Taking firms to the stock market: IPOs and the importance of large banks in imperial Germany, 1896–1913

Large universal banks played a major role in Germany's industrialization because they provided loans to industry and thereby helped firms to overcome liquidity constraints. Previous research has also argued that they were equally important for the German stock market. This article provides quantitative and qualitative evidence that although the market for underwriters was dominated by a small oligopoly of six large banks, there was still perceptible competition, which kept fees and short‐run profits low. Another interesting finding presented here is the absence of a signalling effect to investors. Neither underpricing nor the one‐year performance was different for the IPOs issued by one of the Big Six. Thus, although the German IPO business was in the hands of a small oligopoly, investors did not benefit from the lack of competition. One explanation is that the quality of IPOs on the German stock market of the time was very good in general as a result of the competition between underwriters, but also as a result of the tight regulation of underwriting, which ensured the quality of all firms on the German stock market.     

Determinants and effects of the use of COVID-19 business support programs in Japan

Using a survey of and financial data for Japanese small- and medium-enterprises (SMEs), this paper examines the determinants of firms’ use of the business support programs provided by the Japanese government during the COVID-19 pandemic and their effect. With respect to the determinants, we obtain the following three findings: First, firms were more likely to have obtained subsidized loans, grants, or subsidies the more their sales had fallen during the pandemic, suggesting that funds flowed to firms that were adversely affected by the pandemic. Second, the likelihood that firms obtained funds was higher if their credit scores were lower or if they were classified as “zombies” and/or “low-return borrowers” before the pandemic, suggesting that the government programs also helped firms that had been under-performing before the pandemic. Third, firms were more likely to receive funds if they had a stronger relationship with their main bank before, suggesting that bank relationships play an important role in firms’ access to government programs. Regarding the causal effects, we obtain the following three findings: First, except for the subsidies for employment adjustment, the support programs increased the cash holdings of user firms. Second, subsidized loans from private financial institutions lowered exit rates, while none of the programs had a significantly positive effect on employment relative to non-users (or in absolute terms). Third, the credit scores and profit-to-sales ratio of firms that used the support programs decreased and the likelihood of such firms being a zombie and/or a low-return borrower increased. Overall, our findings provide a cautionary tale in that the business support programs produced mixed results in that they may have prevented business failures but have also helped to prop up firms that are not viable in the long run.     

Business Cycle in China since the Lehman Crisis： Interaction among Macroeconomic Policy,Economic Growth and Inflation

The major objectives of China＇s macroeconomic policy are to stabilize economic growth and inflation, which, in turn, are important factors determining key prices, such as the policy interest rate, the renminbi exchange rate and stockprices. In a framework that distinguishes different phases of the business cycle based on whether the current period＇s economic growth rate and inflation rate are above or below their ＂＇normal＂ values, this paper analyzes the interaction among macroeconomic policy, economic growth and inflation in China since the Lehman crisis, and the implications for these key prices. The path of China＇s economy indicates that stimulus measures taken by the government during the recession phase and tightening measures implemented during the overheating phase have helped minimize the fluctuation over the business cycle. Our analysis shows that Chinese authorities tend to rely more on adjusting the exchange rate than the interest rate to stabilize the economy. Comparing with conditions at the time of the post-Lehman recession, the current slowpace of economie growth in China may reflect not only weakening demand, but also a lowerpotential growth rate associated with the arrival of the Lewis turning point.     

Can Trade Facilitation Prevent the Formation of Zombie Firms? Evidence from the China Railway Express

Using data on firms listed on Chinese A‐share markets from 2009 to 2017, this paper applies the difference‐in‐difference model to test the effect of trade facilitation on preventing the formation of zombie firms. We find that the China Railway Express (CRE) significantly prevented the formation of such firms. Mechanism tests show: (i) the CRE has accelerated the speed of sales, which increased the overseas sales revenue of firms; (ii) the economies of scale and the capital accumulation effect caused by the CRE can help increase firms’ solvency and development ability. Heterogeneity analysis indicates that the effect of the CRE on preventing the formation of zombie firms is mainly reflected in non‐state‐owned firms, firms in highly competitive industries, and firms in the eastern region of China. We suggest that China should continue to promote trade facilitation by expanding the CRE and strengthening the market's dominant role in preventing the formation of zombie firms. Disadvantaged firms should seize the development opportunities brought by the CRE.     

