Firm Constraints Research Articles

When does unrelated diversification increase performance? The effects of financial context and contingencies

PurposeThe purpose of this paper is to examine the financial factors across multiple levels of analysis that influence the performance effects of the unrelated diversification strategy, including institutional-, industry- and firm-levels.Design/methodology/approachUsing a unique panel dataset of Italian firms from 1980 to 2010, the paper tests hypotheses on how industry external financial dependence and the firm's financial constraints both separately and jointly alter the performance benefits of unrelated diversification in contexts with financial market inefficiencies.FindingsUnrelated diversification increases performance in weak financial contexts and such positive effect is enhanced by greater industry external financial dependence and greater firm financial constraints. However, as financial markets develop, the moderating effects of firm financial constraints shrink.Practical implicationsThe study highlights the importance of recognizing the multiple financial contingencies that may alter the benefits of the unrelated diversification strategy, suggesting caution in its pursuit to boost firm performance.Originality/valueThe authors develop a theoretical framework that explains the performance outcomes of unrelated diversification, linking the benefits of an internal capital market (ICM) with the financial context of the firm and offering a fine-grained analysis that moves beyond the advanced/emerging economy dichotomy. Furthermore, leveraging on the unprecedented time frame of the empirical analysis, the paper highlights the crucial role of industry- and firm-level financial contingencies and demonstrates that their effects change at varying levels of development of the financial context.

We miss you George Bailey: the effect of local banking conditions on the county-level timing of the Great Recession

ABSTRACT Community banks have a unique capacity to strengthen economic resilience by alleviating local firm credit constraints during economic downturns. We provide evidence that banking access and community bank market share affected both the county-level timing and duration of the Great Recession in the United States. Using the Cox Proportional Hazards and Heckman Selection models, we find that communities with a higher community bank market share are less likely to experience recession conditions, conditional on local bank health. This suggests community banks have unique institutional structures, allowing them to continue providing funds to firms through economic downturns. This research demonstrates that local financial institutions affect economic resilience, in particular the timing and duration of recession conditions.

Coral reef development and sea-level changes over the past 50,000 years: new evidence from the north-west shelf of Australia

Understanding of global sea-level changes and coral reef development is poorly constrained during Marine Isotope Stage 3 (MIS 3; ~ 60 to 30 ka). Australia’s North West Shelf (NWS), at depths of ~ 50 to 120 m below present sea-level (mbsl), represents an ideal natural laboratory to address these knowledge gaps. In this study, the authors investigate a unique suite of sea-bed rock drill (PROD) cores recovered as part of a geotechnical survey from the NWS ~ 150 km south-east of Ashmore Reef. Twenty cores, penetrating to 28 m below sea floor, were collected from the top of the now drowned platform complex in similar water depths (74.8 to 81.6 mbsl), forming two transects ~ 17 km apart. High-resolution 3D seismic and multibeam bathymetry data reveal three distinct, multigenerational platforms that are rimmed by smaller reef terraces and bisected by deeper channels, placing the core transects into a robust, regional geomorphic context that includes a succession of linear palaeo-shorelines and tidal-estuarine channel systems on the adjacent shelf between ~ 90 to 110 mbsl. The authors have completed detailed logging, high-spatial resolution hyperspectral scanning, petrologic, mineralogic and sedimentary facies analysis of these cores, including a precise palaeoenvironmental reconstruction based on coral, algal and larger benthic foraminifera assemblages; and extensive radiometric dating. The authors have observed a complex suite of lithologies including in situ coralgal reef frameworks, well-lithified to friable grainstones, packstones and coralline algal floatstone facies separated by at least two major palaeosol horizons. Together with thirty 14C-AMS and closed-system U/Th ages spanning 10.7 to > 50 ka, the authors define a complex but consistent record of four distinct chrono-stratigraphic units (Units 1 to 4), representing a repeated succession of shallow reef to deep reef-slope depositional settings as the platforms experienced repeated sea-level oscillations (interstadial/stadial to glacial/deglacial) over the last 75,000 yr. Two distinct phases of shallow-water, high-energy reef development are defined. The age of the older, diagenetically distinct reef unit (Unit 3) is unknown but interpreted to have developed before the MIS 4 lowstand (~ 65 ka). However, firm chronological constraints on the MIS 3 development of the younger reef unit (Unit 2), place the position of relative sea-level (RSL) between ~ 63 to 75 + 1.8 mbsl by 45.95 to 39.23 + 0.2 ka, consistent with other predictions and observations for the region. Following its exposure and demise due to sea-level fall to the Last Glacial Maximum (LGM), the platform system was unable to re-establish fully as it was reflooded during the subsequent deglacial sea-level rise. Deeper reef slope (Unit 1) facies dominate the core tops between ~ 13.2 to 10.7 ka, representing a major hiatus in shallow-water reef development on the platforms. Deglacial sea-level rise was either too fast and/or other environmental conditions inadequate (i.e. massive riverine sediment flux due to the strengthening Australian summer monsoon and/or reworking of shelf sediments) to allow re-establishment of shallow-water coral reef development on the platforms apart from a few isolated and distal locations (i.e. Ashmore, Cartier, Adele and Scott Reefs).

