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on Corporate Finance |
| By: | Minjie Deng (Simon Fraser University) |
| Abstract: | This paper measures the output and TFP costs of sovereign risk incorporating its impact on firm intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the recent sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. We build a sovereign default model incorporating both firm tangible and intangible investment to explain the empirical findings. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms internalize that tangible assets can be used as collateral while intangibles cannot, thus reallocating resources towards tangible investment to offset tightening financial conditions. In a counterfactual analysis, we find that elevated sovereign risk explains 86% of the observed output losses and 72% of TFP losses during the 2011-2013 Italian sovereign debt crisis. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp21-16&r= |
| By: | Strauss, Ilan; Yang, Jangho |
| Abstract: | We detail a secular slowdown in investment rates using a large panel of advanced economy non-financial firms from 18 countries between 1994-2017. We test competing explanations for the investment slowdown using a Bayesian 'mixed effects' model, with time-varying and country-varying coefficients to fully explore variation in financing constraints and investment behaviour. Firms' estimated underlying impetus to invest falls precipitously between 1997-2017, with only a mild recovery between 2003-2008. The slope of the investment demand curve -- approximated by time-varying Q regressions coefficients -- remains roughly constant, indicating that `financialization' or growing monopoly power has not dulled firms' responsiveness to investment opportunities. Contrary to precautionary savings arguments, advanced economy firms are not meaningfully financially constrained. Instead, the corporate sector as a whole is increasingly a net external `releaser' of funds to shareholders, creditors, and bondholders, and this behaviour closely tracks declining investment rates between years. |
| Keywords: | Secular Stagnation, Investment Slowdown, Hierarchical Model, Finance Constrained, Tobin's Q, Investment Rates, Corporate Savings, Bayesian Econometrics. |
| JEL: | D22 D24 E12 E22 E23 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:amz:wpaper:2019-16&r= |
| By: | Heng Geng (Victoria University of Wellington); Harald Hau (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)); Roni Michaely (The University of Hong Kong; ECGI); Binh Nguyen (Victoria University of Wellington - Victoria University of Wellington, Students) |
| Abstract: | We investigate how board overlap affects coordination and performance among public firms. Our identification exploits the staggered introduction of Corporate OpportunityWaivers (COWs) in nine U.S. states since 2000. By reducing legal risk to directors serving on multiple boards, the COW legislation increased intra-industry board overlap for those firms that benefit most from the information flow facilitated by board overlap. We find that more board overlap improves firm profitability but also reduces investment, product overlap, and innovation. Our findings support the notion that board overlap curtails firm rivalry. |
| Keywords: | Board overlap, corporate opportunity waivers, firm coordination, market power |
| JEL: | G30 G38 K21 K22 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2179&r= |
| By: | Cooper Howes |
| Abstract: | While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of U.S. manufacturing firms, I show this increase is driven by the types of firms that are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back. |
| Keywords: | Monetary Policy; Investments; Financial Frictions |
| JEL: | E22 E32 E52 |
| Date: | 2021–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93095&r= |
| By: | Igor Fedotenkov; Anneleen Vandeplas |
| Abstract: | This paper studies the link between the demographic structure of populations and firm entry rates in the European Union. We find that firm entry rates have a hump-shaped relationship with human demography, with the 40-54 age group having the strongest positive impact on firm entry. Potential mechanisms through which this relationship may arise include labour market participation, demand and access to entrepreneurship (linked with experience and access to finance). Perhaps more surprisingly, firm entry again picks up with generations aged 80 and over expanding. This could relate to the fact that a larger 80+ age cohort reflects greater longevity, which in turn increases savings, reduces interest rates and therefore increases availability of external financing. When controlling for life expectancy and interest rates, the coefficient corresponding to the 80+ age cohort sharply declines and becomes insignificant. Based on the results of the analysis, we assess the implications of our results for firm entry rates by 2025 and 2030, using UN population projections. |
| Keywords: | Firm entry rates, demographic structure, longevity |
| JEL: | D22 J11 J15 L29 M13 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:lic:licosd:42821&r= |
| By: | Sebastian Doerr; Dalia Marin; Davide Suverato; Thierry Verdier; Thierry Verdier |
| Abstract: | This paper develops a novel theory of capital mis-allocation within firms that stems from managers’ empire building and informational frictions within the organization. Introducing an internal capital market into a two-factor model of multi-segment firms, we show that international competition imposes discipline on managers and reduces capital mis-allocation across divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters (a new fact we establish). Testing the model’s predictions with data on US companies, results suggest that Chinese import competition significantly reduces managers' over-reporting of costs and improves the allocation of capital within firms. |
| Keywords: | multi-product firms, trade and organization, internal capital markets, conglomerate discount, China shock |
