nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒10‒24
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Capital Controls, Corporate Debt and Real Effects By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  2. Corporate Tax Shields and Capital Structure: Levelling the Playing Field in Debt vs Equity Finance By Cao, Yifei; Whyte, Kemar
  3. EBITDA Add-backs in Debt Contracting: A Step Too Far? By Miguel Faria-e-Castro; Radhakrishnan Gopalan; Avantika Pal; Juan M. Sanchez; Vijay Yerramilli
  4. Racial Diversity in Private Capital Fundraising By Johan Cassel; Josh Lerner; Emmanuel Yimfor
  5. Debt Overhang and the Retail Apocalypse By Ricardo Correa; Jack Liebersohn; Martin Sicilian
  6. "Structural Equation Modelling Approach to Evaluating Capital Budgeting Factors in Oman " By Stephen Aro-Gordon
  7. Movables as Collateral and Corporate Credit: Loan-Level Evidence from Legal Reforms across Europe By Steven Ongena; Walid Saffar; Yuan Sun; Lai Wei
  8. Agency Conflicts, Dividend Payments, and Ownership Concentration in Comparison of Shariah and Non-Shariah Compliant Listed Companies By Azilawati Banchit
  9. Financing gaps of companies during the Covid-19 pandemic By Demary, Markus; Hagenberg, Anna-Maria; Zdzralek, Jonas
  10. Female Entrepreneurship, Financial Frictions and Capital Misallocation in the US By Marta Morazzoni; Andrea Sy

  1. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.
    Keywords: capital controls, corporate FX-debt, real effects, macroprudential, capital inflows
    JEL: F3 F38 F4 F6 G01 G15 G21 G28
    Date: 2022–04
  2. By: Cao, Yifei; Whyte, Kemar
    Abstract: A common feature within most corporate income tax systems is that the cost of debt is deductible as an expenditure when calculating taxable profits. An unintended consequence of this tax distortion is the creation of under-capitalized firms - raising default risk in the process. Using a difference-in-differences approach, this paper shows that a reduction in tax discrimination between debt and equity finance leads to better capitalized banks. The paper exploits the exogenous variation in the tax treatment of debt and equity created by the introduction of an Allowance for Corporate Equity (ACE) system in Italy, to identify whether an ACE positively impacts banks' capital structure. The results demonstrate that a move to an unbiased corporate tax environment increases bank capital ratios, driven by an increase in equity rather than a reduction in lending activities. The change also leads to a reduction in risk taking for ex-ante low capitalized banks. Overall, these results suggest that the ACE could be a valuable policy instrument for prudential bank regulators.
    Keywords: Bank capital structure, Banking regulation, Tax shields, Banking stability
    JEL: G21 G28 G32 H25
    Date: 2022–10
  3. By: Miguel Faria-e-Castro; Radhakrishnan Gopalan; Avantika Pal; Juan M. Sanchez; Vijay Yerramilli
    Abstract: Financial covenants in syndicated loan agreements often rely on definitions of EBITDA that deviate from the GAAP definition. We document the increased usage of non-GAAP addbacks to EBITDA in recent times. Using the 2013 Interagency Guidance on Leveraged Lending, which we argue led to an exogenous increase in non-GAAP EBITDA addbacks, we show that these addbacks increase the likelihood of loan delinquency and default, and also increase the likelihood of the borrower experiencing a ratings downgrade. Greater use of non-GAAP EBITDA addbacks also makes it more likely that lead arrangers lower their loan share exposures through secondary market sales. Our results highlight that covenants based on customized measures of EBITDA hurt loan performance by worsening lead arrangers’ incentives to monitor borrowers and by hampering their ability to take timely corrective actions.
    Keywords: syndicated loans; credit agreements; financial covenants; EBITDA; add-backs; GAAP; leveraged lending guidance; borrower performance; loan performance; lead arranger; lender monitoring; loan sales
    JEL: G21 G23 G28 G32 G34
    Date: 2022–09–22
  4. By: Johan Cassel; Josh Lerner; Emmanuel Yimfor
    Abstract: Black- and Hispanic-owned funds control a very modest share of assets in the private capital industry. We find that the sensitivity of follow-on fundraising to fund performance is greater for minority-owned groups, particularly for underperforming groups. We find little support for a number of explanations for these patterns: that minority fund valuations are overstated, that minority funds encounter difficulties in hiring personnel, or that deploying capital is more difficult for these funds. We do find that the ability of minority groups to raise capital increases during periods of high racial awareness and when the chief investment officer of local public pension plans and endowments are minorities. Together, the results support the hypothesis that the modest representation of Black and Hispanic-owned firms in private capital stems at least partially from the nature of investor demand, rather than the supply of fund managers.
