nep-cfn New Economics Papers
on Corporate Finance
Issue of 2023‒04‒24
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Strapped for Cash: The Role of Financial Constraints for Innovating Firms By Esther Ann Bøler; Andreas Moxnes; Karen Helene Ulltveit-Moe
  2. Corporate diversification, investment efficiency and the business cycle By Yolanda Yulong Wang
  3. The determinants of Public Grants and Venture Capital financing: Evidence from Europe By Andrea Bellucci; Gianluca Gucciardi; Daniel Nepelski
  4. CSR and Firm Survival: Evidence from the Climate and Pandemic Crises By Thomas J. Chemmanur; Dimitrios Gounopoulos; Panagiotis Koutroumpis; Yu Zhang
  5. Family Ownership and Carbon Emissions By Marcin Borsuk; Nicolas Eugster; Paul-Olivier Klein; Oskar Kowalewski
  6. Bankruptcy regime change and credit risk premium on corporate bonds: Evidence from the Indian economy By Rajeswari Sengupta; Harsh Vardhan
  7. The Impact of Relative CEO Pay on Employee Productivity By Afzali, Aaron; Oxelheim, Lars; Randøy, Trond; Paulo Vieito, João
  8. Factors of formation of dividend payment strategies By Shukina Polina
  9. Between Scylla and Charybdis: CEO Political Ideology, Dividends and Downsizing During the Pandemic By Ali Bayat; Marc Goergen; Panagiotis Koutroumpis; Xingjie Wei
  10. Dividend policy of SMEs: A variance decomposition approach By CADENOVIC, Jovana; PAELEMAN, Ine; DELOOF, Marc
  11. What we can learn by linking firms’ reported emissions with their financial data By Matthew Ackman; Timothy Grieder; Callie Symmers; Geneviève Vallée
  12. Financial factors influencing environmental, social and governance ratings of public listed companies in Bursa Malaysia By Alam, Md. Mahmudul; Tahir, Yasmin Mohamad; Saif-Alyousfi, Abdulazeez Y. H.; Waehama, Wanamina; Muda, Ruhaini; Nordin, Sabariah
  13. The impact of ownership structure on the market value of companies in response to COVID-19 By Michal Drabek; Daniel Pastorek
  14. Managing Ownership by Management By Julian FRANKS; Colin MAYER; MIYAJIMA Hideaki; OGAWA Ryo
  15. Networks and Information in Credit Markets By Gupta, Abhimanyu; Kokas, Sotirios; Michaelides, Alexander; Minetti, Raoul
  16. Real Options Technique as a Tool of Strategic Risk Management By Volodymyr Savchuk

  1. By: Esther Ann Bøler; Andreas Moxnes; Karen Helene Ulltveit-Moe
    Abstract: This paper makes use of a reform that allowed firms to use patents as stand-alone collateral, to estimate the magnitude of collateral constraints and to quantify the aggregate impact of these constraints on misallocation and productivity. Using matched firm-bank data for Norway, we find that bank borrowing increased for firms affected by the reform relative to the control group. We also find an increase in the capital stock, employment and innovation as well as equity funding. We interpret the results through the lens of a model of monopolistic competition with potentially collateral constrained heterogeneous firms. Parameterizing the model using well-identified moments from the reduced form exercise, we find quantitatively large gains in output per worker in the sectors in the economy dominated by constrained (and intangible-intensive) firms. The gains are primarily driven by capital deepening, whereas within-industry misallocation plays a smaller role.
