No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Financial Market Development and the Importance of Internal Cash: Evidence from International Data
Abstract
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.
... However, foreign subsidiaries operating in countries with developed credit markets have easy access to external finance at overall low cost due to fewer information asymmetries or contractual frictions (Bilir, Chor, & Manova, 2019;Rajan & Zingales, 1998). It reduces the reliance on internal earnings to fund investment opportunities (Castro, Kalatzis, & Martins-Filho, 2015;Islam & Mozumdar, 2007). Accordingly, lessens the need to decrease or omit planned dividend repatriations. ...
... The findings indirectly suggest that firms hold fewer earnings and pay more dividends in financially developed countries since financial development reduces reliance on internal earnings by increasing the availability of external finance at a lower cost. Islam and Mozumdar (2007) use data from 31 countries and document that financial market development is significantly negatively associated with internal earnings. Tseng (2012) finds that financial development in Taiwan leads to higher access to external finance, thereby decreasing the dependence on internally generated funds for investment. ...
... The findings provide support for the view that financial development in a country improves access to external finance and reduces the sensitivity of internal earnings on investments (Demirg€ uç-Kunt & Maksimovic, 1998;Islam & Mozumdar, 2007;Khurana et al., 2006;Lerskullawat, 2018;Love, 2003;Rajan & Zingales, 1998;Tseng, 2012). It also reveals why prior studies find mix results concerning the impact of investment opportunities on the dividend repatriation policy (Desai et al., 2007;Hasegawa & Kiyota, 2017). ...
This study aims to examine the impact of investment opportunities and the global financial crisis on dividend repatriation policy. Additionally, it investigates the interaction effect of credit market development on the association between investment opportunities and dividend repatriation policy. The current study uses secondary data concerning the foreign subsidiaries of US MNCs in 50 countries during the period 2005–2016. Dynamic panel generalised method of moments (GMM) estimator is applied to estimate the dynamic dividend repatriation models. The findings reveal that investment opportunities in the host country significantly negatively influence the dividend repatriation policy. However, credit market development in the host country significantly positively interacts the link between investment opportunities and dividend repatriation policy. This implies that credit market development reduces the negative impact of investment opportunities on the dividend repatriation policy. Further, the findings suggest that dividend repatriation by US MNCs increased significantly during the global financial crisis.
... Our results also suggest that the effects of financial constraints are more severe for firms classified as constrained, corroborating the results of cross-countries studies by Becker and Sivadasan (2010), Francis, Hasan, Song, and Waisman (2013), Islam and Mozumdar (2007), Khurana, Martin, and Pereira (2006) and Kusnadi and Wei (2011). ...
... These results, therefore, suggest the rejection of H1. Despite this, our results regarding the sensitivity of investment to cash flows corroborate those of Becker and Sivadasan (2010), Francis et al. (2013) and Islam and Mozumdar (2007), in cross-country settings. ...
... That is, the sensitivity of investment to cash flows is positive and increasing in the recoverable fraction of assets, and the cash flow sensitivity of cash is positive. The results therefore indicate that virtually all firms suffer from credit restrictions to some degree and are consistent with the previous cross-country studies of Becker and Sivadasan (2010), Francis et al. (2013), Islam and Mozumdar (2007), Khurana et al. (2006) and Kusnadi and Wei (2011). ...
Purpose
This paper aims to examine the interdependence of financial decisions (investment, financing, dividends and cash-holding) under financial constraints.
Design/methodology/approach
The authors specify and estimate a system of simultaneous equations with panel data and firm fixed effects by three-stage least squares in a sample of firms from 62 countries from 1996 to 2010.
Findings
The main findings largely corroborate previous studies regarding the interdependence of financial decisions. The authors also find evidence suggesting that financial constraints have a major impact on firms’ financial decisions. The results also suggest that financial constraints manifest themselves in virtually all firms, indicating that such constraints are a matter of degree and not of kind.
Research limitations/implications
Implications regarding the impact of cash flows on investment and cash-holding decisions are only partially confirmed.
Practical implications
The results are consistent with the hypothesis that financial constraints distort the financial policies of firms. For the purpose of formulating policies that reduce these distortions, the authors emphasize the role of the availability of internal funds and the recoverable fraction of assets in easing financial constraints, thus allowing for greater investment on the part of firms.
Social implications
The results suggest that regulators should promote policies that reduce the dependence of corporate investment on internally generated cash flows.
Originality/value
Unlike previous studies, the authors account for the direct impact endogenous variables could have on each other. In addition, they explore the impact of each country’s particular legal environment on the pledgeability of assets at the company level.
... Study on the effect of financial development on firm investment is still limited. Such study mostly focuses on developed countries and also on the individual aspect of financial development such as financial liberalization (Gelos & Werner, 2002;Harris, Schiantarelli, & Siregar, 1994;Schiantarelli, Weiss, & Jaramillo, 1996) and capital market development (Islam & Mozumdar, 2007;Laeven, 2003;Love, 2003). Therefore, this has resulted in a lack of case studies in developing countries, including Thailand and also of the study of the role of financial development and the effect of financial constraint on firm investment. ...
... Similar results were found in the case study reported in Laeven (2003) of a group of developing countries. Islam and Mozumdar (2007), Laeven (2003), and Love (2003) also found that capital market development could weaken the effect of firm cash flow on firm investment and this effect was higher for more financially constrained firms. Furthermore, financial development can lower the dependence of firms on their internal finance and the more financially constrained firms will experience greater effects from financial development compared with less constrained ones, which already have less difficulty in finding external funding sources. ...
... This causes a greater opportunity for a firm to obtain more funding sources, such as from the financial market and financial institutions as well as lowering the cost of external funds. Thus, this condition will weaken the effect of firm financial constraint on investment as firm investment will depend more on external funds causing by an increase in financial development, instead of depending on the firm internal financial condition (cash flow and leverage of firms) (Arbel aez & Echavarria, 2002; Islam & Mozumdar, 2007;Love, 2003). Thus, this financial development in terms of activities will weaken the effect of firm financial constraint on investment. ...
This paper examines the effect of firm financial constraint and financial development on firm investment using data from non-financial companies in Thailand from 1999Q1 to 2015Q4. The empirical results showed a significant effect of firm financial constraint on their investment. The cash flow of firms had a positive effect on firm investment, while the leverage ratio of firms had a negative effect. Financial development also weakened the effect of firm financial constraint on firm investment. These effects were considerably higher in more financially constrained firms than less constrained ones.
... As reductions in information asymmetry can be achieved by a higher level of financial development, by this firms can cater their investment opportunities more efficiently. (Khurana, Martin, & Pereira, 2006) and (Islam & Mozumdar, 2007) report that cash flow sensitivity of cash reduces if financial market develops. Information asymmetry theory (Myers & Majluf, 1984) illustrates that information asymmetry between managers and capital markets forces the managers to underinvest. ...
... Undoubtedly, results reveal substantiation on the important role of financial development for boosting firms' investments and performance; this is also the confirmation of previously existing results like (Castro et al., 2015b;Islam & Mozumdar, 2007;Love, 2003). Our study supplies evidence of existence of an additional transmission channel through which financial development affect corporate investments and ultimately real economy. ...
This study investigates the influence of the financial system on firms' investment efficiency in China. For this purpose, we employ country level data of capital markets and financial institutions along with financial data from 2797 Chinese firms in the period from 1998 to 2015. The firms are priori classified into four groups, by high and low values of financial constraints ansd agency problems. Results show that financial development influences firms' investments positively either directly or by reducing cash flow sensitivity. The impact remains the same for all types of firms. Moreover, the financial structure has an impact on investment efficiency of firms; this result also remains the same even after controlling levels of financial development. Study contributes that capital market based financial structure impacts investment decisions by reducing financing constraints and agency issue due to its strong monitoring ability.
... This implies negative correlation between directors' board optimism level and firm debt choice. Islam et al. (2007) point that the presence of asymmetric information the lenders increase the premium charged on the external financing mode (debt or equity). This impulse the controllers to minimize the use of its leader in fashion costly external financing. ...
... This implies a negative relationship between board members loss aversion and leader debt choice. Islam and Mozumdar (2007) argue that the presence of asymmetries information lenders seeking nature to hedge against the risk of non-recovery, are required to increase the cost of borrowing by an external finance premium. This premium on external financing leads to losses controller's showers encourage internal funding choice. ...
... This implies negative correlation between directors' board optimism level and firm debt choice. Islam et al. (2007) point that the presence of asymmetric information the lenders increase the premium charged on the external financing mode (debt or equity). This impulse the controllers to minimize the use of its leader in fashion costly external financing. ...
... This implies a negative relationship between board members loss aversion and leader debt choice. Islam and Mozumdar (2007) argue that the presence of asymmetries information lenders seeking nature to hedge against the risk of non-recovery, are required to increase the cost of borrowing by an external finance premium. This premium on external financing leads to losses controller's showers encourage internal funding choice. ...
... The two basic functions of financial systems in solving information asymmetry and corporate governance are very critical to firms' access to finance. Empirical evidence in this regard i.e. the role of financial development in relaxing credit constraints is found by Zingales (1998), Love (2003), Becker and Sivandasany (2010), Baum et al. (2011), Islam and Mozumdar (2007), Khurana et al.(2006), Semenov (2006, Tseng (2012). ...
... This is possible because financial development mitigates information asymmetry and contracting imperfections, which create a wedge between the cost of internal and external finance. Such result is consistent with many authors cited in the literature (Rajan & Zingales, 1998;Love, 2003;Becker and Sivandasany, 2010;Baum et al., 2011;Islam and Mozumdar, 2007;Khurana et al., 2006;Semenov, 2006). Increased access to finance can be one of the possible channels through which financial development can bring positive effective on the economic growth of a country. ...