Inequality in metropolitan industrial revenue bond programs

Industrial revenue bonds (IRBs) have become an increasingly popular, though expensive and controversial, tool of economic development at the state and local levels. That controversy has focused on the economic impact of IRBs: Whether or not they meet the intended goals of creating jobs and stabilizing the tax base of local communities, and whether the benefits are worth the costs. Though IRBs are often justified, at least in part, as a particularly useful program for older, urban, minority communities, little research has been done on the participation of racial minorities and women in IRB programs. This article examines Chicago’s IRB program and finds that minorities have not participated equitably. Racial minorities and women are underutilized in many firms receiving this form of publicly subsidized financial assistance, and minority-owned businesses receive a disproportionately small share of the loans. Policy recommendations are offered to assure equitable participation of racial minorities and women in IRB programs.     

Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and Bias in Analysts' Earnings Forecasts*

Prior to Regulation Fair Disclosure (“Reg FD”), some management privately guided analyst earnings estimates, often through detailed reviews of analysts' earnings models. In this paper I use proprietary survey data from the National Investor Relations Institute to identify firms that reviewed analysts' earnings models prior to Reg FD and those that did not. Under the maintained assumption that firms conducting reviews guided analysts' earnings forecasts, I document firm characteristics associated with the decision to provide private earnings guidance. Then I document the characteristics of “guided” versus “unguided” analyst earnings forecasts. Findings demonstrate an association between several firm characteristics and guidance practices: managers are more likely to review analyst earnings models when the firm's stock is highly followed by analysts and largely held by institutions, when the firm's market‐to‐book ratio is high, and its earnings are important to valuation but hard to predict because its business is complex. A comparison of guided and unguided quarterly forecasts indicates that guided analyst estimates are more accurate, but also more frequently pessimistic. An examination of analysts' annual earnings forecasts over the fiscal year does not distinguish between guidance and no‐guidance firms; both experience a “walk‐down” in annual estimates. To distinguish between guidance and no‐guidance firms, one must examine quarterly earnings news: unguided analysts walk down their annual estimates when the majority of the quarterly earnings news is negative; guided analysts walk down their annual estimates even though the majority of the quarterly earnings news is positive.     

Picking ‘winners' in China: Do subsidies matter for indigenous innovation and firm productivity?

This paper examines the effects of public subsidies across several dimensions of the innovation process and the implications for productivity. As an identification strategy, panel data is used to estimate a structural innovation model that controls for unobserved heterogeneity combined with matching techniques that help ensure comparability between subsidized and non-subsidized firms. The findings reveal that public subsidies reduce firms' economic performance in lower and higher technology industries despite promoting indigenous innovation in the higher technology industries. Policymakers may tolerate lower average efficiency if they expect that some of the state-backed firms will eventually become successful innovators that go on to generate significantly large social welfare payoffs. Although the findings do not support such an expectation, thus bringing into question whether the social payoff from China's so-called picking ‘winners' strategy justifies the cost.     

Control–ownership Disparity and Business Performance: A Study of Korean Firms

In Korea, there is a large disparity between voting and cash flow rights (control–ownership disparity). Using firm‐level data from Korea for the 2004–2009 period, the present study examines whether control–ownership disparity influenced firm performance. Specifically, the study analyzes whether the effects of control–ownership disparity on firm performance vary according to the type of firm (publicly traded vs private firms) and to the major shareholder's ownership stake (greater than 50 percent vs less than or equal to 50 percent). According to the results, the negative effect of control–ownership disparity on firm performance was weaker for publicly traded firms, and control–ownership disparity had a negative effect on firm performance when the major shareholder's ownership stake exceeded 50 percent.     

