nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒09‒05
thirteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Distressed firms, zombie firms and zombie lending: a taxonomy By Laura Álvarez; Miguel García-Posada; Sergio Mayordomo
  2. One-factor model of liquidity risk By Osadchiy, Maksim
  3. Multiple large shareholder coalitions, institutional ownership and investment decisions: Evidence from cross-border deals in Latin America By Carlos Pombo; Cristian Pinto-Gutierrez; Mauricio Jara-Betín
  4. Valuation of European firms during the Russia-Ukraine war By Bougias, Alexandros; Episcopos, Athanasios; Leledakis, George N.
  5. Mis-allocation within firms: internal finance and international trade By Sebastian Doerr; Dalia Marin; Davide Suverato; Thierry Verdier
  6. Fresh start policies and small business activity: evidence from a natural experiment By Marco Celentani; Miguel García-Posada; Fernando Gómez Pomar
  7. The Impact of Local Heat Extremes on the Performance of Dairy Processing Firms in Europe By Dalhaus, Tobias; Zhang, Yujie
  8. The tragedy of the common holdings: Coordination strategies and product market competition By Neus, Werner; Stadler, Manfred
  9. Why is credit riskier in the South? By Luca Casolaro; Marco Gallo; Iconio Garrí
  10. Macroeconomic Effects of Dividend Taxation with Investment Credit Limits By Matteo Ghilardi; Roy Zilberman
  11. Stress tests and capital requirement disclosures: do they impact banks' lending and risk-taking decisions? By Paul Konietschke; Steven Ongena; Aurea Ponte Marques
  12. Did the COVID-19 Pandemic Create More Zombie Firms in Japan? By Gee Hee HONG; ITO Arata; NGUYEN Thi Ngoc Anh; SAITO Yukiko
  13. The Zombification of the Economy? Assessing the Effectiveness of French Government Support during Covid-19 Lockdown By Mattia Guerini; Lionel Nesta; Xavier Ragot; Stefano Schiavo

  1. By: Laura Álvarez (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: This papers develops a taxonomy of financially distressed and zombie firms using a rich dataset that combines detailed firm-level and bank-firm level information in Spain. A distressed firm exhibits both cash-flow and balance-sheet insolvency whereas a zombie firm is a distressed company that has received new credit. We carry out several analyses to test the validity of these definitions. For instance, we find that being distressed is negatively correlated with the probability of receiving new credit. However, the main bank of a distressed firm is more reluctant to restrict the supply of credit to such firm than a bank with no previous exposure to the company, which may reflect the incentives of the former to engage in loan evergreening. This financial support contributes to keeping zombie firms afloat for a longer period than distressed firms. Moreover, the contraction in capital, employment and sales is much larger in distressed firms than in zombie firms.
    Keywords: taxonomy of firms, distressed firms, zombie firms, credit supply, loan evergreening, real effects
    JEL: G21 G32 G33 L25
    Date: 2022–05
  2. By: Osadchiy, Maksim
    Abstract: Credit and liquidity risks at the bank level depend on idiosyncratic and systematic (market) risks at the firm level. Portfolio effect transforms idiosyncratic risk into expected factor and leaves only systematic risk. Dependence only on market risk allows evaluating credit and liquidity risk using one-factor models. Since market risk is common to both credit risk and liquidity risk, it is useful to evaluate their joint distribution in a closed form. The one-factor Vasicek model was designed to evaluate credit risk – the probability distribution of the portfolio loss. The one-factor model proposed in the paper is designed to evaluate liquidity risk. Combination of credit risk and liquidity risk models is used to evaluate the joint distribution of credit and liquidity risks.
    Keywords: liquidity risk; credit risk; Vasicek model; barrier option; IRB
    JEL: G21 G32 G33
    Date: 2022–07–24
  3. By: Carlos Pombo; Cristian Pinto-Gutierrez; Mauricio Jara-Betín
    Abstract: This paper examines the relationship between multiple large shareholder coalitions and the probability of completing a cross-border merger and acquisitions (M&As). Using different power distribution indicators based on Shapley-Shubik values for cooperative games for a sample of acquirers' firms from Latin America, our results suggest that a higher likelihood of coalitions among large shareholders increases the probability of completing a cross-border deal. This relationship is more pronounced in acquirer firms with more institutional investors and ownership stakes. We also find that multiple large shareholder coalitions are positively associated with the long-term operating performance of an acquirer firm involved in a cross-border deal. As a result, colluding blockholders in acquirer firms are more prone to attempt risky cross-border acquisitions. However, when they do, the acquisitions tend to be value-enhancing in the long term.