Economic theory posits that financial development eases firm level financing constraints by mitigating information asymmetry and contracting imperfections. This paper empirically tests for this notion by using firm level data from selected African countries. The sampled firms show positive and significant investment cash flow sensitivity coefficients indicating they are financially constrained. Financial development is found to have a significant and negative effect on the estimated cash flow sensitivity coefficients indicating it reduces firm financial constraints. The result further shows that such positive role of financial development is attributed to financial intermediary development and not to stock market development. A unique result to the African reality is that even firms in countries with high level of financial development are financially constrained. This implies the financial development in Africa is too weak and more policy attention is needed in this regard.
... A well-developed banking sector promotes economic growth by reducing financial constraints, directing savings to high net present value investments, and exerting prudence in business decisions (Tonguraia & Vithessonthi, 2018). Additionally, lower financial constraints promote economic growth by granting businesses access to funds at lower costs (Pradhan, et al., 2014;Islam and Mozumdar, 2007;Love, 2003). The stability and intense competitiveness of a welldeveloped banking sector foster financial innovation and enhance efficiency (Jayakumar, et al., 2018). ...
To achieve economies with net-zero carbon emissions, it is essential to develop a robust green financial intermediary channel. This study seeks empirical evidence on how domestic bank lending to sovereign and private sectors in Gulf Cooperation Council (GCC) countries impacts carbon dioxide and greenhouse gas emissions. We employ PMG-ARDL model to panel data comprising six countries in GCC over twenty years for carbon dioxide emissions and nineteen years for greenhouse gas emissions. Our findings reveal a long-term positive impact of both bank lending variables on carbon dioxide and greenhouse gas emissions. In addition, lending to the government shows a negative short-term effect on greenhouse gas emissions. The cross-country results demonstrate the presence of a long-run effect of explanatory variables on both types of emissions, except for greenhouse gas in Saudi Arabia. The sort-term impact of the explanatory variables on carbon dioxide and greenhouse gas emissions is quite diverse. Not only do these effects differ across countries, but some variables have opposing effects on the two types of emissions within a single country. The findings of this study present a new perspective for GCC economies: neglecting total greenhouse gas emissions and concentrating solely on carbon dioxide emissions means missing critical information for devising effective strategies to combat threats of environmental degradation and achieve net-zero goals.
... In fact, financial development, on the one hand, can help the acquisition of the capital necessary for production units. On the other hand, it also reduces the constraints on access to external financing for small and medium-sized enterprises (Islam & Mozumdar, 2007). ...
Using a panel data covering more than 100 countries worldwide, we have estimated a dynamic panel model to investigate the relationship between financial development and manufacturing industries’ growth. More specifically, we have estimated the effect that institutional quality might have in this relationship in sub‐Saharan Africa (SSA). The results show that lower quality institutions in SSA are a hindrance to the role financial development plays in the growth of the manufacturing industrial sector, as compared with developed countries. These findings are robust when a quantile regression model is used. Furthermore, the results confirm that the relationship between per capita GDP and industrialization is nonlinear. Finally, in SSA, the abundance of natural resources has an adverse effect on the manufacturing industrial value added, providing more evidence for the Dutch disease hypothesis.
... Meanwhile, we take into account the financial market development of the B&R countries. The improvement of financial market maturity can provide more abundant financial products, financing channels and capital allocation (Islam and Mozumdar, 2007). Financial markets with increasing openness, scale and internationalization could face more market speculation factors, and are more likely to encounter the negative impact of financial market and spillover effects of national policy in the international community. ...
We construct time-varying tail risk networks to investigate systemic risk spillovers in the Belt and Road (B&R) stock markets during 2008–2021. Network metrics clearly reflect aggregate risk level and individual risk accumulation for the B&R stock markets under extreme events (e.g., 2008 financial crisis and COVID-19 pandemic). Tail-event driven network quantile regression analysis shows that network impacts of the B&R stock markets under different risk levels are asymmetric and regional heterogeneity. Panel analysis on determinants of systemic risk spillovers shows that cross-border investment and international trade are significant contagion channels while economic freedom is potential driver.
... In cases where financial markets are efficient, companies can easily reach the most suitable financing conditions. However, due to the frictions experienced in the financial markets, it is often difficult to find suitable financing sources for investments, and as a result, the growth of the country's economies slows down (Islam and Mozumdar, 2007). For this reason, the investment and the financing resources used by the companies for their investments have an important place in the finance literature. ...
If financial markets are efficient, companies can easily access finance. However, due to market frictions in financial markets, it is often not easy to find suitable financing sources for investments. As a result of the market frictions, the growth of national economies slows down. In this study, this problem will be addressed for energy companies. In other words, we examine whether energy companies are faced with financial constraints using the data of energy companies in 13 selected countries between the years 2010-2021. The results show that cash flows created by energy companies in 7 countries are effective in financing their investments. High cash flows and increased investments resulting from fluctuations in energy prices may also indicate that companies exhibit excessive investment behavior due to agency problems. On the other hand, all stakeholders need to make timely investments in the energy sector compared to other industries to support energy policies and increase social welfare.
... Extant literature has documented that AI-based fintech [2] effectively mitigates information asymmetry through better information disclosure (Islam and Mozumdar, 2007;Cheng et al., 2014). Specifically, fintech uses big data to assess a borrower's credit risk and hence can do a better job in less time (Jagtiani and Lemieux, 2018;Langley and Leyshon, 2017). ...
Purpose-This study investigates the impact of AI finance on financing constraints of non-SOE firms in an emerging market.
Design/methodology/approach-Using a sample of non-SOE listed companies in China from 2011 to 2018, this research employs the cash-cash flow sensitivity model to examine the effect of AI finance on financing constraints of non-SOE firms.
Findings-We find that the development of AI finance can alleviate the financing constraints of non-SOE firms. Further, we document that such effect is more pronounced for smaller firms, more innovative firms and firms in developing areas.
Practical implications-This study suggests that emerging market countries can ease the financing constraints of non-SOE firms by promoting AI finance development. Originality/value-This study, to the best of our knowledge, is the first one to explore the relationship between AI finance development and financing constraints of non-SOE firms in emerging markets.
... In addition, the alleviating effect of industrial agglomeration on financing constraints is more obvious in enterprises with a poor initial financing environment [13]. Studies have also shown that the higher the level of regional financial development, the better the external financing environment, and the lower the level of financing constraints of companies [14,15]. This paper takes the annual data of companies listed in Stock A from 2009 to 2018 as the research sample, uses the sensitivity coefficient of corporate investment expenditure to cash flow as a measure of corporate financing constraints, and adopts the difference-in-differences model in order to explore whether the development of urban rail transit is conducive to alleviating financing constraint of enterprises. ...
Urban rail transit (URT) is closely related to the sustainable development of the city. In addition to the traffic improvements, it also brings social and economic benefits. From the perspective of sustainability, we discuss the effect of urban rail transit on financing constraints of companies listed on the China A-share stock market (A-share, common stocks issued by companies registered in China for domestic institutions, organizations or individuals to subscribe and trade in RMB) and further explore whether the level of financial development has an effect on the above relationship. The results show that: (1) Financing constraints are common among sample enterprises, and the later the opening year of urban rail transit, the greater the degree of financing constraints; (2) The development of urban rail transit is beneficial to alleviate the level of financing constraints of listed companies, and this mitigating effect mainly exists in the samples with high relevance to urban rail transit; (3) The higher the level of financial development, the smaller the degree of corporate financing constraints; (4) Financial development may influence the relationship between financing constraints and urban rail transit. With the improvement of the financial development level, the alleviating effect of urban rail transit on corporate financing constraints is less pronounced. This study gives some references to improve the financing constraints of listed companies and for promoting the sustainable development of urban rail transit.
... At the same time, the Bank of China shows strong "ownership discrimination" and "scale discrimination" in the credit process, and private enterprises are facing more serious financing constraints compared with stateowned enterprises [16]. On the other hand, previous studies have shown that the development of financial market in financial structure can significantly alleviate the financing constraints faced by enterprises [17]. The development of a country's stock market is positively correlated with the external financing channels of small and medium sized enterprises in the test of transnational data; Further domestic research has shown that the development of China's regional financial market can improve China's financial system, so as to relieve the financing constraints faced by enterprises [18,19]. ...
... The pecking order theory of Myers and Majluf (1984) and Myers (1984) can suggest that the low use of debt by SMEs is their decision. Especially the SMEs from developing countries rely mostly on internal sources of capital (Islam, Mozundar, 2007). According to the pecking order theory entrepreneurs choose the sources of financing in a following order: internal sources; debt capital as it requires smaller intervention of the investor in the company; ...
Small and medium enterprises have hindered access to capital almost on a worldwide scale (Abraham, Schmukler, 2017). This phenomenon is called a capital, financing or McMillan gap (Frost, 1954). In order to counteract this market inefficiency, governments establish various public aid mechanisms aimed at facilitating
SMEs access to external funds.
Poland developed quite unique public aid mechanism, where loans, guarantees
and seed capital are provided to a significant extent by various non-profit organisations or entities established by the central government agencies (i.e. Bank Gospodarstwa Krajowego – BGK) or local governments. These organisations services
often exceed financing and include training and advisory services, which are usually financed from the EU and national budgets.
The book which we are pleased to offer to the reader discusses the problem of
financing small and medium-sized enterprises (SMEs) and the role played by loan
and guarantee funds in minimising their capital gap.
