nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒02‒14
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. International ownership and SMEs in Middle Eastern and African economies By Baliamoune-Lutz, Mina; Basuony, Mohamed A. K.; Lutz, Stefan; Mohamed, Ehab K. A.
  2. Financial development and small firms’ tax compliance in Sub-Saharan Africa By Balde, Racky
  3. Measuring and stress-testing market-implied bank capital By Martin Indergand; Eric Jondeau; Andreas Fuster
  4. The UK Productivity Puzzle: Does Firm Cohort matter for their Performance following the Financial Crisis? By Mustapha Douch; Huw Edwards; Sushanta Mallick
  5. Turbulence, firm decentralization and growth in bad times By Aghion, Philippe; Bloom, Nick; Lucking, Brian; Sadun, Raffaella; Van Reenen, John
  6. Agency Theory and Bank Governance: A Study of the Effectiveness of CEO's Remuneration for Risk Taking By Gérard Mondello; Nissaf Ben Ayed Smaoui
  7. What Covid-19 Hath Wrought and Debt Exit Options: A Note on Deficit Financing and Public Debt Management By Dante B. Canlas
  8. Markups and financial shocks By Meinen, Philipp; Soares, Ana Cristina
  9. Intertemporal consumption and debt aversion: A replication and extension By Ahrens, Steffen; Bosch-Rosa, Ciril; Meissner, Thomas
  10. Climate Talk in Corporate Earnings Calls By Dzieliński, Michał; Eugster, Florian; Sjöström, Emma; Wagner, Alexander F.
  11. European bank profitability: the Great Convergence? By Martien Lamers; Thomas Present; Rudi Vander Vennet
  12. The Impact of ESG performance on the Financial Performance of European Area Companies: An empirical examination By Phoebe Koundouri; Nikitas Pittis; Angelos Plataniotis
  13. Using Accounting Information to Predict Aggressive Tax Placement Decisions by European Groups By Matteo Borrotti; Michele Rabasco; Alessandro Santoro

  1. By: Baliamoune-Lutz, Mina; Basuony, Mohamed A. K.; Lutz, Stefan; Mohamed, Ehab K. A.
    Abstract: Empirical evidence suggests that international ownership of local firms supports firm performance and growth through various channels such as financing, technology transfer, and improved access to international markets. This is particularly true for small and medium-sized enterprises (SMEs) that otherwise may lack access to a variety of vital resources. At the same time small and medium-sized enterprise (SME) formation may promote economic development. The relationship between firm performance and international ownership has been well explored for firms in developed economies but this is not the case for firms - including SMEs - in Africa and the Middle East. Largely due to lack of relevant cross-country financial data, existing literature on African and Middle-Eastern firms has presented survey-based evidence on firm performance while evidence based on detailed financial information remains lacking. The present paper aims at filling this research gap. We identify African and Middle-Eastern SMEs operating in the formal sector and examine the impact of ownership structure on firm performance. We use cross-sectional financial data covering about 25,500 companies - including about 30% SMEs - in 69 African and Middle-Eastern countries for the years 2006 to 2015. Our results indicate that international ownership has significant positive association with firm performance. For internationally-owned SMEs this appears to be true despite lower levels of equity and debt capital, implying that internationally-owned firms use international resources - other than capital - more efficiently!
    Date: 2022
  2. By: Balde, Racky (UNU-MERIT, Maastricht University)
    Abstract: Lack of fiscal space in sub-Saharan Africa is a major preoccupation, particularly in the context of shocks. The majority of firms in the region are primarily in the informal sector and consequently do not pay taxes. This paper explores the effect of financial development on small firms’ compliance with value-added tax, profit tax and local tax. It equally explores the mitigating impact of informal finance on financial development’s role in driving small firms’ tax compliance. To demonstrate this, we estimate a recursive trivariate probit model. The results show that financial development increases the likelihood of firms being tax compliant. In contrast, access to informal finance decreases that likelihood. It also emerges that the lower the taxes, the greater the effects of low costs of banks on tax compliance. Another finding is that informal finance mitigates the effect of financial development on small firms’ tax compliance.
