nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒03‒28
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. CO2 Emissions and Corporate Performance: Japan's Evidence with Double Machine Learning By Ryo Aruga; Keiichi Goshima; Takashi Chiba
  2. Language and private debt renegotiation By Christophe J. GODLEWSKI
  3. Competition, profitability and financial leverage By Banal Estanol, Albert; Siciliani, Paolo; Yoon, Kyoungsoo
  4. M&As and Their Economic Effects on Target Companies By Ali-Yrkkö, Jyrki; Mattila, Juri; Pajarinen, Mika; Ylhäinen, Ilkka
  5. Asymmetric Information and Sovereign Debt Disclosure By Bulent Guler; Yasin Kursat Onder; Temel Taskin
  6. Consequences of zombie businesses: Australia’s experience By Joel Bowman
  7. Business investment, the user cost of capital and firm heterogeneity By Alari Paulus

  1. By: Ryo Aruga (Associate Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Keiichi Goshima (Assistant Professor, School of Commerce, Waseda University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, UTokyo Economic Consulting and Adjunct Researcher, Research Institute of Business Administration, Waseda University, E-mail:; Takashi Chiba (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Sumitomo Mitsui Banking Corporation, E-mail:
    Abstract: This paper empirically examines the relationship between CO2 emissions and corporate performance in terms of long-term performance, short-term performance, and cost of capital, using available firm-level data in the First Section of the Tokyo Stock Exchange from FY2011 to FY2019. To address potential biases in previous empirical studies, we employ double machine learning, which is one of the semiparametric models introduced by Chernozhukov et al. [2018], for our empirical analysis. We find that corporations with lower CO2 emissions have (i) better long-term corporate performance and (ii) lower cost of equity. These results suggest that investors estimate that corporations with lower CO2 emissions have lower business risks, setting their risk premium to be low, which results in higher market value of such corporations. In addition, our analysis indicates that corporations with lower CO2 emissions have higher short-term performance and lower cost of debt, but also shows that the results of previous studies of these relationships may contain biases and should be evaluated with caution.
    Keywords: CO2 Emissions, Corporate Performance, Double Machine Learning
    JEL: G30 M14 Q54
    Date: 2022–02
  2. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg)
    Abstract: We study how language affects private debt renegotiation. We predict that stronger future time reference (FTR) languages alter the importance of renegotiation risk by lowering the perceived value of loan renegotiation. We test this hypothesis on a sample of 6.500 loans issued to European firms between 1999 and 2017. We find that the use of a stronger FTR language decreases renegotiation likelihood and the number of renegotiation rounds. These findings are robust to several FTR proxies, various specifications including loan, borrower and country level variables, and potential mitigation effects from specific loan, country, or time effects. They suggest that linguistic structure influences the renegotiation process of private debt contracts.
    Keywords: language, future tense marking, future time reference, bank loan, renegotiation.
    JEL: D83 G20 G41 Z13
    Date: 2022
  3. By: Banal Estanol, Albert (Universitat Pompeu Fabra); Siciliani, Paolo (Bank of England); Yoon, Kyoungsoo (Bank of Korea)
    Abstract: We investigate the relationship between profitability and financial leverage for US listed non-financial corporations by taking into account the degree of product similarity among competing firms, which can drive intense pricing rivalry thus undermining the sustainability of high price-cost mark-ups. We find that in markets characterized by high price-cost mark-ups notwithstanding high product similarity, the relationship between profitability and financial leverage is negative. Instead, in the rest of the markets we find a positive relationship, consistent with the dynamic trade-off theory of corporate finance, whereby firms increase their degree of financial leverage in response to profitability improvements. Not only do firms exposed to comparatively higher degree of product substitutability make less use of financial leverage, but they also rely relatively less on long-term debt. The difference is especially attributable to the period after the great financial crisis.