Loan funds tend to provide services to SMEs that focus their business activity
on the region preferred by a fund (usually the one where the fund has its headquarters). To qualify for financial support, SMEs must pay their tax and social
insurance obligations in a timely manner and avoid all types of business activity
that might be perceived as environmentally harmful or unethical (i.e. related to
gambling, tobacco production etc.). The range of eligible loan purposes includes
investment projects, operating capital, or a mix of both.
Guarantee funds issue guarantees upon the consideration of the risk of their potential client becoming insolvent. Such funds often assist their customers handling
bank procedures, provide training, and subsequently monitor them to ensure
smooth cooperation with banks. Guarantee funds issue guarantees for loans provided by banks and non-banking institutions that signed cooperation agreements
with them, which limits the borrowers’ options for choosing the lender.
As mentioned before, in addition to grants, non-bank loans and guarantees
are an essential mechanism the SMEs’ capital gap reduction in Poland backed by
EU funds. It results from the fact that the European Union has decided to reduce
the amount of directs subsidies granted to SMEs in favour of financial instruments such as loans, guarantees and venture capital between 2014 and 2020. The
8 Introduction
argument in favour of this decision was low effectiveness and negligible leverage
of subsidies, as well as cases of misuse of grants. Entrepreneurs attempted to adapt
their needs to the range of projects supported by the EU so that they were eligible
for EU funding.
The effects of loan and guarantee funds are known (Beck et. al., 2010), but there
is a lack of information on the effectiveness of the use of public funds by them. An
assessment of the financial sustainability of SME support organisations is necessary to minimise the loss of public funds used in an inefficient way. The reliance
of loan and guarantee funds on government and EU grants makes it necessary to
assess the costs and benefits of public support for such funds. Furthermore, it is
important to determine what factors influence the performance of the loan and
guarantee funds so that their assessment in different countries and regions takes
into account performance constraints. Existing research results focus on assessing the impact of the use of loans and guarantees by entrepreneurs and the scale
of their use (Cowling, Mitchel, 2003; Cowling et al., 2018; Dvouletý et. al., 2019),
without information on how organisations providing non-bank loans and loan
guarantees deal financially and to what extent they depend on external financing.
Taking the above into consideration, the following research questions need to
be asked:
1. What are the business models of loan and guarantee funds in Poland and
have they evolved over time?
2. How stable are the loan and guarantee funds? Is it likely that they will become
financially independent? What changes and what kind of support from the
central government would they need to continue their business in the long
term (after the EU funding becomes unavailable)? How do different elements
of business models (including the width of value proposition, the quality of
information channels and cooperation with partners or possessed resources)
affect the stability measures of loan and guarantee funds in Poland?
3. What is the impact of the level of regional development on the stability and
efficiency of loan and guarantee funds in Poland?
The questions are very important considering the unfavourable events in the
market, including a weakening of the banking sector after the financial downturns
(financial crisis 2008, the influence of Brexit on the EU economy, coronavirus crisis 2020) that may result in lower values and numbers of loans for the SME sector,
more stringent lending criteria and refusals to finance riskier companies (small
and micro organisations). The research questions translate into research objectives
presented below.
The first objective is to identify and analyse business models of loan and guarantee funds in Poland. It also covers the study of the loan and guarantee funds
business models over time. The mechanism of functioning of guarantee funds in
Poland sets restrictions on their business models. These restrictions may affect or
even distort our results – loan and guarantee funds have limited possibilities to
Introduction 9
adjust their offer (supply) to potential clients’ preferences (demand). The parameters of the offer of financial instruments (target group, repayment period, interest
rate) are to a large extent determined by the body providing capital to the fund
for the programme. According to the Polish Association of Loan Funds, granting capital for financial instruments in the EU Financial Framework for the years
2014–2020 with the use of the tendering system further aggravated this problem.
The second objective of the research is to assess the influence of business models of loan and guarantee funds on their stability. Currently, loan and guarantee
funds mainly use financing regional operational programmes, funds from Bank
Gospodarstwa Krajowego and JEREMIE (Joint European Resources for Micro to
Medium Enterprises) initiatives. If in the following years the inflow of EU funds
for the distribution of loan and guarantees is lower, it will be necessary to modify
the business models of loan and guarantee funds to continue the stimulation of the
SMEs sector development. There are many market signals that raise concerns, such
as the weakening in the banking sector. The question that needs to be answered
is whether the operating organisations offering financial support for SMEs have the
capacity for long term development (an increase of the loan share), whether they
may be financially independent and/or what changes and support from the governing authorities they require to continue their activities in the long term (assuming no access to EU funds).
The third objective of the research discussed in this book is the assessment of the
impact of the level of development of the region – as indicated by (1) the value of
fixed capital per capita in the region, (2) the number of enterprises per 1,000 inhabitants weighed by size category, (3) the registered unemployment rate, (4) the average
monthly disposable income per capita, (5) the share of protected areas in the total
area of the region, (6) the saturation with expressways and highways and (7) the
number of public benefit organisations per 1,000 inhabitants – on the effectiveness
of aid schemes for SMEs (measured by the number and value of guarantees granted
and the financial performance of guarantee institutions) and their sustainability.
The following research methods were used to achieve the goals:
1) analysis of regulations, information on websites of loan and guarantee funds
in order to collect information on their business models,
2) analysis of the content of financial statements of organisations operating
loan and guarantee funds, in order to assess their effectiveness and stability,
3) regression analysis, structure analysis,
4) in-depth interviews with one director of a loan fund and the director of
a guarantee fund,
5) a focus study that clarified the results of previous steps of our research, and disclosed additional factors influencing the business models of loan and guarantee funds.
The book is divided into five chapters. Their structure is described in details
below.
10 Introduction
In the first chapter, based on the literature study, we presented the definitions
of the SMEs capital gap and the approaches provided by researchers to measurement, analysis and interpretation of this gap. This chapter also covers an overview
of regional growth and development theories, used later in chapter 5.
In the second chapter, we present research on the capital gap in Poland and the
role of loan and guarantee funds in closing it. Our research shows that the value
of loans and credits guaranteed by guarantee funds was increasing in the analysed
period, thus reducing the SMEs’ capital gap. However, at the same time, we find
that the potential of the guarantee and loan funds is still underexploited. Moreover,
the analysis also shows that loan and guarantee funds are changing their business
models, focusing their activities not on supporting SME investments but on operational support, e.g. by allowing them to participate in tenders and by guarantying
contracts with international customers.
In the third chapter, we describe, basing on the results of focus research and indepth interviews, the process of establishing loan and guarantee funds and evolution of their business models since their inception in the early 1990s. The provided
analysis shows that loan and guarantee funds modified and often enriched almost
all their business model elements.
In the fourth chapter, we describe the organisation of loan and guarantee
schemes and funds in nine other European countries to illustrate the variety of
guarantee schemes within Europe. France, the United Kingdom, Turkey, Austria,
the Czech Republic, Germany, Hungary, Slovakia and Italy are included in the
analysis. We discuss various aspects of the organisation of loan and guarantee
schemes in these countries compared to the system functioning in Poland. It provides a bigger picture of guarantee and loans distribution mechanisms.
In the last, fifth chapter, we analyse with the use of statistical methods, the performance of loan and guarantee funds in Poland. We answer the research questions relating to the stability of loan and guarantee funds and the relationship between the level of regional development and their performance. One of our most
important conclusions is the negative influence of grants received by the loan and
guarantee funds in the previous year on their stability. A possible explanation is
the following.
The reason for this can be the limitation of the range of decisions that managers
of the funds can take to adjust their offer to the expectations of SMEs. The necessity to fulfil the requirements from grant agreements (limiting the range of clients
and type of instruments) does not allow loan and guarantee funds to build long
term relationships with their clients. At the same time, we conclude that there exist regional differences in results achieved by loan and guarantee funds. However,
the negative correlation between number and value of granted guarantees with the
value of fixed assets held by entrepreneurs indicates the appropriate allocation of
state and UE aid by directing guarantees to entrepreneurs who do not have sufficient collaterals for bank loans.
Introduction 11
The findings of our study fill a research gap in assessing the effectiveness of SME
support schemes on the part of the guarantee institutions and thus on the cost side.
The conclusions of the research discussed in the book are important for researchers, financial experts and economists, but also for politicians making decisions
affecting the development and growth of SMEs and spending government funds.
The research is financed by the National Science Centre in Poland and is part
of a project, entitled “Financing the development of loan and guarantee funds”
– grant number 2016/23/B/HS4/00348.
... In an international study, Aggrawal and Zong (2006) find that the coefficient of ICF sensitivity for Germany is the largest (0.139), followed by the US (0.092), Japan (0.021), and the UK (0.008). However, our findings show similar results to Love (2003) and Islam and Mozumdar (2007), who find that investment is more sensitive to cash flow for firms in less financially developed countries, indicating higher costs of information problems and lower availability of external capital in these countries. In this view, the findings of a higher ICF sensitivity compared to developed markets would be caused by the higher market imperfections in Saudi stock market and their consequence on the difficulty to access to external funds. ...
The purpose of this paper is to examine whether the investment–cash flow (ICF) sensitivities vary with macroeconomic conditions. A fixed‐effect panel technique with OLS regression is used to investigate the impact of macroeconomic factors on the ICF sensitivity applying data from a sample of 74 non‐financial firms listed on the Saudi stock market over the period 2004–2018. The results show that the ICF sensitivity is positive, and is a lot larger for more constrained firms. Compared to developed markets, the results show higher ICF sensitivity in Kingdom of Saudi Arabia (KSA). Moreover, the results reveal that business environment of KSA has a considerable influence on the sensitivity of investment to internal funds. The evidence also shows that better macroeconomic conditions relax financial constraints faced by firms, and thereby reduce the sensitivity of investment to internal financing. Expansionary monetary policy, financial development and liquidity abundance reduce the dependence of firms on their internally generated funds when undertaking new investment projects. Finally, the results show that investment expenditures are more sensitive to internal cash flow during the crisis period, supporting our conjecture that constrained access to capital markets is more likely to be detected during times of liquidity crises.