    Keywords: intangible capital, patents, credit constraints, misallocation, productivity
    JEL: D25 G32 L25 L26 O34 O47
    Date: 2023
  2. By: Yolanda Yulong Wang (SAFTI - Shenzhen Audencia Financial Technology Institute)
    Abstract: I document the time-varying investment efficiency of conglomerates compared with singlesegment firms. I find that, during recessions, conglomerates have higher Q-sensitivity of investment than do stand-alone firms, in contrast to the relationship during expansion periods. I also find that conglomerates, with the benefits from internal capital markets, exhibit increased dependence of investment on internal capital during recessionary periods, while stand-alone firms significantly increase cash retention and deviate their investment from its optimal level more severely. I examine the effect of the degree of diversification and find consistent evidence on investment efficiency and deployment of internal capital. I also provide evidence that conglomerates with stronger governance do not improve investment efficiency during recession, which suggests that agency costs cannot fully explain the changes in investment of conglomerates.
    Keywords: Corporate diversification Internal capital markets Capital allocation Business cycle Time-varying agency costs Corporate governance
    Date: 2023–02
  3. By: Andrea Bellucci (University of Insubria, Department of Economics); Gianluca Gucciardi (UniCredit and University of Milan); Daniel Nepelski (European Commission - JRC)
    Abstract: This analysis compares the characteristics of firms supported by public and private sources in early-stage financing to investigate funding patterns for innovative companies. It examines whether the two sources of funding target similar firms in the period 2008-2017 using a portfolio approach on EU-based firms raising either Venture Capital financing, public grants under the Horizon 2020 ‘SME Instrument’ scheme, or both. The findings show that venture capitalists finance more innovative and younger firms, whereas public investors focus on smaller companies. This pattern is supported by robustness checks and expansions that address multiple dimensions of heterogeneity behaviours in the interaction of private and public funding.
    Keywords: Venture Capital, Investment, Public Grants, Horizon 2020, SME Instrument, Entrepreneurial Finance
    JEL: O30 O38 L20 L53 G20
    Date: 2023–02
  4. By: Thomas J. Chemmanur (Carroll School of Management); Dimitrios Gounopoulos (University of Bath); Panagiotis Koutroumpis (Queen Mary University of London); Yu Zhang (School of Economics, University College Dublin)
    Abstract: We analyse the relationship between the extent of a firm’s corporate social responsibility (CSR) and its long-term survival probability. We conjecture that a better CSR rating is associated with a lower probability of corporate failure and a longer survival period. Consistent with this, we document that four CSR dimensions (environment, community, employee relations, and product) out of six are positively related to firms’ survival probability. The positive association between CSR ratings and firm survival is stronger for firms operating in more competitive industries and those with weaker governance. We find that a firm’s engagement in CSR activities is particularly crucial for firm survival during pandemics and under adverse climate conditions. We establish causality in the relation between a firm’s CSR activities and its survival probability using instrumental variable (IV) and Heckman twostep analyses. Finally, we find that better financial performance, less stringent financial constraints, greater managerial discipline, and enhanced labor productivity are some of the channels through which firms engaging in more CSR activity achieve longer survival times.
    Keywords: Corporate Social Responsibility, Climate Change, Pandemic Uncertainty, Firm Survival, Corporate Governance
    JEL: G30 G41 M14
    Date: 2022–01–28
  5. By: Marcin Borsuk (Institute of Economics, Polish Academy of Sciences, Poland; University of Cape Town, South Africa); Nicolas Eugster (University of Queensland, Australia); Paul-Olivier Klein (University of Lyon, France: Université Jean Moulin Lyon 3, iaelyon School of Management, UR Magellan. 1 av. des Frères Lumière, 69008 Lyon, France. Orcid:; Oskar Kowalewski (Institute of Economics, Polish Academy of Sciences, Poland IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Économie, F-59000 Lille, France)
    Abstract: This study examines the relationship between family ownership and carbon emissions using a large cross-country dataset comprising 6, 610 non-financial companies over the period 2010- 2019. We document that family firms display lower carbon emissions, both direct and indirect, when compared to non-family firms, suggesting a higher commitment to environmental protection by family owners. We show that this differential effect started following the 2015 Paris Agreement. Differences in governance structure, familial values, and higher spendings in R&D partly explain our results. Paradoxically, we find that family-owned firms and family CEOs commit less publicly to a reduction in their carbon emissions and have lower ESG scores, although polluting less. This suggests a lower participation in the public display of such an outcome and a lower tendency to greenwashing.
