nep-cfn New Economics Papers
on Corporate Finance
Issue of 2023‒10‒16
fourteen papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. The development of the Central and Eastern European venture capital market in Europe By Judit Karsai
  2. Impact of the Loan Guarantees Program Reactiva on the Performance of Peruvian Companies By Marcos Ceron; Gerald Cisnero; Rafael Nivin
  3. Macroprudential stress‑test models: a survey By Aikman, David; Beale, Daniel; Brinley-Codd, Adam; Covi, Giovanni; Hüser, Anne‑Caroline; Lepore, Caterina
  4. Credit Supply Shocks and Firm Dynamics: Evidence from Brazil By Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James E. Rauch
  5. COVID-19 pandemic and firm-level dynamics in the USA, UK, Europe, and Japan By Ahmad, Wasim; Kutan, Ali M.; Chahal, Rishman Jot Kaur; Kattumuri, Ruth
  6. The Effects of Subsidies on Firm Size and Productivity By Bearzotti, Enia; Polanec, Sašo; Bartolj, Tjaša
  7. Bank expectations and prudential outcomes By Suss, Joel; Hughes, Adam
  8. Auctioning Long-Term Projects under Financial Constraints By Martimort, David; Arve, Malin
  9. The market for sharing interest rate risk: quantities behind prices By Khetan, Umang; Neamțu, Ioana; Sen, Ishita
  10. Do carbon emissions affect the cost of capital? Primary versus secondary corporate bond markets By Kim, Daniel; Pouget, Sébastien
  11. Motives for Delegating Financial Decisions By Mikhail Freer; Daniel Friedman; Simon Weidenholzer
  12. The entrepreneurial accompaniment and its role in supporting emerging projects: Case study of the National Fund for Credit Guarantee FGAR By Rial Zouina
  13. The Rise of Star Firms: Intangible Capital and Competition By Meghana Ayyagari; Asli Demirguc-Kunt; Vojislav Maksimovic
  14. Margins, debt capacity, and systemic risk By Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin

  1. By: Judit Karsai (Centre for Economic and Regional Studies)
    Abstract: The working paper examines the role and development of the Central and Eastern European venture capital sector in the five years between 2016 and 2020. This period includes both the end of the recovery after the economic crisis in 2008 and the downturn due to the coronavirus crisis in 2019. A statistical analysis of venture capital funds and investments in the CEE region confirms that, while the overall position of the region in Europe did not change over the period under review, the differences between countries in the region increased sharply. The northern part of the region rivals the most developed countries in Europe, the central part is driven by an abundance of public resources, while the venture capital sector in the south is only in its infancy. The size of the venture capital funds in the region is far below the European average, so the start-ups only have a chance to become successful if they are involved in the international flow of venture capital. The role of the government in the funds in the region is extremely high, but the selection between companies is therefore not based solely on market considerations. Rent-seeking behaviour goes against the essence of venture capital. As a result of the deterioration of the global political and economic situation, the entire Central and Eastern European region is losing its ability to attract capital.
    Keywords: Keywords: venture capital; private equity; acquisition; entrepreneurship; startup; innovation
    JEL: G23 G24 G28 L26 M13
    Date: 2023–08
  2. By: Marcos Ceron (Central Reserve Bank of Peru); Gerald Cisnero (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru)
    Abstract: Amid the global COVID-19 crisis, governments worldwide introduced measures to support private enterprises. This study utilizes a newly curated panel database, encompassing the financial records of firms in Peru, to investigate the impact of a substantial governmentbacked loan guarantee program, known as "Reactiva Peru", on the performance of mediumsized Peruvian firms. To address the non-random allocation of loans, our empirical approach combines matching techniques and difference-in-differences methods, drawing upon previous research (Girma et al., 2007; Heyman, 2007). Our findings reveal that the Reactiva program led to heightened liquidity levels among beneficiary firms, albeit with an associated increase in indebtedness. Regarding profitability, the observed impacts on treated companies were not notably positive, except for a modest uptick in the net profit margin. This study contributes valuable insights into the efficacy of public credit support programs during crises, highlighting both their advantages and potential trade-offs for medium-sized enterprises.
    Keywords: Loan guarantees ; COVID-19 pandemic ; Credit risk ; Bank lending
    JEL: G18 G21 G28 H81
    Date: 2023–10–02
  3. By: Aikman, David (King’s College, London); Beale, Daniel (Bank of England); Brinley-Codd, Adam (Bank of England); Covi, Giovanni (Bank of England); Hüser, Anne‑Caroline (Bank of England); Lepore, Caterina (International Monetary Fund)
    Abstract: We survey the rapidly developing literature on macroprudential stress‑testing models. In scope are models of contagion between banks, models of contagion within the wider financial system including non‑bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is twofold: first, to provide a reference guide of the state of the art for those developing such models; second, to distil insights from this endeavour for policymakers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress‑testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policymakers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions’ capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash and (c) the topology of the financial network.
