External Financial Dependence Research Articles

ESG performance and trade credit: evidence from OECD countries

ABSTRACT Using a Difference-in-Differences model, this paper investigates the relationship between firm-level ESG performance and trade credit receipt in OECD countries while accounting for a firm’s external finance dependence. The results indicate that firms with better environmental performance secure more trade credit, whereas social and governance practices do not have a statistically significant effect. This outcome is contingent on the firm’s reliance on external finance, underscoring the importance of ESG performance as one of the key factors for external lenders assessing firms through publicly available ESG scores.

The effect of soaring housing prices on the quality of export products: Evidence from China

AbstractThis paper examines the impact of rising housing prices on the quality of export products. When housing prices increase, the collateral value of firms can rise, easing financial constraints and potentially boosting investment in innovation and product quality. However, higher housing prices can also lead firms to divert investments from their core business operations to the housing sector, where returns are relatively higher. This diversion can negatively affect product quality. We empirically investigate this relationship using Chinese firm‐level data, matched with customs and city‐level data from 2000 to 2013. Our results show that during China's housing boom, rising housing prices significantly reduced the quality of export products. The negative impact of speculative investment in the housing sector outweighed the positive effects of eased credit constraints. Firms with real estate investments and industries with low external financial dependence were more affected by rising housing prices. Additionally, government restrictions on home purchases helped mitigate the negative impact of rising housing prices on export product quality.

Does banking competition increase corporate labor income share? Evidence from China

This paper investigates the impact of banking competition on corporate labor income share in China. Utilizing hand-collected unique data on bank branches within a certain distance of firms and a large sample of Chinese A-share list firms spanning the period 2000–2022, we find that banking competition significantly boosts corporate labor income share. A 10 percent increase in banking competition, the corporate labor income share increases by 0.06 percent on average. The results remain robust after replacing proxies, changing estimation methods, controlling for other shocks, and addressing endogenous concerns. Easing financing constraints, improving investment efficiency, and enhancing human capital are three essential channels through which banking competition promotes corporate labor income share. We also find that the impact of banking competition on corporate labor income share is more pronounced for firms with higher external financing dependence, higher financing gaps, more investment opportunities, higher governance efficiency, and higher information asymmetry. Our findings highlight the significance of enhancing banking competition to promote income distribution, foster common prosperity, and drive high-quality economic development.

How industrial robots affect labor income share in task model: Evidence from Chinese A-share listed companies

This paper analyses the impact of the use of industrial robots on labor income shares at both the theoretical and empirical levels. On the theoretical side, the role of induced technological progress, the creation of new tasks, and the penetration of industrial robots on labor income shares are systematically explored by incorporating industrial robots into task models and endogenizing the task induced technological progress. Empirically, industrial robot penetration at the regional level in China is constructed from the industrial robots data released by the International Federation of Robotics (IFR), which is matched with Chinese A-share listed companies in 2011–2019, and the causal strategy of Bartik-style instrumental variables is used to analyze the impact of the penetration of industrial robots and task induced technological progress on the share of labor income. The study shows that the penetration of industrial robots significantly increases the share of labor income, but the task induced technological progress reduces the share of labor income, and that the impact of the penetration of industrial robots varies significantly external financing dependence, ownership, and regions. From the perspective of the impact mechanism, robot penetration increase the levels of inputs complementarity and hence reduce the elasticity of substitution between robots and labor. Meanwhile, robots can effectively increase the wage level of the labor force, thus increasing the labor income share. The findings of this paper provide a decision-making reference for how industrial robots can better serve human beings in the new era so that workers can share the fruits of economic development.

Green credit and firms’ span of global production stages

This paper investigates the impact of the green credit policy on firms' span of global production stages. We leverage a comprehensive dataset, including customs trade data, industrial firm data, and Chinese Input-Output tables, and employ a difference-in-differences design that accounts for the pollution spillover effect within the production network. Our findings indicate that firms in pollution-intensive industries tend to move downstream in the global production line, accompanied by an expansion in the span of production stages. We present evidence that the broader range of production stages can be attributed to increased firm productivity. The effect is more pronounced for hybrid processing firms, private firms, foreign firms, and those in industries that rely on external finance dependence. Our study provides valuable insights into the impact of green credit policies and sheds light on firms' strategies in the context of green development.