    Keywords: taxation, Africa, financial development, informal finance, informal economy
    JEL: D22 E26 H26
    Date: 2021–11–01
  3. By: Martin Indergand; Eric Jondeau; Andreas Fuster
    Abstract: We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit spread-based correction for the value of shareholders' default option. We show that without such a correction, the estimated impact of a severe market downturn is systematically distorted, underestimating the risk of banks with low market capitalization. We argue that this adjusted measure of capital is the relevant market-implied capital measure for policymakers. We propose an econometric model for the combined simulation of equity prices and CDS spreads, which allows us to introduce this correction in the SRISK framework for measuring systemic risk.
    Keywords: Banking, capital, stress test, systemic risk, multifactor model
    JEL: C32 G01 G21 G28 G32
    Date: 2022
  4. By: Mustapha Douch (Bank of Lithuania, The University of Edinburgh); Huw Edwards (Loughborough University); Sushanta Mallick (Queen Mary University)
    Abstract: This paper provides empirical evidence on how the aftermath of the 2008 crisis affected firm productivity in the UK, taking account of the cohort effect of firms established after 2008. We test this using firmspecific and time-varying credit scores to capture firms’ ability to access credit. To overcome the identification problem, a matched sample based on firm’s credit score, firm age, size and ownership status is used by undertaking the propensity score matching approach. While we find evidence that smaller firm size and changes in credit conditions affect productivity, about half of the difference in productivity remains unexplained. We extend the matching analysis to examine sectors and cohorts, and find that, during 2011-2016, the low productivity is driven primarily by newer firms operating in the services sector, rather than in manufacturing. Within services, the underlying productivity puzzle is driven by a cessation of growth in high-productivity financial services, while abundant labour supply has led to a ‘levelling down’ of performance of newer firms in the rest of services, in line with relatively lowproductivity manufacturing.
    Keywords: : Total Factor Productivity, Cohort, Crisis, Firm Survival, Credit Score.
    JEL: E00 D24 E30 G21
    Date: 2022–01–31
  5. By: Aghion, Philippe; Bloom, Nick; Lucking, Brian; Sadun, Raffaella; Van Reenen, John
    Abstract: What is the optimal form of firm organization during "bad times"? The greater turbulence following macro shocks may benefit decentralized firms because the value of local information increases (the "localist" view). On the other hand, the need to make tough decisions may favor centralized firms (the "centralist" view). Using two large micro datasets on decentralization in firms in ten OECD countries (WMS) and US establishments (MOPS administrative data), we find that firms that delegated more power from the central headquarters to local plant managers prior to the Great Recession outperformed their centralized counterparts in sectors that were hardest hit by the subsequent crisis (as measured by export growth and product durability). Results based on measures of turbulence based on product churn and stock market volatility provide further support to the localist view. This conclusion is robust to alternative explanations such as managerial fears of bankruptcy and changing coordination costs. Although decentralization will be suboptimal in many environments, it does appear to be beneficial for the average firm during bad times.
    Keywords: ES/V009478/1; 1459715
    JEL: G12 G32 G34 L23
    Date: 2021
  6. By: Gérard Mondello (UCA - Université Côte d'Azur); Nissaf Ben Ayed Smaoui
    Abstract: This article studies the links between governance and risk-taking in banks. For the agency theory, when information are asymmetric, the disciplinary mechanisms of governance have a moderating effect on the remuneration policy and, consequently, the managers' choice concerning the balance between assets' revenue and risk. The following model shows that: i) The presence of effective disciplinary mechanisms does not reduce the latitude of managers to award themselves a high level of wages; ii) This binds the control of risk-taking through remuneration structures. Remuneration is not a determining factor in explaining risk-taking. iii) Contrary to the agency theory's teaching, excessive risk-taking is not induced by asymmetric information.
