Availability Of External Finance Research Articles

Investment expectations by vulnerable European firms in times of COVID

The effect of the COVID shock on European economies has been severe and also unequal, with some firms being affected much more strongly than others. To improve the effectiveness of policy interventions, policymakers need to understand which types of vulnerable firms have been suddenly pushed into dire circumstances. We seek to fill this important gap in our knowledge by providing evidence from the European Investment Bank Investment Survey 2016–2020 on how the COVID shock has affected the investment activity and investment-related framework conditions of vulnerable firms. While data on actual investment activity post-COVID is not yet available to us, we focus on investment expectations. We exploit the fact that the same questions relating to investment expectations have been asked in several previous survey waves, which enables a difference-in-differences approach to investigate how investment expectations might have suddenly changed, for vulnerable groups of firms, immediately after the onset of the COVID crisis. We focus on 4 groups of vulnerable firms: High-Growth Enterprises (HGEs), young and small firms, R&D investors and non-subsidiary firms. R&D investors are more likely to be pessimistic about investment plans as a consequence of the COVID shock, and (similarly) HGEs are less likely to be optimistic about investment plans. R&D investors are less likely to be optimistic about the availability of internal finance, while HGEs and R&D investors are more likely to be pessimistic about the availability of external finance. Subsidiary firms, interestingly, are more likely to report a decrease in expected investment, which is not necessarily evidence of financial constraints, because it could instead be part of a conservative group-level strategy and coordinated group-level reduction in investment. Event study graphs generally confirm our regression results.

Competitiveness of Small and Medium Businesses and Competitive Pressure in the Manufacturing Industry

In the paper, there is the relationship between internal competitiveness factors and the perception of Russian SMEs’ level of competitiveness pressures examined, based on a secondary analysis of the RuFIGE (Russian Enterprises in global economy) survey data obtained in 2014 by 1,677 Russian industrial small and medium-sized enterprises (SMEs). It comes out that neither the high technological level, nor the introduction of the CRM system, nor the availability of external financing are sufficient for Russian manufacturing SMEs to feel competitive on the global market. From the other side, those manufacturing SMEs whose main competitors are domestic enterprises, do count neither the technological level nor the presence of a CRM system to be necessary factors of competitiveness. Further, there are different «weight categories» among Russian manufacturing SMEs. SME owners, who work only in local markets, are immune to competition from large foreign companies and consider Russian firms similar to their own as main competitors. Those who work on the whole Russian market feel a high competitive pressure from foreign manufacturers.

Sudden stops in the Euro Area: Does monetary union matter?

This paper examines how membership of a monetary union affects macroeconomic adjustment of Euro Area countries to sudden stops. We focus on a key feature of the monetary union: the availability of external financing from the common central bank reflected in TARGET balances. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bank financing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates the collapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However, a welfare analysis shows that common central bank financing only results in modest welfare gains in the affected country, since it exacerbates the tendency towards over-borrowing, leading to an increased incidence of sudden stop episodes.

Start-up Awareness and Access toFinance: The Case of South African SMEs

Start-up entrepreneurs in South Africa do not move from the stage of existence and survival to growth to maturity/ In order for Start-up businesses to have a competitive advantage, they have to grow beyond the survival stage and keep on growing. Despite the availability of external finance, access to finance from banks has been identified as the main challenge to the establishment and growth of SME Start-ups in South Africa. The aim of this study is toinvestigate the determinants of start-up awareness to improve access to finance from banks by Start-up entrepreneurs in Pietermaritzburg, the capital city of KwaZulu-Natal province in South Africa. Data was collected through self-administrated questionnaires from a random sample of 253 respondents being members of the Chamber of Commerce in the capital city of one of the largest provinces in South Africa.The results from inferential statistical analysis revealed that start-up awareness factors such as conducting a feasibility study, finding a good location, knowing the amount of seed capital needed, developing a business strategy, a business plan, and business model as well as the source of seed capital, are significant determinants of access to bank financing by start-up entrepreneurs.Thus, entrepreneurs should understand the determinants of Start-up awareness in order to improve their ability to access bank finance.