... In accordance with these findings, Wurgler (2000) shows that capital allocation is more efficient in financially developed markets. Similar results are reported by Love (2003) and Islam and Mozumdar (2007), who find that investment is more sensitive to cash flow for firms in less financially developed countries, indicating higher costs of information problems and lower availability of external capital in such countries. In this view, the findings of a higher ICF sensitivity compared to developed markets would be caused by the higher market imperfections in Saudi stock market and their consequence on the difficulty to access to external funds. ...
The purpose of this paper is to examine whether the investment-cash flow sensitivities vary with macroeconomic applying data from a sample of 84 non-financial firms listed on Saudi stock market. The results show that the ICF sensitivity is positive, and is a lot larger for more constrained firms. The evidence also shows that contractionary monetary policy, poor financial development and liquidity crisis strengthen the dependence of firms on internally generated funds when undertaking new investment projects. Taken together, the financial development effect becomes insignificant suggesting that this effect may be caused by either the monetary policy or the financial crisis.
... Os autores encontram uma relação positiva e significativa entre o investimento e o cash flow, controlando as oportunidades de crescimento e dimensão. O estudo seminal de Fazzari et al. (1988) foi, desde então, corroborado por outros estudos, que demonstraram evidência de suporte à hipótese da sensibilidade do investimento ao cash flow constituir um indicador adequado para mensurar as restrições financeiras enfrentadas pelas empresas, embora utilizando diferentes proxies para capturar o grau dessas restrições (e.g., Bond, Elston, Mairesse & Mulkay, 2003;Bond & Meghir, 1994;Calomiris & Hubbard, 1990;Gilchrist & Himmelberg, 1995;Hubbard, Kashyap & Whited, 1995;Islam & Mozumdar, 2007;Love, 2003). ...
O objetivo principal deste trabalho é analisar o impacto das restrições financeiras no investimento e nas reservas de caixa das pequenas e médias empresas portuguesas do setor da metalomecânica. A informação foi recolhida da base de dados SABI, entre 2006 e 2016. Dada a estrutura longitudinal dos nossos dados, as hipóteses foram testadas com recurso a metodologias de dados em painel, nomeadamente através de modelos de efeitos fixos. Os nossos resultados sugerem que as empresas que enfrentam maiores restrições financeiras revelam maior sensibilidade do investimento ao financiamento interno e mantêm maiores reservas de caixa em relação ao cash flow. Por outro lado, as empresas exportadoras aparentam ter maior sensibilidade do seu investimento e das suas reservas de caixa ao cash flow do que as empresas domésticas. Também as empresas que exportam para dentro e para fora do Mercado Comunitário apresentam maior sensibilidade do investimento e das reservas de caixa ao cash flow.
... Kou et al. (2019) emphasize the importance of numerical analysis of financial market with measuring financial systemic risk. Some studies have explicitly confirmed the demand-following hypothesis by employing distinct econometric methods (see for instance, Claessens et al., 2001;Islam and Mozumdar, 2007;Micco et al., 2007;Yartey 2008). Furthermore, the supply-leading hypothesis was documented in the works of Patrick, 1966;Goldsmith, 1969;Jung, 1986;King and Levine, 1993;Levine and Zervos, 1998;Levine et al., 2000;Christopoulous and Tsionas 2004;Güryay et al., 2007. ...
Sound and efficient functioning of financial systems is critical to the economic prosperity of any economy. This paper investigates the tripartite relationship between financial sector output, employment and economic growth in North Cyprus. Using relevant time series data analysis (within the framework of structural breaks and VECM), we found that financial sector output in North Cyprus is sensitive to both internal and external shocks in that its economy is well linked with the global economy, in spite of the political isolation sustained since the bifurcation of Cyprus into North and South. The study further documents evidence of the neutrality hypothesis in the finance-growth nexus. The underlying variables were weakly connected in the short-run. However, economic growth responded to the short-run shocks and handled the equilibrating process of reverting to the long-run trend and thus, the demand following hypothesis is confirmed in the long-run.
... In accordance with these findings, Wurgler (2000) shows that capital allocation is more efficient in financially developed markets. In the same vein, Love (2003) and Islam and Mozumdar (2007) show that the sensitivity of investment to cash decreases with financial market development. In this view, the findings of a higher ICF sensitivity compared to More constrained (8) Less constrained (9) All (7) More constrained (8) Less constrained ( (3) show coefficient estimates for the full sample, more-constrained and lessconstrained firms, respectively. ...
Purpose
The purpose of this paper is to examine the effect of Sharia-compliance (SC) on investment sensitivity to internal funds in oil rich countries.
Design/methodology/approach
A fixed-effect panel technique with OLS regression is used to investigate such relationship applying data from a sample of 207 non-financial firms listed on the Gulf Cooperation Council (GCC) stock markets over the period 2009–2014.
Findings
The results show that the investment-cash flow (ICF) sensitivity is positive, and is a lot larger for more constrained firms. Compared to developed markets, the results show higher ICF sensitivity in GCC countries. The evidence also shows that SC decreases the dependence of firms on internally generated funds when undertaking new investment projects. Unexpectedly, the results reveal that the ICF sensitivity increases when liquidity becomes abundant. Additional analysis suggests that investment expenditures of firms display a greater sensitivity to cash flow in the crisis period.
Practical implications
The implications of this study are that SC is a nature of business that reduces the propensity of corporations to undertake inefficient investments that are derived from capital market imperfections. However, manager ability to overinvest increases when liquidity is abundant suggesting that cash-rich firms are more likely to engage in value-decreasing projects.
Originality/value
The proposed study presents several originalities. First, it provides evidence on ICF sensitivity in specific emerging economies, namely the GCC countries. Second, it highlights the issue of efficient investment. For this purpose, the present paper focuses on Sharia-compliant (SC) firms where financial constraints are bound to be more stringent than for non-Sharia-compliant (NSC) firms. Finally, the study findings enable us to investigate what the sudden abundance of liquidity, generated by the record levels of oil prices, as well as the financial crisis implied for the ICF relationship.
... According to IMF (2017) country assessment report, Pakistan has developing financial sector. Islam (2007) noted that companies in underdeveloped or developing financial market becomes sensitive regarding to capital strcuture due to absence of favourable environment. Schmukler (2006) suggested in his study that cost of financing decreased due to development of financial sector because alternative sources of financing increase. ...
Objective: This study exemplifies how banking sector development influences capital structure of non-financial Sector firms. Methodology: In this study, deductive approach has been used and capital structure used as explained variable. Banking sector development used as explanatory variable and proxies by five key ratios. The six years data ranges from the year 2010 to 2015 used and fixed effect model applied for regression analysis. Findings: The statistical results indicate that first and 4th hypotheses partially accepted while second and third hypotheses fully rejected. The results of study recommend financing policy for finance mangers to consider banking sector development while deciding capital structure. Originality: This study may mark as first study in Pakistan which checks the regression among discussed variables and also the behavior of change.
... Ağca and Mozumdar (2008) suggested that investment-cash flow sensitivity decreases with factors that reduce capital market imperfections. Islam and Mozumdar (2007) found a negative relationship between cross-country financial development and the importance of internal capital for investment decisions. Brown and Petersen (2009) examined the changes in investment-cash flow sensitivity over the period from 1970 to 2006. ...
This study examines the impact of financial development on corporate investment in terms of their influence on financing constraints. This study also tries to find the effect of financial development on the investment-cash flow sensitivity across the size, degree of financial constraints and group affiliation of the firm. This study employs dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique. The estimation results reveal that cash flow affects the investment decision of the company positively, which implies that Indian firms are financially constrained. Also, we observe that financial development reduces the investment-cash flow sensitivity and the effect of financial development is more prominent for small size and standalone firms. The results are robust across the period and, for both financially constrained and unconstrained firms. This study contributes to the existing literature by analyzing the impact of financial development on the role of cash flow in determining investments undertaken by the Indian firms, which is an unexplored issue from an emerging market perspective.
... A literatura sobre o impacto das restrições financeiras no investimento é muito extensa, mas só recentemente os estudos começaram a sustentar essas teorias com evidência empírica. Neste contexto, Carreira e Silva (2010) atribuem essa recente onda de estudos empíricos à disponibilidade da informação (nomeadamente, de microdados), juntamente com os desenvolvimentos no campo da econometria, onde se destacam os seguintes estudos: Bond et al. (2003), Boyle e Guthrie (2003), Love (2003), Islam e Mozumdar, (2007). O foco da análise desses estudos são grandes empresas cotadas. ...
