Preprint
Financial Innovations and the Curse of Safety
Social Science Research Network (SSRN) , Vol.23 February 2020
Elsevier
2020
Abstract
We show that financial innovations, by letting firms benefit from safe cash flows in new ways, potentially cause a misallocation of resources at the firm level with low net present value (NPV) projects (with larger amounts of safe cash flows) getting preference over high NPV projects. Even negative NPV projects may be accepted. Such financial innovations benefit large firms (with large cash flows) more than small firms; hence, they widen the value-gap between leader and follower firms. These results indicate that productivity slowdown and the rise of superstar firms are not independent phenomena, rather they share the same underlying cause: Financial innovations letting firms benefit from safe cash flows. We show that misallocation towards low NPV projects gets worse as interest rates approach zero. The value-gap between large and small firms also increases as interest rates approach zero. These results cast doubt on the effectiveness of monetary policy in a low interest rate environment
Details
- Title
- Financial Innovations and the Curse of Safety
- Authors
- Hammad Siddiqi (Author) - University of the Sunshine Coast, Queensland, School of Business and Creative IndustriesSajid Anwar (Author) - University of the Sunshine Coast, Queensland, School of Business and Creative Industries
- Publication details
- Social Science Research Network (SSRN) , Vol.23 February 2020
- Publisher
- Elsevier
- DOI
- 10.2139/ssrn.3526183
- ISSN
- 1556-5068
- Organisation Unit
- Indigenous and Transcultural Research Centre; University of the Sunshine Coast, Queensland; School of Business and Creative Industries
- Language
- English
- Record Identifier
- 99691178302621
- Output Type
- Preprint
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