    Keywords: Financial leverage; competition; profitability
    JEL: D21 G32 L13 L41
    Date: 2022–02–18
  4. By: Ali-Yrkkö, Jyrki; Mattila, Juri; Pajarinen, Mika; Ylhäinen, Ilkka
    Abstract: Abstract This study examines mergers and acquisitions and their economic impact on companies. The study examined which companies in Finland become the targets of acquisitions, how the economic activities of the target companies develop after the change of ownership and whether there is a difference between domestic and foreign acquisitions in these respects. The study was conducted using firm-level data that included nearly 2,000 acquisitions, supplemented by a qualitative review of 19 research interviews. The results of the study show that companies’ innovation activities have a positive relation to the likelihood of being acquired, especially by foreign buyers. However, foreign acquisitions did not have a significant impact on the development of the value added, productivity, profitability or employment of target companies when compared with the control group.
    Keywords: Mergers and acquisitions, M&A, Impact, Foreign ownership, Foreign company, Productivity
    JEL: D22 F23 G34 O30
    Date: 2022–03–23
  5. By: Bulent Guler (Indiana University Bloomington); Yasin Kursat Onder (Ghent University); Temel Taskin (Bank of Canada)
    Abstract: This paper studies sovereign debt and default dynamics under alternative disclosure arrangements in a sovereign default model incorporated with asymmetric information and long-term debt. Government is assumed to have access to both international bond financing and non-Paris club lending (a hidden and collateralized debt). Our results show that with a shift from partial disclosure to full disclosure regime governments can borrow at more favorable terms conditional on the same levels of debt and income. However, due to lack of commitment, favorable bond prices encourage governments to borrow more and experience higher default rates in the long-run equilibrium of the full disclosure regime. As a result, the switch from partial disclosure to full disclosure generates small welfare losses contrary to conventional wisdom.
    Keywords: Hidden debt, Sovereign debt, Sovereign default, Collateralized debt, Asymmetric information, Debt disclosure
    Date: 2022–03
  6. By: Joel Bowman
    Abstract: This paper assesses the consequences of zombie businesses in Australia between 2001/02 to 2018/19. Zombie businesses are broadly defined as businesses whose ability to meet interest expenses from current profits is less compared with other firms operating within the same industry. This work finds that an increasing share of labour sunk into zombie businesses is correlated with weaker activity for viable businesses operating within the same industry. However, it does not find that zombie firms adversely affect the allocative efficiency of labour and capital and does not reduce the responsiveness of business exits to productivity. Further, the spillover effect of zombie firms does not appear to be propagated by the crowding out of financing or the imposition of additional entry barriers for firms operating within the same industry. Overall, the stable share of labour allocated to zombie firms at an aggregate level since 2007 suggests that it is unlikely that the adverse effects of zombie firms explain the slowdown in Australia’s economic activity since the mid 2000s.
    Keywords: Zombie Firms, Labour Productivity, Firm Dynamics, Resource Allocation
    JEL: D24 E22 G33 J24 L25
    Date: 2022–03
  7. By: Alari Paulus
    Abstract: The sensitivity of business fixed investment to one of its key determinants, the user cost of capital, has been little investigated with firm-level data that captures firm heterogeneity to the full extent. I study the determinants of business fixed investment in Estonia, using the universe of business statements for non-financial firms in 1994-2020 from administrative records. The results with various panel data models provide strong support for a theoretical long-term relationship between the gross investment rate, and changes in production output and the user cost of capital. I find that the capital stock is modestly responsive to changes in output and the user cost of capital, with elasticities less than 0.5 in absolute size, and that different estimation strategies yield broadly similar results. Elasticities differ by firm size, but sectoral variation is relatively limited. User cost elasticities also exhibit notable variation over time, while output elasticities are much more stable. I also find that investments in machinery and equipment are more elastic than investments in buildings and structures.
    Keywords: business investment, user cost of capital, corporate taxation, firm panel data
    JEL: D22 E22 H32
    Date: 2022–03–24

This nep-cfn issue is ©2022 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.