Corporate Financial Behavior Research Articles

Does vertical integration reduce the cost of equity?

Faced with the increasing risk of supply chain disruption, more firms are using mergers and acquisitions or investments to expand their core business's upstream and downstream supply chain and improve their vertical integration. In this vertical integration trend, the cost of capital for core firms is crucial to coordinating the entire supply chain. We manually collected input-output matrix data of segmented departments and supply chain value-added data to explore how vertical integration impacts the cost of equity. Using A-share listed firms from 2008 to 2021 as our sample, the results of our regression analyses show that vertical integration plays a significant role in reducing the cost of equity. These results remain consistent throughout a series of robustness tests. The channel tests indicate that vertical integration can reduce the cost of equity by reducing operating risk and mitigating information asymmetry. Additional analyses show that vertical integration's impact on the cost of equity is more pronounced for firms with more intense industry competition, lower product market positions, lower supply chain concentration, weaker corporate governance, and more aggressive strategies, as well as firms in regions with lower marketization processes and weaker trust environment. Our findings contribute to the literature on the economic consequences of vertical integration from the perspective of corporate financing behavior and extend the literature on cost of equity determinants to the field of supply chains.

Peran Penghindaran Kebangkrutan dalam Mengakselerasi Earning Management

This study aims to analyze the impact of financial distress on earnings management within companies listed on the Indonesia Stock Exchange (IDX) from 2019 to 2021. Utilizing a purposive sampling technique, the research focuses on 44 companies that are noted for their special status on the IDX. Key control variables examined include company size, leverage, cash flow operations (CFO), growth, profitability ratios (ROA), equity issuance (EISSUE), and debt issuance (DISSUE). The findings reveal that financial distress significantly and negatively influences earnings management, indicating that distressed companies are less likely to engage in manipulative financial reporting. Furthermore, the study identifies that all control variables contribute to a nuanced relationship between financial distress and earnings management. Specifically, variables such as size, CFO, leverage, ROA, EISSUE, and DISSUE exhibit a significant positive impact on earnings management, suggesting that larger companies with higher leverage and profitability are more prone to earnings manipulation. Conversely, the growth variable demonstrates a significant negative effect, implying that companies experiencing growth are less likely to manage earnings. These insights contribute to a deeper understanding of the dynamics between financial distress and corporate financial behavior, offering valuable implications for investors, regulators, and policymakers.

Does local government debt management affect cross-border M&As? Evidence from China

The rapid expansion of government debt exacerbates systemic risks and tightens the credit transmission channels of monetary policy, posing a severe threat to the healthy development of firms. Existing literature mainly examines the impact of government debt on corporate financing behavior, innovation, and total output. Using data from a sample of Chinese A-share listed firms covering the period from 2001 to 2022, we investigate the impact of local government debt management on corporate cross-border mergers and acquisitions (M&As). Our analysis reveals that effective local government debt management promotes cross-border M&As by alleviating corporate financing constraints, intensifying market competition, and enhancing corporate risk-taking capacity. The findings offer fresh insights into achieving the dual objectives of risk prevention and stable growth through local government debt management and provide significant implications for boosting the high-quality development of the real economy.

Do CEOs Who Are Raising Daughters Reduce Company Risk‐taking?*

AbstractFamily structure and characteristics are important factors that affect both economic development and CEOs' decision‐making. Corporate risk‐taking reflects the overall risk choices and preferences of decision‐makers in relation to various decisions. Using data for Chinese non‐state‐owned enterprises between the years 2000 and 2019, we examine the association between CEO offspring gender and corporate risk‐taking. We find that CEOs who have daughters are associated with a lower level of corporate risk‐taking than CEOs who have sons only. Raising daughters significantly stimulates cautious attitudes and behaviors in CEOs and reduces firm overinvestment, thereby lowering the level of corporate risk‐taking. Moreover, raising daughters has a more significant inhibitory effect on corporate risk‐taking for female CEOs and CEOs who were born in regions with a strong patriarchal culture. Our findings also show that CEOs with daughters can help companies effectively avoid financial crises. Focusing on both parenting behavior and corporate financial behavior, we suggest that the parent–child relationship extends far beyond the scope of the family, providing a broader perspective for understanding corporate decision‐making and financial behavior.

