Financially-constrained Firms Research Articles

Sovereign wealth funds as anchor investors in IPOs: Evidence from India

Prior literature on SWFs exclusively focuses on SWFs' secondary market investments due to the lack of publicly available IPO allocation data. For the first time, this study examines SWFs' primary market investments using a unique dataset of IPOs from India, a country which has a transparent and flourishing IPO market that has attracted large sums of money from SWFs in recent years. Specifically, this study investigates the investment strategies of SWFs as anchor investors in Indian IPOs and their impact on IPO performance. We find that SWFs target IPOs that are larger, attract high pre-market demand, involve lower dilution of owners' stake, and are issued by large and profitable but financially-constrained firms. We also find that anchoring by SWFs has a positive impact on IPO performance. In the short term, SWF-anchored IPOs outperform other anchored IPOs with respect to initial returns, IPO demand and extent of price revisions. In the long run, the buy-and-hold abnormal returns of SWF-anchored IPOs significantly exceed that of other anchored IPOs as well as the market. SWF-anchoring significantly improves issuing firms' post-IPO operating performance too. Overall, our findings support the hypothesis that SWFs may be superior stock-pickers and valuable monitors, leading to better short-term and long-term performance of their primary market targets.

Spatial disparity of skill premium in China: The role of financial intermediation development

In China, the relative wages of high-skilled and low-skilled workers display huge variation across different regions. We examine whether financial intermediation development (FID) can explain such variation. Conceptually, better-developed financial intermediation helps financially-constrained firms raise new capital, which is usually skill-biased, resulting in an increased demand for skilled labor and skill premium. Using a cross-section of workers from the 1% Population Survey of 2005, we find consistent evidence; besides, the relationship is stronger among workers in industries with higher capital-skill complementarity and in non-state-owned enterprises. Overall, our results suggest that the financial market plays a role in explaining skill premium in China.

The role of completely joint liability in financing multiple capital-constrained firms: Risk sharing, inventory and financial strategies

This paper makes an attempt to explore the relative value of a completely joint liability (CJL) financing scheme over traditional individual financing scheme for two financially-constrained firms. We develop a risk-sharing non-cooperative Nash-game model for the two firms in which they make unilateral ordering and financial decisions based on the CJL financing agreement as to the additional benefit (i.e., unit financing cost reduction) because of joint liability. We prove the existence of the firms’ equilibrium inventory decisions in a Nash game that is in general not quasi-concave or even supermodular. We show that in equilibrium, the completely joint liability of CJL financing induces the two firms to order more (compared to individual financing case), and meanwhile, the firms become more aggressive in ordering as the shared risk goes up. However, such over-investment in ordering under CJL financing does not always result in higher bankruptcy risks for the firms. Importantly, we show that the choice of the proposed financing schemes for both the firms is completely determined by a simple two-threshold policy in terms of the firms’ initial capitals and loan terms, and provide insights on how a financing-need firm to select proper partners to use CJL financing together, and how a profit-seeking bank to strategically set the proper financing terms to make the CJL financing scheme generate more benefits to itself and the two firms simultaneously (i.e., “win-win-win” situation).

A relação entre o nível de especialização da dívida e a restrição financeira de empresas brasileiras no decorrer do tempo

ABSTRACT This article sought to analyze the historical evolution, the composition, and the determinants of debt specialization of Brazilian firms traded on Brasil, Bolsa, Balcão (B3) from 2004 to 2019 in aggregate terms and in accordance with their financial constraints. This paper differs from the few studies on this topic carried out in Brazil and in other countries by promoting a discussion on the specialization of the debt structure in a context of financial constraints, as they are a relevant idiosyncrasy of emerging markets, such as in Brazil. The relevance of the study is to identify that debt specialization is a feature of only of financially constrained firms and not of the financially unconstrained ones. The impact of the study lies in a better understanding of why Brazilian firms are reducing their debt specialization, unlike other international evidences, such as the U.S. Descriptive statistics and regressions were estimated using the probit and tobit methods for 246 Brazilian firms between 2004 and 2019. The main result is that financial constrained firms are more likely to specialize their debt structure. Despite this propensity, these companies were the ones that most decreased their debt specialization between 2004 and 2019 (-27.77%), compared to the general sample (-27.5%) and unconstrained firms (-19.48%), revealing a behavior contrary to the U.S. scenario in which companies are increasingly specialists.

