Firm Investment Research Articles

R&D investment, financing constraints and corporate financial performance: Empirical evidence from China

Enterprises are a deeply significant pillar of social and economic development. The excellent economic interests of enterprises play an essential role in promoting social and economic development. Business is a major innovation force in improving a country’s independent innovation capacity, which in turn is a key factor in shaping its core competitiveness. As the fuel of technological innovation for enterprises, Research and development (R&D) can accelerate their development and enhance their competitiveness. By using Chinese A-share listed companies from 2007 to 2019 as a sample, this study attempts to examine the specific impact of R&D investment by Chinese companies on corporate performance. Key to the development of R&D activities, R&D investment is directly related to the source of funding, the quality of financing channels and the extent of financing restrictions. The current study explains why enterprise innovation cannot be separated from the input and support of capital, technology, professional talent and other factors from the perspective of enterprise financing constraints. By using Chinese A-share listed companies from 2007 to 2019 as a sample, the study not only examined the impact of R&D investment on corporate performance, but also considered specific mediating mechanisms and heterogeneity analysis of R&D investment on corporate performance. Finally, the study found a significant positive correlation between R&D investment and the performance of listed companies, and this positive correlation was more pronounced when funding constraints were lower. According to the study, mediation effect analysis shows that R&D investment can improve corporate performance by boosting total factor productivity. Additional research has also shown that higher levels of internal control quality can improve the boosting effect of R&D investment on corporate performance. Moreover, R&D investment by SOEs is more conducive to improving the performance of their enterprises than that of non-SOE enterprises. In addition, this study provides empirical evidence of the knowledge effect and positive externality of R&D investment for firms, examines the impact of R&D investment on corporate performance from the perspective of financing constraints, and enriches the related literature on R&D investment, financing constraints and corporate performance.

The Effect of Venture Capital on Invested Firms’ Social Responsibility: Evidence from Venture Capital’s Exits

ABSTRACT The impact of venture capital firms (VCs) on invested firms’ shareholder benefits is extensively examined in the literature, but few studies consider VCs’ impact on invested firms’ other stakeholder benefits. In this paper, we use the exit of VCs from a 2010 to 2017 sample of Chinese listed firms as a shock in a difference-in-differences analysis to investigate VCs’ influence on invested firms’ corporate social responsibility (CSR). We find that CSR decreases significantly after VCs’ exits, particularly if VCs are not state-owned or are short-term investors in firms. A further analysis shows that VCs’ exits affect firms’ shareholder, creditor, employee, and environmental benefits. VCs improve CSR by alleviating their agency costs and reducing their financial constraints, both of which increase significantly after VCs’ exit from firms. The effect of VCs on CSR also appears to improve corporate performance, implying that this positive effect is consistent with shareholder benefits.

Impact of Stock Splits on Stock Returns and Liquidity of the Selected Firms : A Study from NSE

Stock splits are used as a tool to bring down the current share price in a market in order to attract all kinds of investors in the market and to make it affordable especially to the small investors. During this course it is not expected to gain any abnormal returns but practically it will most of the times as it supports the signaling hypothesis theory. Corporate actions are just cosmetic events where do not have any impact on firms investments or capital structure, so there is a scope for analyzing the impact of splits on the shareholders return. The purpose of this paper is to evaluate the abnormal returns and to analyze the changes in the liquidity position of the pre-split and post-split announcement. Study has considered 10 samples which are gone for stock splits during the year 2016-2020 and also should be trading under Nifty 50 and derivative segment too. The results were highlighting that the spot market and derivative markets are correlated and moves parallel but just immediately after the spot is near month contract; there it is observed that there is a negative abnormal returns on the event announcement day where investors were not able to cope up the information rapidly.

Asymmetric investments in exchange relationships, perceived supplier shirking and cross-functional information sharing as a moderator

