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on Corporate Finance |
| By: | René M. Stulz |
| Abstract: | Existing evidence shows convincingly that expected cash flows of non-financial firms can be negatively affected by their total risk, so that non-financial firms can create shareholder wealth by managing their total risk. After reviewing theories that demonstrate links between firm value and total risk, I examine how financial risk management is used to manage firm total risk. I conclude from the evidence that the use of financial risk management is mostly limited to near-term risk in non-financial firms. I offer explanations for this limited role of financial risk management. I argue that the limitations of financial risk management make it important for firms to also focus on resilience and call for more research on the costs and benefits of resilience. |
| JEL: | G23 G32 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32882 |
| By: | Hellmann, Thomas (Sa¨ıd Business School, Oxford University and NBER); Montag, Alexander (Kelley School of Business, Indiana University, and); Tåg, Joacim (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Startups face a trade-off between short-term profitability versus long-term growth where investors tolerate prolonged financial losses. We present a new theory and empirical evidence about the existence and shape of so-called J-curves. The theory predicts that investors facing better exit opportunities have a higher loss tolerance, encouraging startups to pursue more ambitious growth strategies. Empirically, we examine a large Swedish dataset with detailed cash flow information. Swedish startups backed by US venture capitalists experience deeper J-curves than those backed by non-US venture capitalists. They have more successful exits, higher exit values, faster sales growth, and more follow-on funding. |
| Keywords: | Venture capital; Loss tolerance; J-curves; Entrepreneurship; Exits |
| JEL: | F39 G24 L26 O16 |
| Date: | 2024–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1500 |
| By: | Elisabeth Kempf; Margarita Tsoutsoura |
| Abstract: | We review an empirical literature that studies how political polarization affects financial decisions. We first discuss the degree of partisan segregation in finance and corporate America, the mechanisms through which partisanship may influence financial decisions, and available data sources to infer individuals' partisan leanings. We then describe and discuss the empirical evidence. Our review suggests an economically large and often growing partisan gap in the financial decisions of households, corporate executives, and financial intermediaries. Partisan alignment between individuals explains team and financial relationship formation, with initial evidence suggesting that high levels of partisan homogeneity may be associated with economic costs. We conclude by proposing several promising directions for future research. |
| JEL: | G0 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32792 |
| By: | Samuel Antill; Neng Wang; Zhaoli Jiang |
| Abstract: | Secured lenders have recently demanded a new condition in distressed debt restructurings: competing secured lenders must lose priority. We model the implications of this “creditor-on-creditor violence” trend. In our dynamic model, secured lenders enjoy higher priority in default. However, secured lenders take value-destroying actions to boost their own recovery: they sell assets inefficiently early. We show that this creates an ex-ante tradeoff between secured and unsecured debt that matches recent empirical evidence. Introducing the recent creditor-conflict trend in this model endogenously increases secured credit spreads. Importantly, it also increases ex-ante total surplus: restructurings endogenously introduce efficient state-contingent debt reduction. |
| JEL: | G31 G32 G33 G34 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32823 |
| By: | Aleksandra Jandric (Institute of Economic Studies, Charles University, Prague, Czech Republic & Faculty of Economics, University of Banja Luka); Adam Gersl (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | This paper examines the determinants of private equity activity across Europe. We analyze a total of 43 explanatory variables, categorized into six groups: Economy; Finance and capital markets; Quality of institutions; Life quality; Economic freedom and Globalization. We assess their impact on three target variables representing overall private equity activity: Investments, Divestments and Fundraising. The study covers 26 European countries over the period from 2007 to 2022. First, we use Bayesian Model Averaging (BMA) to identify which variables are essential for further analysis. We then conduct a multicollinearity test and remove variables highly correlated with those deemed significant by BMA. The final step involves panel data analysis to identify the key variables that countries should prioritize in order to enhance their private equity activity and make the necessary policy adjustments to improve their attractiveness in the private equity sector. Our findings highlight the significance of certain variables that have not been previously analyzed, alongside some traditionally acknowledged factors. Notably, trade openness, bank credit to the private sector, public spending on education, inflation and labor force emerge as significant determinants across Investments, Divestments, and Fundraising. |
| Keywords: | Private equity, Venture capital, Fundraising, Investments, Divestments, Bayesian Model Averaging, Panel data analysis |
| JEL: | C58 E44 G11 G24 G28 M13 O21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_30 |
| By: | Andrea Alati (Bank of England); Johannes J. Fischer (Bank of England); Maren Froemel (Bank of England); Ozgen Ozturk (University of Oxford) |
| Abstract: | How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm-level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. We find attentive firms to be more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks. |
| Keywords: | Investment, survey data, corporate finance, financial frictions, learning |
| JEL: | D22 D25 D84 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2424 |
| By: | Yoshida , Kenichi (Kyushu University); Xie, Jun (Kyushu University); Managi, Shunsuke (Kyushu University); Yamadera, Satoru (Asian Development Bank) |
| Abstract: | This study investigated environmental, social, and governance (ESG) performance and its financial impacts across 38 economies from 2013 to 2022, with a special focus on firms in Asia. The main findings are as follows. First, notable disparities in ESG assessments were found across major rating agencies due to a lack of commensurability in ESG elements and evaluation methods. Second, the multilevel model analysis demonstrated considerable space for enhancing the ESG performance of companies in Asia, in contrast to that of their counterparts in Europe. Notably, the ESG practices of firms in Southeast Asia have stronger positive relationships with financial performance. Finally, inclusive wealth significantly moderates the financial impacts of ESG practices and can serve as a valuable sustainability indicator at the national level to inform ESG practices specific to different regions. |
| Keywords: | ESG performance; comparative CSR; inclusive wealth; multilevel regression model |
| JEL: | M14 M41 O16 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0741 |
| By: | Fabrice Defever; Alejandro Riano; Gonzalo Varela |
| Abstract: | This paper evaluates the impact of two large export finance support schemes on firm-level export performance. The Export Finance Scheme (EFS) and the Long-Term Finance Facility for Plant & Machinery (LTFF), provide loans at subsidized interest rates for Pakistani exporters to finance working capital and the purchase of machinery and equipment respectively. We combine customs data with information on firms' participation in each program between 2015 and 2017 and use matching combined with difference-in-differences to estimate the effect of the subsidies on firms' export values, the number of products exported and the number of destinations they serve. We find that both programs deliver a large and positive impact on export growth rates - primarily along the intensive margin - and do so in an effective way relative to the direct financial cost of the subsidies. |
| Keywords: | trade finance, export subsidies, working capital, machinery and equipment, export margins, Pakistan |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2027 |