    Keywords: G2,G24,G3,G34 Agency theory,Bank governance,information asymmetry,CEO's remuneration,bank risk
    Date: 2021–12–26
  7. By: Dante B. Canlas (School of Economics, University of the Philippines Diliman)
    Abstract: This paper opens up a study of deficit financing and management of the public debt in the context of the COVID-19 outbreak in the Philippines. Borrowings of the national government from the monetary authority and from domestic and international financial markets, as well as the options for exiting from the public debt enlarged by such borrowings are assessed. At this juncture, public spending to strengthen social safety nets for truly disadvantaged families and firms are imperatives, but taxation that relieves big corporations and shifts to households and small firms the recovery of foregone corporate income taxes through burdensome indirect taxes must be shunned. Meanwhile, growing out of the public debt through sound monetary policy and structural reforms that embrace rise in total factor productivity is the least painful option to exit out of the newly expanded public debt.
    Keywords: COVID-19; public debt management; deficit financing; Philippines
    JEL: E5 O4
    Date: 2020–06
  8. By: Meinen, Philipp; Soares, Ana Cristina
    Abstract: This paper analyses the impact of financial frictions on markup adjustments at the firm level. We use a rich panel data set that matches information on banking relationships with firm-level data. By relying on insights from recent contributions in the literature, we obtain exogenous credit supply shifters and markups that are both firm specific and time varying. We uncover new findings at this level. In particular, firms more exposed to liquidity risks tend to raise markups in response to negative bank-loan supply shocks, while less exposed firms generally reduce them. Further empirical analyses suggest that our findings are mostly consistent with models featuring a sticky customer base, where financially constrained firms have an incentive to raise markups in order to sustain liquidity. Our results have important economic implications regarding the cyclicality of the aggregate markup.
    Keywords: Financial Shocks,Markups,Firm-level data
    JEL: L22 L11 D22 G10 G01
    Date: 2021
  9. By: Ahrens, Steffen; Bosch-Rosa, Ciril; Meissner, Thomas
    Abstract: We replicate Meissner (2016) where debt aversion was reported for the first time in an intertemporal consumption and saving problem. While Meissner (2016) uses a German sample, our subjects are US undergraduate students. All of the main findings from the original study replicate, with similar effect sizes. Additionally, we extend the original analysis by correlating a new individual index of debt aversion on individual characteristics such as gender, cognitive ability, and risk aversion. The findings suggest that gender and risk aversion are not correlated with debt aversion. However, cognitive ability is positively correlated with debt aversion. Overall, this paper confirms the importance of debt aversion in intertemporal consumption problems and validates the approach of Meissner (2016).
    Keywords: Debt Aversion,Replication,Experiment
    JEL: C91 D84 G11 G41
    Date: 2022
  10. By: Dzieliński, Michał (Stockholm Business School, Stockholm University); Eugster, Florian (Mistra Center for Sustainable Markets (Misum)); Sjöström, Emma (Mistra Center for Sustainable Markets (Misum)); Wagner, Alexander F. (University of Zurich, CEPR, ECGI, and Swiss Finance Institute)
    Abstract: Climate change is a major concern for many companies, but it has not historically featured much in earnings conference calls. We find a marked increase in climate talk on these calls in recent years. We also find that climate talk is negatively related to the change in CO2 emissions (especially Scope 2) in the year after the call, particularly in firms with high overall environmental and governance ratings. Conversely, investors react particularly negatively to climate talk when it comes from a firm with low levels of ESG performance or following poor earnings performance. Finally, a firm employs more climate talk when it is more material, when there is greater shareholder pressure or when it is better prepared for climate-related disclosure. Overall, these results suggest that investors and other stakeholders interested in corporate climate action should be paying attention to earnings conference calls as a source of useful information about companies’ broader stance on climate-related issues.
