nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒04‒25
fourteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Profitability and Leverage as Determinants of Dividend Policy: Evidence of Turkish Financial Firms By Abdullah, Hariem
  2. Political motives of excess leverage in state-owned firms By Oleksandr Talavera; Shuxing Yin; Mao Zhang
  3. Hierarchical political power and the value of cash holdings By Jia Liu; Oleksandr Talavera; Shuxing Yin; Mao Zhang
  4. Transferable Skills? Founders as Venture Capitalists By Paul A. Gompers; Vladimir Mukharlyamov
  5. Endogenous Option Pricing By Andrea Gamba; Alessio Saretto
  6. Presidential Address: Corporate Finance and Reality By John Graham
  7. Saved by the bell? Equity market responses to surprise Covid-19 lockdowns and central bank interventions By Aakriti Mathur; Rajeswari Sengupta; Bhanu Pratap
  8. Calling All Issuers: The Market for Debt Monitoring By Huaizhi Chen; Lauren Cohen; Weiling Liu
  9. Corporate Governance, Favoritism and Careers By Marco Pagano; Luca Picariello
  10. Intermediated Trade and Credit Constraints: The Case of Firm's Imports By Nucci, Francesco; Pietrovito, Filomena; Pozzolo, Alberto Franco
  11. The Financial Performance and Macrofinancial Implications of Large State-Owned Enterprises in Sub-Saharan Africa By Torsten Wezel; Naly Carvalho
  12. COVID-19, Fintech, and the Recovery of Micro, Small, and Medium-sized Enterprises: Evidence from Bangladesh By Hossain, Monzur; Chowdhury, Tahreen Tahrima
  13. Zombie Lending: Theoretical, International and Historical Perspectives By Viral V. Acharya; Matteo Crosignani; Tim Eisert; Sascha Steffen
  14. Working life and human capital investment By Gohl, Niklas; Haan, Peter; Kurz, Elisabeth; Weinhardt, Felix

  1. By: Abdullah, Hariem
    Abstract: The purpose of this study is to investigate the impact of profitability and leverage ratios on the determination of dividend policy for Turkish financial firms listed on Borsa Istanbul. In order to do so, secondary longitudinal data were collected for the listed financial firms from the DataStream database over the period 2008-2020. The financial crisis of 2007-2008 has affected the sector undoubtedly. Thus, it is important to investigate how dividend policy behaves with debt level and level of profitability in the financial sector of developing countries after the well-known financial crisis. The research expects that both profitability and leverage have a significant correlation with the dividend payout ratio. Consistent to the findings of the majority of the prior empirical studies, the results of this study found that both profitability and leverage are negatively associated with dividend payout ratio.
    Keywords: Dividend policy, Profitability, Leverage, financial firms, and Borsa Istanbul.
    JEL: G35 M41
    Date: 2021
  2. By: Oleksandr Talavera (University of Birmingham); Shuxing Yin (University of Sheffield); Mao Zhang (University of St Andrews)
    Abstract: This study explores the political motives of excess leverage in state-owned firms. To measure the excess leverage, we follow Gao et al. (2013) to estimate how state firms would behave if they were non-state firms. Using a panel of Chinese firms, we find that, on average, state firms take excess leverage (i.e., overleveraged) compared to otherwise similar non-state firms. Examining the determinants of such leverage difference, our results suggest that the excess leverage of state-owned firms positively relates to regional unemployment pressure and economic pressure faced by municipal politicians. Such effects are more pronounced in local state-owned firms. Our paper provides evidence that government control leads to significant political influence over the real decisions of firms.
    Keywords: excess leverage, state-owned firms, political motives, unemployment and economic pressure
    JEL: G30 G32 G34
    Date: 2022–03
  3. By: Jia Liu (University of Portsmouth); Oleksandr Talavera (University of Birmingham); Shuxing Yin (University of Sheffield); Mao Zhang (University of St Andrews)
    Abstract: This study examines the relation between hierarchical political power and the value of cash holdings. To model the power structure, we utilize the hierarchical civil service system to distinguish between the holders of high- and low-level political power. We find that directors with high-level political power increase the market value of cash, whereas those with low-level political power have no impact. The effects are stronger in regions where politicians are subject to greater political pressures and in firms experiencing acute agency conflicts. The findings suggest that the multi-faceted nature of political power is of great significance to corporate wealth.
    Keywords: Political power; Political capital; High- and low-ranking political directors; Board heterogeneity; Value of cash holdings
    JEL: G30 G32 P16
    Date: 2022–03
  4. By: Paul A. Gompers; Vladimir Mukharlyamov
    Abstract: In this paper we explore whether or not the experience as a founder of a venture capital-backed startup influences the performance of founders who become venture capitalists (VCs). We find that nearly 7% of VCs were previously founders of a venture-backed startup. Having a successful exit and being male and white increase the probability that a founder transitions into a venture capital career. Successful founder-VCs have investment success rates that are 6.5 percentage points higher than professional VCs while unsuccessful founder-VCs have investment success rates that are 4 percentage points lower than professional VCs. While successful founder-VCs do get higher quality deal flow than professional or unsuccessful founder-VCs, observably higher deal quality does not explain the entire difference in performance. Using an instrumental variables approach to separate unobservable deal quality from value-add, we find that the outperformance of successful founder-VCs is consistent with them adding more value post-investment.
