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The Economics of Private Placements: A New Look
... Financial systems are deemed as information systems (Ocampo, 2018). VC investment is knowledge-intensive instrument where such investors highly depend on information about the portfolio companies before and after the investment is finalized (Carey, Prowse, Rea & Udell, 1993). Thus, internet is not only the tool that has made VC and VC processes more efficient, but it has also created the most dynamic entrepreneurial environment. ...
... Since uncertainty in private placements is relatively high, public intermediation is more reluctant to commit resources to such ambiguous transactions. Resultantly, such private investments involve more due diligence and monitoring compared to other financing alternatives (Carey et al., 1993). ICT has made information sharing very easy that has facilitated processes of information collection for industry selection, firm selection, deal origination, monitoring and exits. ...
... While the impact of patents on VC is already established in the literature (Schertler, 2007), the stronger impact of ICT on VC confirms the recent findings by Khan et al. (2020) who found ICT to have a strong effect on early stage and later stage VC 7 . Financial systemsand for that matter VCare information systems (Ocampo, 2018) and VC is informationproblematic industry (Fiet, 1995;Lockett et al., 2002), VC processes involve more due diligence and monitoring compared to other financing alternatives (Carey et al., 1993). Certainly, ICT has facilitated VC processes of information collection for deal selection, deal origination and structuring, monitoring, and valuations. ...
The article examines the impact of information and communication technologies (ICT), innovation, and formal and informal institutions on venture capital (VC) investment. The analysis is based on 28-year data spanning 1990-2017 from 19 European and 13 Asia-Pacific countries using generalized two-stage least square instrumental variable technique. After controlling for endogeneity, the results show that ICT, innovation, and informal institutions hold a strong impact on VC investment. ICT and innovation exert a positive and significant influence on VC investment whereas formal institutions exert a positive yet insignificant effect on VC investment. Among the informal institutions, power distance and individualism exert significant and positive influence whereas uncertainty avoidance has significant and negative influence on VC investment. The interaction analysis demonstrates that the association between ICT and VC is strong when institutional quality is high. Moreover, the impact of innovation on VC is pronounced in highly digitized and highly uncertainty-tolerant environments. Explanation of VC capital investment also vary with geography as the effects of trend, ICT and uncertainty avoidance on VC investment are noticeable in the Asia-Pacific region whereas power distance is prominent in the European region. The article makes important contributions to the literature of VC by revealing novel interactions between formal and informal institutions, ICT and innovation depicted in a conceptual model. The study also brings in important highlights to the policy debate on VC development by showing how exactly VC investments are tangled with the different dimensions of institutional and technological environment.
... In the Eurozone context, we have strong evidence that the private placement channel has recently become more frequently used as an option for financing growth, thanks to the renewed involvement of venture capital and private equity funds 1 (Goncalves and Lehmann 2019). From this perspective, our study also contributes to the existing literature on capital market funding by simultaneously considering the determinants of access to public markets (as in Ritter 1987;Mikkelson et al. 1997;Pagano and Röell 1998;Chemmanur and Fulghieri 1994;Chemmanur and Fulghieri 1999;Denis and Mihov 2003;Hale and Santos 2008;Mizen et al. 2009;Gao et al. 2013;Ritter et al. 2013;Badoer and James 2016;Ewens and Farre-Mensa 2018) and to private placements (as in Diamond 1991;Carey et al. 1993;Fenn et al. 1997;Black and Gilson 1998;Cumming et al. 2006;Cumming and Johan 2007;Bonini and Alkan 2012;Groh et al. 2010;Grilli et al. 2018). ...
... Among the core issues related to small business finance, four are particularly pertinent to our analysis and help to frame this paper's contribution: first, the life cycle of small business finance, with different forms of SME financing connected to and influenced by the life cycle of the firm itself (Carey et al. 1993;Meyer 1998;Berger and Udell 1998); second, the financial patterns of European SMEs (Hall et al. 2004;Daskalakis and Psillaki 2008;De Jong et al. 2008;Psillaki and Daskalakis 2009;Lawless et al. 2015;Moritz et al. 2016;Palacín-Sánchez et al. 2018;Andrieu et al. 2018;D'Amato 2019;Mol-Gomez-Vasquez et al. 2019;Masiak et al. 2019); third, the private placement funding channel (Black and Gilson 1998;Schertler 2003;Cumming et al. 2006;Cumming and Johan 2007;Groh et al. 2010;Grilli et al. 2018); and fourth, firms' decision to go public Pagano and Röell 1998;Chemmanur and Fulghieri 1999;Denis and Mihov 2003;Hale and Santos 2008;Mizen et al. 2009;Gao et al. 2013;Ritter et al. 2013;Doidge et al. 2017;Ewens and Farre-Mensa 2018). ...
... The older and larger the firm and the lower its informational opacity, the broader the spectrum of its available financing sources. By contrast, small firms and new ventures, which face difficulties building reputations to signal their quality or overcoming their initial informational opacity, are the most dependent on internal finance (Carey et al. 1993;Meyer 1998). ...
This paper provides an in-depth analysis of small and medium enterprise (SME) access to capital markets across Eurozone countries. First, we determine which factors—at firm and country level—influence the likelihood of SME access to market-based finance. Second, we construct an index of market suitability to indicate the percentage of firms potentially fit for market-based finance. Our results suggest that while several Eurozone countries have realised SMEs’ ‘potential’ for capital market financing, a large number of firms fit for market-based finance remain unexploited. We also find that overall business conditions—measured by GDP growth, the development degree of domestic financial markets and the quality of the legal and judicial enforcement system—considerably influence a firm’s market suitability. In the studied period (2009–2014), macro-economic and institutional factors tended to reduce the likelihood of SMEs accessing market-based finance in most countries in our sample.
... ' Figure 1 is adapted and updated from Carey et al. (1993, Figure 10). ...
... Similarly, firms with access to public debt .. markets often continue to use private debt markets heavily, with bank loans, private placements, and other private debt arrangements accounting for half or more of large corporate debt. Arguably, even large firms may engage in informationally opaque activities that required the information production services of a financial intermediary that can structure a tailored contract and monitor performance over the life of the contract (Carey et al. 1993, Houston and James 1996, Hadlock and James 1997. ...
... One study found that 4770 of private placements required renegotiation one or more times over the maturity of the contract (Kwan and Carleton 1993). We are not aware of any hard data on the frequency of covenant renegotiation for bank loans, but anecdotal evidence suggests that bank loans with covenants are renegotiated even more frequently than private placements (Carey et al. 1993). ...
We examine the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance,and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.
