The uniqueness of short-term collateralization

The author finds evidence that lines of credit secured by accounts receivable are associated with business borrowers with a high risk of default. While an unsecured short-term loan is repaid from the borrower's future cash flow, a loan secured by accounts receivable (a unique form of"inside"collateral) is repaid from previously generated and observed sales (the borrower's trade credit terms to its customers). Consequently, lenders that secure accounts receivable are most concerned with the credit risk of the borrower's customers and the borrower's ability to continue to generate new sales. A stylizedtheoretical model demonstrates that the value of a secured line-of-credit loan in minimizing contracting costs is associated with the borrower's business risk and the quality of the borrower's customers. Empirical tests on a sample of publicly traded U.S. manufacturing firms find that firms with secured line of credit loans are observably riskier and have fewer expected growth opportunities. The author's findings suggest that observably riskier borrowers can borrow more on a secured than on an unsecured basis. The results highlight the important role of secured letters of credit in providing liquidity to risky, credit-constrained firms that might not have access to external financing through other channels.Banks&Banking Reform,Economic Adjustment and Lending,Economic Theory&Research,International Terrorism&Counterterrorism,Business in Development

The impact of the financial crisis on new firm registration

The authors use panel data on the number of new firm registrations in 95 countries to study the impact of the business environment and 2008 financial crisis on new firm registration. The data show that more dynamic formal business creation occurs in countries that provide entrepreneurswith a stable legal and regulatory regime, fast and inexpensive business registration process, more flexible employment regulations, and low corporate taxes. The data also show that nearly all countries experienced a sharp drop in business entry during the crisis. This drop is more pronounced in countries with higher levels of financial development and countries more affected by the crisis.Governance Indicators,E-Business,Emerging Markets,Environmental Economics&Policies,Economic Theory&Research

Taxation and capital structure : evidence from a transition economy

The authors examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a natural experiment. Since the extant literature on tax effects on capital structure studies listed firms in developed countries, it is worth investigating whether the same results apply to privately-held, small and medium size firms in transition economies. The findings provide significant evidence that lower taxes have affected the capital structure of Croatian firms, resulting in increased equity levels and decreased long-term debt levels. The authors also find that smaller and more profitable firms weremore likely to reduce their debt levels. These findings are consistent with the trade-off theory of capital structure, which suggests that lower taxes decrease the incentive to hold debt due to decreasing interest tax deductibility.Debt Markets,Taxation&Subsidies,Emerging Markets,Banks&Banking Reform,Access to Finance

Patterns of business creation, survival and growth : evidence from Africa

The authors study firm dynamics using a novel database of all formally registered firms in Cote d'Ivoire from 1977 to 1997, which account for about 60 percent of gross domestic product. First, they examine entry and exit patterns and the role of new and exiting firms versus incumbents in job creation and destruction. They find that while the rate of job creation at new firms is quiet high -- at 8 percent on average -- the number of jobs added by new firms is small in absolute terms. Next, they examine survival rates and find that the probability of survival increases monotonically with firm size, but manufacturing and foreign-owned firms face higher likelihoods of exit compared with service oriented and domestically owned firms. They find that higher growth of gross domestic product increases the probability of firm survival, but this is a broad impact with no firm size disproportionately affected. In robustness checks, they find that after 1987 size is no longer a significant determinant of firm survival for new entrants, suggesting that the operating environment for firms changed. Finally, they find that trade and fiscal reform episodes raised the probability of firm exit and attenuated the survival disadvantages faced by smaller firms, but exchange rate revaluation and pro-private sector reforms did not significantly lower the likelihood of exit.Microfinance,Environmental Economics&Policies,Labor Markets,Small Scale Enterprise,Economic Theory&Research

Insolvency laws around the world - a statistical analysis and rules for their design

Insolvenzrecht, Welt, Konkurs, Bankruptcy law, World, Bankruptcy

Ownership structure and initial public offerings

The authors study the relationship between ownership structure, corporate governance, and the initial public offering (IPO) process. They examine equity ownership by different institutions, such as foreign and domestic financial institutions, banks with and without lending relationships, venture capitalists, and corporations prior to an IPO. The authors also analyze the relationship between ownership structure and corporate governance. They use a unique dataset of 152 Indian IPOs during the period 1999-2001 to analyze ownership of shares by main groups of shareholders. The authors find a relationship between ownership structure and firm-specific factors such as sales, leverage, and profitability, and IPO characteristics such as percentage of equity locked up, gross proceeds, and exchange of listing. There is also a strong relationship between ownership by different types of institutions. Ownership is also tied to bank lending relationships. Finally, the authors find strong relationships between ownership types and corporate governance. For example, firms with foreign investors are more likely to have an outside chief executive officer and offer an employee stock option plan.Economic Theory&Research,International Terrorism&Counterterrorism,Small Scale Enterprise,Financial Intermediation,Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Economic Theory&Research,Financial Intermediation,Financial Crisis Management&Restructuring,Microfinance

