Longer-term Financing Research Articles

Investor behavior around targeted liquidity announcements

We exploit announcements related to targeted longer-term financing operations (TLTROs) as exogenous shocks in investor perceptions to test recent theories on bank funding liquidity (Ahnert et al., 2019; Liu, 2015). We find that banks with high derivative holdings and more exposed to sovereign credit risk respond better to the announcements, consistent with the view that lower funding costs benefit banks with higher asset encumbrance and located in more vulnerable Eurozone countries. The TLTRO announcements also elicit reductions in short positions on bank stocks relative to stocks of non-financial corporations without impairing their market liquidity. Robustness tests rule out that our results are driven by confounding events and anticipation effects. Placebo tests confirm that the TLTRO announcements are driving the estimated price reactions and changes in short positions.

Late banking transitions: Comparing Uzbekistan to earlier reformers

This paper compares the early experience of Uzbekistan with transitioning its banking system to market principles with the experience of former transition economies. To that effect, it uses novel data on Uzbekistan’s banking sector, data on former transition economies, and evidence from the literature. We find that the 2017 financial liberalization triggered a larger credit boom than former transition countries experienced. The Covid-19 pandemic helped tame the boom and secure a soft landing. Good capitalization of the largest state banks serves as a backstop against a systemic banking crisis. However, structural reform gaps need to be closed for financial deepening to continue sustainably. The state banks enjoy privileged access to longer-term financing, larger economies of scale, and bailout capital injections that inhibit banking competition. The human capital in banking appears lower than what the former transition countries started with and could deter FDI into banking. The small private sector, lacking commercialization, and slow privatization of state enterprises—as well as the state enterprise-state bank nexus—are other factors inhibiting fair banking competition. Financial sector institutions such as risk-based supervision, accounting and auditing, bank resolution, and deposit insurance still fall behind good international practices. The broader governance of state banks is one political economy factor hindering faster transformation of the banking sector in Uzbekistan.

The effect of the need for subsequent seasoned equity offerings on earnings management motivation

PurposeMost prior literature focuses on how managers’ immediate needs affect their current earnings management. The purpose of this paper is to expand this body of literature by investigating the managerial motivation in a multi-period setting. The authors believe that managers’ incentive to engage in earning management around current equity issues is not only determined by the companies’ immediate need, but that it is also determined by their longer-term financing need.Design/methodology/approachThe authors examine all issuances of common stock, whether they are issued as seasoned equity offerings or whether as a reissuance of previously repurchased stock. They believe that the motivations for earnings management are similar for all these various stock-issuance events, which result in an increase in the number of outstanding common stock items.FindingsThe results of this paper reveal that those firms with less of a need for subsequent equity issuances are more likely to engage in “income- increasing” earnings management before their equity issuances. Conversely, equity issuers with more of a need for subsequent equity issuances would be more concerned about the potential impact of current earnings management on their future reported earnings and, therefore, would be less likely to manage earnings.Originality/valueThis paper contributes to the literature by extending the findings of the prior literature, showing that managerial discretion does not only affect the total magnitude of earnings management, but that it also impacts the timing of the earnings management activities. Insights gained from our research may contribute to the literature and enable a better understanding of firms’ financial reporting strategy from a longer-run view.

Global Private Capital: A Network Perspective

The global market of inter-banking syndicated loans is a vast network of obligations upon which lenders rely for longer-term financing, and, in turn, provide to the real economy to finance projects. This network is explicitly modeled from 1998 to 2013 such that firms are nodes and loan facilities are edges in network terminology. Various measures of network topology are calculated, inclusive of temporal firm centrality, network density, transitivity, modularity, and community structure. Like many complex real-life networks, the global inter-lender network displays small world properties that insulate the network from adverse shocks overall. However, specific firms are shown to be systemically important at varying times; the removal of a systemically important firm fractures the network into dissolute communities, potentially disrupting the flow of capital to the economy. Both borrower and lender network centrality affect contract terms; overall, centrality lowers the cost of capital. Global network properties are also shown to inform micro contract terms.

What Determines the Composition of a Firm's Total Cash Reserves?

