nep-cfn New Economics Papers
on Corporate Finance
Issue of 2023‒09‒11
sixteen papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. Research and/or Development? Financial Frictions and Innovation Investment By Filippo Mezzanotti; Timothy Simcoe
  2. The Real Effects of Sentiment and Uncertainty By Birru, Justin; Young, Trevor
  3. High-Yield Debt Covenants and Their Real Effects By Falk Bräuning; Victoria Ivashina; Ali Ozdagli
  4. Crisis Risk and Risk Management By Stulz, Rene M.
  5. Financing and Cost Sharing for a Supply Chain Under CSR - Sensitive Demand By Franck Moraux; D.A. Phan; Thi Le Hoa Vo
  6. The Effect of Firm Size, Profitability and Leverage on Corporate Social Responsibility By Aristananda, Aristananda; Risman, Asep
  7. Bankruptcy in groups By Beaver, William H; Cascino, Stefano; Correia, Maria; McNichols, Maureen F.
  8. Do Actions Follow Words? How bank sentiment predicts credit growth. By Pablo Pastory y Camarasa; Martien Lamers;
  9. Mandatory Credit Allocation and Government Guarantee By Luis F. Dumlao
  10. Corporate Social Responsibility through Shareholder Governance By Bartlett, Robert P.; Bubb, Ryan
  11. CEO Stress, Aging, and Death By Borgschulte, Mark; Guenzel, Marius; Liu, Canyao; Malmendier, Ulrike
  12. Building a Positive Corporate Governance By Laura Lakehal; Muriel Davies; Vitale Di Stefano; Philippe Marras; Stéphanie Buisine
  13. The behavioral finance of MSMEs in the advancement of financial inclusion and financial technology (fintech) By Risman, Asep; Ali, Anees Janee; Soelton, Mochamad; Siswanti, Indra
  14. Business groups, institutions, and firm performance By Cainelli, Giulio; Ganau, Roberto; Giunta, Anna
  15. DeRisk: An Effective Deep Learning Framework for Credit Risk Prediction over Real-World Financial Data By Yancheng Liang; Jiajie Zhang; Hui Li; Xiaochen Liu; Yi Hu; Yong Wu; Jinyao Zhang; Yongyan Liu; Yi Wu
  16. Growth-at-Risk is Investment-at-Risk By Aaron Amburgey; Michael W. McCracken

  1. By: Filippo Mezzanotti; Timothy Simcoe
    Abstract: Abstract U.S. firms have reduced their investment in scientific research (“R”) compared to product development (“D”), raising questions about the returns to each type of investment, and about the reasons for this shift. We use Census data that disaggregates “R” from “D” to study how US firms adjust their innovation investments in response to an external increase in funding cost. Companies with greater demand for refinancing during the 2008 financial crisis made larger cuts to R&D investment. This reduction in R&D is achieved almost entirely by reducing investments in basic and applied research. Development remains essentially unchanged. Although patenting is more strongly correlated with development than research investments, the impact of the crisis appears in citation-weighted patent output after 3 to 5 years. Finally, we show that if other firms patenting similar technologies are exposed to the crisis, then a focal firm's Development investment declines. We consider several mechanisms that could explain these results, and without ruling out every alternative, conclude that the overall pattern is consistent with an important role for technological competition in R&D financing decisions.
    JEL: G30 L20 O31 O32
    Date: 2023–08
  2. By: Birru, Justin (Ohio State U); Young, Trevor (Tulane U)
    Abstract: The effects of sentiment should be strongest during times of heightened valuation uncertainty. As such, we document a significant amplifying role for market uncertainty in the relation between sentiment and aggregate investment. A one-standard-deviation increase in uncertainty more than doubles the effect of sentiment on investment. Moreover, allowing uncertainty-dependent sentiment effects substantially increases explanatory power (i.e., R2). Our results are robust to many sentiment, uncertainty, and investment measures. We also document similar effects for aggregate equity issuance. Consistent with theory, we find even stronger results in the cross-section of valuation uncertainty. The evidence suggests that the importance of sentiment for corporate decisions varies over time and depends crucially on the underlying level of market uncertainty.
    JEL: D81 D84 E22 G31 G35 G40 G41
    Date: 2023–06
  3. By: Falk Bräuning; Victoria Ivashina; Ali Ozdagli
    Abstract: High-yield debt, including leveraged loans, features incurrence financial covenants or "cov-lite" provisions. These covenants differ from traditional loans' maintenance covenants, as they preserve equity control rights but impose specific restrictions on the borrower after crossing the covenant threshold. Contrary to the prevailing belief that incurrence covenants offer limited protection for creditors, our research reveals a significant and sudden decline in investment upon triggering these covenants. This evidence highlights a novel propagation mechanism for economic shocks, wherein contractual restrictions play a crucial role in the highly-leveraged corporate sector, becoming binding well before default or bankruptcy occurs.
