External Financing Constraints Research Articles

Impact of economic policy uncertainty and financial constraints on firms’ markups: evidence from China

ABSTRACT Economic policy uncertainty (EPU) hinders global economic recovery and is an important cause of economic recession. Additionally, EPU also hinders the development of firms. In this context, using firms’ markups as the breakthrough point, this study analyses how EPU and financial constraints affect firms’ markups with the assistance of an econometric model and using an index of EPU and data from Chinese Annual Survey of Industrial Firms. The conclusions are as follows: (1) EPU has a significantly negative impact on firms’ markups; (2) both the internal and external financial constraints have a significantly negative impact on firms’ markups; (3) the interaction between EPU and internal and external financial constraints has a significantly negative impact on the firms’ markups. This study also analyses the differences of firms’ heterogeneity. This study is helpful for firms to fully understand the different impacts of internal and external shocks on firms’ markups, and provide more targeted reference for policy-making departments, and thus improve the policies’ effectiveness.

Do loan subsidies boost the real activity of small firms?

We investigate the effects of subsidized loans on the real activity of small firms. Despite the lack of theoretical consensus, subsidized loans have been considered or used in many countries after the global financial crisis and during the COVID-19 crisis to alleviate the external financing constraints and stimulate the real activity of small firms. We provide empirical evidence on this policy tool by studying the impact of a large-scale subsidized loan program implemented in Hungary in 2013. Utilizing comprehensive credit registry and firm microdata, we find that subsidized loans were not only highly effective at promoting investment and job creation, but they also enhanced the productive efficiency of firms over time. Meanwhile, there was significant heterogeneity both in the benefits from and access to subsidized loans. While firms with better bank relationships received more subsidized loans, firms with lower net working capital and more severe credit constraints responded more strongly to them, which raises allocation considerations.

Global macroeconomic cooperation in response to the COVID-19 pandemic: a roadmap for the G20 and the IMF

The COVID-19 crisis has caused the greatest collapse in global economic activity since 1720. Some advanced countries have mounted a massive fiscal response, both to pay for disease-fighting action and to preserve the incomes of firms and workers until the economic recovery is under way. But there are many emerging market economies which have been prevented from doing what is needed by their high existing levels of public debt and—especially—by the external financial constraints which they face. We argue in the present paper that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need, and that many advanced countries have been able to carry out. We show what such cooperation would involve. We use a global macroeconomic model to explore how extraordinarily beneficial such cooperation would be. Simulations of the model suggest that GDP in the countries in which extra fiscal support takes place would be around two and a half per cent higher in the first year, and that GDP in other countries in the world be more than one per cent higher. So far, such cooperation has been notably lacking, in striking contrast with what happened in the wake of the Global Financial Crisis in 2008. The necessary cooperation needs to be led by the Group of Twenty (G20), just as happened in 2008–9, since the G20 brings together the leaders of the world’s largest economies. This cooperation must also necessarily involve a promise of international financial support from the International Monetary Fund, otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge, creating fiscal crises and currency crises and so causing such expansionary policies which we advocate to be brought to an end.

Effects of financial distress and financing constraints on trade credit provisions

PurposeExisting studies that documented the effect of financial distress on trade credit provisions did not include measures financial constraint. It is possible that financial distress is tie to financial constraints, and both financial distress and financial constraints mutually reinforce each other in their effects on trade credit provision. The purpose of this study is to evaluate the effects of financial constraint and financial distress on trade credit provisions in the UK FTSE 350 listed firms.Design/methodology/approachThis study employs panel data in the estimation of the determinants of accounts payables and accounts receivables of the UK FTSE 350 firms from 2009 to 2017.FindingsThis study finds that financial distress has significant positive effect on accounts payables and a significant negative effect on accounts receivables. Financial constraints have significant negative effect on accounts payables and a significant positive effect on accounts receivables.Practical implicationsTrade creditor desiring to maintain an enduring product-market relationship grant more concessions to customer in financial distress. The amount of trade credit that sellers provide to financially constrained firm is an increasing function of the buyer's creditworthiness. The urgent cash needs of financially distressed firms lead them to sell trade receivables to factoring company leading to reduction in trade receivables. Firm facing external financing constraints increase trade credit to customers in anticipation of cash flow inflow to enhance liquidity.Originality/valueThis study shows that financial distress and financial constraints mutually reinforce each other in their effects on trade credit provisions, and firm's financing condition contributes to divergence in trade credit policies.

