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on Corporate Finance |
| By: | Ralphb W. Sanders, Jr. (Department of Economics and Management, DePauw University) |
| Abstract: | I examine the effects of cash-flow risk resolutions on project valuation by deriving risk-resolution-scenario-specific "families" of capital structure relations (i.e., equations for the value of the levered firm, return on levered equity, and marginal cost of capital). Although I obtain Modigliani and Miller’s family of relations only as highly constrained special cases reflecting "risk-free" cash flows, I find that their qualitative insights into firm value and leverage in the presence of corporate taxes are robust across the cash-flow risk resolution scenarios examined. More practically, I find that analysts will correctly value a scale enhancing project (i.e., a project of the same risk class as the firm funded at the firm’s observable leverage ratio) by discounting its net cash flows at the firm’s observable weighted average cost of capital regardless of the actual way the project’s cash-flow risk actually resolves. However, analysts will misvalue projects involving changes in leverage ratio if they use a weighted average cost of capital implied by a family of capital structure relations inconsistent with the way the project’s cash-flow risk resolves (e.g., valuation errors result when analysts use Modigliani and Miller’s marginal cost of capital in the real world). Employing standard alternatives to traditional weighted average cost of capital valuation (e.g., Myers’ APV and Ruback’s Capital Cash Flow approach) does not solve this problem). More generally, I show that practitioners best not approach project (or firm) valuation with a one-size-fits-all or favorite set of valuation equations. Rather, they must be guided by their best understanding of the way the project’s cash-flow risk resolves, hope that understanding is correct, and employ the family of relations consistent with that understanding. |
| Date: | 2022–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:dew:wpaper:2022-03&r= |
| By: | Federico Huneeus; Joseph Kaboski; Mauricio Larrain; Sergio Schmukler; Mario Vera |
| Abstract: | We study the distribution of credit during crisis times and its impact on firm indebtedness and macroeconomic risk. Whereas policies can help firms in need of financing, they can lead to adverse selection from riskier firms and higher default risk. We analyze a large-scale program of public credit guarantees in Chile during the COVID-19 pandemic using unique transaction-level data of demand and supply of credit, matched with administrative tax data, for the universe of banks and firms. Credit demand channels loans toward riskier firms, distributing 4.6% of GDP and increasing firm leverage. Despite increased lending to riskier firms at the micro level, macroeconomic risks remain small. Several factors mitigate aggregate risk: the small weight of riskier firms, the exclusion of the riskiest firms, bank screening, contained expected defaults, and the government absorption of tail risk. We quantitatively confirm our empirical findings with a model of heterogeneous firms and endogenous default. |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:942&r= |
| By: | Worley, Julian M.; Dorfman, Jeffrey H. |
| Keywords: | Agribusiness, Risk and Uncertainty, Marketing |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea22:322091&r= |
| By: | Erel, Isil (Ohio State University); Inozemtsev, Eduard (Ohio State University) |
| Abstract: | Nonbank lenders have been playing an increasingly important role in the supply of debt financing, especially post Great Recession. These nonbank financial institutions not only participate in syndicated loans to large businesses but also act as direct lenders to small and mid-sized businesses, providing loans previously were primarily supplied by banks. Moreover, the composition of bondholders has changed, with mutual funds and other less regulated entities having gained nontrivial market shares. What is the extent of nonbank lending? How important are the distortions associated with the varying degrees of regulatory oversight for banks that differentially limit risk-taking across alternative sources of credit? What are the financial stability implications of this transformed landscape of credit markets? This selective review addresses these important questions and also discusses how banks and nonbanks helped provide liquidity to the nonfinancial sector during the COVID-19 pandemic shock. |
| JEL: | G21 G22 G23 G24 G28 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2022-04&r= |
| By: | Phoebe Koundouri; Nikitas Pittis (University of Piraeus, Greece); Angelos Plataniotis |
