Banu Demir Pakel, B. Javorcik, T. Michalski, Evren Ors
We examine propagation of a small unexpected supply shock through a production network and the role financial constraints play in its transmission. Using data on almost all Turkish supplier-customer links, we exploit the heterogeneous impact of an unexpected import-tax increase for identification. We find that this relatively minor shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Importantly, we show that low-liquidity firms amplified its transmission.
{"title":"Financial Constraints and Propagation of Shocks in Production Networks","authors":"Banu Demir Pakel, B. Javorcik, T. Michalski, Evren Ors","doi":"10.2139/ssrn.3710349","DOIUrl":"https://doi.org/10.2139/ssrn.3710349","url":null,"abstract":"\u0000 We examine propagation of a small unexpected supply shock through a production network and the role financial constraints play in its transmission. Using data on almost all Turkish supplier-customer links, we exploit the heterogeneous impact of an unexpected import-tax increase for identification. We find that this relatively minor shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Importantly, we show that low-liquidity firms amplified its transmission.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"204 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-01-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132301910","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}
Florentina Paraschiv, Markus Schmid, Ranik Raaen Wahlstrøm
In this paper, we test alternative feature selection methods for bankruptcy prediction and illustrate their superiority versus popular models used in the literature. We test these methods using a comprehensive dataset of more than one million financial statements from privately held Norwegian SMEs in 2006-2017. Our methods are allowed to choose among 155 accounting-based input variables derived from prior literature. We find that the input variables chosen by an embedded least absolute shrinkage and selection operator (LASSO) feature selection method yield the best in-sample fit, out-of-sample performance, and stability. Our findings are robust to using discrete hazard models with either a deep artificial neural network (DNN) or logistic regression (LR) in the estimation and hold across different time periods. We show in a simulation which mimics a real-world competitive credit market that using LASSO to choose bankruptcy predictors improves credit risk pricing and decision making, resulting in significantly higher bank profits.
{"title":"Bankruptcy Prediction of Privately Held SMEs Using Feature Selection Methods","authors":"Florentina Paraschiv, Markus Schmid, Ranik Raaen Wahlstrøm","doi":"10.2139/ssrn.3911490","DOIUrl":"https://doi.org/10.2139/ssrn.3911490","url":null,"abstract":"In this paper, we test alternative feature selection methods for bankruptcy prediction and illustrate their superiority versus popular models used in the literature. We test these methods using a comprehensive dataset of more than one million financial statements from privately held Norwegian SMEs in 2006-2017. Our methods are allowed to choose among 155 accounting-based input variables derived from prior literature. We find that the input variables chosen by an embedded least absolute shrinkage and selection operator (LASSO) feature selection method yield the best in-sample fit, out-of-sample performance, and stability. Our findings are robust to using discrete hazard models with either a deep artificial neural network (DNN) or logistic regression (LR) in the estimation and hold across different time periods. We show in a simulation which mimics a real-world competitive credit market that using LASSO to choose bankruptcy predictors improves credit risk pricing and decision making, resulting in significantly higher bank profits.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127268081","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}
Using a large sample of firms from 45 countries, we find that firms in countries with high climate risk reduce their cash dividends but increasingly use share repurchases to make payouts, suggesting that firms substitute dividends with repurchases to increase their payout flexibility in response to heightened climate risk. These results are robust after controlling for firm performance, cash holdings and various other firm and country characteristics. The effect of climate risk on payout policies is more pronounced for firms that are more vulnerable to climate risk and for those in countries where people pay more attention to climate change and the national culture emphasizes uncertainty avoidance and long-term orientation.
{"title":"Climate Risk and Corporate Payout Policies around the World","authors":"Yuyuan Chang, Wen He, Lin Mi","doi":"10.2139/ssrn.3950421","DOIUrl":"https://doi.org/10.2139/ssrn.3950421","url":null,"abstract":"Using a large sample of firms from 45 countries, we find that firms in countries with high climate risk reduce their cash dividends but increasingly use share repurchases to make payouts, suggesting that firms substitute dividends with repurchases to increase their payout flexibility in response to heightened climate risk. These results are robust after controlling for firm performance, cash holdings and various other firm and country characteristics. The effect of climate risk on payout policies is more pronounced for firms that are more vulnerable to climate risk and for those in countries where people pay more attention to climate change and the national culture emphasizes uncertainty avoidance and long-term orientation.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"117 1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127417569","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}
Using the data from Crunchbase, the leading platform for detailed information on early-stage firms, we document evidence of geographic dispersion and industry declustering of new startups over time. We show that this trend is associated with investment incentives of local angel investors. Specifically, angel investors are more likely to provide early-stage fundings to a firm dissimilar to its geographic peers. We find that this result is attributable to the different diversification preferences of angel investors. Angel investors make geographically concentrated investments with industry diversification, while venture capital investors make industry-concentrated investments with relatively greater geographic diversification.
