Working papers

Entrepreneurial finance

The capital structure of business start-ups across Europe: The effect of a fresh start policy, co-authored with Jürgen Hanssens (Ghent University) and Tom Vanacker (Ghent University)

Abstract: We examine cross-country differences in the capital structure of start-ups in their initial year of operation based on countries’ “fresh start” policy. To do so, we employ a dataset of 2,849,997 start-ups from 26 European countries founded between 2005 and 2012. We find that time-invariant, country-specific factors are important determinants of start-ups’ capital structure. We further document how a “fresh start” policy influences start-ups’ capital structure. Specifically, start-ups use less debt if a “fresh start”—the possibility for bankrupt entrepreneurs to discharge their outstanding credit obligations—is available relative to when a “fresh start” is not available in a country’s personal bankruptcy laws. When we use a difference-in-differences approach to exploit country-level changes in the availability of a “fresh start”, we similarly find that start-ups founded after the implementation of a “fresh start” policy use less debt than start-ups founded before the implementation of a “fresh start” policy. In sum, we provide new cross-country evidence on the capital structure of start-ups in general and the effect of a “fresh start” policy on start-ups’ capital structure more in specific

Local banking development and the use of debt financing by start-up firms, co-authored with Maurizio La Rocca (University of Calabria) and Tom Vanacker (Ghent University)

Abstract: We investigate the effect of local banking development on the use of debt financing by start-up firms for a large sample of Italian start-ups. We find that start-ups use more debt financing when they are located in a province which has more bank branches relative to population and in which the bank market is less concentrated. Our results suggest that the effect of bank branch density is not different for national banks or local cooperative banks. However, the presence of foreign banks in a province reduces the use of debt by start-ups. This finding is consistent with the “cream-skimming” hypothesis, according to which foreign banks focus on large transparent customers, thereby reducing the availability of debt for informationally opaque local borrowers such as start-ups.

Stubborn and persistent: the evolution of slack resources in new firms, co-authored with Jürgen Hanssens (Ghent University) and Tom Vanacker (Ghent University)

Abstract: Past research has focused on the effects of possessing slack, assuming levels of slack are dynamic, but without paying explicit attention to the actual build up and deployment—or the evolution—of slack in firms. Drawing on behavioral theory of the firm and the imprinting literature, we propose that slack levels contain an important stable component, whereby founder- CEOs act as a source of imprinting. Thus, initial slack levels strongly influence future slack levels but this relationship weakens when founder-CEOs are replaced. This is particularly the case when founder-CEO replacements occur early on because there has been limited time for institutionalizing processes to occur. We test these propositions using data on 1,625 firms founded in Belgium in 1998 that are tracked for up to 15 years. Findings are consistent with our predictions. Taken together, our study provides a novel theoretical perspective and first-time empirical evidence on the evolution of slack levels in firms.

The Recent Financial Crisis, Start-up Financing, and Survival, co-authored with Tom Vanacker (Ghent University)

Abstract: We investigate the effects of the recent financial crisis―a negative shock to the supply of credit—on start-up financing and survival using a data set that covers all Belgian business registrations between 2006 and 2009. We find that bank debt is the single most important source of funding, even for start-ups founded during the crisis. However, start-ups founded in crisis years use less bank debt and have a higher likelihood to go bankrupt. Consistent with a credit supply shock driving our findings, these effects are stronger for start-ups in bank dependent industries and start-ups founded by financially constrained entrepreneurs.

Financial history

Performance-Related Remuneration of Directors Before and During the Great Depression in Belgium, co-authored with Veronique Vermoesen (University of Antwerp) and Armin Schwienbacher (Université Côte d’Azur—SKEMA Business School)

Abstract: We study the payment of bonuses (tantièmes) to directors of Belgian firms listed on the Brussels Stock Exchange in the period 1925-1934. Directors received substantial cash bonuses which were positively related to firm performance, measured by accounting income and changes in the market value of equity. If shareholders were expropriated via the payment of excessive director bonuses, we would expect a larger drop in stock market performance during the Great Depression for firms paying higher bonuses. However, this is not confirmed by our findings, which suggest that bonuses were a valuable tool for aligning the interest of directors and shareholders in an environment characterized by weak legal protection of investors.

A horse race of dividend theories: Long-run evidence, 1838-2012, co-authored with Leentje Moortgat (University of Antwerp) and Jan Annaert (University of Antwerp)

Abstract: Using a unique sample of all Belgian firms listed on the Brussels Stock Exchange (BSE) between 1838 and 2012, we investigate why firms pay dividends. The length of the sample period also allows us to investigate whether the determinants of dividends change over time. Our evidence points in the direction of agency conflicts and information asymmetries over the entire sample period. Our results do not support the life-cycle hypothesis. Further, we find no evidence that behavioral motives drive dividend policy.