    Keywords: Blockholders, coalitions, Power Indices, Cross-border deals, institutional ownership, Latin America
    JEL: G32 G34
    Date: 2022–08–04
  4. By: Bougias, Alexandros; Episcopos, Athanasios; Leledakis, George N.
    Abstract: We infer the asset value dynamics of European firms during the Russia-Ukraine war via the structural model of Merton (1974). Using high-frequency stock price data, we find that the war led to lower corporate security prices and higher asset volatility, eventually shifting asset values closer to the default region. On average, the balance sheet of European firms is expected to shrink by 2.05% and their 1-year default probability to increase from 0.32% to 2.12%. Regression analysis on asset and equity returns as well as default probability changes suggests that these effects are stronger for firms with large revenue exposure to Russia.
    Keywords: European firms; Merton model; Russia-Ukraine war; Asset returns; Default risk
    JEL: G12 G14 G32
    Date: 2022–07–16
  5. By: Sebastian Doerr; Dalia Marin; Davide Suverato; Thierry Verdier
    Abstract: This paper develops a novel theory of capital mis-allocation within firms that stems from managers' empire building and informational frictions within the organization. Introducing an internal capital market into a two-factor model of multi-segment firms, we show that competition imposes discipline on managers and reduces capital mis-allocation across divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters (a new fact we establish). We then exploit the China shock as an exogenous shock to competition to test the model's predictions with data on US companies. Results show that tougher competition significantly reduces managers' over-reporting of costs and improves the allocation of capital within firms.
    Keywords: multi-product firms, trade and organisation, internal capital markets, conglomerate discount, China shock
    JEL: F12 G30 L22 D23
    Date: 2022–07
  6. By: Marco Celentani (Universidad Carlos III); Miguel García-Posada (Banco de España); Fernando Gómez Pomar (Universitat Pompeu Fabra)
    Abstract: There is no consensus in the academic literature on whether personal bankruptcy laws should be creditor-friendly or debtor-friendly in order to promote entrepreneurship and small business activity. This paper contributes to that literature by analyzing the effect of the introduction of a fresh start policy in Spain in 2015 on the performance of micro-firms as a natural experiment, using Spanish non-micro firms and Portuguese firms as control groups. We find that the reform substantially increased both the probability of filing for bankruptcy by Spanish micro-firms in financial distress (arguably to seek discharge of part of the firm owner’s debt) and the probability of these firms exiting the market, as the fresh start policy requires the liquidation of the debtor’s non-exempt assets. In addition, the reform increased investment and turnover in micro-firms but had no effect on their employment. Finally, the reform also promoted the creation of new micro-firms, especially those involved in innovation activities and in sectors with high productivity.
    Keywords: personal bankruptcy, fresh start, micro-firms, entrepreneurship
    JEL: K35 G33 L25 L26
    Date: 2022–03
  7. By: Dalhaus, Tobias; Zhang, Yujie
    Keywords: Risk and Uncertainty, Agricultural Finance, Environmental Economics and Policy
    Date: 2022–08
  8. By: Neus, Werner; Stadler, Manfred
    Abstract: We study quantity and price competition in heterogeneous triopoly markets where two firms are commonly owned by institutional shareholders, whereas the third firm is owned by independent shareholders. With such a mixed ownership structure, the common owners have an incentive to coordinate their firms' behavior. If direct coordination of the operational decisions is prevented by antitrust authorities, delegation to managers enables indirect coordination via the designs of the manager compensation contracts. Compared to direct owner collusion, this more sophisticated type of indirect collusion leads to a lower loss of social welfare in the mode of quantity competition, but to a higher loss of welfare in the mode of price competition. In general, owner coordination via the management compensation contracts is detrimental to welfare: the tragedy of common holdings.
    Keywords: Manager compensation,common holdings,shareholder coordination
    JEL: G32 L22 M52
    Date: 2022
  9. By: Luca Casolaro (Bank of Italy); Marco Gallo (Bank of Italy); Iconio Garrí (Bank of Italy)
    Abstract: This paper investigates the determinants of the territorial divides in the riskiness of loans to firms. In the period 2006-19, the South of Italy exhibited consistently worse credit quality than the Centre-North, with a wider gap during the recession that followed the 2011 sovereign debt crisis. Credit demand and supply factors explain only forty percent of this difference, while one third is due to different trends in economic activity in the two areas. The residual gap appears to be attributable to external factors in Southern Italy (organized crime, an inefficient judicial system and a lack of social capital), whose negative externalities are greater in periods of more intense crisis and affect mainly smaller and riskier firms.
