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on Corporate Finance |
| By: | Ine Paeleman (University of Antwerp); Virginie Mataigne (Ghent University); Tom Vanacker (Ghent University and University of Exeter Business School) |
| Abstract: | Past research shows that firms with constrained access to debt are more likely to withdraw from exporting. We argue that a firm’s debt maturity structure (i.e., the short-term/long-term debt mix) also matters because short-term debt entails liquidity risk and long-term debt entails higher costs. Using a database on Belgian start-ups, we find that start-ups relying mainly on either short-term debt or long-term debt exhibit a higher likelihood to withdraw from exporting compared to start-ups with a more balanced debt maturity structure. This U-shaped relationship is weaker for start-ups with more financial slack and stronger for start-ups with higher growth opportunities. |
| Keywords: | Complete export withdrawal, start-ups, debt maturity, financial slack, growth opportunities |
| JEL: | G32 L26 M13 M16 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202502-472 |
| By: | Abhishek Bhardwaj; Abhinav Gupta; Sabrina T. Howell |
| Abstract: | We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that dramatically increasing leverage makes firms much riskier. The debt-bankruptcy relationship is in line with Altman-Z model predictions. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors. |
| JEL: | G23 G32 G33 G35 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33435 |
| By: | Adhikari, Tamanna (Central Bank of Ireland); Mahony, Michael (Central Bank of Ireland) |
| Abstract: | In this Note, we compute a SME repayment difficulty outcome for 2023 and show the resilience of Irish Small and Medium Enterprises in the face of increasing cost pressures. We model the determinants of SME payment difficulty in Ireland using detailed firm-level survey data. We find that firms’ access to internal sources of finance is the most important contributor in reducing the likelihood of missed payments. Among firms with existing financial debts, leverage, liquidity, and interest burden are key determinants of repayment difficulty. A one standard deviation increase in the leverage ratio, the interest expense to turnover ratio and tax to turnover ratio from their mean values raises the probability of SME financial distress by 6.2, 4.6, and 3.3 per cent (respectively). In contrast, a one unit increase in the cash to total assets ratio from its mean value decreases the probability of SME financial distress by 4.5 per cent. Our results suggest that higher interest rates are unlikely to be the primary driver of missed payment propensity for most firms. Overall, Irish SMEs have demonstrated increasing resilience post-COVID-19 with factors such as attitude to debt, leverage, liquidity and interest burden playing a key role in determining resilience. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:fsnote:7/fs/24 |
| By: | KENGERE, GEORGE ONYIEGO; Njagi, Manasseh Mwai; Kamau, Charles Guandaru (Technical University of Mombasa); Chonga, Luvuno |
| Abstract: | The purpose of this paper was to look at the determinants of the cost of capital for a firm. The study conducted a literature review with the goal of identifying the factors that influence the cost of capital for a firm. The research showed that profitability, liquidity, tax, growth, size, and age of the company are among the major determinants that influence the cost of capital for a firm. Further the research showed a positive correlation between the cost of capital and profitability, liquidity, growth, size, and age of the company. The capital arrangement of a firm is determined on account of the pecking order theory and trade-off theory while bearing in mind the cost elements associated with it. In Kenya, economic stability and political stability are the primary determinants that determine the cost of capital for a firm. This determining factor influences the availability and cost of credit offered by financial institutions in Kenya. |
| Date: | 2023–03–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:africa:ym896_v1 |
| By: | Ngcetane-Vika, Thelela Dr (Wits University, Johannesburg, South Africa) |
| Abstract: | Corporate governance is fundamental to well-run organisations. Accordingly, it is associated with the positive performance of corporations and international best practices. It is the blueprint that helps shareholders scope their activities and engagement within a company, including the role and structures of the Board of Directors (BoD). It is against this backdrop that the BoD is the nexus between executive leadership and corporate governance, a hallmark of an effective functioning corporation and the affirming of an integrative approach. Thus, good corporate governance is arguably an important tool in curbing corporate malfeasance and limiting scandals in corporations. Conversely, poor corporate governance is observed when there are lapses in this relationship between shareholder‘s rights and board roles. Invariably, this leads to corporate lapses and scandals. Europe has made strides in corporate governance, through its developing legislative framework. Pursuantly, corporate governance theories exercised in Europe posit ownership and management as key variables to achieving well-run organizations. Thus, central to corporate governance is the principle of separation of ownership and management. In tandem with this view, good corporate governance is achieved through the delicate balance of the rights of shareholders as owners of the company and the roles of directors who have the duty to run the affairs of the company, as enshrined in the Statute governing Company law. The empirical basis for this paper has included collecting data mostly from primary and secondary sources, including literature review on books, articles, case laws and relevant Statutes. The paper contributes to theory, practice, and policy formulation but specifically, to the importance of shareholders’ rights and board roles in corporate governance in Europe. Similarly, policy-makers could find these insights useful to inform evidence-based practices and policymaking |
