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on Corporate Finance |
| By: | Bruno Alexandre Ferreira Albuquerque (Bank of England and FEUC) |
| Abstract: | Does corporate debt overhang affect investment over the medium term? To uncover this association, I measure debt overhang with a concept of debt accumulation or debt boom, and combine leverage with liquid assets to capture financial constraints. Using a large US firm-levelpanel over 1985Q1-2019Q1, I find that debt overhang leads financially vulnerable firms to cutpermanently back on investment: a 10 p.p. increase in the three-year change in the leverageratio is associated with lower investment growth of 5 p.p. after five years compared to the mostresilient firms. I also find that vulnerable firms experience weaker intangible capital growth inthe aftermath of debt booms. Finally, I find that general equilibrium effects dominate, stressingthe risk that firm-specific debt booms in a subset of firms may spill over to the rest of theeconomy. |
| Keywords: | IFRS 9, IAS 39, CECL, credit risk, transition matrices,stochastic simulation. |
| JEL: | D22 E22 E32 G32 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:papers:2021-08&r= |
| By: | Michi NISHIHARA (Graduate School of Economics, Osaka University); Takashi SHIBATA (Graduate School of Management, Tokyo Metropolitan University); Hiroki Kato (Cotsakos College of Business, William Paterson University,) |
| Abstract: | We study the effects of an earnings-based borrowing constraint (EBC) on a firm fs investment, financing, and exit decisions by developing a real options model with EBC. We highlight how EBC affects the decisions and values differently from a liquidation value-based borrowing constraint (LBC). Unlike under LBC, the firm delays investment to increase the cap of debt under EBC. Investment reversibility (or equivalently, liquidation value) does not largely affect the firm with EBC, although it greatly affects the firm with LBC. Unlike LBC, EBC loosens with higher volatility because higher volatility delays investment, which increases the cap of debt. With low investment reversibility and high volatility, EBC is preferable to LBC from a firm value perspective, and in case of financial distress, the firm goes into reorganization bankruptcy rather than liquidation bankruptcy. This also implies a positive relation between the prevalence of EBC and reorganization bankruptcy. Our results are largely consistent with empirical observations. |
| Keywords: | real options; borrowing constraints; capital structure; bankruptcy |
| JEL: | G13 G32 G33 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:2113&r= |
| By: | Bernadette A. Minton; Alvaro G. Taboada; Rohan Williamson |
| Abstract: | We examine the effects of bank merger and local market characteristics on local small business lending. Mergers involving small, in-state acquirers are positively associated with small business loan (SBL) originations in counties where target banks are located. Conversely, mergers involving large, out-of-state acquirers are associated with fewer SBL originations. The analysis suggests that the results are driven by acquirer’s choice of target. Small and in-state acquirers target banks that focus more on SBL and targets with strong relationships while large, out-of-state acquirers pursue better performing banks with stronger balance sheets and less focus on SBL. Results are particularly strong in counties with a large number of small firms. Post-merger activity supports banks expanding on their acquisition strategy decisions. The findings suggest that acquirer strategy is important for evaluating the impact of acquisitions on local community development and that one-size-fits-all policy solutions for bank mergers may not produce common local outcomes. |
| JEL: | G21 G34 O1 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29284&r= |
| By: | Falko Fecht; José-Luis Peydró; Günseli Tümer-Alkan; Yuejuan Yu |
| Abstract: | We analyze how banks' equity stakes in firms influence their credit supply in crisis times. For identification, we exploit the 2008 Global Financial Crisis and merge unique supervisory data from the German credit register on individual bank-firm credit exposures with the security register data that include banks' equity holdings. We find that a large and ex-ante persistent equity position held by a bank in a firm is associated with a larger credit provision from the respective bank to that firm. In crisis times, however, equity stakes only foster credit supply to ex-ante riskier firms especially from relatively weak banks. This ex-ante risk-taking may be due to better (insider) information by the bank, including a traditional lending relationship over the crisis. However, this ex-ante riskier lending translates also into higher ex-post loan defaults, worse firm-level stock market returns and even more firm bankruptcy or restructuring cases. Our results therefore suggest that banks' equity stakes in their borrowers do not mitigate debt overhang problems of distressed firms in crisis times, but rather foster evergreening of banks' outstanding credit to those (zombie) firms. |
| Keywords: | Universal banks; credit supply; bank equity holdings; debt overhang; evergreening |
| JEL: | G01 G21 G28 G30 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1802&r= |
| By: | Ulrich Doraszelski; João F. Gomes; Felix Nockher |
| Abstract: | Access to capital markets plays a key role for the evolution of an industry over time. We develop a benchmark theoretical setting that integrates core corporate finance insights about the impact of financial frictions on investment with those from industrial organization on dynamic competition and industry evolution under perfect capital markets. Using state of the art computational tools to systematically detect and evaluate multiple equilibria and to thoroughly explore the parameter space of our model, we show how, depending on key industry characteristics such as market size, financial frictions impact firms' pricing and investment strategies and the degree of industry concentration. |
| JEL: | G3 L1 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29310&r= |
| By: | Karolis Liaudinskas; Kristina GrigaitÄ— |