{"title":"Startup (Dis)similarity and Types of Early-Stage Financing","authors":"S. K. Moon, Paula Suh","doi":"10.2139/ssrn.3831951","DOIUrl":"https://doi.org/10.2139/ssrn.3831951","url":null,"abstract":"Using the data from Crunchbase, the leading platform for detailed information on early-stage firms, we document evidence of geographic dispersion and industry declustering of new startups over time. We show that this trend is associated with investment incentives of local angel investors. Specifically, angel investors are more likely to provide early-stage fundings to a firm dissimilar to its geographic peers. We find that this result is attributable to the different diversification preferences of angel investors. Angel investors make geographically concentrated investments with industry diversification, while venture capital investors make industry-concentrated investments with relatively greater geographic diversification.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121243750","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}
In a dynamic principal-agent model, the principal, financing the project, cannot observe project failure and the agent, developing the project, can hide failure. As there is a tension between incentives for disclosure of failure and project development, the optimal contract does not reward failure and incentivize disclosure of failure during an initial unconditional financing stage. During the subsequent disclosure stage, time-decreasing rewards for failure provide incentives for disclosure of failure. The continuation of financing becomes more performance-sensitive across stages, and the agent's incentives are backloaded. The model explains several empirical patterns in venture capital financing and the financing of innovation.
{"title":"Financing Breakthroughs under Failure Risk","authors":"S. Mayer","doi":"10.2139/ssrn.3320502","DOIUrl":"https://doi.org/10.2139/ssrn.3320502","url":null,"abstract":"In a dynamic principal-agent model, the principal, financing the project, cannot observe project failure and the agent, developing the project, can hide failure. As there is a tension between incentives for disclosure of failure and project development, the optimal contract does not reward failure and incentivize disclosure of failure during an initial unconditional financing stage. During the subsequent disclosure stage, time-decreasing rewards for failure provide incentives for disclosure of failure. The continuation of financing becomes more performance-sensitive across stages, and the agent's incentives are backloaded. The model explains several empirical patterns in venture capital financing and the financing of innovation.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"83 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117140509","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}
In the past decades, Corporate Social Responsibility (CSR) has been discussed as the "stakeholder approach" of managing firms, while opposing researchers have taken on views of CSR being at the "shareholder's expense". We aim to link this discussion with various factors that have been proposed by academics to have a predictive power on the outcome of M&A transactions. Expanding the research on M&A-value, we assess CSR wealth implications as proxied by sustainability ratings. By studying short-term market reactions around the deal announcement, our results indicate support for the "stakeholder approach". We find target shareholder wealth to positively relate to high CSR-similarity between target and acquirer. While in our sample target owners retrieve a lion's share of M&A synergies, barely changing returns of the acquirers' shareholders do not alter with CSR-reputation of either parties.
{"title":"Short-term Wealth Effects of Corporate Social Responsibility? - Empirical Evidence from ESG Ratings of Firms Involved in M&A Transactions","authors":"Jan Swiatkowski, Fabian Frey","doi":"10.2139/ssrn.3935832","DOIUrl":"https://doi.org/10.2139/ssrn.3935832","url":null,"abstract":"In the past decades, Corporate Social Responsibility (CSR) has been discussed as the \"stakeholder approach\" of managing firms, while opposing researchers have taken on views of CSR being at the \"shareholder's expense\". We aim to link this discussion with various factors that have been proposed by academics to have a predictive power on the outcome of M&A transactions. Expanding the research on M&A-value, we assess CSR wealth implications as proxied by sustainability ratings. By studying short-term market reactions around the deal announcement, our results indicate support for the \"stakeholder approach\". We find target shareholder wealth to positively relate to high CSR-similarity between target and acquirer. While in our sample target owners retrieve a lion's share of M&A synergies, barely changing returns of the acquirers' shareholders do not alter with CSR-reputation of either parties.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125858297","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}
Does derivative market regulation affect real economic outcomes? We investigate this question in the setting of the central counterparty (CCP) clearing reform on the corporate credit default swap (CDS) market. Exploiting the staggered introduction of CCP clearing to CDS contracts -- an insurance against firm default -- we uncover adverse real economic consequences for affected (non-financial) firms. Firms whose CDS contracts are eligible for clearing with the monopolist CCP lose debt market funding, shrink their balance sheet, cut investment and become less profitable. As a response to the funding short-fall on debt markets, firms increase demand for bank loans. We theoretically motivate two channels through which the CCP environment can adversely affect firms’ debt funding situation: the hedging channel -- higher trading costs on the centrally cleared derivative market push hedged investors away from affected firms; and the arbitrage channel -- lower counterparty risk on the centrally cleared derivative market attracts investors from the bond market to the CDS market. Our results indicate that the arbitrage channel dominates the hedging channel.