... 4 Bank guarantees for Japanese corporate bonds are 100% irrevocable and unconditional and thus principal plus interest payments are fully guaranteed for the life of the bond. In the U.S., most unrated bonds are issued through private placements and purchased by life insurance companies (Carey et al., 1993). Whether firms acquire bond ratings typically depends on a firm's size and opacity which in turn affects the choice of bond issuance, namely, bonds issued via public offerings or issued through private placements. ...
... Prior research also shows that corporate bond issuers must consider the costs and benefits associated with: (a) public vs. private bonds and (b) credit ratings vs. guarantees. For example, Carey et al. (1993) show that opaque firms in the U.S. issue privately placed bonds while transparent firms sell public bonds. In addition, Carey et al. (1998) find that the firms that choose private bonds and non-bank loans have higher risk than public bonds. ...
... The vast majority of studies (Carey et al., 1993;Poon, 2003;Poon et al., 2009;and Han et al., 2013) indicate that unrated bonds, as well as bonds with unsolicited ratings, should have higher yield spreads because they are usually issued by firms with low quality and high information asymmetry. Hence, we hypothesize that unrated or privately placed Japanese bonds are sold at higher yields and greater AIC than other types of bonds in Japan and they are more likely to be issued by firms with weaker financial quality and greater information asymmetry. ...
We investigate a large set of yen-denominated Japanese corporate bonds composed of bank-guaranteed vs. unguaranteed bonds and find evidence of the demise of main bank relationships and transformation to market-based corporate governance since the 2008 financial crisis. We find that issuers with unrated and bank-guaranteed bonds have more information asymmetry and possess poorer firm quality. Japanese banks provide credit guarantees to the bonds issued by small or opaque firms with weaker financial profiles, thus reducing the risk of issuer default, as well as saving on bond rating fees and the costs of a public offering. The bank guarantee for private and unrated bonds serves as valuable (but costly) protection for investors who invest in these riskier issuers’ bonds. Most importantly, after the U.S. financial crisis, the impact of bank guarantees on yield spreads becomes much less significant as bond issuers have begun to rely more on credit ratings as a potentially cheaper and more effective monitoring/corporate governance mechanism.
... For this reason, one strand of the literature focuses on the factors suitable to improve SME access to marketbased funding, considering the effect of firm-specific (Bongini et al., 2021;Chemmanur & Fulghieri, 1999;Leland & Pyle, 1977;Ritter, 1987) and country-level characteristics (Beck et al., 2008;de Jong et al., 2008;Kayo & Kimura, 2011;Lawless et al., 2015;Moritz et al., 2016;Psillaki & Daskalakis, 2009). These studies also distinguish among the determinants of a firm's access to public markets (Ritter, 1987;Chemmanur & Fulghieri, 1994;Mikkelson et al., 1997;Pagano & Roell, 1998;Chemmanur & Fulghieri, 1999;Denis & Mihov, 2003;Hale & Santos, 2008;Mizen et al., 2009;Ritter et al., 2013;Gao et al., 2013;Badoer & James, 2016;Ewens & Farre-Mensa, 2020) and private placements (Black & Gilson, 1998;Bonini & Alkan, 2012;Carey et al., 1993;Cumming & Johan, 2007;Cumming et al., 2006;Diamond, 1991;Fenn et al., 1997;Grilli et al., 2018;Groh et al., 2010). ...
... Regarding the firm size dummy, SMEs have a lower likelihood of accessing marketbased finance, suggesting that they still encounter, ceteris paribus, more difficulties than large firms. These results are in line with the life cycle theory of firms' financial choices (Berger & Udell, 1998;Carey et al., 1993;Meyer, 1998) and with several studies relative to firms' financial patterns in Europe (Bongini et al., 2021;De Jong et al., 2008;Lawless et al., 2015;Moritz et al., 2016;Psillaki & Daskalakis, 2009). In addition, the listed status drives access to market-based finance. ...
Plain English Summary
Improving access to market-based finance and public financial support schemes facilitates the scaling up of European SMEs. Public grants enable SMEs to access market-based finance and their subsequent growth. We analyse about 31,000 Eurozone non-financial firms in the period 2009–2020, for which we have information on firms’ market-based finance access and their use of public grants. We demonstrate that the joint role of market-based finance and public financial support helps European SMEs scale up. The firms’ access to market-based finance is driven positively by the previous use of public financial support schemes and considerably affects subsequent firms’ growth. Deepening our analysis, grants-backed SMEs and more informationally opaque firms achieve significantly more robust growth when they issue new equity and bonds than comparable non-grants-backed firms. In sum, our research findings suggest that policymakers should consider all these aspects when establishing their public support policies since adequate access to external market-based finance for SMEs’ investments is a crucial factor for the prosperity of SMEs and economic growth.
... The cost of debt of any firms is impacted by numerous factors, such as the characteristics of the firm, agency costs, and default risk for the bond issue, and the information asymmetry problem (Bhojraj and Sengupta, 2003), interest rate (Diamond, 1989), leverage and cash flow from operations (Petersen and Rajan, 1994), and firm size (Carey et al., 1993). As stated in previous section, if corporate tax avoidance serves as a substitute for the use of debt (Graham and Tucker, 2006;Lim, 2010;2011, Kim, 2010, it could increase financial slack, enhance credit quality, lower default risk, reduce expected bankruptcy costs, and consequently, reduce the cost of debt (Lim 2011). ...
... Since creditors perceive larger firms as less risky and there are economies of scale in debt production costs, there is negative relationship between interest rates and firm size (Carey et al., 1993). So, firm size also has the impact on debt pricing. ...
The primary aims of this study are to identify whether there is any relationship between corporate tax avoidance and the cost of debt, and whether the level of institutional ownership moderates this relationship, with two hypotheses tests on sample of 110 listed firms in the main board of Bursa Malaysia during the year 2005 - 2009. This study supports prior papers with negative relationship between tax avoidance and the cost of debt, suggesting corporate tax avoidance activity can reduce the cost of debt of the firms. The significant and positive relation statistical result between corporate tax avoidance and the cost of debt indicates that tax - favored effect of corporate tax avoidance can serve as a debt for firms; hence tax avoidance serves as a substitute for the use of debt, which is consistent with trade - off theory. Additionally, the empirical evidence suggests that there is no significant effect of institutional ownership on this relationship, meaning that the level of institutional ownership does not impact on the relationship between tax avoidance and the cost of debt, regardless the level institutional ownership is high or low.
