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on Corporate Finance |
| By: | Christian Grimme |
| Abstract: | How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This finding can be explained with a model that includes costly state verification and a special informational role for banks. To reduce uncertainty, banks acquire additional costly information about borrowers. More information increases the value of the lending relationship and lowers the lending rate. Bond investors demand compensation for the increased risk of firm default. |
| Keywords: | uncertainty shocks, financial frictions, relationship banking, bank loan rate setting, information acquisition |
| JEL: | E32 E43 E44 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7456&r=all |
| By: | Ding, Lei (Federal Reserve Bank of Philadelphia); Lee, Hyojung (Harvard University); Bostic, Raphael (Federal Reserve Bank of Atlanta) |
| Abstract: | This study provides new evidence on the effectiveness of the Community Reinvestment Act (CRA) on small business lending by focusing on a sample of neighborhoods with changed CRA eligibility status across the country because of an exogenous policy shock in 2013. The results of difference-in-differences analysis provide consistent evidence that the CRA promotes small business lending, especially in terms of number of loan originations, in lower-income neighborhoods. The generally positive effects of the CRA are sensitive to the types of CRA treatment. Losing CRA eligibility status has a relatively larger effect on small business lending activities, while the effects of newly gaining CRA eligibility are less pronounced. The results are fairly robust when alternative sample periods and control groups are used. |
| Keywords: | Small Business; Credit; Community Reinvestment Act |
| JEL: | G21 G28 G32 |
| Date: | 2018–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpcd:18-01&r=all |
| By: | Shen, Ji (Peking University); Wei, Bin (Federal Reserve Bank of Atlanta); Yan, Hongjun (DePaul University) |
| Abstract: | This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among interdealer trades are decreasing in search cost, search speed, and market size but increasing in investors' trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume might not. Finally, we analyze the multiplicity and stability of the equilibrium. |
| Keywords: | search; chain; financial intermediation; multiplicity; stability |
| JEL: | G10 |
| Date: | 2018–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2018-15&r=all |
| By: | Isabel Casas (BCAM; and Department of Business Economics, University of Southern Denmark); Xiuping Mao (School of Finance, Zhongnan University of Economics and Law); Helena Veiga (Department of Statistics and Instituto Flores de Lemus, Universidad Carlos III de Madrid; and BRU-IUL, Instituto Universitário de Lisboa) |
| Abstract: | This study explores the predictive power of new estimators of the equity variance risk premium and conditional variance for future excess stock market returns, economic activity, and financial instability, both during and after the last global financial crisis. These estimators are obtained from new parametric and semiparametric asymmetric extensions of the heterogeneous autoregressive model. Using these new specifications, we determine that the equity variance risk premium is a predictor of future excess stock returns, whereas conditional variance predicts them only for long horizons. Moreover, a comparison of the overall results reveals that the conditional variance gains predictive power during the global financial crisis period. Furthermore, both the variance risk premium and conditional variance are determined to be predictors of future financial instability, whereas conditional variance is determined to be the only predictor of economic activity for all horizons. Before the global financial crisis period, the new parametric asymmetric specification of the heterogeneous autoregressive model gains predictive power in comparison to previous work in the literature. However, the new time-varying coefficient models are the ones showing considerably higher predictive power for stock market returns and financial instability during the financial crisis, suggesting that an extreme volatility period requires models that can adapt quickly to turmoil. |
| Keywords: | Net measures, Nonparametric methods, Predictability, Realized variance, Variance risk premium, VIX |
| JEL: | C22 C51 C52 C53 C58 G17 |
| Date: | 2018–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-10&r=all |
| By: | Kurz, Michael (Finance); Kleimeier, Stefanie (Finance) |
| Abstract: | Do banks that heavily engage in proprietary trading reduce credit supply relative to their non-trading peers? We answer this question by looking at credit provided by the 135 leading banks in the global corporate loan market between 2003 and 2016. We find that banks with greater trading expertise supply less credit during economically stable times than their non-trading peers and even less during crisis times. This double effect can be attributed to US banks. International banks only reduce their credit supply during crises. We show that these spillovers from trading to credit supply have adverse consequences for the real economy as firms’ ability to invest in capital and expand their workforce is reduced. During a crisis, firms that rely on banks with high trading expertise are most severely affected. Overall, our results suggest that the mandates by global regulators to separate trading from commercial banking are well advised. |
