Corporate External Financing Research Articles

THE SIGNALING EFFECTS OF DIFFERENT TYPES OF R&D GRANTS ON CORPORATE EXTERNAL FINANCING: EVIDENCE FROM CHINESE LISTED FIRMS

In this study, we investigate the heterogeneous signaling effects of government research and development (R&D) grants on corporate bank financing regarding various types of grants. While the literature primarily focuses on the information asymmetry between banks and receivers, this study focuses on the more fundamental aspect of disparate signals sent from various types of subsidies. We categorize public R&D subsidies into three types: project-based, special grants and general subsidies. By using data from Chinese listed firms between 2008 and 2018, we find that R&D projects have positive certification effects on corporate external financing, special funds do not have significant effects, and general subsidies send negative signals regarding firm quality, resulting in the reduction of long-term bank loans of recipients. However, the negative signaling effects of general subsidies are found to be counteracted by political connections, suggesting that the signal associated with political capital could be greater than that associated with firm quality.

ESG performance and corporate external financing in China: The role of rating disagreement

Following the thriving literature on the impacts of ESG performance on corporate financing, this paper investigates corporate ESG performance and debt-financing using a sample of Chinese listed firms. We pay special attention to the influence of rating disagreements across different agencies. While the positive role of ESG performance on the cost and amount of corporate debt financing is revealed, clear heterogeneity is found. More importantly, we uncover the role of rating disagreement, and find that only firms with agreed high ESG rating can benefit through lost cost and larger amount debt-financing. The results confirm the needs for firms to improve information disclosure and pay special attention to ESG performance. Moreover, improving ESG rating quality and establishing a consistent and effective rating system deserve regulators’ attention.

Rushing through the clouds, or waiting to die? The effect of the green credit policy on heavily polluting firms

Since the 2012 issuance of the Green Credit Guidelines by the Chinese government, banks have adjusted their credit lines for heavily polluting firms. Using the data of listed companies operating in China from 2010 to 2018, this paper examines the promulgation of the green credit policy as a quasi-natural experiment, empirically tests the effectiveness of this policy on heavily polluting firms, and examines the response of firms to this policy. The paper shows that the green credit policy has reduced corporate external financing and increased internal working capital to overcome financial challenges; and that the response of heavily polluting firms to the policy is mixed, with increases in both illegal pollution and green innovation.

External financing and earnings management: Evidence from international data

Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.

Indirect effects of direct subsidies: an examination of signaling effects

ABSTRACT This study draws on signalling theory to investigate how government funded research and development (R&D) subsidies influence corporate external financing through their direct and indirect impacts. Analysing data from 469 listed companies in China’s high-tech industries from 2009 to 2016 and after controlling for potential endogenous concerns, the authors find that R&D subsidies have positive effects on corporate short-term debt financing and equity financing but no effects on long-term debt financing. More importantly, their empirical evidence suggests that R&D subsidies serve as an important signalling mechanism to reduce information asymmetry, which in turn affect different types of corporate external financing. These findings contribute to the literature by demonstrating how R&D subsidies serve as market signals to attract external financing, offering important implications to academia, practitioners, and policy makers.

Optimal Financing and Dividend Strategies with Time Inconsistency in a Regime Switching Economy

This paper incorporates a manager’s time‐inconsistent preferences into the unified dynamic q‐theoretic framework to investigate their impact on the optimal external financing and dividend payout strategies in a regime switching economy. We find that with a higher degree of time inconsistency, either in a favorable market condition or in a financial crisis, dividends are paid out earlier and the equity issues are smaller in size in each occurrence; in a favorable market condition equity financing occurs particularly early. Hence, time inconsistency would result in a decreasing of a firm’s precautionary savings, which may directly cause capital chain rupture and make liquidation more likely. It also implies that corporate external financing and dividend payout are highly dependent on the degree of the manager’s time‐inconsistent preferences in a regime switching economy.