The choice of financing with public debt versus private debt: New evidence from Japan after critical binding regulations were removed

The complete removal of binding regulatory constraints on bond issuance till 1993 provides an opportunity ripe enough to test hypotheses on the choice of financing with public debt and bank debt, comparing with the partial deregulation of Japanese financial markets in the late 1980s. Regardless of further deregulation, there is a U-turning to bank debt in Japan's corporate financing as the 1990s’ recession prolonging. In particular, we find high quality Japanese firms leave banks to the bond market, while low quality firms U-turn to bank debt. We also provide new evidence that Japanese banks tend to lend loans to wealthy firms. Because of a shift from equity-linked bond to straight bond during 1993–1997, our study provides a complement to evidence on financing choices of equity-linked public debt versus bank debt with the late 1980s’ bull stock market.     

Creeping Tiger, Soaring Dragon： India, China and Competition in Information Technologies

Although conventional international economic wisdom holds China's hardware and India's software industries to be equipotential, little attempt has been made to compare their information industries in an overarching dynamic framework. Using a schema that links intellectual to financial value creation, it is found that China has systematically moved ahead in creating a self‐supporting industrial and innovation ecosystem. Hardware enjoys higher barriers to entry, which the Chinese companies are increasingly reinforcing with intellectual property investments. In addition to being better integrated with the global economy, they are also buttressed by the huge domestic market. The overdependence of Indian firms on selling low‐value services to a few countries and insulation from domestic demand make them vulnerable to emerging competition and international economic ill‐winds. The two countries provide a study in contrast on the effects of divergent industrial strategies.     

Capital issues and the minority-owned business

This article presents some of the results from an unusual survey of small business owners who differ in their ethnicity: Asians, blacks, Hispanics, and nonminorities. Contrary to the prevailing view of black and Hispanic business owners and their firms, the blacks and Hispanics in the data base—in general and on average—had the same human and financial capital as their Asian and nonminority counterparts. As a result, the black-owned and Hispanic-owned firms performed as well as the Asian-owned and nonminority-owned firms. Nevertheless, black business owners had lower success rates than nonminority men in obtaining commercial bank loans, although the terms for loans granted were similar for the two groups. In light of the apparent credit discrimination, U.S. Small Business Administration (SBA) loans remain an important source of debt-type capital to black-owned firms.     

Firm Efficiency in Cambodia's Garment Industry on the Eve of the Multi‐Fiber Arrangement Termination

Applying a frontier analysis to 2004 firm‐level data, the present paper investigates firm efficiency and its determinants for Cambodia's garment industry. The study finds that firm experience and remuneration are crucial for improving scale efficiency and overall technical efficiency, while effective use of capital and adequate labor‐skill development are important for enhancing a firm's technical capabilities. Foreign‐owned enterprises with a relatively larger share of foreign labor outperform local firms. However, the present study does not reveal evidence of any advantages of a cluster‐type concentration in Phnom Penh and export markets, nor of any positive impacts of product specialization. The findings imply a need to support skill development for workers and local managers at the middle management level, and to streamline foreign direct investment measures to attract greater numbers of efficient foreign enterprises, so as to promote the development of the garment industry as a whole.     

Economic policy uncertainty and firms' investment and financing decisions in China

This paper designs a quasi-natural experiment for the identification of causal relationships between economic policy uncertainty and firms' investment-financing decisions using China's supply-side structural reform in 2015. We construct measures of asset reversibility across industries using China's national input–output flow table and match them with nonfinancial firms listed in China's A-share stock market from 2013 to 2017. We then use the difference-in-difference estimation strategy to investigate two-dimensional variations in periods (i.e., before and after 2015) and asset reversibility (i.e., high- and low-reversibility industries). The empirical results show that economic policy uncertainty significantly impedes real investment and reduces net debt issuance for private firms, whereas no such effects exist in state-owned firms. Interestingly, however, economic policy uncertainty has no significant impact on firms' cash-holding decisions.     