... While the syndicate participants have delegated certain monitoring functions to the arranging bank, little is known about the extent of group monitoring after a loan has been made. Carey, Prowse, Rea, and Udell (1993) contend there is little ex post monitoring in the bond market, no doubt because the representative bond is diffusely held. ...
... They find loans are more likely to be syndicated as information about borrowers becomes more transparent. This result is consistent with the so-called life-cycle model of borrowing propounded by Diamond (1991) and Carey et al. (1993). ...
We examine the size and composition of commercial lending syndicates. Syndicates are smaller and more concentrated when there is little information about the borrower when credit risk is relatively high, and when a loan is secured. This suggests syndicates are structured to enhance monitoring efforts and to facilitate renegotiation if borrowers become financially distressed. Since loan sales can change a syndicate structure, lead banks often constrain such activity. Limiting resales results in larger, more diffuse syndicates at the loan origination stage, however. Syndicates also grow larger and more diffuse when arrangers are more reputable, when loans have longer terms to maturity, and when borrowers hold more growth options. Our results are robust in a sample restricted to borrowers with traded equity or with credit ratings. The findings for composition likewise are robust when we control for potential endogeneity bias and for the influence of syndicate size on composition.
... That is, we find that larger firms tend to issue shorter-term debt than their smaller counterparts. Although contradicting the results reported by Mitchell (1991), Barclay and Smith (1995), and Stohs and Mauer (1996), this finding is consistent with those of Carey et al. (1993), Scherr and Hulburt (2001), and Guedes and Opler (1996). ...
... Based on asymmetric information argument, firm size and maturity should be directly related, however, consistent with Carey et al. (1993) and Scherr and Hulburt (2001), we find that larger firms tent to issue short-term debt than their smaller counterparts. Similarly, syndication of bond offerings usually results in more information sharing between borrowers and lender; therefore, Bond Issuance and Real Estate 19 based on an asymmetric information argument, syndication and maturity should be directly related. ...
... Ugovori u vezi sa finansiranjem MSP nisu isti kao ugovori o finansiranju velikih preduze}a. Na primer, sporazumi imaju tendenciju da budu restriktivniji za manja preduze-}a (Carey et al., 1993) i za informativno neprozirna preduze}a (Berlin i Mester, 1993), dospelost zajmova je kra}a za manja preduze}a (Carey et al., 1993), a kolateral se ~e{}e koristi za rizi~nije zajmoprimce (Berger i Udell, 1990Carey, Post i Sharpe, 1998;Booth, 1992;Klapper, 1998) Mada je korisno analizirati ugovore MSP sa stanovi{ta karakteristika ovih ugovora, ovaj pristup nije kompletan, posebno za razumevanje kako se finansiraju MSP {irom sveta. Umesto toga, novije analize finansiranja MSP isti~u da zajmodavci koriste raznolike "tehnologije" finansiranja (kreditiranja proizvodnje) (Berger i Udell, 2002). ...
... Ugovori u vezi sa finansiranjem MSP nisu isti kao ugovori o finansiranju velikih preduze}a. Na primer, sporazumi imaju tendenciju da budu restriktivniji za manja preduze-}a (Carey et al., 1993) i za informativno neprozirna preduze}a (Berlin i Mester, 1993), dospelost zajmova je kra}a za manja preduze}a (Carey et al., 1993), a kolateral se ~e{}e koristi za rizi~nije zajmoprimce (Berger i Udell, 1990Carey, Post i Sharpe, 1998;Booth, 1992;Klapper, 1998) Mada je korisno analizirati ugovore MSP sa stanovi{ta karakteristika ovih ugovora, ovaj pristup nije kompletan, posebno za razumevanje kako se finansiraju MSP {irom sveta. Umesto toga, novije analize finansiranja MSP isti~u da zajmodavci koriste raznolike "tehnologije" finansiranja (kreditiranja proizvodnje) (Berger i Udell, 2002). ...
In recent years factoring has experienced phenomenal growth and has become an important source of financing – ecpecially short term working capital – for small and medium-size enterprises (SMEs). This paper explores the advantages of factoring over other types of lending for firms in developing economies. The paper also discusses the informational, legal, tax and regulatory barriers to its growth. It examines the role of factoring in the eight Eastern European countries that became EU members on May 1, 2004.
... Within this context, this paper provides a novel contribution to the literature by investigating the extent to which SME reliance on the trade credit channel to finance investment decisions is affected by the structure of the local banking system and relationship banking features. To address our research objectives, on the one hand, we focus on SMEs in Italy because they represent the backbone of the Italian economy and typically have fewer options to access capital markets as they are less transparent than their larger corporate counterparts and poses a higher credit risk (Petersen and Rajan 1997;Carey et al. 1993;Berger and Udell 1998). Trade credit plays an important role in SME financing decisions (Ogawa et al. 2013;Martınez-Sola et al. 2014) and it is the only major source of financing (Berger and Udell 1998). 2 On the other hand, Italy is characterized by geographical heterogeneity in the local banking system across the country: several provinces have an abundance of cooperative banks (Alessandrini and Zazzaro 1999;Alessandrini et al. 2009), mostly relying on soft information in their credit relationships. ...
By exploiting a unique and proprietary panel dataset comprising 6480 Italian SMEs having a relationship with 99 cooperative banks over the period 2008–2014, we investigate the influence of the trade credit channel on firm investment decisions in the Italian market, distinguished by a considerable presence of relationship cooperative banks’ branches with a heterogeneous geographical distribution. Firstly, our findings confirm a significant influence of the trade credit channel on firm investment decisions. Secondly, we document that SMEs located in those Italian provinces with an abundance of cooperative banks’ branches rely less on trade credit to finance investments. Lastly, we show that longer firm-bank relationships decrease firm dependence on trade credit to boost investments. Our study is of particular relevance because it strengthens the effectiveness of the trade credit channel for SMEs in spurring corporate investments. Indeed, fostering a deep understanding of the real effects of firm financing sources is paramount to encourage investment by SMEs and to allow them to preserve their positioning in the market. Moreover, we exploit the Italian market, well-suited to perform such an analysis, since it is characterized by more inter-personal financing relationships as compared to other countries.
... The control for profitability is cash flow from operations (Petersen and Rajan, 1994), which is predicted to have a negative coefficient, since firms that can generate more cash from operations are in a better position to service their debts. I predict an inverse relationship between interest rates and firm size, which is measured as the natural logarithm of total assets, since creditors perceive larger firms as less risky and there are economies of scale in debt production costs (Carey et al., 1993). Prior evidence suggests that interest rates have a positive relationship with collateral (John et al., 2003), which is consistent with the perception in the banking industry that riskier borrowers must provide security for their loans (Morsman, 1986). ...