| Abstract: | We explore Lithuanian credit register data and two bank closures to provide a novel estimate of firms’ bank-switching costs and a novel identification of the hold-up problem. We show that when a distressed bank’s closure forced firms to switch, these firms started borrowing at lower interest rates immediately and permanently. This suggests that firms were held up and overcharged exante, and reveals the lower bound of their ex-ante switching costs. Opaquer firms were overcharged more, which suggests that information asymmetries significantly contribute to switching costs. In line with banks’ reputational concerns, a healthy bank’s closure revealed no overcharging. To policy-makers, our results suggest potential benefits of distressed banks’ closures. |
| Keywords: | switching costs, lending relationships, hold-up, asymmetric information, bank closures, financial distress |
| JEL: | D82 E51 G21 G33 L14 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2021_4&r= |
| By: | Berger, Marius; Gottschalk, Sandra |
| Abstract: | In recent years governments around the world have introduced policies to stimulate investments in early stage entrepreneurial companies, in particular investments by Angel investors. In this paper we study whether introducing subsidies to Angel investors has effects on startups' access to financial and managerial resources provided by Angel investors. Using data for a representative sample of entrepreneurial companies in Germany, we analyze the effect of the introduction of a major subsidy program for Angel investors in Germany. Having data before and after the introduction of the program allows us to use a difference-in-differences framework to examine the effect of the program on eligible companies. Our findings indicate that subsidies for Angel investors both increase the chances to receive financing from Angel investors (+36-67%), as well as the amount of financing received (+70-82%). In terms of managerial resources, we find no effects that are significantly different from zero. This result is in contrast to theoretical predictions suggesting negative effects of investment subsidies on the level of managerial support that companies receive. Exploring the mechanisms behind our results, we find that the policy stimulated entry by inexperienced investors, but also increased syndicate sizes of Angel investors in entrepreneurial companies. |
| Keywords: | Entrepreneurship Policy,Angel Investors,Venture Capital,Syndication |
| JEL: | G28 G24 M13 O38 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21069&r= |
| By: | Jacquelyn Humphrey; Shimon Kogan; Jacob Sagi; Laura Starks |
| Abstract: | We design an experiment to understand how social preferences affect investment decisions through stock allocations and probability assessments. The major preference channel is asymmetric in social outcomes – although negative and positive responsible investment (RI) externalities have the same magnitudes, negative externalities have greater impact on investment choices. The effect is persistent, but heterogenous. We also find asymmetries in belief formation and learning constitute a secondary channel. Overall, our results are consistent with important stylized empirical facts and the predictions of recent RI theories that social preferences lead to different investment choices, but our analyses also suggest important future modeling directions. |
| JEL: | C91 G11 G41 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29288&r= |
| By: | Gharad T. Bryan; Dean Karlan; Adam Osman |
| Abstract: | We experimentally study the impact of substantially larger enterprise loans, in collaboration with an Egyptian lender. Larger loans generate small average impacts, but machine learning using psychometric data reveals dramatic heterogeneity. Top-performers (i.e., those with the highest predicted treatment effects) substantially increase profits, whereas profits for poor-performers drop. The magnitude of this difference implies that an individual lender’s credit allocation choices matter for aggregate income. Evidence on two fronts suggests large loans would be misallocated: top-performers are predicted by loan officers to have higher default rates; and, top-performers grow less than others when given small loans, implying that allocating larger loans based on prior performance is not efficient. Our results have important implications for credit expansion policy and our understanding of entrepreneurial talent: on the former, the use of psychometric data to identify top-performers suggests a pathway towards better allocation that revolves around entrepreneurial type more than firm type; on the latter, the reversal of fortune for poor-performers, who do well with small loans but not large, indicates a type of entrepreneur that we call a “go-getter” who performs well when constrained but poorly when not. |
| JEL: | D22 D24 L26 M21 O12 O16 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29311&r= |
| By: | Nguyen, Phong Thanh; Phu Pham, Cuong; Thanh Phan, Phuong; Bich Vu, Ngoc; Tien Ha Duong, My; Le Hoang Thuy To Nguyen, Quyen |
| Abstract: | Risks and uncertainty are unavoidable problems in management of projects. Therefore, project managers should not only prevent risks, but also have to respond and manage them. Risk management has become a critical interest subject in the construction industry for both practitioners and researchers. This paper presents critical risk factors of office building projects in the construction phase in Ho Chi Minh City, Vietnam. Data was collected through a questionnaire survey based on the likelihood and consequence level of risk factors. These factors fell into five groups: (i) financial risk factors; (ii) management risk factors; (iii) schedule risk factors; (iv) construction risk factors; and (v) environment risk factors. The research results showed that critical factors affecting office building projects are natural (i.e., prolonged rain, storms, climate effects) and human-made issues (i.e., soil instability, safety behaviors, owner’s design change) and the schedule-related risk factors contributed to the most significant risks for office buildings projects in the construction phase in Ho Chi Minh City. They give construction management and project management practitioners a new perspective on risks and risk management of office buildings projects in Ho Chi Minh City and are proactive in the awareness, response, and management of risk factors comprehensively. |
| Keywords: | Construction Management, Office Buildings Projects, Risk Management, Project Management |
| JEL: | G32 L74 O18 |
| Date: | 2020–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109901&r= |