How the Internet Promotes China's Exports: A Firm‐level Perspective

The development of information and communications technology (ICT), particularly the Internet, has reduced trade costs. However, it remains unclear whether these reduced costs are reflected in the “extensive margins” of firms’ exports (which refer to the probability of firms exporting) or the “intensive margins” (which refer to the value of firms’ export). To test this, we used the concepts of information cost and binary margins, an augmented trade model of firm heterogeneity, a two‐stage Heckman estimation, and data from the World Bank Enterprise Survey of Chinese firms in 2012. The results revealed that reduced trade costs from the use of ICT were positively related to extensive margins but that the connection with intensive margins was not significant. The results lead to the conclusion that reduced information costs related to a firm's exporting behavior were primarily reflected in variable trade costs. This study offers theoretical and empirical evidence for China's policies towards the Internet, which are relevant for the export of manufactured goods. The government should encourage the use of ICT to enhance firms’ export opportunities while facing current trade policy uncertainty.     

The Walk‐down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives*

It has been alleged that firms and analysts engage in an "earnings‐guidance game" where analysts first issue optimistic earnings forecasts and then "walk down" their estimates to a level that firms can beat at the official earnings announcement. We examine whether the walk‐down to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm's behalf (through new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk‐down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital‐market incentives on communications between managers and analysts.     

The Value of Political Ties Versus Market Credibility: Evidence from Corporate Scandals in China

This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of (i) the firm's political networks (political scandals), (ii) the firm's market credibility (market scandals), or (iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility, we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, the greater negative market reactions associated with political and mixed scandals are primarily driven by firms that rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to larger decreases in operating performance, greater reduction in loans from state‐owned banks, and higher departure of political directors.     

Credit Conditions in Pakistan: Supply Constraints or Demand Deficiencies?

This paper attempts to pin down the key drivers of demand for and supply of real private sector credit in Pakistan. I use both the equilibrium and disequilibrium econometric frameworks, specifically tackling the issue of lack of consistency and/or efficiency of joint estimators in the former via the three‐stage least squares technique. On the demand side, I find that higher economic activity provides stimulus to credit whereas inflation dampens it. The stock market seems to play a dual role: as a source of alternative financing, a bullish market negatively impacts credit while, as an indicator of economic expectations, it provides a positive impetus. On the supply side, banks' lending capacity is found to be the major driver of credit while government borrowing has a crowding‐out effect. Pakistan currently faces supply constraints, which might put an additional check on capacity utilization by firms, thus damaging growth prospects. The results have important policy implications.     

Outside Blockholders' Monitoring of Management and Debt Financing

Corporate governance mechanisms designed to alleviate manager‐shareholder agency conflicts can worsen shareholder‐bondholder conflicts. This study examines how one such corporate governance mechanism, monitoring by large outside shareholders, influences the choice between public and private debt. I conjecture and find that firms with higher outside blockholdings are inclined to choose bank loans over public debt when they borrow, consistent with the notion that banks are better monitors than public debt markets. I also find that bank loans carry less price protection than corporate bonds against increased agency risk associated with outside blocks. Corroborating the monitoring story, I document that bank loans contain more accounting‐based covenants and dividend restriction provisions for firms with higher outside blockholdings than for those with lower blockholdings. I find no such relation for public debt covenants. This supports that banks' monitoring of their loans counters the agency risk caused by blockholders. This study extends prior research that associates governance mechanisms with agency costs of debt, by incorporating lenders' differential monitoring mechanisms in the overall corporate governance system.     

The Growth Barriers of Informal Sector Enterprises: Evidence from India

The present study investigates the growth barriers of informal sector enterprises in India. The empirical analysis is based on the National Sample Survey Organization's unit‐level data for three years, 2000–2001, 2005–6, and 2010–11. The results of the study reveal: proprietary and large firms survive and grow; enterprises managed by women are less likely to decline; inadequate power supply poses a severe growth obstacle to all categories of firms; and proprietary firms encounter capital shortage while large firms are constrained by the non‐availability of raw materials. We do not find evidence of sub‐contracting acting as an enabling factor in firm growth.