nep-cfn New Economics Papers
on Corporate Finance
Issue of 2021‒11‒22
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Financial Flexibility and Corporate Employment By Lester, Rebecca; Rouen, Ethan; Williams, Braden
  2. Loan Guarantees, Bank Lending and Credit Risk Reallocation By Carlo Altavilla; Andrew Ellul; Marco Pagano; Andrea Polo; Thomas Vlassopoulos
  3. Corporate Real Estate Ownership Under a Dynamic Business Environment By Seger, Julian
  4. Invoice Currency Choice under Financial Constraints and Bargaining: Evidence from Japanese SMEs By GOTO Mizuki; HAYAKAWA Kazunobu; KOIBUCHI Satoshi; YOSHIMI Taiyo
  5. On the Origin of IPO Profits By Sergey Kovbasyuk; David C. Brown; Tamara Nefedova
  6. Distant Lending for Regional Small Businesses Using Public Credit Guarantee Schemes: Evidence from Japan By TSURUTA Daisuke
  7. How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market By Kim, Jinhwan; Olbert, Marcel
  8. Early-Life War Experiences and Corporate Financial Outcomes By Arman ESHRAGHI; TAKAHASHI Hidetomo; XU Peng
  9. As long as you talk about me: The importance of family firm brands and the contingent role of family-firm identity By P. Rovelli; C. Benedetti; A. Fronzetti Colladon; A. De Massis
  10. Windfalls? Costs and Benefits of Investment Tax Incentives due to Financial Constraints By ORIHARA Masanori; SUZUKI Takafumi
  11. Crypto-exchanges and Credit Risk: Modelling and Forecasting the Probability of Closure By Fantazzini, Dean; Calabrese, Raffaella
  12. Designs for Corporate Venture Capital: Emergence of a Hybrid Structural Orientation By Burgelman, Robert A.; Sridharan, Amit; Savini, Giancarlo
  13. Taxes, corporate takeovers, and step transactions By Kazuki Onji; Roger H. Gordon
  14. The Determinants of Competitiveness of the Portuguese Defense Industry By Roxanne Merenda
  15. Analysis of Determinants of Foreign Capital Flow: Focused on Interest Rate and Exchange By Yoon, Deok Ryong; Song, Wonho; Lee, Jinhee
  16. Optimal Dividends under Markov-Modulated Bankruptcy Level By Ferrari, Giorgio; Schuhmann, Patrick; Zhu, Shihao

  1. By: Lester, Rebecca (Stanford Graduate School of Business); Rouen, Ethan (Harvard Business School); Williams, Braden (University of Texas)
    Abstract: We study the role of financial flexibility on COVID-19 employment actions. Using daily data from March through May 2020 for 354 of the largest U.S. employers, we find that firms facing a negative demand shock were 28.8 percentage points more likely to reduce their workforce and 17.3 percentage points less likely to provide pay increases to frontline workers, compared to other sample firms. Pre-pandemic financial flexibility attenuates these effects, reducing the likelihood of workforce reductions by almost half. The role of financial flexibility is greatest in firms with better governance, a more asymmetric cost structure, and better treatment of workers.
    JEL: G31 J01 J20 J30 M40 M50
    Date: 2021–04
  2. By: Carlo Altavilla (European Central Bank, CSEF and CEPR); Andrew Ellul (Indiana University, CSEF, CEPR and ECGI); Marco Pagano (University of Naples Federico II, CSEF, EIEF, CEPR and ECGI); Andrea Polo (Luiss University, EIEF, CEPR and ECGI); Thomas Vlassopoulos (European Central Bank)
    Abstract: We investigate whether government credit guarantee schemes, extensively used at the onset of the Covid-19 pandemic, led to substitution of non-guaranteed with guaranteed credit rather than fully adding to the supply of lending. We study this issue using a unique euro-area credit register data, matched with supervisory bank data, and establish two main findings. First, guaranteed loans were mostly extended to small but comparatively creditworthy firms in sectors severely affected by the pandemic, borrowing from large, liquid and well-capitalized banks. Second, guaranteed loans partially substitute pre-existing nonguaranteed debt. For firms borrowing from multiple banks, the substitution mainly arises from the lending behavior of the bank extending guaranteed loans. Substitution was highest for funding granted to riskier and smaller firms in sectors more affected by the pandemic, and borrowing from larger and stronger banks. Overall, the evidence indicates that government guarantees contributed to the continued extension of credit to relatively creditworthy firms hit by the pandemic, but also benefited banks’ balance sheets to some extent.
