Corporate finance has related corporate policies to cash flow risk. I show that corporate valuation and policies are better understood when taking into account the dynamics of products, which microfound firms' cash flows. I demonstrate empirically that product portfolio age is negatively related to firm value, investment and leverage, consistent with the product life cycle channel. I quantify its importance by estimating a model of financing, investment, and product portfolio decisions. The model rationalizes the stylized facts by showing that capital investment and product introductions act as complements and that product dynamics induce stronger precautionary savings motives. The results indicate that product dynamics are important, as they explain 25% of variation in investment and leverage. The estimates imply that product life cycle effects are large and stronger among firms supplying fewer products and competing more intensely. Alleviating these effects can increase firm value by up to 4.5%.
{"title":"Product Market Strategy and Corporate Policies","authors":"Jakub Hajda, B. Nikolov","doi":"10.2139/ssrn.3354748","DOIUrl":"https://doi.org/10.2139/ssrn.3354748","url":null,"abstract":"Corporate finance has related corporate policies to cash flow risk. I show that corporate valuation and policies are better understood when taking into account the dynamics of products, which microfound firms' cash flows. I demonstrate empirically that product portfolio age is negatively related to firm value, investment and leverage, consistent with the product life cycle channel. I quantify its importance by estimating a model of financing, investment, and product portfolio decisions. The model rationalizes the stylized facts by showing that capital investment and product introductions act as complements and that product dynamics induce stronger precautionary savings motives. The results indicate that product dynamics are important, as they explain 25% of variation in investment and leverage. The estimates imply that product life cycle effects are large and stronger among firms supplying fewer products and competing more intensely. Alleviating these effects can increase firm value by up to 4.5%.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114143606","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We highlight an important but overlooked characteristic of financial fragility: “fragile” stocks are more liquid because they are sensitive to non-fundamental liquidity shocks. This reduces their sensitivity to corporate actions with price impact and affects the firms’ incentives to engage in such actions. We show that fragile firms have lower share repurchases but invest more and the effect is stronger for financially constrained firms. We establish causality by relating changes in corporate actions to exogenous changes in fragility induced by mergers of asset managers. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.
{"title":"The Bright Side of Financial Fragility","authors":"M. Massa, David Schumacher, Yan Wang","doi":"10.2139/ssrn.3730193","DOIUrl":"https://doi.org/10.2139/ssrn.3730193","url":null,"abstract":"We highlight an important but overlooked characteristic of financial fragility: “fragile” stocks are more liquid because they are sensitive to non-fundamental liquidity shocks. This reduces their sensitivity to corporate actions with price impact and affects the firms’ incentives to engage in such actions. We show that fragile firms have lower share repurchases but invest more and the effect is stronger for financially constrained firms. We establish causality by relating changes in corporate actions to exogenous changes in fragility induced by mergers of asset managers. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124543681","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Initial Coin Offerings (ICOs) have recently emerged as a novel source of fund raising for startup entrepreneurs. The ease and flexibility inherent to ICOs are notably significant incentives for founders looking to raise funds. The glaring success of many ICOs over the past few years has further helped cement ICO’s place as a worthy alternative to traditional fund raising mechanisms.
The duo of debt and equity, though starkly different, have for long been established as the primary sources in corporate finance. Over time, it has become almost instinctive to assume any new fundraising mechanism will fit squarely into either boxes or at least be a mishmash of both.
This paper attempts to explore the position, if any, of ICOs vis-a-vis the traditional capital raising options of debt and equity.