Corporate culture and firm value: Evidence from crisis

Based on the Competing Values Framework (CVF), we score 10-K text to measure company culture in four types (collaborative, controlling, competitive, and creative) and examine its role in firm stability. We find that firms with higher controlling culture fared significantly better during the 2008–09 crisis. Firms with stronger controlling culture experienced fewer layoffs, less negative asset growth, greater debt issuance, and increased access to credit-line facilities during the crisis. The positive effect of the controlling culture is stronger among the financially-constrained firms. Overall, the controlling culture improves firm stability through greater support from capital providers.

Trade credit and global value chain: Evidence from cross-country firm-level data

This paper investigates the effect of joining the global value chain (GVC) on trade credit by using the World Bank Enterprise Survey (WBES) for 55 countries from 2003 to 2019. GVC participation reflects status when a firm is a two-way trader and owns a quality certificate. When exporting, a firm may extend trade credit to its customer (account receivable). When importing, a firm may receive trade credit from its suppliers (account payables). Taking into consideration endogeneity due to reverse causality, our empirical results show the positive effects of GVC participation on the use of trade credit. When a firm participates in GVC, it is more likely to receive trade credit from its suppliers, extend trade credit to its customers, and simultaneously be involved in both types of trade credit. These effects become pronounced for financially-constrained firms, especially for small and medium-sized firms. Our findings suggest that one of the firms’ incentives to participate in the global supply chain is to overcome liquidity shortages.

Expansionary yet different: Credit supply and real effects of negative interest rate policy

We show that negative interest rate policy (NIRP) has expansionary effects on credit supply through a portfolio rebalancing channel. By shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero-lower-bound and has effects similar to QE. For identification, we exploit ECB’s NIRP and the Italian credit register and, for external validity, European and U.S. datasets. NIRP affects more banks with higher ex-ante liquid assets, including net interbank positions. More exposed banks reduce liquid assets, expand credit supply, especially to financially-constrained firms, and cut loan rates, inducing firms to increase investment and the wage bill.

Financial Constraints, Debt Capacity, and the Cross Section of Stock Returns in Nepalese Listed Non-Financial Firms

This study aims to determine whether debt capacity holds differential impact in the cross section of stock return for financial constrained and financial unconstrained Nepalese enterprises. Considering listed non-financial firm as population, study collect quantitative nature of 10 year balanced panel data from 11 nonfinancial firms listed in Nepal Stock Exchange (NEPSE) and actively traded during the period of 2008 to 2018. Data were obtained by using secondary source. As per propose of the study firm has been categorized financial constrained and financial unconstrained using the basis of book value of assets. Obtained data were analyzed by using multivariate econometric model. Study found that market value of equity, book to market ratio, and debt capacity are major explanatory variables of stock returns for financially constrained firms. Study further found that debt capacity has positive significant impact on stock returns for financial constrained firms. However, with regard to financial unconstrained firm’s debt capacity impact on stock return is insignificant. Study concluded that debt capacity hold differential impact in the cross section of stock returns in Nepalese nonfinancial firms.

FINANCIAL CONSTRAINTS: A MYTH OR REALITY? AN EMPIRICAL EVIDENCE FROM PAKISTAN STOCK EXCHANGE

Purpose of the study: This study investigates the stock pricing of financially constrained (FC) firms in Pakistan for the period of 20 years (2000 to 2019). The researcher uses accounting information (financial ratios of the firms) to categorize Pakistani firms as the most and least financially constrained firms. Further, it examines how the Asset Pricing models perform with the risk-adjusted portfolio of the stock returns sorted based on financial constraints.
 Methodology: Using the financial constraint proxies/ leverage ratios (Total Debt to Market Value(TDMV), Total Debt to Common Equity (TDC), Interest Coverage Ratio (ICR) and the asset pricing models of Sharpe (1964), Lintner (1965), and the three-factor and the five-factor model of Fama and French (1993, 1996), the returns of all the non-financial firms listed in PSX were sorted as the most and the least financially constraint firms and then their risk-adjusted portfolios were analyzed through Excel, Eviews and STATA.
 Main Findings: Positive results (e.g. higher returns) are observed when the capital structure of the FC firms is heavy with debt as compared to unconstrained firms on Pakistan Stock Exchange (PSX). The time series outcome showed that risk-adjusted returns of most FC firms give an extra premium to investors in the PSX when the leverage ratios are used as proxies of financial constraints.
 Applications of the study: This study can be used to make an augmented model of asset pricing specifically for emerging and frontier markets by taking the FC factor as one of the main contributing risk factors to predict returns in the equity market.
 Novelty/Originality of the study: The devised methodology also results in a more refined and accurate quality of analyses and findings and more comprehensive and sound knowledge of asset pricing as compare to previously conducted studies in PSX.

