nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒05‒16
twelve papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. High-Yield Debt Covenants and Their Real Effects By Falk Bräuning; Victoria Ivashina; Ali Ozdagli
  2. Cross-subsidization of Bad Credit in a Lending Crisis By Nikolaos Artavanis; Brian Jonghwan Lee; Stavros Panageas; Margarita Tsoutsoura
  3. Do Zombies Rise when Interest Rates Fall? A Relationship Banking Model By Fabian Herweg; Maximilian Kähny
  4. Impact of Debt Structure, State Ownership on Business Performance in Energy Enterprises: A Case Study in Vietnam By Hung, Dang Ngoc
  5. Giving zombie firms a second chance: An assessment of the reform of the Portuguese insolvency framework By Ernesto Nieto Carrillo; Carlos Carreira; Paulino Maria Freitas Teixeira
  6. Drivers of Corporate Investment Slowdown in India: A Firm Level Analysis By Pravakar Sahoo; Ashwani Bishnoi
  7. The Role of Venture Capital and Governments in Clean Energy: Lessons from the First Cleantech Bubble By Matthias van den Heuvel; David Popp
  8. Investment and access to external finance in Europe: Does analyst coverage matter? By Sébastien Galanti; Aurélien Leroy; Anne-Gaël Vaubourg
  9. Assessment and analysis of accounting and finance apps in start-ups in Germany: an explorative study By Salvy Goel, Salvy; Berrones-Flemmig, Claudia Nelly
  10. Corporate governance mechanisms and financial reporting quality of commercial banks in Nigeria By Sunday Ogbeide; Henry Ogiugo; Isaac Adesuyi
  11. Applying real options to port infrastructure expansion: the case of a Brazilian port By Pedro Manuel Cortesão Godinho; João Carlos Félix Souza; Pedro Marcelo Amado Garcia da Rocha Torres
  12. Sharing Credit Data While Respecting Privacy—A Digital Platform for Fairer Financing of MSMEs By Duan, Jin-Chuan

  1. By: Falk Bräuning; Victoria Ivashina; Ali Ozdagli
    Abstract: High-yield debt including leveraged loans is characterized by incurrence financial covenants, or “cov-lite” provisions. A traditional loan agreement includes maintenance covenants, which require continuous compliance with the covenant threshold, and their violation shifts the control rights to creditors. 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 the prevalence of incurrence covenants indirectly imposes significant constraints on investments as restricted actions become binding: Similar to the effects associated with the shift of control rights to creditors in traditional loans, the drop in investment under incurrence covenants is large and sudden. The deleveraging and drop in investment and market value associated with such latent violations point to a shock amplification mechanism through contractual restrictions that are at play for a highly levered corporate sector prior to firms filing for bankruptcy and independently of whether they ever do so.
    JEL: G21 G31 G32 G33
    Date: 2022–03
  2. By: Nikolaos Artavanis; Brian Jonghwan Lee; Stavros Panageas; Margarita Tsoutsoura
    Abstract: We study the corporate-loan pricing decisions of a major Greek bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the interest rate and the “breakeven rate” of each loan, as computed by the bank’s own loan-pricing department (in effect, the loan’s marginal cost). We document that low-breakeven-rate (safer) borrowers are charged significant markups, whereas high-breakeven-rate (riskier) borrowers are charged small and sometimes even negative markups. We rationalize this de-facto cross-subsidization of riskier borrowers by safer borrowers through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing.
    JEL: E43 E44 G01 G21 G3
    Date: 2022–03
  3. By: Fabian Herweg; Maximilian Kähny
    Abstract: An entrepreneur chooses a relationship bank or market finance. The advantage of bank finance is that the quality of the entrepreneur’s project is identified early, allowing to liquidate low-quality projects. The loan contract induces an efficient continuation decision if the entrepreneur has sufficient wealth. If the entrepreneur is cash constrained, the loan contract is such that the bank continues inefficient projects, i.e., zombie lending occurs. In the short run - for a given contract - a drop in the market interest rate increases zombification. The bank adapts the contract to this drop in the long run, and zombification diminishes.
