Trade credit versus bank credit: Evidence from corporate inventory financing

In this study, I introduce capital market imperfections into a structure framework of inventory investments and investigate impacts of trade credit on firms’ inventory dynamics and analyze the relationship between trade credit and bank loans. As a result, firms end up using a mix of trade credit and bank loans. I find that the use of trade credit and bank credit can be either complements or substitutes. During tight monetary periods, trade credit operates mainly as a substitute for bank borrowing while during looser monetary episodes even when the economy is weak, trade credit and bank loans are dominated by a complementary effect.     

Private debt, unused credit lines, and seasoned equity offerings

We study a sample of SEOs to examine the impact of private debt and unused credit lines on SEO underpricing and long-run stock and operating performance. We do not find significant effects of private debt financing on SEO underpricing and long-run stock underperformance. However, firms with more bank debt and unused lines of credit exhibit significantly better pre-issue operating performance. Changes in operating performance from the pre-issue year to the post-issue period are negatively related to the size of unused credit lines. Capital spending decreases with the size of unused credit lines in the year prior to SEOs, but increases following SEOs. Our overall evidence suggests that the post-issue operating performance we observed may be a result of overinvestment, which is enhanced by unused credit lines.     

Determinants of bank interest margins in Russia: Does bank ownership matter?

This paper analyzes interest margin determinants in the Russian banking sector with a particular emphasis on the bank ownership structure. Using unique bank-level data covering Russia's entire banking sector for the 1999–2007 period, we find that the impact of a number of commonly used determinants such as market structure, credit risk, liquidity risk and size of operations differs across state-controlled, domestic-private and foreign-owned banks. At the same time, the influence of operational costs and risk aversion is homogeneous across ownership groups. The results overall suggest that the form of bank ownership needs to be considered when analyzing interest margin determinants.     

Why do Japanese firms prefer multiple bank relationship? Some evidence from firm-level data

We explore the determinants of the number of long-term bank relations of listed Japanese firms using a unique data set covering the sample period of 1982–1999. Japanese listed firms have about seven long-term bank loan relations on average, but show a large variation around the mean. We use data on loan and equity ownership to address the impact of the Japan-specific bank–firm relations and bank control on the number of loans decision. We find that having a relation with a top-equity holding bank increases the number of bank relations and debt-rich and cash-poor firms have more bank relations.     

Independent component analysis for realized volatility: Analysis of the stock market crash of 2008

This paper investigates the factors that drove the U.S. equity market returns from 2007 to early 2010. The period was highlighted by volatile energy and commodity prices, the collapse of insurance and banking firms, extreme implied volatility and a subsequent rally in the overall market. To extract the driving factors, we decompose the returns of the S&P500 sector ETFs into statistically independent signals using independent component analysis. We find that the generated factors have interesting financial interpretations and are consistent with the major economic themes of the period. We find that there are two sets of general market betas during the period along with a dominant factor for energy and materials sector. In addition, we find that the EGARCH model which accommodates asymmetric responses between returns and volatility can plausibly fit the high levels of variance during the crash. Finally, estimated correlations dropped when commodity prices moved higher, but then spiked when the S&P500 crashed in late 2008.     

Corporate financial determinants of foreign direct investment

Financial market incompleteness and (partial) segmentation of financial markets internationally may endow some firms with a financial advantage which can be exploited through foreign direct investment. We argue that this advantage appears as a distinct cost-of-capital effect on FDI, and identify possible channels for such an effect. Using a sample of European firms’ cross-border acquisitions, and controlling for traditional firm-level determinants of FDI, we find strong support for a cost-of-equity effect, whereas the effect of debt costs is indeterminate. Moreover, financial FDI determinants are more important for firms with high knowledge intensity and for firms resident in relatively less financially developed countries.     

Performance compensation contracts and CEOs’ incentive to shift risk to debtholders: An empirical analysis

The paper investigates the relationships among CEO incentive contracts, manager ownership, charter value, and bank risk taking. We analyze whether the presence and magnitude of incentive contracts induce CEOs of financially distressed firms and firms with high manager ownership to take unprofitable risks that shift wealth from debtholders to equity holders. Our sample focuses on banks that had both the incentive and opportunity to shift risks, and compares them with those that did not. We compare weak and strong banks in periods when the banks’ principal creditor, the FDIC, was a lenient and then a stringent monitor. The evidence is consistent with bonus compensation inducing CEOs of financially weak firms to shift risk to debtholders only if they do not have large insider ownership. The evidence is also consistent with these contracts rewarding CEOs for their effort to manage unforeseeable risk albeit not their ability. Low charter value banks with high managerial ownership took profitable risk during the lenient regulatory period.     

