Balance Sheets Of Firms Research Articles

Corporate debt maturity in developing countries: Sources of long and short‐termism

AbstractThis paper documents to what extent firms from developing countries borrow short versus long term, using data on corporate bond and syndicated loan markets. Contrary to claims in the literature based on firm balance sheets, firms from developing countries borrow through bonds and syndicated loans at maturities similar to those obtained by developed country firms. There are relevant differences across the debt markets composing this aggregate pattern. Firms from developing countries borrow shorter term in domestic bond markets. But the differences in international issuances (accounting for most of the proceeds) are significantly smaller. Moreover, developing country firms borrow longer term in syndicated loan markets. However, only large firms from developing countries (similar in size to those from developed ones) issue bonds and syndicated loans. The short‐termism in developing countries is partly explained by a lower proportion of firms using these markets, with more firms relying on other shorter‐term instruments.

Factoring policy with constant demand and limited capital

AbstractThe convention of selling on credit (to customers) results in mass accumulation of accounts receivable (AR) on the balance sheet of firms. However, capital‐constrained firms do not have enough capital to invest in AR and cover the production cost incurred during the credit period. To finance future business, a capital‐constrained firm can employ factoring—a financing scheme wherein firms sell AR to a financial institution (called a factor) at a discount—to advance cash from AR. By formulating a time‐continuous model with constant demand over an infinite horizon, we study the factoring policy of firms in two practice‐based discounting schemes: automatic discounting and manual discounting. In the automatic discounting scheme, AR should be discounted at the same age, whereas this requirement is relaxed in the manual discounting scheme and how long in advance to discount the AR is contingent over time. In both discounting schemes, the firm needs to choose the timing of discounting in order to reach a capital‐unconstrained state as soon as possible. In the automatic discounting scheme, we approximate the firm's objective function with a quasi‐convex function whose error is demonstrated to be small. Based on this approximation, the firm's optimal decision and the factor's profit can be calculated more easily. When manual discounting is adopted, the firm should meet all the demand by exploiting factoring if the profit margin under immediate discounting is nonnegative. Given the same factoring discount rate, manual discounting is always more attractive to the firm than automatic discounting. However, the preference of the factor over the two discounting schemes depends on the factoring discount rate.

Financialization, Shareholder Orientation and the Cash Holdings of US Corporations

ABSTRACTGrowth in the cash holdings of US nonfinancial corporations (NFCs) has received considerable attention in recent years. These cash holdings constitute a primary component of the growth in firm-level financial asset holdings often highlighted in analyses of the ‘financialization’ of NFCs. In this article, I use a panel of US corporations to empirically analyze two links between corporate cash holdings and the literature on financialization. First, I find a small but positive relationship between cash holdings and shareholder value ideology among large corporations. I capture the growing entrenchment of shareholder ideology using average industry-level stock repurchases, to proxy for industry-level norms encouraging managers to target stock price-based indicators of firm performance. Second, I find a positive relationship between a firm's cash holdings and a measure of the differential it earns between interest income and expense. Given that cash is classified with short-term marketable (and, therefore, interest-bearing) securities on firm balance sheets, this result lends empirical support to the hypothesis that traditionally nonfinancial firms are increasingly engaged in borrowing and lending for profit.

Road to Industrialized Africa: Role of Efficient Factor Market in Firm Growth

After a decade of rapid growth, industrialization has lost ground with shrinking manufacturing sector and high informality in Sub-Saharan Africa (SSA). This paper explores how land market and labor regulations affect factor allocative efficiency and firm performance in SSA. Using pooled data on firm balance sheets for 40 countries in SSA, the results identify significant land and labor misallocations due to limited market allocation of land and inappropriate regulatory policies. Using variations in ethnic diversity and the intensity of regulatory actions to peer firms at subnational level as instrumental variables, local average treatment effects show large productivity gains from factor reallocations, especially for marginally productive firms. Panel data results for Nigerian firms confirm factor market inefficiency as a principal driver of declining productivity, while showing that the 2011 minimum wage reform increased firm size. The results imply that improving formal regulation is critical to support firm growth at the stage of weak legal capacity, while informal sector monitoring gets effective as legal capacity develops.

