on the impact of market information in predicting corporate defaults for unlisted firms. We employ a sample of 10,136 Italian micro-, small-, and mid-sized enterprises (MSMEs) that borrow from 113 cooperative banks from 2012–2014 to examine whether market pricing of public firms adds additional information to accounting measures in predicting default of private firms. Specifically, we estimate the probability of default (PD) of MSMEs using equity price of size-and industry- matched public firms, and then we adopt advanced statistical techniques based on parametric algorithm (Multivariate Adaptive Regression Spline) and non-parametric machine learning model (Random Forest). Moreover, by using Shapley values, we assess the relevance of market information in predicting corporate credit risk. Firstly, we show the predictive power of Merton’s PD on default prediction for unlisted firms. Secondly, we show the increased predictive power of credit risk models that consider both the Merton’s PD and accounting information to assess corporate credit risk. We trust the results of this paper contribute to the current debate on safeguarding the continuity and the resilience of the banking sector. Indeed, banks’ hybrid credit scoring methodologies that also embed market information prove to be successful to assess credit risk of unlisted firms and could be useful for forward-looking financial risk management frameworks
    Keywords: Default Risk, Distance to Default, Machine Learning, Merton model, SME, PD, SHAP, Autoencoder, Random Forest, XAI
    JEL: C52 C53 D82 D83 G21 G22
    Date: 2021–10
  15. By: Huseyin OZTURK; YASUDA Yukihiro
    Abstract: We empirically investigate the capital structure of small- and medium-sized enterprises (SMEs) in Japan to identify whether the firm-specific determinants of leverage exhibit locational differences. Examining this theme in the context of Japanese geography is important because the country has considerable difference, especially in terms of its demography, capital intensity, and industrial structure. Akin to previous studies that have examined the impacts of firm-specific determinants on the capital structure of firms between geographies, our results indicate differences between Japanese prefectures. However, when we conduct an in-depth test of prefecture pairs, we interestingly find that the impact of the firm-specific determinants of leverage does not greatly differ between prefecture pairs in terms of both sign and magnitude. We briefly discuss why this might be an important finding for policy-making, given the recent policy responses to the COVID 19 pandemic.
    Date: 2021–11
  16. By: Bian, Bo
    Abstract: This paper documents that resource reallocation across firms is an important mechanism through which creditor rights affect real outcomes. I exploit the staggered adoption of an international convention that provides globally consistent strong creditor protection for aircraft finance. After this reform, country-level productivity in the aviation sector increases by 12%, driven mostly by across-firm reallocation. Productive airlines borrow more, expand, and adopt new technology at the expense of unproductive ones. Such reallocation is facilitated by (i) easier and quicker asset redeployment; and (ii) the influx of foreign financiers offering innovative financial products to improve credit allocative efficiency. I further document an increase in competition and an improvement in the breadth and the quality of products available to consumers.
    Keywords: Creditor Rights,Allocative Effciency,Reallocation,Productivity and Growth,Law and Finance
    JEL: D22 D24 G32 G33 K12 K33 L11
    Date: 2020
  17. By: Fumagalli, Laura; Lynn, Peter; Muñoz-Bugarin, Jair
    Abstract: Little is known about the effect of seeking debt advice on borrowers' well-being. To estimate this effect, we designed a randomised encouragement intervention for a new sample of over-indebted people in Britain who had not sought debt advice in the previous six months. Being encouraged to seek debt advice increases the likelihood of seeking informal debt advice (e.g., from friends), but not the likelihood of seeking formal debt advice (e.g., from governmental agencies). When asked about their well-being using standardised questions, people who received the encouragement report increased well-being, especially when asked more than a year after the encouragement. The increased well-being does not seem to be a result of improved debt-management skills. In fact, spending and financial difficulties increase as a result of the encouragement, and attitudes to debt deteriorate. We also estimate the effect of seeking informal debt advice using the receipt of the encouragement as an instrumental variable. While imprecisely estimated, these results are in line with the results on the effects of receiving the encouragement.
    Date: 2021–10–29
  18. By: Fumagalli, Laura; Lynn, Peter; Muñoz-Bugarin, Jair
    Abstract: Using data from a new sample of over-indebted people living in Britain who have not sought debt advice in the previous six months, we estimate the effect of seeking formal debt advice. Our results suggest that there is a negative selection into formal debt advice: people who do seek debt advice are those who experience financial difficulties and struggle to keep up with bills and credit commitments. However, we found that formal debt advice is likely to mitigate, and possibly counteract, these difficulties. Our results suggest that formal debt advice increases the probability of adopting strategies to reduce spending and decreases the probability of being turned down for credit. Formal debt advice also increases knowledge and understanding of the steps needed to get out of debt, and ultimately leads to a better self-reported financial situation, well-being and even physical health.
    Date: 2021–10–29
  19. By: Licht, Amir N.; Adams, Renee B.
    Abstract: We present evidence on the way personal and institutional factors could together guide public company directors in decision-making concerning shareholders and stakeholders. In a sample comprising more than nine hundred directors originating from over fifty countries and serving in firms from twenty three countries, we confirm that directors around the world hold a principled, quasi-ideological stance towards shareholders and stakeholders, called shareholderism, on which they vary in line with their personal values. We theorize and find that in addition to personal values, directors' shareholderism level associates with cultural norms that are conducive to entrepreneurship. Among legal factors, only creditor protection exhibits a negative correlation with shareholderism, while general legal origin and proxies for shareholder and employee protection are unrelated to it.
    Keywords: shareholderism,stakeholders,directors,values,culture,social norms,law,institutions,corporate governance,CSR,ESG,entrepreneurship
    JEL: K22 M14
    Date: 2020

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