Investment committees and corporate cash holdings

We investigate the association between the voluntary formation of a board investment committee (IC) and corporate cash holdings for a large sample of Gulf Cooperation Council (GCC) firms over the 2005–2013 period. We provide evidence that the existence of a specialized IC increases corporate cash holdings. We also find that several IC characteristics, i.e., member experience, independence, number of meetings, and committee size, are associated with an increase in firms’ cash holdings. Furthermore, the local and foreign institutional ownership of GCC firms moderates the IC-cash holdings relationship. These results remain robust to alternative specifications of cash holdings and endogeneity tests. We contribute to the literature on firms’ incentives to hold cash and to the literature on governance in emerging market contexts.     

Regulatory risk, market uncertainties, and firm financing choices: Evidence from U.S. Electricity Market Restructuring

Based on the universe of rate-regulated electric utilities in the U.S., we examine why firms alter their financing decisions when transitioning from a regulated to a competitive market regime. We find that the significant increase in regulatory risk after the passage of the Energy Policy Act, state-level restructuring legislations, and divestiture policies have reduced leverage by 15 percent. Policies that encouraged competition, and hence increased market uncertainty, lowered leverage by another 13 percent on average. The ability to exercise market power allowed some firms to counter this competitive threat. In aggregate, regulatory risk and market uncertainty variables reduce leverage between 24.6 and 26.7 percent. We also confirm findings in the literature that firms with higher profitability and higher asset growth have lower leverage, and those with more tangible assets are more levered. Firms with greater access to internal capital markets and those with a footloose customer segment use less debt, while those actively involved in trading power in the wholesale market use more debt.     

Credit allocation and the financial crisis: evidence from Spanish companies

The worldwide financial crisis of 2007–2008 raised serious concerns about the soundness of banks’ activities and about the extent to which banking regulation should supervise banks’ investment decisions. We contribute to this topic by examining the Spanish case, which has been emblematic of the bubble and burst dynamics in the credit market. In particular, we study the allocation of bank credit among Spanish companies from 1999 to 2014, showing that larger companies accumulated greater amounts of bank loans per unit of total assets, thus leading to a notable concentration. We also find that, during the Spanish boom period, bank loans shifted from the manufacturing to the construction industry, and in particular to the largest companies of the latter sector. This happened in spite of the high leverage of large construction firms, which was increasing also due to their growing debt. We argue that the higher operating benefits, reflecting the increase of the housing price during the boom period, overvalued construction firms as potential borrowers. The bankruptcy of several large construction companies during the Spanish crisis supports the need for monitoring and regulation, to avoid an excessive concentration of bank credit to a few large companies, especially if they belong to a specific sector.

     

Bank Relationships and Private Firms’ Financial Reporting Quality

Private firms with relatively high (proprietary) costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting that assumes that the bank is able to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit lower levels of financial reporting quality. Controlling for many other factors, firms with a single bank relationship disclose their financial reports about 14 days later. The size of such firms’ financial reports is also smaller, containing approximately 8% fewer words than the median report. Firms with a single bank relationship also exhibit more earnings management, exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. The results are robust to different econometric specifications, including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of fewer lending relationships.     

Corporate Value, Managerial Stockholdings and Investments of Japanese Firms

We use a simultaneous equation model which treats firm value, investments and management ownership as endogenous to the firm. Our results show a feedback relation between corporate value and management ownership, i.e., corporate value is positively impacted by management ownership, which in turn is positively impacted by corporate value. Corporate value also affects investments made by the firm. We also find that the effect of the main bank on corporate value is positive but only up to a certain point; then, it turns negative. Supporting the argument that keiretsu firms have lower agency cost, we find that firms belonging to a keiretsu have higher valuations during the sample period. Finally, we find that management ownership increases as the ownership of the main bank, ownership of institutional holders and cross‐holdings decreases, suggesting a substitution effect among these monitoring forces. Our results indicate that ignoring the web of these relationships leads to incorrect inferences.     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.     

Bank efficiency and access to credit: International evidence

This paper examines the impact of bank efficiency on access to credit. We test the hypothesis that higher bank efficiency, meaning a better ability of banks to operate at lower costs, favors access to credit for firms. To this end, we perform a cross-country analysis with firm-level data on access to credit and bank-level data to compute bank efficiency, using a sample of about 54,000 firms from 76 countries. We find that greater bank efficiency improves access to credit for firms. The beneficial impact of bank efficiency to alleviate credit constraints takes place through the demand channel by reducing borrower discouragement to apply for a loan. Whereas the positive impact of bank efficiency on credit access is observed for firms of all sizes, the effect tends to be more pronounced in countries with a better economic and institutional framework. Our results therefore support policies favouring bank efficiency to enhance access to credit.     

