Corporate Investment Research Articles

Can common institutional ownership inhibit the formation of zombie firms? Evidence from China

The survival of zombie firms severely crowds out healthy corporate investment and employment growth, eventually undermining economic growth potential. Hence, how to properly address the problem of corporate zombification is an essential part of achieving high‐quality economic development in China. In recent years, the phenomenon of common institutional ownership has become increasingly widespread in the capital markets and has a significant impact on the strategic decisions of companies. There are currently two views on the corporate governance role of common institutional ownership: the synergistic governance effect and the collusive fraud effect. Using data from Chinese‐listed firms from 2009 to 2021, this paper finds that common institutional ownership can significantly inhibit the formation of zombie firms. The higher the degree of their linkage and the greater the shareholding, the more pronounced the synergistic effect. The findings remained valid after considering the endogeneity issue and conducting robustness tests. Furthermore, the mechanism test suggests that common institutional ownership inhibits the formation of zombie firms by improving internal control quality and reducing agency costs. This paper contributes to the study of how to inhibit the formation of zombie firms by identifying common institutional ownership from the perspective of external governance mechanisms. In addition, this paper enriches the research on the economic consequences of common institutional ownership. Finally, various practical implications for policymakers may be realised, which may help curb the trend of corporate zombification through equity‐based instruments.

An Examination of the Listing of Analyst Coverage on Corporate Websites

ABSTRACT We examine firm decisions to provide listings of sell-side analyst coverage on corporate investor relations (IR) websites. These listings are related to three major areas of financial research—voluntary disclosure, investor relations, and analysts. Our hand-collected data permit cross-sectional and time-series analyses. Firms are more likely to have such listings when analysts are more important information intermediaries and when firms are directly involved in managing their IR websites. For firms with listings, the probability of an analyst being included on the listing is increasing in firm awareness of and familiarity with the analyst, how active and favorable the analyst is, and the analyst’s reputation. Additional analysis indicates similar results across self-hosting versus third-party hosting IR websites, with a notable exception that self-hosting firms exhibit a stronger preference for analysts who issue more favorable research about the firm. Decisions to add or drop analysts from listings reinforce the main results. Data Availability: Data are available from public sources identified in the text. JEL Classifications: G17; G24; M41.

The sustainability factor in asset pricing: Empirical evidence from the Indian market

This study investigates the feasibility of including the sustainability performance of firms in the asset pricing problem. The data of 500 firms from the NIFTY 500 index are used for this study. The stock prices and financial data are downloaded from the CIME database. The sustainability factor is computed using the ESG scores from the Bloomberg database. In order to test the influence of the sustainability factor, the Fama–French Five-Factor model is extended by including the sustainability factor as an additional factor. The dependent variables are the excess returns on 36 size and book-to-market ratio sorted portfolios, 36 size and operating profitability sorted portfolios, and 36 size and investment sorted portfolios. The impact of the sustainability factor on excess portfolio return is tested using the Fama–MacBeth two-pass regression and the Fama–French methodology. The results show that the price of ESG risk (or ESG risk premium) is positive, indicating that firms with lower ESG performance yield more returns than those with higher ESG performance. About one-third of the portfolios witness the significant impact of the sustainability factor on their returns. However, the insignificant relationship in two third of the portfolios between the sustainability factor and excess portfolio returns conveys that in the Indian market, corporate investors have the flexibility to decide on ESG investment. Smaller firms are exposed to a higher ESG risk, and Firms which do not integrate environmental and social costs into their strategies may bear a higher cost of equity.