{"title":"Clear(ed) Decision: The Effect of Central Clearing on Firms’ Financing Decision","authors":"Maximilian Jager, Frederick Zadow","doi":"10.2139/ssrn.3806364","DOIUrl":"https://doi.org/10.2139/ssrn.3806364","url":null,"abstract":"Does derivative market regulation affect real economic outcomes? We investigate this question in the setting of the central counterparty (CCP) clearing reform on the corporate credit default swap (CDS) market. Exploiting the staggered introduction of CCP clearing to CDS contracts -- an insurance against firm default -- we uncover adverse real economic consequences for affected (non-financial) firms. Firms whose CDS contracts are eligible for clearing with the monopolist CCP lose debt market funding, shrink their balance sheet, cut investment and become less profitable. As a response to the funding short-fall on debt markets, firms increase demand for bank loans. We theoretically motivate two channels through which the CCP environment can adversely affect firms’ debt funding situation: the hedging channel -- higher trading costs on the centrally cleared derivative market push hedged investors away from affected firms; and the arbitrage channel -- lower counterparty risk on the centrally cleared derivative market attracts investors from the bond market to the CDS market. Our results indicate that the arbitrage channel dominates the hedging channel.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132750766","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 study the effect of corporate exposure to weather on costs of borrowing. We construct firm-level weather exposure measures and find that firms exposed to greater weather risk experience substantially higher yield spread on their bonds in the secondary and primary markets. Chanel tests reveal that the link between corporate weather exposure and yield spread arises via firm fundamentals rather than from frictions in the bond market. We find that weather variations significantly increase operating cash flow risk and equity volatility of the exposed firms, while bond illiquidity can hardly explain the effect of weather exposure.
{"title":"Corporate Exposure to Weather and Bond Yield Spread","authors":"Lei Zhang, Min Zhu","doi":"10.2139/ssrn.3547895","DOIUrl":"https://doi.org/10.2139/ssrn.3547895","url":null,"abstract":"We study the effect of corporate exposure to weather on costs of borrowing. We construct firm-level weather exposure measures and find that firms exposed to greater weather risk experience substantially higher yield spread on their bonds in the secondary and primary markets. Chanel tests reveal that the link between corporate weather exposure and yield spread arises via firm fundamentals rather than from frictions in the bond market. We find that weather variations significantly increase operating cash flow risk and equity volatility of the exposed firms, while bond illiquidity can hardly explain the effect of weather exposure.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115182594","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 study the transmission of (unconventional) monetary policy to the real sector when firm decisions depend on both current and future credit market conditions. For a given level of current credit access, investment and employment increases more at firms expecting bank credit to improve in the future. Three separate unconventional policies by the ECB—the OMT, the introduction of negative rates, and the CSPP—improved expectations of future credit access for SMEs borrowing from banks that were expected to increase SME lending due to the policy. Our results enhance our understanding of the bank balance sheet channel of monetary policy. JEL Classification: D22, D84, E58, G21, H63
{"title":"Unconventional Monetary Policy, Funding Expectations, and Firm Decisions","authors":"Annalisa Ferrando, A. Popov, Gregory F. Udell","doi":"10.2139/ssrn.3937768","DOIUrl":"https://doi.org/10.2139/ssrn.3937768","url":null,"abstract":"We study the transmission of (unconventional) monetary policy to the real sector when firm decisions depend on both current and future credit market conditions. For a given level of current credit access, investment and employment increases more at firms expecting bank credit to improve in the future. Three separate unconventional policies by the ECB—the OMT, the introduction of negative rates, and the CSPP—improved expectations of future credit access for SMEs borrowing from banks that were expected to increase SME lending due to the policy. Our results enhance our understanding of the bank balance sheet channel of monetary policy. JEL Classification: D22, D84, E58, G21, H63","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124055851","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}
Yangyang Chen, H. N. Duong, Abhinav Goyal, M. Veeraraghavan
Using a sample of 4,892 IPOs in the United States from 1990 to 2019, we establish that the level of social capital in the county of the IPO firm’s headquarters is negatively associated with the level of IPO underpricing. The relation holds for a range of robustness tests, including those addressing endogeneity. Additionally, the relation is weaker among IPO firms with less information uncertainty, and stronger for IPO firms with more agency problems. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of IPOs.
{"title":"Social Capital and the Pricing of Initial Public Offerings","authors":"Yangyang Chen, H. N. Duong, Abhinav Goyal, M. Veeraraghavan","doi":"10.2139/ssrn.3934548","DOIUrl":"https://doi.org/10.2139/ssrn.3934548","url":null,"abstract":"Using a sample of 4,892 IPOs in the United States from 1990 to 2019, we establish that the level of social capital in the county of the IPO firm’s headquarters is negatively associated with the level of IPO underpricing. The relation holds for a range of robustness tests, including those addressing endogeneity. Additionally, the relation is weaker among IPO firms with less information uncertainty, and stronger for IPO firms with more agency problems. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of IPOs.","PeriodicalId":364750,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies eJournal","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131157943","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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