    Keywords: evergreening, interest rates, relationship banking, Zombie firms
    JEL: D82 D86 G21 G33
    Date: 2022
  4. By: Hung, Dang Ngoc
    Abstract: This study examines the impact of debt structure and the interaction of state ownership on business performance of energy enterprises in Vietnam's stock exchange. Data in the study were collected in the period 2009-2020 with 665 observations, the estimated results by the GLS regression model show that short-term debt and long-term debt have a negative impact on business performance when measured by ROA and Tobin's Q. In energy enterprises in Vietnam, the state often holds the dominant stock, so in this study, we consider the impact of the interaction margin of state ownership, this study finds that the interaction of state ownership and short-term debt have a positive effect on business performance measured by ROA. In addition, the study also looks into control variables, namely firm size, liquidity ratio and asset structure that have a positive impact on business performance. We provide some recommendations to improve capital structure and business performance: Energy companies need to build an optimal capital structure to maximize business value; Investors can quantify the model to decide whether or not to invest or how much to invest in an energy business; The government needs to look into and consider holding a controlling stake in energy enterprises that are really necessary and bring good business results.
    Date: 2022–03–01
  5. By: Ernesto Nieto Carrillo (Ph.D. Student at Faculty of Economics, University of Coimbra); Carlos Carreira (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics); Paulino Maria Freitas Teixeira (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics)
    Abstract: In most advanced economies productivity growth has been hampered by barriers that allow zombie firms to survive. We examine the effectiveness of institutional reforms in Portugal that were aimed to improve efficiency in insolvency framework. Estimates show that reallocation barriers declined. The reforms appear to have larger and more effective results in zombie recovery than in exit. Firm size plays a major role in tackling zombie-entrenchment. The decline in barriers has also implied a lower distortion in the economy-wide selection process. The new setting seems to be more desirable than forcing zombie exit at all costs.
    Keywords: Insolvency regimes; Zombie firms; Productivity; Reallocation barriers; Firm exit;Restructuring.
    JEL: D24 G32 G33 K22 L25 O47
    Date: 2022–01
  6. By: Pravakar Sahoo; Ashwani Bishnoi (Institute of Economic Growth, Delhi)
    Abstract: Majority of the existing literature has focused on examining the determinants of investment behaviour and the factors responsible for its slowdown at an aggregate level. There have only been a few studies analysing investment behaviour at firm level, and those are confined to the manufacturing sector using static panel models. In this context, we examine the sector specific heterogeneity of investment dynamics in India using firm level investment data spanning the period 2001-19. The study employs dynamic panel models on micro-level data to provide better clarity on the macroeconomic issue of investment slowdown in the country. This paper finds that a variety of factors contributed to the investment decline in India, including slower expansion of profitability and bank credit amounting to the twin balance sheet problem, debt sustainability, higher burden of indirect and corporate taxes, higher policy rates, rising real interest rates and increasing uncertainty related to economic policy.
    Keywords: Corporate Investment, India, Monetary policy, Financial sector, Economic Uncertainty.
    Date: 2021–09
  7. By: Matthias van den Heuvel; David Popp
    Abstract: After a boom and bust cycle in the early 2010s, venture capital (VC) investments are, once again, flowing towards green businesses. In this paper, we use Crunchbase data on 150,000 US startups founded between 2000 and 2020 to better understand why VC initially did not prove successful in funding new clean energy technologies. Both lackluster demand and a lower potential for outsized returns make clean energy firms less attractive to VC than startups in ICT or biotech. However, we find no clear evidence that characteristics such as high-capital intensity or long development timeframe are behind the lack of success of VC in clean energy. In addition, our results show that while public sector investments can help attract VC investment, the ultimate success rate of firms receiving public funding remains small. Thus, stimulating demand will have a greater impact on clean energy innovation than investing in startups that will then struggle through the “valley of death”. Only with demand-side policies in place should governments try to plug funding gaps by targeting clean energy startups with low potential for outsized returns that will continue to find it hard to attract private capital.