| Date: | 2023–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:africa:w9e42_v1 |
| By: | Bianca Minuth (ESCP Business School, Paris, France); Paul Pronobis (Free University of Bozen-Bolzano, Italy) |
| Abstract: | This study examines how corporate social responsibility (CSR) performance relates to firms’ disclosure tone in CSR reports and their resulting cost of capital. Our empirical analysis reveals that firms with superior CSR performance exhibit systematic patterns in their disclosure tone, characterized by increased usage of positive language and decreased usage of negative language. In contrast, firms with lower CSR performance show no significant strategic communication patterns. Our analysis reveals a complex relationship between CSR performance, disclosure tone, and cost of capital. While CSR performance and optimistic disclosure tone individually have positive associations with cost of capital, their interaction exhibits a significant negative relationship. This finding suggests that the impact of CSR performance on cost of capital is contingent on the optimistic tone employed in CSR disclosures. Firms with strong CSR performance can enhance the favorable impact on their financing costs by adopting a more optimistic disclosure tone, potentially offsetting the standalone positive association between CSR performance and cost of capital. Further analysis reveals that these effects are more pronounced in the pre-NFRD period, indicating that the transition from voluntary to mandatory reporting altered the economic consequences of CSR disclosure strategies. |
| Keywords: | CSR Performance; Disclosure Tone; Cost of Capital; Strategic Communication; Non-financial Reporting. |
| JEL: | M14 M48 Q5 G3 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bzn:wpaper:bemps109 |
| By: | Rebeca Anguren (BANCO DE ESPAÑA); Gabriel Jiménez (BANCO DE ESPAÑA); José-Luis Peydró (BANCO DE ESPAÑA) |
| Abstract: | We study the short-term effects of both tighter and looser bank capital requirements on bank risk-taking in a crisis period. We exploit credit register data matched with firm and bank level data in conjunction with changes in capital requirements stemming from Basel III, including the introduction of a SME supporting bank capital factor in the European Union. We find that tighter capital requirements reduce the supply of bank credit to firms, while looser capital requirements mitigate the credit supply effects of increasing capital. Importantly, at the loan level (credit supply), banks more affected by capital requirements temporarily change less the supply of credit to riskier than to safer firms, and these asymmetric effects occur for both the tightening and the loosening of bank capital requirements. Finally, these effects are also important at the firm-level for total credit availability and for firm survival. Interestingly, our results suggest that those banks most impacted by the tighter Basel III capital requirements prioritize credit among ex-ante riskier firms to avoid their closure, consistent with loan evergreening. |
| Keywords: | bank capital requirements, credit supply, bank risk-taking, Basel III, loan evergreening |
| JEL: | G21 G28 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2508 |
| By: | Louis-Marie Harpedanne de Belleville (Banque de France - Banque de France - Banque de France, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | The loan literature analyzes the hold-up problem from the bank monopolistic information perspective, but if only the firm can fully repay the bank, the loan relationship is actually a bilateral monopoly. Then, if a firm borrows short to finance a long-term project, non-cooperative bargaining occurs at loan renewal. If, regardless of the firm's second-period quality, the perfect equilibrium partition derived from this bargaining grants the bank less than the break-even condition, she declines to lend ex-ante.That is, expected hold-up by the firm induces credit constraints. If the firm gets more by defaulting than by borrowing from another bank, the initial bank cannot break even by filing for the firm bankruptcy; that is, the bank has a weak outside option. Then, even if this option is binding, the previous credit constraints result holds. Such hold-up by illiquid firms provides a new foundation for long-term lending to finance long-term projects. |
| Keywords: | Hold-up, Credit constraints, Subgame perfection, Non-cooperative bargaining, Outside option principle, Perfect equilibrium partition, Strategic default, Liquidity, Long-term loan, Skin in the game, Unverifiability, Interest-bearing asset, Strategic bargaining, Bank, Firm, Loan relationship |