| Keywords: | credit supply, proprietary trading, international lending, banking, corporate loans |
| JEL: | G01 G21 G28 |
| Date: | 2019–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2019005&r=all |
| By: | Joelle Noailly; Roger Smeets |
| Abstract: | The objective of this study is to examine the impact of firms’ financing constraints on innovation activities in renewable (REN) versus fossil-fuel (FF) technologies. Our empirical methodology relies on the construction of a firm-level dataset for 1,300 European firms over the 1995-2009 period combining balance-sheet information linked with patenting activities in REN and FF technologies. We estimate the importance of the different types of financing (e.g. cash flow, long-term debt, and stock issues) on firms’ patenting activities for the different samples of firms. We use count estimation techniques commonly used for models with patent data and control for a large set of firm-specific controls and market developments in REN and FF technologies. We find evidence for a positive impact of internal finance on patenting activities for the sample of firms specialized in REN innovation, while we find no evidence of this link for other firms, such as firms conducting FF innovation or large mixed firms conducting both REN and FF innovation. Hence, financing constraints matter for firms specialized in REN innovation but not for other firms. Our results have important implications for policymaking as the results emphasize that small innovative newcomers in the field of renewable energy are particularly vulnerable to financing constraints. |
| Keywords: | R&D;.; Financing constraints; renewable energy |
| JEL: | O14 O33 Q41 Q42 |
| Date: | 2019–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:gii:ciesrp:cies_rp_58&r=all |
| By: | Torben G. Andersen (Northwestern University and CREATES); Nicola Fusari (The Johns Hopkins University Carey Business School); Viktor Todorov (Northwestern University) |
| Abstract: | We study the dynamic relation between market risks and risk premia using time series of index option surfaces. We find that priced left tail risk cannot be spanned by market volatility (and its components) and introduce a new tail factor. This tail factor has no incremental predictive power for future volatility and jump risks, beyond current and past volatility, but is critical in predicting future market equity and variance risk premia. Our findings suggest a wide wedge between the dynamics of market risks and their compensation, with the latter typically displaying a far more persistent reaction following market crises. |
| Keywords: | Option Pricing, Risk Premia, Jumps, Stochastic Volatility, Return Predictability, Risk Aversion, Extreme Events |
| JEL: | C51 C52 G12 |
| Date: | 2018–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-07&r=all |
| By: | Athreye, Suma (Essex Business School); Fassio, Claudio (CIRCLE, Lund University) |
| Abstract: | This paper analyses the underlying reasons why innovators do not apply for trademarks for all of their valuable inventions. Using a unique database of UK innovations linked to innovative firms, the empirical analysis highlights the many ways that firms can alleviate information asymmetries and the constraints imposed by collaborative innovation without taking recourse to trademarks. When information asymmetries are not at stake, i.e. when firms use an already existing trademark for their innovations or when they use intermediaries for its distribution, trademarks no longer serve their purpose, leading firms to avoid using it for their innovations. Open innovation also decreases the incentive to trademark, especially when the innovative process involves users, mainly because of property rights issues or because the innovator prefers to use the clients’ own distribution channels. |
| Keywords: | rademarks; innovation; intellectual property; open innovation |
| JEL: | O31 O34 |
| Date: | 2019–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lucirc:2019_002&r=all |
| By: | Sylvain Catherine; Thomas Chaney (Département d'économie); Zongbo Huang (Chinese University of Hong Kong (CUHK)); David Sraer (Princeton University); David Thesmar (Sloan School of Management (MIT Sloan)) |
| Abstract: | While a mature literature shows that credit constraints causally affect firm level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu&r=all |
| By: | Bergantiños, Gustavo; Lorenzo, Leticia |
| Abstract: | A planner wants to carry out a project involving several firms. In many cases the planner, for instance the Spanish Administration, includes in the contract a penalty clause that imposes a payment per day if the firms do not complete their activities or the project on time. We discuss two ways of including such penalty clauses in contracts. In the first the penalty applies only when the whole project is delayed. In the second the penalty applies to each firm that incurs a delay even if the project is completed on time. We compare the two penalty systems and find that the optimal penalty (for the planner) is larger in the second method, the utility of the planner is always at least as large or larger in the second case and the utility of the firms is always at least as large or larger in the first. Surprisingly, the final delay in the project is unrelated to which penalty system is chosen. |