The Monetary and Fiscal History of Bolivia, 1960–2015

After the economic reforms that followed the National Revolution of the 1950s, Bolivia seemed positioned for sustained growth. Indeed, it achieved unprecedented growth from 1960 to 1977. Mistakes in economic policies, especially the rapid accumulation of debt due to persistent deficits and a fixed exchange rate policy during the 1970s, led to a debt crisis that began in 1977. From 1977 to 1986, Bolivia lost almost all the gains in GDP per capita that it had achieved since 1960. In 1986, Bolivia started to grow again, interrupted only by the financial crisis of 1998?2002, which was the result of a drop in the availability of external financing. Bolivia has grown since 2002, but government policies since 2006 are reminiscent of the policies of the 1970s that led to the debt crisis, in particular, the accumulation of external debt and the drop in international reserves due to a de facto fixed exchange rate since 2012.

The influence of capital expenditures on working capital management in the corporate sector of an emerging economy: the role of financing constraints

Relying on firm-level panel data from an emerging economy, this study explores the impact of fixed capital expenditure on working capital management practices. When facing insufficient internally generated cash flows and external funds for accommodating capital investments, companies are found to finance capital expenditure by primarily depleting cash reserves and increasing trade payables. Corroborating the postulates of the financing constraints theory, working capital investments are found to be inversely related to the degree of financing constraints, and positively sensitive to operating cash flow fluctuations and availability of external finance. For financially constrained companies, capital expenditures are found to more likely exercise a negative impact on working capital investments. Contributing to the discussion on the nature of business cycles, we document that the negative cash flow shocks are likely to be transmitted to firms’ counterparties through the trade credit channel rather than through the reduction of investment demand. The empirical findings also suggest that financial managers fail to properly account for capital expenditures in short-term liquidity planning, which, under conditions of limited access to imperfect capital markets, may induce the recurrence of costly working capital adjustments.

Born to be green: new insights into the economics and management of green entrepreneurship

While the number of green start-ups has steadily increased around the world in response to the environmental problems demanding immediate solutions, there are several unresolved questions on the behaviour and performance of such ventures. The papers in this special issue shed light on these issues by underscoring the role of several factors, such as industry life cycles, knowledge spillovers, institutions, and availability of external finance, in shaping decision-making and firm behaviour in green start-ups. This paper highlights the state-of-the-art developments in the literature, discusses the key contributions of the papers put together in this special issue, and presents a future research agenda for scholars interested in green entrepreneurship.

Why do firms hold cash? Evidence from Korean stock listings

Corporate governance and the availability of external financing can be important determinants of corporate cash holdings. In this research, in line with Opler et al. (1999), the authors find that Korean firms’ cash holdings are affected by firm-level characteristics including firm size, leverage, market to book, cash flow ratio, net working capital, and cash flow volatility in addition to corporate governance. Rather than agency-prone, the authors can ascribe the increase in cash holdings to the precautionary corporate demand for cash (Campbell et al., 2001). The authors also report that operating risks stemming from cash flow volatility, unavailability of external finance, credit rating downgrades, etc., may be associated with precautionary corporate demand for cash. Lastly, it is documented that corporate governance proxied for by block and/or insider ownership stakes is inversely associated with corporate cash holdings. Keywords: demand for money, corporate governance, corporate cash holding. JEL Classification: G39, E41, G34

Distance to the frontier and the perception of innovation barriers across European countries

Barriers to innovation have mainly been studied in a single country context. This paper studies differences in the perception of innovation barriers between innovative and non-innovative firms for 18 EU countries. The countries are grouped by their distance to the technological frontier using Community Innovation Surveys for the years 2002–2004 and 2004–2006. The results show that knowledge barriers related to the availability of skilled labour, innovation partners and technological knowledge are more important for firms located in countries close to the frontier, while the opposite is true regarding the availability of external finance. Moreover, while the share of innovators decreases with the distance to the technological frontier, the share of firms not interested or in no need of innovation increases. This is consistent with the idea that as firms approach the technological frontier, they increasingly need to focus on the creation of own knowledge and the adoption of innovation-based growth strategies to stay competitive.