Road to Industrialized Africa: Role of Efficient Factor Market in Firm Growth

After a decade of rapid growth, industrialization has lost ground with shrinking manufacturing sector and high informality in Sub-Saharan Africa (SSA). This paper explores how land market and labor regulations affect factor allocative efficiency and firm performance in SSA. Using pooled data on firm balance sheets for 40 countries in SSA, the results identify significant land and labor misallocations due to limited market allocation of land and inappropriate regulatory policies. Using variations in ethnic diversity and the intensity of regulatory actions to peer firms at subnational level as instrumental variables, local average treatment effects show large productivity gains from factor reallocations, especially for marginally productive firms. Panel data results for Nigerian firms confirm factor market inefficiency as a principal driver of declining productivity, while showing that the 2011 minimum wage reform increased firm size. The results imply that improving formal regulation is critical to support firm growth at the stage of weak legal capacity, while informal sector monitoring gets effective as legal capacity develops.

Credit Risk and Contagion

We study default in a multi-firm equilibrium setting with incomplete information. Defaults are modeled to be consistent with the firm's balance sheet and aggregation over firms. Market prices and quantities of risk are derived in closed form. If the number of firms increases, the market prices of risk converge to a well-defined limit while the endogenous volatility and jump size of debt and equity generated by other firms' shocks vanish so that credit spreads depend asymptotically only on the firms' own cash flow risk. This novel contagion result calls into question recent results based on production economies, where quantities of risk are specified exogenously, that attribute credit spreads mostly to contagion.

Optimal Monetary and Macroprudential Policies Under Risk Taking Environment

The purpose of this study is to identify the existence of risk taking behavior in economic agents and optimal monetary and macro prudential policy options in Indonesia. Using the household and firm balance sheet data during the period 2002q1-2013q4, our approach found that risk taking behavior occurs both in households and firms in Indonesia. We develop a model whose economic agents consist of households, firms, banks and central banks by treating the bank credit risk as an endogenous variable. The performance of the model suggests that the monetary shock response drives an increase in credit growth. The same pattern occurs in the shock of increasing asset prices and increasing world GDP. Furthermore, this study model contributes to a deeper understanding of the prudential policy framework. In the even of risk taking, either shock by exogenous asset price or world economy shock, monetary policy alone nor macroprudential alone may not be optimal policy responses.

Uncertainty, capital flows, and maturity mismatch

This paper explores a how the financial uncertainty generated by volatile international capital flows interacts with maturity mismatch on the balance sheets of nonfinancial firms to increase the volatility of output, investment, and total factor productivity (TFP) in emerging market economies. I build a model of a small open economy in which financial frictions force firms to fund long-term projects with short-term debt. In response to changes in the level of uncertainty regarding the availability of foreign borrowing, firms adjust their long-term investment, contributing to the volatility of investment and output as well as generating endogenous fluctuations in aggregate productivity. Using data from a panel of major emerging markets, I show that the volatility of portfolio debt flows negatively affects output by dampening investment, while the volatility of equity flows, which do not generate maturity mismatch, has no effect. Consistent with the mechanism in the model, the negative impact of capital flow volatility is larger at low levels of financial development and in industries with longer time-to-build lags. My estimates imply that shocks to capital flow volatility account for one fifth of the excess output volatility of the emerging markets in my sample relative to a set of small open advanced economies.

An attempt for applying the lcr and car requirements to Turkish iron and steel sector

Iron and steel sector is one of the key determinants of a country's GDP and Industrial Production, both due to size of its volume and the strategic importance of its outputs. Due to high installation costs, it is quite costly to compensate capacity losses. Hence, the financial viability of the iron and steel sector, which is in the locomotive position, is critical for the continuity of intermediate goods supply and overall price volatility. The sector also comprises an important part of banking system total credit risk, so the measurement of the sector’s capacity of the balance sheet and the resistance of the equity against possible shocks determines the overall credit quality. It is aimed that the Basel III liquidity and capital adequacy criteria which are applied to the financial institutions will be applied on the balance sheets of selected iron and steel sector companies, since the risks of the real sector constitute counterparty risk for financial sector firm balance sheets.