    Keywords: : carbon emission, ESG, governance, family firms, greenwashing, climate change
    JEL: G3 G38 M14
    Date: 2023–03
  6. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan
    Abstract: Enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 marked a watershed event in the commercial credit landscape in India, and represented a major enhancement in the rights of creditors. In this paper we hypothesise that in the new regime, creditors would demand a lower price for credit now that the IBC has strengthened their rights in the event of a borrower defaulting. We focus on one class of creditors--investors in the bond market. We consider IBC as a quasi-natural experiment and empirically investigate its impact on credit spreads in the corporate bond market in India. We find that post IBC, credit spreads declined for the non-financial firms in the private corporate sector. However, even for these firms, bond investors seem to assign greater importance to firm-specific characteristics such as firm size and firm financial health compared to the impact of the new bankruptcy regime. It is plausible that a few years after IBC was implemented, the general discontentment in the financial markets regarding the effectiveness of the bankruptcy law may have dampened the effect on credit spreads. Ours is the first study to analyse the influence of the IBC on the cost of credit in the bond market. Currently, the bond market in India is skewed towards high rated bonds which account for the bulk of all issuances. In order to develop a deep and liquid market for lower rated bonds, investor confidence in effective bankruptcy resolution will be crucial. This study provides us with valuable insights about the reaction of the bond investors to the IBC.
    Keywords: Bond pricing, Credit spreads, Bankruptcy law, Creditor rights, Credit rating, Maturity, Liquidity, Risk perception
    JEL: G12 G32 G34
    Date: 2023–02
  7. By: Afzali, Aaron (Hanken School of Economics); Oxelheim, Lars (School of Business and Law, University of Agder, Norway); Randøy, Trond (School of Business and Law, University of Agder, Norway); Paulo Vieito, João (Polytechnic Institute of Viana do Castelo, School of Business Studies, Portugal)
    Abstract: In this study, we examine the relationship between within-firm pay inequality and employee productivity. We use hand-collected data on a sample of S&P 1500 companies from 2018-2022 and find a concave relationship between the relative CEO pay and employee productivity. Consistent with tournament theory, we show that the pay gap between the CEO and the Vice Presidents initially positively affects employee productivity. However, this positive effect only works up to a certain level, at which - as expressed by the CEO-employee pay ratio - employee discontent initiates a fall in firm-level productivity. We identify this tipping point as the point at which CEO pay exceeds the median worker’s pay by a factor of 40. The average CEO-employee pay ratio in our sample is 193:1, suggesting that most firms could have avoided a fall in productivity by reducing their CEO-employee pay ratio. Our results remain robust after controlling for endogeneity. From a public policy perspective, our findings pave the way for corporate self-regulation of CEO pay to avoid politically imposed hard laws.
    Keywords: CEO pay; CEO pay-employee ratio; Employee productivity; Tournament incentives
    JEL: G18 G32 G34 J24 J33 M12
    Date: 2023–04–05
  8. By: Shukina Polina (Department of Economics, Lomonosov Moscow State University)
    Abstract: In the context of increasing competition for capital in the market, it becomes important to increase the investment attractiveness of the company. One of the ways to increase the attractiveness of the company are dividend payments. As part of this work, the factors of dividend payments are identified and systematized, the impact of dividend payments on the yield of shares of the relevant company is shown, and dividend payment strategies in the form of Lintner's target dividend model are studied. To identify correlation relationships, the tools of econometric regression models and machine learning were used. As a result, it turned out that the factor of dividend payments is statistically significantly correlated with the profitability of the company's shares, and the stage of the company's life cycle is a statistically significant factor in influencing dividend payments.
    Keywords: dividend policy; life cycle stage; stock returns; target dividend.
