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on Corporate Finance |
| By: | David Newton (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Ru Xie (University of Bath, School of management); Binru Zhao (University of Bath - School of Management) |
| Abstract: | Is bank- versus market-based financing different in its attitudes towards Environmental, Social, and Governance (ESG) risk? Using a novel sample covering 3,783 U.S. public firms from 2007 to 2020, we study how firm-level ESG risk affects its financing outcomes. We find that companies with higher ESG risk borrow less from banks than from markets, potentially to avoid bank monitoring and scrutiny. The Social and Governance components, in particular, matter. Furthermore, firms suffering higher numbers of negative ESG reputation shocks are less likely to continue to rely on bank credit in response to lenders' threats to end the lending arrangements. Finally, our results indicate that firms' ESG risk reduces after borrowing from banks but increases after bond issuance, suggesting that banks are more effective than public bond markets in shaping borrowers' ESG performance. |
| Keywords: | ESG Risk, Debt Structure, Capital Structure; Debt Choices, Bank Monitoring |
| JEL: | G20 G21 G30 G32 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2222&r= |
| By: | Nocera, A.; Pesaran, M. H. |
| Abstract: | This paper investigates the short- and long-term impacts of the Federal Reserve’s large-scale asset purchases (LSAPs) on the capital structure of U.S. non-financial firms. To isolate the effects of LSAPs from the impact of concurrent macroeconomic conditions, we exploit cross-industry variations in the ability of firms therein to raise external funds without exhausting their debt capacity. We show that firms’ responses to LSAPs strongly depend on the financing decisions of other peers in the same industry. The higher the proportion of firms without high debt burdens in an industry, the stronger the response of firms within the industry to the Fed’s asset purchases. Overall, our results show that LSAPs facilitated firms’ access to debt financing and that the impacts of LSAPs on firms’ capital structure are likely to be long-lasting. |
| Keywords: | Capital structure, identification, interactive effects, leverage, quantitative easing, unconventional monetary policy |
| JEL: | G32 E44 E52 E58 |
| Date: | 2022–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2224&r= |
| By: | Falk Bräuning; Victoria Ivashina; Ali K. Ozdagli |
| Abstract: | High-yield debt, including leveraged loans, is characterized by incurrence financial covenants, or “cov-lite” provisions. Unlike, traditional, maintenance covenants, incurrence covenants preserve equity control rights but trigger pre-specified restrictions on the borrower’s actions once the covenant threshold is crossed. We show that restricted actions impose significant constraints on investments: Similar to the effects of the shift of control rights to creditors in traditional loans, the drop in investment under incurrence covenants is large and sudden. This evidence suggests a new shock amplification mechanism through contractual restrictions that are at play for a highly levered corporate sector long before default or bankruptcy. |
| Keywords: | high-yield debt; corporate debt; covenants; incurrence covenants; cov-lite; amplification mechanisms; contracts; contingent contracting |
| JEL: | G21 G31 G32 G33 |
| Date: | 2022–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93873&r= |
| By: | Hong Chen; Murray Zed Frank |
| Abstract: | In dynamic capital structure models with an investor break-even condition, the firm's Bellman equation may not generate a contraction mapping, so the standard existence and uniqueness conditions do not apply. First, we provide an example showing the problem in a classical trade-off model. The firm can issue one-period defaultable debt, invest in capital and pay a dividend. If the firm cannot meet the required debt payment, it is liquidated. Second, we show how to use a dual to the original problem and a change of measure, such that existence and uniqueness can be proved. In the unique Markov-perfect equilibrium, firm decisions reflect state-dependent capital and debt targets. Our approach may be useful for other dynamic firm models that have an investor break-even condition. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.05885&r= |
| By: | Julian di Giovanni; Manuel García-Santana; Priit Jeenas; Enrique Moral-Benito; Josep Pijoan-Mas |
| Abstract: | We provide a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. We start by using a newly created panel data set of administrative data that merges Spanish credit register loan data, quasi-census firm-level data, and public procurement projects to study firm selection into procurement and the effects of procurement on credit growth and firm growth. We show evidence consistent with the hypotheses that there is selection of large firms into procurement, that procurement contracts provide useful collateral for firms more so than sales to the private sector and that procurement contracts facilitate firm growth beyond the contract duration. We next build a model of firm dynamics with both asset-based and earnings-based borrowing constraints and a government that buys goods and services from private sector firms. We use the calibrated model to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find that granting procurement contracts to small firms, either by directly targeting them or by slicing large contracts into smaller ones, helps these firms grow and overcome financial constraints in the long run. However, we also find that reducing the average size of contracts or making it less likely for large firms to access them removes saving incentives for large firms, whose negative effects on capital accumulation can overcome the expansionary consequences for small firms and hence generate a drop in aggregate output. |
