nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒05‒23
fifteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Trust, social capital, and the bond market benefits of ESG performance By Amiraslani, Hami; Lins, Karl V.; Servaes, Henri; Tamayo, Ane
  2. The banking system and the financing of southern Italian firms By Giorgio Albareto; Michele Cascarano; Stefania De Mitri; Cristina Demma; Roberto Felici; Carlotta Rossi
  3. Disruption and Credit Markets By Bo Becker; Victoria Ivashina
  4. How do Private Equity Fees vary across Public Pensions? By Juliane Begenau; Emil Siriwardane
  5. Can the Government Be an Effective Venture Capital Investor? By Martina Fraschini; Andrea Maino; Luciano Somoza
  6. Corporate Governance, Favoritism and Careers By Marco Pagano; Luca Picariello
  7. On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices By Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
  8. Voluntary Equity, Project Risk, and Capital Requirements By Andreas Haufler; Christoph Lülfesmann
  9. Asymmetric Investment Rates By Hang Bai; Erica X. N. Li; Chen Xue; Lu Zhang
  10. Information chasing versus adverse selection By Pintér, Gábor; Wang, Chaojun; Zou, Junyuan
  11. Sustainable finance: A journey toward ESG and climate risk By Billio, Monica; Costola, Michele; Hristova, Iva; Latino, Carmelo; Pelizzon, Loriana
  12. The New Corporate Governance By Oliver D. Hart; Luigi Zingales
  13. Corporate Finance, Industrial Performance and Environment in Africa: Lessons for Policy By Ekundayo P. Mesagan; Titilope C. Adewuyi; Olugbenga Olaoye
  14. Size discount and size penalty: trading costs in bond markets By Pintér, Gábor; Wang, Chaojun; Zou, Junyuan
  15. Performance feedback and export intensity of Chinese private firms: Moderating roles of institution-related factors By Meitong Dong; Liwen Wang; Defeng Yang; Kevin Zhou

  1. By: Amiraslani, Hami; Lins, Karl V.; Servaes, Henri; Tamayo, Ane
    Abstract: We investigate whether a firm’s social capital and the trust that it engenders are viewed favorably by bondholders. Using firms’ environmental and social (E&S) performance to proxy for social capital, we find no relation between social capital and bond spreads over the period 2006–2019. However, during the 2008–2009 financial crisis, which represents a shock to trust and default risk, high-social-capital firms benefited from lower bond spreads. These effects are stronger for firms with higher expected agency costs of debt and firms whose E&S efforts are more salient. During the crisis, high-social-capital firms were also able to raise more debt, at lower spreads, and for longer maturities. We find no evidence that the governance element of ESG is related to bond spreads. The gap between E&S performance of firms in the bottom and top E&S terciles has narrowed since the financial crisis, especially in the year prior to accessing the bond market.
    Keywords: ESG; CSR; sustainability; social capital; trust; corporate bonds; bond spreads; agency cost of debt; financial crisis; Springer deal
    JEL: G12 G21 G32 M14
    Date: 2022–04–14
  2. By: Giorgio Albareto (Bank of Italy); Michele Cascarano (Bank of Italy); Stefania De Mitri (Bank of Italy); Cristina Demma (Bank of Italy); Roberto Felici (Bank of Italy); Carlotta Rossi (Bank of Italy)
    Abstract: This paper investigates the territorial gap in firms’ access to credit between 2008 and 2019 and describes the functioning of the credit market in the southern regions of Italy. The southern firms are characterized by a higher level of credit risk; all other things being equal, these firms face less favourable credit conditions than others, paying higher interest rates and providing more collateral on loans. Despite this, the dynamics of loans to firms was more marked in the south with respect to the rest of the country, given the support of the southern banks, which increased lending to firms in these regions, especially to small businesses, more than other banks. During the period 2008-2019, the proportion of riskier loans of banks headquartered in the south increased; these banks are characterized by lower quality credit portfolios and lower profitability.
    Keywords: firm credit, banking system, credit conditions territorial gaps, Italy’s southern regions
    JEL: G10 G21 G3 L10
    Date: 2022–04
  3. By: Bo Becker; Victoria Ivashina
    Abstract: We show that over the past half century innovative disruptions were central to understanding corporate defaults. In a given year, industries experiencing abnormally high VC or IPO activity subsequently see higher default rates, higher segment exits by conglomerates, and higher yields on bonds issued by the firms in these industries. Overall, we find that disruption is a broad phenomenon, negatively affecting incumbent firms across the spectrum of age, valuation, and levers, with the exception of very large and low-leverage firms, which confirms our central hypothesis.
