nep-cfn New Economics Papers
on Corporate Finance
Issue of 2022‒12‒12
eleven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Credit Market Freedom and Corporate Decisions By Andrea Calef; Ifigenia Georgiou; Alfonsina Iona
  2. Green Bonds’ Reputation Effect and Its Impact on the Financing Costs of the Real Estate Sector By Aleksandar Petreski; Dorothea Schäfer; Andreas Stephan
  4. Finance, Managerial Inputs, and Misallocation By Chaoran Chen; Ashique Habib; Xiaodong Zhu
  5. European firms, Panic Borrowing and Credit Lines Drawdowns: What did we learn from the COVID-19 shock? By Mario Cerrato; Hormoz Ramian; Shengfeng Mei
  7. Working Paper 364 - ‘Catch Me if You Can’ On Drivers of Venture Capital Investment in Africa By Fadel Jaoui; Omolola Amoussou; Francis H. Kemeze
  8. Small and Medium Sized European Firms and Energy Efficiency Measures: A Probit Analysis By Guglielmo Maria Caporale; Cristiana Donati; Nicola Spagnolo
  9. Do Institutional Directors Matter? By Heng Geng; Harald Hau; Roni Michaely; Binh Nguyen
  10. Stock Liquidity and Firm-Level Political Risk By Kuntal K. Das; Mona Yaghoubi
  11. Borrowing Constraints in Emerging Markets By Santiago Camara; Maximo Sangiacomo

  1. By: Andrea Calef (School of Economics, University of East Anglia); Ifigenia Georgiou (School of Business, University of Nicosia); Alfonsina Iona (School of Economics and Finance, Queen Mary University of London)
    Abstract: Despite the extensive empirical evidence of a positive impact of economic freedom on economic growth, the influence of economic freedom and its components on a firm’s level of cash, leverage and investment remains an unexplored issue in microeconomics and corporate finance research. In this study, we contribute towards filling this gap by examining whether Credit Market Freedom - an important component of the Economic Freedom Index – influences corporate decisions. In particular, we study whether and to what extent Credit Market Freedom affects a firm’s target level of investment, cash holdings, and leverage. We observe the behavior of a large and heterogeneous sample of North American non-financial firms over the period 2000-2019. Our empirical results suggest that higher Credit Market Freedom is associated with a healthier corporate capital structure, higher financial flexibility, and a friendlier investment environment.
    Keywords: Economic Freedom, Corporate Decisions, Capital Structure
    JEL: G10 G18 G30 G31
    Date: 2022–11
  2. By: Aleksandar Petreski; Dorothea Schäfer; Andreas Stephan
    Abstract: This paper explores the effect of a firm’s reputation of being a green bond issuer on its financing costs. Using a sample of 73 listed Swedish real estate companies issuing in total about 1500 bonds over the period from 2011 till 2021, difference-in-difference analyses and instrumental variable estimations are applied to identify the causal impact of frequent green vis-à-vis frequent non-green bond issuing on a firm’s cost of capital and credit rating. The paper argues that it is repetitive issuance which lowers a firm’s cost of capital, while the effects from first or one-time green bond issuance is the opposite. In line with the reputation capital hypothesis, issuing green bonds even lowers the firm’s cost of equity capital, while issuing non-green bonds has no effect on the cost of equity capital.
    Keywords: Bond issuance, green debt, reputation capital, sustainability, ESG
    JEL: G32 R30 R32
    Date: 2022
  3. By: , Uniqbu
    Abstract: This study aimed to analyze the effect of firm size, investment opportunity set, and capital structure on the firm value. This study was explanatory research which uses secondary data in the form of financial statement data obtained from banking industry companies on the Indonesia Stock Exchange for 10 years, the period 2010 - 2019 which is published in the Indonesian Capital Market Directory. The samples were taken by using purposive sampling technique, twenty-seven companies during the last 10 years. It used the path analysis method with the AMOS application. The results of this study found that firm size and Investment Opportunity Set had affected significantly on the firm value, while capital structure has no effect on firm value. The implication of this research is that it should have a strong basis for the investment, especially in the banking industry. And it is necessary to look at several criteria for listed companies for example by considering the size of the company and the investment opportunity set because it is proven that these criteria can increase firm value significantly. Meanwhile, the capital structure should be determined because it had not affected the firm value.
    Date: 2022–08–08
  4. By: Chaoran Chen; Ashique Habib; Xiaodong Zhu
    Abstract: n standard macro-finance models, financial constraints mainly affect small or young firms but not large or old ones due to the self-financing mechanism, and the dispersion of marginal revenue product of capital (MRPK) of a firm cohort is less persistent than in the data. We extend a standard model by allowing firms to hire managers and large firms hire disproportionately more managers, consistent with data. In our model, financial constraints and the dispersion of MRPK persist, and even large firms are likely to be constrained. The productivity loss from financial frictions is also substantially amplified.