| Keywords: | government procurement; financial frictions; capital accumulation; aggregate productivity |
| JEL: | E22 E23 E62 G32 |
| Date: | 2022–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:93773&r= |
| By: | Kimitaka Nishitani (Research Institute for Economics and Business Administration, Kobe University, JAPAN); Akira Kawaguchi (Faculty of Policy Studies, Doshisha University, JAPAN) |
| Abstract: | The purpose of this study is to clarify why gender inequality in the workplace has remained intractable, and how it may be mitigated in Japanese firms. To this end, we analyze gender inequality in the workplace and mitigation in terms of institutional characteristics (i.e., the Japanese employment system and its institutional complementarity with corporate governance, as well as Sustainable Development Goals (SDGs)), using data on Japanese firms listed on the first section of the Tokyo Stock Exchange in 2019. The main findings of this study are as follows. First, gender inequality in the workplace is more severe where institutional complementarity between Japanese-style corporate governance and the employment system is strong. Second, a change to the Anglo-American style of corporate governance mitigates this inequality by encouraging firm efforts to reduce it, even where Japanese-style corporate governance remains strong. Third, the SDGs encourage firms to mitigate gender inequality in the workplace further. Accordingly, it is proved that a firm’s decisions on managing gender workplace inequality strongly align with those of the institutional characteristics of the firm. These institutional factors influence gender (in)equality in the workplace by optimizing the balance between the interdependent social and economic values of firms, so that their overall value is maximized. |
| Keywords: | Gender inequality in the workplace; Institution and institutional changes; Japanese employment system; Corporate governance; Sustainable development goals |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2022-07&r= |
| By: | Özgür, Arslan-Ayaydin; Thewissen, James (Université catholique de Louvain, LIDAM/LFIN, Belgium); Torsin, Wouter |
| Abstract: | This paper examines whether CEO risk aversion – proxied by their political affiliation – explains the method used to manage earnings. We argue that, even though real earnings management can have severe long-term consequences for firm performance, Republican managers are likely to prefer real over accruals-based earnings management because the former incurs significantly lower litigation risk costs than the latter and is relatively more difficult to detect. Based on a sample of more than 20,000 firm-year observations, we find that firms led by Republican (i.e. more risk averse) CEOs tend to manage their earnings through real activities manipulation, while those led by Democratic (i.e. more risk taking) CEOs tend to favor accruals-based earnings management. We also show that the positive (negative) relation between Republican-leaning managers and real (accruals-based) is more positive (less negative) for CEOs whose compensation is more oriented towards risk-taking. |
| Keywords: | Accruals earnings management ; CEO Risk Aversion ; Political affiliation ; Political donations ; Real activities manipulation |
| JEL: | M41 |
| Date: | 2021–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ajf:louvlf:2021017&r= |
| By: | Kirill Shakhnov (University of Surrey); Luana Zaccaria (EIEF) |
| Abstract: | We propose a model of entrepreneurial finance where start-ups raise capital via Initial Coin Offering (ICO) or traditional funding methods such as Venture Capital (VC). While token sales allow startups to leverage network effects, VC's value-adding services enhance product quality. We show that, even when projects have large potential network effects, ICOs may not be optimal if entrepreneurial ability is low. Moreover, despite the potential complementarity between network effects and value-adding services, entrepreneurs combine VC and ICO funding only in highly efficient VC markets and for projects with high network effects. Using data on funding rounds of blockchain startups, we empirically validate the main results of the model. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:2202&r= |
| By: | Christian Esposito; Marco Gortan; Lorenzo Testa; Francesca Chiaromonte; Giorgio Fagiolo; Andrea Mina; Giulio Rossetti |