    Keywords: climate talk; earnings calls; sustainability; CO2 emissions; greenwashing
    JEL: D83 G14 G34 G41 Q54
    Date: 2022–01–29
  11. By: Martien Lamers; Thomas Present; Rudi Vander Vennet (-)
    Abstract: Have Euro Area banks restored viability in the post-crisis era? We investigate profitability convergence for Euro Area banks over the period 2009-2020 using the concepts of ß and s convergence and a club clustering algorithm. Our evidence is consistent with a slow catch up of the weaker banks, but we also document that better performing banks converge towards a lower profit level, suggesting a ‘great convergence’ towards the middle. Moreover, we identify a cluster of banks exhibiting dismal profit dynamics, indicating the need for a restructuring of part of the Euro Area banking sector.
    Keywords: Euro Area banks, bank profitability, ß convergence, s convergence, club clustering analysis
    JEL: C38 G20 G21
    Date: 2022–02
  12. By: Phoebe Koundouri; Nikitas Pittis (University of Piraeus, Greece); Angelos Plataniotis
    Abstract: Achieving climate neutrality dictated by international agreements such as the Paris Agreement, the United Nations Agenda 2030 and the European Green Deal, requires the conscription of all parts of society. The business world and especially large enterprises have a leading role in this effort. Businesses can contribute to this effort, by establishing a reporting and operating framework according to specific Environmental, Societal, Goovernance (ESG) criteria. The interest of companies in the ESG framework has become more intense in the recent years, as they recognize that appart from an improved reputation, ESG criteria can add value to them and help to become more effective in their functioning. However, especially large European companies, are legally obligated by the Non-Financial Reporting Directive (NFRD - Directive 2014/95/EU), to disclose non-financial information on how they deal with social and environmental issues. In the literature, there are discussions on what extent a good ESG-performance affects a company's profitability, valuation, capital efficiency and risk. The purpose of this paper is to examine empirically whether a relationship between good ESG performance and the good financial condition of companies can be documented. For a sample of the top-50 European companies in terms of ESG performance (STOXX 28 Europe ESG Leaders 50 Index), covering a wide range of sectors, namely Automobile, Consumer Products, Energy, Financial Services, Manufacturing etc., first, we reviewed their reportings to see which ESG framework they use to monitor their performance. Next, we examined whether there is a pattern of better financial performance if compared to other large European corporations. Our results show that such a connection seem to exist at least for some specific parameters, while for others such a claim cannot be supported.
    Keywords: ESG, STOXX Europe, Financial Performance, Capital Structure, Profitability, Valuation
    Date: 2022–01–30
  13. By: Matteo Borrotti; Michele Rabasco; Alessandro Santoro
    Abstract: Aggressive tax planning (ATP) consists in taxpayers’ reducing their tax liability through arrangements that may be legal but are in contradiction with the intent of the law. In particular, ATP by multinational groups (MNE) is a source of major concern. In this paper we consider the MNE’s decision to locate or to maintain a company in a tax haven as a relevant symptom of ATP. The research question we want to address is whether this decision can be predicted using publicly available accounting information. We use ORBIS database and we focus on European MNEs. We observe that, in 2021, slightly less than 40% of European MNEs have a company located in a tax haven. Thus, for a tax authority it would be difficult, without a specific analysis, to identify riskier MNEs. We find that a random forest model that uses accounting information for years between 2015 and 2019 predicts reasonably well the decision to locate (or maintain) a company in a tax haven in 2021. Using this model in 2019, a tax authority could have identified almost 80% of European MNEs that were going to locate or maintain a company in a tax haven in 2021. We observe that the most important variables for prediction are those associated to the size of the group, to its positive profitability and to its financial structure, while individual time-invariant features are less relevant. We also find that the predictive performance of the model is maximized when the information is taken from the time subset 2017-2019 and that most important predictors for the risk of using tax havens are also good predictors for the level of intensity of such a use, as measured by the share of subsidiaries located in tax havens. The main policy implication of these results is that (European) non-tax havens could effectively anticipate (and prevent) the decision to locate (or maintain) companies in tax havens, and shape their policies accordingly, with particular reference to cooperative compliance schemes. These policies are more credible in the context of renewed international cooperation in the design of corporate tax rules, and in particular, of the implementation of Pillar Two within the European Union.
    Keywords: Tax Planning, European Multinationals, Machine Learning
    Date: 2022–02

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