| JEL: | F12 G30 L22 D23 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9426&r= |
| By: | Amit Goyal (University of Lausanne; Swiss Finance Institute); Avanidhar Subrahmanyam (University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)); Bhaskaran Swaminathan (LSV Asset Management) |
| Abstract: | Illiquidity measures appear to be related to monthly realized returns but do they actually impact the long-run costs of capital for firms? We make progress on this issue by analyzing the relation between the well-known Amihud (2002) liquidity measure and actual cost-of-capital (CoC) estimates, which rely on imputing the internal rate of returns on firms’ equity cash flows. Using U.S. data, after controlling for well-known determinants of CoC, we find that illiquidity is strongly and negatively related to CoC estimates. This result obtains even as we confirm that illiquidity is positively related to monthly realized returns. Liquidity risk and the probability of informed trading bear no relation to CoC. While our results do not rule out that short horizon investors demand compensation for illiquidity, our results run contrary to the notion that corporations should care about illiquidity, liquidity risk, or information risk, while setting discount rates for long-term projects. |
| Keywords: | Trading Costs, Determinants of Equity Returns, Liquidity Premia |
| JEL: | G12 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2187&r= |
| By: | W. Blake Marsh; Padma Sharma |
| Abstract: | We study bank responses to the Paycheck Protection Program (PPP) and its effects on lender balance sheets and profitability. To address the endogeneity between bank decisions and balance sheet effects, we develop a Bayesian joint model that examines the decision to participate, the intensity of participation, and ultimate balance sheet outcomes. Overall, lenders were driven by risk-aversion and funding capacity rather than profitability in their decision to participate and the intensity of their participation. Indeed, with greater participation intensity, banks experienced sizable growth in their loan portfolios but a decline in their interest margins. In counterfactual exercises, we show that the PPP offset a large potential contraction in business lending, and that bank margins would have fallen even more precipitously if lenders had not participated in the program. Although the PPP was intended as a credit support program for small firms, the program indirectly supported the margins of banks that channeled these loans. |
| JEL: | C11 G21 G28 H12 |
| Date: | 2021–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:92915&r= |
| By: | Marcin Borsuk (European Central Bank, Germany Institute of Economics, Polish Academy of Sciences, Poland School of Economics, University of Cape Town, South Africa); Oskar Kowalewski (Institute of Economics, Polish Academy of Sciences, Poland IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Économie Management, F-59000 Lille, France Univ. Lille, UMR 9221 - LEM - Lille Economie Management, France CNRS, UMR 9221 - LEM - Lille ´Economie Management, France); Pawel Pisany (Institute of Economics, Polish Academy of Sciences, Poland) |
| Abstract: | In this study, we employ a new dataset on bank ownership and reassess the links between domestic and foreign ownership and lending during the 1996– 2018 period. Additionally, we distinguish between privately-owned and state-controlled banks and nd that the lending activities of foreign state-controlled and privately-owned banks dier, particularly following the nancial crisis of 2008. Our analysis conrms that foreign state-controlled and privately-owned banks provided credit during domestic banking crises in host countries, whereas lending by domestic state-controlled banks contracted. Further, foreign state-controlled banks reduced their credit base during a home banking crisis, whereas foreign privately-owned banks expanded lending. Hence, we nd that the credit supply of foreign state-controlled and privately-owned banks differs in host countries because of exogenous shocks. We also nd weak evidence that foreign state control can be a transmission channel during a sovereign crisis in the home country. However, we nd no evidence that foreign banks, state-controlled or privately-owned, transmit a currency crisis to a host country. Overall, our results suggest a mixed banking sector comprising foreign and domestic state-controlled banks and privately-owned banks to contribute to nancial stability during domestic and international crises. |
| Keywords: | : foreign banks, state-controlled banks, private banks, credit growth, crisis |
| JEL: | G01 G21 G28 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f202110&r= |
| By: | Minjie Deng (Simon Fraser University); Min Fang (University of Lausanne & University of Geneva) |
| Abstract: | We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp21-17&r= |
| By: | Amit Goyal (University of Lausanne; Swiss Finance Institute); Sunil Wahal (Arizona State University (ASU) - Finance Department); M. Deniz Yavuz (Purdue University - Krannert School of Management) |
| Abstract: | We study the selection of private equity managers (GPs) for over 100,000 capital commitments between 1990 and 2019 by global institutional investors (LPs) choosing from a plausible contemporaneous opportunity set. In addition to chasing GPs with high prior performance, LPs have large propensities to select first-time or young GPs without a performance history. LPs also have tendencies to follow their peers’ investment decisions, to reinvest with the same GP, and to invest with GPs domiciled in the same state/country. These selection criteria, however, do not provide information material for future performance, and in the case of first-time GPs are associated with lower future performance. |
| Keywords: | private equity, manager selection |
| JEL: | G10 G11 G20 G23 H55 H75 J32 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2186&r= |