The impact of macroprudential policies on industrial growth

This paper analyzes the causal impact of macroprudential policies on growth, using industry-level data for 89 countries for the period 1990 to 2021. The small industry size creates exogenous identification, avoiding reverse-causality. I find macroprudential tightening measures impact manufacturing growth negatively, but only for industries with high external finance dependence. This effect is stronger during banking crises, higher growth periods and for advanced economies. The effect is weaker during periods of high private credit growth. Prudential policies implemented before the pandemic mitigated the fall in growth. Growth effects on externally dependent industries are economically sizeable and can persist over three years.

Foreign investors, firm level productivity, and European economic integration

Using a comprehensive sample of listed and unlisted firms from 34 European countries, we study firm-level manufacturing outcomes conditioned on foreign investment, country characteristics, and EU membership. Higher foreign ownership is associated with higher productivity but lower employment, particularly when the host or source country is an EU member and scores high on disclosure and investor protection, and low on corruption. We confirm our interpretation using staggered EU accession dates and industry-level external financial dependence interacted with a financial crisis. The subset of Eastern European countries appears to benefit from foreign investment and EU accession without losing jobs. Nevertheless, manufacturing outcomes associated with survey findings on public sentiment towards globalization and migration confirm the social and political costs of globalization.

Changing landscape of the finance-growth nexus: Industry growth, credit types, and external financial dependence

The present paper examines the changing landscape of the finance-growth nexus using detailed industry-level data for 40 countries and 20 industries spanning 1980–2020. Regarding the long-term relationship between finance and growth, the findings indicate that industries more dependent on external finance experienced stronger growth in financially more developed markets during the 1980s and 1990s, but weaker growth in the 2000s and 2010s. Moreover, private credit changes are associated with lower industrial growth rates over the medium term. In terms of credit types, corporate credits generally have positive effects, while household credits display negative medium-term growth effects. These results highlight significant changes in the finance-growth relationship over the past four decades.

Digital finance and corporate breakthrough innovation: Evidence from China.

This paper empirically investigates the impact of digital finance on the breakthrough innovation of enterprises with a sample of A-share listed companies in Shanghai and Shenzhen from 2011 to 2022. It is found that digital finance can promote corporate breakthrough innovation, and presents certain structural heterogeneity characteristics. The mechanism test shows that digital finance has the dual attributes of a financing platform and a social platform, which can promote breakthrough innovation by alleviating corporate financing constraints and expanding corporate social networks. Heterogeneity analysis reveals that the role of digital finance in promoting breakthrough innovation is characterized by regional heterogeneity, with digital finance playing a greater role in promoting breakthrough innovation in provinces with a low level of development of the banking sector, provinces with a high level of development of the capital market sector, and the central region. In addition, the degree of firms' external financing dependence and the degree of product market competition can strengthen the positive effect of digital finance on firms' breakthrough innovation. This paper enriches the related research on the impact of digital finance on enterprise innovation, and provides theoretical basis and policy insights on how digital finance can better assist the innovation-driven development strategy.

Local peers and corporate reporting behavior

We find that firms exhibit greater earnings similarity when compared to industry peers in the same city, as the number of local peers increases. This is due to the potential adverse consequences of underperforming relative to local peers. As the number of local peers increases, there is increased local competition, which creates pressure to perform as well as competitors. Firms respond to this pressure by exhibiting earnings similarity to meet market expectations and to take advantage of external financing and growth opportunities. However, we show that this mimicking behavior creates a false similarity and is achieved by firms reporting higher levels of unexpected accruals. This is consistent with the idea that mimicking allows firms to maintain their relative performance with local rivals. These results continue to hold for a sample of firms that move to a location with a higher number of local peers than their initial location. We also find that firms in cities with more peers have a greater likelihood of earnings misstatements. In cross-sectional analyses, the adverse effect of more local peers on earnings quality is stronger for firms with greater market attention, where external financing dependence is higher, and among firms in locations with more growth opportunities. Overall, our evidence points to geographic proximity as a key mechanism in a firm’s reporting behavior in that firms mimic to produce a false similarity in earnings that is achieved through accruals management.