Financial Literacy and Retirement Planning in View of a Growing Youth Demographic: The Russian Case

Our study contributes to the financial literacy literature by examining its association with retirement planning in an interesting and novel context, i.e. that of a country with a relatively old and rapidly ageing population, large regional disparities and a rapidly emerging financial market. Even though consumer borrowing is increasing very rapidly in Russia, we find that only 36.3% of respondents in our sample know about the working of interest compounding and only half can answer a simple question about inflation. In a country with pervasive public pension provision, we find that financial literacy is significantly and positively related to retirement planning using private pension funds and schemes. Residents in rural areas are much more reliant on the public provision and invest less in private schemes and savings. The results of our study have a clear policy implication; along with encouraging the availability of private retirement plans and financial products, efforts to improve financial literacy can be pivotal to the expansion in the use of such schemes

Corporate governance, investor protection, and performance in emerging markets

Recent research studying the link between law, and finance has concentrated on country-level investor protection measures, and focused on differences in legal systems across countries, and legal families. The authors extend this literature, and provide a study of firm-level corporate governance practices across emerging markets, and a greater understanding of the environments under which corporate governance matters more. Their empirical tests show that better corporate governance is highly correlated with better operating performance, and market valuation. More important, the authors provide evidence showing that firm-level corporate governance provisions, matter more in countries with weak legal environments. These results suggest that firms can partially compensate for ineffective laws, and enforcement by establishing good governance, and providing credible investor protection. The authors'tests also show that firm-level governance, and performance is lower in countries with weak legal environments, suggesting that improving the legal system, should remain a priority for policymakers.Financial Crisis Management&Restructuring,International Terrorism&Counterterrorism,Municipal Financial Management,Decentralization,Banks&Banking Reform,Governance Indicators,National Governance,Banks&Banking Reform,Financial Crisis Management&Restructuring,Economic Policy, Institutions and Governance

Financial literacy and retirement planning : the Russian case

The authors examine the association of financial literacy with retirement planning in Russia, a country with a relatively old and rapidly aging population, large regional disparities, and a rapidly emerging financial market. They find that only 36.3 percent of respondents in the sample understand interest compounding and only half can answer a simple question about inflation. In a country with widespread public pension provisions, they find that financial literacy is significantly and positively related to retirement planning involving private pension funds and schemes. Thus, along with encouraging the availability of private retirement plans, efforts to improve financial literacy could be pivotal to the expansion of the use of such schemes.Financial Literacy,Pensions&Retirement Systems,Emerging Markets,Debt Markets,Gender and Law

Bankruptcy around the world - explanations of its relative use

The recent literature on law and finance has drawn attention to the importance of creditor rights in influencing the development of financial systems and in affecting firm corporate governance and financing patterns. Recent financial crises have also highlighted the importance of insolvency systems to resolve corporate sector financial distress. The literature and crises have emphasized the complex role of creditor rights, affecting not only the efficiency of ex-post resolution of distressed corporations, but also influencing ex-ante risk-taking incentives and an economy's degree of entrepreneurship more generally. The authors document how often bankruptcy is actually being used for a panel of 35 countries. Next they investigate the effects of specific design features of insolvency regimes in relation to the quality of the countries'overall judicial systems on the use of bankruptcy. The authors find, correcting for overall financial development and macroeconomic shocks, that bankruptcies are higher in Anglo-Saxon countries and in market-oriented financial systems characterized by weaker and multiple banking relationships. They also find that greater judicial efficiency is associated with more use of bankruptcy, but that the combination of stronger creditor rights with greater judicial efficiency leads to less use. The authors find that the presence of a"stay on assets"leads to fewer bankruptcies independent of the efficiency of the judicial system. These findings suggest that there are important incentive effects of insolvency systems encouraging less risky behavior and more out-of-court settlements.Labor Policies,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Strategic Debt Management,Banks&Banking Reform,Strategic Debt Management,Banks&Banking Reform,Housing Finance,Economic Theory&Research,Legal Products