연구개발비 세액공제 효과에 관한 연구: 기업 재무적 관점을 중심으로 (R&D Tax Credit Analysis: Focusing on Financing)

Korean Abstract: 본 연구는 연구개발 세액공제제도를 기업의 외부자금조달 능력의 관점에서 분석한 보고서이다. 본 보고서는 기업의 외부자본조달 능력이 연구개발 세액공제의 효과에 미치는 영향을 이론 및 실증적으로 분석한다. 이론 분석에서는 기업의 합리적인 의사결정과정을 모형화하여 분석한다. 기본모형에서는 자기자본을 통한 자금조달의 경우를 살펴본다. 외부자본조달 비용이 존재하는 경우, 기업의 내부 현금창출 능력이 부족한 기업은 연구개발 세액공제율이 더 높다고 할지라도 연구개발을 더 늘리지 않는다. 완전모형에서는 부채를 추가하여 분석한다. 정해진 이자와 원금만 갚으면 되지만, 조달한도가 기업의 현금창출 능력에 따라 달라질 수 있는 부채자금조달의 특성을 분석에 활용한다. 분석 결과, 부채조달의 한도가 연구개발 세액공제효과에 영향을 줄 수 있는 것으로 나타난다. 실증연구에서는 2010년에 신설된 중견기업 세액공제구간을 활용하여, 상장 기업과 비상장 중견기업 간의 연구개발활동 변화를 비교한다. 상장 기업은 비상장 기업에 비해 외부자본을 더 용이하게 조달할 수 있다. 분석 결과, 2010년의 중견기업 세액공제구간 신설 전후로 상장 기업들이 비상장 기업들에 비해 연구개발활동을 더 많이 늘린 것을 확인할 수 있다. 본 연구의 시사점은 연구개발 세액공제의 효과를 증진시키기 위해서는 기업들이 자금을 용이하게 조달할 수 있도록 여건을 조성해 주어야 한다는 것이다. 다만, 기업에 직접 자금을 지원해주는 것은 도덕적 해이 등을 야기할 수 있으므로 지양하고, 그보다는 자본시장의 활성화를 통해 혁신적인 연구개발활동을 하는 기업에 자금이 잘 흘러갈 수 있도록 하는 것이 바람직하다. English Abstract: This paper studies R&D tax credit focusing on corporate external financing ability. It analyzes theoretically and empirically how external financing ability of a firm can affect the effects of R&D tax credit. I set up a q-theory type of model that analyzes a firm maximizing its value by choosing optimal R&D spending. The model shows that in case of costly external financing, firms could not increase their R&D as R&D tax credit rate gets high. Empirical evidence corroborates the argument. By taking advantage of introducing a new R&D tax credit bracket for medium size firms in 2009 Korea, I run diff-in-diff analysis. I show that listed firms, which have easy accessibility to external capital market, increased R&D more than non-listed firms after introducing the new tax credit bracket. This paper implies that reducing firms’ financing costs is crucial for improving the effects of R&D tax credit. Direct subsidy on R&D might not be desirable because moral hazard might arise. Easing on flow of capital to R&D active firms is appropriate by enhancing financial market.

Regulatory effects on Analysts' conflicts of interest in corporate financing activities: Evidence from NASD Rule 2711

We investigate the effects of NASD Rule 2711 on analysts' conflict of interest in corporate financing activities. Specifically, we examine the relations (1) between analysts' guidance in earnings forecasts and recommendations and corporate external financing and (2) between external financing and future stock returns during the 1994–2010 period. We find a positive relation of analysts' guidance in earnings forecasts and recommendations (especially long-term growth forecast and recommendations) and corporate financing activities, but the relation is weaker in the post-Rule period than in the pre-Rule period. We also find a negative relation between corporate external financing and future stock returns, but the relation is weaker in the post-Rule period. Moreover, the changes of these relations after the implementation of the Rule are greater for firms with greater conflicts of interest. Our empirical results suggest that Rule 2711 has reduced the extent of analysts' conflicts of interest in corporate financing activities.

Idiosyncratic Volatility and Corporate External Financing Decision by Listed Companies in Kenya

Idiosyncratic Volatility and Corporate External Financing Decision by Listed Companies in Kenya

The role of bank lending tightening on corporate bond issuance in the eurozone

Abstract The availability of bank lending and corporate bond markets underwent a drastic change in the eurozone with the break out of the financial crisis. To quantify the relation between the two, this paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the “pure” credit supply effect on corporate external financing in a sample period of 2003–2013. We find that tightened credit standards positively affect the NFC bond issuance: a 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms’ bond issuance in the eurozone. The substitution effect is net of the demand for bank lending and robust to factors such as price differentials. The impact of bank credit tightening on firms’ bond issuance is particularly observable in core eurozone countries. This is partially due to the underdeveloped debt capital markets in some countries.