    Keywords: high-yield debt; corporate debt; covenants; incurrence covenants; cov-lite; amplification mechanisms; contracts; contingent contracting
    JEL: G31 G33 G21 G32
    Date: 2023–08–22
  4. By: Stulz, Rene M. (Ohio State U)
    Abstract: This paper assesses the current state of knowledge about crisis risk and its implications for risk management. Better data that became available since the Global Financial Crisis (GFC) has improved our understanding of crisis risk. These data have been used to show that some types of crises become predictable when one accounts for interactions between risks. Specifically, a financial crisis is much more likely in the years following both high credit growth and high asset valuations. However, some other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. The existing data show that political crises make economic crises more likely, so that, as suggested by the concept of polycrisis, feedback between non-economic crises and economic crises can be important, but there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility appear successful at reducing the adverse impact of crises on firms.
    JEL: G01 G21 G32
    Date: 2023–05
  5. By: Franck Moraux (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); D.A. Phan (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Thi Le Hoa Vo (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Downstream firms nowadays adopt either financing or cost sharing (CS) mechanisms to enhance the corporate social responsibility (CSR) performance of their suppliers. In this paper, we are interested in combining these two mechanisms in a supply chain. We consider a supply chain where the demand is CSR-dependent and where a large retailer shares the costs of CSR activities undertaken by a SME supplier. We investigate how the retailer's choice of two financing mechanisms, namely Bank Financing (BF) and Reverse Factoring (RF), can influence the various operational decisions of both parties and the performance of the supply chain. Our findings demonstrate that no matter which financing mechanism is applied (BF or RF), CS leads to higher CSR effort and higher profits for all supply chain members. Moreover, a CS contract affects the financing preferences of both the retailer and the supplier. Managerially, a CS contract combined with an appropriate financing mechanism help to improve the CSR performance and the profitability of a supply chain. © 2021, IFIP International Federation for Information Processing.
    Keywords: Bank financing, Corporate social responsibility, Cost-sharing contract, Reverse factoring, Supply chain
    Date: 2021–09–05
  6. By: Aristananda, Aristananda; Risman, Asep
    Abstract: This study aims to analyze the effect of firm size, profitability (ROA) and leverage (DER) on corporate social responsibility. The population in this study are companies registered as members of the Jakarta Islamic Index in 2016-2020. Of the 30 listed companies, there are 11 companies that meet the criteria as samples in this study. Sampling was done by purposive sampling method, using panel data. The method of data collection was carried out using documentation techniques and library research techniques with data sources namely secondary data. The data analysis method uses statistical techniques through Eviews 9. This study proves that the size of the company has a negative and insignificant effect on the disclosure of corporate social responsibility. ROA has a significant negative effect on the disclosure of corporate social responsibility
    Keywords: Firm size; Profitability; ROA; Leverage; DER; Corporate Social Responsibily (CSR), Jakarta Islamic Index;
    JEL: G00
    Date: 2022–05–09
  7. By: Beaver, William H; Cascino, Stefano; Correia, Maria; McNichols, Maureen F.
    Abstract: We examine bankruptcy within business groups. Groups have incentives to support financially distressed subsidiaries, as the bankruptcy of a subsidiary may impose severe costs on the group as a whole. This is in part because, in several countries, bankruptcy courts often “pierce the corporate veil” and hold groups liable for their distressed subsidiaries’ obligations as if they were their own. Using a large cross-country sample of group-affiliated firms, we show that, by reallocating resources within the corporate structure, business groups actively manage intra-group credit risk to prevent costly within-group insolvencies. Moreover, we document that recent regulatory changes in the approval and disclosure of related party transactions are costly for business groups in that they constrain their ability to shield their subsidiaries from credit-risk shocks. Our study informs the current regulatory debate on related party transactions by highlighting an important cost of anti-self-dealing regulation.
    Keywords: bankruptcy; credit risk; business groups; subsidiaries; veil piercing; related party transactions; regulation; Springer deal
    JEL: G14 G15 G38 M41
    Date: 2023–07–26
  8. By: Pablo Pastory y Camarasa; Martien Lamers; (-)
    Abstract: This paper constructs a forward-looking bank managerial sentiment index by using earnings call transcripts of US, Canadian, and European banks from 2001 to 2021. First, we validate this index through regressions showing its predictive power for positive stock returns and earnings forecast revisions. Second, we analyze whether managerial sentiment predicts bank credit growth. We find that a one standard deviation increase in the index of future sentiment leads to a 1.85% rise in credit growth over the next year. The results remain robust to various controls and competing explanations, including managers catering to analysts’ expectations and macroeconomic expectations.