    JEL: G02 G24 G30 L14 L20
    Date: 2022–04
  5. By: Andrea Gamba; Alessio Saretto
    Abstract: We show that a structural model of firm decisions can produce very flexible implied volatility surfaces: upward and downward sloping, u-shaped. A calibrated version of the model is able to match many unconditional financial characteristics of the average option-able stock, and can help explain how, contrary to simple economic intuition, more valuable growth and contraction options are associated with a more negatively sloped implied volatility curve (i.e., a more negatively skewed implied distribution).
    Keywords: option pricing; risk-neutral skewness; growth options; leverage; investments
    JEL: G12 G32
    Date: 2022–03–24
  6. By: John Graham
    Abstract: This paper conducts surveys that document CFO perspectives on corporate planning, corporate investment, capital structure, payout, and the goal of the firm. Current policy choices are compared to CFO survey data from two decades prior, which allows me to identify decision-making themes that are common across policies and through time. These common elements of real-world corporate finance indicate that companies make decisions based on internal forecasts that are miscalibrated and thought to be reliable only two years ahead; use decision rules that are conservative, sticky, simple, and that attempt to market time; and, emphasize corporate objectives that increasingly focus on stakeholders and revenues. These themes can guide and discipline academic models and tests, with the aim of better explaining outcomes. A model of satisficing decision-making aligns with many of these practice-of-finance characteristics: optimization is difficult in a complex fast-changing world, so managers use simple rules to make incremental improvements and they stick with rules that have worked well enough in the past. Non-behavioral models with costly biases can also account for some of the themes. Implications and avenues for future research are discussed
    JEL: A0 G30 G31 G32 G35 G40
    Date: 2022–03
  7. By: Aakriti Mathur (The Graduate Institute of International and Development Studies); Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Bhanu Pratap (Reserve Bank of India)
    Abstract: Negative equity market reactions at the onset of the Covid-19 crisis raised concerns about the vulnerabilities in non-financial firms, requiring swift actions by central banks to prevent system-wide stresses. We investigate the Indian context, where the announcement of a surprise, nationwide lockdown in March 2020, was followed by the announcement of an unanticipated policy package by the central bank a few days later. Using natural language processing on quarterly earnings call reports, we construct a firm-specific measure of concern about the pandemic for a set of Indian non-financial firms. We find that firms that were exposed to the pandemic in early 2020 had worse stock market performance when the lockdown was announced. These results are explained by the implications of pandemic-related uncertainty for the future cash flows of these firms. The central bank's policy package seemed to have reversed the impact of the lockdown announcement in the short-term.
    Keywords: Covid-19, event study, earnings calls, firm performance, uncertainty, central bank policies
    JEL: G14 G18 G32 E58 L25 D8
    Date: 2022–03
  8. By: Huaizhi Chen; Lauren Cohen; Weiling Liu
    Abstract: A substantial fraction of local governments refinance their long-term debt with significant delays – resulting in sizable losses. Using data from 2001 to 2018, we estimate that U.S. municipals lost over $31 billion from this delayed refinancing, whereas the entire U.S. corporate sector, facing the same low interest-rate environment, lost only a comparatively modest $1.4 billion. We present evidence that these delays are related to gaps in localized debt monitoring. For instance, when a bond’s call option unlocks in a month that is the fiscal year-end of a local government – a particularly busy time for finance departments – the decision to call is delayed significantly longer. A significantly longer delay also occurs when a municipality is faced with a wave of calls all due at once. These effects are magnified in smaller municipalities, with fewer finance staff. In addition, the market for outside monitoring (e.g., underwriters), is a fractured one. It is characterized by extreme stickiness: 87% of a municipality’s bonds are issued with the same underwriter over our sample period. Moreover, the usage of a less locally-focused underwriter is associated with significantly greater delays.
    JEL: G18 G21 G24 G28 G32 G38 H7 H74
    Date: 2022–02
  9. By: Marco Pagano (University of Naples Federico II, CSEF, ECGI and EIEF.); Luca Picariello (Università di Napoli Federico II and CSEF.)
    Abstract: Careers are often shaped by favoritism, even though this undermines the performance of firms. When controlling shareholders weigh the efficiency costs of favoritism against its private benefits, the quality of corporate governance enhances meritocratic promotions and so encourages workers skill acquisition. The impact of labor market competition, however, is ambiguous: by raising wages upon promotion, it fosters the supply of skilled labor but lowers the demand for it. With endogenous skill acquisition, there are multiple equilibria, and social welfare increases with the share of meritocratic firms. This brings out a new efficiency rationale for enhancing the quality of corporate governance.
    Keywords: corporate governance, careers, favoritism, merit, job selection, skill development.
