nep-cfn New Economics Papers
on Corporate Finance
Issue of 2023‒01‒02
eight papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Investor Sentiment and Firm Capital Structure By Shengfeng Li; Hafiz Hoque; Jia Liu
  2. Banks vs. markets: Are banks more effective in facilitating sustainability? By Newton, David P.; Ongena, Steven; Xie, Ru; Zhao, Binru
  3. Dividend Decisions and Economic Value-Added of Firms in Kenya By Kasidi, Khamis; Riwegho, Saumu Amir; Omar, Ahmed Mohamed Mr; Kamau, Charles Guandaru
  4. Endogenous market choice, listing regulations and IPO spread: Evidence from the London Stock Exchange By Hafiz Hoque
  5. Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric By Livdan, Dmitry; Nezlobin, Alexander
  6. Quantifying Reduced-Form Evidence on Collateral Constraints By Sylvain Catherine; Thomas Chaney; Zongbo Huang; David Sraer; David Thesmar
  7. Financial Impact of Trust and Institutional Quality around the World By Svatopluk Kapounek; Evzen Kocenda; Ludek Kouba
  8. Public funding of banks and firms in a time of crisis By Haavio, Markus; Ripatti, Antti; Takalo, Tuomas

  1. By: Shengfeng Li (University of Portsmouth); Hafiz Hoque (Swansea University); Jia Liu (University of Portsmouth)
    Abstract: We provide novel evidence of the role of investor sentiment in determining firms’ capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms’ debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is faster in high sentiment periods, indicating a lower cost of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms’ financing decisions and stock returns.
    Keywords: Investor sentiment; capital structure; leverage; debt maturity; debt capacity; speed of adjustment; stock returns
    JEL: G31 G32
    Date: 2022–12–05
  2. By: Newton, David P.; Ongena, Steven; Xie, Ru; Zhao, Binru
    Abstract: Is bank- versus market-based financing different in its attitudes towards Environmental, Social, and Governance (ESG) risk? Using a novel sample covering 3,783 U.S. public firms from 2007 to 2020, we study how firm-level ESG risk affects its financing outcomes. We find that companies with higher ESG risk borrow less from banks than from markets, potentially to avoid bank monitoring and scrutiny. The Social and Governance components, in particular, matter. Furthermore, firms suffering higher numbers of negative ESG reputation shocks are less likely to continue to rely on bank credit in response to lenders' threats to end the lending arrangements. Finally, our results indicate that firms' ESG risk reduces after borrowing from banks but increases after bond issuance, suggesting that banks are more effective than public bond markets in shaping borrowers' ESG performance.
    Keywords: ESG risk,debt structure,capital structure,debt choices,bank monitoring
    JEL: G20 G21 G30 G32
    Date: 2022
  3. By: Kasidi, Khamis; Riwegho, Saumu Amir; Omar, Ahmed Mohamed Mr; Kamau, Charles Guandaru (Technical University of Mombasa)
    Abstract: One of the company's key purposes is to maximize corporate value. Shareholders will benefit more as the firm's value rises. There is a substantial body of literature on dividend policy as a result of empirical and theoretical research. The research is divided into two main schools of thought: one holds that a company's dividend policy affects its value, while the other holds that it has no bearing on firm value. No consensus has been reached after many years of investigation, and academics do not even agree on the same empirical data. The possible impact of dividend decisions on a company's total wealth and performance has been the subject of numerous hypotheses that have developed over the years, with varying degrees of success. A number of financial theories and models were developed, and they were later used in the business sector. The effects of dividend decisions on the share price of the company and the overall wealth of shareholders remain unclear despite several studies. This study sought to examine the relationship between dividend policy decisions and firm value. Some studies have found a statistically significant positive association between dividend policy and return on equity. It means that improving dividend payments has a positive impact on the company's success. A large number of studies, however, show a markedly unfavorable relationship between firm profitability and dividend payout. Consequently, when corporations pay dividends, their retained earnings are impacted, which affects their internal profitability.