This paper examines the impact of tax avoidance on the cost of debt and its interaction effect with shareholder activism. Using Korean firms, I find a negative relationship between tax avoidance and the cost of debt, supporting the trade-off theory. Further tests reveal that the negative relationship becomes stronger when the level of institutional ownership is high. It becomes even stronger after 1998, when the shareholder rights of institutional investors were strengthened. It suggests that the managerial opportunism theory has an additional explanation for tax avoidance activities. My findings indicate that tax avoidance reduces the cost of debt through trade-offs and creates a managerial rent diversion, which is mitigated in firms with larger institutional holdings. Crown
... FSIZE is a measure of firm size and is computed by taking the natural logarithm of book value of total assets. Larger firms are expected to be associated with lower costs of debt because they have more assets in place and greater opportunities for economies of scale (Carey et al., 1993). MTB is a measure of a firm's growth opportunities and calculated as the ratio of market value of equity and book value of equity the firm. ...
Although proponents of integrated reporting (IR) advocate that this emerging practice has the potential to transform corporate reporting, the eventuation of this expectation would depends on the incentive IR provides to firms. This study examines whether integrated reporting is associated with cost of debt and whether IR moderates the relationship between financial reporting quality and cost of debt.
Based on insights drawn from information asymmetry and agency theories, we develop models that link IR and financial reporting quality with a firm’s cost of debt. We analyze 847 firm-year observations drawn from non-financial firms traded on the Johannesburg Stock Exchange (JSE), for the period 2009-2015.
We find that firms that provide integrated reports tend to have a lower cost of debt than firms that do not provide IR. We also find an inverse association between financial reporting quality and cost of debt, and that integrated reports accentuate this association. The findings suggest that the debt market perceives value in the information presented in integrated reports beyond what is furnished in financial reports.
This study is the first study to document evidence suggesting that the debt market perceives value in the information presented in integrated reports, beyond what is furnished in financial reports.
... One important extension of this analysis is to analyze the recontracting possibilities that arise upon the violation of other covenants that are set in bond contracts to mitigate the conicts of interest between shareholders and bondholders (see for example, Smith and Warner 1979). The can also be extended to the bank loan and private placement markets, in which it is also typical for lenders to impose covenants on the rm's debt and for the prevalance of large players of dierent sizes (see for example, Carey, Prowse, Rea and Udell 1993). A strategic value approach might partly explain why the nature of covenants varies across the three types of loans. ...
In times of low liquidity for a firm, poison put bondholders can threaten to either force the company into a reorganization or to raise its borrowing costs. A multilateral bargaining solution for the strategic value is formulated at the time of exercise. Even infinitesimal bondholders, putting non-cooperatively, are able to extract more than the intrinsic value whenever the amount of putable debt exceeds the firm's effective liquidity. Prior to the crisis all financial assets are priced in a continous-time framework when interest rates follow the Vasicek process and firm's debtholders are subject to a sharp price decline due to an LBO. The model is calibrated to one such recent crisis -- that of Kmart Corp.
... Other recent studies supporting this conclusion includePreece and Mullineaux (1 994) and Billett,Flannery and Garfinkel (1995), who find no difference in the reaction of borrower share prices to announcements of loans by banks and nonbanks, and Carey, Prowse,Rea and Udell (1993), who present evidence that insurance companies' private placement portfolios represent a form of information-intensive lending. The only recent studies examining finance companies or competition between finance companies and banks, of which we are aware, areSimonson (1994),Remolona andWulfekuhler(1992), andGorton and Pennacchi (1993). ...
This paper establishes empirically that specialization in private-market corporate lending exists, adding a new dimension to the public vs. private debt distinctions now common in the literature on debt contracting and financial intermediation. Using a large database of individual loans, we compare lending by finance companies to that by banks. The evidence implies that it is intermediaries in general that are special in solving information problems, not banks in particular. But lending by the two types of institutions is not identical. Finance companies tend to serve observably riskier borrowers, especially highly leveraged borrowers, although banks and finance companies do compete across the spectrum of borrower risk. The evidence supports both regulatory and reputational explanations for this specialization and perhaps an explanation based on institutional differences in borrower monitoring and control. In passing, we shed light on various theories of debt contracting and intermediation and also present facts about finance companies, which have received little attention.
... Indeed, studies byJames (1987) andLummer and McConnell (1989) suggested that there is something unique about bank loans but not private placement debts. 4 See for example,Carey, Prowse, Rea, and Udell (1993).5 Hereafter, private placements refer to privately placed corporate bonds, and public issues refer to publicly offered corporate bonds.6 ...
... On the other hand, large enterprises are generally considered to be less risky, due to more assets in place and greater opportunities for economies of scale, and they are negatively associated with the cost of debt (Carey et al., 1993). Large enterprises have greater asset diversification and more opportunities for economies of scale than small and medium-sized enter- prises and therefore these enterprises are generally considered to be safer ( Borisova et al., 2015). ...
The argument on the puzzling relationship between bank concentration and firms' debt structure in China remains inconclusive as the effects of firm ownership competition and firm size competition are intertwined in the existing research. This article utilizes the market shares of Big Four state-owned banks to investigate whether bank concentration affects debt structure in China. The results show that bank concentration has a stronger positive effect on debt maturity for state-owned enterprises and large-sized enterprises. The effect of bank concentration on debt maturity strengthens with firm state ownership and firm size. Moreover, state-owned enterprises and large-sized enterprises are associated with a longer debt maturity compared to non-state-owned enterprises and small and medium-sized enterprises, respectively. These results reveal that privatizing state-owned banks and state-owned enterprises would be an effective way to reduce credit discrimination and relieve the capital constraints of non-state-owned enterprises and small and medium-sized enterprises .
... The first institutional seed investors (also referred to as venture capitalists or formal, professional venture capitalists) were formally founded in 1946. These investors raise funds from individuals, organizations, endowments, pension funds, banks, sovereign wealth funds, family offices, governments, and insurance companies, with the funds raised then being invested in early stage ventures that offer high reward potential through an equity stake, yet also high risk (Barry, 1994;Carey et al., 1993;Fenn et al., 1997;Gompers, 1994;Gompers and Lerner, 2001;Sahlman, 1990;Weston and Brigham, 1978). Institutional investors invest by themselves or co-invest with other institutional seed investors or with other financial mechanisms in the entrepreneurial finance market (Bonnet and Wirtz, 2012). ...