    JEL: G12 G30 G32
    Date: 2022–03
  4. By: Juliane Begenau; Emil Siriwardane
    Abstract: We study how investment fees vary within private-capital funds. Net-of-fee return clustering suggests that most funds have two tiers of fees, and we decompose differences across tiers into both management and performance-based fees. Managers of venture capital funds and those in high demand are less likely to use multiple fee schedules. Some investors consistently pay lower fees relative to others within their funds. Investor size, experience, and past performance explain some but not all of this effect, suggesting that unobserved traits like negotiation skill or bargaining power materially impact the fees that investors pay to access private markets.
    JEL: G11 G23 G24 H55
    Date: 2022–03
  5. By: Martina Fraschini (University of Lausanne, HEC; Swiss Finance Institute); Andrea Maino (University of Geneva); Luciano Somoza (University of Lausanne, HEC; Swiss Finance Institute)
    Abstract: In recent years, governments have allocated increasing capital to direct startup funding through Government-sponsored Venture Capital funds (GVC). In this paper, we study the role of GVCs in the venture capital market and their relationship with Private Venture Capitalists (PVC). Using European data, we find that GVCs invest consistently with their policy mandates, favoring specific industries, geographical areas, and firms with high innovation potential, but have lower average performances. These findings indicate that GVCs can identify innovative companies and prioritize positive externalities over profit maximization. We build an asset pricing model with heterogeneous preferences to study the role of GVCs in catalyzing PVC investments. We find that PVCs invest less in startups previously funded by GVCs, in line with empirical evidence. At aggregate level, GVC investments can crowd-in private ones if they focus on startups in VC hubs.
    Keywords: venture capital, public investments, crowd-in, subsidy, industrial policy, patent data, innovation.
    JEL: G24 G11 G18 H54 O30
    Date: 2022–04
  6. By: Marco Pagano (University of Naples Federico II, CSEF, ECGI and EIEF); Luca Picariello (University of Naples 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.
    Date: 2022
  7. By: Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
    Abstract: We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the financial payoff and raise the cost of capital.
    JEL: G14 G32
    Date: 2022–04
  8. By: Andreas Haufler; Christoph Lülfesmann
    Abstract: We introduce a model of the banking sector that formally incorporate a buffer function of capital. Heterogeneous banks choose their portfolio risk, bank size, and capital holdings. Banks voluntarily hold equity when the buffer effect against the risk of default outweighs the cost advantages of debt financing. In the optimum, banks with lower monitoring costs are larger, choose riskier portfolios, and have less equity. Binding capital requirements or levies on bank borrowing are shown to make higher-risk portfolios more attractive. Accounting for banks’ interior capital choices can thus explain why higher capital ratios incentivize banks to undertake riskier projects.
    Keywords: voluntary equity, capital requirements, bank heterogeneity
    JEL: G28 G38 H32
    Date: 2022
  9. By: Hang Bai; Erica X. N. Li; Chen Xue; Lu Zhang
    Abstract: Integrating national accounting with financial accounting, we provide firm-specific estimates of current-cost capital stocks for the entire Compustat universe, as well as an array of estimates of investment flows, economic depreciation rates, and capital and investment price deflators. The firm-level current-cost investment rate distribution is heavily right-skewed, with a small fraction of negative investment rates, 5.51%, but a huge fraction of positive investment rates, 91.64%. Despite a tiny fraction of inactive investment rates, 2.85%, firm-level investment also seems lumpy, featuring a fraction of 32.66% for positive spikes (investment rates higher than 20%). For a typical firm, 39% of total investment is completed within 20% of the sample years.
    JEL: E44 G12
    Date: 2022–04
  10. By: Pintér, Gábor (Bank of England); Wang, Chaojun (The Wharton School); Zou, Junyuan (INSEAD)
    Abstract: Contrary to the prediction of the classic adverse selection theory, a more informed trader could receive better pricing relative to a less informed trader in over‑the‑counter financial markets. Dealers chase informed orders to better position their future quotes and avoid winner’s curse in subsequent trades. When dealers are perfectly competitive and risk averse, their incentive of information chasing dominates their fear of adverse selection. In a more general setting, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection dominates when dealers face differentially informed trades from a given speculator. These two seemingly contrasting predictions are supported by empirical evidence from the UK government bond market.