Archaeomagnetism in the Levant and Mesopotamia Reveals the Largest Changes in the Geomagnetic Field.

Our understanding of geomagnetic field intensity prior to the era of direct instrumental measurements relies on paleointensity analysis of rocks and archaeological materials that serve as magnetic recorders. Only in rare cases are absolute paleointensity data sets continuous over millennial timescales, in sub-centennial resolution, and directly dated using radiocarbon. As a result, fundamental properties of the geomagnetic field, such as its maximum intensity and rate of change have remained a subject of lively discussion. Here, we place firm constraints on these two quantities using Bayesian modeling of well-dated archaeomagnetic intensity data from the Levant and Upper Mesopotamia. We report new data from 23 groups of pottery collected from 18 consecutive radiocarbon-dated archaeological strata from Tel Megiddo, Israel. In the Near East, the period of 1700-550BCE is represented by 84 groups of archaeological artifacts, 55 of which were dated using radiocarbon or a direct link to clear historically dated events, providing unprecedented sub-century resolution. Moreover, stratigraphic relationships between samples collected from multi-layered sites enable further refinement of the data ages. The Bayesian curve shows four geomagnetic spikes between 1050 and 600BCE, with virtual axial dipole moment (VADM) reaching values of 155-162ZAm2, much higher than any prediction from geomagnetic field models. Rates of change associated with the four spikes are ∼0.35-0.55μT/year (∼0.7-1.1ZAm2/year), at least twice the maximum rate inferred from direct observations spanning the past 180years. The increase from 1750 to 1030BCE (73-161ZAm2) depicts the Holocene's largest change in field intensity.

The regulatory environment and financial constraints of private firms in the European Union

This study analyzes the influence of the institutional environment on firms' capital structure in the European Union (EU). Unlike other research, we focus on private firms and include data from all EU countries from 2010 to 2018. We split the sample into groups of small and large firms, which we consider financially constrained and unconstrained, respectively. Throughout the study, we posit that institutional effects on financing policies vary with size, with the effects being greater for constrained firms as they face more financing frictions. We also run regression models controlling for firm-level characteristics and relevant macroeconomic factors. Our findings reveal that a high-quality regulatory environment negatively affects firms' leverage, whereas social corruption has the opposite effect. Moreover, the efficiency of enforcing commercial contracts and developing the financial system positively influences firms' leverage.

ESG performance, investors’ heterogeneous beliefs, and cost of equity capital in China

Previous studies on the relationship between environmental, social and governance (ESG) information disclosure and cost of equity (COE) have found mixed results. They conclude that this relationship may be affected by some attributes of the company inside. In this study, we examine whether investors’heterogeneous beliefs moderates the relationship between ESG performance and COE. Our sample starts with ESG-rating firms included in Huazheng index of the Wind China financial database (WIND) for years 2015–2020. We collect financial information and relevant data from the China Stock Market and Accounting Research database (CSMAR). Using a two-way fixed effect multiple regression model, we report a negative moderate effect of both ESG performance on COE. We also find that COE Is higher when the firm financing constraints increase. Investors’heterogeneous beliefs with a lower (rather than higher) level tends to pay close attention from ESG performance by stakeholders and financing constraints decreases, which then leads to the reduction of investors’ expected risk. We therefore conclude that firms that manage actions on ESG issues have a better choices of release investors disagreements which in turn reduces their equity financing costs.