Venture capital, angel financing, and crowdfunding have evolved and matured in the entrepreneurial finance market. These market developments have also been accompanied by a growing body of research. In this monograph, we provide an overview of a vast body of literature in the field of entrepreneurial equity finance, presenting the current state of research and succinctly identifying its subcategories. We also provide insight into major research trends and research gaps and examine the growing research field of cognition in entrepreneurial equity finance. Our review is structured using a theoretical framework that aims to link venture capital, angels, and crowdfunding whilst considering the significant differences exhibited between each investment stage.
... The firms they lend to are riskier than those that banks lend to, and there is anecdotal evidence that finance companies monitor more intensively than banks (see Carey, Post, and Sharpe, 1998). Life insurers invest in privately placed bonds and monitor somewhat less intensively than banks (see Carey, Prowse, Rea, and Udell, 1993). In all cases, these institutions focus their monitoring on avoiding bad outcomes, but the intensity varies. ...
We analyze how entrepreneurial firms choose between two funding institution: banks, which monitor less intensively and face liquidity demands from their own investors, and venture capitalists, who can monitor more intensively but face a higher cost of capital because of the liquidity constraints that they impose on their own investors. Because the firm's manager prefers continuing the firm over liquidating it and aggressive (risky) continuation strategies over conservative (safe) continuation strategies, the institution must monitor the firm and exercise some control over its decisions. Bank finance takes the form of debt, whereas venture capital finance often resembles convertible debt. Venture capital finance is optimal only when the aggressive continuation strategy is not too profitable, ex ante; the uncertainty associated with the risky continuation strategy (strategic uncertainty) is high; and the firm's cash flow distribution is highly risky and positively skewed, with low probability of success, low liquidation value, and high returns if successful. A decrease in venture capitalists' cost of capital encourages firms to switch from safe strategies and bank finance to riskier strategies and venture capital finance, increasing the average risk of firms in the economy.
... As such there is an expectation that firms with greater cash-flow will be negatively associated with interest rate pricing, although this coefficient was not significant in the Malaysian paper. Larger firms are expected to be associated with lower interest rates being charged given that large firms have greater potential for benefitting from economies of scale, and they generally have more assets (see Carey, Prowse, Rea and Udell, 1993). The association between cost of debt and property plant and equipment (PPE) is expected to be negative given that PPE can be used as security for loans. ...
... Following the logic of the "pecking order theory" of finance, companies use internal money (retained profits) in the first instance to finance their development and when they subsequently seek external funds, they graduate from bank finance to bond finance as information about their creditworthiness becomes more complete (Myers, 1984;Myers and Majluf, 1984;Diamond, 1991;Carey, Prowse, Rea, and Udell, 1993;Bolton and Freixas, 2000). Monitoring of private debt is most efficiently delegated to a financial intermediary rather than collected directly by many intermediaries (Diamond, 1984). ...
The determinants of bank lending to developing countries have been investigated in the existing academic literature within the risk-return framework, but the conclusions of earlier research have often been only partial or even contradictory. The analysis of a large sample of individual syndicated credit facilities allows the application of the risk-return framework to study the determinants of syndicated lending to developing countries in a more systematic manner. That is the approach taken in this chapter.
... Following the logic of the "pecking order theory" of finance, companies use internal money (retained profits) in the first instance to finance their development and when they subsequently seek external funds, they graduate from bank finance to bond finance as information about their creditworthiness becomes more complete (Myers, 1984;Myers and Majluf, 1984;Diamond, 1991;Carey, Prowse, Rea, and Udell, 1993;Bolton and Freixas, 2000). Monitoring of private debt is most efficiently delegated to a financial intermediary rather than collected directly by many intermediaries (Diamond, 1984). ...
Syndicated loans are credits granted by a group of banks to a borrower. They are hybrid instruments combining features of relationship lending and publicly traded debt. They allow the sharing of credit risk between various financial institutions without the disclosure and marketing burden that bond issuers face. Syndicated credits are a very significant source of international financing, with signings of international syndicated loan facilities accounting for no less than a third of all international financing, including bond, commercial paper and equity issues (Figure 2.1). This chapter describes the functioning of this increasingly global market, focusing on participants, pricing mechanisms, primary origination and secondary trading.
... Following the logic of the "pecking order theory" of finance, companies use internal money (retained profits) in the first instance to finance their development and when they subsequently seek external funds, they graduate from bank finance to bond finance as information about their creditworthiness becomes more complete (Myers, 1984;Myers and Majluf, 1984;Diamond, 1991;Carey, Prowse, Rea, and Udell, 1993;Bolton and Freixas, 2000). Monitoring of private debt is most efficiently delegated to a financial intermediary rather than collected directly by many intermediaries (Diamond, 1984). ...
In 2004, international syndicated lending represented more than one-third of new international capital market financing, and is deemed to have generated more underwriting revenue in recent years than either the equity or the bond market (Madan, Sobhani and Horowitz, 1999). In particular, leveraged lending has been growing rapidly, as commercial borrowers have increasingly displayed a preference for leveraged borrowing over junk-bond financing (Jones, Lang and Nigro, 2000).1 Specific tranches of such syndicated loans are purchased by non-bank investors. These non-bank tranches are in most cases equivalent to public bonds and subject to an ‘arm’s-length’ relationship in the case of problems (Altman and Suggitt, 2000). This means that banks arranging syndicated credits, especially at the leveraged end of the credit quality spectrum, have de facto been acting as investment banks, collecting fees for putting together syndicates, but not always warehousing the loans themselves, leaving that activity to commercial banks or even non-banks.2 Indeed, in the aftermath of the banks’ reduced lending following the Russian crisis, BIS locational banking statistics show a marked decline after 1995 of banks’ international loan portfolios relative to their total foreign claims including holdings of securities (Figure 5.1).
... 4 Superior monitoring models includeDiamond (1991),Diamond (1984),Besanko and Kanatas (1993),Boot and Thakor (1997),Petersen and Rajan (1994),Rajan (1992) andRepullo and Suarez (1998). Fixed costs models includeBhagat and Frost (1986),Smith (1986),Blackwell and Kidwell (1988),and Carey et al. (1993). Our empirical tests do not cover monitoring outside of distress at all. ...
In many countries, poorly functioning bankruptcy procedures force viable but insolvent firms to restructure out of court, where banks may have a bargaining advantage over other creditors. We model the choice of restructuring process and derive implications for the corporate mix of bank and bond financing. Empirical patterns match the model: inefficient bankruptcy in a country is associated with less bond issuance by risky, but not by safe, borrowers there. This pattern holds for both levels and changes in bankruptcy recovery. Our results establish a link between bankruptcy reform and corporate bond markets, especially high yield markets.
