2022 RCFS Winter Conference
February 19-20, 2022
Margaritaville Hollywood Beach Resort, Florida
RCFS Sponsoring Editors: Andrew Ellul, Isil Erel, Camelia Kuhnen, Robert Marquez
Call for Papers
Submission Deadline: November 19, 2021
Call for Registered Reports/Proposals on “Finance for the Greater Good”
Submission Deadline: December 5, 2021
The Paycheck Protection Program (PPP), with over $500 billion distributed over a few months in 2020, was one of the largest stimulus programs in U.S. history. The program was created to help “small businesses” survive the COVID-19 shock. However, in a forthcoming RCFS paper, “Public Firm Borrowers of the U.S. Paycheck Protection Program,” Anna Cororaton and Samuel Rosen document that nearly half of U.S. public firms were eligible for the Paycheck Protection Program (PPP) in 2020 and almost half of those eligible public firms chose to borrow! Nonetheless, loans to public firms comprised a very small fraction of total PPP funds (<0.3%). Even though most public borrowers of the PPP loans were smaller with less cash, higher leverage, and fewer investment opportunities, 13.5% of them ended up returning their loans facing public backlash. In addition, their firm values declined upon PPP loan announcement, and they grew slower in 2020 relative to nonborrowers. Overall, authors show that concerns of reputational harm and negative signaling appear to affect public firms’ participation in government funding.
Spotlight by Isil Erel
Photos courtesy of Anna Cororaton and Samuel Rosen
Risk taking by banks has been discussed extensively by researchers and policy makers for many years, even preceding the Great Recession. Literature has focused on two mechanisms that alter banks’ risk-taking behavior: higher regulatory capital ratios and higher competition due to bank deregulation. But, how does a bank’s equity capital ratio interact with banking competition in their impact on risk taking? In a forthcoming RCFS paper, “Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior,” Jia Hao and Kuncheng Zheng explore the answer to this important question and provide interesting findings. While competition in the banking market mitigates banks’ risk-taking behavior on average, banks’ ex- ante equity capital ratio can alter this relationship. Authors show that increased competition leads to relatively larger reductions in risk taking–especially in their lending portfolios–only by banks with low ex-ante equity capital ratios. This difference between high- and low-capital banks in risk-taking behavior cannot be explained by pre-existing trends, geographical location, or other bank characteristics, such as size, that may influence bank risk-taking. Overall, this paper shows us that a bank’s capital ratio has not only a direct effect but also an indirect effect on its risk taking. Therefore, this indirect effect should be considered in using capital requirements to mitigate risk taking by banks.
Spotlight by Isil Erel
Photos courtesy of Jia Hao and Kuncheng Zheng
First published July 2, 2021
Edith S. Hotchkiss
David C. Smith
Leveraged buyouts by private equity funds have been a constant, and growing, phenomenon in corporate finance over the last two decades and their importance is likely to increase in the post-COVID world. Empirical literature on this subject has explored various angles, but one unanswered question is whether the high leverage used in private equity (PE) buyout transactions contributes to the disproportionately high default rates among buyout targets. In the paper “Private Equity and the Resolution of Financial Distress,” Edith S. Hotchkiss, Per Strömberg and David C. Smith investigate how PE ownership correlates with the probability of default and resolution of financial distress, a relationship that is, theoretically speaking, unclear. One can argue that actions that boost the short-term returns to PE owners, increasing leverage to pay large dividends as an example, could drain liquidity and put PE-owned firms at higher default risk. But there is an opposite argument to be made as well: PE sponsors could help avoid defaults or resolve financial distress, thus preserving firm value, because of their expertise and skill. The authors find a series of interesting results that will help the literature understand better this relationship. First, they find that PE-backed firms have higher leverage and default at higher rates than other companies borrowing in leverage loan markets. This said, conditional on contemporaneous leverage, default rates are not significantly higher for PE-owned firms. These results suggest that it is leverage, rather than PE-backing specifically, that could be the key driver of default probabilities. Second, among leveraged borrowers that experience a default, PE-backed firms restructure more quickly and are less likely to be liquidated. Third, PE owners are more likely to retain control post-restructuring than other pre-default owners, often by infusing capital as firms approach distress. Overall these results suggest a very nuanced view of PE investors and their potential impact on subsequent target firms’ default: while PE investors contribute to more defaults due to the high leverage they put on companies’ balance sheets, such cost is reduced by the PE investors’ intrinsic abilities and skills in dealing with and managing financial distress.
Spotlight by Andrew Ellul
Photos courtesy of Edith S. Hotchkiss, David C. Smith, and Per Strömberg
“Corporate Transactions in Hard-to-Value Stocks” by Itzhak Ben-David, Byungwook Kim, Hala Moussawi, and Darren Roulstone
We’re happy to announce that the Associate Chair for SFS Cavalcade North America 2022 will be Jules van Binsbergen (The Wharton School, University of Pennsylvania). Professor van Binsbergen joins Chair Andrea Eisfeldt (UCLA) and Vice Chair Victoria Ivashina (Harvard Business School).
“Sharing R&D Risk in Healthcare via FDA Hedges” by Adam Jorring, Andrew Lo, Tomas J. Philipson,
Manita Singh, and Richard T. Thakor
“Information asymmetry, financial intermediation, and wealth effects of project finance loans” by Andrew Ferguson and Peter Lam
Murray Z. Frank
Despite the large theoretical literature that asserts the importance of taxes on corporate investment and financing decisions, the empirical literature often fails to demonstrate the effects of taxes in a convincing way. One reason for the discrepancy could be measurement error in variables. In “The Effect of Taxation on Corporate Financing and Investment,” Hong Chen and Murray Z. Frank take issue with the theoretical predictions themselves. They construct a model with a household and a firm that are both infinitely-lived. The government collects taxes from both parties. In the steady-state equilibrium of the model, many personal taxes are irrelevant to corporate decision-making, and other forms of taxation affect particular corporate decisions only. Specifically, (i) a small change in many personal taxes (including on consumption, dividend, or capital gains) has no effect on the firm’s investment or financing policies, (ii) a small change in the personal tax on interest income affects leverage but not investment, and (iii) a small change in the corporate tax rate affects leverage and investment, but not the interest rate on corporate debt. The first-order conditions pin down the optimal policies of the firm and the consumer, and the authors show that in a steady-state equilibrium, these conditions are not affected by some of the tax rates (significantly, including the dividend tax rate). A numerical example shows the change in the steady-state equilibrium outcomes to a change in various tax rates. If the theory on tax effects does not match the data, perhaps the theory needs to be reconsidered, and this paper represents an important step in that direction.
Spotlight by Uday Rajan
Photos courtesy of Hong Chen and Murray Z. Frank
“P2P Lenders versus Banks: Cream Skimming or Bottom Fishing?” by Calebe DeRoure, Loriana Pelizzon, and Anjan V. Thakor
The Call for Papers for the ECGI Corporations and COVID-19 conference is now available. The conference, which features a dual submission option with RCFS and RFS, will take place June 2, 2022. The RCFS sponsoring editor is Andrew Ellul and the RFS sponsoring editors are Itay Goldstein and Holger Mueller. The submission deadline is October 29, 2021. For more details, please see the ECGI website.