| Keywords: | game theory; PERT; delays; penalties |
| JEL: | C72 |
| Date: | 2019–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:91718&r=all |
| By: | Torben G. Andersen (Northwestern University and CREATES); Nicola Fusari (The Johns Hopkins University Carey Business School); Viktor Todorov (Northwestern University) |
| Abstract: | We explore the pricing of tail risk as manifest in index options across international equity markets. The risk premium associated with negative tail events displays persistent shifts, unrelated to volatility. This tail risk premium is a potent predictor of future equity returns, while option-implied volatility only forecasts the future return variation. Hence, compensation for negative jump risk is the primary driver of the equity premium across all indices, whereas the reward for pure diffusive variance risk is largely unrelated to future equity returns. We also document pronounced commonalities, suggesting a high degree of integration among the major global equity markets. |
| Keywords: | Equity Risk Premium, International Option Markets, Predictability, Tail Risk, Variance Risk Premium |
| JEL: | G12 G13 G15 G17 |
| Date: | 2018–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2018-02&r=all |
| By: | Shizuka Sekita (Kyoto Sangyo University, Graduate School, Division of Economics); Vikas Kakkar (City University of Hong Kong, Department of Economics and Finance); Masao Ogaki (Faculty of Economics, Keio University) |
| Abstract: | This paper considers the relationship between wealth, financial literacy and several other variables using data from Japan's first large-scale survey on financial literacy. Using an instrumental variables approach to account for possible endogeneity of financial literacy, we find that financial literacy has an economically large and positive impact on wealth accumulation. We also decompose financial literacy into 5 sub-categories and find that deposits literacy, risk literacy and debt literacy have significant impacts on wealth accumulation in Japan, whereas inflation literacy and insurance literacy do not. In addition to financial literacy, several variables suggested by behavioral economics, such as over-confidence, self-control, myopia and loss-aversion are also significant determinants of wealth. |
| Keywords: | Financial Literacy, Financial Education, Wealth Accumulation, Behavioral Biases, Retirement Preparation |
| JEL: | D12 D14 J26 |
| Date: | 2018–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2018-023&r=all |
| By: | Bachev, Hrabrin; Koteva, Nina; Mitova, Dilyana; Ivanov, Bojidar; Chopeva, Minka; Sarov, Angel; Toteva, Dessislava; Todorova, Kristina; Yovchevska, Plamena; Kaneva, Krasimira; Aleksandrova, Svetlana; Mitov, Anton |
| Abstract: | This paper gives answer to topical and debated research and practical questions at the current stage of development of Bulgarian agriculture - „what is sustainability of agriculture", „how to assess sustainability of agricultural in the conditions of EU CAP implementation in the country“, and „which are critical factors for improvement of socio-economic and environmental sustainability in the sector“. Evolution of the „concept“ of agrarian sustainability and the major approached for its assessment are discussed More precise definition of sustainability of Bulgarian agriculture is suggested and the requirements for the system of its assessment are characterised. For the first time a new „governance“ pillar of agrarian sustainability is included along with the universally accepted economic, social and environmental pillars (aspects). Practically applicable for the specific conditions of Bulgarian agriculture holistic framework for assessing sustainability level of agrarian systems of different types (sector, sub-sector, region, ecosystem, agricultural farm) is suggested. The later included 25 principles, 66 criteria, and 163 indicators and reference values for assessing integral, governance, economic, social and environmental sustainability as well as approach for their calculation, integration and interpretation. Approbation of the elaborated framework in assessment of agrarian sustainability at various levels (national, sub-sector, region, (agro)ecosystem, and farm) is made on the base of official statistical, etc, information and original farm surveys. Critical factors for improving sustainability of Bulgarian agriculture are identified, and recommendation made for amelioration of research and assessment practices, public policies and farming strategies for sustainable development. Website of the project: https://zem.alle.bg |
| Keywords: | agrarian sustainability, assessment framework, governance, economic, social, environmental, integral, Bulgaria |
| JEL: | Q10 Q12 Q13 Q15 Q18 Q5 |
| Date: | 2019–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92049&r=all |