nep-cfn New Economics Papers
on Corporate Finance
Issue of 2024‒04‒29
six papers chosen by
Zelia Serrasqueiro, Universidade da Beira Interior

  1. A Causal Linkage: Corporate Debt and Sovereign Spreads By Jun Hee Kwak
  2. Private equity financing & firm productivity By Paul Lavery; John Tsoukalas; Nick Wilson
  3. Corporate Income Tax (CIT) and Capital By Stanislas T. M. D. C. Agossadou
  4. Blended Finance By Caroline Flammer; Thomas Giroux; Geoffrey Heal
  5. Risk-Adjusting the Returns to Private Debt Funds By Isil Erel; Thomas Flanagan; Michael S. Weisbach
  6. Private Debt Funds: What They Are and Trends under Interest Rate Hikes By Koichi Kuroda; Akira Hasebe; Satoshi Ito; Daisuke Ikeda

  1. By: Jun Hee Kwak (Department of Economics, Sogang University, Seoul, Korea)
    Abstract: This study shows that corporate debt accumulation during credit booms can explain increases in sovereign risk during stress periods. Using detailed firmlevel database across six Eurozone countries, I construct granular instruments for aggregate corporate leverage. Instrumental variable regressions indicate that rising corporate leverage causally increases sovereign spreads in Eurozone countries during the debt crisis period of 2010-2012. This result provides the first empirical evidence on the causal link between corporate debt and sovereign debt crises. Additionally, firm-level evidence suggests that highly leveraged firms are likely to pay fewer taxes to the government, contributing to the rise in sovereign risk.
    Keywords: Financial Crisis, Corporate Debt, Sovereign Risk, Granular Instrument, Indentification
    JEL: F34 F41 G32 L11
    Date: 2023
  2. By: Paul Lavery (Adam Smith Business School, University of Glasgow); John Tsoukalas (The Productivity Institute, The University of Glasgow); Nick Wilson (Leeds University Business School)
    Keywords: Private equity buyouts; productivity; investment; firm growth
    JEL: F14 G01 G32 G34
    Date: 2024–01
  3. By: Stanislas T. M. D. C. Agossadou (FASEG/UAC - Faculté des Sciences Economiques et de Gestion (FASEG) de l'Université d'Abomey-Calavi (UAC))
    Abstract: This research consists of verifying whether CIT has an effect on capital given the financing risk incurred. A review of several capital theories has shown that CIT is one of the main determinants of a firm's capital structure. The inclusion of CIT in capital structure models continues to divide the world of corporate finance. Debt interest deduction in computing CIT reinforces the controversy over the question of the capital structure that optimizes the tax savings provided by this deduction. The consequence is the existence of two opposing groups on the optimum capital structure: on the one hand, the group of those who believe that there is one and only one optimal capital structure, and on the other, the group of those who reject out of hand any possibility of an optimal capital structure. The sample starts with a case study of two hypothetical identical firms, one indebted and the other non- indebted, with the same profitable investment project over a period of time, and ends with 101 pairs of identical firms belonging to different classes of financing risk. The hypothesis of non-gratuity of cost and income is used, and capital markets are assumed to be pure and perfect. The results confirm that CIT has no effect on the structure, value, cost and return of capital for a given financing risk, and reveal the existence of a third source of financing called "public capital", whose cost is the corporate capital tax rate (CCTR). There is no longer any question of thinking about the optimum capital structure, which is a pure financial illusion. This paper is one of the first to show that CIT does not affect capital, and to propose a model that explains capital structure behavior in the presence of CIT.
    Abstract: Cette recherche consiste à vérifier si l'IS a un effet sur le capital compte tenu du risque de financement encouru. L'examen de plusieurs théories de capital a montré que l'IS est l'un des principaux déterminants de la structure de capital de la firme. La prise en compte de l'IS dans les modèles de détermination de la structure de capital continue de diviser le monde de la finance d'entreprise. La déduction des intérêts de la dette dans le calcul de l'IS, renforce la controverse sur la question de la structure de capital permettant d'optimiser l'économie fiscale procurée par cette déduction. La conséquence est l'existence de deux groupes opposés sur l'optimum de la structure de capital : d'un côté, le groupe de ceux qui pensent qu'il existe une et une seule structure optimale de capital, de l'autre, le groupe de ceux qui rejettent d'emblée toute possibilité d'une structure optimale de capital. L'échantillon part de l'étude