    Keywords: Stress testing; system-wide models; contagion; systemic risk; market-based finance; real-financial linkages; sectoral interlinkages; macroprudential policy
    JEL: G21 G22 G23 G32
    Date: 2023–08–11
  4. By: Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James E. Rauch
    Abstract: We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.
    JEL: D21 D22 D92 L25 L26 M13 O12
    Date: 2023–09
  5. By: Ahmad, Wasim; Kutan, Ali M.; Chahal, Rishman Jot Kaur; Kattumuri, Ruth
    Abstract: This paper examines the impact of the coronavirus pandemic during its first and second waves for the USA, UK, Europe, and Japan. We explore the firm-level dynamics and exhibit the impact of coronavirus events on large and small firms and firms' idiosyncratic risk. We find that the intensity of the impact of the coronavirus pandemic events is not uniform for firms. The Blank Swan events in March 2020 exhibit stronger impact the second wave till April 2021. The second wave analysis reveals the sign of recovery and receding effect of the pandemic. The idiosyncratic analysis shows the positive impact of the coronavirus and stringency measures on the idiosyncratic risk.
    Keywords: Covid-19; event study; idiosyncratic risk; stock returns; structural break; coronavirus
    JEL: R14 J01
    Date: 2021–11–01
  6. By: Bearzotti, Enia; Polanec, Sašo; Bartolj, Tjaša
    Abstract: This paper evaluates the impact of varying subsidy sizes and distinct program objectives on firm size and performance. The magnitude of treatment effects increases with subsidy size, although the marginal effects tend to decrease. We also find that treatment effects differ across subsidy programs due to their distinct objectives. Among these, labor-support measures are most effective at supporting employment, capital, and output while being most harmful to productivity. Contrary to theory, subsidies providing incentives for investments have no impact on capital or productivity. The treatment effects tend to decrease over time and are thus temporary. As recipient firms are more likely to receive additional support in the future, the effects of subsidies accumulate giving rise to permanent differences between subsidized and non-subsidized firms. However, the lack of productivity improvements in such firms questions the benefits of repeated supporting measures.
    Keywords: Subsidies, Firm Growth, Firm Performance, Industrial Policy
    JEL: H25 L25 L52
    Date: 2023–09–06
  7. By: Suss, Joel (Bank of England); Hughes, Adam (Bank of England)
    Abstract: We study bank expectations using a unique and rich data set derived from regulatory returns. The data covers key bank-level variables, including profitability, capital, and loan impairments. We find that banks tend to be optimistic, expecting higher returns, higher capital ratios and fewer impairments than are subsequently realised. However, there is substantial variation in forecasting performance across banks, and banks with better quality governance and management tend to also have smaller forecast errors. We go on to examine the relationship between forecast performance and bank outcomes, finding that forecast errors are associated with greater prudential risk, even after controlling for bank and time fixed effects. Importantly, forecast errors have an asymmetric effect on bank outcomes – errors of optimism drive our findings. We find that forecast errors are also associated with lending – banks that have higher errors tend to have significantly lower subsequent loan growth.
    Keywords: Banks; forecasts; prudential risk
    JEL: G21 L20 M20
    Date: 2023–08–04
  8. By: Martimort, David; Arve, Malin
    Abstract: We consider a procurement auction for the provision of a basic service to which an add-on must later be appended. Potential providers are symmetric, have private information on their cost for the basic service and the winning firm must also implement the add-on. To finance cost-reducing activities related to the add-on, this firm may need extra funding by outside financiers. Non-verifiable effort in reducing these costs creates a moral hazard problem which makes the firm’s payoff function for the second period concave in returns over the relevant range. This concavity has two effects: It makes it more attractive to backload payments to facilitate information revelation and uncertainty on the cost of the add-on introduces a background risk which requires a risk premium. In this context, we characterize the optimal intertemporal structure of payments to the winning firm, equilibrium bidding behavior and reserve prices in the first-price auction with bidders.
    Keywords: Auctions; procurement; financial constraints; dynamic mechanism design, asymmetric information; uncertainty; endogenous risk aversion.