    JEL: G32 G34
    Date: 2022–09
  5. By: Ricardo Correa; Jack Liebersohn; Martin Sicilian
    Abstract: Debt overhang is central for theories of capital structure, yet credible empirical estimates of its effects remain elusive. We study the consequences and mechanisms of debt overhang using exogenous changes in the leverage of commercial retail properties. Identification comes from changes in property values occurring after pre-determined debt rollover dates. We show that debt reduces profitability by impairing property owners' response to negative shocks, reducing the business activity of their remaining retail tenants. For the median property, a 10 percentage point leverage increase causes 22% lower employment, mostly in large retail stores, and overall 15% lower operating income.
    Keywords: commercial real estate; debt overhang; capital structure; commercial mortgage-backed securities; retail properties
    JEL: G21 G32 L81 R33
    Date: 2022–08
  6. By: Stephen Aro-Gordon (Business and Accounting, Muscat College, Bousher Street, Muscat, Sultanate of Oman Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: "Objective - This study aims to critically evaluate capital budgeting factors in Oman's manufacturing sector using the structural equation modelling (SEM) approach. Methodology – One hundred and twelve managers participated in the pilot survey conducted in different parts of Muscat, Oman, from September 2020 to January 2021. The managers responded to questions set on a 5-Likert scale bordering on aspects of managerial and organisational attributes, the rationale for selecting specific capital budgeting techniques, the impediments to the use of advanced capital budgeting techniques (ACBTs), and the traction of non-financial, environmental, social, and governmental (ESG) factors. IBM SPSS v.23 and analysis of moment structure (AMOS) v.20, descriptive analysis, correlation, and multiple regressions were used. SEM was applied to determine the strength of the relationship between the latent capital budgeting variables tested in the model. Findings – The results show that the model has an acceptable fit that meets the recommended values. Specifically, the use of advanced capital budgeting methods (ACBMs) relative to financial and non-financial factors in the capital investment decision model is the most influencing path in this SEM model; The rest of the observed relationships are insignificant at a 5% significance level. Novelty – Using relatively more advanced capital budgeting approaches such as real options could significantly impact financial and non-financial factors, thereby opening the prospects for more integrated project appraisal approaches. Cash flow, net present value (NPV), environmental, social, and governance (ESG) considerations, top management role, and clarity of business policy are among the determinants of sustainable capital budgeting. This is perhaps the first study that has applied the SEM approach to generating more insights into capital budgeting factors than previous studies emphasizing the Omani non-oil sector. Type of Paper - Empirical"
    Keywords: Advanced capital budgeting methods (ACBMs); Confirmatory factor analysis; Exploratory factor analysis; Investment decisions; Oman, Real options; Structural equation modelling.
    JEL: G11 G31
    Date: 2022–09–30
  7. By: Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Walid Saffar (Hong Kong Polytechnic University - School of Accounting and Finance); Yuan Sun (Hong Kong Polytechnic University - School of Accounting and Finance); Lai Wei (Lingnan University - Department of Finance and Insurance)
    Abstract: Does pledging movables as collateral alter corporate borrowing? To answer this question, we study the effect of collateral law reforms on syndicated bank loans granted across nine European countries that facilitated pledging movables between 1995 and 2019, comparing them to nineteen countries that did not. We find that although the reforms have enabled firms to issue more secured loans, the average cost of the loans and the number of covenants has also increased. Banks may demand more to compensate for both the potential wealth redistribution induced by newly issued secured credit and the extra monitoring involved to mitigate concerns about using movables as collateral.