Financial Distress: Identifying Influencing Factors and Moderating Dynamics in Manufacturing Companies

In order to adapt to changes in the economy and reduce possible losses, financial distress plays a critical strategic role. Therefore, the purpose of this study is to determine the characteristics that reduce financial distress as well as the factors that moderate it. All manufacturing companies listed on the Indonesia Stock Exchange between 2017 and 2021 are included in this quantitative study. A total of 79 companies were chosen for observation during a five-year period using the purposive sample method, yielding 395 observations. Using Stata software, linear regression and moderated regression analysis (MRA) were used to analyze the data. This study demonstrates that the factors of leverage and ROA each have a significant impact on financial distress. It wasn't demonstrated that operating cash flow significantly affects financial distress, nevertheless. Additional findings revealed that size significantly moderates the association of leverage on financial distress. This study makes a significant contribution to our understanding of the variables that lead to financial distress, particularly in light of the manufacturing sector's poor performance during the COVID-19 pandemic. Furthermore, revealing this moderating influence might benefit investors significantly by enabling them to take business size into consideration when assessing corporate investments.

Beneath the surface: The asymmetric effects of unconventional monetary policy on corporate investment

This paper explores the asymmetric effects of unconventional monetary policy on corporate investment in the aftermath of the Great Recession. Using a comprehensive dataset of US listed firms, our research unveils a compelling insight: firms with higher investment irreversibility and market power are less responsive to fluctuations in corporate bond yields following an unconventional monetary policy announcement. These results emphasize the critical importance of taking into consideration firm-specific characteristics when formulating monetary policy, providing valuable insights for central banks aiming to enhance the effectiveness of their policies.

Board effectiveness and corporate investment in emerging markets: evidence from the gulf cooperation council countries

PurposeThis study aims to empirically examine the impact of internal corporate governance mechanisms (ICGM) related to the size of the board, board composition, CEO duality and audit committee independence as a single metric on a firm’s investment decisions.Design/methodology/approachThis study attempts to develop an internal corporate governance quality index comprising 10 items under four main ICGMs – size and independence of the board, CEO duality and audit committee independence – employing panel data analysis to investigate its impact on the investment decisions in 301 nonfinancial firms listed in six emerging capital markets in the Gulf Cooperation Council (GCC) member countries for the years 2015–2020. Data were extracted from sample companies' websites, stock markets, annual reports and Refinitiv database.FindingsThis study provides convincing evidence that effective ICGMs minimize inefficient investment and ultimately boost investment efficiency. The findings remain consistent even after considering the potential endogeneity bias.Originality/valueThis study provides empirical evidence on investment efficiency in the GCC region and emphasizes the importance of high-quality ICGMs in reducing inefficient investment. By examining the impact of ICGMs on investment inefficiencies, this study contributes to the corporate governance literature. The GCC region's unique economic and social contexts, with its growing economies, are considered to shed light on this issue.

Selective industrial policy and overcapacity: Evidence from a quasi-natural experiment in China

Overcapacity has long been a "chronic problem affecting China's economic development." Why is China's overcapacity intractable? This study takes the "Revitalization Plans of Ten Industries" (the RPTI) issued by the Chinese government in 2009 as a quasi-natural experiment. It deploys the data of China's A-share listed enterprises and the difference-in-differences (DID) model to investigate the impact of the selective industrial policy on enterprise overcapacity. The results show that the policy has a significant and persistently negative effect on the capacity utilization rate of the treated group. Mechanistic studies reveal that policy-induced overcapacity is caused by increasing government subsidies for the treated group, depressing corporate investment efficiency, and growing capital misallocation. After considering zombie enterprises, we find that the policy mainly leads to the overcapacity of regular enterprises but has no negative impact on zombie enterprises, and zombie enterprises crowd out the capacity utilization rate of regular enterprises in the same industry. This study indicates that a selective industrial policy that prevents the market elimination mechanism from functioning is an underlying cause of overcapacity in China. The study's findings reveal why the administrative de-capacity policies enacted by the Chinese government have failed to eliminate backward capacity but rather created a new overcapacity issue.

