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We develop a dynamic model of investment, financing, and cash management decisions in which investment is lumpy and firms face capital supply uncertainty. We characterize optimal policies explicitly, demonstrate that smooth-pasting conditions may not guarantee optimality, and show that firms may not follow standard single barrier policies. In the model, firms with high investment costs differ in their behaviors from firms with low investment costs, financing policy does not follow a strict pecking order, and the optimal payout policy may feature several regions with both incremental and lumpy dividend payments.

The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries.

We use randomized grants to generate shocks to capital stock for a set of Sri Lankan microenterprises. We find the average real return to capital in these enterprises is 4.6%-5.3% per year), substantially higher than market interest rates. We then examine the heterogeneity of treatment effects. Returns are found to vary with entrepreneurial ability and with household wealth, but not to vary with measures of risk aversion or uncertainty. Treatment impacts are also significantly larger for enterprises owned by males; indeed, we find no positive return in enterprises owned by females.

Insolvency practitioners from 88 countries describe how debt enforcement will proceed against an identical hotel about to default on its debt. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern vs. piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. This measure is strongly correlated with per capita income and legal origin and predicts debt market development. Several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, influence efficiency.

Does bank branch density matter for the conservative financing puzzle? This paper looks at the importance of nearby physical banking services to the decision to eschew debt among SMEs. Our multivariate logistic models rely on recent information from Portugal, a small open bank-based European economy, and control for firm-level and municipality-level effects. We show that banks' branch density at the municipality level increases the odds of local SMEs following a conservative financing policy. However, the weight of local cooperative bank branches relates negatively to the odds of not using debt. Several robustness checks concerning sampling procedures, estimation methods, and variables’ definitions corroborate our baseline results. Moreover, our results show that the effect of bank branches on the decision to eschew debt is economically more relevant for the long-term than the short-term debt.Plain English SummaryHigher bank branch density fosters the decision to avoid debt among SMEs in a given municipality. Based on multivariate logistic models and recent information from Portugal, a small open bank-based European economy, and controlling for firm-level and municipality-level effects, we show that bank branch density at the municipality level increases the odds of local SMEs following a conservative financing policy, an effect that is most pronounced for long-term debt. Several robustness checks confirm our baseline results. We highlight two main implications of our study. First, SMEs should not ignore the potential benefits of using debt taking for granted the greater availability of credit suggested by the higher density of bank branches. Second, in the current context of increased digitalization of the financial services market, firms should recognize banks’ digital information channels as a feature of the business environment, so as not to be ignored in the credit market.

This paper investigates the joint effects of manager–shareholder agency conflicts and macroeconomic risk on corporate policies and firm value. I first derive the implications of a structural model of a firm with assets in place and an investment opportunity, run by a self-interested manager who captures part of the firm’s net income as private benefits. The model implies that dynamic aggregate agency costs are driven by firms in the upper half of the distribution of private benefits. Managers of those firms capture 0.8% of firms’ net income on average, thereby decreasing aggregate firm value by 1.7%. These agency costs are procyclical (1.9% in booms and 1.4% in recessions) because managerial underleverage decreases default costs particularly in recessions. Furthermore, the model can explain empirical regularities, including the joint level and cyclicality of leverage. The Internet appendix is available at https://doi.org/10.1287/mnsc.2017.2813 . This paper was accepted by Gustavo Manso, finance.

Under the traditional “competition-fragility” view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative “competition-stability” view, more market power in the loan market may result in higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. Even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. We test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. Our results suggest that—consistent with the traditional “competition-fragility” view—banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the “competition-stability” view—that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.

Although research shows that financial development accelerates aggregate economic growth, economists have not resolved conflicting theoretical predictions and ongoing policy disputes about the cross-firm distributional effects of financial development. Using cross-industry, cross-country data, the results are consistent with the view that financial development exerts a disproportionately positive effect on small firms. These results have implications for understanding the political economy of financial sector reform.

PurposeThis paper studies the impact of societal trust on the conservative financing policy puzzle, aiming to cover a gap in the relationship between cultural values and the conservative financing policy.Design/methodology/approachWe use a sample of 14,509 privately held medium-sized manufacturing firms from 26 European countries between 2015 and 2020 and rely on logistic regression methods controlling for firm-specific and macroeconomic factors.FindingsWe show that societal trust decreases the odds of being a zero-leverage or almost zero-leverage firm. Also, the probability of being a conservatively financed firm increases for older and more profitable firms and decreases with tangibility. In more trustworthy national environments, firms are less averse to debt as a source of financing. Our results are robust to the specific measure of trust, estimation methods, sampling procedures, and annual financial constraint status. Moreover, we show that the effect is noticed both in the long-term debt and the short-term debt with a lower economic impact in the latter situation and that increased societal trust attenuates (reinforces) the effect of being a financially constrained (unconstrained) firm on the odds of adopting a conservative financing policy.Research limitations/implicationsSocietal trust strategically impacts debt financing policy and could help foster firms’ growth, particularly for those facing heavier financial constraints.Originality/valueNovel evidence on the impact of societal trust on the conservative financing policy, for privately held medium-sized European firms.

U.S. corporate sponsors of defined benefit (DB) pension plans in recent years have been de-risking by paying premiums to transfer their pension plan assets and liabilities to the balance sheets of third-party insurers. The passage of the Moving Ahead for Progress in the 21st Century Act (MAP-21) in 2012 provided the pension funding relief necessary to make de-risking a mainstream corporate activity. This study provides the first empirical analysis of plan and firm factors that cause a firm to de-risk its DB pension plans. We find a positive association between de-risking and aggregate corporate risk-taking. The results also show that de-risking, on average, has a stronger effect on corporate financing policy than investment policy, leading to an increase in credit risk reflected in a firm's credit rating and cost of debt. Also, we present suggestive evidence that the reallocation of pension risk increases firm idiosyncratic risk and excess returns.