Availability Of Internal Finance Research Articles

Investment in the context of financial constraints: A case of Vietnamese listed firms

To consider investment in the context of financial constraints, this study focuses on analysing the sensitivity of investment to internal funds (cash flow) to examine the impact of financial constraints on investment by Vietnamese enterprises as well as supporting evidence that the financial market is imperfect. Using data from financial statements and market data of 306 enterprises listed on the Ho Chi Minh City Stock Exchange, the authors find that Vietnamese listed firms have to face with many financial constraints due to investment dependence on the availability of internal finance. In particular, the firms with low dividend payout and high KZ (Kaplan & Zingales) index do exhibit higher sensitivity coefficients of investment to internal funds than those with high dividend payout firms and low KZ index. The findings imply that the sensitivity of investment to internal funds varies across the degree of financial constraints of firms, and financial constraints are considered a barrier to investment of the Vietnamese enterprises.

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.

Internal financial constraints and firm productivity in China: Do liquidity and export behavior make a difference?

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 productivity has been overlooked in the literature. We fill this gap using a panel of 130,840 Chinese manufacturing firms over the period 2001–2007 to estimate a TFP model augmented with cash flow. We find that, especially for illiquid foreign and private firms, productivity is strongly constrained by the availability of internal finance. Furthermore, contrary to private firms, foreign non-exporters display higher dependence of productivity on cash flow than exporters.

Financial Constraints and Firm Productivity in China: Do Liquidity and Export Behavior Make a Difference?

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 productivity has been overlooked. We fill this gap in the literature using a large panel of Chinese manufacturing firms over the period 2001-2007. We find that, especially for illiquid firms, productivity is strongly constrained by the availability of internal finance. Furthermore, we find higher sensitivities of productivity to cash flow for private exporters, but lower sensitivities for foreign exporters. Our results are robust to estimating a TFP model and a production function augmented with cash flow.

Financial Constraints and Firm-Level Investment in Asia: Dynamic Panel Smooth Threshold Regression Approach

This paper provides evidence on the impact of internal finance constraints, growth opportunities and debt overhang on the firm-level investment in 14 Asian countries over the period of 1990-2010. We used Panel Smooth Threshold Regression (PSTR) which relaxes the assumption of the a priori splitting of firms into constrained and unconstrained firms. We provide large-sample evidence that shows, for firms with low cash flow and low growth opportunities, investment is not sensitive to the availability of internal finance, and that these firms rely more on the long-term debt finance than external equity. Our results indicate that for firms with high cash flow and high growth opportunities, equity finance dominate the long-term debt finance. On the other hand, for high leveraged firms, debt overhang reduces investment through a ‘liquidity’ effect. We find that firms with concentrated ownership are not financially constrained, and that they use more equity finance than long-term debt to finance investment. Overall, our findings indicate the availability and access to sources of external finance is critical for firm investment in Asia.

Corporate Investment and Financing Constraints: Evidence from Nepalese Capital Market

Capital market imperfection and problems of asymmetric information lead to a difference between the cost of internal and external funds. As a consequence investment by firms facing high information cost is not only determined by expected profitability but also potentially by the availability of internal funds. Investments by those firms expected to face higher information cost are thought to be more constrained by the availability of internal finance and vice versa. Therefore, the present study derives a theoretical investment-liquidity constraint model to test the hypothesis that the investment decisions of more financially constrained firm will be more sensitive to their internal funds as compared to the less financially constrained firms in the case of least developed capital market. The basic idea to this notion underlies various empirical studies on the severity of liquidity constraints for investment. The major findings of the study indicate that when the information asymmetry between firm and investor increases, investment becomes more sensitive to changes in internal funds.

Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy

In this paper we compare the role of internal finance on the growth of firms between a leading transition country, Slovenia and an established market economy, Belgium. We find that firms in Slovenia are more sensitive to internal financing constraints than their Belgian counterparts. Furthermore, we find that de novo firms and firms with long term debt are most constrained and that micro and SMES can face great difficulties in accessing external sources of finance. Foreign firms, however, are able to raise external finance and consequently their growth is less reliant on the availability of internal finance. Our findings appear to indicate that although Slovenian firms are no longer recipients of soft budget constraints, the financial environment is not yet fully functional.

Financial development and dynamic investment behavior: Evidence from panel VAR

We apply vector autoregression (VAR) to firm-level panel data from 36 countries to study the dynamic relationship between firms’ financial conditions and investment. By using orthogonalized impulse-response functions we are able to separate the ‘fundamental factors’ (such as marginal profitability of investment) from the ‘financial factors’ (such as availability of internal finance) that influence the level of investment. We find that the impact of financial factors on investment, which indicates the severity of financing constraints, is significantly larger in countries with less developed financial systems. Our finding emphasizes the role of financial development in improving capital allocation and growth.