Carbon Market and corporate financing behavior-From the perspective of constraints and demand

In the context of the development of the Low-Carbon Economy, the Carbon Market is an important way to guide enterprises to actively participate in environmental governance and promote enterprises to achieve green transformation. In this study, the first group of electric power industry companies participating in the carbon market on July 16, 2021, was selected as the treatment group. And the difference-in-differences (DID) model was used to investigate the influence of the Carbon Market on corporate financing behavior. This study finds that Carbon Market can significantly promote the level of corporate financing. This is achieved through enhancing credit financing and long-term financing. The heterogeneity analysis shows that the promotion impact is more obvious in state-owned enterprises, start-ups, and smaller enterprises. Additionally, we discuss the above impacts in terms of constraints and demands. In terms of constraints, the increase of external financing difficulty and the squeeze of own financing space will inhibit the promotion of the Carbon Market on the financing level. In terms of demand, corporate investment demand and investors’ attention will enhance the positive impact of the Carbon Market on the financing level. This paper expands the relevant research on the Carbon Market. It reveals the mechanism and effective path of corporate financing behavior in the Low-Carbon Economy. In addition, the paper provides new evidence for the improvement and development of the Carbon Market policies.

The impact of carbon risk on real earnings management

Carbon risk has aroused widespread concern in society. With the implementation of carbon policy and the development of carbon market, the research on the impact of carbon risk on corporate financial behavior has become an important academic frontier issue. We examine the impact of carbon risk on firms’ real earnings management before and after the Paris climate change agreement, signed by China in 2016. A difference-in-differences model is deployed by using a sample of Chinese A-share listed companies. We find that high-carbon-intensive firms engage in significant upward real earnings management compared to low-carbon-intensive firms to offset the negative impact of carbon risk by conveying the message of good corporate development to investors after signing the Paris Agreement. The above research findings still hold after the robustness tests. Further heterogeneity analyses show that the impact of carbon risk on firms’ real earnings management is greater in the sample of non-state-owned firms. The above impact is more significant in firms with weaker corporate governance, implying that strong corporate governance constrains managers from engaging in real earnings management. Therefore, policymakers and regulators should pay attention to the ‘strategic response’ to earnings management of carbon-intensive firms, taking into account the nature of property rights, corporate governance to reasonably improve the policy design and regulatory direction.

Central Bank Communication and Leverage Differentiation of Non-Financial Enterprises

ABSTRACT As an expectation management policy, central bank communication can affect corporate market expectations, thus effectively guiding corporate investment and financing behavior. Based on the quarterly data of non-financial listed enterprises from 2007 to 2020, this paper analyzes the relationship between central bank communication and non-financial corporate leverage differentiation. The results show that central bank communication can reduce corporate leverage differentiation. The increase in the degree of bank credit discrimination can further amplify the inhibitory effect of central bank loose communication on the leverage differentiation of non-financial enterprises. The mechanism analysis shows that central bank communication can affect the leverage differentiation of non-financial enterprises by reducing financial mismatches, stabilizing the market expectation mechanism, and reducing managers’ myopia. The results of the extended analysis show that the central bank’s loose communication can inhibit the degree of leverage differentiation between zombie firms and non-zombie firms, and improve the dynamic adjustment speed of corporate capital structure.

Carbon abatement pressure and corporate cash holdings: Evidence from China

This study investigates whether and how the perception of carbon abatement pressure affects corporate financing behavior. The results show that carbon abatement pressure increases corporate cash holdings via the channel of financing constraints, and this positive relationship still holds after a series of robustness tests. This positive relationship is pronounced for private firms, those with higher operational risks, and firms in regions with lower levels of marketization.