    Keywords: Collateral Constraint, Managerial Inputs, Elasticity of Scale, Misallocation, Aggregate Productivity, China
    JEL: E13 G21 L16 L26 O16 O41
    Date: 2022–11–23
  5. By: Mario Cerrato; Hormoz Ramian; Shengfeng Mei
    Abstract: We show that European firms, at the peak of the COVID-19 shock in 2020:Q2, went into a “panic borrowing” status and drew down €87bn in a very short period. We show that firms with less stringent solvency and liquidity constraints drew down their credit lines and accumulated cash. Our study exploits the implications of the social distancing policies to corporate operations across Europe. It proposes a novel empirical framework that identifies panic borrowing while accounting for the endogeneity between credit line drawdowns and an underlying borrowing ability during the COVID-19 shock. We use COVID-19 infection data and proxies for social distancing policies in Europe to study if the increase in risk following the COVID-19 shock can explain the panic borrowing while accounting for possible endogenous credit lines drawdowns. Finally, we show that European corporate drawdowns during the pandemic crisis increased drawdowns, on average, by 3.35 percentage points in response to an unexpected one percentage point fall in their cash flows but only when firms’ earnings are negative. This result is driven by the lockdown policies introduced in Europe
    Keywords: Corporate credit lines, cash holding, investment, default risk
    JEL: G21 G32 G33
    Date: 2022–11
  6. By: Hung, Dang Ngoc
    Abstract: The paper examined the impact of capital structure (CP) on the firm value in Vietnam. The study applies the threshold regression model of Hansen (1999, 2000). We considered if there existed a threshold of CP and how CP affected the firm value at each threshold. Research data included 440 listed enterprises on the Vietnam stock market from 2011 to 2020. The findings have found that CP was inversely related to the firm value, which was determined at three different thresholds. In addition, the size of the business had a positive relationship with firm value and the growth rate of revenue had a reverse relationship at a low level to firm value. However, when testing with short-term liabilities and debt ratios, there is no threshold. This study comprehensively examined CP’s impact on the value of non-financial enterprises and for each particular industry. This study was conducted in listed companies on the Vietnam stock market — an emerging economy that demonstrated the reverse impact of CP on firm value.
    Date: 2022–06–29
  7. By: Fadel Jaoui (African Development Bank); Omolola Amoussou (African Development Bank); Francis H. Kemeze (African Development Bank)
    Abstract: This paper investigates the determinants of venture capital investments across 25 African countries over the period 2014-2019. In particular, it considers the significance of innovation and digitalization in Africa’s venture capital activity. The results show that digital infrastructure, high-technology exports, internet coverage, market size, minority investor protection, and government effectiveness are the main drivers of venture capital deals in Africa over the period examined. More generally, these findings highlight that digital infrastructure and connectivity, innovation and institutional frameworks all play an important role in shaping a favorable environment to attract venture capital funding.
    Keywords: Venture capital, Digitalization, Innovation, Africa JEL classification: G18, G24, O33
    Date: 2022–07–08
  8. By: Guglielmo Maria Caporale; Cristiana Donati; Nicola Spagnolo
    Abstract: This paper investigates the factors (such as different sources of financing, energy audits and internal monitoring activities) affecting the propensity of European small and medium sized enterprises (SMEs) to adopt energy efficiency measures (EEMs). For this purpose, a Probit model is estimated using data from the 2017 Flash Eurobarometer survey covering a large sample of European firms. The analysis is carried out for the full sample as well as for clusters based on an environmental performance index (EPI) and on the level of economic development in turn. The results indicate that internal financing always has a positive effect on a firm’s propensity to adopt EEMs. Private external sources of financing appear to be more important for Western European firms as well as for those located in countries with a greater level of environmental awareness; in the latter, when firms combine private financing with energy audits or internal monitoring activities the propensity to adopt EEMs increases further. By contrast, in the Eastern Countries this occurs when firms simultaneously rely on public funds and monitoring activities.
    Keywords: energy efficiency measures, EPI, financing, SMEs
    JEL: G32 O16 Q40
    Date: 2022
  9. By: Heng Geng (Victoria University of Wellington); Harald Hau (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)); Roni Michaely (The University of Hong Kong; ECGI); Binh Nguyen (RMIT University Vietnam)
    Abstract: The large increase in common institutional ownership raises significant antitrust concerns, even if the precise channel of any potential influence on market outcomes is unclear. Using a novel dataset on shareholders’ board representation, we examine the role of common institutional directors (i.e., joint board representation by institutional shareholders) as one such potential channel with three main findings. First, institutional board representation is extremely low relative to extensive institutional ownership. Second, common institutional directors on rival firm boards are rare. Third, common institutional directors show no incremental effect on market outcomes amidst the positive relationship between common ownership and firm profitability.
    Keywords: Common ownership, institutional board representation, competition policy
    JEL: G32 G34 L4
    Date: 2022–11
  10. By: Kuntal K. Das (University of Canterbury); Mona Yaghoubi (University of Canterbury)
    Abstract: Exploiting a novel measure of firm-level political risk based on earnings conference calls, we examine the effect of firm-level political risk on stock liquidity. We show that liquidity decreases significantly more in firms that are exposed to political risk. An increase in firm-level political risk by one standard deviation lowers liquidity by around 3.64%. We further investigate whether the effect of firm-level political risk on stock liquidity can be mitigated or exacerbated by the political environment of the U.S. economy and find some evidence of the Democratic liquidity premium. Our results are robust to alternative measures of (il)liquidity, and an estimation method.
    Keywords: Stock liquidity, political risk
    JEL: G11 G14
    Date: 2022–11–01
  11. By: Santiago Camara; Maximo Sangiacomo
    Abstract: Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is constrained by the value of their collateralized assets. Using credit registry data from Argentina for the period 1998-2020 we show that less than 15% of firms debt is based on the value of collateralized assets, with the remaining 85% based on firms cash flows. Exploiting central bank regulations over banks capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the interest coverage borrowing constraint studied by the corporate finance literature. Lastly, we argue that EMs exhibit a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. From a structural point of view, we show that in an otherwise standard small open economy DSGE model, an interest coverage borrowing constraints leads to significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraint. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification leads to managed exchange rate policy being more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.
    Date: 2022–11

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