Balance Sheet Effects in Colombian Non-Financial Firms

After building up foreign currency-denominated (FC) liabilities over several years, the balance sheets of Colombian firms might be particularly vulnerable to a shift in external conditions. This paper undertakes four exercises in order to get a better understanding of these vulnerabilities. First, probit/logit estimations are used to identify the firm-level and macroeconomic determinants of FC borrowing by non-financial corporations. Second, the implications of the balance sheet vulnerability for real activity are investigated. Evidence is found of an FC balance sheet effect that transmits exchange rate fluctuations to firm-level investment, and show that that this effect is asymmetric, much greater for depreciations than for appreciations. Third, using logit/probit estimations, it is shown that not all firms use forward exchange derivatives solely to hedge their FC liabilities. This might be a consequence of exchange rate intervention by the monetary authority, protecting against extreme exchange rate misalignments. Finally, results are reported of a survey-based qualitative analysis on the hedging policies and activities of 12 large non-financial firms.

The Transmission of Monetary Policy through Bank Lending: The Floating Rate Channel

We describe and test a mechanism through which outstanding bank loans affect the firm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to floating rates affect the liquidity, balance sheet strength, and investment of financially constrained firms that use bank debt. We show that firms---especially financially constrained firms---with more unhedged bank debt display stronger sensitivity of their stock price, cash holdings, sales, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, which further supports the floating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the floating rate channel can have a significant macroeconomic effect due to the large size of the aggregate stock of unhedged floating-rate business debt, an effect at least as important as the bank lending channel through new loans.

Global Liquidity, Current Account Deficit, and Exchange Rate Balance Sheet Effects in Turkey

ABSTRACTThis study investigates the current account deficit (CAD) of Turkey from the perspective of its capital account. We discuss how global liquidity conditions and monetary policies in Turkey have contributed to higher deficits through real exchange rate appreciations. We analyze the impact and consequences of exchange rate (ER) changes on the investments of non-financial firms. In the case of real ER depreciations, we find that the magnitude of the contractionary effect through balance sheets of firms with dollarized liabilities is significantly higher than the expansionary effect through trade competitiveness. We also analyze the “soft-landing” policies aimed at reducing the CAD in Turkey and estimate the rate of economic growth that must be foregone for a percentage reduction in CAD.

An Early Warning Tool for Measuring the Build-Up of Systemic Risks in Banks and Financial Systems

This paper develops, analyses and implements an early warning tool for systemic risk in banks and financial entities. The tool is based on a refined approach to stress testing. Calculations performed on Australian bank data are shown to predict past distres. Risk is measured as a function of expected capital shortfall in individual firms. A simple model of regulatory capital is assumed. Systemic risk is shown to be driven by the size and leverage of balance sheets and interdependence between firms. Firm balance sheets are modelled using publicly available information and assumed to depend on market returns. Model refinements using more comprehensive information and practical implementation are also discussed.

Saving Wall Street or Main Street

​We build a dynamic stochastic general equilibrium model, where the balance sheets of both banks and non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared with firm capital. We study public funding of banks and firms in times of crisis. Government capital injections can be useful as a shock cushion, but they distort incentives. Small capital injections benefit banks more than firms but the relative benefit is declining in the injection size. Government should first recapitalize banks, and if resources are large enough, lend to firms too.

China's Rising IQ (Innovation Quotient) and Growth: Firm-level Evidence

This paper examines whether the rapid growing firm patenting activity in China is associated with real economic outcome by building a unique dataset uniting detailed firm balance sheet information with firm patent data for the period of 1998-2007. We find strong evidence that within-firm increases in patent stock are associated with increases in firm size, exports, and more interestingly, total factor productivity and new product revenue share. Event studies using first-time patentees as the treatment group and non-patenting firms selected based on Propensity-Score Matching method as the control group also demonstrate similar effects following initial patent application. We also find that although state-owned enterprises (SOEs) on average have lower level of productivity and are less innovative compared to their non-state-owned peers, increases in patent stock tend to be associated with higher productivity growth among SOEs, especially for patents with lower innovative content. The latter could reflect the preferential government policies enjoyed by SOEs.

