Financialization and Corporate Performance in China: Promotion or Inhibition?

Using a sample of Chinese listed firms for the period 2009 to 2018, we analyze the relationship between the financialization of non-financial corporations (NFCs) and corporate performance from both long-term and short-term perspectives. Our results show that the impact of financialization on firm performance is not simply a crowding-out or pulling effect but rather depends on the type of financial assets held by the firms. The holdings of investment financial assets generally have a pulling effect on both the short-term performance and market expectations of a firm's future profits as proxied by Tobin's Q, but they crowd out the innovation activities that are critical to long-term performance. Although monetary financial assets positively affect corporate profitability, they inhibit the increase of return on invested capital and long-term performance. Additionally, compared with monetary financial assets, investment financial assets play a more important role in promoting short-term performance, although the crowding-out effect on innovation activities is more prominent for investment financial assets. Furthermore, this paper also concludes that compared with manufacturing and non-state-owned enterprises (NSOEs), the role of financialization in promoting the performance of non-manufacturing and state-owned enterprises (SOEs) is more significant.     

Risk Capital: Theory and Applications

After a brief review of the current theory and practice of risk capital by financial firms, the authors define the concept of risk capital and identify the costs and benefits of using more or less of it. Next, they present their procedure for allocating risk capital to assets and lines of business on the basis of marginal default values, and in a way designed to prevent risk shifting and internal arbitrage. Then, they show how allocations of risk capital are likely to be affected by, and in turn influence, a financial firm's decisions about both the scale and composition of its portfolio of businesses. Finally, the authors present a number of applications and consider their implications for maximizing the value of financial firms. In so doing, the authors also show how their method produces very different allocations of risk capital than those based on two measures that have long been widely used by financial firms: value at risk (VaR) and risk‐adjusted return on capital (RAROC). Moreover, the adjusted present value (APV) rule for evaluating investment opportunities is shown to be workable for nonfinancial as well as financial firms.     

How does house price influence monetary policy transmission?

The literature has focused on house price growth to explain the inefficiency of monetary policy. From the perspective of substitution, this paper explains the relationship between house prices and monetary policy considering not only house price growth but also house price uncertainty. By constructing a theoretical model including both financial-asset and fixed-asset investment, we find that expansionary monetary policy not only promotes total investment but simultaneously also leads to substitution towards financial assets. However, a rise in house price growth or house price uncertainty will mitigate the substitution effect generated by monetary policy. These propositions are supported by empirical data on China's nonfinancial listed firms from 2009 Q1 to 2018 Q3 and the results are robust to a variety of model specifications and empirical approaches. Our findings imply that real estate regulatory policy should coordinate with monetary policy in maximizing fixed-asset investment.     

The tax incentives and corporate cash holdings: Evidence from a quasi-natural experiment of an accelerated depreciation tax policy for fixed assets

Based on a quasi-natural experiment of an accelerated depreciation tax policy (ADP) for fixed assets in China, we examine the impact of the ADP on corporate cash holdings. Using a multiperiod difference-in-differences model with a sample of Chinese A-share listed firms from 2008 to 2020, we document that firms subject to the ADP exhibit lower cash holdings compared to firms not affected by the policy. The effect is more pronounced for young firms, profitable firms, and firms with less R&D investment. According to our mechanism analysis, the ADP mitigates a firm's financing constraints and financialization and therefore, a firm does not need as much as cash holdings as they did before the implementation of the ADP. The mechanism test results suggest that the ADP lowers the precautionary and speculative demand for cash. The analysis of economic consequences shows that the reduction of cash holdings significantly enhances firm value. Our research results suggest that the ADP is a good policy for firms.     

Asset liquidity,corporate investment,and endogenous financing costs

We analyze how the liquidity of real and financial assets affects corporate investment. The trade-off between liquidation costs and underinvestment costs implies that low-liquidity firms exhibit negative investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities. If real assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Our findings demonstrate that asset liquidity is an important determinant of corporate investment.     

Corporate leverage and the collateral channel

We investigate whether and how corporate leverage depends on the structure of corporate assets. Based on a large panel dataset of US firms from 1990 to 2010, we show that property, plant and equipment are important drivers of the collateral channel, while inventories and receivables are less important. The collateral channel is more pronounced for firms that have to rely on banks and trade creditors to raise debt finance, but it has become weaker for these firms after the start of the financial crisis. Our study provides new evidence on the cross-sectional and time-varying importance of the collateral channel for corporate leverage.     

Precautionary Savings with Risky Assets: When Cash Is Not Cash

U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.     

RELATIONSHIPS AND UNDERWRITER SPREADS IN THE EUROBOND FLOATING RATE NOTE MARKET

We examine the role of issuer‐underwriter relationships in determining underwriter spreads for Eurobond floating rate notes from 1992 to 2002. Financial and nonfinancial firms with long‐term relationships pay a higher underwriter spread. Financial issuers that switch underwriters receive a discounted spread that is invariant to the underwriter's reputation and quality of the issue. However, the discount is not evident for nonfinancial firms. For both financial and nonfinancial firms, spreads are higher for noninvestment grade issues and, within investment grade, increase as quality declines. We also find higher spreads when underwriting is syndicated, and a strong negative time trend consistent with increasing competitive pressures.     

