Conservative Financial Policies Research Articles

Customer concentration and firm risk: The role of outside directors from a major customer

This paper examines the role of customer-affiliated outside directors on suppliers in reducing risk arising from having a major customer. Using a sample of US supplier firms, we find that a positive relationship between having a major customer and supplier risk is weakened with the presence of the major customer's representatives at suppliers' board. We further show that suppliers with customer-affiliated outside directors are more likely to have less conservative financial policies. Our results suggest that customers' board membership at suppliers helps mitigate the business risk due to the tightened supplier–customer relationship and reduced information asymmetry.

Modern pandemic crises and R&D investment

ABSTRACT This study investigates the impact of crises caused by pandemics on firms’ R&D investments. We explore these associations by utilizing a comprehensive cross-country sample of 261,959 firm-year observations collected from 39 countries during five modern health crises (SARS in 2003, H1N1 in 2009, MERS in 2012, Ebola in 2012, and Zika in 2016). The results indicate that pandemics have a positive and significant impact on R&D investment. Furthermore, we show that private firms in civil-law countries were more likely to adopt conservative financial policies than those in common-law countries. We conclude that the difference between the legal origins of private firms influences the impact on R&D investment. Moreover, it promotes conservative policies to reduce private firms’ R&D investment in countries with civil law.

The Influence of the Gender of the Chairman and CEO on the Company's Financial Leverage

The number of female CEOs reached a historic high in 2014. It shows that women have a greater impact on a company, and more and more studies have explored the impact of female executives in a company. This study investigates how the gender of chairmen and CEOs affects corporate leverage in Taiwan through regression analysis with fixed effects. We especially focus on whether the firms operated by female chairpersons and female CEOs have more conservative financial policies or corporate leverage than the firms operated by male chairpersons or male CEOs’. Leverage and volatility are common measures of corporate risk-taking. The firms with higher leverage and volatility are regarded as the firms which are risky and more willing to take the risk. The firms with lower leverage and lower volatility are taken as the more stable firms. The empirical results show that the firms operated by female chairpersons have higher leverage and volatility. It indicates that female chairpersons are more aggressive than their male counterparts. However, the empirical results of CEOs are different from chairmen. The results show that the firms led by female CEOs have lower leverage. The figures show that female CEOs in Taiwan are more conservative than male CEOs. The empirical results also show that female chairpersons have more impact on corporate leverage and volatility.

Does incentive conflict between CEOs and CFOs benefit firms? Implications for corporate decision-making

This study evaluates how incentive conflict between CEOs and CFOs, defined as the disparity in risk-taking incentives between the two executives, impacts corporate decision-making. We find that when incentive conflict between CEOs and CFOs is larger, firms enjoy less risk through the adoption of more conservative financial policies. Greater incentive conflict is associated with lower leverage, more cash holdings and lower net debt to EBITDA ratios. This decrease in risk is not at the expense of shareholders as greater incentive conflict increases firm value. The effect of incentive conflict on risk reduction is not apparent for investment policies, suggesting that CFOs may have greater influence over financial decisions compared to investment decisions.

Funds financial management approaches

The successful development of the funds' finances makes it possible to remove some of the burden from the budgetary system of the Russian Federation. The generalization of their individual behavioral aspects in financial management allows you to effectively use the funds raised. A study of more than 1700 Russian funds over five years showed the predominance of working capital, their dependence on the size of sponsorship contributions and donations, income received from financial investments. The result is the recognition of the conservative financial policies of the funds as the most effective for managing capital for sustainable development.

Financing a corporate venture capital program

Firms invest in Corporate venture capital (CVC) for strategic reasons. Consistent with maintaining financial flexibility to fund CVC driven innovation and acquisitions, CVC investing firms hold less debt and more cash. Our results are more pronounced among the highest CVC investors and strategically driven CVC investors as such firms maintain the most conservative financial policies. CVC firms are more likely to acquire using cash and this relationship is more pronounced among strategic CVC firms. Overall, our results are consistent with studies that advances that firms with growth or investment opportunities maintain financial flexibility.

Alternative Work Arrangements, Payout Policy, and Employment: Evidence from Independent Contractor Misclassification Statute

Using the 2004 Massachusetts Independent Contractor Law that discourages the use of independent contractors, I find that firms adopt conservative financial policies by reducing payout since companies attempt to reduce financial risk in response to increased operating leverage. I find that the effect is more pronounced in industries with a higher proportion of independent contractors, and in firms with high financial constraints and operating leverage. I also find that the state government’s attempt to improve the mis-classified worker’s status reduces the number of employees at the firm level by 4.4%, highlighting that reclassification does not lead to an increase in the number of employees. The findings imply that heightened operating risk caused by the law may lead to risk-averse financial policies and subdued job creation at the firm level.

