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on Corporate Finance |
| By: | Sharjil M. Haque; Anya V. Kleymenova |
| Abstract: | We document the importance of a financial sponsor when a borrower violates a covenant, providing creditors the opportunity to enforce debt contracts. We identify private-equity (PE) sponsored borrowers in the Shared National Credit Program (SNC) data and find PE-sponsored borrowers violate covenants more often than comparable non-PE borrowers. Yet, compared to non-PE, PE-backed borrowers experience smaller reductions in credit commitment upon violation, suggesting lenders are lenient with PE sponsors. Moreover, this leniency is stronger among financially healthier lenders. We show that our results are consistent with a repeated-deals mechanism, as lenders frequently interact with financial sponsors and choose to preserve relationship rent. Consistent with this mechanism, we find little evidence that PE-sponsored loans eventually underperform relative to non-PE-sponsored ones following covenant violations. Our findings have important implications for understanding heterogeneity in debt contract enforcement and credit constraints faced by distressed borrowers with financial sponsors. |
| Keywords: | Private Equity Funds; Covenants; Debt Contract Enforcement; Bank Lending |
| JEL: | G00 G10 G30 G32 G33 |
| Date: | 2023–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-18&r=cfn |
| By: | Fernando Leibovici; David Wiczer |
| Abstract: | This paper studies the role of credit constraints in accounting for the dynamics of firm exit during the Great Recession. We present novel firm-level evidence on the role of credit constraints on exit behavior during the Great Recession. Firms in financial distress, with tighter access to credit, are more likely to default than firms with more access to credit. This difference widened substantially in the Great Recession while, in contrast, default rates did not vary much by size, age, or productivity. We identify conditions under which standard models of firms subject to financial frictions can be consistent with these facts. |
| Keywords: | firm exit; credit constraints; financial distress; Great Recession; financial frictions |
| JEL: | E32 G01 G33 L25 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:96160&r=cfn |
| By: | Olayinka Oyekola (Department of Economics, University of Exeter); Sofia Johan (College of Business, Florida Atlantic University); Rilwan Sakariyahu (Business School, Edinburgh Napier University); Oluwatoyin Esther Dosumu (Alliance Manchester Business School, University of Manchester); Shima Amini (Department of Finance, University of Leeds) |
| Abstract: | Worldwide, lack of access to finance has been identified by many firms as the most detrimental obstacle facing business entities. This article studies how political institutions and financial liberalisation alleviate or deepen financial constraints faced by firms. We hypothesise that a complementarity exists between political institutions and financial liberalisation in constructing barriers to firms securing bank financing. Evidence from an international sample of over 63, 000 firms in 75 countries, establishes that political institutions, proxied by democracy level in a country, and financial liberalisation, proxied by entry and participation of foreign banks, are significant factors in explaining cross-country disparities in firm-level credit accessibility. Importantly, we find a strong support for our proposition, documenting a remarkably significant and sizeable positive interaction effect between foreign bank presence and the level of democracy for access to finance. These results are robust against various forms of sensitivity checks. Overall, our study provides fresh insights into the financing effects of foreign bank activities interacted with democracy on firms. We conclude that these results may be of considerable benefit to policymakers, especially within developing, and emerging, economies, who are searching for economic growth, to re-evaluate what are the primary lending obstacles for their small and medium-sized enterprises. |
| Keywords: | financial liberalisation, foreign banks, political institutions, access to finance, credit constraints, firm-level data |
| JEL: | G21 G23 G32 O16 |
| Date: | 2023–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:2307&r=cfn |
| By: | Sharjil M. Haque |
| Abstract: | Detractors have warned that Private Equity (PE) funds tend to over-lever their portfolio companies because of an option-like payoff, building up default risk and debt overhang. This paper argues PE-ownership leads to substantially higher levels of optimal (value-maximizing) leverage, by reducing the expected cost of financial distress. Using data from a large sample of PE buyouts, I estimate a dynamic trade-off model where leverage is chosen by the PE investor. The model is able to explain both the level and change in leverage documented empirically following buyouts. The increase in optimal leverage is driven primarily by a reduction in the portfolio company's asset volatility and, to a lesser extent, an increase in asset return. Counterfactual analysis shows significant loss in firmvalue if PE sub-optimally chose lower leverage. Consistent with lower asset volatility, additional tests show PE-backed firms experience lower volatility of sales and receive greater equity injections for distress resolution, compared to non PE-backed firms. Overall, my findings broaden our understanding of factors that drive buyout leverage. |
