Non-financial Corporate Sector Research Articles

The impact of the Covid-19 pandemic on sales and employment of the non-financial corporate sector in Slovenia

The impact of the Covid-19 pandemic on sales and employment of the non-financial corporate sector in Slovenia

70 years of US corporate profits

We construct and compare aggregate measures of profits for the U.S. non-financial corporate sector over the period 1946–2016. The measures commonly show that the profit share is declining from 1946 to the early 1980s and has been increasing since. As a share of gross value added, profits today are higher than they were in 1984, but lower than their value in the years after World War II.

Whose firm? Resilience of the German corporate sector to financialization

Abstract We examine how financialization has progressed in the German nonfinancial corporate sector since the 2000s. Using a sample of firms historically listed in the largest German stock market indices, DAX and MDAX, we not only confirm the rise of international passive asset managers but also find a growing prevalence of controlling business families. Although executive pay increasingly consists of equity grants, indicating growing shareholder value orientation, we do not identify corporate financialization in terms of rising share buybacks and payout rates. Instead, ever larger shares of corporate funds are kept inside firms as retained earnings. While firms in the USA ‘downsize-and-distribute’ under the pressure of institutional investors, we hold that German firms ‘save-and-sit-on-it’. Although shaped by the liberalization of corporate governance regulations, this regime still relies on blockholdings and codetermination, while integrating asset managers as new providers of patient capital.

A liquidity preference approach to nonfinancial corporate liquid asset holdings

This paper examines the long-run pattern of the U.S. nonfinancial corporate sector’s liquid financial asset holdings in the period from 1951 to 2018. My approach to examining this pattern builds from the banks’ liquidity preference theory put forward in Keynes’ 1937 papers, as well as Minsky’s 1957 paper discussing the role of financial innovation in the banks’ management of liquidity preference. I argue that financial intermediaries affect nonfinancial corporations’ liquid asset holdings through two primary money creation channels: (1) banks’ commercial and industrial loans advanced to nonfinancial corporations and (2) the liquidity premium of financial intermediaries, which can be measured by the interest rate spread in the intermediaries’ liabilities markets. Through theoretical and empirical exercises, I find that these two endogenous liquidity creation channels have been the important factors accounting for liquid asset accumulation by the nonfinancial corporate sector. Overall, my results suggest that financial innovations, structural changes of the U.S. financial system, and financial intermediaries’ liquidity premium could contribute to our understanding of the shift in nonfinancial corporations’ asset portfolio composition in favor of liquid financial assets.

Fixed Capital Formation in the Non-Financial Corporate Sector of the Spanish Economy: Crisis, Recovery and Prospects

Fixed Capital Formation in the Non-Financial Corporate Sector of the Spanish Economy: Crisis, Recovery and Prospects

The asymmetric impact of COVID-19: A novel approach to quantifying financial distress across industries

This paper assesses corporate financial distress in terms of liquidity and risk of insolvency due to the COVID-19 pandemic. We develop a novel multivariate approach to obtain monthly data on industry turnover, exploiting real time data to capture the atypical character of industry-specific disturbances. By combining the estimated set of industry revenue shocks with pre-pandemic financial statements, we quantify the impact of the pandemic on the risk of insolvency in the EU non-financial corporate sector. Our definition of risk of insolvency takes into account not only the equity position of firms, but also risks relating to overindebtedness. The analysis controls for firms that were financially vulnerable already before the pandemic, thus being prone to become at risk of insolvency also in absence of the COVID-19 turmoil. We find that, for the EU as a whole, 25% of firms exhausted their liquidity buffers by the end of 2021 (a practical cut-off date of the analysis, not an assumed end of the pandemic). Furthermore, 10% of firms which were viable before the pandemic, appear to have shifted into risk of insolvency as a result of the COVID-19 crisis. The magnification of financial vulnerability in the hardest-hit industries mainly occurs among firms with no legacy issues, i.e. firms with positive profitability pre-pandemic. A similar finding is reported for some of the hardest-hit countries, such as Italy and Spain. In other countries, such as Germany or Greece, the magnification of financial vulnerability mainly occurs among firms with negative profitability pre-pandemic.

