nep-cfn New Economics Papers
on Corporate Finance
Issue of 2023‒09‒25
four papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. Optimal regulation of credit lines By José E. Gutiérrez
  2. Complementing Business Training with Access to Finance: Evidence from SMEs in Kenya By Anik Ashraf; Elizabeth Lyons
  3. Capital Structure Dynamics and Financial Performance in Indian Banks (An Analysis of Mergers and Acquisitions) By Kurada T S S Satyanarayana; Addada Narasimha Rao; Kumpatla jaya surya
  4. Optimal ratcheting of dividend payout under Brownian motion surplus By Chonghu Guan; Zuo Quan Xu

  1. By: José E. Gutiérrez (Banco de España)
    Abstract: This paper presents a contract-theoretic model in which banks choose pre-arranged and ex post funding to finance firms’ liquidity needs through credit lines. When liquidity needs are high, pre-arranged funding is key to sustaining lending and reducing the number of firms going into liquidation. Yet, in the presence of a pecuniary externality on firms’ liquidation values, competitive banks choose insufficient pre-funding compared with a constrained social planner. Constrained efficiency can be restored using regulatory liquidity ratios. The optimal regulatory ratio depends on the frequency of high liquidity need conditions, the value lost after a firm’s liquidation, and the premium on pre-funding.
    Keywords: credit lines, bank liquidity risk regulation, LCR, NSFR, Basel III
    JEL: G01 G21 G28 G32
    Date: 2023–08
  2. By: Anik Ashraf; Elizabeth Lyons
    Abstract: This paper investigates the complementarity between business training and access to financial capital for small and medium enterprises (SMEs) in Kenya. All participants in a business training program are offered training. One-third of participants are offered loans immediately after training (Concurrent Loan group), one-third are offered loans six weeks after training (Delayed Loan group), and the remaining third are offered loans after another four weeks (Control group). While a long time lag may reduce knowledge retention and application by SMEs, concurrent access to loans and associated business spending may crowd out the entrepreneurs’ attention from improving business practices. We find evidence for the latter in both intention-to-treat and treatment-on-the-treated estimates. While SMEs in both Control and Delayed Loan groups improve their business practices, SMEs in the Concurrent Loan group who take loans do not improve their practices at all. Moreover, entrepreneurs who take loans spend less time on their businesses and their business revenue falls. Our evidence is consistent with the entrepreneurs in our study using loans to substitute for their income.
    Keywords: business training, access to finance
    JEL: O12 L26 M53
    Date: 2023
  3. By: Kurada T S S Satyanarayana; Addada Narasimha Rao; Kumpatla jaya surya
    Abstract: This research investigates the multifaceted relationship underlying capital structure dynamics along with financial performance as a result of mergers and acquisitions, or M&As, in Indian banks. In the face of increasing competition, banks have deliberately embraced M&A as a strategy of improving commercial prospects and maintaining financial stability. The primary goal of this study is to examine the changes in the capital framework and financial results of banks before and after M&A transactions. The investigation, which employs a paired t-test as a method of statistical analysis, is based on a review of annual reports from selected banks over a two-year period before and after M&A transactions. The paired t-test approach allows for a thorough statistical analysis of interconnected datasets, revealing the subtle influence of M&A attempts on both bank financial performance as well as capital structure dynamics. The study's findings have the potential to add to the current body of knowledge on organisational planning, managing finances, and capital structure optimisation. The research has practical significance for financial companies, legislators, and scholars interested in understanding the profound effects of M&A inside the arena of financial institutions that operate within fiercely competitive landscapes because it provides comprehensive insights regarding the complex consequences of banking merger and acquisition (M&A) deals on capital structure as well as financial performance. Finally, the goal of this research is to provide the banking sector with educated decision-making capabilities and strategic guidance to businesses facing heightened competition while coping with the complexities of capital structure.
    Date: 2023–08
  4. By: Chonghu Guan; Zuo Quan Xu
    Abstract: This paper is concerned with a long standing optimal dividend payout problem in insurance subject to the so-called ratcheting constraint, that is, the dividend payout rate shall be non-decreasing over time. The surplus process is modeled by a drifted Brownian motion process and the aim is to find the optimal dividend ratcheting strategy to maximize the expectation of the total discounted dividend payouts until the ruin time. Due to the path-dependent constraint, the standard control theory cannot be directly applied to tackle the problem. The related Hamilton-Jacobi-Bellman (HJB) equation is a new type of variational inequality. In the literature, it is only shown to have a viscosity solution, which is not strong enough to guarantee the existence of an optimal dividend ratcheting strategy. This paper proposes a novel partial differential equation method to study the HJB equation. We not only prove the the existence and uniqueness of the solution in some stronger functional space, but also prove the monotonicity, boundedness, and $C^{\infty}$-smoothness of the dividend ratcheting free boundary. Based on these results, we eventually derive an optimal dividend ratcheting strategy, and thus solve the open problem completely. Economically, we find that if the surplus volatility is above an explicit threshold, then one should pay dividends at the maximum rate, regardless the surplus level. Otherwise, by contrast, the optimal dividend ratcheting strategy relays on the surplus level and one should only ratchet up the dividend payout rate when the surplus level touches the dividend ratcheting free boundary.
    Date: 2023–08

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