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on Corporate Finance |
| By: | Olayinka Oyekola (Department of Economics, University of Exeter); Meryem Duygun (Business School, University of Nottingham); Samuel Odewunmi (Department of Economics, University of Exeter); Temitope Fagbemi (Aberdeen Business School, Robert Gordon University) |
| Abstract: | Drawing on the strands of literature on agency theory, institutions and financial development, this paper investigates whether, and how, political risk can explain access to external finance by 127, 542 firms in 108 countries over the period 2006 to 2021. We do this by combining international firm-specific data with a globally representative political risk measure to explore variations in access to external finance for working capital and fixed investment by firms. Our results provide robust evidence of a strong positive impact of political risk on external finance. Specifically, we find that a one-standard-deviation increase in political risk leads to a 10.89% increase in access to external finance for working capital of sampled firms. We then examine which dimensions of political risk matter for external finance, finding that bureaucratic quality, corruption, government stability, socioeconomic conditions, investment profile, external conflict, and ethnic tensions are the relevant individual components. Further analyses show that the effects of political risk on external finance for working capital are amplified for firms that are either experiencing low growth, innovative, in the service sector, or small- and medium-sized enterprises. Our results survive a battery of robustness checks, including an alternative proxy for external finance (fixed investment), controlling for additional confounding factors and outliers. Given the central importance of firms as engines of growth, our paper makes an insightful contribution to the literature on the institutional determinants of access to entrepreneurial financing by firms. |
| Keywords: | political risk, institutions, access to finance, external finance, working capital, firm-level evidence |
| JEL: | G20 G30 O16 O50 L26 |
| Date: | 2023–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:2312&r=cfn |
| By: | Antonio Acconcis (University of Naples Federico II and CSEF); Daniela Fabbri (Bayes Business School, City University of London); Annamaria Menichini (Università di Salerno and CSEF) |
| Abstract: | Empirical literature documenting the real costs of financial crises links the surge of unemployment to mainly bank frictions. This paper takes a more comprehensive approach by looking at how bank credit constraints, firm’s capital structure and inputs characteristics interact in shaping the firms’s response. We document that both the firm’s ability to substitute bank with trade credit and the characteristics of the inputs transacted along the supply chain matter in shaping the labor market reaction of Italian corporations to the unfolding of the 2008-9 financial crisis. As bank lending conditions tightened, firms intensively increasing their reliance on trade credit managed to partly mitigate their employment contraction but faced a stronger input bias against labor. Manufacturing firms largely using trade credit to buy differentiated inputs experienced a smaller drop in employment but a stronger input bias than firms buying standardized inputs. Finally, while the labor market recovered quite fast for firms increasing their reliance on trade credit, with the number of employees reaching the pre-crisis level around 2016, the shift toward technologies less intensive in labor showed more persistence, with the input bias even sharpening during 2013-14 and being in 2019 still 6 percentage points higher than the initial 2008 value. |
| Keywords: | Bank financing, trade credit, employment, labor share. |
| JEL: | G32 G33 K22 L14 |
| Date: | 2023–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:686&r=cfn |
| By: | Yusuf Emre Akgunduz; Abdurrahman B. Aydemir; Halil Ibrahim Aydin |
| Abstract: | We estimate the causal effects of entrepreneur education on credit outcomes. We link credit and business registries and identify the effects of education on access to credit, loan terms and default using a compulsory schooling reform implemented in Türkiye. More educated cohorts have higher access to credit, receive 3.3 percent larger loans and pay 0.23 percentage points lower interest rates compared to less educated cohorts despite no differences in borrowers' creditworthiness. We test alternative explanations for our findings and conclude that education reduces credit search costs and enables borrowers to shop around banks for better loan terms. |
| Keywords: | Compulsory schooling, Entrepreneurship, Bank loans |
| JEL: | G21 I25 O16 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2301&r=cfn |
| By: | Ozili, Peterson K |
| Abstract: | This article points out the significant changes in the 2018 codes of corporate governance in Nigeria. This document also highlights our concern that the failure of the 2018 code to address some identified issues can have unintended consequences among firms and could harm the ease of doing business in Nigeria. In particular, the 2018 code gives the board significant powers but underestimate the board’s ability to misuse their power, which may lead to complacency on the part of senior management and may affect the long-term survival and performance of Nigerian firms. Also, the Financial Reporting Council of Nigeria has not considered how companies will react to the new regulations. These observations have important implications for African countries and their codes of corporate governance. |
| Keywords: | Corporate governance codes, Corporate Accountability, Nigeria Code of Corporate Governance, financial reporting. |
| JEL: | M10 M12 M14 M19 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118795&r=cfn |
| By: | Pantelis Kazakis (University of Glasgow); Woon Sau Leung (University of Edinburgh; University of Southampton); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; CEPR) |