{"title":"Initial Coin Offerings (ICOs): Debt or Equity?","authors":"Mubaraq Popoola","doi":"10.2139/ssrn.3722528","DOIUrl":"https://doi.org/10.2139/ssrn.3722528","url":null,"abstract":"Initial Coin Offerings (ICOs) have recently emerged as a novel source of fund raising for startup entrepreneurs. The ease and flexibility inherent to ICOs are notably significant incentives for founders looking to raise funds. The glaring success of many ICOs over the past few years has further helped cement ICO’s place as a worthy alternative to traditional fund raising mechanisms.<br><br>The duo of debt and equity, though starkly different, have for long been established as the primary sources in corporate finance. Over time, it has become almost instinctive to assume any new fundraising mechanism will fit squarely into either boxes or at least be a mishmash of both.<br><br>This paper attempts to explore the position, if any, of ICOs vis-a-vis the traditional capital raising options of debt and equity.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123996847","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the relationship between the intensity of share pledging activities and the level of financial constraint. Using a sample of Chinese publicly listed firms from 2003 to 2018, our main findings are fourfold. First, we document that the high financial constraint level may motivate insiders to use share pledging as an alternative funding source and an expropriation mechanism. Second, share collateralization can cause a subsequently more constrained financing condition. Third, investors may raise more concerns about the existence of share collateralization than the proportion of pledged shares in a firm. Fourth, we find evidence that share pledging made by the controlling shareholder is likely to mitigate financial constraints in the following year. Our results are robust to alternative measures of share pledging, an alternative definition of financial constraint, and an instrumental variable for dealing with endogeneity problems. Our findings provide insights into rationales behind and consequences of share pledging activities, which have important implications for financially constrained firms and regulators in emerging markets.
{"title":"Share Pledging and Financial Constraints in China","authors":"Zijian Cheng, Z. Liu, Yupu Sun","doi":"10.2139/ssrn.3536042","DOIUrl":"https://doi.org/10.2139/ssrn.3536042","url":null,"abstract":"We investigate the relationship between the intensity of share pledging activities and the level of financial constraint. Using a sample of Chinese publicly listed firms from 2003 to 2018, our main findings are fourfold. First, we document that the high financial constraint level may motivate insiders to use share pledging as an alternative funding source and an expropriation mechanism. Second, share collateralization can cause a subsequently more constrained financing condition. Third, investors may raise more concerns about the existence of share collateralization than the proportion of pledged shares in a firm. Fourth, we find evidence that share pledging made by the controlling shareholder is likely to mitigate financial constraints in the following year. Our results are robust to alternative measures of share pledging, an alternative definition of financial constraint, and an instrumental variable for dealing with endogeneity problems. Our findings provide insights into rationales behind and consequences of share pledging activities, which have important implications for financially constrained firms and regulators in emerging markets.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"112 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127694642","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Different ETS allowance distribution method may vary the effeteness of the ETS on the regulated firm’s performance. This paper uses the Propensity Score Matching Difference-in-Differences method found that the China ETS could increase its regulated firm competitiveness from different aspects. Furthermore, we have tested the impact of the carbon price and its volatility on firm financial performance. Different from the traditional view on the impact of the carbon price, this paper has found that growing the carbon price would benefit regulated firm financial performance, but higher volatility is harmful to the performance.
{"title":"Corporate Financial Performance in the China Emission Trading Scheme: Evidence From China Listed Firm","authors":"Yizhe Dong, Liang Xi, Tianju Wang","doi":"10.2139/ssrn.3726020","DOIUrl":"https://doi.org/10.2139/ssrn.3726020","url":null,"abstract":"Different ETS allowance distribution method may vary the effeteness of the ETS on the regulated firm’s performance. This paper uses the Propensity Score Matching Difference-in-Differences method found that the China ETS could increase its regulated firm competitiveness from different aspects. Furthermore, we have tested the impact of the carbon price and its volatility on firm financial performance. Different from the traditional view on the impact of the carbon price, this paper has found that growing the carbon price would benefit regulated firm financial performance, but higher volatility is harmful to the performance.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"168 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114155976","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sjoerd van Bekkum, Bruce D. Grundy, P. Verwijmeren
Sovereign bond benchmarks are important determinants of corporate bond issuance and maturity. We show that by providing benchmark rates, long-maturity government issues complement the issuance of similar-maturity corporate issues. Government and corporate bond issues are also substitutes and more long-term corporate bonds are issued when sovereign alternatives are in short supply. However, the substitution weakens when sovereign bonds fail to provide a precise benchmark. Sovereign debt and its maturity play an important role in capital market development with sovereign bond issues that increase a country’s maximum maturity preceding increases in the maximum maturity of corporate issues.