Multidimensional financial development, exporter behavior and export diversification

Financial development shapes export sector performance because exporters need external finance and face credit constraints. Previous empirical research has relied largely on single-country studies. The Exporter Dynamics Database (EDD), which features firm-level exports from over 60 countries, reveals differences in the microstructure of the export sector across countries. In this paper, we first provide new evidence that these differences are related to cross-country variation in financial development and structure. Second, we combine the EDD and multidimensional data on financial development with a global database on export diversification. This study is the first to examine how macrolevel export diversification is determined by the microcharacteristics of the export sector. This approach is novel in the empirical literature on export diversification. According to our cross-country analysis, access to domestic financial services positively contributes to export diversification by increasing the number of small exporters, as financial services ease the credit constraints these exporters face.

POSTCRISIS M&As AND THE IMPACT OF FINANCIAL CONSTRAINTS

AbstractWe find that mergers and acquisitions (M&As) occurring after the 2007–2009 financial crisis were significantly more value enhancing than precrisis M&As, in both the short and long term. This superior postcrisis performance can be attributed to an increase in external financing constraints following the crisis that caused a decline in general financing availability. This decline restricted the universe of potential acquiring firms to those that were less financially constrained, whereas the typical postcrisis target firm was more financially constrained. As a result, postcrisis acquirers were able to obtain targets at more attractive prices relative to their intrinsic value during the precrisis period when external financing was much less constrained. We also find that the typical postcrisis acquirer had greater long‐term focus than their precrisis counterparts and used their financial strength to capitalize on strategic opportunities.

An Endogenous Approach to the Cyclicality of R&D Investment under Credit Constraints: Firms’ Cash Flow Matters!

This paper examines the sensitivity of firms’ R&D expenditures to being externally financial constrained to undertake innovation projects, considering that being constrained is endogenous. It focuses on devising a model that enable us to explore the combined impact of liquidity constraints, demand shocks, and credit cycle on the cyclically of R&D, controlling by the firms characteristics. The methodology proposed consists of jointly estimating three interrelated equations with mixed distributions of dependent variables. The results obtained complete and improve those of the previous research. It is found that the effect of the business cycle on the perception of external financial constraints is subject to the availability of internal funds in each firm. On the other hand, constrained firms expend in R&D halve of the unconstrained ones, and the sensitivity of firms’ R&D expending to GDP is countercyclical in firms with low cash flows and procyclical in firms with high cash flows. The R&D expending of firms is negatively associated with the aggregate leverage ratio of the non-financial sector. These results mean that business decisions, in particular R&D expending decisions, and macroeconomic variables are strongly related. A better understanding of these interrelations should help in designing macroeconomic policies aimed at stabilizing the economy and reduce growth volatility.

Financing constraints and exports: Evidence from manufacturing firms in India

This paper examines the relationship between external financing constraints and the intensive margin of exports for manufacturing firms in India. We use a sample of nearly 3200 firms over the period: 2000–2015 and construct a multivariate index proposed by Musso and Schiavo (J Evol Econ 18(2):135–149, 2008) to estimate the degree of external financing constraints. We find that an increase in the degree of external financing constraints faced is associated with lower firm-level exports and this result holds even after accounting for endogeneity issues. We next examine whether business group-affiliated firms are less dependent on external finance to support their overseas sales. We find that financing constraints are a significant binding factor even for firms with access to internal capital markets. Moreover, we find that firm size matters, as a decline in the financial health of small- and medium-sized firms is associated with a significantly larger decline in their export levels. Finally, we find some evidence of industry-level heterogeneity, as financing constraints lead to a more pronounced decline in the exports of firms in industries with greater dependence on external finance.