A Five-Factor Asset Pricing Model of Shariah Compliant Firms in the United States

Shariah compliant firms operating in an environment with little to no access to a robust Islamic capital market (such as in the United States (US) stock market) will exhibit a consistent bias towards certain corporate financial behaviour. Does this bias subsequently lead to a skewed asset pricing behaviour? To answer this question, this paper investigates the asset pricing behaviour of multiple samples of Shariah compliant firms listed in the US as compared to an overall conventional sample by employing the Fama & French Five-Factor Model. By applying contemporary Shariah stock screening methodology on a sample of all stocks listed in the NYSE, NASDAQ and the IEX from January 2000 to December 2019, this paper shows that asset pricing behaviour differs not only between Shariah compliant and conventional samples, but also amongst Shariah compliant samples themselves. Ultimately, this paper shows that when deriving the appropriate expected return for Shariah compliant portfolios in the US, there are evidence to suggest that the Fama & French Five-Factor model is more suitable compared to the traditional Capital Asset Pricing Model (CAPM) since the additional risk premiums show consistent significance across groups of Shariah compliant firms.

Earnings pressure, external supervision, and corporate environmental protection investment: Comparison between heavy-polluting and non-heavy-polluting industries

Environmental protection investment (EPI) is an important part of promoting firms’ green development and fostering sustainability. However, few studies have discussed the influencing factors of EPI at the micro-firm level. This study uses data on Chinese A-share listed companies covering 2008 to 2020 empirically examine how earnings pressure from the capital market affects EPI and investigate the moderating effect of external supervision intensity. The results show that firms with earnings pressure have a significantly negative impact on the EPI scale, which is observed mainly in the non-heavy-polluting samples. Moreover, increased external supervision intensity reduces the negative impact of earnings pressure on the EPI scale. This study further finds that the manipulation of EPI by managers under earnings pressure supplements discretionary expenses manipulation. In addition, firms that invest more in environmental protection experience reduced current profitability and market values. These findings provide novel insights into the impact of earnings pressure on corporate financial behavior and offer theoretical guidance and policy recommendations useful for both regulators and stakeholders.

Indicators From China's Listed Corporations on Corporate Financing Behavior and Policy-Related Risk.

This study explores corporate financing behavior regarding the company and country-level factors and risks associated with policy-related regulations. The study considers all three categories of risk: geopolitical risk, economic policy uncertainty, and political risk. In addition to this, we investigated how the links between diverse types of financing activities and the policy-related risks associated with them change depending on the type of financing strategy utilized (debt vs. equity). The study examined quarterly data from 2016Q1 to 2020Q3. EViews 12 is used for data analysis. Findings show financial restrictions, as well as inequities within the sector, have an impact on corporate investment while policy-related risks might impact a company's financing selections. Compared to equity financing, debt financing is more susceptible to policy-related risk. According to the available information, features at the company and nation levels also impact corporate finance choices. Finally, firms that have little financial resources are more susceptible to the adverse effects of policy-related risk than industrial companies are. Managers, as well as governments, should utilize these insights to design economic strategies that are more successful in the future.

Theory and evidence of the impacts of Shariah debt screening on firm behaviour

PurposeThe paper aims to construct a theoretical framework to investigate whether the Shariah debt ratio screening in contemporary Shariah stock screening methodologies results in a bias towards a certain set of corporate financial behaviour for Shariah-compliant firms in the USA where access to a liquid Islamic debt market is non-existent.Design/methodology/approachThe paper extends the earnings valuation approach of Modigliani and Miller (1963) to theoretically asses the impacts of the 33% conventional debt limit on Shariah-compliant firms’ corporate financial behaviour. Then, supporting evidence is shown via empirical stylised facts of samples of Shariah-compliant firms in the USA.FindingsA theoretical floor limit to investment cut-off rates is found for US Shariah-compliant firms so that lesser projects pass their internal rate of return versus conventional firms. Subsequently, such firms consistently show the following corporate financial characteristics: above-average size, larger marginal change in size and profitability in response to a given marginal change in investments, low book-to-market ratio and lower investment rates.Research limitations/implicationsThe findings of this paper may not hold where access to a liquid Islamic capital market is present.Practical implicationsCaveat emptor. These findings may be inconsistent to the investor’s risk preferences.Social implicationsThe findings suggests that Shariah-compliant firms are more conservative compared to their conventional counterparts.Originality/valueThe paper is the first to introduce a theoretical framework to address consistent biasness in corporate financial behaviour due to the Shariah debt screening. It may prove useful for future academic studies as well as investment managers.