Government intervention, leverage adjustment, and firm performance: Evidence from defaulting firms

Using data on defaulting firms in China, we show that government intervention distorts the discipline imposed by creditors. This paper examines the impact of government intervention on leverage adjustment speed and firm performance of defaulting firms, using non-defaulting firms as the baseline. Defaulting firms have slower leverage adjustment speeds than non-defaulting firms because creditors will constrain these firms by tightening up the loan contracts. In China, local governments have incentives to bail out defaulting firms. Government intervention, by relieving loan constraints and providing subsidies, accelerates leverage adjustment speed for defaulting firms. However, higher government intervention leads to worse performance and overinvestment problems of defaulting firms. This paper indicates that government intervention can rescue and relieve firm financial constraints during an individual debt crisis. However, it can mute the disciplinary role of creditors and distort resources allocation, thus hurting firm performance.

Can FinTech improve corporate environmental, social, and governance performance?—A study based on the dual path of internal financing constraints and external fiscal incentives

The fulfillment of ESG responsibility by enterprises is crucial to achieving China’s “double carbon goal” and the sustainable development of the whole society. However, ESG development is facing financing constraints and information asymmetry, while the rapid development of fintech supports ESG development to improve quality and efficiency. Therefore, it is crucial to study the impact of fintech on corporate ESG development. Can financial technology (FinTech) “empower” traditional financial institutions with technology to improve corporate ESG performance? Based on this, this paper examines the relationship between regional FinTech development and corporate ESG performance and its underlying mechanisms from internal and external perspectives, using data from Chinese A-share listed companies from 2011 to 2020. The following were found: 1) The level of regional FinTech development significantly contributes to firms’ ESG performance, and the results remain robust after mitigating endogeneity using Bartik instrumental variables and difference-in-differences model estimation. 2) Mechanistic analysis finds that FinTech not only alleviates the internal financing constraints of firms, but also enhances the external government subsidies and tax rebates of firms. These significantly contribute to the improvement of firms’ ESG performance. 3) Heterogeneity analysis shows that the contribution of FinTech to improving corporate ESG performance is more pronounced in the eastern region, mature firms and firms with CEOs with unbanked financial backgrounds. Therefore, in the context of sustainable development, we should continue to promote the development of FinTech, use modern technology to “empower” finance, and help enterprises balance economic and social benefits to build a sustainable country.

The effect of Tobin's q on investment in a bank-based financial system: Evidence from Japan

This study replicates the empirical analyses of investment-q theory in Japanese settings. We focus on publicly listed firms in Japan because their financial system is a bank-based system, which is different from the market-oriented system in the U.S. First, we find that investment-q regression does not work better for high-tech firms in Japan, which are different from U.S. firms during 1984–2015. Second, the investment-q regression works better for high-tech firms post the bubble-bursting era, same as in U.S. Third, the value of fits of the investment-q regression in Japanese firms is smaller than that in the U.S. Based on the findings, we interpret that the investment-q theory may not work better under financial constraints in research-intensive firms in a bank-based system.

The combined effect of foreign direct investment on firm productivity

This paper attempts to answer the economic implications of combining inward foreign direct investment (IFDI) and outward foreign direct investment (OFDI) by constructing a panel fixed effects model using Chinese industrial firm-level data for the period 1998–2013. Specifically, we focus on the impact of combining IFDI and OFDI on firm productivity in China. We also introduce interactive terms into the model to explore the direct and indirect mechanisms through which IFDI and OFDI affect productivity growth. The results show that IFDI and OFDI work together to contribute to productivity growth by acting directly on the level of technology, thereby increasing productivity. IFDI intensifies market concentration, which in turn positively moderates the relationship between OFDI and productivity. Furthermore, IFDI moderates the financing constraints of firms, but has a weaker effect; the easing of financing constraints facilitates the positive impact of OFDI on productivity. Absorptive capacity favours IFDI spillover, but OFDI inhibits absorptive capacity improvements. Our in-depth analysis of the mechanism of the combined impact of IFDI and OFDI on productivity reveals the objectives of using this combination, thereby providing theoretical support and policy recommendations for the implementation of this strategy.