Although financial managers spend significant time and effort deciding in which financial assets corporate cash reserves should be invested, we know surprisingly little about the determinants of the variation in the composition of the financial assets that constitute these reserves. We find that firms invest more of their cash reserves in longer-maturity, less liquid securities that earn a higher yield if they can better forecast their short-term liquidity needs. Also, financially constrained firms, which typically hold large cash reserves to meet longer-term financing needs, invest more of their cash reserves into such securities. During years when significant amounts of their cash reserves are needed to fund operations or new investment, financially constrained firms shift funds to shorter-maturity, more liquid securities that earn a lower yield. We use several different identification strategies to establish causality of our results. Our findings provide insights on an important component of corporate liquidity management practices.

Long-Term Financing in Europe

Although policymakers in Europe are increasingly focused on fueling economic growth and job creation with infrastructure projects that require long-term investment, there are potential obstacles to channeling investment capital appropriately. To help shape the policy debate, CFA Institute recently brought together key thought leaders and policymakers at the forefront of the long-term financing debate to explore the implications for investors of less dependence on bank financing and more interest in investment capital. Speakers included John Kay, chair of “The Kay Review of UK Equity Markets and LongTerm Decision-Making” (prepared at the request of the UK government) and currently chair of the CFA Institute Future of Finance Advisory Council, and Fons Lute, managing director of the fiduciary mandates investment team at BlackRock. Discussion centered on three major topics: regulation, the transition from relationship banking to transaction banking, and better due diligence. In Europe, regulation has focused more on market conduct than on market structure, but most of the roundtable participants agreed that structure is a longer-term issue. Further complicating matters in Europe is the diversity of needs within European countries; some countries have a large need in the mortgage market while others are targeting infrastructure or public works. The transition from relationship banking to transaction banking has increased the intermediary chain, eroding knowledge of both investors and borrowers. In addition, longer-term financing needs a diversity of financing to match cash flow needs. Investors may not currently have the same level of expertise where long-dated maturities are concerned. Longer-term financing needs better due diligence and the possibility of nonbank loans. In the aftermath of the financial crisis, financing has lacked diversification, with the drying up of the securitization market and the difficulty of finding seed capital in private equity. CFA Institute is closely monitoring the debate around long-term financing. In a June 2013 comment letter to the European Commission, CFA Institute reflected the opinions developed in an EU members’ poll. The comment letter highlighted five priorities: (1) regulatory framework, (2) short-termism, (3) investment vehicles, (4) securitization, and (5) fair value accounting. First, a regulatory structure at the EU and national level that incentivizes long-term investing is essential. Second, in regard to short-termism, asset owners should hold asset managers accountable for performance over longer-term evaluation horizons rather than the current tendency to focus on quarterly returns. Third, concerning investment vehicles, innovation in developing new pooled fund vehicles targeted toward infrastructure and other long-term investments (“long-term investment funds”) is welcome and can afford investors important diversification opportunities. Any such new investment vehicles should offer enhanced disclosure to investors regarding risks and redemption restrictions. Fourth, a revival of the securitization market is welcome but must not be characterized by the complexity and opacity of deals in the past. CFA Institute proposes a special designation that would distinguish those long-term investments that satisfy a suitably high standard of disclosure quality. Finally, CFA Institute refutes the notion that fair value accounting policies contribute to short-termism and argues that fair value can in fact reduce the information asymmetry that exists between issuers and investors as to the value of corporate assets and liabilities. Because Europe is trying to stimulate its sluggish and diverse economy, especially through small and mediumsized enterprises (SMEs), long-term financing will be the focus of many talks within the European regulatory environment. Both the European Commission and the European Parliament will be taking stock in the coming months, preparing for elections in the European Parliament and for a new Commission. With investors playing a growing part in SME financing, it is essential that policymakers consider these issues from an investor perspective.

O custo de imperfeições do mercado brasileiro de capitais: uma aplicação da moderna teoria de finanças

Using information on companies with shares traded on the Sao Paulo Stock Exchange, relative to the end of the 1988 fiscal year, the relationship between the Modigliani-Miller capital structure analysis, the capital asset pricing model, and the Black-Scholes option pricing model, involving an equation for the firm's weighted cost of capital, is used for (1) estimating the cost of financiaI distress implied by the firm's choice of capital structure and (2) evaluating the impact of the absence of longer-term financing opportunities in the Brazilian capital market. The final results indica te that the cost of financial distress results in a one percent monthly addition to the cost of capital, in real terms, whereas the lack of longer-term financing has no significant economic consequences.