nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒01‒10
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Examining the impact of debt on investment for Austrian non-financial sectors and firms By Dennis Dlugosch; Selçuk Gul
  2. Corporate Liquidity During the Covid-19 Crisis: the Trade Credit Channel By Benjamin Bureau; Anne Duquerroy; Frédéric Vinas
  3. The COVID-19 Impact on Corporate Leverage and Financial Fragility By Mr. Richard Varghese; Sharjil M. Haque
  4. Private or Public Equity? The Evolving Entrepreneurial Finance Landscape By Michael Ewens; Joan Farre-Mensa
  5. The Real Side of Financial Exuberance: Bubbles, Output and Productivity at the Industry Level By Francisco Queirós
  6. Remittances and firm performance in sub-Saharan Africa: evidence from firm-level data By Kabinet Kaba; Mahamat Moustapha
  7. The role of the Australian financial sector in supporting a sustainable and inclusive recovery By Christine Lewis; Ben Westmore
  8. Carbon Boards and Transition Risk: Explicit and Implicit exposure implications for Total Stock Returns and Dividend Payouts By Matteo Mazzarano; Giovanni Guastella; Stefano Pareglio; Anastasios Xepapadeas
  9. How institutions moderate the effect of gender diversity on firm performance By Hoch, Felix; Seyberth, Lilo
  10. Investor-driven corporate finance: Evidence from insurance markets By Kubitza, Christian
  11. Public Certification to Fight against Illegality: Evidence on Private Investment By Antonio Acconcia; Maria Rosaria Alfano; Anna Laura Baraldi; Claudia Cantabene
  12. Cash on the Table? Imperfect Take-up of Tax Incentives and Firm Investment Behavior By Wei Cui; Jeffrey Hicks; Jing Xing
  13. Contagion in Debt and Collateral Markets By Chang, Jin-Wook

  1. By: Dennis Dlugosch; Selçuk Gul
    Abstract: Using a micro-level model of investment, this paper finds that firm-debt and investment are negatively associated across firms in Austrian manufacturing industries. The finding is robust to various changes to the model specification. Moreover, in an extension of the basic model, different components of debt are examined, pointing out that debt owed to banks and long-term debt have a stronger negative effect than other forms of debt. Comparisons with investment models estimated for other European countries suggest that the impact of debt on investment is more negative in Austria than elsewhere. Results from interaction models of debt owed to banks with an index of credit easing show that firms in industries which are more bank-dependent invest relatively more than firms in industries that are less bank-dependent after an easing of credit conditions.
    Keywords: Austria, corporate debt, Corporate investment
    JEL: E22 E44
    Date: 2021–12–17
  2. By: Benjamin Bureau; Anne Duquerroy; Frédéric Vinas
    Abstract: Using unique daily data on payment defaults to suppliers in France, we show how the trade credit channel amplified the Covid-19 shock, during the first months of the pandemic. It dramatically increased short-term liquidity needs in the most impacted downstream sectors: a one standard deviation increase in net trade credit position leads to a rise in the probability of default of up to a third. This effect is short-term and cyclical and is concentrated on financially constrained firms. We argue that taking into account the trade credit channel is critical to properly quantify liquidity shortfalls in crisis times.
    Keywords: Firm, Corporate Finance, Trade Credit, Liquidity, Payment Default, Covid-19, Lockdown, Pandemic
    JEL: E32 G32 G33 H12 H32
    Date: 2021
  3. By: Mr. Richard Varghese; Sharjil M. Haque
    Abstract: We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.
    Keywords: COVID-19; Corporate Debt; Optimal Capital Structure; Rollover Risk; Distance-To-Default; Default Risk; Stress Tests
    Date: 2021–11–05
  4. By: Michael Ewens; Joan Farre-Mensa
    Abstract: The U.S. entrepreneurial finance market has changed dramatically over the last two decades. Entrepreneurs raising their first round of venture capital retain 30% more equity in their firm and are more likely to control their board of directors. Late-stage startups are raising larger amounts of capital in the private markets from a growing pool of traditional and new investors. These private market changes have coincided with a sharp decline in the number of firms going public—and when firms do go public, they are older and have raised more private capital. To understand these facts, we provide a systematic description of the differences between private and public firms. Next, we review several regulatory, technological, and competitive changes affecting both startups and investors that help explain how the trade-offs between going public and staying private have changed. We conclude by listing several open research questions.
    JEL: G23 G24 G28 G34 G38
    Date: 2021–12
  5. By: Francisco Queirós (Università di Napoli Federico II and CSEF)
    Abstract: There has been a growing interest in the theory of rational bubbles. Recent theories predict that bubbles are expansionary, but differ in the underlying mechanisms. This paper provides empirical evidence that help us assess different theories, and documents four main findings: stock market overvaluation is associated with (i) faster output and input growth, (ii) declining TFP growth, (iii) a greater contribution of labor for output growth, with no change in the contribution of capital, (iv) an increase in the number of firms. Overall, these findings suggest that bubbly expansions are driven by increased factor accumulation (in particular labor), and not from higher productivity growth.