    JEL: D21 D23 M50 M51
    Date: 2022–04–19
  10. By: Nucci, Francesco; Pietrovito, Filomena; Pozzolo, Alberto Franco
    Abstract: Growing evidence suggests that a large share of international trade transactions are made through intermediaries and that whether firms use them or not depends on different factors. The aim of this paper is to empirically investigate if credit constraints introduce a degree of difference among firms in their mode of importing. Building on the intuition provided by a simple theoretical framework, we use firm-level data from 66 developing and developed countries to test the possible links between credit constraints and reliance on import intermediaries. Our results show that indeed credit-constrained firms exhibit a higher probability of importing their inputs using an intermediary, while unconstrained firms are more likely to import directly. Our results also establish that the impact of credit constraints on the probability of indirect importing is amplified for firms with a higher distance from their international sourcing network. Moreover, if firms face other types of frictions to import, then the probability that credit-constrained firms rely on intermediaries is estimated to be higher. Remarkably, credit rationing affects the probability of indirect importing no matter what the mode of exporting is.
    Keywords: Firms' Import Mode, Trade Intermediaries, Financial Constraints
    JEL: F10 F14 F36 G20
    Date: 2022–04–11
  11. By: Torsten Wezel; Naly Carvalho
    Abstract: Using a newly-compiled dataset of state-owned enterprises in Sub-Saharan Africa, we present aggregate information about profitability, liquidity and leverage. We find that 40 percent of the close to 300 surveyed SOEs are unprofitable, while larger firms also tend to be illiquid and overleveraged. In cross-sectional regressions we find that SOE debt stock sustainability is impacted by firms’ profitability and liquidity, while macroeconomic factors cannot be shown to matter, expect for some governance variables. Based on these findings and citing country examples, we also illustrate that weak SOE performance may have a macrofinancial impact affecting bank soundness through delinquent loan exposures.
    Keywords: Firm Performance, State-Owned Enterprises, Sub-Saharan Africa
    Date: 2022–03–18
  12. By: Hossain, Monzur (Asian Development Bank Institute); Chowdhury, Tahreen Tahrima (Asian Development Bank Institute)
    Abstract: We assess the impact of the COVID-19 pandemic on micro, small, and medium-sized enterprises (MSMEs) and the role of fintech, in particular, mobile financial services (MFS), in their recovery from COVID-induced losses. We use data from a survey of 216 MSMEs from Bangladesh Small and Cottage Industries Corporation industrial estates in Bangladesh during January to March 2021. Our results suggest that firms have been recovering gradually after the withdrawal from lockdown in June 2020. So far, 80% of production of the firms compared with pre-COVID levels had recovered by the end of December 2020. We use instrumental variable regression to assess the impact of the use of MFS on firms’ production, sales, and profit for three periods: lockdown (March–May 2020), limited lockdown (June–September 2020) and the reopening period (October–December 2020). We find significant and positive impact from the use of MFS on the production, sales, and profit of firms during this pandemic. The results indicate that the use of digital finance facilitates firms’ production through ensuring a stable supply of raw materials and sales that have prompted them to recover faster. However, the concern is that only about 31% of our sample firms use MFS for their businesses and an even lower proportion of firms are accustomed to using an online platform. Therefore, more incentives and supportive policies are needed to motivate MSMEs to use digital finance and online platforms to stay active in operations, particularly during the pandemic.
    Keywords: fintech; MSMEs; Bangladesh Small and Cottage Industries Corporation Estates; BSCIC; COVID-19; firm recovery; Bangladesh
    JEL: D20 D22 G10 G20
    Date: 2022–04–01
  13. By: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Sascha Steffen
    Abstract: This paper surveys the theory on zombie lending incentives and the consequences of zombie lending for the real economy. It also offers a historical perspective by reviewing the growing empirical evidence on zombie lending along three dimensions: (i) the role of under-capitalized banks, (ii) effects on zombie firms, and (iii) spillovers and distortions for non-zombie firms. We then provide an overview of how zombie lending can be attenuated. Finally, we use a sample of U.S. publicly listed firms to compare various measures proposed in the literature to classify firms as "zombies." We identify definitions of zombie firms that are adequate to investigate economic inefficiency in the form of real sector competitive distortions of zombie lending. We find that only definitions that are based on interest rate subsidies are able to detect these spillovers and thereby provide evidence in support of credit misallocation.
    JEL: E44 E58 G01 G2 G3
    Date: 2022–04
  14. By: Gohl, Niklas; Haan, Peter; Kurz, Elisabeth; Weinhardt, Felix
    Abstract: This paper provides a novel test of a key prediction of human capital theory that educational investment decisions depend on the length of the pay-off period. We obtain causal estimates by leveraging a unique reform of the German public pension system that, across a sharp date-of-birth cutoff, increased the early retirement age by three years. Using RDD, DiD, and IV estimation strategies on census and householdpanel data, we show that this reform causally increased educational investment in the form of on-thejob training. In contrast, non-job related training before retirement was not affected. We explore heterogeneity and additional outcomes.
    Keywords: human capital; retirement policies; RDD
    JEL: J24 J26 H21
    Date: 2021–03–19

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