{"title":"The Importance of Sovereign Bond Benchmarks for Corporate Debt Issuance","authors":"Sjoerd van Bekkum, Bruce D. Grundy, P. Verwijmeren","doi":"10.2139/ssrn.3330391","DOIUrl":"https://doi.org/10.2139/ssrn.3330391","url":null,"abstract":"Sovereign bond benchmarks are important determinants of corporate bond issuance and maturity. We show that by providing benchmark rates, long-maturity government issues complement the issuance of similar-maturity corporate issues. Government and corporate bond issues are also substitutes and more long-term corporate bonds are issued when sovereign alternatives are in short supply. However, the substitution weakens when sovereign bonds fail to provide a precise benchmark. Sovereign debt and its maturity play an important role in capital market development with sovereign bond issues that increase a country’s maximum maturity preceding increases in the maximum maturity of corporate issues.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122014490","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-10-05DOI: 10.15728/bbr.2020.17.6.1
Paulo Victor Novaes, José Elias Feres de Almeida
We examine the effects of firms’ life cycle stages on voluntary disclosure and the cost of equity capital. We also examine the relationship between the interaction of life cycle stages and voluntary disclosures measures on cost of equity capital. Our sample consists of non-financial Brazilian public companies, covered by analysts between 2008 and 2014, collected from I/B/E/S and Comdinheiro databases. We find that voluntary disclosure level is higher for firms in maturity and growth stages. We also find that firms in introduction and decline life cycle stages show higher implied cost of capital, however declining firms that increase voluntary disclosure reduce their cost of capital. Moreover, mature firms significantly reduce such inherent risk by reporting social and environmental voluntary information. Our results are useful for investors, practitioners, and regulators to the understanding of the incentives of voluntary disclosure practices.
{"title":"The Role of Firms’ Life Cycle Stages on Voluntary Disclosure and Cost of Equity Capital in Brazilian Public Companies","authors":"Paulo Victor Novaes, José Elias Feres de Almeida","doi":"10.15728/bbr.2020.17.6.1","DOIUrl":"https://doi.org/10.15728/bbr.2020.17.6.1","url":null,"abstract":"We examine the effects of firms’ life cycle stages on voluntary disclosure and the cost of equity capital. We also examine the relationship between the interaction of life cycle stages and voluntary disclosures measures on cost of equity capital. Our sample consists of non-financial Brazilian public companies, covered by analysts between 2008 and 2014, collected from I/B/E/S and Comdinheiro databases. We find that voluntary disclosure level is higher for firms in maturity and growth stages. We also find that firms in introduction and decline life cycle stages show higher implied cost of capital, however declining firms that increase voluntary disclosure reduce their cost of capital. Moreover, mature firms significantly reduce such inherent risk by reporting social and environmental voluntary information. Our results are useful for investors, practitioners, and regulators to the understanding of the incentives of voluntary disclosure practices.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127010852","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We provide evidence that growth options play an important role in determining the negative relation between corporate investment and idiosyncratic risk in the absence of agency problem. A simple real options model predicts that the negative relation between corporate investment and idiosyncratic risk is a U-shaped function of the level of idiosyncratic risk: investment responds the most when idiosyncratic risk is at the intermediate level. And the negative relation is stronger when firms possess more growth options. Our results are robust when we control for the effect of managerial risk aversion, supporting the view that firms’ optimal response to uncertainty is an important driving force behind the negative investment–idiosyncratic risk relation.
