nep-cfn New Economics Papers
on Corporate Finance
Issue of 2024‒03‒25
eleven papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. Co-opted Boards and Corporate Cash Holdings By Ghafoor, Abdul; Zhichuan, Frank Li; Yousaf, Imran
  2. Credit Constraints, Corporate Transparency, and Export By Yikai Zhao; Rui Sun; Jun Nagayasu
  3. Credit Supply Shocks and Firm Dynamics: Evidence from Brazil By Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James Rauch
  4. Venture capital, the fetish of artificial intelligence, and the contradictions of making intangible assets By Kampmann, David
  5. Financing instruments and challenges for innovation in the EU: Panel evidence from the SAFE survey By Mitra, Alessio; Di Girolamo, Valentina; Canton, Erik
  6. Climate Change, Demand Uncertainty, and Firms' Investments: Evidence from Planned Power Plants By Lin, Chen; Schmid, Thomas; Weisbach, Michael S.
  7. Supply Network Fragility, Inventory Investment, and Corporate Liquidity By Sanz, Leandro
  8. Token vs Equity for Startup Financing By Guangye Cao
  9. Passive and Proactive Motivations of Cash Holdings By Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama
  10. Manager Characteristics and SMEs’ Restructuring Decisions: In-Court vs. Out-of-Court Restructuring By Rachid Achbah
  11. Information-Based Pricing in Specialized Lending By Blickle, Kristian; He, Zhiguo; Huang, Jing; Parlatore, Cecilia

  1. By: Ghafoor, Abdul; Zhichuan, Frank Li; Yousaf, Imran
    Abstract: We study the relationship between board co-option and corporate cash holdings. We find that as the fraction of co-opted board members (those appointed after a CEO assumes office) increases, firms opportunistically maintain higher cash holdings, indicating an agency problem of board co-option. The effect of gaining one co-opted board member is comparable, in magnitude and significance, to that of losing an independent board member. The agency problem of cash holdings arises once a board is co-opted, regardless of whether it is classified as independent based on conventional and legal definitions. We further discover that abnormal cash holdings under co-opted boards are driven by flexibility motives, but not precautionary motives. The positive effect of board co-option on cash is more pronounced in financially unconstrained firms and firms with high information asymmetry. In addition, board co-option leads to a significantly lower marginal value of cash and reduced dividend payouts. Finally, we find that alternative governance mechanisms, such as institutional ownership and analyst coverage, dampen the documented effects. We address the endogeneity problem with a variety of methods including exogenous events of CEO sudden deaths.
    Keywords: Board co-option; board independence; cash holdings; agency problem; corporate governance
    Date: 2024–02–23
  2. By: Yikai Zhao; Rui Sun; Jun Nagayasu
    Abstract: This study investigates the impact of corporate transparency on a firm's extensive margin in exports ("transparency-export" (TE) relationship). We propose a theoretical model for an asym­metric information environment and demonstrate that the TE relationship depends on a firm's current corporate transparency record. Moreover, we posit that mandated firms, especially those with severe financing constraints, can harm their export activities to enhance transparency. How­ever, improving a city's financial deepening and legal environment could offset these negative impacts and positively impact its TE relationship. The Chinese data support these theoretical implications.
    Date: 2024–02
  3. By: Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James Rauch
    Abstract: This paper explores how financial constraints distort entry decisions among otherwise productive en- trepreneurs 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 study this growth mecha- nism 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 ex ante weaker credit markets 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.
    Date: 2024–02
  4. By: Kampmann, David
    Abstract: This paper examines the venture capital-driven process of making intangible assets in platform start-up firms. By examining the case study of the rise and fall of a venture capital-backed ‘unicorn’ firm developing a digital health platform, this paper argues that the process of real valorization of capital invested in platform start-up firms involves the making of algorithmic systems and data as intangible assets as well as the experimentation with strategies of exploitation and appropriation, which are inherently linked to the future-oriented financial valorization process of equity shares since unprofitable start-up firms continuously require outside capital to expand operations. While the fetish of ‘artificial intelligence’ posing the firm’s chatbot for self-diagnosis as an intelligent ‘doctor in your pocket’ plays an important role in financial valorization, it is the failed real valorization process in making profits that ultimately leads to the platform start-up’s financial collapse. The conceptual contribution of the paper centres on the contradictory nature of assetization processes which sheds light on how class domination operates in and through venture capital-driven accumulation.
    Keywords: venture capital; asset making; Babylon Health; artificial intelligence chatbot; fetishism of technology; T&F deal
    JEL: L81
    Date: 2024–01–31
  5. By: Mitra, Alessio; Di Girolamo, Valentina; Canton, Erik
    Abstract: This paper studies the firm-level drivers of product, process, organisation and marketing innovation in the EU with panel data from 2009 to 2021. Employing conditional logit and linear probability models we investigate how firms’ characteristics, firms’ sources of financing, and firm perception of different challenges influence their likelihood to innovate. In line with the academic literature, we find that firms’ size and profit level improve firms’ innovation performance, while firms’ age decreases it. We also observe that the effectiveness of different financing instruments varies considerably depending on whether the company is pursuing product, process, organisation or marketing innovation. Finally, innovative firms more frequently report access to finance and regulations as important challenges for their future, while the relevance of other challenges (e.g. the availability of skilled staff or finding customers) varies depending on what type of innovation activities companies are engaged in.