    Keywords: Information chasing; adverse selection; over-the-counter; price efficiency
    JEL: D82 G14 G18
    Date: 2022–04–08
  11. By: Billio, Monica; Costola, Michele; Hristova, Iva; Latino, Carmelo; Pelizzon, Loriana
    Abstract: The present paper proposes an overview of the existing literature covering several aspects related to environmental, social, and governance (ESG) factors. Specifically, we consider studies describing and evaluating ESG methodologies and those studying the impact of ESG on credit risk, debt and equity costs, or sovereign bonds. We further expand the topic of ESG research by including the strand of the literature focusing on the impact of climate change on financial stability, thus allowing us to also consider the most recent research on the impact of climate change on portfolio management.
    Keywords: environmental,social,and governance factors (ESG),credit risk,debt cost,equity cost,sovereign bonds,portfolio management
    JEL: M14 G24 G11
    Date: 2022
  12. By: Oliver D. Hart; Luigi Zingales
    Abstract: In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. In some cases shareholders are pushing companies to take actions that may reduce market value. It is hard to understand this behavior using the dominant corporate governance paradigm based on shareholder value maximization. We explain how jurisprudence has sustained this criterion in spite of its economic weaknesses. To overcome these weaknesses we propose the criterion of shareholder welfare maximization and argue that it can better explain observed behavior. Finally, we outline how shareholder welfare maximization can be implemented in practice.
    JEL: G3 K22 L21
    Date: 2022–04
  13. By: Ekundayo P. Mesagan (Pan Atlantic University, Lagos, Nigeria.); Titilope C. Adewuyi (University of Lagos, Lagos, Nigeria.); Olugbenga Olaoye (Bells University of Technology, Nigeria)
    Abstract: This study employs the Pool Mean Group framework to investigate the impact of corporate finance and industrial performance on pollution in Africa between 1990 and 2020. The study, which focuses on 36 African nations, found that corporate financing insignificantly enhances environmental quality in the short run, while it significantly worsens the environment in the long run. Also, the result shows that industrial performance exerts a negative but insignificant impact on pollution in both the short- and long-run periods. Lastly, the interaction term between corporate finance and industrial performance has a negative and significant impact on pollution in both periods. With this striking result, the study recommends that efforts should be made to promote the growth of environmentally sound production plants in the continent through the removal of credit facilitation bottlenecks.
    Keywords: Corporate Finance, Industrial Performance, Pollution, Africa
    JEL: G3 L25 O14 Q53
    Date: 2022–01
  14. By: Pintér, Gábor (Bank of England); Wang, Chaojun (The Wharton School); Zou, Junyuan (INSEAD)
    Abstract: We show that larger trades incur lower trading costs in government bond markets (‘size discount’), but costs increase in trade size after controlling for clients’ identities (‘size penalty’). The size discount is driven by the cross‑client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.
    Keywords: Trading costs; trade size; government and corporate bonds; trader identities
    JEL: G12 G14 G24
    Date: 2022–04–08
  15. By: Meitong Dong (HKU - The University of Hong Kong); Liwen Wang (Audencia Business School, Shenzhen Univerisity [Shenzhen]); Defeng Yang (Jinan University [Guangzhou]); Kevin Zhou (HKU - The University of Hong Kong)
    Abstract: Building on the behavioral theory of the firm and institutional view, we examine how performance feedback (i.e., a focal firm's performance relative to its industry peers) affects export intensity and how institution-related factors moderate this relationship. Using a sample of Chinese private manufacturing firms, we find that positive performance feedback lowers export intensity while the relationship between negative performance feedback and export intensity is insignificant. Moreover, outperforming firms are likely to decrease their export intensity even more when they are located in regions of better institutional development or have political connections. Underperforming firms with political connections tend to increase their export intensity. These findings enrich our understanding of the export behavior of emerging market firms.
    Keywords: performance feedback,export intensity,institutional development,political connections,behavioral theory of the firm,institutional view
    Date: 2022

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