Capital Allocation Efficiency Research Articles

Learning and the capital age premium

Imperfect information and learning are introduced into a production-based asset pricing model. Our model features slow learning about firms’ exposure to aggregate productivity shocks over time. In contrast to a full information case, our framework provides a unified explanation for the stylized empirical features of the cross-section of stocks that differ in capital age: old capital firms (1) have higher capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and, hence, earn higher expected returns, which we refer to as capital age premium; and (3) have shorter cash-flow duration, when compared with young capital firms.

CEO marital status and capital allocation efficiency

PurposeThe extant literature provides evidence that single CEOs are less risk-averse. Building on the theory of risk aversion, the authors argue that the risk aversion trait arising from CEO’s marital status partially explains capital allocation efficiency. The paper aims to examine the association between CEO marital status and capital allocation efficiency.Design/methodology/approachThe primary sample includes 9,671 observations from 1,264 US firms. The authors apply multivariate regression and a series of endogeneity tests to examine the association between CEO marital status and capital allocation efficiency.FindingsSingle-CEO firms have higher capital allocation inefficiency than those with married CEOs. The findings continue to hold after a series of endogeneity tests such as propensity score matching, change analysis and instrumental variable regression analysis and are robust to alternative proxies for capital allocation inefficiency. The capital allocation inefficiency in single-CEO firms arises from overinvestment but not underinvestment, and corporate risk-taking channels the effect.Research limitations/implicationsThe study is limited to the effect of CEO marital status, not CEO marital quality.Practical implicationsThe findings imply that besides information asymmetry and agency conflicts, CEO marital status should receive special attention for capital allocation efficiency. Also, marital status influences the CEOs’ commitment to the general good of society, affecting the potential conflict of interest with different stakeholders from inefficient capital allocation.Originality/valueThis study extends corporate finance literature on CEO marital status by providing novel evidence on the effect of single CEOs on capital allocation efficiency. The authors conclude that CEOs’ personality traits, such as marital status, matter in corporate policy choices.

Place-Based Policies and Carbon Emission Efficiency: Quasi-Experiment in China's Old Revolutionary Base Areas.

Regional imbalance is a typical feature of economic and social development in China, and place-based policies aimed at promoting balanced regional development may bring challenges to low-carbon goals. This study uses the panel data of China's prefecture-level cities from 2003 to 2019 to investigate the impact of place-based policies on carbon emission efficiency using a quasi-experimental method. Results indicate that place-based policies significantly reduce the regional total-factor carbon emission efficiency. The difference-in-differences method based on propensity score matching and entropy balancing matching consistently supports the finding that carbon emission efficiency decreases after policy intervention. Place-based policies lead to a significant decline in capital allocation efficiency but have an insignificant impact on labor allocation efficiency. Moreover, place-based policies result in the expansion of carbon-intensive industries but hinder the progress of the financial technology of financial institutions. Nevertheless, place-based policies do not lead to the deterioration of environmental quality. Among the advantages of these policies are the significant promotion of regional digitization and increased fiscal expenditure on science and technology. Political promotion, carbon regulation, trade policies, and other conditional factors may be optimally designed to promote low-carbon development in the old revolutionary areas.

Monetary Stimulus amidst the Infrastructure Investment Spree: Evidence from China's Loan‐Level Data

ABSTRACTWe study how a fiscal expansion via infrastructure investment influences the dynamic impacts of monetary stimulus on credit allocation. We develop a two‐stage approach and apply it to the Chinese economy with a confidential loan‐level data set that covers all sectors. We find that infrastructure investment significantly weakened monetary policy's transmission to credit allocated to private firms, while reinforcing the monetary effects on loans to state‐owned firms. This fiscal‐monetary interaction channel is key to understanding the preferential credit access enjoyed by state‐owned firms during the stimulus period. Consequently, monetary stimulus crowded out private investment and decreased capital allocation efficiency.

Female directors on the board and efficiency of capital allocation: evidence from Colombo Stock Exchange

The main scope of this research project is to investigate the relationship between women on director board in Sri Lankan context and their participation impacts on the efficiency of capital allocation of corporate companies. A plenty of research in this nature have been studied in the context of developed economies. The panel data methodology was involved to find out the link between female boardroom involvement, and capital efficiency and Tobin’s Q ratio and value- added growth were used as dependent variables to indicate capital efficiency. The study found a favorable relationship between the quality of investment prospects and the amount of money invested in companies run by female CEOs, while this relationship is far weaker in companies run by male CEOs.