| Abstract: | We document that private firms are more efficient in investment than public firms. Exploiting the Sarbanes-Oxley Act that reduces agency problems of public firms but raises their compliance costs, we find that public firms, especially those with more complex operations, become more inefficient after SOX. Private firms that are likely more financially constrained exhibit greater investment efficiency. Furthermore, during periods of heightened uncertainty and when operating within industries characterized by increased environmental activism, consumer focus, and greater labor expenditure, public firms tend to exhibit higher levels of inefficiency. Mediation tests show that the more efficient investment of private firms translates into future profitability gains. Overall, the investment inefficiency of public firms does not stem from higher agency costs but rather from the inherent difficulty and costs of managing a complex organization. |
| Keywords: | Investment Efficiency; Public Firms; Private Firms; Information Asymmetry; Agency Costs; Compliance Costs; Uncertainty |
| JEL: | D25 G30 G32 G38 L11 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2389&r=cfn |
| By: | Ito, Tadashi; Ryan, Michael; Tanaka, Ayumu (Aoyama Gakuin University) |
| Abstract: | Using matched firm-bank-FDI data over the period 1989–2016, this study explores how a firm's financial constraints affect its choice of foreign affiliate ownership structure. Importantly, it tests the hypothesis that parent firms with banks as their largest shareholders hold lower ownership shares in their foreign subsidiaries, in part due to typical bank risk-averse behavior. The empirical analysis confirms that foreign subsidiary ownership ratios are negatively associated with parent firms’ debt ratios. Moreover, this study finds evidence that greater bank ownership of the investing parent leads to lower foreign affiliate ownership shares. However, this result is not robust to two specifications: "crisis times" when bank lending is greatly restricted to all borrowers, and a follow-the-customer relationship where the bank already has an overseas subsidiary in the host country. |
| Date: | 2023–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:9djup&r=cfn |
| By: | K. Sankarganesh (Ph.D. Research Scholar, Madras School of Economics, Chennai); K. R. Shanmugam (Director and Professor, Madras School of Economics) |
| Abstract: | This study is an attempt to empirically analyse the effect of corporate income tax on investment of manufacturing firms in India during 2005-2019, using the standard panel two way fixed effects model estimation techniques. It is found that the effective corporate tax has a negative and significant impact on the corporate investment. Moreover, the estimated effective tax elasticity is relatively low as compared to the magnitude found in other countries. Our analysis also indicates that the deduction rate has a positive impact on investment while interest-debt ratio and leverage ratio have a negative impact. The effective rate increases with age and size of firms. It is our hope that these results will be useful to policymakers and other stakeholders to take appropriate strategies to design the corporate tax policy such that it will not hinder business investment in India. |
| Keywords: | Investment, Effect tax rate, Corporation income tax, panel data methods |
| JEL: | D21 E22 E51 H25 C23 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2022-233&r=cfn |
| By: | Ozili, Peterson K |
| Abstract: | This paper examines the association between corporate governance and financial inclusion in terms of correlation and causation. It examines whether countries that have a strong corporate governance environment also have better financial inclusion outcomes. The indicators of financial inclusion are automated teller machines (ATMs) per 100, 000 adults, bank accounts per 1, 000 adults and bank branches per 100, 000 adults, while the indicators of corporate governance are extent of corporate transparency index, the extent of director liability index, the extent of disclosure index, the extent of ownership and control index, the extent of shareholder rights index, minority investors protection index and ease of shareholder suits index. The data were analyzed using Pearson correlation and granger causality tests. The results indicate that strong corporate governance is significantly correlated with better financial inclusion outcomes. The regional analyses show that corporate governance has a significant positive association with financial inclusion in Asian countries and in Middle East countries. However, a positive and negative association was observed between some indicators of corporate governance and financial inclusion in European countries, North American countries, South American countries, African countries and in Middle East and North Africa countries (MENA) countries, implying that strong corporate governance has a positive and negative association with financial inclusion depending on the indicators of corporate governance and financial inclusion used. There is also evidence of uni-directional granger causality between corporate governance and financial inclusion. |
| Keywords: | financial inclusion, corporate governance, financial institutions |
| JEL: | M12 M14 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118799&r=cfn |
| By: | Felix von Meyerinck (University of Zurich); Jonas Romer (University of St. Gallen); Markus Schmid (University of St. Gallen; Swiss Finance Institute; ECGI) |
| Abstract: | This paper analyzes the reputational effects of forced CEO turnovers on outside directors. Directors interlocked to a forced CEO turnover experience large and persistent increases in withheld votes at subsequent re-elections relative to non-turnover-interlocked directors. Reputational losses are larger for turnovers with a higher potential for disrupting a firm's management, for directors favorably inclined to the CEO, and for directors with a committee-based responsibility for monitoring the CEO. Our results imply that the average forced CEO turnover signals a governance failure at the board level, and that shareholders rely on salient actions to update their beliefs about directors' hidden qualities. |
| Keywords: | CEO turnover, director elections, director reputation, CEO succession, shareholder voting |
| JEL: | G32 G34 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2387&r=cfn |