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on Corporate Finance |
| By: | Stulz, Rene M. (Ohio State U and ECGI) |
| 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:ecl:ohidic:2024-15 |
| By: | Davydiuk, Tetiana (Johns Hopkins U); Erel, Isil (Ohio State U and ECGI); Jiang, Wei (Emory U and ECGI); Marchuk, Tatyana (Nova School of Business and Economics) |
| Abstract: | This paper examines the dual role of Business Development Companies (BDCs) as creditors and shareholders in the private direct lending market. Utilizing a comprehensive deal-level database, our analysis shows that dualholder BDCs are more effective monitors than sole lenders, benefiting from enhanced tools for information access and governance. This effectiveness allows them to charge higher loan spreads, while simultaneously reducing credit risk and lowering the borrowing cost of portfolio firms from other lenders. We rule out alternative explanations attributing higher loan spreads to mere compensation for capital injection or to hold-up by a dominant financier. Our findings highlight a critical mechanism through which BDCs serve a market segment — mid-sized firms with low (or even negative) cash flows and a lack of collateral but high growth potentials — that is typically undesired by traditional bank lenders. |
| JEL: | G20 G21 G23 G28 G32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:ohidic:2024-21 |
| By: | Dongmin KONG (School of Economics, Huazhong University of Science and Technology); Chen LIU (School of Economics, Huazhong University of Science and Technology); Mengxu XIONG (School of Economics, Huazhong University of Science and Technology) |
| Abstract: | This paper explores the effects of the coronavirus disease (COVID-19) pandemic on firm response. Using a novel COVID-19 sentiment index, our estimation shows that the pandemic significantly reduced the overseas revenue and profits of firms listed on the Chinese A-share market. Moreover, we observe that an increase in loans, and a drop in debt financing cost and trade credit, were prominent during the pandemic. We contend that reduced cash flows, which damaged firm operations; government support, which provided more financing channels; and increased default risks, which placed barriers on trade credit, are the plausible mechanisms through which the COVID-19 pandemic affects firm performance. Profit contraction was more pronounced for firms with a lower ratio of domestic content in exports and state-owned enterprises, while external financing was easier for firms subject to stringent financial constraints despite their lowered trade credit. |
| Keywords: | COVID-19 pandemic, firm response, external financing |
| Date: | 2024–02–16 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-29 |
| By: | Marcin Borsuk (Institute of Economics, Polish Academy of Sciences, University of Oxford); Nicolas Eugster (UQ [All campuses : Brisbane, Dutton Park Gatton, Herston, St Lucia and other locations] - The University of Queensland); Paul-Olivier Klein (Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon); Oskar Kowalewski (Institute of Economics, Polish Academy of Sciences, LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux]) |
| Abstract: | This study examines the relationship between family firms and carbon emissions using a large cross-country dataset of 6600 non-financial firms over the period 2010–2019. We find that family firms emit less carbon than non-family firms, especially after the Paris Agreement. Several factors contribute to this outcome, including governance structure, the degree of family control, R&D spending, and the issuance of green patents. Our study also shows that despite lower carbon emissions, family firms have lower environmental scores, primarily due to their reduced public commitment to emission reduction. Both environmental scores and carbon emissions increase when non-family CEOs are appointed and when family ownership decreases, indicating that agency conflicts may influence these outcomes. |
| Keywords: | Carbon emission, ESG Governance, Family firms, Greenwashing, Climate change |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04710120 |
| By: | Paul Lavery; Marina Spaliara; Holger Görg |
| Abstract: | This paper examines whether private equity (PE)-backed companies are better able to remain active on export markets compared to similar non-PE firms, when hit by a negative shock. We look at two such recent shocks, namely the global financial crisis (GFC) and COVID-19 pandemic. We construct two matched samples, one for each crisis period, to assess the resilience of exporting under PE ownership in recessionary periods. We then explore how improvements in working capital management allow PE-backed firms to engage in international activities and maintain their export relationships relative to similar, non-PE-backed firms. Our results show that the export activities of PE-backed firms are significantly more resilient to the e ects of the GFC but less pronounced following COVID-19. PE investment enhances working capital management, which in turn improves the persistence in export markets at the onset of the crises. |
| Keywords: | Private equity buyouts; exporting; working capital; recessions |
| JEL: | F14 G01 G32 G34 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_09 |
| By: | Chung, Richard Yiu-Ming (Saint Francis University, Hongkong); DeVaro, Jed (California State University, East Bay); Fung, Scott (California State University) |
| Abstract: | Research Question/ Issue: Do large, within-firm executive pay differences hurt firm performance? Prior literature shows mixed results concerning the sign of the relationship between executive pay disparity and firm performance. This study evaluates that literature, clarifies what tournament theory predicts about the relationship, identifies methodological pitfalls and how to address them, and guides future scholarship in this area of considerable importance to firms and policy makers. Research Findings/ Insights: We estimate the relationship using improved methodology and find evidence of an inverted-U shaped relationship between the executive pay spread and firm performance. However, the peak of this inverted U occurs at such a high level of the executive pay spread that it is practically irrelevant in most firms. The inverted U is found using a market-based measure of firm performance, but not a returns-based measure (i.e., ROA). Theoretical/Academic Implications: This study addresses the theoretical and empirical limitations of the prior literature, thereby providing more credible estimates of the relationship between pay disparity and firm performance. Tournament theory offers a unified framework that can explain an inverted-U-shaped relationship between the executive pay spread and firm performance. Practitioner/Policy Implications: Our results should reduce public concerns that CEOs increase their own compensation to exorbitant levels, to the detriment of firm performance. |
