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on Corporate Finance |
| By: | Dinev, Nikolay (Vienna Graduate School of Finance (VGSF)) |
| Abstract: | This paper examines the phenomenon of management-initiated, court-supervised reorganization of companies in U.S. bankruptcy court. The proposed in-court persuasion mechanism reconciles excessive reorganizations of non-viable companies (and subsequent repeat failures) with management-initiated filings and a judge who aims to always take appropriate action. In the model, management makes a preemptive voluntary filing to retain control of the process, and thereby engage in a game of Bayesian Persuasion with asymmetric information vis-à-vis the judge. This mechanism endogenously results in the reorganization of some non-viable companies, and exclusively management-initiated (i.e., voluntary) bankruptcy filings. This paper, therefore, explains why non-viable companies could be permitted to reorganize and why there are repeat offender firms that enter bankruptcy multiple times. |
| Keywords: | Bayesian Persuasion, Bankruptcy, Chapter 11, Asymmetric Information |
| JEL: | C72 D21 D72 D82 D83 G33 K20 K40 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:334&r=cfn |
| By: | Ming Dong; David Hirshleifer; Siew Hong Teoh |
| Abstract: | We test how market overvaluation affects corporate innovative activities and success. Estimated stock overvaluation is very strongly associated with R&D spending, innovative output, and measures of innovative novelty, originality, and scope. R&D is much more sensitive than capital investment to overvaluation. The effects of misvaluation on R&D come more from a non-equity channel than via equity issuance. The sensitivity of R&D and innovative output to misvaluation is greater among growth, overvalued, and high turnover firms. This evidence suggests that market overvaluation may have social value by increasing innovative output and by encouraging firm to engage in ‘moon shots.’ |
| JEL: | D22 D23 G14 G3 G31 G32 O32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24142&r=cfn |
| By: | João Granja; Christian Leuz |
| Abstract: | An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through capital but can also overcome frictions in bank management, leading to more lending and a reallocation of loans. Consistent with the latter, we find increases in business entry and exit in counties with greater expose to OTS banks. |
| JEL: | E44 E51 G21 G28 G32 G38 K22 K23 L51 M41 M48 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24168&r=cfn |
| By: | Gu, Lifeng; Hackbarth, Dirk; Johnson, Tim |
| Abstract: | Investment-based asset pricing research highlights the role of irreversibility as a determinant of firms' risk and expected return. In a neoclassical model of a firm with costly scale adjustment options, we show that the effect of scale flexibility (i.e., contraction and expansion options) is to determine the relation between risk and operating leverage: risk increases with operating leverage for inflexible firms, but decreases for flexible firms. Guided by theory, we construct easily reproducible proxies for inflexibility and operating leverage. Empirical tests provide support for the predicted interaction of these characteristics in stock returns and risk. |
| Keywords: | Operating flexibility; real options; risk premia; Stock returns |
| JEL: | D31 D92 G12 G31 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12441&r=cfn |
| By: | P. Pessarossi; J.-L. Thevenon; L. Weill |
| Abstract: | We investigate how high profitability influences the occurrence of bank distress in Europe. We utilize four indicators for ‘too high’ profitability, defined as the top quantiles of earnings, in logit models to explain bank distress with a hand-collected dataset of European bank distresses over the 2001-2014 period. We test the hypothesis that profitability can be beneficial for stability until a certain level but can turn detrimental at high level. We find that ‘too high’ profitability does not reduce the occurrence of bank distress. We obtain limited evidence that the top quantiles of the profitability distribution can lead to enhance such occurrence through a time horizon of about 3 years. With the hindsight of the Great Financial Crisis, our findings therefore qualify the view that bank profitability only should be promoted to favor bank stability. |
| Keywords: | Bank profitability, financial distress, financial stability. |
| JEL: | G21 G33 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:decfin:31&r=cfn |
| By: | Panagiotis Avramidis (ALBA Graduate Business School); Ioannis Asimakopoulos (Bank of Greece); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Nickolaos G. Travlos (Bank of Greece) |
| Abstract: | Using a data set of bank loans to Greek firms during the period of the Greek sovereign crisis, we provide empirical evidence that firms affiliated with groups are less likely to default on their bank loan during a credit crunch, compared to stand-alone firms. We show that the lower default risk of affiliated firms is due to access to the internal capital market in the form of intra-group loans and to enhanced access to the restricted external financing. Furthermore, we provide empirical evidence that banks evaluate positively the group membership and that they collect private information about the delinquent affiliated firms from other firms that belong to the group. Finally, we find that banks are more likely to show forbearance against affiliated firms with non-performing loans, in order to delay additional loan charge-offs and to preserve their relationship with the rest of the group. |
| Keywords: | group affiliation; co-insurance; non-performing loans; forbearance |
| JEL: | G01 G21 G32 C23 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:237&r=cfn |
| By: | Giorgio Ffagiolo (Scuola Superiore Sant'Anna Pisa Italy); Daniele Giachini (Scuola Superiore Sant'Anna Pisa Italy); Andrea Roventini (Scuola Superiore Sant'Anna Pisa Italy also OFCE Sciences Po Paris) |