| Keywords: | Private Equity; Capital Structure; Default Risk; Trade-off Theory |
| JEL: | G23 G30 G32 G33 |
| Date: | 2023–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-09&r=cfn |
| By: | Kubitza, Christian |
| Abstract: | I study the causal effect of bond investor demand on the financing and investment decisions of nonfinancial firms using granular data on the bond transactions of U.S. insurance companies. Liquidity inflows from insurance premiums combined with insurers’ persistent investment preferences identify bond demand shifts, which raise bond prices and reduce firms’ financing costs. In response, firms issue more bonds, especially when they have well-connected bond underwriters. The proceeds are used for investment rather than shareholder payouts, particularly by financially constrained firms. The results emphasize that bond investors significantly affect corporate financing and investment decisions through their price impact. JEL Classification: G12, G22, G23, G3, G32 |
| Keywords: | corporate bonds, corporate investment, institutional investors, insurance |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232816&r=cfn |
| By: | Niclas Dombrowski; Wolfgang Drobetz; Lars Hornuf; Paul P. Momtaz |
| Abstract: | What role does the selection of an investor and the timing of financing play in initial coin offerings (ICOs)? We investigate the operating and financial performance of ventures conducting ICOs with different types of investors at different points in the ventures’ life cycle. We find that, relative to purely crowdfunded ICO ventures, institutional investor-backed ICO ventures exhibit poorer operating performance and fail earlier. However, conditional on their survival, these ventures financially outperform those that do not receive institutional investor support. The diverging effects of investor backing on financial and operating performance are consistent with our theory of certification arbitrage; i.e., institutional investors use their reputation to drive up valuations and quickly exit the venture post-ICO. Our findings further indicate that there is an inverted U-shaped relationship for fundraising success of ICO ventures over their life cycle. Another inverted U-shaped relationship exists for the short-term financial performance of ICO ventures over their life cycle. Both the fundraising success and the financial performance of an ICO venture initially increase over the life cycle and eventually decrease after the product piloting stage. |
| Keywords: | Token Offering, Initial Coin Offering (ICO), crypto funds, operating versus financial performance, entrepreneurial finance, optimal timing |
| JEL: | G24 G32 K22 L26 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10393&r=cfn |
| By: | Julian di Giovanni (FEDERAL RESERVE BANK OF NEW YORK); Manuel García-Santana (Universitat Pompeu Fabra); Priit Jeenas (Universitat Pompeu Fabra); Enrique Moral-Benitoz (Banco de España); Josep Pijoan-Mas (CEMFI) |
| Abstract: | We provide a framework to study how different public procurement allocation systems affect firm dynamics and long-run macroeconomic outcomes. We build a new panel dataset of administrative data for Spain that merges credit-register loan data, quasi-census firm-level data and public procurement project data. We find evidence consistent with the hypothesis that procurement contracts provide valuable collateral for firms, and that they do so to a greater extent than private-sector contracts. We then build a model of firm dynamics with both asset-based and earnings-based borrowing constraints and a government that buys goods and services from private-sector firms, and use it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find that policies that promote the participation of small firms have sizeable macroeconomic effects, but their net impact on aggregate output is ambiguous. These policies help small firms grow and overcome financial constraints, which increases output in the long run. However, they also reduce saving incentives for large firms, decreasing output. The relative strength of these two forces and hence which of them dominates crucially depends on the type of financial frictions firms face and the specific way the policy is implemented. |
| Keywords: | government procurement, financial frictions, capital accumulation, aggregate productivity |
| JEL: | E22 E23 E62 G32 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2233&r=cfn |
| By: | Jessie Jiaxu Wang |