On the Corporate Demand for Insurance: The Case of Korean Nonfinancial Firms

Several theories have been developed to explain the motives for corporate insurance purchases, but there are few empirical tests of these theories. Furthermore, the empirical results are not consistent across studies, suggesting the need for further research. This study uses accounting data for 433 publicly listed nonfinancial firms in Korea to test the determinants of insurance demand for the period 1990 through 2001. Our results support the theory that firm size, tax considerations, and firm ownership are important determinants of insurance demand. Firms that are members of chaebols demand more insurance than unaffiliated firms, all else equal. Contrary to theory, our results also indicate that firms that have higher debt‐to‐equity ratios demand less insurance than less leveraged firms, and that firms that have greater liquidity demand more insurance. This might be related to the overall high debt levels of firms in the period leading up to the Korean financial crisis in 1997, but that investigation is beyond the scope of this study.     

The Responsiveness of Corporate Investments to Changes in Corporate Income Taxation During the Financial Crisis: Empirical Evidence from Slovenian Firms

I examine the responsiveness of corporate investments to changes in corporate income taxation during the financial crisis. When investigating tax effects in financially constrained firms, the model of investment demand needs to be extended to include an additional channel through which taxes could affect investments. I model the tax effects via two transmission channels, the traditional user cost of capital channel and the cash flow channel, which is crucial for financially constrained firms. The empirical results show that corporate investments in financially constrained firms do not respond to changes in corporate income taxation through the user cost of capital channel, but there is strong evidence of the effect that materializes through the cash flow channel.     

The deregulation of capital markets in France

This paper investigates how the deregulation of French capital markets affected corporate investment in the 1980s. Access to public financial markets may be less important in countries that have traditionally relied on institutional investors to finance their corporate investment projects. This should be true for France where, contrary to the US, banks and government agencies have always been involved in firms’ long term activities. In this study, French firms are categorized based on their ownership structure and trading characteristics. Two investment models are augmented with measures of corporate liquidity in order to test the role of internal funds on investment. Empirical results show that only small French firms trading on the secondary stock market have to rely on liquid assets to finance their capital expenditures. French firms with strong bank ties avoid this constraint since they are allowed to maintain higher debt levels.     

Costly external finance,corporate investment,and the subprime mortgage credit crisis

We study the effect of the recent financial crisis on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. Corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address endogeneity concerns, we measure firms’ financial positions as much as four years prior to the crisis, and confirm that similar results do not follow placebo crises in the summers of 2003–2006. Nor do similar results follow the negative demand shock caused by September 11, 2001. The effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature.     

Bank systemic risk and corporate investment: Evidence from the US

In this paper, we develop a simple two-period model in which a bank’s investment (e.g., loans) is influenced by short-term financing and a probability of a financial crisis. When banks ex ante expect to be bailed out during financial crises, they do not necessarily internalize the cost of financial crises and invest more. We argue that the level of systemic risk in the banking sector is largely driven by (1) the way in which banks finance their investment (e.g., loans) using more short-term debt and/or (2) the increase in asset commonality amongst banks. We use three measures that arguably capture two dimensions of “bank systemic risk”, namely, (1) bank funding maturity and (2) bank asset commonality, to empirically test whether bank systemic risk has a positive effect on corporate investment. We document that in a sample of publicly listed firms in the United States over the period 1991–2013, bank systemic risk is positively associated with the firm-level investment ratio after controlling for a large set of country- and firm-level variables. In addition, we show that a firm's leverage strengthens the positive effect of bank systemic risk on corporate investment, suggesting that more financially constrained firms experience a larger effect of bank systemic risk on corporate investment than less financially constrained firms.     

The impact of corporate governance on financial performance of Indian and GCC listed firms: An empirical investigation

Corporate governance plays a vital role in creating a corporate culture of consciousness, transparency, and openness. In this context, this paper provides a brief view about the background of corporate governance mechanisms in India and Gulf Corporation Council (GCC) countries, corporate legal system and monitoring policies laid down by Indian and GCC governments. Furthermore, it analyzes the impact of corporate governance mechanisms on the financial performance of Indian and GCC listed firms. The study uses a sample that consists of 53 non-financial listed companies from India and 53 non-financial listed companies from GCC countries for the period 2009–2016. Results revealed that board accountability (BA) and audit committee (AC) have an insignificant impact on firms' performance measured by ROE and Tobin’s Q. Similarly, transparency and disclosure (TD) have an insignificant negative impact on firms' performance measured by Tobin’s Q. Moreover, the country dummy results show that Indian firms are performing better than Gulf countries ones in terms of corporate governance practices and financial performance. The current study is considered as a battery for further research and studies particularly in India & GCC listed firms in the context of corporate governance and financial performance.     

