|
on Corporate Finance |
| By: | Miglo, Anton |
| Abstract: | We build a model of debt for firms with investment projects for which flexibility and free cash flow problems are important issues. We focus on the factors that lead the firm to select the zero-debt policy. Our model provides an explanation of the so-called "zero-leverage puzzle" (Strebulaev and Yang (2013)). It also helps to explain why zero-debt firms often pay higher dividends compared to other firms. In addition, the model generates new empirical predictions that have not yet been tested. For example, it predicts that firms with zero-debt policy should be influenced by free cash flow considerations more than by bankruptcy cost considerations. Also the choice of zero-debt policy can be used by high-quality firms to signal their quality. This is in contrast to most traditional signalling literature such as Leland and Pyle (1977), for example, where debt serves as a signal of quality. The model can explain why the probability of selecting the zero-debt policy is positively correlated with profitability and investment size and negatively correlated with the tax rate. It also predicts that firms that are farther away from their target capital structures are less likely to select the zero-debt policy compared to firms that are close to their target levels. |
| Keywords: | Zero-Debt Policy; Flexibility; Capital Structure; Tax Shield; Free Cash Flow Problem; Debt Overhang; Dividend Policy |
| JEL: | D82 G32 G35 L26 M21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98631&r=all |
| By: | Qi, Yingjie (Stockholm School of Economics & Swedish House of Finance) |
| Abstract: | Using unique micro-data that contain the internal information on all corporate customers of a large Nordic bank, I show that combining loan and non-loan products (cross-selling) has two benefits. First, it increases credit supply, especially in recessions. Second, it increases the likelihood of receiving lenient treatment in delinquency. I argue that non-loan relationships play an important role in determining credit supply and debt renegotiation, not only by (i) mitigating information asymmetries (as suggested in earlier literature), but also by (ii) increasing the profitability of the relationship. Exploiting an exogenous and differential change in similar products' profitability due to the Basel II implementation, I estimate the causal effect of this new profit channel on credit supply. A 20 percent decrease in non-loan products' profitability (i) reduces credit supply to affected firms by 13 percent (600,000 USD) compared with unaffected firms, and (2) reduces likelihood of receiving lenient treatment for affected firms by 30 percent (13 pp) compared with unaffected firms, conditional on being delinquent. |
| Keywords: | relationship banking; cross-selling; credit allocation; debt renegotiation; financial distress |
| JEL: | G01 G21 G28 |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0384&r=all |
| By: | Emanuele Ciani (Bank of Italy); Marco Gallo (Bank of Italy); Zeno Rotondi (UniCredit) |
| Abstract: | In this paper we study the functioning of the Italian public guarantee fund (“Fondo Centrale di Garanzia”, FCG) for Small and Medium Enterprises (SMEs). Using an instrumental variable strategy, based on the eligibility for the FCG, we investigate whether the guarantee generated additional loans and/or lower interest rates to SMEs. Differently from previous literature, by focusing on the lending activity of a single large Italian lender we control for the probability of default as assessed by the bank’s internal rating model, and we examine whether the effects of the guarantee differ across firms belonging to different classes of risk. We find that guaranteed firms receive an additional amount of credit equal to 7-8 percent of their total banking exposure. We also estimate a reduction of about 50 basis points of interest rates applied to term loans granted to guaranteed firms. The effects on credit availability are concentrated in the intermediate class of solvent firms, i.e. those neither too safe nor too risky. Conversely, interest rate effects are present in all classes, but for the least risky firms. Finally, we observe a stronger impact of the guarantee for solvent firms with a longer relationship with the bank. This finding questions their ability to reduce financial frictions for very young firms. |
| Keywords: | credit guarantees, access to credit, banking |
| JEL: | L25 O12 G28 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1265_20&r=all |
| By: | Inoue, Hitoshi; Kani, Masayo; Nakashima, Kiyotaka |
| Abstract: | Using firm-level data on the Japanese manufacturing industry, this study identifies the causal effect of uncertainty on the dynamic relation between corporate investment and financing conditions. It demonstrates that the cautionary effect is increasingly dominant under high uncertainty irrespective of the type of corporate investment—capital investment and R&D—and that this result remains even in the weak instrument robust inference. Hence, the dominance of the cautionary effect over the financing constraint effect makes actual corporate investment decisions under high uncertainty indifferent to the firm’s financing conditions. |
| Keywords: | uncertainty shock; capital investment; R&D; sensitivity to internal and external financing; system GMM; weak instruments |
| JEL: | G01 G31 G32 |
| Date: | 2019–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98533&r=all |
| By: | Isil Erel; Yeejin Jang; Michael S. Weisbach |