    Keywords: credit quality, geographical disparities
    JEL: G21 R19
    Date: 2022–06
  10. By: Matteo Ghilardi; Roy Zilberman
    Abstract: We analyze the effects of dividend taxation in a general equilibrium business cycle model with an occasionally-binding investment credit limit. Permanent dividend tax reforms distort capital investment decisions in the binding long-run equilibrium, but are neutral otherwise. Temporary unexpected tax cuts stimulate shortterm real activity in the credit-constrained economy, yet produce contractionary macroeconomic outcomes in the slack regime. The occasionally-binding constraint reconciles the `traditional' and `new' views of dividend taxation, and highlights the importance of measuring the firm's initial borrowing position before enacting tax reforms. Finally, permanently lower dividend taxes dampen financial business cycles, and help to explain macroeconomic asymmetries.
    Keywords: Dividend Taxation; Occasionally-Binding Borrowing Constraints; Investment; Business Cycles.; borrowing position; tax relief; dividend distribution; dividend tax rate; dividend tax adjustment; tax environment; benchmark system; dividend tax shock; dividend tax cut; tax adjustment; dividend tax system; Dividend tax; Credit; Corporate income tax; Collateral; Stocks
    Date: 2022–07–01
  11. By: Paul Konietschke (European Central Bank (ECB)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Aurea Ponte Marques (European Central Bank (ECB))
    Abstract: How do banks respond to changes in capital requirements as a result of the stress tests? Does the disclosure of stress test results matter? To answer these questions, we study the impact of European stress tests on banks' lending, their corresponding risk-taking, the ensuing effect on their profitability and the respective publication effect. Exploiting the centralised European stress tests in conjunction with two unique confidential databases containing (i) stress test information for the 2016 and 2018 exercises covering a total of 93 and 87 banks, respectively; and (ii) quarterly supervisory information on approximately 1,000 banks (stress-tested and non-tested), allow us to implement a dynamic difference-in-differences strategy for a comparable sample of banks. We find that banks participating in the stress tests reallocate credit away from riskier borrowers and towards safer ones in the household sector, making them in general safer but also less profitable. This is especially the case for the set of banks part of the Supervisory Review and Evaluation Process with undisclosed stress tests, which were also not disclosing their Pillar 2 Requirements voluntarily. Our results confirm that the publication of capital requirements can have a disciplinary effect since banks publishing their requirements tend to have more robust capital ratios, which improves market discipline and financial stability.
    Keywords: Stress-testing, Credit supply, Profitability, Financial stability, Market discipline
    JEL: E51 E58 G21 G28
    Date: 2022–08
  12. By: Gee Hee HONG; ITO Arata; NGUYEN Thi Ngoc Anh; SAITO Yukiko
    Abstract: The COVID-19 pandemic constituted a massive shock to the Japanese economy, as in other countries, posing a significant threat to the business continuity of firms. Bankruptcy rates remain low, partly thanks to large government support, but it is unclear whether the pandemic worsened business dynamism and generated more zombie firms in Japan. In this paper, using firm-level balance sheet and exit information, we find that firm exit rates declined in general, including firms with weak balance sheets, suggesting that the cleansing mechanism, whereby a less productive firm exits to allow for a more productive firm to enter, weakened during the pandemic. Overall firm borrowing also increased during the pandemic, with particular increases in long-term borrowing. The share of zombie firms rose especially in the manufacturing sector.
    Date: 2022–08
  13. By: Mattia Guerini; Lionel Nesta; Xavier Ragot; Stefano Schiavo
    Abstract: This paper evaluates the risk of zombification of the French economy during the sanitary crisis, as a result of the unconditional financial support provided to firms by public authorities. We develop a simple theoretical framework based on a partial-equilibrium model to simulate the liquidity and solvency stress faced by a large panel of French firms and assess the impact of government support measures. Simulation results suggest that those policies helped healthy but illiquid firms to withstand the shock caused by the pandemic. Moreover, the analysis finds no evidence of a “zombification effect”, as government support has not disproportionately benefited less productive companies.
    Keywords: Covid-19, zombie firms, job-retention, schemes, microsimulation, policy evaluation
    JEL: H12 H32 J38 G33 L20
    Date: 2022

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