    Date: 2021
  3. By: Seger, Julian
    Abstract: Companies are increasingly faced with a dynamic business environment. Fundamental structural changes overlap with economic cycles and force decision-makers to act under uncertainty. This situation challenges corporate real estate management to adapt the provision of space to the new corporate situation. In this context, one of the most critical decisions represents the choice between the provision forms of ownership, rental or leasing. In the past, European companies in particular have held ownership to a large extent. However, doubts have arisen as to whether this strategy should be continued. Owning property is considered to be highly inflexible as it can often only be sold with a time delay or at a discount in the event of a quantitative change in space demand. This represents a first possible contradiction to the progressively dynamic corporate environment. Accordingly, this paper addresses the question whether the role of ownership alters in an environment charac-terised by change. To answer this question, six studies were conducted and summarised in five articles. In order to understand adjustments in provision strategy, it is necessary to understand its impact on corporate success. Maximisation of the company’s success represents the guiding motive for adapting the provision of space to environmental changes. Here, the first article develops a holistic framework for the relationship between corporate real estate management and corporate success as well as empirically testing its validity. This understanding, in turn, forms the basis for the subsequent studies and allows initial conclusions to be drawn about the impact of holding property on corporate success. In the three subsequent articles (2-4), which focus on Germany, the UK and Europe as a whole, a first step is to use balance sheet ratios to illustrate the role that real estate ownership has played for non-property companies in recent decades. Against the background of an increasingly dynamic corporate environment, possible changes over time would support the theory regarding the changing role of real estate ownership. An empirical investigation of real estate ownership and its influence on capital market performance allows initial insights about the importance of ownership strategy for corporate success. Although up to this point the articles pursue a similar objective, they then attempt to map the importance of real estate ownership for corporate success with different foci of investigation depending on the corporate situation. Thus, Article 2 aims to show that the contribution of real estate ownership to success depends not only on the core business as previous studies have shown, but also on additional business segments in which companies operate. This is of high interest because companies are increasingly expanding their existing activities with services by offering integrated solutions, resulting in new requirements for the provision of space. In contrast, Article 3 addresses the question of whether holding real estate actually reduces flexibility and, therefore, has a negative impact on a company’s success in the event of economic fluctuations. For this purpose, the impact of real estate ownership during economic upswings and downturns is to be compared. Article 4 then ties in with this line of argument. Due to the previously described long-term nature and difficult revisability, the importance of property should change, especially for companies under uncertainty. Thus, it should be shown that companies anticipate uncertainty by restraining their investment behaviour. If firms were to continue to hold on to property under uncertainty, then this could have a negative impact on their performance. The concluding Article 5 extends the previous research by establishing a link between current structural change and ownership strategy. Through a comprehensive survey of CREM decision-makers, companies are grouped according to the extent of their affection by structural change and examined with regard to a possible reaction in their ownership strategy. A differentiated analysis according to types of use and a query of ownership-reducing measures provides a more detailed insight into the types of use for which an ownership reduction could be considered as well as for how this could be implemented. This dissertation thus expands previous discussions regarding the advantageousness of real estate ownership by explicitly including the increasingly dynamic and uncertain corporate environment. At the same time, the underlying work complements previous studies focusing on Anglo-American and Asian markets by adding a European perspective. This not only provides a valuable contribution to knowledge but, in parallel, these studies provide practice-relevant insights into the possible consequences of adhering to or adapting current ownership strategies. However, the knowledge gained is not only relevant for non-property companies. An adapted ownership strategy would also have overall real estate economic implications for investors as well as service providers.