Income diversification and bank risk in Asia Pacific

This paper investigates the effect of income diversification on bank risk for a large sample of commercial banks in 14 Asia Pacific economies over the period 2011–2016. Using a dynamic panel data model with a system generalized methodof moments estimator, we find that banks with a higher level of income diversification are less risky in general. We further consider both developed and emerging economies according to the International Monetary Fund's classification of the level of economic development. Specifically, for emerging economies, the results indicate that banks with a higher level of income diversification face less risk. However, the diversification of commercial bank income has no significant impact on bank risk in developed Asia Pacific economies.     

Board internationalization and corporate social responsibility

This study examines the association between board internationalization and firms’ corporate social responsibility (CSR) performance in China during 2009–2019. Using a large dataset of director nationalities and CSR scores, we find that foreign directors promote CSR performance as evidenced by higher CSR scores. We further document that this relationship is more pronounced among government-controlled firms, firms with better corporate governance, and firms operating under stricter institutional environments. These findings remain valid after sequential robustness checks. Overall, our findings imply that foreign directors motivate the board of directors and their firms to actively pursue and practice social responsibility. Our study enriches the literature on the outcomes of board internationalization and determinants of CSR and provides the internationalization of corporate governance mechanisms a reasonable basis.     

Carbon Financial Instruments, thin trading, and volatility: Evidence from the Chicago Climate Exchange

We provide the first econometric investigation of volatility dynamics for the Carbon Financial Instrument (CFI) traded on the Chicago Climate Exchange (CCX). A CFI is a financial contract with the right to emit 100 metric tons of CO₂ equivalent. In this study, we present evidence of infrequent trading in the CCX, consistent with emerging markets that are inhabited by non-competitive agents trading permits. We explore the relationship between the observed thin trading effects and GARCH model testing and estimation, concluding with some implications for volatility-based Value-at-Risk forecasts. Our results are important for traders of Carbon Financial Instruments and for policy makers seeking to improve the design of the Chicago Climate Exchange.     

Do Pan-African banks have the best of both worlds?

There has been a large expansion of foreign banks in Africa over the last two decades, with Pan-African banks playing a key role in this phenomenon. This paper questions if this development is beneficial for bank efficiency in African countries by investigating if Pan-African banks are more efficient than other types of foreign and domestic banks. We analyse the relation between ownership type and bank efficiency on a large sample of African banks covering 39 African countries over the period 2002–2015. We find that Pan-African banks are the most efficient banks in the African banking industries. We explain this finding with the fact that these banks combine the best of both worlds: they have the global advantages of foreign banks and the home field advantages of domestic banks. They are therefore able to be more efficient than both foreign banks from developed countries and domestic banks. This suggests that favouring the entry of Pan-African banks would be beneficial to bank efficiency in Africa.     

The Macroeconomic Effects of Shocks to Large Banks’ Capital

We propose a simple approach to quantifying the macroeconomic effects of shocks to large banks’ leverage. We first estimate a standard dynamic model of leverage targeting at the bank level and use it to derive an aggregate measure of the economic capital buffer of large US bank holding corporations. We then evaluate the response of key macro variables to a shock to this aggregate bank capital buffer using standard monetary VAR models. We find that shocks to the capital of large US banks explain a substantial share of the variance of credit to firms and real activity.     

Measuring productivity growth, technical progress, and efficiency changes of CPA firms prior to, and following the Sarbanes–Oxley Act

This paper investigates productivity growth, technical progress, and efficiency change for a group of the 56 largest CPA firms in the US from the period 1996–1999 through the period 2003–2006, where the former preceded, and the latter followed, enactment of the Sarbanes–Oxley Act (SOX). Data envelopment analysis (DEA) is used to calculate Malmquist indices of three measures of interest: productivity growth, technical progress, and efficiency change. Results indicate that CPA firms, on average, experienced a productivity growth of approx. 17% from the pre- to post-SOX period. Consistent with the finding of Banker et al. [Banker RD, Chang H, Natarajan R. Productivity change, technical progress and relative efficiency change in the public accounting industry. Management Science 2005;51:291–304], this productivity gain can be attributed primarily to technical progress rather than a change in relative efficiency. In addition, results indicate that the “Big 4” firms underperformed their non-Big 4 counterparts in both productivity growth and technical progress.