    JEL: G11 G31 G32
    Date: 2022–11
  9. By: Ali Bayat (University of Aberdeen); Marc Goergen (IE University, Spain); Panagiotis Koutroumpis (Queen Mary University London); Xingjie Wei (University of Leeds)
    Abstract: We study whether CEO political ideology affected how S&P 500 firms reacted to the Covid-19 pandemic, an exogenous shock to demand and supply. We hypothesize that conservative CEOs are more likely to adopt shareholder-friendly than employee-friendly reactions to the pandemic. Hence, they should be more likely to downsize their workforce while maintaining dividends. In contrast, other CEOs should be less likely to meet dividend expectations and less likely to downsize. We find confirmation of this hypothesis. We also find that CEOs used the dividend forecasts for 2020 as their benchmark rather than the 2019 dividends to make their dividend decision.
    Keywords: CEO political ideology, dividend policy, downsizing, stakeholder management, Covid-19 pandemic
    JEL: G35 G34 M51
    Date: 2022–01–28
  10. By: CADENOVIC, Jovana; PAELEMAN, Ine; DELOOF, Marc
    Abstract: Previous research on dividend policies in privately held firms has been largely focused on the determinants of dividend policies which are identified at the firm-year, firm, and industry levels. Studying these effects in isolation would, however, provide an incomplete picture of the overall drivers of dividend policy. In this study we go a step further by analysing these effects simultaneously by applying a variance decomposition method to explore how much each level of the analysis contributes to dividend policy of Small and Medium Sized Enterprises (SMEs). Based on a sample of 110, 050 Belgian SMEs, our data reveal that firm-year and firm-level differences explain most of the variance of dividend policies which is in line with the resource based theory. Industry-level differences and region differences matter very little for dividend policy of SMEs.
    Keywords: Dividend policy, SMEs, Variance decomposition
    Date: 2023–03
  11. By: Matthew Ackman; Timothy Grieder; Callie Symmers; Geneviève Vallée
    Abstract: We analyze the financial statements and stock prices of publicly traded firms incorporated in Canada that report greenhouse gas emissions. We find that these firms primarily use equity financing. We also find that equity investors increasingly account for firms’ emissions when making investment decisions but the impact appears small. This suggests that assets exposed to climate change remain at risk of a sudden repricing.
    Keywords: Asset pricing; Climate change; Financial stability; Firm dynamics
    JEL: G G1 G3 Q Q5
    Date: 2023–04
  12. By: Alam, Md. Mahmudul (Universiti Utara Malaysia); Tahir, Yasmin Mohamad; Saif-Alyousfi, Abdulazeez Y. H.; Waehama, Wanamina; Muda, Ruhaini; Nordin, Sabariah
    Abstract: Environmental, Social and Governance (ESG) ratings are widely recognised methods to assess the sustainability practices of corporations. However, the scores of these ratings are not satisfactory in emerging market economies. This study examines the financial factors that influence ESG ratings regarding public listed companies on the FTSE4 Good Bursa Malaysia Index (F4GBM Index). This paper uses static and dynamic Generalized Method of Moments (GMM) techniques to analyse the data of 31 public listed companies on the F4GBM Index and reported full ESG ratings data for the period 2007-2016. To utilise the maximum number of observations by avoiding the missing data and outlier due to COVID-19, this study applied the sample data up to 2016. Using the two-step system dynamic GMM estimator, such results indicate that highly profitable Malaysian companies enjoy a higher score for ESG overall ratings as well as all three individual ratings. Poorer credit management diminishes the environmental ratings, yet increases overall scores such as the social and governance scores. Companies with higher leverage have a weaker social, governance and overall score, but a higher environmental rating. Finally, companies eliciting a higher sustainable growth rate have weak governance and overall scores. This study provides empirical evidence that will be useful to capital market investors, management teams of these companies and policymakers in their efforts to promote responsible investment in Malaysian public listed companies in line with UN-PRI policy.