    JEL: G21 G30 G40 D83 M1
    Date: 2023–08
  9. By: Luis F. Dumlao (Department of Economics, Ateneo de Manila University)
    Abstract: Mandatory credit allocation is a policy intervention to pressure banks to lend to certain sectors otherwise unfettered finance would not give access to. While some would argue that mandatory credit allocation results in sub optimal allocation of resources, it has been shown that such intervention results in socially desirable outcome. However, mandatory credit allocation should not be the responsibility of banks only, it must be supported with government guarantees. There are three sectors in which mandatory credit allocation is given namely the agriculture sector, the micro, small and medium enterprises or MSME sector, and enterprises involved in innovation. In one, the credit allocation is too big, in another too small, and yet in another difficult to identify. In all of these, the banks are left to shoulder the respective mission without government support. Banks either comply or they pay the penalty.
    Keywords: Bank Lending, Credit Rationing, Agricultural Finance
    JEL: G21 Q14
    Date: 2021–12
  10. By: Bartlett, Robert P. (U of California, Berkeley); Bubb, Ryan (New York U)
    Abstract: New approaches to corporate purpose have emerged in recent years that hold out the promise of addressing concerns about corporate social responsibility (CSR) through shareholder governance, rather than in spite of it. The seminal such approach—enlightened shareholder value—posits that treating other stakeholders well can ultimately redound to long-term shareholder value. However, two more recent proposals reconceptualize shareholder interests in more holistic ways and urge that it is shareholders’ welfare, not shareholder value per se, that managers should pursue. In particular, the “shareholder social preferences†view incorporates into the corporate objective the degree to which the firm’s operations align with the social views of shareholders. The “portfolio value maximization view, †in contrast, argues that corporate fiduciaries should maximize the value of diversified shareholders’ portfolios by considering the externalities of the firm’s operations on those portfolios. Shifting to shareholder welfare as the corporate objective, however, would do little to improve corporate conduct and would entail substantial costs. The social preferences of shareholders are conflicted, muted, and often prefer less protection of stakeholder interests than provided by law. Shareholders’ portfolio value captures only a small portion of the externalities like pollution that its proponents hope to address and risks motivating anticompetitive conduct. And neither corporate managers nor shareholders would have the information and incentives needed to pursue these additional shareholder welfare considerations. On the contrary, by distracting management from their core competencies, shareholder welfarism would ultimately lower shareholder welfare. The future of CSR, as with its past, is instead with enlightened shareholder value (ESV). But the existing law-and-economics literature on ESV has been stunted by key misconceptions, which we attempt to dispel. The increasing use by various actors in the corporate system of normative arguments that sound in ESV terms may lead to new pathways for achieving social progress.
    Date: 2023–07
  11. By: Borgschulte, Mark (University of Illinois at Urbana-Champaign); Guenzel, Marius (Wharton School, University of Pennsylvania); Liu, Canyao (Yale University); Malmendier, Ulrike (University of California, Berkeley)
    Abstract: We assess the long-term effects of managerial stress on aging and mortality. First, we show that exposure to industry distress shocks during the Great Recession produces visible signs of aging in CEOs. Applying neural-network based machine-learning techniques to pre- and post-distress pictures, we estimate an increase in so-called apparent age by one year. Second, using data on CEOs since the mid-1970s, we estimate a 1.1-year decrease in life expectancy after an industry distress shock, but a two-year increase when anti-takeover laws insulate CEOs from market discipline. The estimated health costs are significant, also relative to other known health risks.