    Keywords: Stock prices, fundamentals, bubbles, productivity growth.
    JEL: E44 G12 G31 G32
    Date: 2021–12–20
  6. By: Kabinet Kaba (CERDI, University Clermont Auvergne); Mahamat Moustapha (Paris Dauphine University-PSL)
    Abstract: Sub-Saharan African firms face enormous obstacles to their development. The main constraints to business performance identified are poor access to finance and a weak domestic market. In this paper, we examine how international remittances affect firms’ performance. Specifically, we investigate the role of remittances on capital accumulation, sales, and employment in 34,010 f irms operating in 42 Sub-Saharan African countries between 2006 and 2020. Using a fixed-effect instrumental variable approach to control for the endogeneity of remittances, we find that international remittances positively affect the share of capital held by nationals in manufacturing firms. Moreover, international remittances positively affect sales in non-manufacturing firms, while a negative effect on the sales of manufacturing firms is observed. Regarding the effect of remittances on employment, we find a positive impact on both manufacturing and non-manufacturing f irms. Heterogeneity tests suggest that the effect of remittances on firms’ performance is larger in less financially developed and non-resource-rich countries. As for the negative impact of remittances on sales in manufacturing firms, the results show that it is entirely due to small firms. Finally, using remittances per capita instead of remittances relative to GDP, similar result are found.
    Keywords: Remittances, Firm Performance, Entrepreneurship, Saving and Capital Investment, Firm Employment, Africa
    JEL: F24 L25 L26 M51 O16 O55
    Date: 2021–12
  7. By: Christine Lewis; Ben Westmore
    Abstract: Australia’s financial sector entered the COVID-19 crisis in a strong position, enabling it to play a key role in cushioning the pandemic’s impact. Once the national economy reopens, policymakers will turn their focus to securing a robust, sustainable and inclusive recovery. However, low interest rates are boosting house prices and demand for credit in a banking sector that is already highly exposed to housing and highly indebted households. At the same time, many young and innovative firms – which are the drivers of job creation and productivity growth - struggle to access finance. And financial frictions impede the alignment of financial flows with environmental sustainability. Addressing these obstacles, through regulatory change, developing alternatives to bank finance and facilitating technological transformation, would raise productivity and set the recovery on a more sustainable path. Financial inclusion and financial literacy are comparatively high and financial education is entrenched at schools. Further efforts are still needed to address persistent gaps in outcomes for disadvantaged groups, accompanied by stronger consumer protections to ensure that the recovery is inclusive.
    Keywords: access to finance, Australian financial system, environmental risk exposure, financial inclusion, household debt
    JEL: G20 G21 G24 G28 G33 Q58
    Date: 2021–12–23
  8. By: Matteo Mazzarano (Fondazione Eni Enrico Mattei, Milano – Dipartimento di Matematica e fisica “Niccolò Tartaglia”, Università Cattolica del Sacro Cuore, Brescia); Giovanni Guastella (Fondazione Eni Enrico Mattei, Milano – Dipartimento di Matematica e fisica “Niccolò Tartaglia”, Università Cattolica del Sacro Cuore, Brescia); Stefano Pareglio (Fondazione Eni Enrico Mattei, Milano – Dipartimento di Matematica e fisica “Niccolò Tartaglia”, Università Cattolica del Sacro Cuore, Brescia); Anastasios Xepapadeas (Department of International and European Economic Studies, Athens University of Economics and Business, Greece – Department of Economics, University of Bologna)
    Abstract: The Security and Exchange Commission (SEC) has considered climate change as a risk issue since 2010. Several emission disclosure initiatives exist aimed at informing investors about the financial risks associated with a zero or low carbon transition. Stricter regulations, particularly in a few sectors, could affect operations costs, ultimately impacting companies financial performances, especially of listed companies. There are two ways these companies can disclose their transition risk exposure and are not alternatives. One is the explicit declaration of exposure to transition risk in the legally binding documents that listed companies must provide authorities. The other is the disclosure of GHG equivalent emissions, which is implicitly associated with transition risk exposure. This paper empirically analyses to what extent US companies stock returns incorporate information about transition risk by using explicit and implicit risk measures and comparing them. In addition, multiple total stock return measures distinguishing dividend payouts from simple stock returns. Results suggest that both explicit and implicit risks are positively related to dividend payouts and not to stock returns, while the overall effect on total stock returns is negative. Evidence supports the view that market operators price negatively the transition risk exposure and, probably as a consequence, boards in carbon intensive companies use dividend policies to attract investment in risky companies.