Board Characteristics and Capital Structure Decisions of Commercial Banks in Kenya

Organizations in the modern society are faced with numerous challenges that require those in charge with governance to make effective decisions that enhance organizations’ overall performance and sustainability. One of the key decisions an organization’s board ought to make involve capital structure. Despite various research that have been conducted relating to board characteristics and capital structure, several authors concurs that the manner in which banks select the best capital structure, and the factors that influence their corporate financing behavior are not well understood. The main aim of this study therefore was to investigate board characteristics and capital structure decisions of commercial banks in Kenya. The study measured board characteristics with respect to board size, board diversity, board independence and board expertise while the capital structure decisions was gauged with capital structure ratio, that is, total debt ratio. These dimensions also formed the specific objectives of the study. The study assessed various literatures covering both theoretical and empirical that elaborates on the study variables providing more insight as well as identified gaps that needed to be filled. The study employed correlation design as it strived to demonstrate the causative connection between study variables. All selected commercial banks formed the target population with chief finance officers and internal auditors being the target respondents in these banks. The primary source of information was both primary and secondary data of this study whereby primary data collection instrument was the questionnaire whose reliability and validity was ensured before collecting data. Collected data was properly assessed and checked before conducting final analysis. Data was analyzed using descriptive and inferential analysis, which was aided by statistical package for social science and the outputs were presented in form of graphs, pie charts, frequency tables and narrations. The findings of the study showed a strong positive correlation between all the study measures as shown by R value of 0.824. From inferential analysis findings, the study concludes that on the overall all the board of directors’ characteristics studied had a significant influence on capital structure decisions of commercial banks in Kenya. The regression coefficients p-values were 0.000, 0.000, 0.002 and 0.001 consecutively which were all less than 0.05 indicating a significant relationship between board characteristics dimensions studied and capital structure decisions; therefore, all the null hypotheses were rejected. The study also established that capital structure of commercial banks in Kenya over a period of 5 years between 2013 and 2017 averaged at 0.841 which was less than 1.00, indicating that these banks finance their assets using equity as opposed to debts. As a result, the study concluded that board characteristics have a significant impact on capital structure decisions made by Kenyan commercial banks. Furthermore, commercial banks in Kenya regard financial flexibility as more important than the tax shelter advantage, implying aversion to debt and a proclivity to follow an inverted pecking order when it comes to external funds. The study therefore recommends that banks’ board and management should manage debt and equity levels rationally to enhance their performance; banks should select the right size of board with the right mix of expertise and diversity who will be able to monitor the management but will not interfere with or infringe on capital structure decisions; banks should also increase board independence in order to benefit from the skills and expatriates of these board members; and finally a selection of banks’ board with divergent skills and qualifications so that banks can reap from the heterogeneity of educational backgrounds and competences.

Financing and supervisory effects of credit ratings: evidence from mergers and acquisitions

Purpose The purpose of this paper is to examine how credit ratings affect corporate financial behavior from the perspective of merger and acquisition (M&A) decisions. The goal is to test the financing and supervisory effects of credit ratings and study the economic consequences of credit ratings in the context of China. Design/methodology/approach Using a sample of Chinese A-share listed companies over the 2008–2017 period, this paper empirically examines the effect of credit ratings on firms’ M&A decisions. The authors used a probit model for regression when they tested the effect of credit rating on M&A likelihood and a tobit model when they tested the effect of credit rating on M&A intensity. Findings First, rated enterprises tend to make more acquisitions compared with non-rated enterprises, consistent with the hypothesis that credit ratings alleviate financing constraints. Second, high-rated enterprises are more cautious toward M&As due to concerns about preserving their ratings, which indicates that credit ratings also play a supervisory role in the M&A process. Additional tests show that enterprises reduce M&A activity after a rating downgrade to avoid further deterioration in their ratings; this further supports the supervisory role of credit ratings. Originality/value This paper adds incremental evidence to the literature on the impact of credit ratings on corporate financial behavior and extends the literature on the factors influencing M&As. The authors provided empirical evidence from emerging capital markets for the financing and supervisory effects of credit ratings and provided theoretical guidance for promoting the stable, long-term development of China’s credit rating industry.