Global Macroeconomic Cooperation in Response to the COVID-19 Pandemic: A Roadmap for the G20 and the IMF

The COVID-19 crisis has caused the greatest collapse in global economic activity since 1720. Some advanced countries have mounted a massive fiscal response, both to pay for disease-fighting action and to preserve the incomes of firms and workers until the economic recovery is under way. But there are many emerging market economies which have been prevented from doing what is needed by their high existing levels of public debt and—especially—by the external financial constraints which they face. We argue in the present paper that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need, and that many advanced countries have been able to carry out. We show what such cooperation would involve. We use a global macroeconomic model to explore how extraordinarily beneficial such cooperation would be. Simulations of the model suggest that GDP in the countries in which extra fiscal support takes place would be around two and a half per cent higher in the first year, and that GDP in other countries in the world be more than one per cent higher. So far, such cooperation has been notably lacking, in striking contrast with what happened in the wake of the Global Financial Crisis in 2008. The necessary cooperation needs to be led by the Group of Twenty (G20), just as happened in 2008–9, since the G20 brings together the leaders of the world’s largest economies. This cooperation must also necessarily involve a promise of international financial support from the International Monetary Fund, otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge, creating fiscal crises and currency crises and so causing such expansionary policies which we advocate to be brought to an end.

How Israel avoided hyperinflation. The success of its 1985 stabilization plan in the light of post-Keynesian theory

This article uses a post-Keynesian framework to analyse the inflationary process at work from 1948 until the 1980s in an attempt to understand the origins of the near-hyperinflation of the first semester 1985 and the success of the stabilization plan introduced that same summer. In 1985 the shekel seems to have been entirely abandoned by its users for the U.S. dollar, which, in the context of high inflation of the time should have caused hyperinflation. Such an outcome results from the conjunction of several factors: the historic virulence of the distribution conflict, the presence of indexation mechanisms, and the fragility of the balance of payments marked by a structural current deficit. The stabilization plan, supported by substantial U.S. financial aid, immediately attenuated the external financing constraint and lastingly eased the distribution conflict, thereby averting the hyperinflationary risks. Analysis of this historical trajectory confirms the theoretical coherence of the post-Keynesian analysis of hyperinflation.

Managerial entrenchment, financial constraints, and investment choice in unlisted firms

AbstractThis paper examines how internally generated cash is allocated for investment in unlisted firms in the post‐global financial crisis period. We estimate models using a panel data set from unlisted firms in the United Kingdom from 2009 to 2014. With the use of a commercially available credit rating and a widely used index in the literature to proxy for external financial constraints, the paper concludes that less financially constrained firms display a higher investment‐cash flow sensitivity. This association has been consistent across the post‐global financial crisis period. We find some evidence to suggest that investment inefficiencies reduce investment‐cash flow sensitivity, and this is intensified in the presence of external financial constraints. We extend the investment choice literature in the presence of financial constraints using evidence from unlisted firms. We also enhance the investment choice literature by incorporating the managerial entrenchment effect along with financial constraints. Provision of financial support for private entities is a crucial policy focus for any government. We call for policymakers to enhance microfinancing options for unlisted firms to reduce the impact from external financial frictions.

Capital Structure and Firm Growth in China

Using dynamic GMM method with data from 2003 to 2015, we propose a growth hypothesis of capital structure of Chinese firms, that is, higher growth leads to higher financial leverage. The paper further investigates the impact of external financing constraints on the relationship of growth and leverage, and shows that the firm with tighter financing constraints has a stronger relation between growth and leverage. Finally, the robustness test is conducted in the high-tech industries with financial constraints and high growth. The conclusions of this paper have important implications for both the listed firms and the market regulators.

