nep-cfn New Economics Papers
on Corporate Finance
Issue of 2023‒05‒15
four papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. The signaling value of legal form in debt financing By Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
  2. Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory By Schmitz, Patrick W.
  3. Ownership concentration and firm risk: the moderating role of mid-sized blockholders By Silvia Rossetto; Nassima Selmane; Raffaele Stagliano
  4. The impact of credit substitution between banks on investment By Francesco Bripi

  1. By: Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
    Abstract: We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.
    Keywords: legal form, minimum capital requirements, signaling, access to debt, financial constraint
    Date: 2023–04–17
  2. By: Schmitz, Patrick W.
    Abstract: In the property rights approach to the theory of the firm, ownership matters if parties have to make partly relationship-specific investments, but ownership would be irrelevant if the investments were completely relationship-specific. We show that if negotiations after the investment stage require transaction costs to be paid, then ownership matters even when investments are completely relationship-specific. While in the standard model without transaction costs there are underinvestments compared to the first-best benchmark, in our setting a party may overinvest in order to induce the other party to incur the transaction costs that are necessary to enter the negotiation stage.
    Keywords: incomplete contracts; investment incentives; ownership rights; relationship specificity; transaction costs
    JEL: D23 D86
    Date: 2023
  3. By: Silvia Rossetto (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Nassima Selmane (Unknown); Raffaele Stagliano (Unknown)
    Abstract: This study analyzes the relationship between mid-sized blockholders and firm risk. We show that ownership structure matters for firm risk beyond the first largest blockholder. Firms with multiple blockholders take more risk than firms with just one blockholder, even when controlling for the stake of the largest blockholder. Consistent with the diversification argument, we find that firm risk increases by 22% when the number of blockholders increases from one to two. Our results are robust to controlling for blockholder type and firm characteristics. We carry out various robustness checks to tackle endogeneity issues. More generally, we provide evidence that firms' decisions are affected by mid-sized blockholders and not merely the largest blockholder. This is in line with theoretical predictions.
    Date: 2022–05–31
  4. By: Francesco Bripi (Bank of Italy)
    Abstract: This paper estimates the elasticity of substitution across banks using matched bank-firm data and assuming monopolistic competition in local credit markets. It also quantifies the impact of credit supply shocks on corporate investment as shaped by this elasticity. Credit supply shocks have significant effects on firms’ investments in industries with a lower degree of substitutability. In these industries, where firms find it difficult to acquire funding and obtain better credit conditions from other banks, a 1 per cent increase in credit supply increases firms’ investment rates by 0.2 per cent. The effect of lenders substitutability on investment offsets that of bank specialization, thus highlighting that the risks of excessive bank concentration in specific industries may be alleviated by lenders substitution. Overall, the evidence suggests that considering the demand side, i.e. the heterogeneous effects of the elasticity of substitution in credit markets, is crucial for a better understanding of the bank lending channel.
    Keywords: banks, credit, substitution, investments
    JEL: G21 D22 E22
    Date: 2023–04

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