... Average recovery rates for financial claimants in a relatively simple bankruptcy range from negligible to above 90%, according to Djankov et al. (2008). 3 Such differences in bankruptcy recoveries can be traced to poor liquidation decisions by courts, sluggish and bureaucratic decision making in Bhagat and Frost (1986), Smith (1986), Blackwell and Kidwell (1988), and Carey et al. (1993). Our empirical tests do not cover monitoring outside of distress at all. ...
In many countries, bankruptcy is associated with low recovery by creditors. We develop a model of corporate credit markets in such an environment. Corporate credit is provided by either a bond market or risk-averse banks. Restructuring of insolvent firms happens out of court if in-court bankruptcy is inefficient, giving banks an advantage over bondholders. Riskier borrowers will use bank loans anywhere, but also bonds when bankruptcy is efficient. The model matches empirical debt mix patterns better than fixed-issuance-cost models. Across systems, efficient bankruptcy should be associated with more bond issuance by high-risk borrowers. This effect is small or absent for safe firms. We find that both predictions hold both cross-country and using insolvency reforms as natural experiments. Our empirical estimates suggest that a one-standard-deviation increase in the efficiency of bankruptcy is associated with an increase in the stock of corporate bonds equal to 5% of firm assets. This is equivalent to two thirds of the difference between the US and other countries.
... Where venture capital is dominant, new start ups from reputable labs and universities can often finance higher risk-taking in return for higher returns. Where investment funding for small firms is underdeveloped, new firms tend to rely considerably on the funds of the owners and business 'angels' (Carey et al., 1993). Venture capital normally accepts intangible assets for funding, as long as the reputation of the "technopreneur" or the organization he or she comes from is known. ...
... Public bonds are also issued significantly more often than private bonds, with over 82% multiple issues in comparison to 53% multiple issues of private bonds. These differences in size and issuance frequency are consistent with firms issuing greater amounts to take advantage of the economies of scale in public debt issues (Blackwell and Kidwell, 1988; Carey et al.,1993). About 80% of the private placements in our sample are high yield issues, in comparison to only 17% in the public bonds sample. ...
... Finalement, les coûts fixes d'émission sont un paramètre important à considérer. Les petites entreprises peuvent opter rationnellement pour de la dette bancaire dans la mesure où les émissions publiques impliquent des coûts fixes (syndication , rating) trop élevés (Detragiache, 1994 ;Easterwood et Kadapakkam, 1991 ;Carey et al., 1993). ...
Résumé Dans ce travail, nous modélisons la complémentarité entre dette bancaire et dette obligataire dans un contexte où les banques se caractérisent par leur supériorité en matière d'évaluation des emprunteurs. Les entreprises peuvent signaler leur qualité au marché obligataire en recourant à de la dette bancaire. Un tel signal est coûteux dans la mesure où la banque utilise sa position dominante pour extraire une partie du surplus généré par le projet de l'entreprise. Nous montrons dans ce cadre que la part du financement bancaire est croissante avec la qualité des firmes. Nous étudions ensuite l'arbitrage entre un financement mixte (bancaire et obligataire) et un financement obligataire pur. Nous montrons alors que le marché obligataire est sollicité en tant que mode de financement unique, à la fois par les firmes de moindre qualité qui répugnent à se signaler, et par les meilleures qui y trouvent un mode de financement moins onéreux ; les firmes de qualité moyenne préfèrent négocier un financement mixte, bancaire et obligataire, tel que la part de la dette bancaire est alors croissante avec la qualité de la firme.
... A higher cash-flow is expected to reduce a lenders' perceived risk as these firms are more likely to be able to service their debts. Larger firms are expected to be associated with lower costs of debt as they are perceived as less risky by virtue of their having more assets in place and greater opportunities for economies of scale (Carey et al., 1993). The association between cost of debt and property plant and equipment is expected to be negative as borrowers with PPE are in a better position to provide security on their loans. ...
This paper investigates the association between Malaysian politically connected (PCON) firms and the cost of debt. We extend previous research that finds Malaysian PCON firms are perceived as being of higher risk by the market, and by audit firms, by providing evidence that lenders also perceive these firms as being of higher risk. We also find that PCON firms have a significantly (1) higher extent of leverage, (2) higher likelihood of reporting a loss, (3) higher likelihood of having negative equity, and (4) higher likelihood of being audited by a big audit firm. We suggest that PCON firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks. Additionally, we find that CEO duality present in PCON firms is perceived by lenders as being more risky, and that a higher proportion of independent directors on the audit committee mitigate this perceived risk. (C) 2012 Published by Elsevier B.V.
... The author suggests that in a high-growth, high-risk environment, such as the Brazilian, restrictive covenants are too costly to employ, and he cites that contract flexibility " provides the freedom required to address the needs of those that must raise capital as well as the desires of those who wish to invest " (p.47). 23 Gilson, John, and Lang (1990) and Carey, Prowse, Rea, and Udell (1993). 24 Nash, Netter, and Poulsen (2003 provide a detailed discussion of costs and benefits of covenants. ...
Are restrictive covenants effective mechanisms in mitigating agency problems? Is the magnitude of the increase in the cost of debt due to agency problems non-trivial? We tackle these questions using a large dataset of public bonds. Contrary to the view that covenants in public bond contracts are standard boilerplates that serve little purpose, we find significant benefits in terms of reduction in the cost of debt associated with covenants. Restrictions on investment activities or financing activities, for example, reduce the cost of debt by about 50-70 basis points. These findings suggest that investors view covenants as important instruments in mitigating agency problems, and an increase in the cost of debt due to agency problems could be substantial. The findings also confirm a link between accounting information and the cost of debt. We also find that high growth firms and firms with low probability of default are less likely to include covenants suggesting that the costs of covenants outweigh benefits for these types of firms.
The article presents a comparative analysis of private equity (PE) investments in 13 Asian-Pacific and 19 European economies over the period of twenty-nine years from 1990 to 2017 using the fixed effects estimation technique. Results show that ICT, investment profile, human capital, and market capitalization are the strong positive determinants of PE in all the samples. For the rest of the variables, there are significant differences between the two regions. Population growth and real interest rate exert significant influence in the overall samples as well as in the Asia-Pacific region while real exchange rate, unemployment, and tax burden play significant role in the Europe. The article contributes to the PE literature by filling the regional gap and offering new insights into the previously contested results.