Resumo Objetivo: O objetivo deste trabalho é investigar o impacto das restrições financeiras na decisão de investimento em ativos reais. Para tal, analisamos a sensibilidade do investimento empresarial ao financiamento interno, ou seja, ao cash flow. Metodologia: Dada a evidência demonstrada pelos estudos empíricos anteriores, as nossas hipóteses de investigação foram testadas através de metodologias de dados em painel. A amostra usada neste estudo baseia-se num conjunto de pequenas e médias empresas portuguesas pertencente ao setor têxtil. O período em análise é entre 2005 e 2015. Resultados: Os nossos resultados sugerem uma relação positiva e significativa entre o investimento e o cash flow, sendo que a magnitude dessa relação é alterada conforme o status das empresas seja considerado como restrito ou não restrito financeiramente. Adicionalmente, examinamos a relação entre as reservas de caixa e o cash flow. Os nossos resultados demonstram evidência que as empresas consideradas como financeiramente restritas conservam maiores reservas de caixa para precaverem o investimento atual e futuro. Originalidade: Tanto quanto é de nosso conhecimento, este estudo é o primeiro a demonstrar evidência sobre a sensibilidade do investimento ao financiamento interno no Setor Têxtil Português. Deste modo, este trabalho contribui para a literatura da estrutura de capitais sobre empresas de pequena e média dimensão. Palavras-chave: Fluxo de caixa; investimento; restrições financeiras; reservas de caixa; endividamento 1. Introdução No seu trabalho seminal, Fazzari et al. (1988) argumentam que as empresas com maiores restrições financeiras baseiam o seu investimento no fluxo de caixa disponível, dado o custo de acesso ao financiamento externo ser muito elevado. Neste contexto, o presente trabalho tem como principal objetivo demonstrar evidência sobre o impacto das restrições 1 ISCAP-Instituto Politécnico do Porto.
... The results obtained by Hubbard, Kashyap & Whited (1995) are similar to those of Fazzari et al. (1988), since they analyzed the distribution of dividends with the same purpose of assessing the sensitivity of the investment to cash flow; both studies have shown that the companies with the highest dividend payout ratio belong to the group with the lowest financial restrictions. Those researches were followed by others that obtained similar results: Calomiris and Himmelberg (1995), Alti (2003), Bond, Elston, Mairesse & Mulkay (2003), Boyle and Guthrie (2003), Love (2003) or Islam and Mozumdar (2007), among others. ...
The purpose of this study is to analyze the degree of financial constraints faced by the companies included on the Portuguese Stock General Index when accessing to external financing, especially after the beginning and during the most recent financial crisis that affected the world financial markets from 2007. According to this aim, a longitudinal database is collected from the SABI database and was analyzed under panel data methodology. The final sample is panel data of 430 firm-year observations, related to 43 companies, during the period 2006-2015.In line with previous literature, our results provide evidence that the payout ratio is an efficient measure of the degree of financial constraints; companies that pay out less (or no) dividends display higher sensitivity of the investment to the cash flow. Moreover, we also found that the investment sensitivity to cash flow intensifies immediately after and during the most recent financial crisis.
... The theoretical literature on the effect of financial market development on bank capital ratio stems from the finance growth literature that highlights the importance of the financial system in enhancing economic growth (Bena & Ondko, 2012;Djalilov & Piesse, 2011;Gloede & Rungruxsirivorn, 2013;Levine, 2005;Murinde, 2012;Narayan & Narayan, 2013). The development of financial markets due to financial openness enhances firm growth and reduces the dependence of firms on internal capital for investment purposes (Bena & Ondko, 2012;Islam & Mozumdar, 2007). This action suggests that firms may need to seek some form of external finance, which, may be in the form of bank loans, equity, preference shares, corporate bonds or any other means of financing available. ...
Financial sector liberalization in many African countries, set in a series of financial sector reforms, aimed at developing the system. Theoretically, reforms that develop the banking sector are expected to improve banks’ performance and reduce excessive bank-risk taking by enhancing bank capital ratio in addition to maintain the stability in the system. Nonetheless, literature also shows that the health of the financial system may be at risk following a liberalization process in the form of contagion effects of financial markets integration. A recent example is the global 2007/2008 global financial crisis. Against this background, this article examines the extent to which banking sector development in selected African countries affect the commercial banks’ capitalization ratio. Employing a dynamic panel regression technique for the examination while controlling for bank-specific and macroeconomic factors over the period 2000–2014, this article finds that banking sector development in the selected countries improves bank capital ratio consistent with the aims of banking sector reforms and the maintenance of stable financial system.
... Love (2003) finds that costs generated by market imperfections are lower in countries with strong shareholder protection, which reduces investment-cash flow sensitivity of firms from these countries. The empirical works of Islam and Mozumdar (2007) and Agca and Mozumdar (2008) highlight that greater sensitivity of investment to internal funds is associated with factors that increase capital market imperfections. 4 In a similar line of research, Ascioglu et al. (2008) find a positive relationship between the degree of asymmetric information-as a type of market imperfections-and investment-cash flow sensitivity. ...
This study investigates the effect of ownership structure on the use of cash flow in financing corporate investments—the investment-cash flow sensitivity—in a concentrated ownership context. Using a sample of 6797 French listed firms from 2000 to 2013, results show that investment-cash flow sensitivity decreases with the cash-flow rights of the controlling shareholder and increases with the separation of its cash-flow and control rights (excess control rights). Firms are, thus, less likely to use cash flow in investments when the interests of controlling shareholders are aligned with those of minority shareholders. However, they appear to use considerable internal funds for their investments when they have severe agency problems, driven by excess control rights of the controlling shareholders. Overall, our findings help advance the understanding of the role of agency relationship in shaping corporate financial policy.
... In this study, cash holdings in the developing market is investigated which is different in governance and institutional framework from the US and UK (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997). In cash holding literature there are studies which have pointed out that there are significant differences among the cash holding behaviour of developed and developing countries (see, for example, Islam & Mozumdar, 2007;Fernandes & Gonenc, 2014;Kusnadi & Wei, 2011). However, Al-Najjar (2013) observed that there are similarities between developed and developing countries on the factors determining cash holdings. ...
This study aims to investigate the direct relationship between precautionary cash holdings, cash flow volatility and the financial constraints of Pakistani firms for the period 2003–2013.The study also takes into account the 2008 financial crisis. This study seeks to discover that if a firm is financially constrained and its cash flows are highly volatile then it will increase its cash holdings and voluntarily reduce its current investment level due to the intertemporal trade-off between current and future investments. Thus, a positive relationship between cash holdings and future cash flow volatility and a negative relationship between current investments and future cash flow volatility is expected. In order to test the impact of cash flow volatility firms are classified in to constrained and unconstrained groups on the basis of four criteria, i.e., firm size, dividend payment, Kaplan-Zingales (KZ) index and group affiliation. For each criterion estimation is done by using two steps Generalised Method of Moments (GMM) estimator. Results show that financially constrained firms increase their cash holdings when cash flow volatility increases while financially unconstrained firms do not, except for KZ index criteria. It is also found that during the 2008 financial crisis constrained firms were more prone to saving cash than unconstrained ones. The study provides important insights into understanding the behaviour of Pakistani firms relating to cash holdings when they are financially constrained and cash flows are highly volatile. This is the first study of its kind that establishes a conclusive relationship between precautionary cash holdings, cash flow volatility and financial constraints in a Pakistani context.
... Various empirical studies such as those of Allayannis and Mozumdar (2004) and Pawlina and Renneboug (2005); Cleary (2006); Love and Zicchino (2006); Aggarwal and Zong (2006) and Islam and Mozumdar (2007) have focused on the analysis of the relationship between investment and internal funds. The study of Pawlina and Renneboug (2005) show that firms with excess cash and strong growth opportunities chooses to finance investment through internal resources. ...
This study investigates the impact of financial constraints on investment decisions and corporate cash holding of Tunisian firms over the period of 2003-2013. We will investigate this task in a particular context which is the Jasmine Revolution. Our results show that the investment decisions of firms with financial constraints are significantly sensitive to the availability and the level of internal funds versus unconstrained ones. Generally, our results suggest that financial constraints significantly influence the decisions of Tunisian companies. In particular, these financial constraints are considered more handicapping during negative cash years and after the revolution.
... Prior researches confirm that investment can exhibit an excess of sensitivity to cash flow in many circumstances (Ağca and Mozumdar, 2008;Cleary, 1999;Cull et al., 2015;Fazzari et al., 1988;George et al., 2011;Islam and Mozumdar, 2006;Kaplan and Zingales, 1997;Kim, 2014;Love, 2003). This can be explained in terms of restricted access to external finance. ...
Purpose
The purpose of this paper is to document the relation between investment-cash flow sensitivity and a firm’s engagement in corporate social responsibility (CSR) activities in European context. Specifically, this paper aims to empirically examine how CSR moderates the sensitivity between investment spending and firm internal funds.
Design/methodology/approach
The Euler equation technique approach is applied to test the sensitivity of investment to internally generated funds for a panel data set of 398 European companies listed in the STOXX Europe 600 during 2009-2014. Furthermore, a mediated moderation model is developed in order to examine the moderating role of CSR in the investment-cash flow sensitivity, as well as the mediating role of agency costs on the moderation effect of CSR.
Findings
The results show that CSR performance weakens the sensitivity of investment to internal funds; agency costs of free cash flow mediate the negative moderating effect of CSR on investment-cash flow sensitivity. Thus, this study demonstrates empirically that firms with socially responsible practices are better positioned to obtain financing in the capital markets through reducing market frictions as well as agency costs.
Practical implications
Firms are invited to engage more in CSR activities that reduce agency conflicts between management and shareholders.
Originality/value
The originality of this paper consists in proposing the establishment of both direct and indirect link between CSR and investment-cash flow sensitivity.
... Several studies show the presence of a positive correlation between behavioural biases leader's and the absence of a dividend distribution policy. Islam and Mozumdar (2007) point out that in the presence of asymmetric information lenders increase the premium charged on external financing (debts or equities). This implies that an optimistic leader about his company capacities prefers self-financing to fund his investment projects. ...