External Financing and Customer Capital: A Financial Theory of Markups

We develop a continuous-time industry equilibrium model of monopolistic competition to understand how product markups are determined in the presence of external financing costs and customer capital. Firms optimally set markups to balance the tradeoff between profiting from their existing customer base and developing their future customer base. We characterize how the equilibrium markups are determined by the interaction between the marginal value of corporate liquidity and the marginal value of customer base. Firms’ markups are more responsive to changes in their marginal value of corporate liquidity when the marginal value of customer base is higher. Moreover, the model predicts that greater product market threats lead to more conservative financial policies, which is supported by the data. This paper was accepted by Gustavo Manso, finance.

Short selling threat and corporate financing decisions

Abstract This paper presents evidence that firms choose conservative financial policies to mitigate firms’ exposure to short selling threat. I exploit changes in the regulation of short selling constraints as an exogenous shock to the short selling threat borne by firms. I find that higher short selling threat leads to decreased corporate leverage, particularly for firms facing greater expected short selling threats, for firms with higher financial distress risks, and for firms whose managers are more risk averse. The findings suggest that short selling threats have a significant impact on corporate financing decisions through changes in the costs of financial distress.

Workplace Automation and Corporate Financial Policy

We show that firms’ ability to substitute automated capital for labor provides an option to reduce labor-induced operating leverage, allowing for less conservative financial policies. Using an occupational measure of labor’s susceptibility to automation, we find that firms with a more substitutable workforce hold less cash, use more financial leverage, and pay higher dividends. We provide causal evidence by exploiting the 2011–2012 Thailand hard drive crisis as a shock to the cost of automation. Following adverse shocks to cash flow from state tax increases, firms with a more substitutable workforce replace labor with automated capital and increase financial leverage.

Shadow Union in Local Labor Markets and Capital Structure

This paper identifies an externality of a firm's unionization that affects the capital structure decisions of other, non-unionized firms within a local labor market. We find that victory in a firm leads non-unionized firms to increase their market leverage ratio by 0.9 to 1.3 percentage points. This union effect is more pronounced when the probability of unionization rises in a larger margin and firms face higher rents conditional on being unionized. This is consistent with a heightened threat of unionization in the local labor market following shadow organizing. We confirm that this threat is credible enough to shape corporate financing decisions because unionization leads to an increase in wages in the local labor market. The findings suggest that a shadow labor market institution creates a strategic incentive for non-unionized firms to use less conservative financial policies to combat the threat.

Public Debt of Japan: Analysis of Features and Assessment of Prospects

The article describes the current state of Japan's public debt, which exceeds its GDP by almost 2.5 times; it seeks to identify the main causes for its growth, analyses its structure, reviews the main stages of its formation; assesses the effectiveness of government measures to regulate it and makes a comparative analysis with the national debt of the United States. The distinctive nature of Japan's public debt is that it is based on the relative stability of Japan’s financial system and a high degree of trust in it both domestically and abroad. In particular, the sustainability of the debt is ensured by the fact that 95% of government bonds are owned by residents. Despite the pessimistic mood of the IMF, investors continue to actively acquire debt obligations of the Japanese government. The behavior of investors is affected by the strengthening of the position of Neo-Keynesians in world economic sci ence, who consider domestic debt safe, assuming that budget expenditures can be equal to the sum of tax revenues and domestic debt. Government bonds will continue to play a dominant role in the Japanese debt market for a long time and, although the volume of this type of loans is large, a high degree of confidence in Japanese finances will remain both domestically and abroad thanks to a competent, cautious and conservative financial policy. In the field of public debt regulation, the author considers the Bank of Japan's policy to be successful, it mitigates the negative impact of public debt on the development of the Japanese economy. On the contrary, the effectiveness of government measures, including the Three Arrows Plan of Prime Minister S. Abe, is assessed as non-effective. Government spending is growing, but the government does not introduce restrictive measures of debt policy, considering that an annual increase in government debt by 1% is necessary to maintain economic growth. Based on the study, a forecast is made that Japan will maintain a high level of public debt for the next five years.

Capital structure decisions along the supply chain: Evidence from import competition

This paper studies the spillover effect of import competition in downstream industries on upstream capital structure. We find that a large reduction in import tariffs in a customer industry induces suppliers to choose more conservative financial policies. We show that firms lower their leverage more when the customer–supplier relationship is more valuable to the firms and when firms are more vulnerable to the downstream shock. Finally, firms adjust their leverage mainly by issuing more equity.

Do U.S. Firms Innovate to Escape Neck-and-Neck Competition?

Yes, when product-market competition is measured explicitly by a firm’s neck-and-neckness with its competitive rivals. Using an identification strategy where major reductions in U.S. import tariffs act as exogenous shocks to competition, we show that these shocks differentially incentivized U.S. manufacturing firms to escape competition. Firms facing more neck-and-neck competition generated more patents and patent citations. They took an exploitative strategy in innovation and pursued higher-valued innovation. Difference-in-differences tests further reveal explicit channels in which the escape-competition effect occurs: it occurs among firms that had high potential for product differentiation, faced high product market threats, and adopted conservative financial policies.