    Date: 2021
  4. By: GOTO Mizuki; HAYAKAWA Kazunobu; KOIBUCHI Satoshi; YOSHIMI Taiyo
    Abstract: Recent empirical studies explore factors behind the currency invoicing pattern in exports of listed firms by using questionnaire surveys; however, there is insufficient evidence regarding small and medium-sized enterprises (SMEs). We conducted a questionnaire survey for 2,100 unlisted manufacturers engaged in exports during the 2010s and received responses from 300 firms. By constructing a database with invoice currency choice and trade partner by export destination, we empirically examine the determinants of invoice currency choice in export using the probit model estimation. We confirm that the major determinants of currency invoicing in existing research effectively work as determinants of currency invoicing by SMEs. After controlling for various determinants, we found that financial constraints play an important role in their invoice currency choice. The firms with deteriorated capital ratios and rapid sales growth depend more on the producer's currency invoicing. The results are confirmed through a robustness test using detailed financial data, showing that the firms with lower capital ratios, lower liquidity positions, and greater investment opportunities tend to use the producer's currency invoicing. These novel findings are consistent with the predictions from the theoretical research on the bargaining model of currency invoicing and corporate risk management for hedging.
    Date: 2021–10
  5. By: Sergey Kovbasyuk (New Economic School); David C. Brown (University of Arizona); Tamara Nefedova (Universit Ì e Paris Dauphine-PSL)
    Abstract: By combining investors’ portfolio holdings with trading and commissions data, we analyze the determinants of IPO allocations. We distinguish among common explanations for investors’ IPO profits: information revelation, quid pro quo arrangements (related to commissions), and post-IPO trading behaviors. We find that information proxies explain the majority of the variation in IPO profits, while commissions and post-IPO trading behaviors explain relatively little. Commissions and post-IPO trading matter at the extensive, but not intensive, margins, while information matters at both. Different explanations matter for allocations and IPO profits to Investment Managers, Hedge Funds, and Banks, Pension Funds and Insurers.
    Keywords: IPOs, Allocations, Institutional Investors, Underwriters, Money Left on the Table
    JEL: G23 G24 G32
    Date: 2021–11
  6. By: TSURUTA Daisuke
    Abstract: In this paper, we investigate to what extent banks use public credit guaranteed loans for distant small business borrowers. Existing studies argue that when banks provide loans for these borrowers, the information asymmetry between them is severe. These studies then empirically show how banks can mitigate this problem. In this analysis, we focus instead on the role of Japan's public credit guarantee scheme in mitigating these same information problems. If banks provide credit guaranteed loans, they suffer few losses from borrower default because the public credit guarantee corporations (not the small business borrowers) make payments to the banks. Therefore, banks can provide loans to distant borrowers even if the information asymmetry is severe. To conduct our analysis, we use semiannual bank-region level data from Japan, which allows us to control for several unobserved fixed effects. The results show that the credit guarantee loan size is larger if banks provide loans to distant small business borrowers. In addition, the default rate is higher when banks provide credit guaranteed loans to distant borrowers. These results suggest that banks successfully mitigate the losses of distant lending using the public credit guarantee scheme.
    Date: 2021–10
  7. By: Kim, Jinhwan (Stanford Graduate School of Business); Olbert, Marcel (London Business School)
    Abstract: We investigate the relationship between private firms’ disclosures and the demand for the equity of their publicly traded peers. Using data on the global movement of public equity, we find that a one standard deviation increase in private firm disclosure transparency – proxied by the number of disclosed private firms’ financial statement line items — reduces global investors’ demand for public equity by 13% to 16% or by $206 million to $253 million in dollar terms. These findings are consistent with private firm disclosures generating negative pecuniary externalities – global investors reallocate their capital away from public firms to more transparent private firms — and less consistent with these disclosures creating positive information externalities that would benefit public firms. Consistent with this interpretation, we find that the reduction in demand for public equity is offset by a comparable increase in capital allocation to more transparent private firms. Using staggered openings of the Bureau van Dijk database offices in each investee country as a plausibly exogenous shock to private firm disclosures, we conclude that the negative relationship between private firm disclosures and public equity demand is likely causal.