| Abstract: | This paper extends the endogenous-growth agent-based model in Fagiolo and Dosi (2003) to study the finance growthnexus. We explore industries where firms produce a homogeneous good using existing technologies, perform R&D activities to introduce new techniques, and imitate the most productive practices. Unlike the original model, we assume that both exploration and imitation require resources provided by banks, which pool agent savings and finance new projects via loans. We find that banking activity has a positive impact on growth. However,excessive financialization can hamper growth. In- deed, we find a significant and robust inverted-U shaped relation between financial depth and growth. Overall, our results stress the fundamental (and still poorly understood) role played by innovation in the finance-growth nexus. |
| Keywords: | Agent based models, Innovation, Exploration vs Exploitation, Endogenous Growth, Banking Sector, Finance Growth Nexus |
| JEL: | C63 G21 O30 O21 |
| Date: | 2017–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1728&r=cfn |
| By: | Salia, Samuel; Hussain, Javed; Tingbani, Ishmael; Kolade, Oluwaseun |
| Abstract: | Purpose: Against the background of growing concerns that development interventions can sometimes be a zero-sum game, this paper examines the unintended consequences of microfinance for women empowerment in Ghana. Design/methodology/approach: The study employs a participatory mixed-method approach including household questionnaire surveys, focus group discussions and key informant interviews to investigate the dynamics of microfinance effects on women in communities of different vulnerability status in Ghana. Findings: The results of hierarchical regression, triadic closure and thematic analyses demonstrate that the economic benefits of microfinance for women is also directly associated with conflicts amongst spouses, girl child labour, polygyny and the neglect of perceived female-domestic responsibilities due to women’s devotion to their enterprises. Originality/value: In the light of limited empirical evidence on potentially negative impacts of women empowerment interventions in Africa, this paper fills a critical gap in knowledge that will enable NGOs, policy makers and other stakeholders to design and implement more effective interventions that mitigate undesirable consequences. |
| Keywords: | Microfinance; Women Empowerment; Unintended Consequences; Ghana |
| JEL: | G30 O1 O16 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82895&r=cfn |
| By: | Oana Peia |
| Abstract: | This paper proposes a new channel to explain the medium- to long-term effects of banking crises on the real economy. It embeds a banking sector prone to runs in a stylized growth model to show that episodes of bank distress affect not only the volume, but also the composition of firm investment, by disproportionally decreasing investments in innovation. Thishypothesis is confirmed empirically employing industry-level data on R&D spending around 13 recent banking crises episodes. Using difference-in-difference identification strategies, I show that industries that depend more on external finance, in more bank-based economies, invest disproportionally less in R&D following systemic banking crises. These industries also have a lower share of R&D spending in total investment, suggesting a shift in the composition of investment that is specific to recessions following banking crises and not other business cycle recessions. |
| Keywords: | Banking crises; R&D investment; Financial dependence; Global games |
| JEL: | G01 G21 E22 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201727&r=cfn |
| By: | Grechyna, Daryna |
| Abstract: | Financial intermediation facilitates economic development by providing entrepreneurs with external finance. The relative costs of financing depend on the relative efficiency of the financial sector and the sector using financial intermediation services, the real sector. These costs determine the occupational choices and the set of active firms in the financial and real sectors. A model of firm-size distributions in the financial and real sectors results. This model is calibrated to match facts about the U.S. economy, such as the interest-rate spread and the establishment-size distributions in the financial and real sectors. It is then used to evaluate the importance of the relative technological progress in the financial and real sectors for the dynamics of the average establishment size in the financial sector. The model accounts for 58\% of the reduction in the average establishment size in the U.S. financial sector over 1986-2006 and for a 4.5 persons per establishment decline in the average size of the financial sector establishment in Taiwan over 1971-2011. |
| Keywords: | economic development; financial development; technological progress; firm-size distributions; interest-rate spreads. |
| JEL: | E13 O11 O16 O41 |
| Date: | 2017–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83196&r=cfn |
| By: | Guduza, Sinazo; Phiri, Andrew |
| Abstract: | This study investigates weak form efficiency for 4 stock and 7 bond market return under the Johannesburg Stock Exchange (JSE) using monthly data spanning from 2002 to 2016. Our empirical strategy consists of using both individual and panel based unit root testing procedures. Moreover, we split our empirical data into two sub-samples corresponding to periods before and periods subsequent to the global financial crisis. Our empirical results point to an overwhelming evidence of weak form efficiency as the integration test fail to produce convincing evidence of unit root behaviour amongst the observed time series. The study thus confirms the efficiency of equities and debt markets in South Africa in light of the global financial crisis. |
| Keywords: | Equity markets, Bond market; Efficient market hypothesis; unit root tests; Johannesburg Stock Exchange (JSE); South Africa |
| JEL: | C12 C13 C22 C23 G10 N27 |
| Date: | 2017–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83487&r=cfn |