PurposeWith asymmetric investments in exchange (i.e. sourcing) relationships, both sourcing firms and suppliers invest but one party invests more than the other. This paper aims to examine the associations between asymmetric (i.e. unequal) investments in exchange relationships and the tendency of the strategic supplier base to shirk as perceived by the sourcing firm, as well as the moderation effects of cross-functional information sharing within a sourcing firm on these associations.Design/methodology/approachThe authors analyzed survey data from 500 US middle-market manufacturers via ordinary least squares (OLS) estimation. Besides appropriate controls, the authors also employed the heteroskedasticity-based instrumental variable approach to ensure that analytical inferences are not influenced by endogeneity.FindingsOn average, when a sourcing firm invests more than its strategic supplier base into their exchange relationships, the perceived tendency of the strategic supplier base to shirk decreases. This negative association is more pronounced when a sourcing firm facilitates cross-functional information sharing. Conversely, when the strategic supplier base invests more than the sourcing firm into their exchange relationships, the perceived tendency of the strategic supply base to shirk is not detected unless the sourcing firm facilitates cross-functional information sharing.Originality/valuePrior research reveals that investments by a sourcing firm or by suppliers influence supplier shirking. This paper provides new evidence as to how and why asymmetric investments in exchange relationships relate to the perceived tendency of the strategic supplier base to shirk and new evidence as to how and why cross-functional information sharing safeguards against this tendency when investments in exchange relationships are unequal.

Impact Investing Holds Promise for Nutrition If Guided by Evidence

There is a widely recognized need to increase funding available for improving nutrition in low- and middle-income countries and to move beyond traditional grants from development agencies and private foundations. This includes the so-called innovative financing approaches, such as impact investment (i.e., investing with the intent to generate positive social impact). Impact investment is no substitute for much-needed public funding to support direct nutrition interventions, but such approaches could make sense where supporting nutrition entails a "business case" that could create profit for a business-thus fostering the positive returns needed by investors. This includes some food-based approaches, as most households purchase food from for-profit companies and entrepreneurs. Investment in firms that produce nutritious foods for local markets could be profitable and-if it were to improve food affordability, accessibility, or desirability-could help improve diet quality. In this Perspective, we describe these innovative financing mechanisms and discuss their potential for supporting nutritious foods. We note that doing so would require a simple yet evidence-based approach to screening nutritious foods for potential investment, and we describe our experience operationalizing this through a novel nutrition impact investment mechanism: the Nutritious Foods Financing Facility. We conclude by highlighting remaining gaps to explore the potential of impact investment in nutrition and what the nutrition community can do to help fill them-and to mitigate the risk of such approaches being applied in ways that do not lead to positive social impact for nutrition.

Why Do U.S. Firms Invest Less over Time?

Capital expenditures of US public firms, relative to total assets, decrease by more than half from 1980 to 2020. The decline is pervasive across industries and firms of different characteristics and cannot be explained by the usual determinants of investment and many other seemingly plausible reasons. The decline is consistent with the transformation in production technology – firms rely more on intangible capital and less on fixed assets in production. Industry-level analyses yield supporting evidence. We observe similar declining trend in capital expenditure in other developed countries but not in most emerging markets. • US firm capital expenditures relative to total assets decrease by almost 80% from 1980 to 2020. • The decline is pervasive across industries and firms of different characteristics. • The decline is associated with the transformation in production technology – US firms rely more on intangible capital and less on fixed assets in economic production. • Similar declining trend is observed in other developed countries but not in emerging markets. • Corporate investments should include broader items in addition to capital expenditures.

Making honest men of them: Institutional investors, financial reporting, and the appointment of female directors to all-male boards

In this paper, we theorize that dedicated institutional investors are more likely than transient institutional investors to appoint female directors to investee firms with all-male boards, particularly those with high opacity. We conjecture that dedicated investors appoint female directors as a governance mechanism to improve the financial reporting quality of these investee firms. Specifically, we find that through the appointment of female directors, dedicated institutional investors trigger the release of stockpiled negative accounting information, thereby increasing the likelihood of a stock price crash risk. We also show that dedicated investors, through the appointment of female directors, improve investee firms' corporate disclosure environment by decreasing earnings management. Finally, we find that through continued service on investee firms' boards, female directors reduce the future likelihood of a stock price crash.

Legal distance moderation in the inter-partner technology distance on cross-country equity investments: A multilevel analysis of the information & communication technology sector

The ICT (information & communication technology) sector has increased inter-firm equity investment across countries, and scholars have explicated the role of technological distance or institutional distance to explain the equity size. This study extends the framework to integrate the legal distance (institutional) as a moderator between the technological distance (orientation) and the equity size in cross country investment decisions. Empirically, little is known about whether the legal distance between the home and host countries of high technology firm influences its equity decisions. This study addresses this question using equity deals in the ICT sector during a critical period (2007–2009). Multilevel analysis is based on 51,198 inter-firm equity deals, 120 home countries, 154 host countries, 19,712 equity investing firms and 32,987 equity target firms. This robust analysis offers sever insights. First, the inter-firm technological proximity predicts higher equity than the inter-firm technological distance. In other words, the technology strategy firm invests equity more than a non-technology firm. Second, the inter-legal distance (home-host) between partners predicts lower equity than the inter-legal proximities between the investor and target. Third, the inter-legal distance moderates the technological orientation, predicting that the effect of technological distance decreases the coefficient by 49%, and the effect of the legal distance coefficient increases by 49%. This study contributes to the international business equity investment decision in the high technology sectors to manage uncertainty. The study contributes to institutional contingencies in this field by integrating them with technological contingencies. In addition, it rests on a robust methodology (multilevel) for the academic audience and managerial implications for the business audience.

