The Journal of Finance

The Risk‐Adjusted Cost of Financial Distress

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01286.x

HEITOR ALMEIDA, THOMAS PHILIPPON

Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk‐adjusted default probabilities derived from corporate bond spreads. For a BBB‐rated firm, our benchmark calculations show that the NPV of distress is 4.5% of predistress value. In contrast, a valuation that ignores risk premia generates an NPV of 1.4%. We show that marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000). Thus, distress risk premia can help explain why firms appear to use debt conservatively.

A Theory of Pyramidal Ownership and Family Business Groups

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2006.01001.x

HEITOR V. ALMEIDA, DANIEL WOLFENZON

We provide a new rationale for pyramidal ownership in family business groups. A pyramid allows a family to access all retained earnings of a firm it already controls to set up a new firm, and to share the new firm's nondiverted payoff with shareholders of the original firm. Our model is consistent with recent evidence of a small separation between ownership and control in some pyramids, and can differentiate between pyramids and dual‐class shares, even when either method can achieve the same deviation from one share–one vote. Other predictions of the model are consistent with both systematic and anecdotal evidence.

The Working Capital Credit Multiplier

Published: 08/27/2024   |   DOI: 10.1111/jofi.13385

HEITOR ALMEIDA, DANIEL CARVALHO, TAEHYUN KIM

We provide novel evidence that funding frictions can limit firms’ short‐term investments in receivables and inventories, reducing their production capacity. We propose a credit multiplier driven by these considerations and empirically isolate its importance by comparing how a similar firm responds to shocks differently when these shocks are initiated in their most profitable quarter (“main quarter”). We implement this test using recurring and unpredictable shocks (e.g., oil shocks) and provide extensive evidence supporting our identification strategy. Our results suggest that funding constraints and credit multiplier effects are significant for smaller firms that heavily rely on financing from suppliers.

The Cash Flow Sensitivity of Cash

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00679.x

Heitor Almeida, Murillo Campello, Michael S. Weisbach

We model a firm's demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm's propensity to save cash out of cash flows (the cash flow sensitivity of cash). We hypothesize that constrained firms should have a positive cash flow sensitivity of cash, while unconstrained firms' cash savings should not be systematically related to cash flows. We empirically estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory.

Aggregate Risk and the Choice between Cash and Lines of Credit

Published: 05/13/2013   |   DOI: 10.1111/jofi.12056

VIRAL V. ACHARYA, HEITOR ALMEIDA, MURILLO CAMPELLO

Banks can create liquidity for firms by pooling their idiosyncratic risks. As a result, bank lines of credit to firms with greater aggregate risk should be costlier and such firms opt for cash in spite of the incurred liquidity premium. We find empirical support for this novel theoretical insight. Firms with higher beta have a higher ratio of cash to credit lines and face greater costs on their lines. In times of heightened aggregate volatility, banks exposed to undrawn credit lines become riskier; bank credit lines feature fewer initiations, higher spreads, and shorter maturity; and, firms’ cash reserves rise.

Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis

Published: 08/06/2015   |   DOI: 10.1111/jofi.12309

HEITOR ALMEIDA, CHANG‐SOO KIM, HWANKI BRIAN KIM

This paper examines capital reallocation among firms in Korean business groups (chaebol) in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for the investment and performance of chaebol firms. We show that chaebol transferred cash from low‐growth to high‐growth member firms, using cross‐firm equity investments. This capital reallocation allowed chaebol firms with greater investment opportunities to invest more than control firms after the crisis. These firms also showed higher profitability and lower declines in valuation than control firms following the crisis. Our results suggest that chaebol internal capital markets helped them mitigate the negative effects of the Asian crisis on investment and performance.

The Real Effects of Credit Ratings: The Sovereign Ceiling Channel

Published: 06/02/2016   |   DOI: 10.1111/jofi.12434

HEITOR ALMEIDA, IGOR CUNHA, MIGUEL A. FERREIRA, FELIPE RESTREPO

We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.