    Date: 2022–11–25
  4. By: Hafiz Hoque (Swansea University)
    Abstract: This study examines the endogenous market choice and its impact on underwriter spread if AIM IPOs that meet Main Market (MM) listing requirements had issued equity in the MM during the 1995-2021 period. We find that the spread is 1.33% higher in the AIM than the MM for IPO listings that meet the MM listing requirements. This finding suggests that AIM companies, meeting the MM listing requirements, could have saved more than £100 million by going public through the MM than the AIM market. We also find that this spread differential is attributed to the issuing firms’ market self-selection. We also find that listing requirements in the MM has an impact on the gross spread. The Propensity score matching results show that AIM firms that meet the MM market listing requirements pay a 0.921% higher spread which is significant at a 1% level compared to the MM market IPOs.
    Keywords: Gross Spread, Listing requirements, Heckman Selection model, underwriter fixed effects, Propensity Score Matching
    JEL: G15 G24
    Date: 2022–12–05
  5. By: Livdan, Dmitry; Nezlobin, Alexander
    Abstract: This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm’s capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm’s investment history. If capital goods have constant efficiency over a finite useful life, then simple proxies are readily available for both the replacement cost of assets in place and capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We then show that these components exhibit significantly different economic determinants and behavior.
    Keywords: Tobin's Q; investment; capital stock; replacement stock; depreciation
    JEL: D21 D24 G31 M41
    Date: 2021–12–01
  6. By: Sylvain Catherine (University of Pennsylvania [Philadelphia]); Thomas Chaney (USC - University of Southern California, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Zongbo Huang (The Chinese University of Hong Kong [Hong Kong], Shenzhen University [Shenzhen]); David Sraer (University of California [Berkeley] - University of California, CEPR - Center for Economic Policy Research - CEPR, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research); David Thesmar (MIT - Massachusetts Institute of Technology, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic investment model with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced-form coefficient from the recent corporate finance literature that connects exogenous debt capacity shocks to corporate investment. Relative to a frictionless benchmark, collateral constraints induce losses of 7.1% for output and 1.4% for total factor productivity (TFP) (misallocation). We show these estimated losses tend to be more robust to misspecification than estimates obtained by targeting leverage.
    Date: 2022–08
  7. By: Svatopluk Kapounek (Mendel University in Brno, Faculty of Business and Economics, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Ludek Kouba (Mendel University in Brno, Faculty of Business and Economics, Czech Republic)
    Abstract: We investigate the financial impact of social trust, institutional quality, and regulations. As a testing ground we employ a unique, large, and hand-crafted dataset of more than 850 000 lending-based crowdfunding projects from 155 platforms across 55 countries during 2005-2018. We show that the impact of social trust is positive but economically less pronounced than that of institutional trust proxied by legal and property rights protection and regulation. Moreover, the financial impact of social trust is greater at the national level, while impact of institutional quality dominates at the international level. Nevertheless, the financial impact of trust and institutional quality around the world is positive, which is an encouraging implication under increasing anonymity and internationalization of financial environment.
    Keywords: social capital, social trust, institutional trust, uncertainty, crowdfunding, financial markets
    JEL: A13 D23 G41 K11
    Date: 2022–12
  8. By: Haavio, Markus; Ripatti, Antti; Takalo, Tuomas
    Abstract: We study public funding of banks and non-financial firms in a time of crisis. We find that bank capitalization is more effective in stabilizing the economy than direct funding to firms, but it also creates larger distortions. We show that the optimal, social-welfare-maximizing, structure of a public funding program depends on its size. Small funding programs should target banks while large programs should be directed at non-financial firms.
    Keywords: economic crises,optimal public funding,financial frictions,macro-financial linkages
    JEL: E44 G21 G28 G38 H12 H81
    Date: 2022

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