| Keywords: | executive compensation, vertical pay disparity, firm performance, tournament theory, market structure |
| JEL: | G32 G39 J31 M12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17346 |
| By: | Mario Cerrato; Shengfeng Mei |
| Abstract: | Recently, Cooperman et al. (2023) show that the covariance of banks’ funding costs and credit lines draw-downs is debt overhang costs for the bank’s equity holders. In this paper, we empirically and theoretically study whether this cost can be mitigated by central banks’ quantitative easing. We focus on the COVID-19 shock. Based on Cooperman et al. (2023), we empirically f ind that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer that cost to the credit lines’ fees. However, our econometric analysis, event studies, and theory suggest and formalise why central banks’ quantitative easing (QE) can be crucial to mitigating that cost, thereby ensuring a cheaper supply of credit to the economy. Our f indings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), focusing on an important source of credit for firms: credit lines. |
| Keywords: | Quantitative Easing, Central Bank, Debt Overhang, Credit Line |
| JEL: | G01 G21 G28 G32 E44 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_05 |
| By: | Jérémie Bertrand (IÉSEG School Of Management [Puteaux]); Paul-Olivier Klein (Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon); Fotios Pasiouras (Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School) |
| Abstract: | High secrecy cultures are characterized by a preference for confidentiality and non-disclosure of information. This study documents the impact of cultural differences in secrecy on firms' access to credit. We use data from the World Bank Enterprise Surveys for a large sample of firms operating in 35 countries from 2010 to 2019. We show that firms operating in countries with higher levels of secrecy are less likely to apply for credit when they need it—they are more discouraged—and also less likely to receive credit when they do apply—they are more rationed. The underlying economic channels are greater opacity and corruption in cultures with high secrecy. The effect of cultural secrecy on credit discouragement and credit rationing is moderated by trust in banks, interpersonal trust, and firms' financial dependence on external sources. We control for several potential alternative drivers and conduct several robustness tests. The results confirm that firms have better access to credit in cultures that promote transparency and information disclosure. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04691594 |
| By: | Hongyong ZHANG (RIETI); Ha Thi Thanh DOAN (Economic Research Institute for ASEAN and East Asia (ERIA)) |
| Abstract: | Firms hold inventory to manage input shortages and stockout risks. This is particularly true for firms relying on international supply chains and imported inputs. Using a large-scale quarterly government survey of Japanese manufacturing firms (Q1 2015–Q2 2021), we examine firm-level inventory adjustments to supply chain shocks and focus on firms that sourced inputs globally during the pandemic. We find that before the pandemic, relative to firms that purchase inputs only domestically, importing firms tend to have larger inventories (inventories over sales) in materials, work in process (intermediate goods), and finished goods, even after controlling for firm size. After the pandemic, importers significantly and persistently increased their inventories of intermediate inputs, especially for firms with ex ante higher import intensity and multinational firms that experienced supply chain disruptions in China. These results suggest the possibility of a shift from just-in-time to just-in-case production during the pandemic. We then discuss the role of inventories as a buffer against input shortages and other factors affecting inventory holdings, such as the prefecture-level severity of COVID19 infections, industry-level input and output prices, and firm-level financial constraints and uncertainties regarding the economic and business outlook. |
| Keywords: | global sourcing, imports, inventory, COVID-19 |
| Date: | 2024–02–16 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-30 |
| By: | Gomtsyan, Suren Gomtsian; Schuster, Edmund-Philipp |
| Abstract: | Various reasons have been put forward for the declining global relevance of the London equity market. Reform proposals and changes already implemented target some of the major problems identified as reasons for the stock market's decline. Surprisingly, tax related explanations for the current state of the UK stock market are largely absent from the discourse. This paper argues that the preferential tax treatment of the dividend income of UK pension funds and insurance companies introduced in the early 1970s and repealed in the mid 1990s first contributed to the UK stock market's growth by implicitly subsidising financing via equity and encouraging the flow of the funds of these investors into the market, and subsequently led to the market's decline as a result of the outflow of the funds of the two major classes of institutional investors: UK pension funds and insurance companies. The key implication of this argument is that omitting tax as a major factor in the decline of the UK stock market risks ending up with reforms that can, at best, do little to change the current situation. |
| Keywords: | corporate governance; dividend taxation; institutional investors; London stock market; pension funds; tax |
| JEL: | F3 G3 J1 |
| Date: | 2024–09–17 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123539 |