An Empirical Study on the Short-term Impact of the Environmental Protection Fee-to-Tax Reform on Corporate Investment Efficiency

This paper uses non-financial A-share listed companies in China from 2010 to 2020 as research samples, utilizing the quasi-natural experiment conducted through the implementation of the "Environmental Protection Tax Law". The study investigates the short-term impact of the environmental protection fee-to-tax policy on corporate investment efficiency using a generalized difference-in-differences approach. The results indicate that the implementation of the environmental protection fee-to-tax policy significantly suppresses corporate investment efficiency in the short term and increases firms' inefficient investment. Furthermore, it is found that the policy exacerbates the problem of corporate overinvestment, whereas its impact on underinvestment is not significant. After conducting robustness tests by substituting the dependent variables, the conclusion remains valid. Subsequent heterogeneity analysis was conducted, differentiating between state-owned controlling enterprises and non-state-owned controlling enterprises based on the proportion of state capital, compared to state-owned controlling enterprises, the impact of the policy is more significant on non-state-owned controlling enterprises; Additionally, the policy effects across different economic regions of China were analyzed, revealing that the policy's effect is most significant in the eastern region, significant in the western region, but not significant in the central region. The conclusions of this study further enrich the empirical evidence of the micro-effects of environmental regulation, extending the research on the effects of the environmental fee-to-tax policy, and also provide suggestions for policymakers to formulate effective market-incentive-based environmental regulatory policies.

Analysis of Investors' Investment Choices for Oil Companies

This paper delves into the significance of oil within the realms of energy supply, transportation, and the chemical industry, all while exploring the unique challenges encountered by diverse categories of investors. Employing a multifaceted approach encompassing risk analysis, profitability assessment, and market ratio analysis, this study meticulously dissects the financial records of select oil companies. Consequently, it formulates insightful recommendations aimed at enhancing investor decision-making processes and fostering stronger corporate investor relations. The primary findings of this research emphasize the intricate interplay of numerous factors that sway investors' choices, necessitating a comprehensive evaluation that takes into account risk, profitability, and prevailing market conditions. This study not only identifies these influences but also offers specific, actionable guidance to navigate them effectively. The implications of this research extend to the practical domains of investment decision-making and corporate strategic planning, thus underscoring its intrinsic value in shaping both individual investment portfolios and the strategic directions of oil enterprises.

The stabilizing effect of government guarantees in real economy investment: Evidence from China

This study examines how government guarantees affect the relationship between economic policy uncertainty and corporate investment for Chinese A-share listed companies covering 2012–2019. We find that government guarantees significantly weaken the inhibitory effect of economic policy uncertainty on firms' investment by changing the risk expectations of firms and banks. Mechanism tests show that this relationship is more pronounced in the case of high capital irreversibility, low market competition, high financing constraints, and external financing premiums, which proves the real option and financial friction mechanism. Heterogeneity tests suggest that the stable investment effect of government guarantees is more substantial for firms in lower marketization degree regions, non-state-owned, and more affected by information asymmetry. We further find that government guarantees significantly inhibit under-investment when economic policy uncertainty is high but do not significantly impact over-investment. For high-quality firms with more robust profitability or development capabilities, the positive impact of government guarantees on optimizing resource allocation efficiency is more significant. Our findings contribute to the literature on the cross-sectional variation of the relationship between government intervention and firms’ strategies in China.

The inside track: Entrepreneurs' corporate experience and startups' access to incumbent partners' resources