    JEL: F21 F30 G15 G30 M16 M40 M41
    Date: 2021–04
  8. By: Arman ESHRAGHI; TAKAHASHI Hidetomo; XU Peng
    Abstract: This paper examines early-life exposure to war experiences among a comprehensive sample of corporate managers and their subsequent tendency towards leverage, cash-holding, investments and M&A activity. Drawing data from the well-document and severe Japanese experience in WW2, we show managers who survived such experiences in their pre-adolescence demonstrate distinct behavioral patterns of financial decision-making in later life. Specifically, they tend to borrow more, hold less cash, invest more in capital expenditure but engage less in M&A deals. This can be understood in the context of ‘what doesn’t kill you makes you stronger' and in this case, more risk-seeking. Extended analyses confirm that the tendency could be driven by managerial traits of being locally altruistic. In the economic significance tests, we find that the tendency is welcomed by stock market participants.
    Date: 2021–10
  9. By: P. Rovelli; C. Benedetti; A. Fronzetti Colladon; A. De Massis
    Abstract: This study explores the role of external audiences in determining the importance of family firm brands and the relationship with firm performance. Drawing on text mining and social network analysis techniques, and considering the brand prevalence, diversity, and connectivity dimensions, we use the semantic brand score to measure the importance the media give to family firm brands. The analysis of a sample of 52,555 news articles published in 2017 about 63 Italian entrepreneurial families reveals that brand importance is positively associated with family firm revenues, and this relationship is stronger when there is identity match between the family and the firm. This study advances current literature by offering a rich and multifaceted perspective on how external audiences perceptions of the brand shape family firm performance.
    Date: 2021–10
  10. By: ORIHARA Masanori; SUZUKI Takafumi
    Abstract: We find that financially unconstrained firms claimed temporary investment tax incentives more often than their constrained counterparts. The former, however, did not necessarily increase their investments. We consider a 2014 tax reform in Japan which introduced both an investment tax credit and bonus depreciation, using confidential tax return survey data. Our data show low adoption rates, only 25%, in line with the recent literature. Many of them claimed the tax credit, which brings direct monetary benefits. Our finding is most prominent for a comparison between public and private firms among various constrained measures: the former claimed the tax credit more often and the bonus depreciation less often than the latter. Older firms claimed tax benefits. This might suggest that prior experience with claiming tax credits plays a role. Inconsistent with currently accepted theories, investment opportunities did not lead to more applications. Tax incentives encouraged investment mostly by financially constrained firms, such as private firms, small firms, and non-bond issuers. Our findings demonstrate a novel cost associated with investment tax incentives: encouraging financially constrained firms’ investment through tax incentives has the side effect of unintended tax benefits for unconstrained firms.
    Date: 2021–10
  11. By: Fantazzini, Dean; Calabrese, Raffaella
    Abstract: While there is an increasing interest in crypto-assets, the credit risk of these exchanges is still relatively unexplored. To fill this gap, we consider a unique data set on 144 exchanges active from the first quarter of 2018 to the first quarter of 2021. We analyze the determinants of the decision of closing an exchange using credit scoring and machine learning techniques. The cybersecurity grades, having a public developer team, the age of the exchange, and the number of available traded cryptocurrencies are the main significant covariates across different model specifications. Both in-sample and out-of-sample analyses confirm these findings. These results are robust to the inclusion of additional variables considering the country of registration of these exchanges and whether they are centralized or decentralized.
    Keywords: Exchange; Bitcoin; Crypto-assets; Crypto-currencies; Credit risk; Bankruptcy; Default Probability
    JEL: C21 C35 C51 C53 G23 G32 G33
    Date: 2021
  12. By: Burgelman, Robert A. (Stanford Graduate School of Business); Sridharan, Amit (First Rays Venture Partners); Savini, Giancarlo (Honeywell)
    Abstract: Combining qualitative survey and in-depth field research, we present a new typology of corporate venture capital (CVC) designs that highlights a hybrid CVC structural orientation to advance understanding of the process of integrating externally generated innovation with the company’s internal innovation efforts. Based on our field study of JetBlue Technology Ventures, the paper provides insights into the interlocking multi-level managerial activities that relate hybrid CVC initiatives to the corporation’s mainstream operations. These insights also serve to compare how the hybrid CVC design enables effective interaction with the company’s internal innovation process to create enduring corporate strategic value with that of the other CVC designs.