    Date: 2023–09–18
  9. By: Khetan, Umang (University of Iowa); Neamțu, Ioana (Bank of England); Sen, Ishita (Harvard Business School)
    Abstract: We study the extent of interest rate risk sharing across the financial system. We use granular positions and transactions data in interest rate swaps, covering over 60% of overall swap activity in the world. We show that pension and insurance (PF&I) sector emerges as a natural counterparty to banks and corporations: overall, and in response to decline in rates, PF&I buy duration, whereas banks and corporations sell duration. This cross-sector netting reduces the aggregate net demand that is supplied by dealers. However, two factors impede cross-sector netting and add to dealer imbalances across maturities. (i) PF&I, bank and corporate demand is segmented across maturities. (ii) Large volumes are traded by hedge funds, who behave like banks in the short end and like PF&I in the long end. This worsens segmentation, exposing dealers to a steepening or flattening of the yield curve in addition to residual duration risk. Consistent with this, we find that demand pressure, in particular hedge funds’ trades, impact swap spreads across maturities. We also document that long-tenor pension fund trades are less likely to be centrally cleared, adding counterparty credit risk to demand imbalances.
    Keywords: Interest rate risk; OTC derivatives; hedge funds; pension funds; insurance companies; banks; non-financial corporations; demand elasticities; counterparty credit risk
    JEL: G11 G12 G15 G21 G22 G23 G24 G32
    Date: 2023–07–21
  10. By: Kim, Daniel; Pouget, Sébastien
    Abstract: We empirically study whether carbon emissions affect US firms’ cost of capital. We show that firms with higher carbon emissions tend to face higher cost of capital on the primary market. However, this carbon premium represents less than 15% of the one prevailing on the secondary market. A simple model attributes this gap to uncertainty about future climate preferences of investors and limited competition among primary market dealers. We find evidence for these two channels. Our findings imply that market imperfections reduce the effectiveness of the cost of capital channel in inducing firms to reduce their carbon emissions.
    Keywords: Climatefinance; Carbonpremium; Bondmarkets; Greeninvestors; Underwriting dealers
    JEL: G12 G41
    Date: 2023–09
  11. By: Mikhail Freer; Daniel Friedman; Simon Weidenholzer
    Abstract: Why do investors delegate financial decisions to supposed experts? We report a laboratory experiment designed to disentangle four possible motives. Almost 600 investors drawn from the Prolific subject pool choose whether or not to delegate a real-stakes choice among lotteries to a previous investor (an ``expert'') after seeing information on the performance of several available experts. We find that a surprisingly large fraction of investors delegate even trivial choice tasks, suggesting a major role for the blame shifting motive. A larger fraction of investors delegate our more complex tasks, suggesting that decision costs play a role for some investors. Some investors who delegate choose a low quality expert with high earnings, suggesting a role for chasing past performance. We find no evidence for a fourth possible motive, that delegation makes risk more acceptable.
    Date: 2023–09
  12. By: Rial Zouina (UMBB - Université M'Hamed Bougara Boumerdes)
    Abstract: We present the concepts of entrepreneurship and entrepreneurial accompaniment in Algeria, highlighting the National Fund for Credit Guarantee for Small and Medium Enterprises (FGAR) as one of the mechanisms of entrepreneurial escort by analysing the various statistics and results of this fund. The study concluded with the positive role played by the FGAR in supporting entrepreneurship in Algeria, but the lack of coherence and coordination between the various mechanisms of support and entrepreneurial accompaniment led to the disruption of its development goals.
    Keywords: Entrepreneurship Entrepreneurial Accompaniment the National Fund for Credit Guarantee FGAR Start-ups Small and Medium Enterprises. JEL Classification Codes: L26 M13, Entrepreneurship, Entrepreneurial Accompaniment, the National Fund for Credit Guarantee FGAR, Start-ups, Small and Medium Enterprises. JEL Classification Codes: L26, M13
    Date: 2023–06–04
  13. By: Meghana Ayyagari (School of Business, George Washington University); Asli Demirguc-Kunt (Center for Global Development); Vojislav Maksimovic (Robert H Smith School of Business at the University of Maryland)
    Abstract: The large divergence in the returns of top-performing star firms and the rest of the economy is substantially reduced when we account for the mismeasurement of intangible capital. Star firms produce and invest more per dollar of invested capital, have more valuable innovations as measured by the market value of patents, and are as exposed to competitive shocks as non-stars. While star firms have higher markups, these are predicted early in their life-cycle at a time when they are small. Overall, correcting for mismeasurement, the evidence points to superior ability of star firms to use tangible and intangible capital.
    JEL: E22 L1
    Date: 2022–11–17
  14. By: Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
    Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.
    Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk
    JEL: G22 G23 G28
    Date: 2023–09

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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