We examine how small and medium‐sized enterprises (SMEs) may signal their quality and growth orientation to the market and the effect on the cost of bond funding, which is often high for unlisted firms and SMEs mainly because of their information opacity and higher riskiness. The paper contributes to the growing European debate on market innovations aimed at facilitating funding for smaller and nonlisted firms, breaking from the prior main focus on the cost for large and listed companies of accessing liquid bond markets. We analyze 220 mini‐bonds listed in Italy between 2013 and 2017 to examine determinants of yield spreads. Our explanatory variables are size, age, and tangible assets—all indicators of the firm's information opacity—together with the issuer's growth opportunities, rating availability, and the presence of a guarantee. The findings suggest that tangible assets can ease the asymmetric information and associated monitoring costs for investors, thus reducing the bond yield spread. More significantly, the yield spread depends on the type of investment project financed: risky growth projects are associated with a higher cost of funding than other types of projects. Under such circumstances, the rating represents an informative instrument for the market in assessing issuers' growth orientation.
Beginning with classical theories on finance, such as the capital structure theory, the trade-off theory of capital structure, and the pecking order theory, the literature shows a negative correlation between tax avoidance and institutional ownership with respect to the business cost of debt. However, the impact of tax avoidance and institutional ownership on corporate debt policy in Vietnam is an under-researched topic. The aim of the study is to identify the effect of those mentioned factors on business borrowing policy, using data on 207 companies listed on the Ho Chi Minh City Stock Exchange (HOSE) in Vietnam from 2008 to 2016. The study employs model proposed by Lim in 2009 to achieve mentioned research object with Feasible Generalized Least Squares (FGLS) method to overcome for any defection. The study results show no conclusive empirical evidence of a relationship between business’s cost of debt and tax avoidance and institutional ownership. This result contrasts with the conclusion in previous studies and can be explained by the characteristics of the funding market in Vietnam where financial organizations often focus on business results and management efficiency in making lending decisions and this characteristic is at no sign of change soon.
This paper investigates the risk of failure of loans guaranteed by public credit guarantee schemes. We analyse the determinants of the time to default of approximately 15,000 loans guaranteed by the Italian Central Guarantee Fund between 2007 and 2009. Using the Cox proportional hazards model, we test the role of the financial intermediary that requests the guarantee on a firm’s behalf, while distinguishing between banks and mutual guarantee institutions (MGIs) and controlling for a set of variables that characterise each guaranteed loan. The findings confirm that loans are more likely to default when a bank—rather than an MGI—is involved in the guarantee process. Considering some elements (e.g. age, size and sector) that affect opacity among small- and medium-sized enterprises (SMEs), banks seem to perform better than MGIs in screening and monitoring loans requested by firms in the manufacturing sector.
Recent studies have found that disruptive technologies, such as FinTech, have the potential to overturn existing business models and overthrow incumbents. These studies have demonstrated that newly emerging digital platforms financing early-stage ventures threaten traditional venture capital (VC). We argue that, conversely, VC benefits from advances in information and communication technology (ICT), as ICT fosters entrepreneurship and mitigates agency issues in VC deals. This paper examines the impact of digitization on VC investments from 23 European countries spanning 2007–2019 using a dynamic panel two-step system generalized method of moments (GMM) estimation technique. The results show that the factors “ICT penetration” (a general measure of societal internet and computer access and use) and “digital economy” (a measure of ICT-powered economic activity) exert significant and positive effects on early-stage, later-stage, and total VC investments. Moreover, availability of bank credit moderates the effect of digital economy on VC investment. Finally, this study reveals that it is digital entrepreneurship (as reflected in our “digital economy” measure), and not total entrepreneurial activity, that attracts VC investment. We conclude that the VC industry is aligned with rather than threatened by the newly emerging digital environment. The empirical results are robust to different control variables and data sources. This paper offers useful implications for policy and contributes to the literature on digital entrepreneurship and venture capital.
This paper provides evidence on the likelihood of formal finance usage among innovative small and medium enterprises (SMEs) operating in ASEAN countries. To this end, the SMEs are classified into four categories, namely non-innovators and product, process, and product-and-process innovator SMEs. Subsequently, a propensity score weighting (PSW) analysis is performed to adjust for diversity existing across innovative SMEs. The resulting propensity scores are further used to perform the causal effect analysis based on the average treatment effect (ATE) approach, which measures the likelihood of formal finance usage among different types of innovative SMEs. Our ATE results reveal that SMEs simultaneously engaged in product and process innovation show a higher likelihood of using formal finance than non-innovators. However, formal finance usage of SMEs perusing only product/service or process innovation is not any different from non-innovators. Furthermore, our pairwise analysis shows that product and process innovators also exhibit a higher likelihood of formal finance usage than product/service or process innovators. Besides, younger and medium-size product and process innovating SMEs are more likely to use formal finance. These results are robust for different subsamples and firm- and country-level controls.
We study whether firms spread out debt-maturity dates, which we call granularity of corporate debt. In our model, firms that are unable to roll over expiring debt need to liquidate assets. If multiple small asset sales are less inefficient than a single large one, it can be optimal to diversify debt rollovers across time. Using a large sample of corporate bond issuers during the 1991–2012 period, we establish novel stylized facts and evidence consistent with our model’s predictions. There is substantial heterogeneity (i.e., firms have both concentrated and dispersed debt structures). Debt maturities are more dispersed for larger and more mature firms and for firms with better investment opportunities, higher leverage, and lower profitability. During the recent financial crisis, firms with valuable investment opportunities implemented more dispersed maturity structures. Finally, firms manage granularity actively and adjust toward target levels.
Global rating agencies, such as Moody's and S & P, have assigned credit ratings to corporate bonds issued by Japanese firms since 1980s. Local Japanese rating agencies, such as R & I and JCR, have more market share than the global raters. We examine the yield spreads of 1,050 yen-denominated corporate bonds issued by financial firms in Japan from 1998 to 2014 and find no evidence that bonds rated by at least one global agency are associated with a significant reduction in the cost of debt as compared to those rated by only local rating agencies. Unlike non-financial firms, the reputation effect of global rating agencies does not exist for Japanese financial firms. We also observe that firms with less information asymmetry are more likely to acquire ratings from Moody's or S & P. Additionally, the firm's financial profile does not affect its choice to seek out ratings from global raters. Our findings are contradictory to those by Han, Pagano, and Shin (2012), who employ bonds issued by non-financial firms in Japan. Our conjecture is that the asymmetric nature of financial firms makes investors less likely to depend on a credit risk assessment by rating agencies in determining the yields of new bonds.