| Abstract: | An increasing fraction of firms worldwide operate in multiple countries. We study the costs and benefits of being multinational in firms’ corporate financial decisions and survey the related academic evidence. We document that, among U.S. publicly traded firms, the prevalence of multinationals is approximately the same as domestic firms, using classification schemes relying on both income-based and a sales-based metrics. Outside the U.S., the fraction is lower but has been growing. Multinational firms are exposed to additional risks beyond those facing domestic firms coming from political factors and exchange rates. However, they are likely to benefit from diversification of cash flows and flexibility in capital sources. We show that multinational firms, indeed, have a better access to foreign capital markets and a lower cost of debt than otherwise identical domestic firms, but the evidence on the cost of equity is mixed. |
| JEL: | G30 G31 G32 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26762&r=all |
| By: | Sabrina T. Howell; J. David Brown |
| Abstract: | This paper examines how employee earnings at small firms respond to a cash flow shock in the form of a government R&D grant. We use ranking data on applicant firms, which we link to IRS W2 earnings and other U.S. Census Bureau datasets. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.07 (0.21) at the employee (firm) level. The beneficiaries are incumbent employees who were present at the firm before the award. Among incumbent employees, the effect increases with worker tenure. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate effect on earnings. Instead, the data and a grantee survey are consistent with a backloaded wage contract channel, in which employees of financially constrained firms initially accept relatively low wages and are paid more when cash is available. |
| JEL: | G32 G35 J31 J41 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:20-6&r=all |
| By: | Hong Ru; Antoinette Schoar |
| Abstract: | Using granular data on the contract terms and design details of more than 1.3 million credit card offers, we document how card issuers shroud unappealing, back-loaded features of an offer (e.g., high default APRs, late or over-limit fees) via the position of the information, font size, or complexity of the language used. More heavily shrouded offers that rely on back-loaded fees are also more likely to be offered to less-educated consumers. In addition, we document a novel interaction between behavioral screening and adverse selection: Using changes in state-level unemployment insurance (UI) as positive shocks to consumer creditworthiness, we show that issuers rely more on shrouded and back-loaded fees when UI increases, especially for less-educated consumers. Card issuers weigh short-term rent maximization against increased credit risk when targeting consumers' behavioral biases. |
| Keywords: | credit card, shrouding, back-loaded |
| JEL: | G02 G1 G21 G23 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:842&r=all |
| By: | Igor Letina; Armin Schmutzler; Regina Seibel |
| Abstract: | This paper provides a theory of strategic innovation project choice by incumbents and start-ups. We apply this theory to identify the effects of prohibiting start-up acquisitions. We differentiate between killer acquisitions (when the incumbent does not commercialize the acquired start-up’s technology) and acquisitions with commercialization. A restrictive acquisition policy reduces the variety of research approaches pursued by the firms and thereby the probability of discovering innovations. Furthermore, it leads to strategic duplication of the entrant’s innovation by the incumbent. These negative innovation effects of restrictive acquisition policy have to be weighed against the pro-competitive effects of preserving potential competition. |
| Keywords: | innovation, acquisitions, mergers, competition, start-ups. |
| JEL: | O31 L41 G34 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp2003&r=all |
| By: | Francesco Nucci (Sapienza University); Filomena Pietrovito (University of Molise); Alberto Franco Pozzolo (Roma Tre University and Centro Studi Luca d’Agliano) |
| Abstract: | Firm performance is known to benefit from participation in import markets. For this reason, understanding whether credit constraints hamper firms’ ability to purchase foreign inputs is a relevant issue. In this paper, we investigate the relationship between financial constraints and imports of intermediate inputs using a large sample of small- and medium-sized enterprises from 66 developing countries. To measure credit constraints we use information from a firm’s in-depth self-assessment of its difficulties in having access to external finance. Furthermore, to tackle the endogeneity problems in the estimation, we rely on an instrumental variable approach that allows us to establish more directly the impact of financial constraints on importing activities. We provide robust evidence of a statistically and economically significant restraining effect of credit constraints on both the probability of importing intermediates (the extensive margin) and the incidence of imported intermediates in total input expenditure (the intensive margin). Moreover, we show that the impact on these margins of import is stronger for firms operating in countries where the financial system is less developed, the quality of institutions poorer and the overall level of economic freedom lower. |
| Keywords: | import market participation; import margins; credit constraints. |
| JEL: | D22 F10 F14 F23 M21 |
| Date: | 2020–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:461&r=all |
| By: | S\"oren Christensen; Jan Kallsen; Matthias Lenga |
| Abstract: | We call a given American option representable if there exists a European claim which dominates the American payoff at any time and such that the values of the two options coincide in the continuation region of the American option. This concept has interesting implications from a probabilistic, analytic, financial, and numeric point of view. Relying on methods from Jourdain and Martini (2001, 2002), Chrsitensen (2014) and convex duality, we make a first step towards verifying representability of American options. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2002.05571&r=all |