Amount Of External Finance Research Articles

The Complexity of Technological Innovation Decision-Making in Emerging Industries

It is well known that innovation-driven emerging industries have gradually become the main driving force of global economic recovery and growth. Technological innovation decision-making is a complex and dynamic system, which is affected by various factors inside and outside an enterprise. In this dynamic system, how to make the optimal technological innovation investment decisions is a key concern for enterprises and governments. As an investment activity, technological innovation largely depends on the amount of external financing obtained by enterprises. However, financial constraints have increasingly become an obstacle to enterprises’ technological innovation. At the same time, technological innovation is also affected by the external political and economic environment, such as changes in economic policy, government subsidy policies, and institutional environmental policies. Can these external environments reduce the negative impact of financing constraints on technological innovation? In this study, based on the data of listed companies in China’s strategic emerging industries, we adopt a panel negative binomial regression model to investigate the complexity of technological innovation decision-making from the perspective of financing constraints. Our main findings include the following. First, financing constraints significantly inhibit the input and output of technological innovation in emerging industries. Second, the inhibition effect on the output of substantive innovations is more pronounced than that on the output of strategic innovations. Third, based on the analysis of enterprise heterogeneity in different dimensions, we show that this inhibition has a selective effect among different industries. Finally, we show that economic policy and marketization can help alleviate the inhibition effect of financing constraints on technological innovation.

Finance and Schumpterian Rents: On the Timing of Innovation

I model an innovation game in which firms can choose to be leaders or followers. Internal finance leads to a stalemate in which each firm wants to free-ride on the others' experimentation costs. Therefore, no innovation occurs. When instead firms compete in the capital markets to finance innovation (e.g., in the case of venture capital) there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimist information. I characterize the relative sizes of waves of leaders and followers in innovation cycles - and the endogenous, intertemporal distribution of quality as each wave builds and crashes - as a function of the risk of the innovation and the amount of external finance required.

Corporate Finance in the Euro Area: Including Background Material

This report analyzes the financial position of non-financial enterprises in the euro area, in particular the amount of external financing, the choice between debt and equity and the composition and maturity structure of debt. It aims at identifying the main features of the euro area, as well as the peculiarities that depend on the country of origin and the sector of activity. Attention is also devoted to assessing whether a country's institutional features are correlated with different financial structures by firms. In light of the particular interest in the access of small and medium-sized enterprises (SMEs) to financing, the report also analyses how financing patterns differ across large, medium-sized and small enterprises. Finally, the report discusses the recent trends observed in the corporate finance landscape of the euro area over the past few years. Although it is still too early to pass final judgement, vast structural changes are underway that could have already influenced in a positive way in the availability of external funds for firms. All in all, a comprehensive understanding of corporate finance in the euro area is important from a monetary policy perspective, given its impact on the transmission mechanism and for productivity and economic growth. Moreover, such an understanding is also relevant from a financial stability perspective. A first assessment is now possible eight years into the third stage of Economic and Monetary Union (EMU), given that sufficient data have been accumulated during this period. This assessment is particularly important as the introduction of the single currency has had significant structural effects on the working of financial markets, increasing their size and liquidity, and fostering cross-border competition. The data available for this report generally cover the period 1995-2005, and the cut-off date for the statistics included is 10 March 2007.

Monetary Policy, Debt and the Cyclical Behavior of Inventories

An earlier study on the determinants of inventories investment has been proposed by Lovel (1961). However, the study fails to mention the effects of financial variables. The puzzle prevails on account of imperfect capital markets. This implies that interest rate generally affects inventory investment indirectly through the debt channel. For instance, in the period of tight monetary policy, increasing interest rates have a negative impact on the present value of firms’ collateralizable net worth. In addition, they also weaken firms’ balance sheets as interest expenses also rise up. In imperfect capital markets, this fact indicates an increase in the amount of external financing that firms need, a rise in the premium on external financing that they face, and a reduction in their accumulation of assets, their spending and their production. Given the low adjustment cost that characterizes firms, it will be inventories that firms will initially reduce. Therefore, this paper is contributes to the issue of monetary policy transmission in Malaysia. Our specific attention is limited to the channel of monetary policy on a firm’s inventory. Using micro data, we try to take into account the relevance of the firm’s balance sheet conditions in the transmission of monetary policy.

