Corporate Finance

This article studies whether the volume and composition of capital flows affect the degree of credit crunch during the 2007–2009 crisis. Using data on 3,823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. Interestingly, while the volume of capital flows per se has no significant effect, the composition matters a lot.

Standard valuation models forecast cash flows or earnings, add a growth rate, and discount the cash flows to their present value with a discount rate that typically reflects the cost of capital. But as the author argues, projecting the long-term growth rate is essentially speculative; and along with uncertainty about the growth rate, analysts generally do not have a good grasp of the discount rate either.

This paper exploits India's rapid, comprehensive and externally imposed trade reform to establish a causal link between changes in tariffs and firm productivity. Pro-competitive forces, resulting from lower tariffs on final goods, as well as access to better inputs, due to lower input tariffs, both appear to have increased firm-level productivity, with input tariffs having a larger impact. The effect was strongest in import-competing industries and industries not subject to excessive domestic regulation.

The empty creditor problem arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy. We analyze this problem from an ex-ante and ex-post perspective in a formal model of debt with limited commitment, by comparing contracting outcomes with and without insurance through credit default swaps (CDS).

Blight findings have functioned as a cornerstone for condemnation since the great urban decline of the mid-twentieth century prompted governments at all levels throughout the country to intervene in the real estate market. Elements of blight, and then the term itself, became a basis for this intervention. But the use of blight as a basis for takings has become increasingly controversial as its application has migrated from slum clearance to urban renewal, then to economic development projects, and on to revenue-enhancing projects.

A major governance problem in closely-held corporations arising from the illiquidity of shares is the majority shareholders' expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large dataset of closely-held corporations. We find that shared-ownership firms report substantially larger return on assets (up to 14 percentage points) and lower expense-to-sales ratios.

Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization.

One of the most important features of securitization is the ability to create securities whose credit risk is based on the quality of a pool of loans rather than the credit risk of the lender who originated the assets. However, the recent failure of many specialized lenders who relied on securitization, and the subsequent extremely poor performance of their securities, raises the question whether the performance of the security can be separated from the financial condition of its sponsor.

This paper examines whether underwriters of prime mortgage-backed securities exploit private information when trading in the secondary market. While underwriters bid on more than 83 percent of their own tranches, the tranches they avoid bidding on have fewer bidders and exhibit worse-than-average ex-post performance. Most strikingly, when an underwriter declines to submit a bid at a secondary market sale, 30-day delinquent loans are about 3 times as likely to roll to 60-days delinquent in the next month compared to pools where the underwriter bids.