| Abstract: | Using an occupational probability of computerization, we measure a firm’s ability to replace labor with automated capital. Our evidence suggests that the potential to automate a workforce enhances operating flexibility, allowing firms to hold less precautionary cash. To provide evidence for this mechanism, we exploit the 2011–2012 Thailand hard drive crisis as an exogenous shock to the cost of automation. In addition, the negative relation between prospective automation and cash holdings is greater for firms with a lower expected cost of worker displacement and greater labor-induced operating leverage. |
| Keywords: | Automation; Operating flexibility; Corporate liquidity policy; Substitutability of labor with automated capital; Labor-induced operating leverage |
| JEL: | G32 G35 J23 O33 |
| Date: | 2023–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-23&r=cfn |
| By: | Carlo Wix |
| Abstract: | I study the long-run effects of credit market disruptions on real firm outcomes and how these effects depend on nominal wage rigidity at the firm level. Exploiting variation in firms' refinancing needs during the global financial crisis, I trace out firms' investment and growth trajectories in response to a credit supply shock. Financially shocked firms exhibit a temporary investment gap for two years, resulting in a persistent accumulated growth gap six years after the crisis. Shocked firms with rigid wages exhibit a significantly steeper drop in investment and an additional long-run growth gap relative to shocked firms with flexible wages. |
| Keywords: | Financial Crises; Bank Lending; Real Effects; Firm Investment; Wage Rigidity |
| JEL: | E22 E24 E51 G01 G21 G31 |
| Date: | 2023–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-19&r=cfn |
| By: | Nadya Malenko |
| Abstract: | This survey provides an overview of theoretical and empirical research on information flows in corporations. It highlights key frictions preventing effective information flows and discusses how organizational structure and corporate governance can alleviate these frictions, focusing on three broad topics: 1) organizational design, such as the choice between centralized and decentralized decision-making; 2) composition and decision-making process of the board of directors; and 3) communication among shareholders and between shareholders and management in the context of shareholder activism. The goal of the survey is to draw connections between theoretical and empirical work and point out directions for future research. |
| JEL: | D82 D83 G34 L22 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31209&r=cfn |
| By: | Abdelnour Joseph (ESSCA Research Lab - ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Aubert Nicolas (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon); Campa Domenico (IUM - International University of Monaco - International University of Monaco) |
| Abstract: | Employee stock ownership (ESO) is often associated with decreases in agency costs because it increases employees' satisfaction and attachment to their company and aligns the employees' and their firm's interests. Another stream of research argues that ESO may have the opposite effect on agency costs because it serves as a management entrenchment tool and leads to divergence between stakeholders. This paper examines the relationship between ESO and agency costs in France, a leading European country for ESO. Using a panel database of 125 firms over the period 2002–2016, we find an inverted U-shaped relationship between ESO and agency costs. This evidence highlights that low levels of ESO increase agency costs, consistent with managerial entrenchment mechanisms. The findings also suggest that beyond a certain point, ESO reduces agency problems because it links employees' wealth to their firm's success. |
| Abstract: | L'actionnariat salarié (AS) est souvent associé à une diminution des coûts d'agence car il augmente la satisfaction des salariés et leur attachement à leur entreprise et aligne leurs intérêts avec ceux de l'entreprise. Un autre courant de recherche suggère que l'AS peut avoir l'effet inverse sur les coûts d'agence en servant l'enracinement des dirigeants. Il entraînerait une divergence entre les parties prenantes et diminuerait la valeur actionnariale. Cet article étudie la relation entre AS et coûts d'agence en France, un pays leader européen en matière d'AS. Nos analyses sur des données issues de 125 entreprises françaises cotées sur la période 2002-2016 mettent en évidence une relation en U inversé entre l'AS et les coûts d'agence. Nos résultats indiquent que des niveaux faibles ou élevés d'AS sont associés à des coûts d'agence élevés en raison de l'enracinement des dirigeants. Les résultats suggèrent aussi qu'au-delà d'un certain seuil, l'AS réduit les problèmes d'agence en liant le patrimoine des salariés à la performance de leur entreprise. |
| Keywords: | Corporate governance, Employee stock ownership, Shared capitalism., Agency costs, Audit fees, Coûts d’agence, Honoraires d’audit, Gouvernance d’entreprise, Actionnariat salarié, Partage du capital |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03723164&r=cfn |