Firm leverage, financial constraints, and employment

Property rights protection, financial constraint, and capital structure choices: Evidence from a Chinese natural experiment

Firm leverage and employment dynamics

The aim of the study is to investigate the relationship between the internal financial and capital structure of an organization in the travel and tourism sector. The study shows how financial constraints on tourism companies affect their ability to finance themselves. The study also shows a relationship between tax shielding and financial leverage. This study analyzes panel data collected over a 21 year period, from 1998 to 2019, from over 100 publicly traded tourism companies in three Asian countries. A panel data methodology and the generalized method of moments estimation (GMM) were used in this empirical study. To support our hypothesis, using a generic method to evaluate parameter estimation will be our most effective method to improve the literature. Overall, the results show that financially stressed tourism firms use their option of debt-free tax avoidance to increase leverage. There is also a positive correlation between tax haven and leverage for firms with limited resources. The correlations between financial leverage and corporate debt supported by the results theoretically support the pecking order. By providing useful insights into the tax shielding of non-debt, which is significantly correlated with leverage for firms operating in tourism, this study closes the gap in firms’ capital structure decisions regarding access to finance. JEL Classification: G0, G01, L25

We examine the relationship between firm leverage and firm-level labour shares by using the panel threshold effect model. Based on the sample of Chinese firms listed in the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) from 2010 to 2019, we find that leverage has a significant threshold effect on the labour share of firms, and on average, firm leverage is positively associated with the labour share when the debt per labour is less than 640,000 CNY (approximate 89,600 USD). When the firm leverage exceeds the threshold, firm leverage is negatively associated with labour share. We also find significant heterogeneity over state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs), capital-intensive firms and labour-intensive firms, firms with different levels of financial constraints and firms in different life cycles. We contribute to prior literature by revealing the nonlinear association between leverage and firm-level labour share. Therefore, various policies (e.g. made credit policy to restrict lending to firms without sustainable profitability) must be implemented to increase the labour share of enterprises as well as achieve the higher-quality development of the economy in the long term.

“ESG disclosure and its impact on firm leverage: Moderating role of quality of financial reporting and financial constraints”

This paper aims to understand the effect of Environmental, Social, and Governance (ESG) disclosure scores on tax avoidance. The sample consists of public firms listed on the Indonesia Stock Exchange, excluding those in the financial services industry, for the period 2015-2021. We employ panel data regression methods, with the dependent variable being the total of deferred tax assets and liabilities and the independent variable being the Bloomberg ESG disclosure scores. The effect of Bloomberg ESG disclosure scores on tax avoidance is controlled by firm leverage, profitability, growth, and size. Our findings indicate that higher Bloomberg ESG disclosure scores have a positive effect on deferred tax assets relative to deferred tax liabilities. This suggests that firms with high Bloomberg ESG disclosure scores contribute to indirect stakeholders, reflecting a broader commitment beyond direct stakeholders. Additionally, we do not find statistical evidence of a significant effect of a firm's financial constraints and growth opportunities on the deferred tax assets relative to deferred tax liabilities. These results imply that tax avoidance is more influenced by a firm's commitment to ESG principles rather than its financial capabilities and growth opportunities. This research provides valuable insights for policymakers and corporate managers, highlighting the importance of ESG disclosure in shaping tax-related strategies and demonstrating a firm’s commitment to broader stakeholder engagement.

We empirically study the strategic behavior of levered firms in competitive and noncompetitive environments. We find that regulation induces firms to increase leverage, and this reduces their ability to compete when deregulation occurs. Large and small levered firms adopt different strategies upon deregulation. Whereas more levered small firms charge higher prices to increase margins at the expense of market shares, highly levered large firms prey on their rivals by increasing output and reducing prices to increase their market shares. The difference in their behavior is due to differences in their probability of bankruptcy and their financing constraints.

The impact of financial tightening on firm productivity: Maturity matters

A number of empirical studies have identified channels through which banking and financial crises transmit to the real economy. In particular, the financial accelerator model requires firms' financial condition to impact labour. This paper contributes to investigating this link by focusing on a set of countries that underwent dramatic changes in the few decades prior to the Global Financial Crisis, namely Central and Eastern European countries. The deregulation of labour markets that accompanied the transition of former socialist economies has meant the rapid spread of flexible forms of employment (particularly temporary employment), where forms of employment protection are sizably reduced. This paper investigates the response of different forms of employment to firms' debt during the years preceding and following the onset of the GFC. Unlike other studies that have investigated the impact of firms' financial constraints and leverage on employment, this study finds that the transmission to the labour markets originated from previous investments in fixed assets that were only partially covered by internal finances. Firms' debt impacted more on the permanent workforce than on the temporary one, a result that questions the generality of the empirical evidence previously reported on this issue. Finally, firms experiencing sharp changes in their ability to meet fixed assets investments with their internal funds laid off high human capital employees more than unskilled segments of their workforce. This result confirms the one that Milanez (2012) recently found in a sample of Californian firms during the GFC. Both these studies, although different in the way they measure workers' skill, contradict theoretical labor economics predictions that firms lay off workers in inverse order of the degree of human capital.

We document that the U.S. and other G7 economies have been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become non-binding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, on the other hand, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.

We document that the United States and other G7 economies have been characterized by an increasingly negative business-cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become nonbinding in the face of expansionary shocks, allowing agents to freely substitute inter-temporally. Contractionary shocks, however, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially driven expansions lead to deeper contractions, as compared with equally sized nonfinancial expansions. (JEL D14, E23, E32, E44)

Firms' leverage and export market participation: Evidence from South Korea

This study investigates whether fluctuations in credit supply in a macroeconomy and a relational bank’s financial condition affect the capital structure adjustment of firms. Using data for Japanese listed firms from 1988 to 2014, we find that firms adjust their capital structure slower during credit contraction periods than during other periods, and that the effects of credit market tightness are more evident for small firms. Examining firm-bank matched data, we also find that credit supply shocks have heterogeneous effects on the rebalancing behavior of firms. Firms that are associated with banks that have limited capacity to supply loans or those associated with failed banks show a slower adjustment, thereby suggesting that a bank’s financial weakness places the leverage of relationship firms into a suboptimal level for a long period of time. These findings suggest that bank supply shocks play a significant role in the targeting behavior of firms.

Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?

In response to climate change, the UK government released the report ‘Net Zero Emissions and the Future of Green Finance’ in 2019, aiming to guide capital flows to low-carbon sectors and promote green transformation in the manufacturing sector through green finance policies. Taking the panel data of UK manufacturing firms from 2015-2022 as a sample, this paper constructs a quasi-natural experiment based on the 2019 policy, and analyses the causal effect of green finance policy on capital structure using a difference in difference model (DID). The study sets capital goods manufacturing firms as the experimental group (GICS code beginning with 2010) and other product manufacturing firms as the control group, and further examines the heterogeneous effects of financing constraints and firm size. The results show that the policy significantly reduces the financial leverage of capital goods firms, and the effect is more prominent for firms with high financing constraints and smaller size. Based on the results, this paper proposes policy optimisation proposals at the government, financial institution and enterprise levels to help achieve the goal of "net-zero emissions".