Knowledge that Transforms

This paper examines the degree to which cash flow availability influences firm investment in six OECD countries. In particular, we are interested in the extent to which the reliance on internal funds is affected by firm size, since there is general agreement that smaller firms have less access to external capital markets and, thus, should be more affected by the availability of internal funds. Earlier work has concluded that the documented positive relationship between cash flow and investment is evidence of the existence of financial constraints. We first examine all firms, regardless of size, in each country, and we find that the amount of corporate investment is affected by internal resources in all six countries; that is, internal financing affects firm investment. We then repeat the analysis segmenting the sample using three measures of firm size. Contrary to our a priori expectations, we find that the cash flow-investment sensitivity is generally highest in the large firm size group and smallest in the small firm size group. We deduce that the explanations for these findings are grounded in managerial agency considerations, and in the greater flexibility enjoyed by large firms in timing their investments. Thus, we conclude that the degree of sensitivity of a firm's investments to its cash flows cannot be interpreted as an accurate measure of its access to capital markets (as do Kaplan, S., Zingales, L., 1997. The Quarterly Journal of Economics 169–215), since small firms are known to have less access to external markets.

Price clustering and optimal tick sizes have recently been topics of substantial public policy interest, and this paper presents evidence which is relevant to both debates. Around 98% of quoted and traded prices for LIFFE stock index derivatives are found to occur at even ticks. We report that clustering increases with volatility and transaction frequency, and decreases with trade size, and find that the proportion of odd ticks is significantly lower near the market open and higher near the close. Further, an inverse relationship is reported between bid–ask spreads and the number of odd ticks, and spreads cluster at even-tick values. This evidence of extreme price clustering is the first to be presented for financial derivatives. The results support both the price resolution and the negotiation hypotheses of price clustering.

Following the ongoing debate on risks in interbank payment networks, gross settlement systems are being adopted in several industrialized countries. These systems, which effect real-time transfers of monetary base among bank accounts, add management of intraday liquidity to the duties traditionally performed by central banks, and require new, ad hoc policy instruments. The paper presents a simple model of a real-time gross settlement (RTGS) system, which is used to analyze the reaction of banks and monetary policy variables to this new environment. It is shown that if daylight liquidity is costly, a network externality may induce banks to postpone payment activity, thereby affecting the quality of the information available to counterparts for cash management purposes. The increased noise may in turn induce higher than optimal levels of banks' end-of-day reserve holdings, relative to a social optimum, with adverse effects on expected profits. The rise of a daylight market for funds, predicted by the model, does not solve the mentioned externality problem. Some corrective policy measures are discussed.

Private equity for rapidly growing small business is raised primarily from the organized venture capital market and the informal market, comprised of high-net worth individuals or “angel” investors. We discuss commercially and publicly available data on private equity, the research findings of studies that use these data, and some of the more important questions that the available data have been unable to address.

There are many studies investigating the location choice of foreign direct investment (FDI) of US banks. Nigh et al. (Journal of International Business Studies 17 (1986) 59–72) find that the choice does not depend on local banking opportunity. This paper examines what factors affect the location choice of Japanese multinational financial institutions. Our results are consistent with previous studies analyzing US banks in that the FDI of the manufacturing industry is an important determinant of the location choice of Japanese financial institutions. However, our results differ from Nigh et al., in that Japanese financial institutions choose their locations at least partially based on the local banking opportunity in the host countries.

We examine empirically the role of lending relationships in determining the costs and collateral requirements for external funds. The data originate from a recently concluded survey of small and medium-sized German firms. In our descriptive analysis, we explore the borrowing patterns and the concentration of borrowing from financial institutions. Using data on L/C interest rates, collateral requirements, and the firm's use of fast payment discounts we find that relationship variables may have some bearing on the price of external funds, but much more so on loan collateralization and availability. Firms in financial distress face comparatively high L/C interest rates and reduced credit availability.

This paper provides new empirical evidence on the relationship between personal commitments and the allocation of small business credit. The data suggest that personal commitments are important for firms seeking certain types of loans. Guarantees are more prevalent than collateral and organization type (corporate versus noncorporate status) appears to be particularly important in determining commitment use. No systematic relationship is observed between commitment use and owner wealth. Personal commitments appear to be substitutes for business collateral, at least for lines of credit, while personal collateral and personal guarantees do not seem to substitute for each other. Personal commitments have generally become more important to small business lending since the late 1980s.

We find that acquirers tend to recast the target in their own image, causing the small business loan portfolio share of the consolidated bank to converge toward the pre-merger portfolio share of the acquirer. However, concerns that this pattern will necessarily reduce bank small business lending may be overblown. First, most mergers are of two (or more) small banks. Second, acquirers are almost as likely to have larger as smaller shares of small business loans in their portfolios, compared to their targets. Finally, in roughly half the mergers, small business loans increase in the period immediately after the merger.

Venture capital distributions, a legal form of insider trading, provides an ideal arena for examining the share price impact of transactions by informed parties. These sales, which occur after substantial run-ups in share value, generate a substantial price reaction immediately around the event. In the months after distribution, returns apparently continue to be negative. When the short- and long-run reactions are decomposed, they are consistent with the view that venture capitalists use inside information to time stock distributions: Distributions of firms brought public by lower quality underwriters and of less seasoned firms have more negative price reactions.

Recent widespread consolidation in the banking industry has elicited concern that lending to small businesses will be reduced by the banking industry. The consolidation, though, has stimulated an upsurge in new bank charters. This study compares the lending by de novo banks to small businesses with the lending by similarly sized incumbent banks for the years 1987–1994. We find that the portfolios of de novo banks consistently contain a substantially higher percentage of small business loans than do the portfolios of similar incumbents. These results indicate that de novo banks can be part of the solution to the problems that consolidation may create.