Risk Aggregation, Tail Risk, Correlation: Capital Allocation Efficiency and Regulator-Set Standard Models for Bank Capital

Risk Aggregation, Tail Risk, Correlation: Capital Allocation Efficiency and Regulator-Set Standard Models for Bank Capital

Does supply chain finance business model innovation improve capital allocation efficiency? Evidence from the cost of capital.

Based on the sample of China's A-share listed companies from 2008 to 2021 and the text analysis data of supply chain finance, this study examines whether the supply chain finance business model innovation can improve the efficiency of capital allocation. Results showed that: 1) Firms with a supply chain finance business model have a low cost of capital, particularly the cost of equity capital; 2) The supply chain finance business model reduces the cost of capital in firms with low strategic commitment and a high degree of information asymmetry; 3) The supply chain finance business model innovation can reduce the cost of capital when the degree of competition in the external product market is low and the internal enterprise scale is large. The above findings can greatly inform the optimization of equity finance market supply, the promotion of innovation, and the provision of investment and financing and business decisions that are consistent with sustainable development goals.

ESG and Financial Constraints

Prior evidence that firm’s environment, society and governance (ESG) performance has a positive impact on its investment behavior, leaves unaddressed whether it has the same impact on corporate financing constraints. Drawing on stakeholder theory and Information asymmetry theory, this study analyzes the issue in a more exhaustive way. Use Chinese A-share listed companies samples from 2009 to 2020, the author analyzes the relationship between ESG performance and financing constraints, and finds that firms with better ESG performance, measured by high ESG ratings, face less financing constraints. This study helps to clarify the economic significance of ESG performance, provides empirical basis for listed companies to attach importance to and improve ESG performance, and has implications for government departments to formulate relevant policies to improve the efficiency of capital allocation and promote high-quality economic development.

Comparing Capital Allocation Efficiency in Public and Private Equity Markets

Comparing Capital Allocation Efficiency in Public and Private Equity Markets

Mandatory dividend policy and investment efficiency within state-owned business groups

This research explores capital allocation efficiency in business groups when parent firms experience adverse shocks in their cash flow. Using the quasi-experimental method, this study finds that: (1) When parent central state-owned enterprises (parent CSOEs) are required to pay dividends to the government, their group-affiliated listed central state-owned enterprises (listed CSOEs) substantially improve investment efficiency. (2) A plausible mechanism is that the adverse cash shocks of parent CSOEs could facilitate the resource reallocation through related party transactions within a business group motivated by the listed CSOEs' investment opportunity instead of the parent CSOEs' tunneling behavior. (3) Our findings are more pronounced for firms with more serious agency problems. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm's investment efficiency within a state-owned business group.

Social capital and capital allocation efficiency

AbstractBased on the social norms and structural theories of social capital, this study examines the relationship between community social capital and the firms’ capital allocation efficiency. We hypothesize and find that the community social capital of a firm's headquarter area has a negative and statistically significant impact on its capital allocation inefficiency, which is robust to alternative proxies for community social capital and capital allocation inefficiency, propensity score matching and instrumental variable regressions. In addition, we find that the effect of community social capital is more pronounced for firms with poor internal ethical culture and weak network connections to outside executives and directors, implying that community social capital becomes important in these situations. This finding links prior social norms and networks literature to capital allocation studies in that the norms and networks components of community social capital discipline self‐interested managers’ behavior and reduce information asymmetry‐two channels of capital allocation efficiency. Overall, community social capital works as a compensatory monitoring and information transfer mechanism and improves the firms’ capital allocation efficiency.