| Abstract: | Achieving climate neutrality, as dictated by international agreements such as the Paris Agreement, the United Nations Agenda 2030 and the European Green Deal, requires the conscription of all parts of society. The business world and, in particular, large enterprises have a leading role in this effort. Businesses can contribute to this effort by establishing a reporting and operating framework according to specific Environmental, Social and Governance (ESG) criteria. The interest of companies in the ESG framework has become more intense in the recent years, as they recognize that apart from an improved reputation, ESG criteria can add value to them and help them to become more effective in their functioning. In particular, large European companies are legally obligated by the Non-Financial Reporting Directive (NFRD-Directive 2014/95/EU) to disclose non-financial information on how they deal with social and environmental issues. In the literature, there are discussions on the extent to which a good ESG performance affects a company's profitability, valuation, capital efficiency and risk. The purpose of this paper is to examine empirically whether a relationship between good ESG performance and the good financial condition of companies can be documented. For a sample of the top 50 European companies in terms of ESG performance (STOXX Europe ESG Leaders 50 Index), covering a wide range of sectors, namely Automobiles, Consumer Products, Energy, Financial Services, Manufacturing, etc., we first reviewed their reportings to see which ESG framework they use to monitor their performance. Next, we examined whether there is a pattern of better financial performance compared to other large European corporations. Our results showed that such a connection seems to exist at least for some specific parameters, while for others, such a claim cannot be supported. |
| Keywords: | ESG, STOXX Europe, financial performance, capital structure, profitability, valuation |
| Date: | 2022–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:2218&r= |
| By: | Sebastian Link; Manuel Menkhoff; Andreas Peichl; Paul Schüle |
| Abstract: | This policy brief provides novel empirical evidence on the causal effect of increasing corporate taxes on firm investment. The study combines unique data on investment plans and their realizations of firms in the German industrial sector and data on more than 1,400 local tax changes in the specific system of business taxation in Germany. We show that firms reduce their investments if corporate taxes were increased. An increase of corporate tax rates to stabilize fiscal revenues would be especially costly during recessions. We conclude that fiscal policy should therefore avoid higher corporate taxation in times of economic crisis. Moreover, our results have implications for the op-timal design of fiscal federalism in Germany. Strong dependencies of municipalities on local business tax revenues should be avoided, as they can be very harmful during recessions. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econpb:_44&r= |
| By: | Granda-Carvajal, Catalina; Hamann, Franz; Tamayo, Cesar E. |
| Abstract: | In this paper we build an incomplete-markets model with heterogeneous households and firms to study the aggregate effects of saving constraints and credit constraints in general equilibrium. We calibrate the model using survey data from Colombia, a developing country in which informal saving and credit frictions are pervasive. Our quantitative results suggest that reducing savings costs increases selection into formal saving, but the effect on aggregate outcomes and welfare is dwarfed by that of a policy which ameliorates borrowing constraints. Such a policy improves resource allocation and increases returns to capital and labor, resulting in higher savings and welfare gains for both households and firms. |
| Keywords: | saving constraints; credit constraints; financial inclusion; misallocation; savings; formal and informal financial markets |
| JEL: | E21 E44 G21 O11 O16 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:92&r= |
| By: | Stulz, Rene M. (Ohio State University); Taboada, Alvaro G. (Mississippi State University); Van Dijk, Mathijs A. (Erasmus University Rotterdam) |
| Abstract: | Bank liquid asset holdings vary significantly across banks and through time. The determinants of liquid asset holdings from the corporate finance literature are not useful to predict banks’ liquid asset holdings. Banks have an investment motive to hold liquid assets, so that when their lending opportunities are better, they hold fewer liquid assets. We find strong support for the investment motive. Large banks hold much more liquid assets after the Global Financial Crisis (GFC), and this change cannot be explained using models of liquid asset holdings estimated before the GFC. We find evidence supportive of the hypothesis that the increase in liquid assets of large banks is due at least in part to the post-GFC regulatory changes. |
| JEL: | G21 G28 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2022-05&r= |