Relationship Banking and Monetary Policy Transmission: Evidence from India

Though the monetary policy transmission and financial intermediation literatures have respectively highlighted the role of the “bank credit channel” and relationship banking, the effect of relationship banking on the transmission of monitory policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monitory policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using a sample of bank dependent firms in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that engage in transactional banking. The effects are symmetric across monetary policy tightening and loosening. We conjecture that reduced information asymmetry due to relationship banking blunts the impact of “firm balance sheet channel” of monitory policy transmission.

Small DSGE Model with Financial Frictions

In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.

The Federal Reserve and a Cascade of Failures: Inequality, Cognitive Narrowness and Financial Network Theory

The recent financial crisis hollowed out the core of American middle-class financial stability. In the wake of the financial crisis, household net worth in the U.S. fell by 24%, for a loss of $16 trillion. Moreover, retirement accounts, the largest class of financial assets, took a steep drop in value, as did house prices, and these two classes of assets alone represent approximately 43% of all household wealth. The losses during the principal crisis years, 2007-2009, were devastating, “erasing almost two decades of accumulated prosperity,” in the words of a 2013 report. By the Federal Reserve. Beyond these direct household balance-sheet losses, 1 out of every 4 homeowners were underwater by 2009 with mortgages worth less than the value of their homes. If we add the 3.7 to 5 million foreclosures that forced Americans to move from the economic and emotional stability of family homes, we see a portrait of dramatic financial instability in the wake of the financial collapse. And the Federal Reserve’s commitment to low interest rates, so beloved on Wall Street, has prevented many families from rebuilding their wealth through interest on savings; these “zero-bound” interest rates are an impediment to middle-class recovery from the losses of the crisis.By contrast, the financial sector, the cause of the crisis, has prospered from adversity, growing to 9% of GDP by 2010 even as it became less efficient. This is one of the highest shares of GDP in the past half century and represents 29% of all profits in America. The financial sector earns profits by pooling funds to bring net savers together with net borrowers in financial contracts, a process known as intermediation. Economist Thomas Philippon of New York University found that the profits from intermediation grew from less than 2% of GDP in 1870 to nearly 6% before the economic crash of 1929. After World War II, financiers gradually increased their share of the economy to 5% by 1980, close to what it had been before the crash. The focused deregulatory agenda of the Reagan administration and Alan Greenspan’s deregulatory passions at the helm of the Fed from 1987 to 2006 swelled the balance sheets of financial firms to the high point of 9% of GDP by 2010.The return to investors did not match the growth in the financial sector’s share of GDP. So what did investors get for their money? Philippon says it’s impossible to beat the market in part because of high-frequency trading that locks out the ordinary investor through sophisticated high-speed computer transmission of orders with preferential cable and algorithmic access to the trading desks.

Oppose, Support, or Hedge? Distributional Effects, Regulatory Pressure, and Business Strategy in Environmental Politics

What explains the choice of corporate political strategy in environmental politics? Drawing on recent models of actor strategy formation in political economy, this article argues that basic material interests of firms are translated into strategies in the context of institutional environments. I advance a typological model that posits how distributional effects—positive versus negative—and perceived regulatory pressure—low versus high—interact in leading firms to adopt one of four ideal-type strategies: opposition, hedging, support, and non-participation. This article examines the model through the case of corporate strategies in the making of the European Union’s Emission Trading Scheme. The article contributes to theory-building on business strategy in environmental politics by offering a probabilistic explanatory model, and it flags hedging strategies as an increasingly prevalent form of business behavior.

Floating with a Load of FX Debt?

Countries with de jure floating exchange rate regimes are often reluctant to allow their currencies to float freely in practice. One reason why countries may wish to limit exchange rate volatility is potential negative balance sheet effects due to currency mismatches on the balance sheets of firms and households. In this paper, we show in a sample of 15 emerging market economies that countries with large foreign exchange (FX) debt in the non-financial private sector tend to react more strongly to exchange rate changes using both FX interventions and monetary policy. Thus, our results support the idea that an important source of “fear of floating” is balance sheet currency mismatches. This effect is asymmetric; that is, countries stem depreciation but not appreciation pressure. Moreover, FX debt financed through the domestic banking system is more important for fear of floating than FX debt obtained directly from external sources.