Scholar-type CEOs and Stock Price Crash Risk of Listed Companies

For China’s stock market, which is in the emerging capital market, chasing the rise and killing the fall and extreme market risks occur frequently. The risk of stock price crash caused by this phenomenon has become a major obstacle to the orderly development of capital market. The managerial characteristics of scholar-type CEOs are of great significance to the management behavior of enterprises. Their management style is reflected in the decision-making behavior of enterprises, which provides a new research perspective for the risk of stock price crash. Based on the brand theory and the reputation theory, academic experience shapes executives’ higher moral quality and sense of social responsibility, and shapes their rigorous logical reasoning and analytical judgment ability; it makes them have higher reputation cost, and makes them more conservative, self-disciplined, professional and rational, and more motivated to restrain themselves when participating in management decision-making. Based on the A-share listed companies in China from 2009 to 2018, this paper empirically tests the objective performance, transmission path and influencing factors of CEO academic experience influencing stock price crash risk. From the perspective of information risk and agency risk, we find that scholar-type CEOs can significantly reduce the risk of stock price crash by reducing information risk and agency risk; further research on the influencing factors and economic consequences of stock price crash risk shows that CEO academic experience can reduce the risk of stock price crash more effectively in the case of non-state-owned enterprises, the combination of two jobs, and higher institutional investors’ shareholding ratio. This paper interprets the formation mechanism of stock price crash risk of listed companies based on the perspective of executive governance, and supports the information hiding hypothesis. From the theoretical level, the research result provides ideas for further exploring how management experience affects corporate financial behavior, and provides a new perspective and beneficial supplement for the research of high-level echelon theory and executive heterogeneity; from the practical level, it provides new evidence support for listed companies to make scientific and reasonable CEO appointment decisions and high-level talent selection, and provides practical guidance and experience reference for further exploring the impact of executive academic experience on enterprise management behavior, promoting the healthy and orderly development of the capital market, and establishing a stable multi-level capital market.

Does carbon emission trading policy affect bank loans of firms? Evidence from China

ABSTRACT Using a carbon emission trading pilot policy in China, we construct a DID method to investigate the effect of carbon emission trading on corporate financial behaviour. We find that enterprises in the pilot areas get less bank loans after the ‘pilot policy’, which indicates that carbon emissions trading has a negative impact on debt financing. Additional analysis shows that the negative influence is more significant in state-owned enterprises. Our study provides a more complete picture of the microeconomic impact of carbon emissions trading, and improves our understanding of the role and significance of corporate ‘carbon assets’ in the capital market.

Does corporate culture matter to earnings management? Evidence from Chinese Time‐honoured Brand firms

AbstractThis paper focuses on the earnings management and the culture of China Time‐honoured Brand. It shows that the accrual earnings management and real earnings management of China Time‐honoured Brand are significantly lower than other enterprises. The transmission mechanism between culture and corporate earnings management comes from the executives' culture infiltration. Property rights and incentive compatibility have significant moderating effect on the relationship between China Time‐honoured Brand and earnings management. From the quantitative point of view, this paper supplements the function of China Time‐honoured Brand culture in overcoming the problem of corporate information distortion and points out also the transmission mechanism and adjustment factors. On the one hand, it helps to deepen the understanding of the cultural factor and corporate financial behaviour, and on the other hand, it provides the direct evidence about the influence of Chinese excellent traditional culture to the small companies. The article helps to understand the relationship between traditional culture, corporate culture and corporate financial behaviour and its mechanism of action, which has an important practical significance.

