nep-cfn New Economics Papers
on Corporate Finance
Issue of 2024‒03‒18
seven papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. Inflation, capital structure and firm value By Andrea Fabiani; Fabio Massimo Piersanti
  2. Picking winners: Managerial ability and capital allocation By Benz, Andreas; Demerjian, Peter R.; Hoang, Daniel; Ruckes, Martin E.
  3. Beyond the Balance Sheet: Analyzing the Relationship between Corporate Governance, Financial Performance, and Stock Prices in Pakistan's Non-Bank Financial Industry By Sulehri, Fiaz Ahmad; Ali, Amjad
  4. The European Small Business Finance Outlook 2023 By Krämer-Eis, Helmut; Botsari, Antonia; Gvetadze, Salome; Lang, Frank; Torfs, Wouter
  5. ChatGPT and Corporate Policies By Manish Jha; Jialin Qian; Michael Weber; Baozhong Yang
  6. Subsidizing business entry in competitive credit markets By Vincenzo Cuciniello; Claudio Michelacci; Luigi Paciello
  7. Relationship-Specific Investments and Firms' Boundaries: Evidence from Textual Analysis of Patents By Bena, Jan; Erel, Isil; Wang, Daisy; Weisbach, Michael S.

  1. By: Andrea Fabiani (Bank of Italy); Fabio Massimo Piersanti (Bank of Italy)
    Abstract: How does inflation affect firms' performance, conditional on their capital structure? To answer this question, we exploit survey-based inflation surprises from the Eurozone and analyze the cross-section of stock returns for non-financial companies on days of release of inflation data over the period 2020-2022. Our results suggest that, in reaction to a positive inflation surprise, firms with relatively higher financial leverage experience larger stock returns. Moreover, long-term leverage drives the adjustment, consistent with Fisherian theories emphasizing the fall in the real value of debt liabilities associated with higher inflation.
    Keywords: inflation, capital structure, leverage, debt maturity, stock returns, high-frequency
    JEL: E31 E50 G12 G30 G32
    Date: 2023–12
  2. By: Benz, Andreas; Demerjian, Peter R.; Hoang, Daniel; Ruckes, Martin E.
    Abstract: We examine how division managers' human capital affects internal capital allocation using a hand-collected data set of divisional managers at S&P 1, 500 firms. Based on a novel measure of division-manager ability, we show that more able division managers receive substantially larger capital allocations. This effect is robust to controlling for the possibility of assortative matching and more pronounced for firms with better governance. We also find that the allocation of extra capital to higher-ability managers creates firm value. These findings suggest efficient fund transfers to high-productivity managers and provide support for a largely unexplored bright side of internal capital markets.
    Keywords: Managerial Ability, Managerial Efficiency, Human Capital, Capital Budgeting, Investment, Internal Capital Markets
    JEL: G31 G32 G34 J24
    Date: 2024
  3. By: Sulehri, Fiaz Ahmad; Ali, Amjad
    Abstract: This study explores the complex relationship among corporate governance, financial performance, and stock prices in Pakistan's non-bank financial industry from 2017 to 2021. Employing panel least squares and generalized method of moments for empirical analysis, our research highlights the substantial and positive correlation between stock prices and earnings per share, emphasizing the significance of profits per share. Corporate governance factors, such as board meetings, board size, and board independence, exhibit shaded impacts on stock prices. Board meetings transition from insignificance in static analysis to a negative, substantial association in dynamic analysis. Conversely, board size and board independence remain insignificant, suggesting a limited influence on stock price fluctuations. Institutional ownership emerges as a robust driver, displaying a positive impact in both static and dynamic analyses. In contrast, managerial ownership yields mixed impacts, with static analysis revealing a nonsignificant negative relationship and dynamic analysis unveiling a significant negative association. The study underlines the need to consider both static and dynamic perspectives when evaluating these relationships, highlighting the temporal dynamics and lagged effects in assessing the influence of managerial ownership on stock prices. Additionally, return on assets demonstrates an insignificant impact on stock prices in Pakistan's non-bank financial industry, consistent across both static and dynamic analyses.
    Keywords: stock prices, financial performance, corporate governance, Earnings per share
    JEL: G3
    Date: 2023
  4. By: Krämer-Eis, Helmut; Botsari, Antonia; Gvetadze, Salome; Lang, Frank; Torfs, Wouter
    Abstract: This working paper provides an overview of the main markets relevant to the EIF, thereby documenting the impact of the polycrisis and the related challenging economic environment on SME financing. The publication first discusses the general market environment and then covers the markets for SME equity and debt products. In addition, it focuses on a number of thematic policy areas that are of particular interest to the EIF, such as Inclusive Finance, Fintech and Green finance & investment.
    Date: 2023
  5. By: Manish Jha; Jialin Qian; Michael Weber; Baozhong Yang
    Abstract: We create a firm-level ChatGPT investment score, based on conference calls, that measures managers' anticipated changes in capital expenditures. We validate the score with interpretable textual content and its strong correlation with CFO survey responses. The investment score predicts future capital expenditure for up to nine quarters, controlling for Tobin's q and other determinants, implying the investment score provides incremental information about firms' future investment opportunities. The investment score also separately forecasts future total, intangible, and R&D investments. High-investment-score firms experience significant negative future abnormal returns. We demonstrate ChatGPT's applicability to measure other policies, such as dividends and employment.
    JEL: C81 E22 G14 G31 G32 O33
    Date: 2024–02
  6. By: Vincenzo Cuciniello (Bank of Italy); Claudio Michelacci (EIEF); Luigi Paciello (EIEF)
    Abstract: Business creation subsidies are a means for reducing firm debt and bankruptcy risk. Do they work? To answer the question, we consider a general equilibrium model where firms are financially constrained at entry and borrow in a competitive market by issuing long-term debt. A subsidy stimulates entry and market competition, which increases the bankruptcy rate of incumbent firms. If the subsidy is paid out ex ante to finance start-up expenditures, the subsidy reduces the debt and the bankruptcy rate of start-ups; if paid out ex post as a refund for start-up expenditures, the subsidy crowds out the equity rather than the debt of start-ups and their bankruptcy rate also increases. The model is calibrated to match North-South differences across Italian provinces. The optimal subsidy in the South is paid out entirely ex ante and yields an increase in welfare equivalent to almost one percent of consumption. When the same subsidy is paid out ex post as a proportion of 60 per cent, it results in a welfare loss of a similar amount. We discuss the implications for the ‘I Stay in the South’ policy recently introduced in Italy.
    Keywords: Firm dynamics, overborrowing, ratchet effect
    JEL: E44 E62 G32 G33
    Date: 2023–10
  7. By: Bena, Jan (U of British Columbia); Erel, Isil (Ohio State U and ECGI); Wang, Daisy (Ohio State U); Weisbach, Michael S. (Ohio State U and ECGI)
    Abstract: The hold-up problem can impair firms' abilities to make relationship-specific investments through contracts. Ownership changes can mitigate this problem. To evaluate changes in the specificity of human capital investments, we perform textual analyses of patents filed by lead inventors from both acquirer and target firms before and after acquisitions. Inventors whose human capital is highly complementary with the patent portfolios of their acquisition partners are more likely to stay with the combined firm post-deal and subsequently make their investments more specific to the partner's assets. As ownership of another firm results in increasingly specific investments to that firm's assets, contracting issues related to relationship-specific investments is likely a motive for acquisitions.
    JEL: G34 L14 L22
    Date: 2023–12

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