Export behaviour of SMEs in transition countries

Melitz’s dynamic model of export participation is the basis of our empirical specification that accounts for a wide range of internal and external factors affecting the export behaviour of small and medium-sized enterprises (SMEs) in Transition Countries (TCs). Using firm-level data, our estimates highlight the particular importance of the human and technology-related factors to the export behaviour of SMEs in TCs. Other important factors for SME exporting activities are productivity-enhancing spillovers from industry—especially vertical—linkages, firm size, ownership type, type of activity, the availability of external finance, networking through business associations, and market share. In addition, significant period and country differences are identified. This paper contributes to the transition literature by filling an important gap in the understanding of the SME internationalisation process and by identifying a comprehensive set of variables to explain firms’ export behaviour in TCs.

Imported malaria: a possible threat to the elimination of malaria from Sri Lanka?

To discuss epidemiological aspects of imported malaria and the potential impact of imported malaria cases reported in Sri Lanka 2008-2011 in terms of a possible resurgence of the disease. The national malaria database was used to assess details regarding country where the infection was possibly acquired, species of Plasmodium, number of days lapsed between disembarkation in Sri Lanka and diagnosis, compliance with national treatment guidelines including percentage of patients followed up as per the national guidelines. After the strengthening of malaria surveillance, during the 4-year period, 152 imported malaria cases were recorded: an increase of 176% in the number of cases. Most of the imported malaria infections were acquired by Sri Lankan Nationals mainly from South Asia, especially India. Plasmodium vivax accounted for 64% of the infections. Approximately 50% of the cases were diagnosed in the Western Province. The average period from disembarkation in Sri Lanka to malaria diagnosis was 3.6days. Patients were managed and treated according to the national guidelines. 82% of the patients were followed up for 28days to ensure parasite clearance. There is a possible increasing risk of re-introduction of malaria to the country from imported cases. Enhanced surveillance activities and the increase in international travel have contributed to an increase in recorded case numbers. There is a need to further strengthen surveillance, especially for monitoring and timely addressing of imported malaria, if the country is to prevent the re-establishment of transmission within. The importance of having an efficient response mechanism to deal with imported malaria is also highlighted.

Corporate Governance and Firm Value in Mexico

The objective of this paper is twofold. On one hand, we undertake an analysis of the recent evolution of capital markets and their effect on the availability of external financing in Mexico in the last two decades. On the other hand, based on a newly assembled firm-level data set on corporate governance and firm performance, we show that better firm-level corporate governance practices are linked to higher valuations, better performance and more dividends disbursed to investors. These results hold after controlling for endogeneity. Overall, the evidence shows that the Mexican legal environment poses serious problems for access to capital.

Determinants of Abandoning Innovative Activities: Evidence from Spanish Firms

We empirically analyse the effect of firms’ barriers to innovation on the probability of abandoning innovation projects. Specifically, we study factors related to the availability of finance, knowledge and market conditions. We use a sample of more than 8,300 innovative Spanish firms for the period 2005–2007. We find that all obstacles to innovation have a positive effect on the probability of abandoning innovative activities. Results show that market-related factors seem to be the most important determinants of innovation failure. Analyzing results by firm size, we find that, for small-medium firms, the main factors that lead to abandoning innovative projects are competition from established firms and market uncertainty. In contrast, for large firms, the most important barriers are the lack of qualified personnel and the availability of external finance. These results might suggest that large and small-medium firms differ in the scale and complexity of their innovative projects.