Corporate characteristics and leverage: evidence from Gulf countries

Purpose This study aims to investigate the impact of corporate characteristics on leverage in the Gulf Cooperation Council (GCC) non-financial listed firms. Design/methodology/approach A sample comprising a balanced panel for eight years from 2009–2016 for four Gulf countries is used. In total, 85 non-financial listed companies have been selected using a non-probability sampling technique. Corporate characteristics are represented by return on assets (ROA), return on equity, return on capital employed, market value-added, Tobin-Q, liquidity and firm size. The study used fixed and random effect models to estimate the results. Findings The findings of the study revealed that both ROA and FSIZE have a significant negative effect on leverage. However, market value-added, return on capital employed and Tobin-Q exhibited a statistically significant positive effect on leverage. Further, the results indicated that Qatar is better than kingdom of Saudi Arabia (KSA), Oman and the UAE. In addition, evidence noted that KSA is better than both UAE and Oman in terms of the overall impact of corporate characteristics on the leverage. However, this effect is not statistically significant. Practical implications This study provides an open insight for managers, bankers, financial analysts in the GCC countries and some other developing economies by highlighting the relationship between corporate characteristics and leverage in an emerging market. Originality/value The current study provides an important insight into corporate characteristics and leverage. By so doing, it provides an attempt to identify the factors influencing corporate financing behavior taking into consideration different issues such as different proxies of firms’ profitability, market capitalization, market value added and liquidity, which provides original evidence from Gulf countries emerging markets. These countries are characterized by low tax rates and high liquidity. High liquidity may reduce the cost of borrowing and debt financing may not be a huge burden on firms’ profits. This makes the investigation of leverage and corporate characteristics, particularly, firms’ profitability and liquidity, very important. Therefore, the study tries to bridge an existing gap in the body of literature of capital structure and debt financing in Gulf countries emerging markets.

Does Making a Business Case for Voluntary Quota-Induced Board Gender Diversity Pay Off?

Women in top management have attracted global interest, and many governments have implemented the policy of female director quotas on corporate boards. In the context of self-regulatory quotas, policy- makers justify their intervention to improve board gender balance by appealing to the business case rather than gender equity concerns, that gender diversity improves firm performance. Critical mass theory provides theoretical support to such a position; according to this theory, a positive influence on the corporate financial behavior may exist when the number of female directors increases to critical mass level. Using FTSE 350 companies from 2006 to 2016 as the sample, the current paper evaluates female directors’ influence on corporate financial outcomes against the background of imposing UK self- regulatory quotas. Our results show a significant positive correlation after the imposition of the quota. Moreover, based on all firm-year observations, we find that the effect of three and more female directors is more pronounced than that of two women, or just one, confirming the predictions of critical mass theory. Finally, we show that female directors serve as a supplementary mechanism for companies with weak governance but can lead to over-monitoring for organizations with strong governance. These findings demonstrate that the introduction of a gender quota not only dramatically increases the number of female directors of FTSE 350 companies but also significantly changes firm outcomes.

Policy-related risk and corporate financing behavior: Evidence from China’s listed companies

Focusing on quarterly data of China’s publicly-listed firms from 2013Q1-2017Q3, this paper presents an exploratory analysis of the causes of corporate financing behavior through the channels of firm-level characteristics, country-level factors, and policy-related risks. The analysis uses multidimensional measures of policy-related risks, including economic policy uncertainty, geopolitical risk, and political risk. In addition, we assess whether the correlations between policy-related risks and financing activities vary under different financing strategies such as debt financing and equity financing. We also examine how financial constraints and industry differences influence firm financing. The empirical findings indicate policy-related risks can negatively affect corporate financing decisions. The effect of policy-related risk is larger on debt financing than on equity financing. Evidence also reveals that both firm- and country-level factors are essential determinants that guide corporate financing decisions. Finally, the inhibitory influence of policy-related risk is larger for the two separate subsamples of financially constrained firms and manufacturing firms. Knowledge of these impacts can help managers and policymakers to formulate more efficient strategies aimed at improving their economic performance.