Corporate Finance in the Euro Area - Including Background Material

This report analyses the financial position of non-financial enterprises in the euro area, in particular the amount of external financing, the choice between debt and equity and the composition and maturity structure of debt. It aims at identifying the main features of the euro area, as well as the peculiarities that depend on the country of origin and the sector of activity. Attention is also devoted to assessing whether a country’s institutional eatures are correlated with different financial structures by firms. In light of the particular interest in the access of small and medium-sized enterprises (SMEs) to financing, the report also analyses how financing patterns differ across large, medium-sized and small enterprises. Finally, the report discusses the recent trends observed in the corporate finance landscape of the euro area over the past few years. Although it is still too early to pass final judgement, vast structural changes are underway that could have already influenced in a positive way in the availability of external funds for firms. All in all, a comprehensive understanding of corporate finance in the euro area is important from a monetary policy perspective, given its impact on the transmission mechanism and for productivity and economic growth. Moreover, such an understanding is also relevant from a financial stability perspective. A first assessment is now possible eight years into the third stage of Economic and Monetary Union (EMU), given that sufficient data have been accumulated during this period. This assessment is particularly important as the introduction of the single currency has had significant structural effects on the working of financial markets, increasing their size and liquidity, and fostering cross-border competition. The data available for this report generally cover the period 1995-2005, and the cut-off date for the statistics included is 10 March 2007.

Does SBA Guaranteed Lending Improve Economic Performance in Low-Income Areas?

Recent studies have provided evidence that financial market development leads to higher rates of economic growth. This is further investigated by focusing on the rationale that financial market development may increase the amount of external finance available to small firms. In particular, a test of whether Small Business Administration (SBA) guaranteed lending positively impacts economic performance in low-income markets is conducted. It is hypothesized that credit market frictions, that is, costly information-gathering and verification of a small firm's project, lead to socially suboptimal credit allocation that negatively impacts the labor employment rate in the local market. If SBA guaranteed lending mitigates credit market frictions, a positive relationship should be seen between SBA guaranteed lending and level of employment, particularly in low-income financial markets. Loan-specific data on the borrower and lender was obtained from 1991 through 2002, including 360,000 loans. Economic data were also obtained for that time period. Results show a positive and significant correlation between the average annual level of employment in a local market and the level of SBA guaranteed lending that market. The intensity of the correlation increases for low-income markets.

Reputation and Spillovers: Evidence from Indian Business Groups

We investigate the importance of reputation-based implicit contracts in firm financing in the context of Indian Business Groups. The group structure enables us to cleanly analyze the negative spillovers on other firms, triggered by a member firm defaulting on its debt obligations. We hypothesize that business group insiders will support financially distressed member firms in order to maintain the group's reputation. The default by a group firm will damage a group's reputation - making it more difficult for the remaining firms to raise capital, thereby affecting their performance and survival. We show this to be the case for our sample: Groups use intra-group loans to support member firms in financial distress and, as a result, firms belonging to groups with unimpaired reputation are less likely to become bankrupt, relative to stand alone firms. The first bankruptcy in a group is followed by a significant drop in the amount of external finance raised, a discontinuous drop in investments and profits, and an increase in the bankruptcy probability of other healthy firms in the group. Consistent with loss of reputation being the reason for these spillovers, we find that negative consequences are more severe for firms in the group with closer managerial links to the bankrupt firm and for firms which depend more on external finance.