Financial constraint and output pricing: the case of international sanctions against Iran

ABSTRACT This paper examines whether financial constraints of firms influence their pricing behavior. To do so, a product-level dataset is used from Iranian-listed manufacturing companies. This study employs the imposition of international sanctions against Iran in 2012 as an exogenous shock to identify the effect of financial constraints. According to the results financially restricted firms keep their prices lower than their counterparts to increase their internal financial resources. The results show the difference between output prices of constrained and unconstrained firms rising after the imposition of sanctions. In addition, this relationship is affected by the degree of export-orientation of firms, and only exporter firms that experienced the negative demand shock after the sanctions, set their price lower to reduce the financial pressures. Also, the degree of dependency on imported input does not play a significant role in the relationship and ownership structure of firms has a significant impact on the relationship.

The Terreneuvian MacCodrum Brook section, Mira terrane, Cape Breton Island, Nova Scotia, Canada: age constraints from ash layers, organic-walled microfossils, and trace fossils

The MacCodrum Formation is a classical “lower” Cambrian unit in southeastern Cape Breton Island stratigraphy, described since the 1800s. The age of this formation and its correlation with other Avalonian Cambrian units in eastern Newfoundland and southern New Brunswick have remained uncertain through numerous revisions. Here we present U-Pb CA-TIMS ages from an ash bed in the basal part of the MacCodrum Formation in its type-section on MacCodrum Brook that fix the maximum time of deposition at 531.86 ± 0.34 Ma. Organic-walled microfossils sampled throughout the MacCodrum Formation type-section yield acritarch taxa identifying the Asteridium– Comasphaerdium Zone, whereas the first acritarchs of the Skiagia– Fimbriaglomerella Zone appear in the overlying Canoe Brook Formation in other sections. The radiometric age and acritarch zonation place the MacCodrum Formation in the upper Fortunian, Cambrian Stage 2. Among trace fossils in the MacCodrum Formation, the meandering trace fossil Didymaulichnus dailyi comb. nov. is of particular note and morphologically identical to the type material from the lower part of the Ratcliffe Brook Formation in New Brunswick. The new radiometric and biostratigraphic data presented here provide the first firm constraints on the age of the MacCodrum Formation and enable more precise correlation with sections in southern New Brunswick and eastern Newfoundland.

External capital market frictions, corporate governance, and tax avoidance: Evidence from the TED spread

This study investigates whether corporate tax avoidance can benefit shareholders when external capital market frictions are high. Using the TED spread as an exogenous shock to firm financial constraint, the study documents that firms tend to reduce their effective tax rates more aggressively when external financing is very costly. This negative relation is stronger in industries more sensitive to TED. Furthermore, we find that the positive effect of TED on tax avoidance is more pronounced within firms with good corporate governance. Our final analyses suggest that the tax-savings during the time of high external market frictions positively affect firm value and the positive effect on firm value is stronger within firms with good corporate governance.

Democracy favors access to credit of firms

Access to credit is one of the main obstacles for the growth of firms. We test the hypothesis that democracy exerts an impact on access to credit. We perform regressions at the firm-level on a large dataset of 46,000 firms in 108 countries. We find evidence of a negative relationship between democracy and credit constraints for firms. We further establish that democracy contributes to reduce borrower discouragement and leads to more bank loan approval decisions. Our key finding is therefore that democracy favors firms' access to credit. Our work contributes to the debate on the impact of democracy on economic development by considering one firm-level channel of transmission.