1930: first modern crisis

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks’ decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

Firm-level political risk and intellectual capital investment: Does managerial ability matter?

This paper examines the impacts of firm-level political risks on intellectual capital investment decisions and how managerial ability adjusts this relationship. Using a broad sample of U.S firms from 2002 to 2021, our results show that firms with higher political risks reduce their investment in intellectual capital. This impact is more prominent for high-tech firms and firms with high financial distress, external financial dependence, and lower institutional ownership. Further, we find supportive evidence that managerial ability can prevent a substantial dimension (around 20%–40%) of the destructive impact of political risk on intellectual capital investment, which is also driven by firm-specific characteristics. These findings hold after a battery of robustness tests.

Zombie firms, misallocation and manufacturing capacity utilization rate: Evidence from China

AbstractThis paper investigates the effects of zombie firms on Chinese manufacturing capacity utilization rate (CUR hereafter) from the perspectives of both the intra‐industry and supply chain propagation. The results show that zombie firms not only significantly reduce the CUR of healthy firms in the same industry, but also inhibit the increase of CUR through the supply chain propagation. Specifically, if the supply chain propagation effect is not considered, the inhibitory effect of intra‐industry zombie firms on the healthy firms' CUR would be overestimated on one hand, and the overall inhibitory effect of zombie firms on CUR would be underestimated on the other hand. The heterogeneity analysis demonstrates that the inhibitory effect of zombie firms on CUR is more pronounced for private firms, the firms in the industries with higher external financing dependence and the firms in the areas with a poorer institutional environment. In addition, this paper further studies the relationship among zombie firms, resource misallocation and the manufacturing aggregate CUR at the industry level, and finds that both intra‐industry and upstream (downstream) zombie firms have significant inhibitory effects on the growth of manufacturing aggregate CUR. However, there are differences in the ways of influence that, specifically, the upstream (downstream) zombie firms inhibit manufacturing aggregate CUR growth mainly through the within‐firm effect, while the intra‐industry zombie firms are more likely to restrain manufacturing aggregate CUR growth through resource misallocation. Our study contributes to a profound understanding of the causes of overcapacity in a large transition economy and also expands the research perspective of assessing the economic effects of zombie firms.

External finance dependence, financial development and exports: a firm-level study from India

PurposeThis study aims to add to the growing literature on the trade–finance nexus by exploring the interplay between a country's level of financial development, the external finance dependence of firms and their exporting decisions.Design/methodology/approachThe study first develops a theoretical model to motivate the idea that a firm's liquidity (financial) position and its home country's level of financial development act as substitute factors in its export market entry decisions. It then empirically tests whether an improvement in a country's financial development level enhances the number of entrants in the foreign markets and boosts the exports of incumbent exporters using firm-level data of manufacturing firms in India for the period 1993–2020.FindingsEmpirical results suggest that a higher level of financial development helps increase the exporting probability of firms that rely more on external finance for their operations. Further, the study finds that the sunk costs-induced hysteresis effect plays a major role in firms' exporting decisions and financial factors don't play a significant role in the exporting activities of incumbent exporters.Practical implicationsThe findings suggest that a well-developed financial market is necessary to help more and more firms initiate their foreign market operations. The results underscore that trade-liberalisation measures alone may not increase India's exports and the government must complement them with financial sector reforms.Originality/valueStudies highlighting the role of financial sector development in helping financially-constrained Indian firms overcome the entry barriers associated with exporting are extremely limited. This study contributes to this nascent literature by conducting an empirical investigation on an extensive database of Indian manufacturing firms. Moreover, in contrast to the previous firm-level studies in this area, this empirical analysis uses the actual values of external finance raised by the firms as a critical factor in determining their extensive and intensive margin of exports instead of the usual balance sheet variables such as liquidity and leverage.

Banking crises and exporter dynamics

ABSTRACT This article examines the effects of systemic banking crises on exporter dynamics using exporter data at the country-industry level from the Exporter Dynamics Database (EDD). By considering industries with varying levels of external finance dependence, we are able to capture the heterogeneous impacts of banking crises. Our results demonstrate that banking crises lead to a decrease in the number of successful market entries, a reduction in export market concentration, and a slowdown in both product dynamics and destination dynamics. These findings are robust when accounting for other financial crises, industry characteristics, and potential endogeneity concerns. Overall, our empirical evidence confirms the detrimental impact of banking crises on the extensive margin of exports.