Cash Holding or Net Debt : What Matters for Firms' Financial Policies ? Evidence from India

The paper examined the relevance and determinants of cash holding and net debt for firms’ financial policies. The sample was constructed from Eikon database of Thomson Reuters considering 500 largest market capitalization firms listed on the National Stock Exchange of India (NSE). Initially, firm level determinants were examined separately for firms’ cash holding and net debt. Then, four subsamples were formed based on the twofold criterion of firms’ debt level and cash flows. These subsample firms were categorized as financially-constrained firms, no cash hedging firms, growth firms, and declining firms. Firm level determinants for cash holding and net debt were examined separately for all the four subsamples. For the complete sample of the firms, larger number of independent variables demonstrated statistically significant relationship with net debt than cash holding. The results confirmed that for financially constrained firms, net debt was more relevant for firms’ financial policies than cash holding. Negative relationship between firm size and cash holding was ubiquitous, signifying economy of scale for cash holding. Relevance of cash holding and net debt was analogous for declining firms. The findings revealed that growth firms placed relatively more emphasis on net debt ; whereas, no-cash hedging firms gave more weightage to cash holding.

Corporate investment and the real exchange rate

We examine the relationship between real exchange rate fluctuations and firm-level investment and growth using data for a sample of close to 33,000 firms from 68 advanced and emerging market countries over the 2000–2014 period. We show that real depreciations boost profits, investment, and asset growth of tradable sector firms that have higher labor shares and are relatively more financially constrained. These findings are consistent with an “internal financing channel” whereby depreciations boost profits by reducing real product wages, spurring investment of labor-intensive but financially-constrained firms. Our results are robust to controlling for alternative channels through which real exchange rates affect corporate investment, including via direct competitiveness gains, balance sheet mismatch, costs of imported intermediate inputs, and aggregate credit supply.

Governance through trading on acquisitions of public firms

We identify an important channel, acquisitions of public targets, via which the governance through trading (GTT) improves firm values. The disciplinary effect of GTT is more pronounced for firms with higher managerial wealth-performance sensitivity and moderate institutional ownership concentration. Firms with higher GTT also have higher subsequent ROA, ROE, Tobin's Q, analysts forecasted EPS growth rate, and lower expected default risk. The effect is stronger after Decimalization. We conduct several exercises to rule out alternative explanations, such as institutional superior information, investor activism, and momentum. Additional tests show that the disciplinary effect of GTT only exists for less financially-constrained firms and non-all-cash M&As where the agency problem is more likely to be prevalent.

Acquisitions and funding conditions

We find evidence that aggregate funding conditions play an instrumental role in mergers and acquisitions (M&A). Funding conditions impact the benefits, participants and the number of deals transacted and this impact extends well beyond merger waves. Specifically, when aggregate funding conditions are favorable, the merger market is especially active and small, financially-constrained firms participate heavily. These same firms, however, are largely absent from the deal market when funding conditions are tight. Furthermore, investors view deals during favorable environments as relatively attractive, particularly if the deals are initiated by small bidders. In contrast, deals transacted by large firms during easy-money periods are viewed as value-destroying. We also document that these value-destroying deals are particularly prevalent among large bidders with significant potential for agency costs. Overall, our results suggest that aggregate funding conditions do not merely cause bidders to adjust the scope of their investment decisions consistent with capital rationing, but rather, the changing state of aggregate funding appears to significantly determine the size and composition of the M&A potential bidder pool.

Corporate Culture and Firm Value: Evidence from Crisis

Measuring company culture in four types (collaborate, control, compete, and create) using 10-K text, we examine the role of culture in firm stability. We find that firms with higher controlling culture fared significantly better during the 2008-09 crisis. The results are robust to using alternative measures of firm performance and examining alternative crisis episodes. Firms with stronger controlling culture experienced fewer layoffs, less negative asset growth, greater debt issuance, and increased access to credit-line facilities during the crisis. The positive valuation effect of controlling culture is stronger among financially-constrained firms. Overall, the controlling culture improves firm stability through greater support from capital providers.

Corporate Hiring under COVID-19: Labor Market Concentration, Downskilling, and Income Inequality

Big data on job vacancy postings reveal multiple dimensions of the impact of Covid-19 on corporate hiring. Firms disproportionately cut hiring for high-skill jobs (within-firm downskilling). Financially-constrained firms scaled back high-skill hiring most, as did firms with workforces more adaptable to "working-from-home." Applying machine learning to job-ad texts, we show that firms have skewed hiring towards operationally-core positions. New positions take longer to fill, displaying greater flexibility regarding schedules, tasks, and requirements. Financing constraints amplify pandemic-induced changes to the nature of positions firms seek to fill, with constrained firms' new hires witnessing larger adjustments to job roles and employment arrangements.