The Impact of Financing Constraints and Uncertainty on Manufacturing Innovation Efficiency: An Empirical Analysis from Chinese Listed Firms

Chinese listed manufacturing companies face more serious financing constraints. Considering financing constraints and uncertainties, an accurate assessment of the innovation efficiency of China’s listed manufacturing industry can provide decision support for China to become an innovation nation. We construct a heterogeneous stochastic frontier model to analyze the overall innovation efficiency, innovation quality efficiency, and innovation quantity efficiency of the Chinese manufacturing industry, using Chinese A-share listed manufacturing companies as a research sample from 2011–2019. The research results show that (1) Financing constraints make enterprises deviate from innovation efficiency, and internal financing significantly reduces enterprise financing constraints and does not bring uncertainty to subsequent financing, commercial credit, and external financing; although it can alleviate enterprise financing constraints, it will increase the uncertainty of subsequent financing constraints and the enterprise size.. (2) Internal financing, commercial credit financing, external financing, and firm size can effectively alleviate the financing constraint for firms to carry out quality innovation activities of invention patents and quantitative innovation activities of utility patents; internal financing, external financing, and firm size can effectively alleviate the financing constraint for quantitative innovation activities of design patents, while commercial credit financing has no significant effect. (3) The influence of factors such as financing constraints makes the real innovation efficiency of China’s listed manufacturing industry only about 20%, and enterprises face more serious financing constraints. (4) The heterogeneity results found that the overall innovation efficiency, innovation quality efficiency, and innovation quantity efficiency in the eastern region are the highest, and the innovation efficiency level is higher than the national average, followed by the central and western regions. The overall innovation efficiency, innovation quality efficiency, and innovation quantity efficiency of the central region are higher than the national average, but the innovation quality efficiency and innovation quantity efficiency of the western region are lower than the national average; the overall innovation efficiency, innovation quality efficiency, and innovation quantity efficiency of large-scale enterprises are the highest and even higher than the average value of the whole sample, while the innovation efficiency of medium and small-scale enterprises are lower than the average value of the whole sample.

Numerical relativity simulations of the neutron star merger GW190425: microphysics and mass ratio effects

ABSTRACT GW190425 was the second gravitational wave (GW) signal compatible with a binary neutron star (BNS) merger detected by the Advanced LIGO and Advanced Virgo detectors. Since no electromagnetic counterpart was identified, whether the associated kilonova was too dim or the localization area too broad is still an open question. We simulate 28 BNS mergers with the chirp mass of GW190425 and mass ratio 1 ≤ q ≤ 1.67, using numerical-relativity simulations with finite-temperature, composition dependent equations of state (EOS) and neutrino radiation. The energy emitted in GWs is $\lesssim 0.083\mathrm{\, M_\odot }c^2$ with peak luminosity of 1.1–$2.4\times ~10^{58}/(1+q)^2\, {\rm {erg \, s^{-1}}}$. Dynamical ejecta and disc mass range between 5 × 10−6–10−3 and 10−5–$0.1 \mathrm{\, M_\odot }$, respectively. Asymmetric mergers, especially with stiff EOSs, unbind more matter and form heavier discs compared to equal mass binaries. The angular momentum of the disc is 8–$10\mathrm{\, M_\odot }~GM_{\rm {disc}}/c$ over three orders of magnitude in Mdisc. While the nucleosynthesis shows no peculiarity, the simulated kilonovae are relatively dim compared with GW170817. For distances compatible with GW190425, AB magnitudes are always dimmer than ∼20 mag for the B, r, and K bands, with brighter kilonovae associated to more asymmetric binaries and stiffer EOSs. We suggest that, even assuming a good coverage of GW190425’s sky location, the kilonova could hardly have been detected by present wide-field surveys and no firm constraints on the binary parameters or EOS can be argued from the lack of the detection.