The Impact of Macroprudential Policy on Credit Growth in Nine Euro Area Economies

Abstract In this paper, we investigate the impact of macroprudential policy measures (bundled together into a macroprudential policy index, MPI) on the non-financial corporate sector credit and household credit growth using a one-step system GMM empirical research method. The goal of our paper is to test whether contractionary macroprudential policy stymies credit growth rate and whether expansionary macroprudential policy spurs credit growth rate in selected Euro Area economies (Austria, Belgium, Finland, Germany, Ireland, Italy, Netherlands, Slovenia, and Spain) over the period 2008Q4–2018Q4. We test two hypotheses: H1: The tightening of macroprudential policy measures reduces the non-financial corporate sector credit growth rate, and H2: The tightening of macroprudential policy measures reduces the growth rate of household credit. Based on our empirical results, we can confirm the first hypothesis. In contrast, the second hypothesis can be neither confirmed nor rejected since the explanatory variable of interest (MPI) is statistically insignificant in the second model.

What are firms borrowing for? The role of financial assets

Recent studies show that nonfinancial corporate debt is weakly correlated with aggregate demand, raising the question: Why is the nonfinancial corporate sector borrowing? We use flow of funds data for fifteen advanced economies since 1990 to econometrically show that nonfinancial corporate borrowing primarily finances financial asset accumulation. We show that an increase in borrowing of one percent of GDP is associated with an increase in capital expenditures of only 0.013 percent of GDP, but a 0.82 percent of GDP increase in the acquisition of financial assets net of non-debt liabilities. This rise in net financial asset acquisition is dominated by gross financial asset accumulation. Furthermore, corporate borrowing is primarily associated with non-cash financial assets, and is not associated with foreign direct investment. These results suggest that the nonfinancial corporate sector’s growing orientation toward accumulating financial assets underlies the weak relationship between their borrowing and aggregate demand.

Short-term cross-border capital flows and corporate leverage ratio: China's empirical evidence and enlightenment

In consideration of increasing global economic uncertainties and the leverage ratio of non-financial corporate sector in China reaching a historical peak, this paper uses the parallel multiple mediation model to analyze the mechanism and impact of cross-border short-term capital flows on non-financial corporate leverage in China, in which corporate borrowing and asset price are taken as mediators in parallel multiple mediation model. The research findings indicate that the influence of short-term cross-border capital flows on corporate leverage ratio in China is mainly through the direct path. The influence of the two indirect channels is relatively weak, in which the size of corporate borrowing is more influential than corporate asset price. The indirect impact of short-term cross-border capital flows on corporate leverage ratio is more significant for state-owned enterprises compared to non-state-owned enterprises.

The Impact of Economic Crises on the Performance of Non-Financial Corporations in the Czech Republic

Since the 1990s, the Czech economy has faced four crises. Each of them had different causes, duration and consequences for the non-financial corporate sector. The first crisis (1997-1998) had internal causes and severely affected non-financial firms. In contrast, the second crisis (2009) had external economic causes and non-financial corporations emerged with a positive economic outcome. As a result of extremely rigorous economic policies and net borrowing by non- financial firms, the Czech economy experienced a crisis in 2012 and 2013. The COVID- 19 pandemic was the external, not economic cause of the fourth crisis (2020-2021) that brought about a successful outcome for non-financial corporations. The aim of this analysis is to answer the question of what causes these divergent economic results and why the external impulses of the crisis led to a reversal of the traditionally negative economic balance. The results showed that the levels of indebtedness and profitability conceal the main differences in conditions. The analysis is based on data from the Czech National Accounts and uses relative indicators to describe the economic behaviour of non-financial corporations constructed in such a way that their explanatory power is closer to the conditions for assessing economic performance in corporate practice.

Zombification and Industry 4.0—Directional Financialisation against Doomed Industrial Revolution

This contribution addresses the puzzle of whether Industry 4.0 is able to autochthonously bring back the real economy (non-financial corporate sector) into the consciousness of the financial sector. It is all the more important since the conventional wisdom over financialisation says that it cannot be reversed without re-establishing the command of the social and collective over the private and individual for the modern era. Our paper argues that a healthy diffusion of Industry 4.0 is doomed unless some directionality is set within the financialisation process. To this end, by building on the relevant lessons of complexity science, it investigates the complex nexus among financialisation, zombification and Industry 4.0 development, an aspect which is not even sporadically examined in the literature. After presenting a short stock take on excessive financialisation, the paper deciphers the main systemic channels of zombification affecting negatively the outlooks of Industry 4.0. Some important policy recommendations are drawn as well.