In this chapter we are interested in the impact of specific microstructure criteria of emerging markets in the financing of SMEs especially in risk measures. The main risk measurement tool is the Value-at- Risk (VaR) which is recommanded by the Basel II Committee on Banking Supervision (BCBS). The recommendations of the Basel II committee give financial institutions the freedom to develop their own Value-at-Risk model of risk measurement in order to calculate their capital requirements for financial risk. The Basel II committee recommends the use of back testing in order to validate the choice of the best method. In order to finance SMEs enterprises in emerging market we must consider the specific microstructure criteria of these emerging markets such as low liquidity, very pronounced asymmetric information, over predictability and high volatility how affects the risk estimation.
In this chapter we are interested in the impact of specific microstructure criteria of emerging markets in the financing of SMEs especially in risk measures. The main risk measurement tool is the Value-at-Risk (VaR) which is recommanded by the Basel II Committee on Banking Supervision (BCBS). The recommendations of the Basel II committee give financial institutions the freedom to develop their own Value-at-Risk model of risk measurement in order to calculate their capital requirements for financial risk. The Basel II committee recommends the use of back testing in order to validate the choice of the best method. In order to finance SMEs enterprises in emerging market we must consider the specific microstructure criteria of these emerging markets such as low liquidity, very pronounced asymmetric information, over predictability and high volatility how affects the risk estimation.
Mounting evidence indicates that firms, particularly SMEs, suffered from a significant credit crunch during this crisis. We analyze for the first time whether trade credit provided an alternative source of external finance to SMEs during the crisis. Using firm-level Spanish data we find that credit constrained SMEs depend on trade credit, but not bank loans, and that the intensity of this dependence increased during the financial crisis. Unconstrained firms, in contrast, are dependent on bank loans but not on trade credit.
In many countries, poorly functioning bankruptcy procedures force viable but insolvent firms to restructure out of court, where banks may have a bargaining advantage over other creditors. We model the choice of restructuring process and derive implications for the corporate mix of bank and bond financing. Empirical patterns match the model: inefficient bankruptcy in a country is associated with less bond issuance by risky, but not by safe, borrowers. This pattern holds for both levels of and changes in bankruptcy recovery. Our results establish a link between bankruptcy reform and corporate bond markets, especially high-yield markets.
Received September 29, 2014; accepted February 1, 2016 by Editor David Denis.
We examine the choice of borrowing source among public debt, syndicated bank loans, bilateral bank loans and non-bank private debt. Using a sample of 400 non-financial firms over the period 2000–2012, we find strong support for the reputational theory of borrowing source. Larger firms are more likely to borrow in public debt markets. Bank dependent firms are less likely to borrow in public debt markets and choose between bank and non-bank private debt based on maturity, collateral available to lenders and other firm characteristics. These results are consistent with the role of borrower reputation being the primary determinant of borrowing source for UK listed firms.
This paper examines the issue of the impact of the consolidation of the U.S. banking industry on the supply of bank credit to small businesses. It reviews the popular argument that bank mergers and acquisitions create larger institutions that may be less inclined to lend to small business. In particular, these institutions may lose their local community identity and refocus their franchises toward providing capital market services to large corporate clientele. Theoretical arguments that provide economic content to this view are synthesized. The paper then reviews the extant empirical literature which generally provides support for the contention that larger banks, and the merger of larger banks, are associated with a lower allocation of bank assets to small business lending. However, the empirical evidence also suggests that increased lending by other banks in the local market, as well as other factors, may likely offset reductions in small business lending by the consolidating institutions.
Using unique Australian data we examine the choice of issuance mechanism for unseasoned equity (between initial public offers and direct placements) prior to exchange listing. Controlling for liquidity in the decision to go public and incorporating interrelated decisions, we find that corporate control concerns and expected underpricing differences between initial public offers and direct placements play an important role. Also the probability of an initial public offer (direct placement) decreases (increases) with information asymmetry and the reputation of the issuer. Further, the choice of issuance mechanism and the underpricing, issue size and ownership retention decisions are interrelated. (c) 2005 Elsevier B.V All rights reserved.
Over recent years important changes have taken place in the Spanish banking sector, requiring banks to adopt adequate strategies. Commercial and savings banks have faced new problems posed by the dynamics of the environment and have anticipated new directions in the banking business. In the sequence cause-effect-response it is possible to consider features that are common to the whole banking sector as well as others that differ by firm.
The post-crisis and regulatory changes face banks with a new framework, replacing financial performance at the heart of their model. With the exception of risks associated with proprietary financial transactions, effects of the structure of income on the profitability and the stability of results, however, are debated. This doctoral study proposes a further research on bank performance through the influence of economic and financial markets conditions. Such influence is little explored beyond credit risk and trading. Economic and financial markets conditions may explain significant variations for most components of earnings. Hence appraising possible earnings, and more broadly measuring uncertainties, require the consideration of the whole income structure as well as of volatilities and correlations of influencing variables.Further on a strategic level, the research then turns to the estimation of the performance, owing to the environment, of "traditional" banking services and of customers' financial services. Finally, expectations of performance (profitability, volatility) as well as possible deviations are assessed throughout multiple scenarios. It appears that diversification into customers' financial services, and prudent interest rate mismatch strategies, improve performance related to traditional banking services alone. Further, the overall uncertainty of performance associated with such a diversified bank seems to be contained when weighted by expected benefits. The influence of economic and financial conditions is exogenous; results however suggest that the choice of the business mix may provide with opportunities for risk mitigation and enhancement of risk-return.
This paper extends prior work on the linkage between politically connected (PCON) firms and capital structure in developing countries. Specifically, this paper focuses on the association between Malaysian PCON firms and leverage, and is motivated by the results of Fraser et al. (2006) who report a positive association between leverage and political patronage. Controlling for a potential misspecification in that paper, this study documents that a significant proportion (almost 12%) of the Malaysian PCON firms have negative equity, and builds on the previous paper by providing fresh evidence that market to book ratio is positively associated with leverage, and that borrowing PCON firms have significantly lower ROA compared to non-PCON firms.
This paper uses survival analysis to investigate the timing of a firm’s decision to issue for the first time in the public bond market. We find that firms that are more creditworthy and have higher demand for external funds issue their first public bond earlier. We also find that issuing private bonds or taking out syndicated loans is associated with a faster entry to the public bond market. According to our results, the relationships that firms develop with investment banks in connection with their private bond issues and syndicated loans further speed up their entry to the public bond market. Finally, we find that a firm’s reputation has a “U-shaped” effect on the timing of a firm’s bond IPO. Consistent with Diamond’s reputational theory, firms that establish a track record of high creditworthiness as well as those that establish a track record of low creditworthiness enter the public bond market earlier than firms with intermediate reputation.
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