    Keywords: Cost of Debt, Collateral Laws, Access to Credit
    JEL: G30 G20
    Date: 2022–09
  8. By: Azilawati Banchit (Universiti Teknologi MARA, Malaysia Author-2-Name: Dayang Ernie Nurfarah'ain Awang Ahmad Author-2-Workplace-Name: Universiti Teknologi MARA, Malaysia Author-3-Name: Aiza Johari Author-3-Workplace-Name: Academy of Language Studies, Universiti Teknologi MARA, Sarawak Branch, Kampus Samarahan, 94300 Sarawak Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: " Objective - The study analyzes the agency cost, dividend payments, and ownership concentration compared to Shariah and non-Shariah listed companies. Furthermore, this paper also seeks to examine the efficiency of managers in generating and utilising revenues to pay for operating expenses by comparing shariah and non-shariah compliant companies in determining any occurrences of agency conflicts. Methodology/Technique - The sampling data were extracted from the Thomson Refinitiv Eikon Database for 5 years, from 2016 until 2020, for 567 Malaysian listed companies with a total of 2835 observations. The research implemented a One-way analysis of variance (ANOVA) to analyse the data. Findings - ANOVA tests have shown that both Shariah and non-Shariah compliant companies pay dividends to their shareholders on average between 29 percent to 35 percent on returns. Interestingly, the decisions to pay the shareholders show that the shariah-compliant companies are more likely to pay out dividends than their non-shariah counterparts. Revenue generation is also found to be higher by 62 percent. Shariah-compliant companies demonstrate statistically significant higher dividends with better asset usage or lower agency conflicts in Malaysia. Novelty - This paper is novel as it provides a thorough baseline analysis of the significant difference in agency conflicts, using both proxies, which are the dividend payments and the efficiency ratios, taking into consideration all the industries of the Shariah and non-Shariah listed companies in Malaysia. Type of Paper - Empirical."
    Keywords: Agency conflicts; Shariah and non-shariah public listed companies; dividend and asset utilisation ratio; concentrated ownerships
    JEL: C87 G10 G32 G35
    Date: 2022–09–30
  9. By: Demary, Markus; Hagenberg, Anna-Maria; Zdzralek, Jonas
    Abstract: For firms' business and investment decisions their access to finance is a critical determinant. In times when access to finance becomes tight, corporations face either higher capital costs or they have to postpone their investment decisions when credit lines are not prolongated. Since business investment is a prerequisite to spur economic growth, access to finance is a critical variable in business cycle stabilization. Therefore, central banks take a close look at the financing conditions of companies, and they have to loosen monetary policy when access to finance becomes tighter. In contrast to the US, where firms rely to a great degree on capital market financing, euro area firms are dominantly funded by banks. For our empirical analysis we use data from the Survey of Access to Finance of Small and Medium-sized Enterprises (SAFE) from the ECB. SAFE is a semi-annual survey and it covers the relevant data on financing conditions from the viewpoint of euro area firms with a focus on SMEs. The first wave started in the first half of 2009. Regression analyses with only three macroeconomic variables (yield on sovereign bonds, GDP growth and unemployment rate) on the percentage of vulnerable firms yield the result of a strong positive correlation with long-term interest rates. This effect is reduced when adding access to finance or the change in the external financing gap to the equation, which are also positively correlated to the vulnerability of SMEs. At the same time, the vulnerability of companies is negatively correlated with GDP growth indicating that in times of economic crisis, the vulnerability is higher than in times of economic boom. However, the coefficient loses its significance, when the change in the financing gap and access to finance were added to the regression. Since these two variables are also dependent on the business cycle, they better explain the vulnerability than GDP.
    JEL: E32 E44 E58
    Date: 2022
  10. By: Marta Morazzoni; Andrea Sy
    Abstract: We document and quantify the effect of a gender gap in credit access on both entrepreneurship and input misallocation in the US. We show that female-owned firms are more likely to be rejected when applying for a loan and have a higher average product of capital, a sign of gender-driven capital misallocation across firms. Calibrating a heterogeneous agents model of entrepreneurship to the US economy, we establish that such gap in credit access explains the bulk of the gender differences in capital allocation across firms, and more than a third of their disparities in entrepreneurial rates. In a counterfactual exercise, we illustrate that eliminating this credit imbalance leads to a 4% increase in output, and that fiscal policies affect differently female and male entrepreneurial margins in the presence of gender gaps in financial access.
    Keywords: entrepreneurship, misallocation, aggregate productivity, gender differences, Financial constraints
    JEL: O11 E44 D11
    Date: 2021–10

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