Stress Testing of Non-financial Corporate Sector: A Top-down Input-output Framework

This paper provides a framework for conducting simulations and stress testing in the non-financial corporate sector. It relies on national accounting and uses a set of input-output tables to track the propagation of shocks between parts of the sector while staying entirely consistent with the big picture framed by the core forecasting model and the underlying scenario. The simulation framework allows standard macroeconomic developments to be captured, but one-off measures such as government wage and salary compensation and loan moratoria can also be easily implemented. The main output of the simulation is a set of industry-level performance and profitability variables. These variables can be used for various types of analysis, such as credit risk modelling and profitability and liquidity analysis. Some of them - such as forecasting portfolio default rates - are shown in the paper. The historical default rate estimates obtained are accurate and economically sensible for most industries and exhibit high reliability even under severe economic conditions. Given its national accounting framework and its level of detail, the model can be used to support decision-making processes and to evaluate the effects of existing or planned economic policies. Two different scenarios are considered to demonstrate the benefits of the proposed approach.

Corporate Vulnerabilities in the Middle East, North Africa, and Pakistan in the Wake of COVID-19 Pandemic

This paper analyzes corporate vulnerabilities in the Middle East, North Africa and Pakistan (MENAP hereafter) in the wake of the COVID-19 pandemic shock. Using a sample of nearly 700 firms from eleven countries in MENAP, we assess the non-financial corporate (NFC) sector’s liquidity and solvency risk and viability over the medium term under different stress test scenarios. Our findings suggest that the health crisis has exacerbated vulnerabilities in the corporate sector, though the effects are heterogenous across the region. Small firms, which entered the pandemic in a more vulnerable position, would remain under high liquidity stress over the medium term, putting a substantial share of these firms’ debt at risk of default. Similarly, liquidity needs of firms in contact-intensive sectors have also worsened and would remain elevated in 2022-23. We also show that an adverse scenario of subdued growth and premature withdrawal of policy support would impair the capacity to service interest expenses, especially among small firms, resulting in higher insolvency risk. Overall, our results indicate that some segments of the MENAP corporate sector could remain reliant on policy support during the recovery phase and that structural reforms are critical to save distressed but viable firms from bankruptcy and ensure an efficient liquidation of “zombie” firms.

Balance Sheet Effects in a Financialized Environment: A Stock-Flow Consistent Framework for Mexico

ABSTRACT Exchange rate volatility, growing foreign corporate debt, and decreasing private investment ratio are among the consequences of financialization experienced by developing countries such as Mexico. The present work analyses the combined effect of these three factors using a Stock Flow Consistent (SFC) model. It analytically explores the balance sheet effect in the non-financial corporate sector; higher foreign debt would affect private investment after episodes of real currency depreciation. To explore such mechanisms, we simulate the commodity price cycle of the early 2000s alongside the shifts in the stance of the FED in the aftermath of the Global Financial Crisis. The scenario analysis points to a hysteresis of the Real Exchange Rate (RER) and an increase in foreign debt level.

Financial liberalization and the Indian non-financial, corporate sector

A distinct feature of the India’s path of financial liberalization is that it led to the emergence of the corporate, non-financial sector, rather than the financial sector as the key wedge for the penetration of global finance. Neoliberal reforms eroded the traditional role of development banks and state-directed credit and empowered a section of large corporations and non-financial companies in India. The partial, calibrated path to capital account liberalization has meant that this section of the Indian non-financial corporate sector, rather than the commercial banking system came to be the conduit integrating the Indian economy with international financial markets. Where the Indian state had earlier harnessed finance towards developmental priorities, it shifted to channeling finance in service of the internationally embedded segment of the corporate sector that enjoys disproportionate access to both the domestic financial system and international financial markets. JEL CodesE44 G32, F65

Evaluating the nonlinear relationship between nonfinancial corporate sector leverage and financial stability in the post crisis era