{"title":"Investment, Idiosyncratic Risk, and Growth Options","authors":"Clark Liu, Shujing Wang","doi":"10.2139/ssrn.3783590","DOIUrl":"https://doi.org/10.2139/ssrn.3783590","url":null,"abstract":"Abstract We provide evidence that growth options play an important role in determining the negative relation between corporate investment and idiosyncratic risk in the absence of agency problem. A simple real options model predicts that the negative relation between corporate investment and idiosyncratic risk is a U-shaped function of the level of idiosyncratic risk: investment responds the most when idiosyncratic risk is at the intermediate level. And the negative relation is stronger when firms possess more growth options. Our results are robust when we control for the effect of managerial risk aversion, supporting the view that firms’ optimal response to uncertainty is an important driving force behind the negative investment–idiosyncratic risk relation.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127150763","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Credit contract enforcement influences financial market allocations and prices. Well-functioning credit markets enable firms to finance their operations. Can greater judicial efficiency therefore help to improve credit market allocations, by increasing firm dynamism and boosting aggregate productivity? We build a dynamic model of heterogeneous firms with short-term liquidity needs, in which two key features of enforcing credit contract proceedings, case resolution time and the expected recovery rate, directly affect credit supply. Once calibrated to replicate Italian firm dynamics, we use the model to analyze the extent to which court efficiency determines aggregate outcomes through the credit channel. In our economy, either increasing the average recovery rate on defaulted loans from 62 to 80 per cent, or reducing case resolution time from 9 to 5 years, raises average firm productivity by about 2 per cent. These gains are attained through a substantial improvement in the allocation of resources across firms.
{"title":"Court Efficiency and Aggregate Productivity: The Credit Channel","authors":"Guzman Gonzalez-Torres, Giacomo Rodano","doi":"10.2139/ssrn.3680573","DOIUrl":"https://doi.org/10.2139/ssrn.3680573","url":null,"abstract":"Credit contract enforcement influences financial market allocations and prices. Well-functioning credit markets enable firms to finance their operations. Can greater judicial efficiency therefore help to improve credit market allocations, by increasing firm dynamism and boosting aggregate productivity? We build a dynamic model of heterogeneous firms with short-term liquidity needs, in which two key features of enforcing credit contract proceedings, case resolution time and the expected recovery rate, directly affect credit supply. Once calibrated to replicate Italian firm dynamics, we use the model to analyze the extent to which court efficiency determines aggregate outcomes through the credit channel. In our economy, either increasing the average recovery rate on defaulted loans from 62 to 80 per cent, or reducing case resolution time from 9 to 5 years, raises average firm productivity by about 2 per cent. These gains are attained through a substantial improvement in the allocation of resources across firms.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121635772","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use Texas's constitutional amendment in 1997 that expanded the scope of home equity loans as a source of exogenous variation to estimate the effects of relaxing credit constraints on small businesses. We find, using standard panel data methods and restricted-use micro-data from the US Census Bureau, that the Texas amendment increased the use of home equity finance by small businesses, increased new business and job creation and reduced establishment exit and job loss. The effects are larger and significant for businesses with fewer than ten employees.
{"title":"Home Equity Lending, Credit Constraints and Small Business in the US","authors":"W. D. Lastrapes, Ian M. Schmutte, Thor Watson","doi":"10.2139/ssrn.3655661","DOIUrl":"https://doi.org/10.2139/ssrn.3655661","url":null,"abstract":"We use Texas's constitutional amendment in 1997 that expanded the scope of home equity loans as a source of exogenous variation to estimate the effects of relaxing credit constraints on small businesses. We find, using standard panel data methods and restricted-use micro-data from the US Census Bureau, that the Texas amendment increased the use of home equity finance by small businesses, increased new business and job creation and reduced establishment exit and job loss. The effects are larger and significant for businesses with fewer than ten employees.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134537766","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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