CONVERTIBLE SECURITIES AND HETEROGENEITY OF INVESTOR BELIEFS

AbstractWe conjecture that convertibles can better attract investors with different beliefs about a firm's future cash flows compared to straight bonds and stocks. Our empirical findings are consistent with this conjecture. We find that a firm is more likely to issue convertibles rather than seasoned stocks and straight bonds in the public markets when investors' beliefs are more heterogeneous. The positive effect of heterogeneous beliefs on the relative likelihood of convertibles is greater when investors are more optimistic. Overall, our findings provide a novel rationale based on investors' heterogeneous beliefs for the use of convertibles in corporate external financing decisions.

Assessment of Investment Capacity of Power Companies Based on TOPSIS Method

Establishing the evaluation index system, from their own investment capacity, corporate external financing capacity of the two dimensions, using resultant weights and TOPSIS method for comprehensive evaluation of investment capacity of the power enterprises. Set a power company for example, results show that, the evaluation results are in line with the actual investment capacity situation of the power enterprises, the established evaluation index system and evaluation model has better applicability.

The Role of Bank Lending Tightening on Corporate Bond Issuance in the Eurozone

The availability of bank lending and corporate bond markets underwent a drastic change in the eurozone with the break out of the financial crisis. To quantify the relation between the two, this paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the pure credit supply effect on corporate external financing in a sample period of 2003 - 2013. We find that tightened credit standards positively affect the NFC bond issuance: a 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms' bond issuance in the eurozone. The substitution effect is net of the demand for bank lending and robust to factors such as price differentials. The impact of bank credit tightening on firms’ bond issuance is particularly observable in core eurozone countries. This is partially due to the underdeveloped debt capital markets in some countries.

Market Valuation of Corporate Investments: Acquisitions versus R&D and Capital Expenditures

I investigate whether investors incorporate the future benefits of corporate mergers and acquisitions, research and development (R&D), and capital expenditures into equity values in an unbiased manner. I examine simultaneously the relation between these corporate investments and future stock returns, while controlling for confounding effects such as corporate external financing, accounting accruals, and firm characteristics. I document a significantly negative relation between acquisitions and future stock returns, primarily driven by stock-financed acquisitions. Furthermore, both R&D and capital expenditures are significantly positively related to future stock returns. That is, although prior studies document a negative relation between capital expenditures and future stock returns, I find a positive relation after controlling for external financing and accruals. Finally, I corroborate these findings by investigating future firm profitability. Collectively, the evidence suggests that relations between corporate investments and future stock returns arise because investors do not predict future profitability in an unbiased manner.

Testing Pecking Order Prediction from the Viewpoint of Managerial Optimism: Some Empirical Evidence from Taiwan

In this paper we examine the relationship between managerial optimism and corporate external financing decisions by empirically testing Heaton's (2002) model. Heaton theoretically shows that, besides traditional information explanations, managerial optimism is also able to lead to managers' pecking order preferences in financing decisions. By using a specification of Shaym-Sunder and Myers (1999), we conduct a comparative test to see whether the pecking order hypothesis performs better when managers are optimistic. That is, the sensitivities of the net debt issues in relation to financing deficits for optimistic managers are larger than those for non-optimistic ones. Using listed Taiwanese companies as our sample, we find that optimistic managers indeed exhibit greater net-debt-issue/financing-deficit sensitivities than do non-optimistic ones. These findings are consistent with the predictions of Heaton's model.