The role of cash holding towards cleaner production in China’s manufacturing sectors: A financial constraint perspective

Abstract China’s manufacturing sector has been growing with increasingly strict environmental regulations. The sector’s sustainable growth depends on how firms might best reduce the financial constraints, such as high costs of external financing involved in cleaner production. To address this challenge, this study explores how the financing behavior of Chinese firms impacts production-generated pollution by illustrating financial constraint mechanisms. We argue that cash holdings significantly finance pollution control investment with a marginal contribution of 0.1%, which can be explained by the low financial cost of cash holdings. Furthermore, our empirical results indicate that a) financially-constrained firms are more likely to use cash to smooth financial constraints to finance pollution control investment; b) internal cash flow only supports pollution investment in financially-constrained firms, i.e., firms with a poor ability to pay debt and higher debt costs prefer to use cash to smooth their pollution control investment activities. Notably, debt significantly curbs the high cost of pollution control investment at a general level of 0.04%. In addition, the effect of cash-backing pollution control investment is particularly compelling in industries that are more pollution- and labor-intensive, with respective marginal contributions of 0.14% and 0.63%. Finally, we find that fixed asset investments and intangible asset investments crowd out pollution control investment at 0.11% and 0.52%, respectively.

Global ceramic balls market will reach $809 M by 2026

This study examines the effect of policy uncertainty on corporate debt maturity structure. We find that elevated levels of policy uncertainty lead firms to shorten debt maturity, indicating that firms become more cautious to committing to long-term debt obligations and is suggestive of increased risk aversion during high policy uncertainty periods. However, not all firms react similarly. In contrast to Myers' (1977) prediction, high growth firms lengthen debt maturity during high policy uncertainty periods. The evidence regarding the relationship between debt maturity and credit quality is not non-monotonic as firms with highest and lowest credit quality diverge in terms of debt maturity when policy uncertainty is elevated. Further, larger firms increase their debt maturity, while financially-constrained firms and firms with greater exposure to domicile political environment obtain short-term debt. The results are robust to a battery of tests including the use of instrument variable and placebo analysis.

Policy uncertainty and the maturity structure of corporate debt

This study examines the effect of policy uncertainty on corporate debt maturity structure. We find that elevated levels of policy uncertainty lead firms to shorten debt maturity, indicating that firms become more cautious to committing to long-term debt obligations and is suggestive of increased risk aversion during high policy uncertainty periods. However, not all firms react similarly. In contrast to Myers' (1977) prediction, high growth firms lengthen debt maturity during high policy uncertainty periods. The evidence regarding the relationship between debt maturity and credit quality is not non-monotonic as firms with highest and lowest credit quality diverge in terms of debt maturity when policy uncertainty is elevated. Further, larger firms increase their debt maturity, while financially-constrained firms and firms with greater exposure to domicile political environment obtain short-term debt. The results are robust to a battery of tests including the use of instrument variable and placebo analysis.

Political Connections and Cash Holdings in Financially Constrained Firms: Evidence from Top 500 Firms in Malaysia

This study examined the association between political connections and corporate cash holdings, with a focus on financially-constrained firms. Using a unique dataset of the top 500 publicly listed firms in Malaysia as determined by market capitalisation for the years 2001-2004, this study measured political connections based on informal ties and government supports. The empirical results of this study show that firms with financial constraints have a lower level of cash holdings, while politically connected firms hold more cash. However, politically connected firms with financial constraints hold more cash. Taken together, this study shows that financially constrained firms are relatively conservative in their cash holdings when they are politically connected even though they are generally perceived as risky by investors, consistent with precautionary motives. The outcome of this study should prove useful in assessing the potential economic consequences to the business environment of politically connected firms, especially in shaping corporate policy.

Acquisitions and Funding Conditions

We find evidence that aggregate funding conditions play an instrumental role in mergers and acquisitions. Funding conditions impact the benefits, participants and the number of deals transacted. Specifically, when funding is favorable, the merger market is especially active and small, financially-constrained firms participate heavily. These same firms, however, are largely shutout of the deal market when funding is tight. Furthermore, investors view deals during favorable environments as relatively attractive, particularly if the deals are initiated by small bidders. In contrast, deals transacted by large firms during easy-money periods are viewed as value-destroying, which we document to be linked to the presence of agency costs.