This paper assumes that managers, investors or both behave irrationally. More specifically, it examines the links between managenal emotional characteristics' and firm dividend policy. This stream of research argues whether to distnbute dividends or not depends on CEO emotional intelligence level. We introduce an approach based on decision tree analysis technique with a series of semi-directive interviews. The originality of this research paper is guaranteed since it treats the behavioural corporate policy choice in emergent markets. To the best of our knowledge, this is the first study in the Tunisian context that explores such area of research. Our results show that CEO emotional intelligence level encouraged using this leverage to report the decision performance of the business, the application of a dividend distribution policy.
... Several studies show the presence of a positive correlation between behavioural biases leader's and the absence of a dividend distribution policy. Islam and Mozumdar (2007) point out that in the presence of asymmetric information lenders increase the premium charged on external financing (debts or equities). This implies that an optimistic leader about his company capacities prefers self-financing to fund his investment projects. ...
This paper assumes that managers, investors or both behave irrationally. More specifically, it examines the links between managerial emotional characteristics' and firm dividend policy. This stream of research argues whether to distribute dividends or not depends on CEO emotional intelligence level. We introduce an approach based on decision tree analysis technique with a series of semi-directive interviews. The originality of this research paper is guaranteed since it treats the behavioural corporate policy choice in emergent markets. To the best of our knowledge, this is the first study in the Tunisian context that explores such area of research. Our results show that CEO emotional intelligence level encouraged using this leverage to report the decision performance of the business, the application of a dividend distribution policy.
... Both the short term and long term effect of financial market development on the economic growth has been addressed as in the study of [4] who have demonstrated in their study on Argentinean economy that financial liberalization has had a positive and long term effect on economic growth even though in short run it has negative impact as well. At the same point in time [5] have their opinion that the echelon of financial market development reduce up to those firms which are entirely depends upon the internal capital for the corporate level investment opportunities. In addition to above findings the study of [6] have shown that efficient allocation of the resources come into existence through financial market development. ...
... and external costs of funding, depends on the institutional context (e.g., Love 2003;Khurana, Pereira, and Martin 2006;Islam and Mozumdar 2007). Compared to other countries, the United States has a well-developed "frictionless" financial market with strong investor protection and contract enforcement, and with relatively better access to outside financing (Francis et al. 2005). ...
We investigate the link between analyst forecast characteristics and the cost of debt financing in international markets, and the influence of country-level institutions. Using a sample of 3,768 bond issues from 42 non-U.S. countries from 1996 to 2014, we find statistically and economically significant evidence that analysts lower bond yield spreads. Furthermore, this relation is stronger in firms operating in countries with weak institutions governing property rights, creditor protection, and disclosure standards. Overall, our findings imply that financial analysts play an important role as information intermediaries, and show that this relation is especially important in countries with weak institutional environments.
Purpose
This study investigates the impact of oil price uncertainty on corporate cash holdings. Moreover, it examines whether the effect of oil price volatility differs between Shariah-compliant corporations (SCCs) and non-Shariah-compliant corporations (NSCs). It also explores the role of Islamic financial development in the home countries of these corporations in this relationship
Design/methodology/approach
The study utilizes a sample of non-financial firms listed in eight emerging economies, for the period between 2013 and 2019. A static, ordinary least squares, and dynamic, Generalized Method of Moments models have been employed to test the hypotheses of the study.
Findings
The findings reveal that, on average, high oil price uncertainty influences both SCCs and NSCs. However, SCCs are more severely affected than NSCs. Notably, during periods of high oil price uncertainty, SCCs reserve more cash than their NSC counterparts. Additionally, the Islamic financial development of the country moderates the severity of the impact of oil price uncertainty on SCCs. Further analysis suggests that the impact of oil price uncertainty is more pronounced for firms operating in oil-exporting countries.
Research limitations/implications
Corporate managers should build a liquidity strategy that allows them to deal with oil price uncertainty. Also, the findings of the study highlight the importance for Islamic financial development of Islamic countries. The improved Islamic financial development of the country improves access to capital markets for shariah compliant firms and hence, reduces their need for holding excessive large amount of cash asset.
Originality/value
The study contributes to the growing literature on the effects of oil price uncertainty on corporate cash holding policy by highlighting the roles of Shariah compliance status and Islamic financial development in this relationship. It is the first to explore the joint relationship between oil price uncertainty, Shariah compliance, and corporate cash holding policy.
The decline and diminishment of investment-cash flow sensitivity remains a puzzle in literature. This paper attempts to address this puzzle by examining the heterogeneous effects of domestic financial liberalization and international financial integration on corporate investment-cash flow sensitivity. Using a large firm level data for 69 developed and emerging economies over the period 1995-2019, we provide robust evidence that firms in countries with more liberalized domestic financial markets exhibit lower sensitivity of investment to the availability of cash flows. Reducing financial constraints and then promoting external finance are possible mechanisms through which domestic financial liberalization affects investment-cash flow sensitivity. While the effect of international financial integration, on average, is less clear, our results show that increases in international financial integration promote investment more for firms with higher cash flows in high income economics but more for firms with lower cash flows in non-high income economies. Our paper provides new insights into the real effects of financial institutional arrangements on the economy.
The chapter examines the relationship between sectoral growth and sectoral credit across Indian states during last four decades. Findings based on system generalized method of moments estimations reveal that in the decades of 1980 and 1990, different credit components hardly had any effect on Indian states’ sectoral growth. However, in the 2000s, financial intermediation exerts a positive and significant effect on economic growth, given that service sector credit witnessed the most significant spurt. Contrary to expectations, industrial credit did not affect sectoral growth in the 1990s following a significant deceleration in the industrial sector. However, following the revival of industrial sector in the decade of 2000 and the subsequent period under investigation, industrial credit played a significant role in growth process of states. The rapid growth in Indian economy in the 1990s has been primarily supported by service sector rather than industry. However, major policy concern lies in an optimal allocation of resources through efficient credit delivery mechanism and investment in infrastructure for sustained and balanced growth across sectors.
This eagerly awaited update of a popular text has been substantially revised and updated to incorporate developments in the field of International Business. It continues to do so in Alan Sitkin's characteristically direct, lively and accessible style which is ideal for introductory students. This new edition expands upon issues of growing importance to global businesses, including corporate social responsibility, corporate citizenship and sustainability. It explores topics of great importance to business at the start of the new decade, including digital transformation and digital business, and explores the intersection of technology and pandemic-accelerated change to look to the future of business in a global setting. Enriched with practitioner examples as well as new, colourful and illustrative cases, and ideally structured to make navigation and learning straightforward, this textbook is an ideal introduction to international business. Tutors are supported with a range of materials including an instructor manual, testbank, suggested assignment questions and resources to offer their students, such as revision tips, additional cases and self-test multiple-choice questions.
We demonstrate that the severity of financial constraints has declined over time for two reasons: (i) improved access to external funds as evidenced by a decreased reliance on internal cash flows, and (ii) an inward shifting investment frontier with reduced investment opportunities. The decline in financial constraints coincides with the documented diminishing sensitivity of investment to cash flows, yet we show that cash flows remain a determining factor in helping constrained firms overcome restricted access to external capital. There is a flight‐to‐quality during economic shocks, where the adverse effects following periods of tightened credit are particularly pronounced for smaller firms, with larger firms appearing largely unaffected.
This article is protected by copyright. All rights reserved.
A key issue in artistic labor market is human capital. The basic question is whether human capital can play a significant role in the first level artists’ labour market? Some cultural economists believe that human capital does not have any effect on the first level artists’ labour market, but the prevailing literature suggests a positive impact of human capital. On the other hand, despite the recent wave of attention of researchers to the importance and position of financial development, it is critical to investigate the role of external financing in cultural employment.
However, no study has been ever done which examine the role of financial development in the first level artists’ labour market. This research, considering the frictions of the first level artists’ labour market, explain a different view through a theoretical study of the potential of financial development to finance the self-employment of artists.
Our findings reveal the role of financial development in the first level artists’ labour market. The results show that financial development through existing mechanisms can play a significant role in reducing frictions in this market, or in reducing their adverse effects of them. Accordingly, the first level artists’ labour market will be adjusted to the social optimal equilibrium. To achieve this, it is necessary to develop the financial system to reduce the frictions of the first level artists’ labour market, and to supply innovative financial instruments to develop the access of the first level artists.
Since 2001, the China Securities Regulatory Commission has implemented a series of policies to ensure that dividend payments constitute a prerequisite of equity financing, which is known as the semi-mandatory dividend policy. Using a sample of Chinese listed firms from 2007 to 2015, we demonstrate that firms with more R&D investments tend to pay more dividends. This can be explained by the semi-mandatory dividend policy and the equity dependence of R&D investments. R&D firms are more likely to have equity financing needs and they have strategic incentives to pay dividends in order to access external equity markets. Such pay-for-financing incentives are stronger for firms with lower cash holdings and higher internal financing deficit. We further demonstrate equity financing needs as the underlying mechanism for R&D investments to positively affect dividend payout. In addition, we show that such semi-mandatory dividend payments adversely affect firm value and sustainable growth.
In the study, it is aimed to reveal the effect of agency costs on financial constraints.
The data of the 12 firms that have been operating continuously in BIST Basic Metal Index during the period of 2008-2017 were analyzed by static and dynamic panel data analysis. Statistically significant and negative relationship was found the agency costs between firm managers and creditors to the firm and financial constraint, while there was a statistically significant relationship between agency costs between managers and shareholders and between shareholders and creditors could not be determined. Therefore, firms operating in the BIST Basic Metal Index need to consider the agency costs that may arise between managers and creditors to avoid financial constraints or
minimize financial constraints.