Employee Departure Costs and Capital Structure Decisions

I show that the risk of incurring large employee departure-related costs, unrelated to trade secret-related costs, impacts firms’ capital structure decisions. I proxy for these costs with the cross-industry labor mobility of a firm’s workers using a novel dynamic textual measure for this mobility based on network centrality. When firms face a higher risk of employee departures to firms in other industries, they maintain a lower debt ratio, hold more cash, and pay less dividends. The effect of cross-industry labor mobility on firms’ capital structure is stronger for firms with more workers who are skilled or in managerial occupations, firms in labor-intensive industries, firms with greater hiring costs, financially constrained firms, and when workers have lower switching costs. Conversely, the effect of cross-industry labor mobility on firms’ capital structure is weaker for firms in industries with higher relative performance and valuations. To infer causality, I make use of several different exogenous shocks to employee departure and job switching costs. Overall, my findings imply that firms choose more conservative financial policies when they face a greater risk of incurring large employee departure costs.

The IMF As a Biased Global Insurance Mechanism: Asymmetrical Moral Hazard, Reserve Accumulation, and Financial Crises

AbstractA large literature has established that the International Monetary Fund (IMF) is heavily politicized. We argue that this politicization has important consequences for international reserve accumulation and financial crises. The IMF generates moral hazard asymmetrically, reducing the expected costs of risky lending and policies for states that are politically influential vis-à-vis the institution. Using a panel data set covering 1980 to 2010, we show that proxies for political influence over the IMF are associated with outcomes indicative of moral hazard: lower international reserves and more frequent financial crises. We support our causal claims by applying the synthetic control method to Taiwan, which was expelled from the IMF in 1980. Consistent with our predictions, Taiwan's expulsion led to a sharp increase in precautionary international reserves and exceptionally conservative financial policies.

Improving Bargaining Power or Putting Safety First? Ownership Structure and the Effect of Labor Market Regulation on Leverage

While previous work suggests two competing explanations for the effect of labor market regulation on firms’ demand for debt, our results reconcile both the “strategic use of debt” and “financial flexibility” view. Exploiting staggered changes to labor laws in 28 OECD countries, we find that the average causal effect of employment protection on firm financial leverage is close to zero but hides much heterogeneity depending on firm ownership structure. We posit that a regulatory-induced increase in labor power (i) gives a firm a strategic incentive to raise more debt, but also (ii) increases operating leverage and the risk of financial distress that could encourage firms with poorly diversified blockholders to react with a more conservative financial policy compared to widely-held firms. Examining non-financial, non-utility listed firms over a 20-year period, we find that higher ownership concentration mitigates the positive effect of labor power on financial leverage, making the relationship less positive or more negative. This result does not seem to be driven by pretreatment differences among firms and is robust against a wide variety of tests. Our results highlight the importance of considering ownership structure in studying firms’ capital structure decisions.

Exploring the causal effect of religious piety on dividend policy: evidence from historical religious identification

ABSTRACTTheory suggests that religious piety is associated with greater risk aversion and more conservative financial policies. Returns to shareholders through dividends are much more certain than returns through capital gains expected to be realized far into the future. We hypothesize that religious piety leads to a higher likelihood of dividend payments. We exploit the variation in religious piety across the US counties and estimate the effect of religion on dividend policy. To draw a causal inference, we use historical religious piety in 1971 as the instrument. Our two-stage least squares results confirm that religious piety induces firms to pay larger dividends.

CEO inside debt and firm debt

PurposeThis paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm.Design/methodology/approachUsing S&P 1500 data from CRSP, Compustat, Execucomp and Capital IQ between 2006 and 2011, statistical analysis and regression models are used to determine potential correlations between the variable of interest, inside debt and debt control variables, including specialization.FindingsFirms with high inside debt specialize in commercial loans and drawn credit lines. Larger firms diversify their debt holdings among commercial instruments and senior bonds. As firm size increases with inside debt, the effects are counteracted. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt.Research limitations/implicationsDebt diversification is partially affected by compensation in the form of inside debt. Future studies of debt diversification should include CEO compensation controls.Practical implicationsFor struggling companies or for those that want to return to a conservative financial policy, they can influence the CEO to make this decision by deferring his compensation to retirement.Originality/valueThis paper considers debt policy through the lens of a key decision maker, the CEO, and uses compensation as an incentive to determine what choices are made concerning debt.

Exploring the Causal Effect of Religious Piety on Dividend Policy: Evidence from Historical Religious Identification

Theory suggests that religious piety is associated with greater risk aversion and more conservative financial policies. Returns to shareholders through dividends are much more certain than returns through capital gains expected to be realized far into the future. We hypothesize that religious piety leads to a higher likelihood of dividend payments. We exploit the variation in religious piety across the U.S. counties and estimate the effect of religion on dividend policy. To draw a causal inference, we use historical religious piety in 1971 as the instrument. Our 2SLS results confirm that religious piety induces firms to pay larger dividends.