    Keywords: venture capital, renewable energy, start-up firms
    JEL: G24 Q40 Q48 Q55
    Date: 2022
  8. By: Sébastien Galanti (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours); Aurélien Leroy (UB - Université de Bordeaux, BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Anne-Gaël Vaubourg (CRIEF - Centre de recherche sur l'intégration économique et financière - Université de Poitiers)
    Abstract: We aim to determine whether analyst coverage improves European firms' access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect framework and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms' debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms' financial conditions
    Keywords: nvestment,debt issuance,share issuance,analyst,coverage
    Date: 2022–03
  9. By: Salvy Goel, Salvy; Berrones-Flemmig, Claudia Nelly
    Abstract: Small and medium-sized enterprises face several challenges mainly related with lack of access to Finance frequently due to a lack of formal Accounting system and financial management, which leads to weaknesses in their internal financial capabilities. Moreover, from the supply side traditional financial institutions have failed to fulfil the needs of SMEs and presently FinTechs have developed innovative ways to increase the financial literacy in SMEs and to facilitate financing for SMEs (Imanbaeva et al., 2017). This study aims to assess and analyze one of these innovative financial instruments in an explorative way: some relevant Accounting and Finance applications present in the market, based on criteria decided by exploring the scientific literature and evaluating it by interviewing Accounting professionals working in start-ups in Germany. The results show that Zoho Books and Xero turned out to be better than the others in the services provided by them and they received the best ratings and feedback. Their best features are their user friendliness, the integrations offered by them, the diversity of the financial reports that they offer and amount of automation they offer to perform the everyday tasks. The most important factor when choosing an Accounting system is assessing the needs and requirements of the business and then to select the software that best suits the needs. Therefore, this research can be also helpful for small and medium business owners who do not have much idea about the financial aspects and need help with choosing the right accounting software for their business, based on the experience and perspectives of the interviewing Accounting professionals. It can act as a guide for them to understand which factors they should take into account while making their decision and the feedback from the participants can help them while choosing among the five software analysed during this research.
    Keywords: SME Finance,Fintech,Accounting and Finance apps,innovative financial instruments,start-ups,Germany
    JEL: M O
    Date: 2022
  10. By: Sunday Ogbeide (Elizade University); Henry Ogiugo (Ajayi Crowther University); Isaac Adesuyi (Elizade University)
    Abstract: This study examined corporate governance mechanisms and financial reporting quality of listed commercial banks in Nigeria. The population of the study consists of all listed commercial banks on the stock exchange as at 31 st December 2018. A sample of nine (9) listed commercial banks were selected and data were collected over the period 2008 to 2018. Descriptive statistics and panel Least Square regression were used for the data analysis. The findings reveal that board size and audit committee were negative and exerted significant impact on financial reporting quality of listed commercial banks while board independence is significant and exerts a positive influence on financial reporting quality of listed commercial banks in Nigeria. Female directorship does not have a significant relationship with financial reporting quality of listed commercial banks in Nigeria. The study therefore recommends that steps should be taken by regulators to stipulate stiffer penalty on firms engaging in earnings smoothing capable of undermining corporate governance ethics and framework for banks in Nigeria as this will serve as deterrent to others and further entrench sanity.
    Keywords: Board Size,Board Independence,Female Directorship,Audit Committee Size,financial Reporting Quality
    Date: 2021–03–30
  11. By: Pedro Manuel Cortesão Godinho (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra); João Carlos Félix Souza (Ph.D., Graduate Program in Applied Computing (PPCA).University of Brasília, Brazil); Pedro Marcelo Amado Garcia da Rocha Torres (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra)
    Abstract: This case study applies Monte Carlo-based real options to analyse the expansion of a port. A stochastic model is defined for the Santarém port, in Brazil, and the optimal moment for expanding the terminal is determined. The application resorts to a common spreadsheet and a simulation add-in, allowing the quantification of both the value of expanding the terminal and the flexibility to determine when to expand. The results allow us to conclude that deterministic cash flow models, based on the expected value, may lead to important biases in projects with capacity constraints. We also conclude that the expansion option may have a high value, which is strongly determined by the initial conditions, and that the expansion thresholds (the values of demand that trigger the expansion) change significantly along the project.
    JEL: C63 G31 R42
    Date: 2021–09
  12. By: Duan, Jin-Chuan (Asian Development Bank Institute)
    Abstract: Lending institutions’ reluctance to lend to MSMEs or to offer them competitive interest rates stems from the relatively costly information acquisition for small loans. The central idea is to bridge the information gap between the demand and the supply side by creating a credit analytics sharing infrastructure through federated learning, which completely respects data privacy. Pooling credit information across multiple lending institutions, particularly rare default events, enables the construction of a more informative credit model for MSMEs, which can then serve as a common good among lenders. The technology also allows for lender-specific models, which in essence share the model’s parameters on the common prediction variables while differing in their respective alternative data fields. The lenders in the MSME space can work like a coopetition and continue to compete with their varying risk appetites, loan rates, and banking services. We use real MSME credit data to demonstrate the feasibility of the sharing technology and to study the impact of the COVID-19 pandemic via a portfolio that we assembled from four hypothetical banks operating in six ASEAN countries.
    Keywords: COVID-19; coopetition; alternative data; federated learning; default
    JEL: C10 C80 G21
    Date: 2021–08

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.
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