| Date: | 2024–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:hal:psewpa:hal-04792104 |
| By: | Ayoze Alfageme |
| Abstract: | This paper establishes a connection between non-financial corporate mergers and acquisitions (M&A) and the rise of large firms, decline productive investment, concentration of markets and profits, and rising markups. First, using Refinitiv M&A deals data, I briefly recount the history of corporate M&A deal making in the last four decades in which this study focuses (1980-2020), with special attention to its sector dynamics. Second, the paper presents a literature review highlighting the gap for the type of study presented here, in terms of both methods and time scope. An articulation of the process from which M&A are linked to the new corporate environment is presented in the form of 6 hypothesis. Third, using Compustat firm-level data I present stylised evidence poiting towards the potential validation of those 6 hypothesis. I found that M&A has become an important corporate growth strategy (hypothesis 1). A steeper drop in capital expenditure among firms with the highest acquisition spending points to scrapping capex for M&A (hypothesis 2). Fed’s flow of funds data suggests corporate funds are redirected to the household sector for M&A payments, potentially depleting corporate funds. A micro-macro tension arises (hypothesis 3), where individual firms grow larger in total assets through M&A to achieve corporate growth goals, while their capex declines, dampening aggregate corporate investment. M&A is also connected to the rise in market concentration (hypothesis 4) and the accumulation of intangibles that create barriers to entry (hypothesis 5). Finally, firms with the most acquisitions, account for 40% of total profits and have higher markups (hypothesis 6). In a period where efforts are aimed at curbing M&A deals, these findings highlight the implications of leaving the M&A market unrestricted. |
| Keywords: | Mergers and Acquisitions, Market Concentration, Corporate Investment, Firm Growth |
| JEL: | D22 G34 L11 L40 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2505 |
| By: | Coen, Jamie; Coen, Patrick; Hüser, Anne-Caroline |
| Abstract: | Repo markets are systemically important funding markets, but are also used by firms to obtain the assets provided as collateral. Do these two functions complement each other? We build and estimate a model of repo trade between heterogeneous firms, and f ind that the answer is no: volumes and gains to trade would both be higher absent collateral demand. This is because on average the firms that need funding are also those that value the collateral to speculate or hedge interest rate risk. These results have implications for policies that affect collateral demand in repo markets, including rules on short selling. |
| Keywords: | Repo, collateral demand, intermediation, financial crises. |
| JEL: | G01 G21 G23 G11 L14 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130323 |
| By: | Douglas W. Diamond; Yunzhi Hu; Raghuram Rajan |
| Abstract: | By improving the pledgeability of returns to financiers, financial development enhances a producer’s ability to raise capital to fund long term complex investments. Consequently, it should increase output and welfare. However, a general equilibrium analysis suggests this is not always so. We consider an economy where producers and consuming/financing households are distinct agents, where producers lack sufficient capital, and where households care about both pledgeable returns and liquidity. In this economy, the greater pledgeability of long-term project earnings can reduce long term production and overall welfare, even though it makes financing more accessible. Our results have implications for why economies face impediments to financial development and overall growth, especially when producer capital is scarce. |
| JEL: | G1 G3 O10 O16 O4 O43 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33416 |
| By: | Bruno Merlevede; Pablo Muylle (-) |
| Abstract: | Since the late 2000s, shocks and crises of various types have led to a revival of state intervention around the world. This paper builds a large firm-level dataset to analyze state ownership of firms in Europe for the period 2002-18. We confirm the underperformance of state-owned enterprises (SOEs) relative to privately-owned enterprises (POEs) found in earlier literature for this recent period for a range of firm-level performance indicators. We also examine the impact of SOEs on private firms. We find that larger SOE presence in an industry is associated with lower productivity growth and lower productivity levels among private firms in that industry, but does not affect industry dynamics in terms of entry and exit. This suggests potential aggregate productivity gains from reallocating resources from SOEs to POEs. Further, we show that employment is more stable and crisis-resistant at SOEs, and that SOEs are a more stable source of downstream input demand for other firms. Leveraging our dataset's cross-country nature, we find that SOEs are complements to, rather than substitutes for, lower quality institutions. |
| Keywords: | State ownership, Firm performance, Productivity, Spillover e ects, Privatization, Business dynamism |
| JEL: | H11 L25 L32 O47 P31 P52 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:25/1105 |