<abstract> <p>This paper analyzes the relationship between the nonfinancial corporate sector leverage (NFCL) and financial stability in the post crisis era, revealing considerable heterogeneity across the level of financial intermediation (FI). First, we use the financial soundness indicators proposed by the IMF and the generalized dynamic factor model (GDFM) to measure the financial stability represented by the FSI of OECD countries. Second, in a panel quantile regression framework, we examine the effects of NFCL on FSI for different quantiles of FSI. The result shows that the impact of NFCL on financial stability at different levels is asymmetric, which reflects differences in the supply and demand of debt. Third, this paper further discusses the transmission mechanism of FI between NFCL and FSI based on the panel smooth transition regression model (PSTR). We find that the transmission channel of NFCL to financial stability depends on the level of financial intermediation, but with diverging magnitude for the different levels of FI.</p> </abstract>

Determinants of Corporate Savings in Germany

Abstract From the early 2000s onwards, the rise in net lending of the nonfinancial corporate sector has contributed substantially to the increase in the German current account surplus. The main driving factor behind the development in the nonfinancial corporate sector’s net lending was a rise in savings (retained earnings) while business investment was comparatively stable. To shed light on the determinants of corporate savings, this study presents results from an analysis using firm-level data from the recently developed Bundesbank database Janis. The descriptive analysis suggests that the increase in corporate savings was a widespread development across the corporate sector in Germany. In line with aggregate results, also the median firm saw an increase in profitability while dividends were subdued. Empirical results show that firms with initially higher leverage ratios increased their saving ratios more after the year 2001, providing arguments for a role of a desire to deleverage in explaining increased corporate savings. No (unanimous) evidence is found that increases in uncertainty and market power of firms affect corporate savings positively.

The corporate saving glut and the current account in Germany

We investigate, in the case of Germany, the positive correlation between the cyclical components of the corporate saving glut in the non-financial corporate sector and the current account surplus from a capital account perspective. Employing sign restrictions, our findings suggest that mostly labor supply, world demand and financial friction shocks account for the joint dynamics of excess corporate saving and the current account surplus. Household saving shocks, by contrast, cannot explain the correlation. We conclude that, explained through these factors, the corporate saving glut is an important driver of the cyclical component of the current account.

Quantifying the vulnerabilities of China’s corporate sector with contingent claims

This paper measures and analyzes the default risk and debt sustainability of China’s non-financial corporate sector both on an aggregate level and within a sector by employing the contingent claims approach (CCA). Our results suggest that the vulnerabilities of Chinese firms are heterogenous in terms of investment source, ownership group, corporate form, industry type, and geographic unit etc. First, foreign capital enterprises have a lower default risk than domestic capital enterprises. Within domestic capital enterprises, state-owned firms have the lowest default risk, whereas private and collective firms are most unsustainable despite that they have the highest returns on assets. Second, state-controlled firms, private stock limited firms, and Chinese foreign cooperative firms are least vulnerable in the state-owned corporate sub-sector, the private corporate sub-sector and the foreign corporate sub-sector, respectively. Third, all industries except the coal industry are sustainable by industry type. Fourth, the vulnerabilities of local state-owned sub-sectors are diverse across China’s administrative regions. Moreover, we provide robustness tests which support our findings. In Sum, our study shed key light on ensuring the soundness of China’s non-financial corporate sector and thereby maintaining the stability and sustainability of the Chinese economy.

In Search of Distress Risk in Emerging Markets

Although the non-financial corporate sector accounts for the lion’s share of the post-Global Financial Crisis surge in emerging-market leverage, there is little systematic research on factors that impact corporate distress risk in emerging markets. Existing bankruptcy risk models developed using US data have low predictive power when applied to emerging market firms. We suggest that these models do not account for emerging market vulnerabilities to global shocks such as advanced economy monetary policy changes, US dollar movements, or shifts in global liquidity and risk-aversion. A novel multi-country dataset of corporate defaults allows us to quantify the importance of global shocks on emerging market corporate distress. Using a set of accounting, market, and macroeconomic variables, we develop a model of distress risk specific to emerging markets with comparable forecasting power to that of existing models based on US data. We also explore the asset pricing implications of our model by testing whether equity returns accurately reflect default risk. We find that global factors like US interest rates and credit risk contribute more predictive power for corporate default risk than domestic macroeconomic variables, especially for those firms whose stock returns are most sensitive to global financial conditions.