Financial frictions, capital misallocation, and total factor productivity: evidence from China

ABSTRACT From the perspective of credit constraints and heterogeneous financing costs, this paper aims to enrich our understanding on how financial frictions affect capital misallocation and total factor productivity (TFP). Our model predicts that financial frictions could lead to greater capital misallocation and TFP losses. Moreover, credit constraints exacerbate capital misallocation and amplify TFP losses caused by heterogeneous financing costs. On this basis, we use micro-level data of the Chinese industrial firms to quantify the TFP losses caused by financial frictions. The results show that: (1) financial frictions have caused huge TFP losses in China’s manufacturing industry, and credit constraints have contributed to 120.7% of annual manufacturing TFP losses on average. (2) The manufacturing TFP losses are significantly higher in the post-crisis period than in the pre-crisis period because of the more prevalent and tighter credit constraints. (3) The increase in the post-crisis TFP losses is largely accounted for by the tightening credit constraints faced by firms in central China and non-state-owned enterprises. Our findings highlight the importance of alleviating financial frictions to improve capital allocation efficiency and promote economic growth.

The Impact of Chinese Carbon Emissions Trading System on Efficiency of Enterprise Capital Allocation: Effect Identification and Mechanism Test

The carbon emission trading system, as a significant policy instrument to ensure the Chinese economy achieves a green and low carbon transition, will also affect economic enterprise efficiency. This paper takes listed enterprises in a Chinese carbon trading pilot from 2011 to 2020 as research samples, constructs a multi-period differential model, and explores the impact of Chinese the carbon emission trading system on enterprise capital allocation efficiency. We find that the Chinese carbon emission trading system effectively improves the capital allocation efficiency of enterprises, which is more significant in enterprises with light pollution intensity and strong regional environmental regulation. Further analysis shows that the carbon emission trading system can improve the efficiency of enterprise capital allocation by improving the efficiency of working capital management and asset operation efficiency, while the path of human capital value is not established. Carbon trading market activity and government efficiency play a positive moderating role in the impact of the carbon emission trading system on enterprise capital allocation efficiency. The higher carbon trading market activity and government efficiency, the stronger the relationship between them. The above conclusions provide empirical evidence for the microeconomic effects of the Chinese carbon emission trading system, and also provide a useful reference for the government to implement carbon trading according to local conditions and improve the efficiency of enterprise capital allocation.

Inexperienced Component Auditors and the Internal Information Asymmetry of Multinational Corporations

With the global expansion of business operations, many U.S. corporations now operate internationally. While these multinational corporations (MNCs) rely on information about their operations to allocate resources, this information is likely dispersed within the firm, leading to internal information asymmetry between top executives and divisional managers. Meanwhile, audits of these geographically dispersed MNCs are challenging, and parts of these audits are sometimes outsourced to local foreign auditors who have no experience serving as opinion-issuing auditors for U.S. issuers (“inexperienced component auditors”). In this article, we examine whether involving such inexperienced component auditors is associated with MNCs’ internal information environment. We find that, relative to a matched control sample, Securities and Exchange Commission (SEC) issuers with the participation of inexperienced component auditors have higher internal information asymmetry and lower internal capital allocation efficiency. Our results suggest that audit quality matters not only to a firm’s external financial statement users but also to its internal users.

An empirical investigation of market risk, dependence structure, and portfolio management between green bonds and international financial markets

The study aims to explore the market risk, dependence structure, and portfolio diversification benefits of green bonds with Islamic and conventional (equity, bonds, and energy) markets. We first examine the market risk dynamics and dependence structure between green bonds and the international financial markets by using value-at-risk (VaR), copula models, and the Copula-VaR approach over the period from July 2014 to August 2020. Findings reveal the existence of the symmetric upper (lower) tail dependence between green bonds and international financial markets, except for the conventional bonds market with zero dependence. Our empirical results suggest that international financial markets possess different risk profiles, and the investors should not treat them as homogenous assets to combine with green bonds. Moreover, we also explore the portfolio diversification benefits, using hedge ratios, optimal portfolio weights, and hedging effectiveness for all pairs of green bonds-international financial markets. The results suggest that Islamic bonds and the oil markets are best to hedge green bonds, followed by conventional bonds, conventional equity, and the Islamic equity market. These results provide implications for effective risk management and fund allocation to policymakers and socially responsible investors. The study's findings are critical for current and future investors for efficient capital allocation in the environmental and ethically responsible assets.