Legal Institutions, Corporate Governance and Aggregate Activity: Theory and Evidence

This paper investigates the interaction between legal institutions and financial arrangements and the effects that these have on corporate decisions and aggregate activity, both theoretically and empirically. We develop a two country general equilibrium model with overlapping generations and asymmetric information in the credit market. We show that, at the steady state equilibrium, firms located in the country providing tighter legal enforcement to the creditors' rights receive a larger amount of external finance at a lower price and have a larger size. While these results rationalize some recent empirical evidence in the corporate finance literature, we obtain a new result for the leverage ratio that we show to be independent of the quality of legal institutions (i.e. it is the same across firms located in the two countries). At the aggregate level, we show that countries with higher creditors' protection enjoy a larger aggregate output level and a bigger capital stock. The driving force behind our results is that improvements in the legal protection of creditor rights to repossess a collateral asset, increase the investment rate of return, by tempering the inefficiencies due to asymmetric information. In the empirical part, we provide evidence that confirms our theoretical predictions by using new data sets at firm and regional level for Spain and Italy. Unlike the already existing literature, we proxy the degree of legal enforcement by using statistical information on the performance of judicial districts, i.e. measures based on the number of backlogs, the number of concluded trials and the average length of trials.

Asset Pricing Implications of Firms' Financing Constraints

We incorporate costly external finance in an investment-based asset pricing model and investigate whether frictions are quantitatively important for pricing a cross-section of expected returns. We show that common assumptions about the nature of the frictions are captured by a simple financing cost function, equal to the product of the premium and the amount of external finance. This approach provides a tractable framework for empirical analysis. Using GMM, we estimate a pricing kernel that incorporates the effects of constraints on investment behavior. The key ingredients in this pricing kernel depend not only on fundamentals, such as profits and investment, but also on the variables, such as default premium and the amount of external financing. Our findings, however, suggest that the role played by frictions is fairly negligible, unless the premium on external funds is procyclical a property not evident in the data and not satisfied by most models of costly external finance.

Law, Property Rights and Growth

This paper investigates how different legal frameworks not only affect the amount of external financing available, but also the allocation of resources among different type of assets. Using a simple model, we show that a firm will get less financing, and thus invest less, in a weak law and order environment. We also show that weaker property rights can lead to an asset substitution effect with firms investing less in intangible assets. Empirically, these two effects appear to be equally important drivers of growth in sectoral value added for a large number of countries. Using individual firm data, we also show that weaker legal frameworks are associated with relatively more fixed assets, but less long-term financing for a given amount of fixed assets.

STRUCTURAL EXTERNAL FINANCING UNDER UNCERTAINTY

This study is an attempt to solve one of the fundamental problems posed on founding a company: to determine the amount of external financing needed. Based on the structure of the balance sheet, a situation of financial equilibrium that will be the starting point for developing a crisp model of investment and financing is defined. This is then adapted in order to define and concretise those variables which, as they are uncertain, will give rise to a model of the same characteristics. The application of the fuzzy sets theory and concretely the use of triangular fuzzy numbers, will enable the different possible values of the uncertain variables to be determined. This will assist the later decision process.

Organizational Restructuring, Equity Valuation, and Limited Partnerships

AbstractThis research investigates common equity price reactions to announcements of limited partnerships (LPs) in which parent firms retain general partnership interests. On average, prices react positively to these announcements, which suggests that creating LPs is a marginally effective method of separately financing investment projects. This study provides evidence that the systematic variation in prediction errors across announcements is positively related to the percent ownership retained in the LP by the parent, which suggests that ownership retention signals information about the value of the LP, the costs of controlling the LP, and the amount of external financing needed for the LP.

Toward a Growth-Oriented Model of Financial Programming

This paper extends the basic monetary model that underlies the monetary approach to the balance of payments to allow for the endogenous determination of the short-run growth rate of the economy. In the extended model domestic credit expansion affects not only the balance of payments but also the output growth rate, which bears implications for the formulation of credit ceilings. Furthermore, the amount of external financing can influence both the output growth rate and the balance of payments outcome, unlike with the basic model. An integrated treatment of exchange rate adjustment involving both absorption and elasticity effects is provided.