    Keywords: Access to finance, Financing instruments, Innovation challenges, Firm innovation
    JEL: G20 G23 O30
    Date: 2023
  6. By: Lin, Chen (U of Hong Kong); Schmid, Thomas (U of Hong Kong); Weisbach, Michael S. (Ohio State U and ECGI)
    Abstract: How does demand uncertainty affect firms' investment decisions? We consider this issue from the perspective of electricity-producing firms and their planned investments in new power plants. Using plausibly exogenous variations in temperature predictions across scientific climate models to measure uncertainty about future electricity demand, we find that uncertainty increases investments in plants with flexible production technologies but depresses non-flexible investments. The net effect of uncertainty on investments is positive if firms have access to flexible investment opportunities. These results are consistent with models in which the impact of uncertainty on investments depends on the investments' production flexibility.
    JEL: G30 G31
    Date: 2023–09
  7. By: Sanz, Leandro (Ohio State U)
    Abstract: This study uses a novel dataset of over 11, 000 foreign suppliers to U.S. manufacturers to investigate the impact of supply network fragility on corporate policies. The scarcity of suppliers offering specialized inputs emerges as a key driver of fragility. Both theoretical and empirical evidence indicate that firms with fragile supply networks maintain more input inventories, less cash, and higher leverage. Moreover, plausible exogenous variation in fragility from technology adoption and disruptions supports a causal interpretation of the results. My findings indicate that because specialized inputs lack a spot market post-disruptions, firms with fragile supply networks favor operational over financial hedging.
    JEL: F23 G31 G32 L23
    Date: 2023–11
  8. By: Guangye Cao
    Abstract: Why would a blockchain-based startup and its venture capital investors choose to finance by issuing tokens instead of equity? What would be their rates of return for each asset? This paper focuses on the liquidity difference between the two fundraising methods. I build a three-period model of an entrepreneur, two types of investors, and users. Some investors have unforeseen liquidity needs in the middle period that can only be met with tokens. The entrepreneur obtains higher payoff by issuing tokens instead of equity, and the payoff difference increases with investors risk-aversion and need for liquidity in the middle period, as well as the depth of the token market.
    Date: 2024–02
  9. By: Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama
    Abstract: We present a novel fact called the ``V-shaped relationship'' between firms' growth opportunities and cash holdings. Specifically, cash holdings are positively correlated with growth opportunities in firms experiencing positive growth but negatively correlated with those facing adverse growth opportunities. This divergent link suggests that the motivation for cash holdings varies between these two types of firms. To account for this V-shaped relationship, we develop a new numerical model in which a manager optimally determines the levels of investment and cash holdings in response to shocks that affect the corporate production process. A unique aspect of this model is that it incorporates the dual motives of cash holdings: cash serves as a cushion against an adverse shock and simultaneously allows the provision of agile money, thereby seizing a growth opportunity. Considering these passive and proactive motives for cash holdings enables the model to replicate the V-shaped link. Furthermore, we investigate the rise in corporate cash holdings in recent decades through the model and find that tighter borrowing constraints and lower interest rates after the global financial crisis account for more than 60% of the rise in corporate cash holdings.
    Date: 2024–03
  10. By: Rachid Achbah (UL2 UFR SEG - Université Lumière - Lyon 2 - UFR de Sciences économiques et de gestion - UL2 - Université Lumière - Lyon 2)
    Abstract: This study aims to empirically investigate the impact of managers' characteristics on their choice between in-court and out-of-court restructuring. Based on the theory of upper echelons, we tested the preferences of 342 managers of financially distressed French firms regarding restructuring decisions. The overall findings of this study provide empirical support for the upper echelons theory. Specifically, managers with a long tenure and those with a high level of education are less likely to restructure before the court and are more likely to restructure privately. The findings also indicate that managers' age and gender do not significantly affect their choice between in-court and out-of-court restructuring. This study contributes to the literature on bankruptcy and corporate restructuring by turning the focus from firm characteristics to manager characteristics to explain restructuring decisions.
    Keywords: SMEs, Insolvency proceedings, Manager characteristics, Restructuring, Upper echelons theory
    Date: 2023
  11. By: Blickle, Kristian (Federal Reserve Bank of New York); He, Zhiguo (Stanford U); Huang, Jing (Texas A&M U); Parlatore, Cecilia (New York U)
    Abstract: We study specialized lending in a credit market competition model with private information. Two banks, equipped with similar data processing systems, possess "general" signals regarding the borrower's quality. However, the specialized bank gains an additional advantage through further interactions with the borrower, allowing it to access "speciliazed" signals. In equilibrium, both lenders use general signals to screen loan applications, and the specialized lender prices the loan based on its specialized signal conditional on making a loan. This private-information-based pricing helps deliver the empirical regularity that loans made by specialized lenders have lower rates (i.e., lower winning bids) and better ex-post performance (i.e., lower non-performing loans). We show the robustness of our equilibrium characterization under a generalized information structure, endogenize the specialized lending through information acquisition, and discuss its various economic implications.
    JEL: G21 L13 L52 O33 O36
    Date: 2023–12

This nep-cfn issue is ©2024 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.