| Abstract: | In this paper we characterize the performance of venture capital- backed firms based on their ability to attract investment. The aim of the study is to identify relevant predictors of success built from the network structure of firms' and investors' relations. Focusing on deal-level data for the health sector, we first create a bipartite network among firms and investors, and then apply functional data analysis (FDA) to derive progressively more refined indicators of success captured by a binary, a scalar and a functional outcome. More specifically, we use different network centrality measures to capture the role of early investments for the success of the firm. Our results, which are robust to different specifications, suggest that success has a strong positive association with centrality measures of the firm and of its large in- vestors, and a weaker but still detectable association with centrality measures of small investors and features describing firms as knowl- edge bridges. Finally, based on our analyses, success is not associated with firms' and investors' spreading power (harmonic centrality), nor with the tightness of investors' community (clustering coefficient) and spreading ability (VoteRank). |
| Keywords: | Network analysis; functional data analysis; venture capital; investment trajectory. |
| Date: | 2022–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2022/07&r= |
| By: | Nina Brooks (University of Connecticut); Tom Zohar (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | This paper studies the effects of abortion access on fertility and women’s career outcomes. To establish causality, we leverage a policy change that in 2014 increased the eligibility age cutoff for free abortion in Israel. We use newly constructed administrative data that allows us to track abortions, births, employment, earnings, and formal education for the universe of Israeli women over a seven-year period. We show that access to free abortion increases the abortion rate but does not increase conceptions. Instead, the result is driven by more abortions among poor women who live in religious communities in which abortion is socially stigmatized. This finding suggests that when abortion is free, poor women do not need to consult family members for financial support, which allows them to have an abortion in private. In the medium-run, access to free abortion delays parenthood, increases human capital investment, and shifts employment towards the white-collar sector, suggesting a large career opportunity cost of unplanned parenthood. Finally, by using observable information on the women we suggest alternative policies that improve targeting of financially constrained women. |
| JEL: | I11 I12 I18 J13 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2021_2111&r= |
| By: | Loren Brandt; Ruochen Dai; Gueorgui Kambourov; Kjetil Storesletten; Xiaobo Zhang |
| Abstract: | This paper studies entrepreneurship and the creation of new firms in China through the lens of serial entrepreneurs, i.e. entrepreneurs who establish more than one firm, and their differences with non-serial entrepreneurs. Drawing on data on the universe of all firms in China, we document key facts about serial entrepreneurship in China since the early 1990s and develop a theoretical framework to rationalize the role of endowments, ability, and capital market frictions in their behavior. We also examine the key determinants of the sectoral choice for serial entrepreneurs' second firms. Quantitatively, serial entrepreneurs are more productive, raise more capital, and operate larger firms than non-serial entrepreneurs. Moreover, serial entrepreneurs with greater liquidity and whose firms have relatively similar productivity are more likely to operate these firms concurrently rather than sequentially. We also find that less productive serial entrepreneurs are more likely to switch sectors when establishing new firms, with the choice of sector influenced by considerations of risk diversification, upstream and downstream linkages, and sectoral complementarities. |
| Keywords: | Serial Entrepreneurship; Entrepreneurship; Capital Distortions; Sector Choice |
| JEL: | D22 D24 E22 E44 L25 L26 O11 O14 O16 O40 O53 P25 R12 D21 |
| Date: | 2022–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-721&r= |
| By: | Cândida Ferreira |
| Abstract: | This paper analyses the evolution of the bank non-performance loans to total loans ratio using three categories of explaining variables: bank performance indicators (bank credit to bank deposits ration, bank cost to income ratio, bank net interest margin, bank noninterest income to total income, and bank return on assets), market conditions and financial structure indicators (bank concentration, Lerner index, bank Z-score, bank regulatory to risk-weighted assets, and bank crisis dummy), and economic growth indicator (natural logarithm of real GDP per capita). The paper applies panel fixed effects and dynamic Generalised Method of Moments (GMM) estimates to a panel of 80 countries spread by all Continents, over the period 1999-2017. The results obtained clearly demonstrate that bank performance, bank market conditions, and bank capital regulation are relevant to explain the evolution of non-performance loans, but the promotion of economic growth is always much more important to assure the decrease the levels of non-performing loans, preventing the losses of the banking system as well as potential financial crisis. |
| Keywords: | Bank risk, non-performing loans, bank performance, bank market conditions, panel estimates. |
| JEL: | G21 G15 G32 F39 C33 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02162022&r= |