de cas de deux firmes identiques hypothétiques, l'une est endetté et, l'autre, est non endetté, ayant le même projet d'investissement rentable sur une période, pour aboutir sur 101 couples de firmes identiques appartenant à des classes différentes de risque de financement. L'hypothèse de non-gratuité de coût et de revenu est utilisée et les marchés de capitaux sont supposés purs et parfaits. Les résultats confirment que l'IS n'a aucun effet sur la structure, la valeur, le coût et le rendement de capital pour un risque de financement donné et ont révélé l'existence d'une troisième source de financement appelée « capital public » dont le coût est le taux de l'impôt sur le capital des sociétés (CCTR). Il n'est plus question de penser à l'optimum de la structure de capital qui, constitue une pure illusion financière. Ce papier est l'un des premiers à montrer que l'IS n'a pas d'effet sur le capital et à proposer un modèle qui explique le comportement de la structure de capital en présence d'IS.
    Keywords: Capital structure; firm value; weighted average cost of capital (WACC); return on investment; financial integration of corporate tax., Capital structure, firm value, weighted average cost of capital (WACC), return on investment, financial integration of corporate tax.
    Date: 2024–03–17
  4. By: Caroline Flammer; Thomas Giroux; Geoffrey Heal
    Abstract: Blended finance---the use of public and philanthropic funding to crowd in private capital---is a potential way to finance a more sustainable world. While blended finance holds the promise of being catalytic in mobilizing vast amounts of private capital, little is known about this practice. In this paper, we provide a conceptual framework that formalizes the decision-making of development finance institutions (DFIs) that engage in blended finance. We then provide empirical evidence on blended finance using data from a major DFI. The key variable we study is the level of concessionality, which captures the subsidy from the blended co-investment. Our findings indicate that DFIs provide higher concessionality for projects that have a higher sustainability impact per dollar invested. Moreover, the concessionality is higher for projects in countries with higher political risk and a higher degree of information asymmetries. In such cases, the blending tends to also include risk-management provisions. These findings are consistent with the predictions from our conceptual framework, in which DFIs have a limited budget that they allocate across projects to create societal value.
    JEL: G23 H41 O1 Q01 Q14
    Date: 2024–03
  5. By: Isil Erel; Thomas Flanagan; Michael S. Weisbach
    Abstract: Private debt funds are the fastest growing segment of the private capital market. We evaluate their risk-adjusted returns, applying a cash-flow based method to form a replicating portfolio that mimics their risk profiles. Using both equity and debt benchmarks to measure risk, a typical private debt fund produces an insignificant abnormal return to its investors. However, gross-of-fee abnormal returns are positive, and using only debt benchmarks also leads to positive abnormal returns as funds contain equity risks. The rates at which private debt funds lend appear to be high enough to offset the funds’ fees and risks, but not high enough to exceed both their fees and investors' risk-adjusted rates of return.
    JEL: G12 G21 G23
    Date: 2024–03
  6. By: Koichi Kuroda (Bank of Japan); Akira Hasebe (Bank of Japan); Satoshi Ito (Bank of Japan); Daisuke Ikeda (Bank of Japan)
    Abstract: Private Debt (PD) funds are those that specialize in providing loans mainly to middle-market firms with low creditworthiness. Their assets under management (AUM) have expanded mainly in the U.S., as their borrower-investor bases have broadened, against the background of growing investment needs in the low interest rate environment and the strengthening of financial regulations after the global financial crisis. However, with the recent interest rate hikes in the U.S. and Europe, both the average time required to raise new funds and concentration in major PD funds have increased, and the amount of fundraising for new funds has declined. In Japan the market size of PD funds is extremely limited relative to the U.S. and Europe. Potential risks of PD funds include opacity due to lack of disclosed information, the interconnectedness within the financial system, the accumulation of vulnerabilities associated with rapid credit growth, and the liquidity risk of open-end funds. It is necessary to pay close attention to these developments, including their impact on the efficient allocation of resources for sustainable economic growth in the longer run.
    Date: 2024–04–12

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.