Corporate Governance and Corporate Financing and Investment during the 2007‐2008 Financial Crisis

We examine the impact of the 2007‐2008 financial crisis on nonfinancial firms’ financing and investment activities and the role of corporate governance in alleviating the adverse consequences of the external capital supply shock. Employing a difference‐in‐differences research design, we find that better governance mitigates the disruption caused by the bank credit supply shock to firms’ financing and investment activities. A variety of robustness tests suggest that our findings are unlikely to be driven by an endogeneity problem. We obtain similar results when we extend the sample period to include the delayed spillover from the banking sector to other capital market sectors.     

Testing the fire-sale FDI hypothesis for the European financial crisis

Using a panel of corporate transactions in 27 EU countries from 1999 to 2012, we investigate the impact of the financial crisis on the market for corporate assets. In particular, we test the ‘fire-sale FDI’ hypothesis by analyzing the number of cross-border transactions, the price of corporate assets and the impact of credit and macroeconomic conditions. According to the fire-sale FDI hypothesis, countries affected by a crisis attract foreign buyers selling assets at a discount. We find a dampening effect of the crisis on cross-border transactions in all EU countries. Although countries with higher sovereign default risk and lower economic demand attracted more foreign buyers in the crisis, lower domestic credit is associated with less cross-border transactions. Corporate assets in crisis countries are cheaper, particularly if domestic credit is low; however, these findings are not limited to the crisis period. This pattern is strikingly different from the East Asian and Latin American financial crises. Overall, we find little evidence for ‘fire-sale FDI’ suggesting an integrated European market without significant frictions.     

财政转移支付如何影响了地方政府债务?

本文以地方融资平台公司发行的城投债为样本,研究来自中央政府的财政转移支付对于地方城投债发行的影响。研究发现,来自中央政府的人均财政专项转移支付每增加1元,会导致地方融资平台公司城投债发行增加人均0.312元,而包括税收返还和一般性转移支付在内的非专项转移支付对城投债的发行并无显著影响。并且,专项转移支付对城投债发行的显著正影响只在中西部省份存在,东部地区并未发现这一机制。本文的进一步研究表明,地方政府债务的借新还旧现象也正在显现,并且变得越来越严重。     

CEO EXTRAVERSION AND CAPITAL STRUCTURE DECISIONS: THE ROLE OF FIRM DYNAMICS,PRODUCT MARKET COMPETITION,AND FINANCIAL CRISIS

Using panel data of U.S. firms, we focus on an important yet understudied facet of the chief executive officer's (CEO) personality—extraversion—and how it affects corporate capital structure decisions. We examine how this relation is moderated by financing (tax) benefits, financial crisis, firm size, growth opportunities, and collateralization. The results show that firms managed by extraverted CEOs use greater financial leverage, adjusting toward target leverage levels at a faster speed, with about half-life within a year for book and market leverage. In addition, the positive extraversion–leverage relation is enhanced for firms that are large, have greater collateralizable assets, and are more vulnerable to external shocks (financial crisis). Last, although the positive extraversion–leverage relation holds particularly when product market competition is high, the effect is attenuated for high-growth opportunity firms.     

中国实体企业金融化:货币扩张、资本逐利还是风险规避?

本文构建了一个刻画实体企业在流动性金融资产和固定资产之间进行权衡的投资组合选择模型,并创新性地将货币扩张的宏观因素引入微观模型,推演中国实业部门金融化的驱动逻辑。理论模型显示:货币扩张、资本逐利和风险规避本质上是宏观和微观两个不同层面的要素变量,但都卷入实业部门金融化的驱动机制中,然而驱动效应的表现形式要比已有文献的理论模型更加复杂。基于上市公司面板数据总体样本的实证结果表明:货币扩张、资本逐利和风险规避均是企业金融化的关键影响因素,但货币扩张表现为直接抑制和间接促进两种效应。进一步引入宏观风险因素和根据企业所有权性质划分样本的稳健性检验则给出了更为细致的信息:货币因素可能通过宏观风险因素间接作用于企业金融化;所有权性质不同的企业的金融化驱动机制也表现出明显的异质性:国有企业金融化主要受货币因素和风险规避因素影响;民营企业金融资产占比层面的金融化驱动因素是风险规避和资本逐利,而金融渠道获利占比层面的金融化则受到货币因素的显著影响;其他类型企业的金融化主要受货币因素的显著影响。     

International Evidence on Financial Derivatives Usage

Theory predicts that nonfinancial corporations might use derivatives to lower financial distress costs, coordinate cash flows with investment, or resolve agency conflicts between managers and owners. Using a new database, we find that traditional tests of these theories have little power to explain the determinants of corporate derivatives usage. Instead, we show that derivative usage is determined endogenously with other financial and operating decisions in ways that are intuitive but not related to specific theories for why firms hedge. For example, derivative usage helps determine the level and maturity of debt, dividend policy, holdings of liquid assets, and international operating hedging.