    Keywords: Climate risk, Transition Risk, SEC-10K, Mandatory Disclosure, Text analysis, Dividend Policy
    JEL: G35 G32 G38 Q54
    Date: 2021–11
  9. By: Hoch, Felix; Seyberth, Lilo
    Abstract: Research investigating the relationship between firm performance and gender diversity has so far reported conflicting evidence: Some studies find firm performance to benefit from gender diversity, others find negative results or no effect at all. Taking this inconclusive evidence as a sign for moderators influencing the effect of gender diversity on firm performance, we investigate the moderating influence of institutions on this relationship. Using data on 7,661 firms in 71 countries, we employ a multilevel linear regression with fixed effects to examine the moderating effect of formal as well as informal institutional characteristics. We find that institutions indeed moderate the relationship between gender diversity and firm performance. In particular, informal institutions seem to moderate the effect of diversity on market valuation (Tobin's Q), while formal institutions moderate the effect of gender diversity on firm financial performance (ROA). These results have important theoretical implications for the academic debate on gender diversity and firm performance as well as practical implications for both businesses and lawmakers.
    JEL: J16 J71 L25 M12 M14
    Date: 2021
  10. By: Kubitza, Christian
    Abstract: This paper documents that the bond investments of insurance companies transmit shocks from insurance markets to the real economy. Liquidity windfalls from household insurance purchases increase insurers' demand for corporate bonds. Exploiting the fact that insurers persistently invest in a small subset of firms for identification, I show that these increases in bond demand raise bond prices and lower firms' funding costs. In response, firms issue more bonds, especially when their bond underwriters are well connected with investors. Firms use the proceeds to raise investment rather than equity payouts. The results emphasize the significant impact of investor demand on firms' financing and investment activities.
    Keywords: Corporate Finance,Corporate Bonds,Insurance,Real Effects
    Date: 2021
  11. By: Antonio Acconcia (Università di Napoli Federico II and CSEF); Maria Rosaria Alfano (Università della Campania L. Vanvitelli); Anna Laura Baraldi (Università della Campania L. Vanvitelli); Claudia Cantabene (Università della Campania L. Vanvitelli)
    Abstract: In 2012, the Italian government introduced public certification to signal creditworthy firms not involved in corruption and accounting frauds, and with no connections to mafias. In the case of loan applications, this certification can determine lower credit costs due to the lower firm screening costs incurred by the banks. We provide evidence consistent with its effectiveness in mitigating financial frictions. Our results show that certified firms increase their tangible capital expenditure, and show also that the effect of the certification is stronger in areas where it is more difficult for the banks to assess firms' creditworthiness. This latter finding has implications for local development.
    Keywords: Corruption and Organized Crime, Creditworthiness, Investment, Public Certification.
    JEL: G14 G21 H40 H81 R38
    Date: 2021–12–21
  12. By: Wei Cui; Jeffrey Hicks; Jing Xing
    Abstract: We investigate whether investment incentives work in less developed countries by exploiting the introduction of accelerated depreciation (AD) for fixed asset investment in China as a natural experiment. In contrast to the large positive impact of similar tax incentives in the U.S. and U.K. found in recent studies, we document that AD was ineffective in stimulating Chinese firms' investment. Further, using confidential corporate tax returns from a large province, we find that firms fail to claim the AD benefit on over 80% of eligible investments. Firms’ take-up is significantly influenced by their taxable positions and tax sophistication. Moreover, resources of local tax authorities help improve awareness of the policy. Our study contributes to the understanding of conditions under which tax incentives for investment can be effective.
    Keywords: tax incentives, investment, take-up, tax administration
    JEL: H20 H30
    Date: 2021
  13. By: Chang, Jin-Wook
    Abstract: This paper investigates contagion in financial networks through both debt and collateral markets. Payment from a collateralized debt contract depends not only on the borrower's balance sheet but also on the price of the underlying collateral. I show that the existence of the collateral channel of contagion amplifies the contagion from the counterparty channel, and this additional channel generates different patterns of contagion for a given network structure. If the negative liquidity shock is small, then having more connections make the network safer as contagion through debt channel is minimized by diversified exposures while contagion through collateral channel is limited. However, if the liquidity shock is large, then having more connections make the network more vulnerable as contagions through both debt and collateral channels are maximized by more exposures. The most novel and surprising result is that the ring network is safer than the complete network when the shock is large. This is because the ring network minimizes the contagion through collateral channel while maximizing the contagion through debt channel. The model also provides the minimum collateral-debt ratio (haircut) to attain robust macro-prudential state for a given network structure and aggregate shock.
    Keywords: collateral, contagion, debt, financial networks, interconnectedness, systemic risk
    JEL: D52 D53 E44 G23 G24 G28
    Date: 2021–12–12

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