ICTs quality and technical efficiency: An empirical analysis

In 1987, Robert M. Solow hinted at the computer age and productivity statistics puzzle. While this puzzle persisted for many years, a growing literature has picked it up to examine the effect of ICTs on technical efficiency. However, this literature has focused mainly on quantity-based ICTs measures, which have come under severe criticism in recent times. We advance this literature in this paper by shifting the focus of analysis to quality-based ICTs measures; in this case, Internet quality. We also extend the literature by examining how the envisaged relationship between ICTs quality and technical efficiency is conditioned by a country's unique attributes. Our results show a significantly positive effect of ICTs quality on technical efficiency. We also find that the technical efficiency gains associated with ICTs quality are higher in skill-abundant countries, countries that engage more intensively in cross-border trade, have stronger contracting institutions, and are endowed with well-functioning and well-developed financial markets that ensure greater efficiency of capital allocation. We find a network effect in the nexus between ICTs quality and technical efficiency. That is, the marginal effect of ICTs quality on technical efficiency increases as the number of Internet users expands. We discuss the policy implications of our findings.

Research on The Effect of Digital Finance on The Transformation and Upgrading of Residents' Consumption Structure

The effect of digital finance on the upgrading of China's resident consumption structure, at this stage of China's expansion of domestic demand, transformation and development of new momentum, economic shifting transformation is extremely important, can greatly improve the efficiency of capital allocation in the real economy, most scholars agree that digital finance can improve the consumption level of residents and optimize the consumption structure of residents, this paper from the perspective of reducing the consumption gap between urban and rural residents, narrowing the consumption gap of different income groups, breaking the consumption gap of different age groups to study the impact of digital finance on China's consumption structure.

Green Finance Evaluation Based on Neural Network Model.

The weights of green finance indicators are established in accordance with the AHP in order to suggest an evaluation system that is more thorough and reasonable and to construct an evaluation index system. The findings indicate that the growth of urban green finance is more closely correlated with the development of environmental protection businesses, capital allocation efficiency, and governmental and social capital support. Regulation of consumption also has a significant impact. In order to encourage the growth of urban green finance, this paper analyzes the scoring outcomes and changes for each city and offers solutions and recommendations.

The Moderating Role of Innovation on Institutional Components and Life Insurance Penetration: Evidence from Sub-Saharan Africa

A well-functioning insurance market benefits the economy by promoting efficient capital allocation, liquidity, savings, and risk reduction. However, in most Sub-Saharan African (SSA) countries, risk protection uptake is sketchy compared to other regions. For instance, data shows that insurance penetration in Africa stood at 2.78% in 2019, lower than the global average of 7.23%. Hence, this study aims to determine the moderating effect of innovation on institutional components and life insurance penetration in 35 SSA nations between 2009 and 2020. The study employs data from the Financial Development and Structure Database (FDSD), Worldwide Governance Indicators (WGI), and World Intellectual Property Organization (WIPO) for life insurance penetration, the institutional components, and the global innovation index. The study uses the panel corrected standard errors (PCSEs) estimation technique. The study establishes that innovation promotes life insurance penetration by enhancing voice and accountability, the rule of law, and government efficacy mechanisms. The study concludes that innovation is an essential catalyst for performance efficiency through which weak institutional factors can be improved to stimulate insurance uptake. This study adds to the scant body of knowledge on insurance advancement in Africa by examining the previously underexplored function of innovation via the pathway of institutional components. The findings may assist policymakers, managers, and other stakeholders in coordinating innovation plans with institutional mechanisms to boost insurance coverage in the SSA region.

The Spatial Economic Effect of Industrial Credit Misallocation in China

The cross-industry allocation of bank credit plays an important role in China’s economic development and optimizing and upgrading industrial structures. This article collects the panel data of 19 industries in China from 2007 to 2017, constructs dynamic spatial panel models, and deeply analyzes the impact of credit misallocation on industry economy. The results show that structural misallocation of bank credit exists in various industries in China. Particularly, credit deviation degree of China’s industries has gradually declined, but structural volatility remains large. A large amount of capital flows to the tertiary industry, while the capital of the primary industry and the secondary industry is relatively scarce. What is more, credit misallocation has a negative impact on industry economic growth and shows a weak acceleration effect. Therefore, in formulating economic policies, the government should actively guide the rational flow of inter industry credit funds and improve the efficiency of capital allocation. The government should continue to increase investment in manufacturing and promote independent innovation. Additionally, reasonable financial policies should be formulated to ensure the effective operation of the market and reduce the degree of credit misallocation.