    Date: 2022–03–08
  13. By: Michal Drabek (Department of Business Economics, Faculty of Business and Economics, Mendel University in Brno, Zemedelska 1, 613 00 Brno, Czech Republic); Daniel Pastorek (Department of Finance, Faculty of Business and Economics, Mendel University in Brno, Zemedelska 1, 613 00 Brno, Czech Republic)
    Abstract: The paper focuses on differences in the valuations of privately held companies and publicly traded companies in the EU market as a result of the first year of the COVID-19 pandemic. This exercise is carried out by employing a unique dataset of individually assessed valuations of companies from the brewing industry for 2019 and 2020. The results confirm the existence of a discount in the valuation of private companies and indicate that it increased during the pandemic. The paper also identifies a significant difference between the median multiple and the market capitalization of the whole of the industry sector. This provides more detailed data on the differences with respect to ownership structure, but also information that allows the practical use of multiples in the valuation of privately held companies.
    Keywords: private company valuation, private vs. public, COVID-19, brewery, private company discount, industry multiples
    JEL: G12 G32
    Date: 2023–03
  14. By: Julian FRANKS; Colin MAYER; MIYAJIMA Hideaki; OGAWA Ryo
    Abstract: This paper describes a previously undocumented internal market for corporate control. It is utilized in Japan where purchases and sales of blocks of shares are organized by the management of firms themselves. The paper records how Japanese companies have undertaken repurchases that are held in treasury stock and subsequently placed with other companies. Japanese management has a long history of engaging in such practices and the cross-shareholdings that resulted were defensive in nature and value destructive. However, they have recently taken on a very different form: in contrast to traditional cross-shareholdings, they are now inter-corporate holdings that are strategic and on average value enhancing. The change has resulted from the growing presence of international institutional investors and improved corporate governance. It suggests that, when subject to external market discipline, internal management of ownership can be used to promote value enhancing outcomes. This raises the question of whether there is a greater degree of managerial influence on ownership elsewhere than is currently recognized. We discuss this in the context of dominant forms of dispersed and family ownership observed around the world.
    Date: 2023–03
  15. By: Gupta, Abhimanyu (University of Essex); Kokas, Sotirios (University of Essex); Michaelides, Alexander (Imperial College London); Minetti, Raoul (Michigan State University, Department of Economics)
    Abstract: A large theoretical literature emphasizes financial networks, but empirical studies remain scarce. We exploit the overlapping bank portfolio structure of US syndicated loans to construct a financial network and characterize its evolution over time. Using techniques from spatial econometrics, we find large spillovers in lending conditions from peers’ decisions during normal times: a standard deviation increase in peer lending rates can increase a bank’s lending rate by 17 basis points. However, these spillovers vanish in a large recession. We rationalize these findings through the lens of a model of syndicate lending, where banks’ reliance on private signals rises during recessions.
    Keywords: Financial networks; spillovers; cost of lending; syndicated loan market
    JEL: C31 G21
    Date: 2023–03–03
  16. By: Volodymyr Savchuk
    Abstract: The real options approach is now considered an effective alternative to the corporate DCF model for a feasibility study. The current paper offers a practical methodology employing binomial trees and real options techniques for evaluating investment projects. A general computation procedure is suggested for the decision tree with two active stages of real options, which correspond to additional investments. The suggested technique can be used for most real options, which are practically essential regarding enterprise strategy. The special case named Binomial-Random-Cash-Flow Real Options Model with random outcomes is developed as the next step of real options modelling. Project Value at Risk is introduced and used as a criterion of investment project feasibility under the assumption regarding random outcomes. In particular, the Gaussian probability distribution is used for modelling option outcomes uncertainty. The choice of the Gaussian distribution is caused by the desire to obtain estimates in the final analytical form. Choosing another distribution for random outcomes leads to using Monte Carlo simulation, for which a general framework is developed by demonstrating some instances. The author could avoid the computational complexity that makes these solutions feasible for business practice.
    Date: 2023–03

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