    Date: 2021–05
  13. By: Kazuki Onji (Graduate School of Economics, Osaka University); Roger H. Gordon
    Abstract: Taxes affect the size of a corporate takeover market in theory; the extant empirical studies from the US data offer limited such evidence. We consider Japan after 2001, which offers an alternative setting in which a tax system implicitly subsidizes mergers that follow a particular sequence of steps ("step transactions"). We construct a novel dataset on step transactions from a list of takeover deals from 1996 through 2013 and examine their utilization rates before and after Japan's tax reform of 2001. We find a statistically and economically significant discontinuity across the two regimes. We also examine tax payments using a panel dataset of firms from 1997 through 2013 and find a strong association between unexplained falls in tax payments and step transactions. The Japanese tax system provided subsidies to marginal as well as infra-marginal mergers among domestic corporations: we estimate tax expenditure to be \172.3 billion.
    Keywords: Tax Avoidance, M&A, Corporate Restructuring
    JEL: H25 H26 G34 H32
    Date: 2021–11
  14. By: Roxanne Merenda
    Abstract: This paper exploits a panel data ranging from 2010 to 2019 to investigate firm-level determinants of export intensity in the Portuguese defense industry, using a fixed effects model. As in any study exploiting corporate finance panel data, it is likely that some variables are endogenous due to reverse causality. Although we address this issue, the interpretation of our results cannot be fully causal. We find evidence that learning economies, proxied by export persistence, are the largest determinants associated with export intensity at firm level. Worker productivity and firm size also play a positive and significant role. Financial indicators such as financial pressure and leverage ratio negatively correlate with export intensity, albeit not always significantly. Finally, and contrary to the literature, we cannot find evidence that the Portuguese defense industry’s competitiveness rely on investment and R&D, nor is it impacted by geographical agglomeration.
    Keywords: Exports, Competitiveness, Firm-level data, Defense industry
    JEL: D22
    Date: 2021–11
    Abstract: As the linkage between domestic and foreign financial markets grows stronger, concerns have been raised about the inflow and outflow of foreign investment capital as a source of financial instability whenever the financial market becomes unstable. Considering that opening the capital market is not an option, it becomes essential to examine the determinants of foreign investment to maximize the benefits of foreign capital inflows and outflows for sound growth in the real sector as well as the financial sector. Accordingly, this study attempts to produce evidence-based policy implications by empirically analyzing the determinants of the inflow and outflow of foreign investment funds.
    Keywords: foreign; capital flow; interest rate; exchange; capital market
    Date: 2021–05–31
  16. By: Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Schuhmann, Patrick (Center for Mathematical Economics, Bielefeld University); Zhu, Shihao (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper proposes and solves an optimal dividend problem in which a two-state regime- switching environment affects the dynamics of the company’s cash surplus and, as a novel feature, also the bankruptcy level. The aim is to maximize the total expected profits from dividends until bankruptcy. The company’s optimal dividend payout is therefore influenced by four factors simul- taneously: Brownian fluctuations in the cash surplus, as well as regime changes in drift, volatility and bankruptcy levels. In particular, the average profitability can assume different signs in the two regimes. We find a rich structure of the optimal strategy, which, depending on the interaction of the model’s parameters, is either of *barrier-type* or of *liquidation-barrier type*. Furthermore, we provide explicit expressions of the optimal policies and value functions. Finally, we complement our theoret- ical results by a detailed numerical study, where also a thorough analysis of the sensitivities of the optimal dividend policy with respect to the problem’s parameters is performed.
    Keywords: Optimal dividend policy, Regime-switching, Regime-dependent bankruptcy levels, HJB equation, Singular stochastic control
    Date: 2021–11–15

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