Çalışmada, temsil maliyetlerinin finansal kısıtlara olan etkisini ortaya çıkarmak amaçlanmıştır. Bu doğrultuda Borsa İstanbul Metal Ana Endeksi’nde devamlı olarak faaliyet gösteren 12 firmanın 2008-2017 dönemindeki verileri, statik ve dinamik panel veri analizleri ile incelenmiştir. Çalışmada, firma yöneticileri ile firmaya borç verenler arasında ortaya çıkan temsil maliyetleri ile finansal kısıt arasında istatistiksel olarak anlamlı ve negatif ilişki tespit edilirken, yöneticiler - hissedarlar arasında ve hissedar - borç verenler arasında ortaya çıkan temsil maliyetleri ile finansal kısıt arasında ise istatistiksel olarak anlamlı bir ilişki tespit edilememiştir. Dolayısıyla, BIST Ana Metal Endeksinde faaliyet gösteren firmaların finansal kısıtlar ile karşı karşıya kalmamak ya da finansal kısıtları minimize edebilmek için yönetici ile borç verenler arasında oluşabilecek temsil maliyetlerini dikkate almaları gerekmektedir.
Using a new and unique dataset of Chinese private firms, this paper explores how private firms access bank loans to finance innovative activities. The results reveal that political connection, rather than membership in a government-controlled business association, largely determines private firms' innovations by providing access to bank loans. Furthermore, the “grease-the-wheels” mechanism of political connection is stronger if the firms are more constrained financially, located in regions with low levels of financial development, or located in regions with relatively under-developed institutional environments. Finally, cash flow, used to measure internal financing, and trade credit, used to measure informal financing, are important alternative financing channels and support firms' R&D investments. Our paper implies that China's government needs to continue fostering a good financing environment and supporting innovation activities.
Purpose
This paper aims to examine how financial development affects the growth of industries that are more dependent on external finance, demystifying the roles played by the banks, stock and bond markets.
Design/methodology/approach
The authors apply panel fixed-effects and dynamic panel generalized methods of moments on disaggregated industry-level data of the Indian manufacturing sector for the period of 2001-2015 to examine the relationship between financial development, banking market structure and economic growth.
Findings
The study finds that financial development has a significant impact on the growth process by reducing cost of external finance. Among the three sources of finance, the study finds that while the banking sector has been the most preferred source of external finance, increasing concentration and selective disbursement of credit have continued to dent the prospects of the industry. This paradoxical result explains the dismal performance of the Indian manufacturing sector.
Originality/value
The effect of financial development (encompassing banking market structure) on economic growth has received sparing attention. Related literature is unclear regarding the impact of banking market structure on the growth process in the context of emerging economies. The authors attempt to fill this important gap in the literature. Moreover, they add novelty to the literature by calculating the external dependence at the firm level, diverging from using US industry as a proxy for calculation of external dependence.
Financial factors have been found highly important in influencing firms’ real activities and in promoting aggregate growth. Yet, the linkage between finance and firm-level total factor productivity (TFP) has been overlooked in the literature. I fill this gap using 147,310 non-listed Chinese firms over the period 1999–2007 to estimate a TFP model augmented with working capital. I find that TFP is strongly and significantly associated with working capital for private and foreign firms, but not for SOEs. More specifically, an increase in working capital has a negative (positive) effect on TFP in firms with positive (negative) working capital. Furthermore, highly external financial constrained, highly internal financial constrained, under-developed institutional regions and small size private and foreign firms are more sensitive to working capital.
Motivated by ongoing debates on investment–cash flow sensitivity (ICFS) and its documented decline and disappearance in the U.S., we investigate the determinants of ICFS. Using firm-level data across 41 countries for the 1993–2013 period, we document an important role of asset tangibility in explaining the patterns in ICFS. Asset tangibility affects ICFS through two channels: investment intensity and cash flow persistence. As the share of tangible capital, investment and cash flow persistence has fallen in developed economies, ICFS has declined. In contrast, as developing economies operate with more tangible capital, have higher investment rates and more persistent cash flows, their ICFS is more stable. The results support our explanation of ICFS as a reflection of capital (investment) intensity and income predictability, rather than a measure of financial constraints.
The main objective of the current study is to examine the effect of audit report on cash-flow investment sensitivity of 123 listed companies in Tehran Stock Exchange (TSE) during 2006-2010. Regression analysis and synthetic data were used for data analysis. The results showed that receiving modified report has a significant negative effect on cash flow-investment sensitivity. The findings also suggest the significant effect of receiving qualified report and unqualified report with explanatory paragraphs on cash flow-investment sensitivity.
Stole and Luigi Zingales for very useful comments.
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
We study how a firm's optimal investment varies with two different measures of financial constraints: the firm's internal funds and the extent of asymmetric information between the firm and outside investors. We derive the financial contract between firm and investor endogenously; in our model, a debt contract is optimal. Decreases in internal funds and more asymmetric information both worsen the financial situation of the firm. However, they differ in their effects on the firm's investment because they change the marginal cost of debt finance in different ways. More asymmetric information generally leads to lower investment, and investment becomes more sensitive to changes in internal funds. The relationship between internal funds and investment, in contrast, is U-shaped: depending on the level of a firm's internal funds, a decrease in internal funds may lead to decreased, unchanged, or even increased investment. Our results explain seemingly contradictory findings in the recent empirical literature.
"First draft: June 1988--This draft: September 1988."--T.p.
A recent paper in this Journal by Kaplan and Zingales reexamines a subset of firms from work of Fazzari, Hubbard, and Petersen and criticizes the usefulness
of investment-cash flow sensitivities for detecting financing constraints. We show that the Kaplan and Zingales theoretical
model fails to capture the approach employed in the literature and thus does not provide an effective critique. Moreover,
we describe why their empirical classification system is flawed in identifYing both whether firms are constrained and the
relative degree of constraints across firm groups. We conclude that their results do not support their conclusions about the
usefulness of investment-cash flow sensitivities.
Using a sample of forty-nine countries, the authors show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries. Coauthors are Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. Copyright 1997 by American Finance Association.
Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the "cost of capital" or "q"). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a "financing hierarchy," in which internal finance has important cost advantages over external finance. We build on recent research concerning imperfections in markets for equity and debt. This work suggests that some firms do not have sufficient access to external capital markets to enable them to respond to changes in the cost of capital, asset prices, or tax-based investment incentives. To the extent that firms are constrained in their ability to raise funds externally, investment spending may be sensitive to the availability of internal finance. That is, investment may display "excess sensitivity" to movements in cash flow. In this paper, we work within the q theory of investment, and examine the importance of a financing hierarchy created by capital-market imperfections. Using panel data on individual manufacturing firms, we compare the investment behavior of rapidly growing firms that exhaust all of their internal finance with that of mature firms paying dividends. We find that q values remain very high for significant periods of time for firms paying no dividends, relative to those for mature firms. We also find that investment is more sensitive to cash flow for the group of firms that our model implies is most likely to face external finance constraints. These results are consistent with the augmented model we propose, which takes into account different financing regimes for different groups of firms. Some extensions and implications for public policy are discussed at the end.
Suppose that a firm receives a cash windfall which does not change its investment opportunity set, or equivalently its marginal Tobin's Q. What will this firm do with the money? We provide empirical answers to this question using a sample of firms with such windfalls in the form of a won or settled lawsuit. We examine a variety of decisions of the firm to shed light on alternative theories of corporate financing and investment. Our evidence is broadly inconsistent with the perfect capital markets model. The results need to be stretched considerably to fit the asymmetric information model in which managers act in the interest of shareholders. The evidence supports the agency model of managerial behavior, in which managers try to ensure the long run survival and independence of the firms with themselves at the helm.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Do well-functioning stock markets and banks promote long-run economic growth? This paper shows that stock market liquidity and banking development both positively predict growth, capital accumulation, and productivity improvements when entered together in regressions, even after controlling for economic and political factors. The results are consistent with the views that financial markets provide important services for growth and that stock markets provide different services from banks. The paper also finds that stock market size, volatility, and international integration are not robustly linked with growth and that none of the financial indicators is closely associated with private saving rates. Copyright 1998 by American Economic Association.
Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow. Paralleling these findings is the disappointing performance of the q theory of investment: even though marginal q should summarize the effects of all factors relevant to the investment decision, cash flow still matters. We examine whether this failure is due to error in measuring marginal q. Using measurement error-consistent generalized method of moments estimators, we find that most of the stylized facts produced by investment-q cash flow regressions are artifacts of measurement error. Cash flow does not matter, even for financially constrained firms, and despite its simple structure, q theory has good explanatory power once purged of measurement error.
This textbook provides an introduction to econometrics through a grounding in probability theory and statistical inference. The emphasis is on the concepts and ideas underlying probability theory and statistical inference, and on motivating the learning of them both at a formal and an intuitive level. It encourages the mastering of fundamental concepts and theoretical perspectives which guide the formulation and solution of problems in econometric modelling. This makes it an ideal introduction to empirical econometric modelling and the more advanced econometric literature. It is recommended for use on courses giving students a thorough grounding in econometrics at undergraduate or graduate level.
Recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks. Evidence for such a mechanism (also known as the ‘financial accelerator’) consists largely of firm-level studies showing that cash flow is an important predictor of investment. But this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities. In this paper, we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a ‘fundamental’ versus its role in alleviating credit frictions. For firms with access to commercial paper and bond markets, we find that the perfect capital markets model of investment can fully account for the role of cash flow. For firms with only limited access to capital markets (as indicated by lack of participation in public debt markets) however, investment appears to be ‘excessively’ sensitive to fluctuations in cash flow. These results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator.