    Keywords: managerial stress, life expectancy, apparent-age estimation, job demands, industry distress, visual machine-learning, corporate governance
    JEL: G34 I12 M12
    Date: 2023–08
  12. By: Laura Lakehal (LINEACT - Laboratoire d'Innovation Numérique pour les Entreprises et les Apprentissages au service de la Compétitivité des Territoires - CESI - CESI : groupe d’Enseignement Supérieur et de Formation Professionnelle - HESAM - HESAM Université - Communauté d'universités et d'établissements Hautes écoles Sorbonne Arts et métiers université); Muriel Davies (LINEACT - Laboratoire d'Innovation Numérique pour les Entreprises et les Apprentissages au service de la Compétitivité des Territoires - CESI - CESI : groupe d’Enseignement Supérieur et de Formation Professionnelle - HESAM - HESAM Université - Communauté d'universités et d'établissements Hautes écoles Sorbonne Arts et métiers université, Avelis); Vitale Di Stefano (Avelis); Philippe Marras (Avelis); Stéphanie Buisine (LINEACT - Laboratoire d'Innovation Numérique pour les Entreprises et les Apprentissages au service de la Compétitivité des Territoires - CESI - CESI : groupe d’Enseignement Supérieur et de Formation Professionnelle - HESAM - HESAM Université - Communauté d'universités et d'établissements Hautes écoles Sorbonne Arts et métiers université)
    Abstract: Organizations are subject to a dual movement of evolution: in the short term, they must adapt to fluctuations of the economic, geopolitical, energy, health, situations and so on. In the long term, they must be part of major societal and environmental transformations. Corporate governance must assume this dual mission of strategic decision and social responsibility, to combine performance and responsibility, which can be particularly problematic in small enterprises with informal processes and limited resources. The objective of this research is to structure the development of positive governance in SMEs, while respecting its ethics and identity. Our application field is a small company in the construction sector that will host this research over a period of three years. In order to prevent tension between individual and organisational requirements in a Corporate Social Responsibility approach, we find it important to also analyse employees' state of mind and experience at work. In particular, the motivation process could be the focal point of convergence between individual expectations, organizational objectives (purpose, structure of the governance, leadership style, impact...) and the managerial framework implemented to articulate everything. Our interventions will be based on a mixed methods approach to bring out the components of governance, organizational culture and values, and on a co-design approach to clarify governance, increase social performance, leadership and employees' work engagement to support corporate social responsibility and contribute to the common good. The first step of this research project will be dedicated to designing a tool for measuring social and environmental performance. Measurements will be based on employees' perception of corporate performance in social and environmental dimensions at the internal level of the company, at the local level of the territory and at the societal and global level. The transformational approach will target organizational processes, leadership style and individual activities. It will be iteratively designed and tested during this research project is expected to contribute to the domain of ethical management.
    Keywords: Governance, Corporate Social Responsibility, SME, Social Performance, Environmental Performance
    Date: 2023–11–23
  13. By: Risman, Asep; Ali, Anees Janee; Soelton, Mochamad; Siswanti, Indra
    Abstract: This study aims to determine empirical evidence of the effect of financial inclusion and financial technology (fintech) on the behavioral finance of MSMEs. This study uses a quantitative method with a positivist paradigm approach. The population of this study is all MSMEs in Indonesia. The sample used in this study is 205 respondents (MSME owners) from all over Indonesia. Sampling is carried out using a random technique. Data collection is carried out by distributing questionnaires, both manually and online using Google Forms, and is measured using a 5-point Likert scale. The data processing is carried out using Partial Least Square (PLS) software with a Structural Equation Modeling (SEM) model. The results of this study show that financial inclusion and financial technology (fintech) have a direct positive effect on the behavioral finance of MSMEs. Financial technology (fintech) can mediate and increase the effect of financial inclusion on the behavioral finance of MSMEs.
    Keywords: Financial Inclusion, Financial Technology, Behavioral Finance of MSMEs
    JEL: G02
    Date: 2022–08–28
  14. By: Cainelli, Giulio; Ganau, Roberto; Giunta, Anna
    Abstract: The aim of this paper is twofold. First, we analyze whether firms affiliated to national and international business groups outperform independent firms. Second, we investigate whether any potential performance premium associated with national and international business group membership depends on the quality of sub-national, regional institutions. Using data on Italian and Spanish manufacturing firms, we find a short-run growth premium for international business group members - while not for national business group members - with respect to independent firms. We also find that the growth premium associated with international business group membership is detected in low-quality regional institutional environments only.
    JEL: D02 R12
    Date: 2022–01–31
  15. By: Yancheng Liang; Jiajie Zhang; Hui Li; Xiaochen Liu; Yi Hu; Yong Wu; Jinyao Zhang; Yongyan Liu; Yi Wu
    Abstract: Despite the tremendous advances achieved over the past years by deep learning techniques, the latest risk prediction models for industrial applications still rely on highly handtuned stage-wised statistical learning tools, such as gradient boosting and random forest methods. Different from images or languages, real-world financial data are high-dimensional, sparse, noisy and extremely imbalanced, which makes deep neural network models particularly challenging to train and fragile in practice. In this work, we propose DeRisk, an effective deep learning risk prediction framework for credit risk prediction on real-world financial data. DeRisk is the first deep risk prediction model that outperforms statistical learning approaches deployed in our company's production system. We also perform extensive ablation studies on our method to present the most critical factors for the empirical success of DeRisk.
    Date: 2023–08
  16. By: Aaron Amburgey; Michael W. McCracken
    Abstract: We investigate the role financial conditions play in the composition of U.S. growth-at-risk. We document that, by a wide margin, growth-at-risk is investment-at-risk. That is, if financial conditions indicate U.S. real GDP growth will be in the lower tail of its conditional distribution, we know that the main contributor is a decline in investment. Consumption contributes under extreme financial stress. Government spending and net exports do not play a role.
    Keywords: growth-at-risk; real-time data; quantiles; expected shortfall
    JEL: C12 C32 C38 C52
    Date: 2023–08–21

This nep-cfn issue is ©2023 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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