External Financing and Customer Capital: A Financial Theory of Markups

2020 ◽  
Author(s):  
Winston Wei Dou ◽  
Yan Ji
Keyword(s):  
Continuous Time ◽  
Monopolistic Competition ◽  
External Financing ◽  
Financial Policies ◽  
Marginal Value ◽  
Corporate Liquidity ◽  
Customer Base ◽  
Financing Costs ◽  
Customer Capital ◽  
Industry Equilibrium

We develop a continuous-time industry equilibrium model of monopolistic competition to understand how product markups are determined in the presence of external financing costs and customer capital. Firms optimally set markups to balance the tradeoff between profiting from their existing customer base and developing their future customer base. We characterize how the equilibrium markups are determined by the interaction between the marginal value of corporate liquidity and the marginal value of customer base. Firms’ markups are more responsive to changes in their marginal value of corporate liquidity when the marginal value of customer base is higher. Moreover, the model predicts that greater product market threats lead to more conservative financial policies, which is supported by the data. This paper was accepted by Gustavo Manso, finance.

scholarly journals Cash Holdings and CEO Turnover

2016 ◽  
Vol 06 (04) ◽  
pp. 1650022
Author(s):  
Vincent J. Intintoli ◽  
Kathleen M. Kahle
Keyword(s):  
Cash Holdings ◽  
Chief Executive ◽  
Ceo Turnover ◽  
Asset Sales ◽  
Working Capital ◽  
Financial Policies ◽  
Firm Level ◽  
Marginal Value ◽  
Corporate Liquidity ◽  
Ceo Characteristics

Chief Executive Officer (CEO) characteristics, such as the level of risk aversion, are known to affect corporate financial policies, and therefore are likely to impact corporate liquidity decisions. We examine changes in cash holdings around CEO turnover events, a period in which discrete changes in managerial preferences and abilities are likely to have the most dramatic effect on cash holdings. Our results suggest that cash holdings increase significantly following forced departures. The increase is persistent over the successor’s tenure and is robust to controls for the standard firm-level determinants of cash holdings and corporate governance characteristics. We find that higher cash holdings arise mainly through the management of net working capital, as opposed to asset sales or reductions in investment. This suggests that the changes are optimal for shareholders rather than an indication of serious agency problems. This conclusion is supported further by our finding that the marginal value of cash does not decrease following the turnover.

scholarly journals Labor and Capital Dynamics under Financing Frictions*

2018 ◽  
Vol 23 (2) ◽  
pp. 279-323 ◽  
Author(s):  
Ryan Michaels ◽  
T Beau Page ◽  
Toni M Whited
Keyword(s):  
Wage Bargaining ◽  
Reduced Form ◽  
Probability Of Default ◽  
External Financing ◽  
Financing Costs ◽  
Financing Frictions ◽  
Investment And Financing ◽  
Unemployment Risk

Abstract We assemble a new, quarterly panel dataset that links firms’ investment and financing to their employment and wages. In the data, wages and leverage are negatively related, both cross-sectionally and within firms. This pattern contradicts models in which firms insure workers against unemployment risk. We reconcile this fact with a model that integrates factor adjustment frictions and wage bargaining with costly external financing. In the model, the probability of default rises with debt. Because default incurs deadweight costs, the expected surplus over which firms and workers bargain falls, thus depressing wages. We show that raising financing costs reduces employment and wages, in line with recent reduced-form evidence.

Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending

2018 ◽  
Vol 54 (5) ◽  
pp. 2141-2178 ◽  
Author(s):  
Olivia S. Kim
Keyword(s):  
Developed Countries ◽  
Syndicated Loans ◽  
External Financing ◽  
Political Uncertainty ◽  
Large Sample ◽  
Financing Costs ◽  
Electoral Uncertainty ◽  
The Impact

This article investigates the impact of political uncertainty on contractual lending terms using a large sample of syndicated loans and a within-firm estimation approach to achieve identification. Firms pay 7 basis points (bps) more on loans originated when their lenders are undergoing an election relative to when their lenders are not undergoing an election. Lenders from less financially developed countries are more likely to pass political uncertainty costs to borrowers. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Industry Tournament Incentives and the Product-Market Benefits of Corporate Liquidity

2018 ◽  
Vol 54 (2) ◽  
pp. 829-876 ◽  
Author(s):  
Jian Huang ◽  
Bharat A. Jain ◽  
Omesh Kini
Keyword(s):  
Chief Executive Officer ◽  
Cash Holdings ◽  
Chief Executive ◽  
Product Market ◽  
Capital Expenditures ◽  
Marginal Value ◽  
Corporate Liquidity ◽  
Value Of Cash ◽  
Excess Cash ◽  
Market Benefits

We evaluate the link between chief executive officer (CEO) industry tournament incentives (ITIs) and the product-market benefits of corporate liquidity. We find that ITIs increase the level and marginal value of cash holdings. Furthermore, ITIs strengthen the relation between excess cash and market-share gains, especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITIs lead to increased research and development (R&D) expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITIs increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product-market benefits.

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