The Demand for Funds in the Public and Private Corporate Bond Markets

THE purpose of this paper is (1) to determine whether corporations' decisions to borrow in the public or private corporate bond markets are significantly influenced by yield differentials between the two markets and (2) whether the sensitivity of corporations to yield differentials increases with the relative ease with which they can borrow in either market. In recent years, the influence of interest rates on corporation financing decisions has received considerable attention in studies which have sought to identify the determinants of corporate external financing and the maturity composition of corporations' liabilities.' In none of these studies, however, can the signs of the interest rate variables in the regression equations be predicted. This is because the expectations hypothesis of the term structure of interest rates which these studies accept posits that interest costs will be equalized regardless of the maturity financing strategy a borrower adopts. As a result the credibility of the findings of these studies concerning the influence of interest rates on financing decisions must be questioned even when this influence was found to be significant.2 In contrast, yield differentials between the public and private corporate bond markets have a predictable effect on the distribution decisions of borrowers. Since nominal rates typically are higher in the private market, a decrease (increase) in yield differentials should encourage (discourage) the sale of private placements. In the aggregate, then, the percentage of corporate debt sold privately should be negatively related to yield differentials between the two markets. In section II, the variables which influence the supply of and demand for funds in the public and private markets -are identified, and supply and demand equations are formulated. Differences in the distribution process in the two markets as well as marketing constraints, limit the ability of some corporations to borrow in both markets, as described in section III. For the purpose of measuring the influence of yield differentials on distribution decisions, then, corporations are divided into three groups, based on their ability to borrow in both markets. The regression results are discussed in section IV. Only the demand equation is estimated since appropriate data on the supply of funds to the corporate market is not available. The estimation of demand by itself, however, produces biased estimates of the coefficient of yield differentials between the public and private markets. The direction of this bias is considered in section V. The major findings are that yield differentials have exerted a significant influence on the distribution decisions of most of the groups studied. Moreover, the sensitivity of corporations to yield differentials is an increasing function of the relative ease with which they can borrow in both the public and private markets. Finally, if supply and demand had been estimated simultaneously, yield differentials most likely would have exerted a stronger influence on the distribution decisions of borrowers. Received for publication November 29, 1972. Revision accepted for publication May 22, 1973. * This paper is based in part on a study of the private placement market by Shapiro and Wolf (1972). In Shapiro and Wolf (chapter 5), the variables influencing the supply and demand for public and private financing are discussed and the distribution patterns of different borrower categories are compared. This paper extends this analysis by estimating a demand equation for public and private financing and by measuring the sensitivity of different borrower groups to yield differentials between the two markets. T am indebted to Professors John Keith, Richard Rippe and Maurice Wilkinson of the Columbia Business School and to Professors Robert Glauber and John Lintner of the Harvard Business School for their helpful comments. This study was supported by faculty research funds of the Columbia Business School. 1 Cragg and Baxter (1970) attempted to determine the factors which influenced the timing and the size of bond financings of 129 industrial companies using a probit analysis. Bosworth (1971) and White (unpublished) explained the maturity composition of total corporate borrowing using the Federal Reserve's Flow-of-Funds data. 2 Only in White's study was the fraction of long-term-tototal debt issues significantly (and negatively) related to the relative cost of long-term financing.

Patterns of Corporate External Financing

Patterns of Corporate External Financing

Structure of Corporate External Financing

D URING the postwar period through 1968, corporate extemal financing in the United States totaled $220 billion. In the late 1940's, this financing averaged $5 billion a year; since 1965, it has averaged over $22 billion a year. While the dollar amount has grown far faster than aggregate economic activity, the proportion which external financing has contributed to overall corporate financial requirements has fluctuated surprisingly little, averaging around 22 per cent for the whole period. Nevertheless, important shifts have occurred in the composition of external financing. This article endeavors to discover and explain the shifts in the relative importance of the chief forms of corporate external financing. Table I summarizes trends in the percentage distribution of the various types of external financing according to four five year periods: 1946-50, 1951-55, 1956-60, 196165 and, a final shorter period 196668. Table II shows the same percentage distributioln annually for each of the twenty-three years. The data shown is for all non-farm, nonfinancial business corporations and is taken from the Federal Reserve Board of Governors Flow-ofFunds statistics. Corporate financing in the mortgage market is not included because it is used only to finance corporate home construction. What is left, therefore, financed normal business investment and consisted of bank loans, commercial paper, new stock issues and new bond issues. The distribution during the first fifteen years of the postwar era (our first three periods) was substantially different from the last eight years. In the early period stock financing was important and bank financing declined. Commercial paper's rise was nominal until the late 1950's. Bond financing, however, was very stable at about one half of total requirements. As Table I shows, the distribution in the early 1960's was very different. In the first place there was a reduced role for total external financing which averaged only about 17 per cent of total sources, this compares with from 22 per cent to 24 per cent earlier. There was also a large increase in the relative importance of commercial bank financing and the use of paper financing continued to expand as it had in the late 1950's. The proportion of bond market financing, on the other hand, declined. But the most dramatic development was the shrinking of new equity financing to one third of its former importance. These changes reflected the steady bialanced growth of the economy during this period which, in turn, enhanced corporate cash flow, favored an expansionary monetary policy and put relatively little financing pressure on the bond or stock markets. The late 1960's differed substantially from the early 1960's. Demands grew at a far faster rate than resources. This is evident from the relatively smaller role of bank loans and the increased roles of paper and bond market financing. These trends reflect the greater monetary restraint and the revival of inflation. The sections below will deal in greater detail with several specific