Are family firms really reluctant to innovate? Evidence from IPOs

PurposeThe aim of this paper is to explore the family firms' propensity to undertake R&D investments after going public, showing how it varies due to the ownership structure.Design/methodology/approachThe analysis is based on a sample of 132 French and Italian family and nonfamily IPOs in the period 2013–2018.FindingsThe empirical findings show a positive relationship between the quantity of post-IPO shares retained by family owners and R&D investments. Furthermore, the abovementioned relationship is negatively affected by the generational stage and positively by the presence of a lone founder.Practical implicationsOutside investors of family firms may be assured in buying shares of founding family firms after going public because they are stimulated to undertake R&D investments and therefore create overall value in the long term. Furthermore, external managers of lone-founder and first-generation family firms can adopt innovation investments without fear of being replaced as a consequence of a hostile takeover. Lastly, private equity should support later generation family IPOs, providing them with capital and managerial skills in order to generate value for shareholders.Originality/valuePast studies have mostly shown family firms' reluctance to undertake R&D investments; however, scholars have focused on private or public family firms, ruling out the analysis of family firms' innovation behaviour within the setting of an IPO. To the best of the author's knowledge, this study represents the first empirical attempt to investigate the relationship between family firms and post-IPO innovation investments, when the capital infusion relaxes the financial constraints of family firms.

Corporate Tax Integrity and Financial Constraints: Evidence from China

ABSTRACT This study examines how corporate tax integrity affects financial constraints. In the past, scholars have captured corporate’s trust in an indirect way, and our paper fills this void. To capture the earned trust of enterprises in a more direct way, we use a firm’s tax integrity level as a proxy for its earned trust. Our results show that corporate tax integrity is negatively related to financial constraints. Further, we examine whether social trust in the regions where the corporate is located will affect the relationship between firm’s tax integrity and financial constraints, the result suggests that corporate tax integrity has a stronger effect on financing constraints of firms located in high social trust regions. Finally, we further find that firms’ business risk is a channel where corporate tax integrity affects financial constraints.

Government Financial Support and Firm Innovation

Prior studies have documented a positive effect of government financial support on firms’ innovation. However, such a positive effect could be due to two alternative underlying mechanisms –‘additionality’ or ‘crowding-out’. The former, whereby government financial assistance relaxes financial constraints for recipient firms and enables their innovation, represents the desired positive effect. On the other hand, the crowding-out mechanism – whereby financially unconstrained recipient firms use government funding to simply replace their private spending – represents mistargeted government intervention. This paper attempts to disentangle these two mechanisms to understand which one of them drives empirical observations of a positive effect of government funding on firm innovation. We achieve this through formulating and testing two competing moderator hypotheses, each one being a unique derivative of the additionality and crowding-out mechanisms respectively. Our empirical analysis uses firm-level panel data from the Business Longitudinal Database (BLD) compiled by the Australian Bureau of Statistics (ABS), 2011-2016, and addresses both endogeneity and selection problems in our estimation. We find that government financial support increases the number of innovation that recipient firms produce. However, we also find that this positive effect is likely a result of the crowding-out mechanism. Financially unconstrained firms appear to benefit more from government support than financially constrained firms.

The Need for Speed: The Impact of Capital Constraints on Strategic Misconduct

Under what conditions do firms engage in strategic misconduct? Why do they undertake actions that increase profitability yet break laws or violate strong norms often with costly consequences for public welfare? The strategic management literature offers two external constraints that might explain these actions. First, firms in highly competitive environments with few options for differentiation turn to strategic misconduct for survival. Second, firms that operate in weak regulatory environments adopt strategic misconduct to overcome market frictions that lack of regulation creates. This paper offers a third explanation – access to affordable financing. Existing research on capital constraints has demonstrated firms benefit greatly from additional capital but has yet to investigate its impact on strategic misconduct. I examine the impact of capital constraints on strategic misconduct in the minibus taxi industry in South Africa. Exploiting a natural experiment in which a financing company changed their interest rates due to nation wide protests, I assess the impact of declining interest rates on over 5000 firms from 2015 to 2020. Using an instrumental variable analysis, I find that firms given lower interest rates decrease strategic misconduct, measured by speeding alerts and aggressiveness with other firms, and are more likely to survive. Exploring potential mechanisms through survey and qualitative analysis, I find suggestive evidence that binding capital constraints and high penalties for default might drive these results. My findings suggest that the reduction of capital constraints for firms under duress might increase both firm survival and public safety presenting implications for how we might approach building sustainable and resilient firms and communities.