We compare the investment–cash flow sensitivity of Korean chaebols (conglomerates) and non-chaebol firms. We show that investment–cash flow sensitivity is low and insignificant for chaebol firms but is high and significant for non-chaebol firms. On the other hand, a chaebol firm's investment is significantly related to the growth opportunities but that of a non-chaebol firm is not. A chaebol firm's investment is significantly affected by the cash flow of other firms within the same chaebol even though they are independent legal entities. With these findings, we argue that there is an internal capital market in a chaebol and the internal capital market reduces the financing constraints of the chaebol. However, the operation of the internal capital market does not improve the efficiency of allocation of scarce funds in the Korean economy since we find that chaebols invest more than non-chaebol firms despite their relatively poor growth opportunities.
This paper uses international panel data to examine the interrelationships among some commonly used measures of financial constraint. The analysis reveals the following insights: (1) firms with stronger financial positions are more investment-cash flow sensitive than firms with weaker financial positions even after controlling for size and dividend payout and (2) higher payout firms are more investment-cash flow sensitive than lower payout firms even after controlling for size and financial strength. Evidence regarding the impact of firm size that is documented originally becomes much weaker once financial health and dividend payout behavior are controlled for. Finally, additional analysis reveals that many of these results may be driven by the fact that firms possessing high cash flow volatility display lower investment-cash flow sensitivities.
Kaplan and Zingales [Quart. J. Econ. 112 (1997) 169] and Clearly [J. Finance 54 (2) (1999) 673] diverge from the large literature on investment–cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms. We examine if this result can be explained by the fact that when firms are in sufficiently bad shape (incurring cash losses), investment cannot respond to cash flow. We find that while Cleary's results can be explained by such negative cash flow observations, the Kaplan–Zingales results are driven more by a few influential observations in a small sample. We also record a decline in investment–cash flow sensitivity over the 1977–1996 period, particularly for the most constrained firms.
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.
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
Using detailed information on the debt structure of 250 publicly traded U.S. firms over the 1980-93 period, we find that the sensitivity of investment to internally generated funds increases with a firm's reliance on bank financing. Bank-dependent firms also hold larger stocks of liquid assets and have lower dividend payout rates. However, the greater cash sensitivity of investment for bank-dependent firms arises only for the largest capital expenditures (relative to assets). For most levels of investment spending, bank-dependent firms appear to be slightly less cash-flow-constrained than firms with access to public debt markets. Copyright 2001 by University of Chicago Press.
Work by Kaplan and Zingales provides both theoretical arguments and empirical evidence that investment-cash �ow sensitivities are not good indicators of �nancing constraints. Fazzari, Hubbard, and Petersen {this Journal} criticize those �ndings. In this note we explain how the Fazzari et al. criticisms are either very supportive of the claims in earlier work by Kaplan and Zingales or incorrect. We conclude with a discussion of unanswered questions. Fazzari, Hubbard, and Petersen {1988} (hereinafter, FHP {1988}) introduce a methodology to identify the presence of �nancing constraints based on the differential sensitivity of corporate investment to cash �ow. Kaplan and Zingales {1997} (hereinafter, KZ) provide both theoretical arguments and empirical evidence that this differential sensitivity is not a valid measure of �nancing constraints. Fazzari, Hubbard, and Petersen {2000} (hereinafter, FHP {2000}) criticize those �ndings. In this note we explain that the main arguments in FHP {2000} are, in fact, quite supportive of KZ’s main conclusion, while the speci�c criticisms in FHP {2000} are unjusti�ed. I. POINTS OF AGREEMENT FHP {2000} admit that �nancially distressed �rms are likely to have lower investment-cash �ow sensitivities than less �nancially constrained �rms. This is exactly the point that the KZ model makes: investment-cash �ow sensitivities are not necessarily monotonic in the degree of �nancing constraints. The only disagreement FHP {2000} have with KZ is how pervasive the nonmonotonicity result is. But this is ultimately an empirical question. FHP {2000} also recognize that the literature on investmentcash �ow sensitivities has not been based on a solid theoretical foundation. As KZ point out, the practice of (1) splitting the sample according to a measure of �nancing constraints and then
No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing
the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find
that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more
financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results
(and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more
financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.
This paper presents evidence suggesting that information and incentive problems in the capital market affect investment. We
come to this conclusion by examining two sets of Japanese firms. The first set has close financial ties to large Japanese
banks that serve as their primary source of external finance and are likely to be well informed about the firm. The second
set of firms has weaker links to a main bank and presumably faces greater problems raising capital. Investment is more sensitive
to liquidity for the second set of firms than for the first set. The analysis also highlights the role of financial intermediaries
in the investment process.
This paper assumes that outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that under these conditions, such dividends function as a signal of expected cash flows. By structuring the model so that finite-lived investors turn over continuing projects to succeeding generations of investors, we derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.
Financial markets appear to improve the allocation of capital--across 65 countries, those with developed financial markets increase investment more in growing industries, and decrease investment more in declining industries, than financially undeveloped countries. The efficiency of capital allocation is also negatively correlated with the extent of state ownership in the economy, and positively correlated with the degree of firm-specific movement in domestic stock returns and the legal protection of investors (which appears to be particularly useful for limiting investment in declining industries).
This paper tests for evidence of financing constraints in the U.S. hospital industry. The authors hypothesize that small hospitals and free-standing hospitals are more likely to face financing constraints than, respectively, large hospitals and members of hospital chains. They estimate the relationship between liquidity and investment within each cohort, controlling for a variety of factors that might affect the marginal profitability of hospital investment. The results provide strong evidence that small hospitals and free-standing hospitals face borrowing constraints due to agency costs. This supports earlier work that found evidence of financing constraints in other contexts. Copyright 1995 by Ohio State University Press.
Over the past decade, a number of researchers have extended conventional models of business fixed investment to incorporate a role for "financial constraints" in determining investment. This paper reviews developments and challenges in this empirical research, and uses advances in models of information and incentive problems to motivate those developments and challenges. First, I describe analytical underpinnings of models of capital-market imperfections in the investment process, and illustrate the principal testable implications of those models. Second, I motivate tests and describe and critique existing empirical studies. Third, the review considers applications of the underlying models to a range of investment activities, including inventory investment, R&D, employment demand, pricing by imperfectly competitive firms, business formation and survival, and risk management. Fourth, I discuss implications of this research program for analysis of effects of investment of monetary policy and tax policy. Finally, I examine some potentially fruitful avenues for future research.
A new theoretical literature has suggested that the Modigliani-Miller theorem may not hold under imperfect information and that liquidity may affect a firm's investment spending. This paper provides three original tests for such capital market imperfections based on predicted differences in investment between firms in different informational positions with respect to potential creditors or investors. The empirical tests suggest that information asymmetries have a large effect on investment behavior. The form of the tests reduces the likelihood of biases due to problems of endogeneity. The paper also examines the effect of differential measurement error on the tests.
Firm investment decisions are shown to be directly related to financial factors. Investment decisions of firms with high creditworthiness (according to traditional financial ratios) are extremely sensitive to the availability of internal funds; less creditworthy firms are much less sensitive to internal fund availability. This large sample evidence is based on an objective sorting mechanism and supports the results of Kaplan and Zingales (1997), who also find that investment outlays of the least constrained firms are the most sensitive to internal cash flow. Copyright The American Finance Association 1999.
Using data from the 1986 oil price decrease, the author examines the capital expenditures of nonoil subsidiaries of oil companies. He tests the joint hypothesis that (1) a decrease in cash/collateral decreases investment, holding fixed the profitability of investment, and (2) the finance costs of different parts of the same corporation are independent. The results support this joint hypothesis: oil companies significantly reduced their nonoil investment compared to the median industry investment. The 1986 decline in investment was concentrated in nonoil units that were subsidized by the rest of the company in 1985. Copyright 1997 by American Finance Association.
We extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the firm's managers to know more than outside investors about the true state of the firm's current earnings. The extension endogenizes the dividend (and financing) announcement effects amply documented in recent research. But once trading of shares is admitted to the model along with asymmetric information, the familiar Fisherian criterion for optimal investment becomes time inconsistent: the market's belief that the firm is following the Fisher rule creates incentives to violate the rule.
We show that an informationally consistent signalling equilibrium exists under asymmetric information and the trading of shares that restores the time consistency of investment policy, but leads in general to lower levels of investment than the optimum achievable under full information and/or no trading. Contractual provisions that change the information asymmetry or the possibility of profiting from it could eliminate both the time inconsistency and the inefficiency in investment policies, but these contractual provisions too are likely to involve dead-weight costs. Establishing which route or combination of routes serves in practice to maintain consistency remains for future research.
This article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise
distort efficient allocation of investment. The financing constraints are inferred from the investment Euler equation by assuming
that the firm's stochastic discount factor is a function of the firm's financial position (specifically, the stock of liquid
assets). The magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial
development as in a country with an average level of financial development. The size effect, business cycles, and legal environment
effects are also considered.
This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality. (JEL O4, F3, G1) A large literature, dating at least as far back as Joseph A. Schumpeter (1911), emphasizes the positive influence of the development of a country's financial sector on the level and the rate of growth of its per capita income. The argument essentially is that the services the financial sector provides -- of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse ...
Financial market development and the importance of internal cash: Evidence from international data. (Extended Version) Working Paper, Virginia Tech Available from The impact of cash flows and firm size on investment: The international evidence
- S S Islam
- A Mozumdar
Islam, S.S., Mozumdar, A., 2005. Financial market development and the importance of internal cash: Evidence from international data. (Extended Version). Working Paper, Virginia Tech. Available from: http:// www.nvc.vt.edu/abon. Kadapakkam, P., Kumar, P.C., Riddick, L.A., 1998. The impact of cash flows and firm size on investment: The international evidence. Journal of Banking and Finance, 298–320.