AbstractResearch SummaryStartups are increasingly turning to incumbent firms for venture capital, anticipating access to the investor's knowledge and complementary assets. However, startups' eventual access to these resources varies widely. This article highlights one important driver of such variance, whether startups' managers were previously employed by an incumbent in the same industry. Using data from the life sciences, I find that such corporate experience can precipitate technical knowledge flows to startups by enabling the generation of relational capital with incumbent firm managers. It also helps startups navigate incumbents' decision‐processes to formalize access to downstream complementary assets via alliances. The former effect is stronger when corporate experience is technology‐focused, the latter when it is commercialization‐focused. Corporate experience at the investing incumbent firm amplifies informal knowledge‐flows but not formal alliances.Managerial SummaryStartups typically expect corporate venture capital investors to facilitate access to resources these investors' parent companies control. However, such resource‐access often does not materialize, with startups struggling to navigate the large, complex organizations within which these resources are located. I identify an important driver of variance in such resource‐access. Prior experience working in an established company in the same industry enhances startup leaders' ability to informally tap into corporate investors' technical knowledge, and to formalize alliances to access corporate investors' go‐to‐market assets. Technology‐focused experience is especially helpful with the former, and commercialization‐focused experience with the latter. Such access is more likely to enable exit for the startup if the established firm has direct experience in the specific product markets the startup is focusing on.

Digital financial inclusion and corporate investment efficiency: Evidence from small‐ and medium‐sized enterprises in China

AbstractThis study investigates the influence of digital financial inclusion (DFI) on the investment efficiency of small‐ and medium‐sized enterprises (SMEs) in China. Employing a dataset of listed National Equities Exchange and Quotations firms over the period from 2011 to 2020, we find robust evidence that the development of DFI improves the investment efficiency of underinvested SMEs. However, no such effect is observed for overinvested SMEs. The mechanism analysis indicates that DFI can mitigate the underinvestment problem of SMEs by restraining their risk‐taking behaviors and easing their financial constraints. Furthermore, we find that the positive effect of DFI on underinvestment is more pronounced for SMEs with weaker financial statuses or in less competitive industries.

Fintech development and corporate credit risk: Evidence from an emerging market

This paper analyzes the impact of fintech development on the credit risk of non-financial firms. Using the city-level fintech development index constructed based on data from Ant Finance Service Group, we find that: (1) non-financial firms in cities with better fintech services have lower credit risk; (2) two channels identified are financial constraints and corporate investment efficiency; (3) the role of fintech development in reducing corporate credit risk are more pronounced for non-state-owned firms, small and medium-sized firms, firms in regions with a lower level of marketization, and firms experiencing economic contraction. Our research provides implications for the development of fintech in an emerging market.

Firm-level political risk and equity issuance

We examine whether firm-level political risk influences the issuance of equity (debt) to finance corporate investment. With a sample of 64,693 firm-quarter observations from 2002 to 2020, we find that firm-level political risk is significantly and positively associated with subsequent equity issuance as opposed to debt issuance. To mitigate endogeneity, we estimate firm fixed-effects regression, perform nearest-neighbor score matching technique and Heckman’s (1979) two-step correction procedure, and employ gubernatorial elections in different states of the U.S. as a shock to the firm-level political risk. We also test for two potential economic mechanisms, financial flexibility and information asymmetry, and find that our baseline results are more pronounced for these channels. Our study presents new evidence on firms’ financing choices in the presence of firm-level political risk.

Economic Policy Uncertainty and Corporate Investment Efficiency: Evidence from Australian Energy Companies

This study examines the impact of Economic Policy Uncertainty (EPU) on corporate investment efficiency. I argue that EPU increases financing constraints or induces firms to postpone investment projects, thereby reducing their investment efficiency. Using a data set of Australian energy firms from 2010 to 2022 and the EPU index of Australia, the findings show that the EPU index has a significant and negative effect on corporate investment efficiency. The results hold in fixed-effects and dynamic GMM models and after control for firm-specific factors, suggesting that a macroeconomic factor like the EPU index also plays an important role in determining the efficiency of Australian energy companies’ investments.

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.