Financial Constraints and R&D Investment: The Moderating Role of CEO Characteristics

How CEOs with different characteristics act differently on R&D investment under the condition of financial constraints is an important but understudied question towards firms’ sustainable innovation. Employing the dataset from China-Enterprise Survey 2012 of the World Bank, this study tests the impact of financial constraints on firms’ R&D investment and the moderating role of CEO characteristics. Empirical results show that: (1) firm’s financial constraints have a significant restricting effect on their R&D investment; (2) internal financial constraints have no significant restricting effect on R&D investment for firms with female CEOs in comparison with firms with male CEOs, while the external financial constraints have a significant restricting effect on R&D investment for both groups. (3) CEO experience has a non-linear moderating effect on the relationship between financial constraints and a firm’s R&D investment. When the accumulated experience is overloaded, the positive moderating effect of CEO experience begins to decline and even become negative. Robustness tests further confirm these empirical findings. This study directly contributes to the literature of financing innovation and top management team’s impact on firms’ sustainable innovation, and generates insights on firms’ R&D management under the condition of financial constraints.

Financialisation, institutions and financing constraints in developing countries

AbstractThe paper uses a consistent firm-level data from the World Banks Enterprise Surveys to explore the impact of financialisation in the economy on firms’ access to finance in 138 developing countries. Access to finance reflects survey-based firms’ perceptions of external financing constraints. Financialisation is proxied by consistent cross-country measures of financial depth. These proxies capture separately the role of bank-based versus market-based financing. Firm-, sector- and country-level information is jointly used for the analysis. Firm-specific characteristics and economic and non-economic national factors are included as controls. The results show that the proxies of financialisation are broadly robust predictors of financing constraints of firms in developing countries. However, the magnitude of the financialisation effect varies between bank-based and market-based channels of financing as well as between low- and high-income countries, and it is influenced by social, institutional and religious factors.

The Effect of Diversification under Different Ownership Structures and Economic Conditions: Evidence from the Great Recession

The effect of corporate diversification on firm performance has been extensively documented in the literature. In the general finance literature, Kuppuswamy and Villalonga (2015) studied the diversification effect during the 2007–2009 financial crisis and found that diversification adds value in the presence of external financing constraints. Motivated by this finding, we investigate whether a similar effect applies to insurance firms and we develop hypotheses for their different ownership structures (stock vs. mutual insurers; and group vs. non-group affiliated insurers). Using a sample of property-liability insurers over a period of 2004 to 2013, we find that the effect of diversification on performance is contingent on ownership structures and economic conditions. The diversification effect for stock insurers and insurers affiliated with a group is not significantly affected by economic conditions. However, the diversification effect for mutual insurers and non-affiliated insurers is reversed during the financial crisis. More specifically, diversified firms with these kinds of ownership structures perform better than focused firms during normal economic conditions, but their performance was significantly worse during the financial crisis. Our results are robust to alternative measures of performance and diversification, and to corrections for endogeneity. Our study contributes to the diversification literature by showing how the effect of diversification varies with ownership structure under different economic conditions and the results shed light on the specific circumstances in which diversification can improve or reduce performance.

Optimality of Morocco’s Currency Basket

<p><em>The objective of this article is to analyze the behavior of the monetary authorities of Morocco in the readjustment of the official weights of anchor currencies in Dirham basket on April 13, 2015. To do this, we are taking into account the objective of the external financing constraints for comparing, with different scenarios, the optimal weights with the implicit weights of the currencies. Such a comparison proves that the authorities take more into consideration the structure of the commercial exchanges than that of the debt for the choice of the optimal weight of the anchor currency. In the final part of the paper, we have delved deeper into this issue by proposing a detailed sectoral study to examine the impact of the exchange rate on the trade balance for each activity sector. Our intention is to find out which foreign currency seems more volatile against the local currency in order to lead the economy to manage the stability of dirham by increasing its weight in the basket. As a result, the higher price elasticity of the Dollar against the dirham encourages Moroccan monetary authorities to increase its weight in the basket. </em></p>

External Financing Constraints and Firm Innovation

We investigate the effect of individual banks affected by the recent financial crisis of 2008/2009 on the innovation activities of their business customers. Firms associated with a bank that relies strongly on the interbank market are more likely to be exposed to a credit supply shock during the financial crisis and therefore face external financing constraints. Exploiting both the extensive and the intensive margin, our difference‐in‐differences results imply that those firms which have a business relation to a bank with higher interbank market reliance reduce their innovation activities during the financial crisis to a higher degree than other firms. Tests for additional expenditures reveal that marketing expenditures show a lower or even no sensitivity to bank financing during the financial crisis.