Capital account liberalization and economic performance: Evidence from Korea

This study examines whether capital account liberalization is beneficial for inducing foreign investment and positively affects allocative efficiency and economic performance in Korea. Using panel data on Korean industries and firms from 1991 to 2019, we confirm that capital account liberalization is positively associated with foreign investment. This effect is more pronounced for industries with high external financing dependence. Additionally, we conduct a firm-level analysis and find that capital account liberalization improves capital allocative efficiency, indicating that it helps firms with high growth opportunities to make more investment. Furthermore, changes in allocative efficiency attributable to capital account liberalization positively affect firms’ future financial performance. Overall, our study highlights the importance of capital account liberalization in attracting foreign capital, improving allocative efficiency, and enhancing the economic performance of firms in a transition economy.

COVID-19 pandemic and corporate liquidity: The role of SOEs’ trade credit response

Although state-owned enterprises are associated with less efficiency and lead to resource misallocation, they may have stabilizing effect in face of a crisis. Exploiting the COVID-19 pandemic as a natural experiment, we study the role of firm ownership in trade credit provision and find robust evidence that SOEs increase their trade credit to downstream firms more than non-SOEs after the outbreak of the pandemic. Moreover, we explore the underlying mechanism and find that better financing ability and multitask of the SOEs contribute to greater trade credit during the pandemic, and the latter plays a more active role. Further analyses show that SOEs’ advantage in trade credit extension is more pronounced in industries with higher external financial dependence and provinces with a higher level of government involvement. Our paper provides new insights into the real effects of SOEs on the economy.

International transmission of exchange rate volatility: Evidence from FIEs’ investments in China

This paper studies the cross-border transmission of exchange rate volatility through foreign-invested enterprises (FIEs)’ investments. We find that exchange rate volatility in FIEs’ home countries reduces the investments made by FIEs, which is exacerbated in industries with greater external finance dependence. We further confirm that the reduction in investment is due to a decrease in financial support from FIEs’ parent enterprises. By comparing FIEs whose parents are located in countries with different levels of financial development and in sectors with different levels of investment irreversibility, we test two potential channels of transmission, namely, the uncertainty channel and the financing channel. We also attempt to test the potential indirect impact on local firms through the production network.

Financing constraints and female share of employment: evidence from China

ABSTRACT This paper constructs a theoretical model where brain skills and capital are complementary, and female workers have a comparative advantage in brain-intensive occupations compared with brawn-intensive occupations. Financing constraints reduce the capital intensity and the demand for brain-intensive occupations, thus reducing the demand for female workers. Using data of manufacturing firms in China from 2004 to 2007, this paper finds that financing constraints reduce the female share of employment in firms. This effect is greater in industries with higher external finance dependence.

Have China’s Regional Carbon Emissions Trading Schemes Promoted Industrial Resource Allocation Efficiency? The Evidence from Heavily Polluted Industries at the Provincial Level

Based on the data of A-share listed companies in China, this paper examines how China’s regional carbon emissions trading scheme (ETS) affects the resource allocation efficiency of China’s provincial heavily polluted industries through the DID method. The empirical results show that China’s regional carbon ETSs have reduced the TFP dispersion of enterprises in the industry, thus improving the industries’ resource allocation efficiency. The heterogeneity analysis shows that China’s regional carbon ETSs have more significantly promoted the resource allocation efficiency in industries with high competition and high external financing dependence, while the policy effects in industries with low competition and low external financing dependence are less significant. Further mechanism analysis shows that, on the one hand, China’s regional carbon ETSs have promoted the flow of capital resources from low-TFP enterprises to high-TFP enterprises. On the other hand, China’s regional carbon ETSs have promoted low-TFP enterprises to improve TFP to a higher degree than high-TFP enterprises, which reduces the TFP dispersion among different enterprises in the industry. In addition, China’s regional carbon ETSs have promoted the market share of high-TFP enterprises and restricted low-TFP enterprises entering the market, which raises the TFP threshold for new enterprises entering the market.