Dividend growth predictability revisited: Long-run evidence from the Brussels Stock Exchange: 1850-2015, co-authored with Gertjan Verdickt (University of Antwerp) and Jan Annaert (University of Antwerp)

Abstract: We re-examine the conventional wisdom regarding dividend growth and return predictability with more than 160 years of data on the Brussels Stock Exchange. With this extended period, we find strongly robust dividend growth predictability evidence, in particular when using pure dividend metrics. This conclusion holds (i) when we sort stocks on sectors, size, volatility, and a book-to-market proxy, (ii) when we control for business cycles, inflation, risk-free rates, and term spreads, (iii) and apply other established statistical methods. There are at least three reasons for the disconnect with previous US results, with a lack of dividend smoothing as the most prominent explanation.

(Multinational) business group finance

Earnings Management in Multinational Corporations, co-authored with Christof Beuselinck (IESEG School of Management & LEM), Stefano Cascino (London School of Economics) and Ann Vanstraelen (Maastricht University) – FULL PAPER HERE

Abstract: Using a large sample of multinational corporations (MNCs) from different countries around the world, we examine the determinants of earnings management within the firm. We argue that MNCs manage their consolidated earnings via an “orchestrated” reporting strategy across their subsidiaries. We find that country-level as well as firm-specific characteristics of both parents and subsidiaries jointly explain the location of earnings management inside the firm. Most importantly, we provide compelling evidence that MNCs exploit regulatory arbitrage opportunities arising from differences in the institutional environments of their subsidiaries. Parent companies in high-quality institutional environments tend to manage their consolidated earnings more through subsidiaries in low-quality institutional environments. When regulatory shocks exogenously improve the institutional environment of parent companies, MNCs shift earnings management towards subsidiaries in low-quality institutional environments. Overall, our findings yield important insights on the drivers of earnings management location within the firm and have implications for regulatory design

The flight home effect in multinational internal capital markets during the Great Recession, co-authored with Fabiola Montalto

Abstract: We investigate whether the Great Recession induced a ‘flight home effect’ in internal capital markets of multinational firms, whereby multinationals reallocate funding from foreign subsidiaries to their home country after a negative financial shock. Using a difference-in-difference approach, we find a significant reduction in group borrowing by Italian subsidiaries of European multinationals since 2008, compared to a propensity score matched sample of subsidiaries of Italian business groups. While the relative reduction in group borrowings by foreign subsidiaries in Italy is partially counterbalanced by an increase in bank borrowings, foreign subsidiaries reduced their investments more than subsidiaries of Italian firms. These effects are more pronounced for subsidiaries of multinationals headquartered in a European country which has been hit harder by the Great Recession.

Other corporate finance/governance papers

Industry Policy uncertainty, Local Government Intervention and Corporate Investment in China, co-authored with Jie Yang and Chaoyang Xu (Wuhan Textile University)

Abstract: We investigate the effect of industrial policy uncertainty caused by changes in China’s Five Year Plan (FYP) on investments by Chinese firms. We find systematic decreases in investments in the year prior to a new FYP for a large sample of listed firms in the 1998-2012 period. The drop in investments is stronger for firms with higher investment irreversibility and in industries sensitive to policy changes. These findings are consistent with the hypothesis that industrial policy uncertainty generated by the periodical amendments of the FYP dampens investment. We also find that local government intervention reduces the negative effect of industry policy uncertainty on investments. In provinces with a strong local government, state owned enterprises do not reduce investments in the FYP change period, while private firms do decrease their investments.

Older papers, which for various reasons were never published but which I think are interesting anyway:

Business Elites, Political Connections, and Economic Entrenchment: Evidence from Belgium 1858-1909 (latest version: 2009), co-authored with Livia Ghita (University of Antwerp) and Ludo Cuyvers (University of Antwerp) – FULL PAPER HERE

Abstract: We investigate the evolution and performance of networks based on interlocking directorships between large listed Belgian firms in the 20th century, focusing on the role of financial institutions. Network density was very high for most of the century. Financial institutions played a pivotal role. Network density strongly increased before World War I, but it decreased from the 1930s onwards when universal banks were forced to split up. Political connections followed a similar pattern. For most of the 20th century, firms grew more strongly if they were connected to financial institutions. Combined, our results are consistent with economic entrenchment theory.

Who’s Afraid of Foreigners? Religion, Trust, and Directors in Multinational Corporations (latest version: 2006), co-authored with Catherine Campo (University of Antwerp) – FULL PAPER HERE

Abstract: We investigate how religion and trust in the parent country of multinational corporations affect the likelihood that the board of directors of foreign subsidiaries include parent country nationals, and the likelihood that the managing director of these subsidiaries is a parent country national. For a sample of 781 Belgian subsidiaries of multinational corporations from 13 different countries, we find that the likelihood of parent country (managing) directors is greater if the parent company is located in a Catholic country, or in a country where interpersonal trust is lower. Whether or not parent country nationals generally like foreigners or Belgians does not seem to matter.


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