Federico Beltrame

Understanding the Impact of Entrepreneurial Orientation on Smes’ Performance. the Role of the Financing Structure☆

Abstract Based on a sample of 300 small and medium enterprises (SMEs) located in the Province of Udine (north East of Italy) and the Kartner Region (South of Austria) we perform an analysis of the impact of Entrepreneurial Orientation (EO) on SMEs’ subjective performances. We develop a model in which EO dimensions are moderated by the role of financial leverage The present work is part of a research project on an interregional co-operation programme Italy-Austria (INTERREG IV) financed by the European Regional Development Fund whose program areas include the Province of Udine and the Kartner Region. Subjective performances has been widely investigated in academic literature where various streams of research have been developed. A prominent field of research focuses on the constructs of EO orientation and their ability to prompt performances through innovative attitude, risk taking behaviour, aggressiveness, autonomy and competitive energy. Another established field of research focuses on the impact of financial structure (i.e. leverage) on performances, although with ambiguous results.. We find support to the hypothesis that competitive energy might have a significant and positive impact in driving performance, which has obvious implications for managers and theoreticians. We also find that leverage might have a significant moderating role through interactions with EO dimensions.

Estimating SMEs Cost of Equity Using a Value at Risk Approach

1. The Financial Structure of Small and Medium Firms and the Impact on the Cost of Capital 2. Valuation of Small and Medium Enterprises 3. The Capital at Risk Model 4. Application of the Capital at Risk Model to Small and Medium Enterprises 5. The Capital at Risk Model Applied to the Firms Alpha, Beta and Gamma

Earnings Quality and the Cost of Debt of SMEs

Based on a panel of Italian SMEs over the period 2004–2012, we investigate the relationship between earnings quality and the cost of debt . We find a negative association between accruals quality and the cost of debt for SMEs . The results hold even when controlling for different measures of accruals quality, alternative determinants of bank debt and the potential endogeneity between leverage and earnings quality.

Leverage, Cost of Capital and Bank Valuation

In this paper we present a model that demonstrates the effect of debt on cost of capital and value for banks with risky assets. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank- specific valuation metric which separately attributes value to assets and debt cash flows in the form of a liquidity premium and a tax-shield. The asset side model proposed does not require the assumption of stable capital structure, typical of the currently applied DCF equity side methods. Furthermore, the theoretical framework we present is helpful in reconciling asset and equity side approaches in banking.

A Comparison between Valuation Metrics in a Real Case

We run a simulation of a real case of a bank valuation with the application of the AMM and its derived market multiples, and we compare this with the traditional metrics currently used in banking. Results show that the AMM allows a better understanding of where the value of a bank lies and appoints greater value to the liabilities side than the traditional valuation approach. The asset-side model we present could represent a useful method with which to compare the equity-side approach currently used in bank valuation.

Valuation in Banking: Issues and Models

We discuss the problems in valuing banks affecting the application of the standard models of valuation used for industrial firms. In particular, we refer to the different roles of debt and capital, the regulatory framework, the provisioning effect and to the issues related to the cash flow measurement (net working capital and capital expenditure determination). In the second part of Chap. 2, we discuss the equity- and asset-side valuation metrics which academic literature and professionals consider the most suitable for banks. For each method, we highlight the main characteristics, the formalization and the advantages or disadvantages in their application.

Banks’ Asset-Side Multiples: Profitability, Growth, Leverage and Deposits Effect

The focus in this chapter is on banks’ market multiples. In particular, we first show the influence of firm growth on market multiples. Moreover, according to the theoretical framework we presented in Chap. 3, we propose alternative options for asset-side multiples that can be used in the relative valuation of banks. In addition, we implement a new approach that mixes the use of asset-side multiples with a separate evaluation of deposits and tax-shields.

Does Earnings Management Affect Banks’ Cost of Funding? An Empirical Investigation Across an European Sample

Loan loss provisions which are the main components, by which managers handle earnings, are used discretionally to smooth earnings, manage capital requirements and increase the stock market valuation. However managers’ discretionary behavior might have a negative effect, since hidden risks can alter the risk profile of a bank. In this paper, we investigate whether such a discretionary component of provisioning has an impact on the cost of funding. We use panel data regression on a sample of European banks, during the period 2005–2013. Our finding suggests that the discretionary use of provisioning affects the cost of funding, due to the increase of the overall risk to the bank.

The Banks Cost of Capital: Theories and Empirical Evidence

In this chapter, we discuss the methodologies used for cost of capital estimation in the banking industry. In particular, we first consider the generic treatment of the cost of equity calculation techniques that we divided into those methods quantifying the systematic risk premium and those measuring the total risk premium. The first aim of this chapter is to modify the Hamada (1972) formula excluding deposits value from a banks’ asset beta. Following this approach, we obtain a better measure with which to represent asset risk that is, additionally, independent from bank leverage. The second aim is to discuss the equity pricing methods that enable the quantification of the total risk (such as total beta and the implied cost of capital measures), in particular, adapting the CaRM to the banking industry. In order to better understand the applicability of the models, the chapter provides examples on listed and non-listed banks.

Value, Capital Structure and Cost of Capital: A Theoretical Framework

In this chapter, we discuss the implementation of an asset-side approach in order to overcome the problems of the equity-side models. Unlike non-financial firms, bank deposits generate value. Such an effect is explored by several empirical studies concerning the relation between capital requirements and the weighted average cost of capital (WACC) and, consequently, on a bank’s value. Moreover, in this chapter, we use such empirical evidence to highlight the problems related to the applicability of Modigliani and Miller propositions to the banking industry. Specifically, the main concern of this chapter is to build a new corporate finance theoretical framework for bank valuation, exploring a new issue that represents a relevant gap in the literature. Using the theoretical framework, we elaborate the AMM to highlight the value generated from the unlevered assets, deposits and tax-shields. To do this, we formalize the link between the cost of assets and the WACC, and propose a restatement of the Modigliani and Miller propositions using bank-specific adjustments. Additionally, we compare and reconcile the AMM to excess returns models.