Investor Protection and Business Creation

We study the effects of investor protection on the availability of external finance, entrepreneurship, and creation of new firms in an equilibrium search model of private capital markets. In addition to search frictions, we examine contract frictions, specifically interim and ex post moral hazard problems stemming from entrepreneurs' possibilities to expropriate financiers. In our model, the government chooses the level of investor protection that determines the transferability of match surplus between entrepreneurs and financiers. The results indicate that anything that increases (decreases) entrepreneurship also increases (decreases) the creation of start-ups. The effect of investor protection on the creation of start-ups thus hinges on the relative importance of various search and contract frictions. Only when investor protection has a sufficiently large impact on the ex post moral hazard problem relative to the interim moral hazard does strengthening investor protection enhance start-up creation. We also find that search frictions dilute the beneficial effect of investor protection and that contract frictions modify the standard Hosios condition for efficiency.

Beyond internal capital markets: The in-house transmission of adverse sales shocks and the collateral channel

We study how shocks to some business segments affect investment in a firm's non-shock segments. We find that subsequent investment in the non-shock segments is significantly lower compared to segments of firms that do not experience shocks. Surprisingly, lower availability of internal funds does not account for the lower investment. We find that segment shocks propagate within the firm by decreasing the value of collateral assets and reducing the availability of external finance. Our results support the operation of an external finance collateral channel ([Kiyotaki, N., Moore, J., 1997. Credit cycles. Journal of Political Economy 105, 211–248.]) previously discussed in the literature.

Rule of Law, Risk Sharing, and the Cost of Funds

This paper shows that the quality of laws, by affecting the cost of investment for outside investors, has an effect on risk sharing and, through it, on the availability of external finance to firms. If, because of high investment costs, the provision of finance to projects is concentrated in few risk-averse individuals, the risk premium rises steeply with the amount of funds firms demand. As a consequence, in countries where the financial system does not favor risk sharing, the larger the demand for external funds of a firm, the costlier external finance becomes. Empirical evidence of this effect is also provided. The cost of debt is higher for firms demanding larger loans, even after controlling for leverage and other firm characteristics. Not surprisingly, the scale of the loans matters especially in countries where creditor rights are less protected.

Cephalon, Inc. Taking risk management theory seriously

Cephalon Inc., a biotech firm, bought call options on its own stock to meet its conditional cash flow needs. We analyze this decision by using the cash flow hedging concepts of Froot et al., (1993. Journal of Finance 5, 1629–1658). We identify the managerial analyses necessary to apply this theory and discuss managerial considerations absent from the theory. We find that managers consider deadweight costs of risk management, which theory tends to ignore. Theory provides little guidance in how to measure these and other deadweight costs. Finally, uncertainty about the availability of external financing and accounting considerations are critical considerations by managers.

EXTERNAL FINANCE IN TRANSITION ECONOMIES: CGE MODELS APPLIED TO POLAND AND HUNGARY

The transition economies of Eastern Europe and the former Soviet Union have implemented at the eve of the transition public measures to promote economic growth and income protection. The success of the policies is very much dependent on the availability of external finance. By calibrating for a country like Poland CGE models for 1987 and 1990 and simulating such measures it is possible to explore likely changes over these years and the effects of these measures on the sectoral and total levels of production, prices, as well as factor remuneration and use. The analysis is complemented with applications for Hungary in 1988 and 1990. The results show commonalties but also differences between the two countries in their dependence on foreign financial resources necessary for the transition.

Trade, finance and developing countries: strategies and constraints in the 1990s

The author presents a detailed analysis of the past performance of a large range of developing countries. They are used to examine the opportunities facing other countries in the 1990s. Analysis of the successes of the Newly Industrialising countries has always emphasized the important role of exports-a view reinforced by the problems faced by those countries who have pursued inward-looking strategies and by the impact of the debt crisis in the 1980s. The author shows how national policies have not simply responded to external opportunities, but have used them and adapted their own strategies to international conditions. She also demonstrates the increasing importance of financing constraints. The reduction in the availability of external finance and the restrictions on the type available places a serious limitation on the choice of trade policies and therefore on industrial and development strategies that can be pursued.