Can monetary policy affect renewable energy enterprises investment efficiency? A case study of 92 listed enterprises in China

This paper aims to objectively identify the impact of monetary policy on renewable energy enterprises' investment efficiency, further analyze the effectiveness of the Renewable Portfolio Standard, and then put forward some suggestions that are good for the government to implement the monetary policy rationally, guide the direction of renewable energy investment, improve the investment efficiency, and promote the development of the renewable energy industry. We use data on 92 renewable energy listed enterprises in China from the first quarter of 2007 to the third quarter of 2017 as a sample, the Richardson Model to calculate the investment efficiency of related enterprises, and the Regression Discontinuity Model to measure the effectiveness of the Renewable Portfolio Standard. We find that, first, underinvestment is common among China's renewable energy enterprises during the sample period; second, the influence of monetary policy on investment efficiency varies from different transmission channels, and the effect of the credit channel is more significant. The monetary policy status is measured by the growth rate of M2, and the Monetary Policy Perception Index promotes renewable energy enterprises' investment efficiency by 0.3635% and 0.0344%, respectively; they are promoted by 0.8389% and 0.0940%, respectively, through the credit channel; third, easy monetary policy can increase the investment opportunities of renewable energy enterprises in general and then ease their external financing constraints; fourth, the Renewable Portfolio Standard of China promotes the overall renewable energy investment efficiency by 0.2573% and strengthens the promoting effect of monetary policy on renewable energy enterprises' investment efficiency. To some extent, this proves the effectiveness of the policy.

Financial constraints and firm productivity: Evidence from Chinese manufacturing

This paper explores the link between financial constraints and productivity using firm-level data from Chinese manufacturing industries. Based on a dynamic optimization model which provides a direct measure of the degree of firms’ external financial constraints, we endogenize the relationship between firms’ financial constraints and productivity through the research and development (R&D) investment channel. We resolve the simultaneity issues in the estimation of productivity with the proxy variable method. Using an unbalanced panel including 312,534 Chinese manufacturing firms over the period 1998–2007, we find that about 90% of firms face external financial constraints and the state firms are much less constrained than the non-state firms. We hypothesize that financial constraints have two opposite effects: (i) they raise productivity by reducing “sub-optimal” investment, and (ii) they reduce productivity because the paucity of funds reduces productivity-enhancing investment. Consistent with our hypothesis, we find an inverted U-shaped relationship between financial constraints and firm productivity. If the level of financial constraints for a typical unconstrained firm is adjusted to the productivity-maximizing level, its productivity will increase by 11% in the short run and 16% in the long run after controlling for firm specific characteristics. The empirical results are robust when we control for the sample selection issue in the estimation of productivity.

Financial constraints on investment: Effects of firm size and the financial crisis

We estimate the effect of external financial constraints on fixed investment intentions for UK manufacturing by size of firm distinguishing between normal effects and those since the financial crisis began in the UK in 2007. Our financial constraints data are constructed to reflect only supply-side influences i.e. they are independent of cyclical conditions that may affect the demand for credit. Using consistent quarterly long run survey data with IV estimation, we find that only for the crisis period are financial constraints important for large firms and then only for periods of falling business optimism. By contrast, small firms experienced continuous constraint but with no additional supply side effects during the crisis. A policy implication for the UK is that the key to resumed lending may lie not so much with bank behaviour as with the demand conditions that firms face, in particular the sustainability and certainty of demand.