To the test of economic recovery: The swings in energy resource prices

This paper examines how changes in oil prices impact a wide range of economic indicators worldwide, using empirical data, and a vector autoregressive (VAR) model analyzes oil price volatility. In this paper, we use fast Fourier units and multivariate regression to conduct a Granger causality test and find that volatility from 2001 to 2021 significantly affected economic recovery and spending during that period. Even during the global financial crisis, oil price and corporate investment were two of the most stable economic indicators. The COVID-19 pandemic has caused significant changes in economic activity and energy prices, and oil prices and economic growth are linked to the global financial crisis and COVID-19. In particular, the recent decline in oil prices can be traced back to the COVID-19 pandemic and worldwide economic concerns. Information about the COVID-19 pandemic spread between the oil market and banking activities faster than it did during previous global financial crises or COVID-19 breakouts. The results of this study have comprehensive implications on human understanding.

Corporate investors and the housing affordability crisis: Having wall street as your landlord

AbstractGiven the importance of housing affordability to one's social class standing, one's ability to afford decent, secure housing is not only important on an individual level, but impacts intergenerational im/mobility as well. The purpose of this research is threefold. First, it examines the recent trend in bulk housing purchases by corporate investors who turn those purchases into single family rental properties. In so doing, it discusses the implications for the population in general, but for marginalized population in perticular, that is, persons of color and those inthe lower socioeconomic strata of society. Second, this research examines a closely related housing phenomenon, condominium deconversion, where corporate investors purchase privately owned condominiums in bulk who turn them into rental units. Third, summary analysis and suggestions for future research as well as legislative and policy proposals to offset housing affordability conclude this research.

Digital financial supervision and inefficient investment of enterprises: Evidence from China's internet financial industry

This article examines the impact of China's digital financial supervision policy, specifically the Chinese Plan to Implement Special Rectification Work on Internet Finance Risks, on companies involved with the fintech business. This study constructs an internet finance dictionary from annual reports to identify companies involved in the internet finance business. We examine the impact of the policy on inefficient corporate investments using a difference-in-differences approach. We find that the policy reduces the inefficient investments by companies involved in the internet finance business from 2013 to 2019 and addresses in particular the problem of underinvestments. Mechanism analysis reveals that the policy primarily alleviates the principal–agent problem, reducing the “crowding-out effect” of the internet finance business on other investments and reducing inefficient investments. The additional dynamic analysis results demonstrate that the policy's effectiveness gradually strengthens after policy implementation, thereby continuously exerting a positive impact on corporate operations.

Corporate governance and green innovation: international evidence

PurposeThis study aims to exploit Tobin’s Q model of investment to examine the relationship between corporate governance and green innovation.Design/methodology/approachThe study is based on a sample of 3,896 firms from 2002 to 2021, covering 45 countries worldwide. The authors adopt Tobin’s Q model to conceptualize the relationship between corporate governance and investment in green research and development (R&D). The authors argue that agency costs and financial market frictions affect corporate investment and are fundamental factors in R&D activities. By limiting agency conflicts, effective governance favors efficiency, facilitates access to external financing and encourages green innovation. The authors analyzed the causal effect by using the system-generalized method of moments (system-GMM).FindingsThe results reveal that the better the corporate governance, the more the firm invests in green R&D. A 1%-point increase in the corporate governance ratings leads to an increase in green R&D expenses to the total asset ratio of about 0.77 percentage points. In addition, an increase in the score of each dimension (strategy, management and shareholder) of corporate governance results in an increase in the probability of green product innovation. Finally, green innovation is positively related to firm environmental performance, including emission reduction and resource use efficiency.Practical implicationsThe findings provide implications to support managers and policymakers on how to improve sustainability through corporate governance. Governance mechanisms will help resolve agency problems and, in turn, encourage green innovation.Social implicationsUnderstanding the impact of corporate governance on green innovation may help firms combat climate change, a crucial societal concern. The present study helps achieve one of the precious UN’s sustainable development goals: Goal 13 on climate action.Originality/valueThis study goes beyond previous research by adopting Tobin’s Q model to examine the relationship between corporate governance and green R&D investment. Overall, the results suggest that effective corporate governance is necessary for environmental efficiency.