Does unconventional monetary policy boost local economic development? The case of TLTROs and Italy

This study investigates the impact of the ECB's Targeted Longer-Term Refinancing Operations (TLTROs) on Italian provinces’ economic development. The program provided preferential funding to banks conditional on them lending to firms. We find that TLTROs did not generate beneficial effects in terms of economic development across Italian provinces. The results show that average firm investment rate fell, driven by small and micro firms, who witnessed a decline in assets. This had a negative, albeit economically small, impact on per capita GDP and unemployment rates at the provincial level. TLTROs were associated with worsened economic conditions for those firms performing well in the pre-TLTRO period. Distressed (zombie) borrowers saw their investment increase, but their post-TLTRO performance did not improve. Overall, TLTROs did not spur economic development through the lending channel across provinces.

Which do second-generation heirs prefer in family firms: real investment or financial investment?

ABSTRACT In recent years, the financial investment level of enterprises particularly family firms has increased rapidly. This phenomenon has drawn intense attention from both government regulators and academia. In this study, we argue that the second-generation succession is an important reason for family firms’ preference for financial investment. Using 9,701 firm-year observations of Chinese family listed firms from 2007 to 2018, we find that the second-generation succession has a positive effect on financial investment in family firms, while successors with professional background have less preference for financial investment. Further, the positive effect exists mainly in both preparation and epistasis stages of second-generation succession. The number of family founders’ children will enhance successors' preference for financial investment. Finally, financial investment especially long-term one reduces real investment, and damages future performance.

Inevitability of Budget Deficit in a Growing Economy

Using a simple macroeconomic model and a model with microeconomic foundations about behavior of consumers and firms, we examine the budget deficit in a growing economy, and will show mainly the following results. 1) If the initial savings is positive (or investment of private firms is not large), we need budget deficit including interest payments on government bonds to maintain full employment with or without inflation. 2) If the initial savings is negative (or investment of private firms is large), investment of private firms cannot be financed only by consumers’ investment, but also by the government. 3) If the interest rate on the government bonds is larger than the growth rate, the budget surplus excluding interest payments is necessary to maintain full employment under constant prices.

Organizational resilience under COVID-19: the role of digital technology in R&D investment and performance

PurposeThis study aims at the sudden outbreak of COVID-19, which had an unprecedented negative impact on the Chinese economy, with firms being affected most. Firms differ in terms of their specific internal environment, shaping their ability to respond to the outbreak, so the impact may also vary.Design/methodology/approachIn this paper Chinese listed firms are selected as samples to investigate the mediating effect of prior digital technology on the relationship between R&D (research and development) investment (funds and staff) and firm performance during the epidemic. Firm size and diversification are then introduced as moderating variables to explore the conditional mediating effect of digital technology.FindingsThe results indicate that the higher the firm's prior R&D investment, the higher its digital technology level, and thus the stronger its resistance to the epidemic. Moreover, compared with large-scale firms, small-scale firms have the advantage of strategic flexibility to technological changes, which can help them accumulate experience from R&D activities for digital transformation, thus attenuating the negative impact of the COVID-19 on firm performance. Finally, the results also show that digital technology mediates more strongly between R&D investment and firm performance in diversified firms than in centralized firms.Originality/valueThe study builds a mediation model to reveal the process mechanism through which R&D investment affects firm performance via digital technology. Firm size and diversification are then innovatively introduced as situational factors to build the moderated mediation model, which opens up a new perspective for understanding the effect of firm internal factors on the relationship between R&D investment, digital transformation and firm performance.

Corporate debt maturity and investment over the business cycle

The business cycle dynamics of firms’ debt maturity vary across the firm size distribution. Small and medium-sized firms have a more pro-cyclical debt maturity than large firms. This paper explores the determinants of firms’ debt maturity, and the importance of firms’ debt maturity for their investment and leverage dynamics. To do so, it embeds a maturity choice in a model of firm investment and financing. Firms shorten debt maturity during times when default risk premiums are high and their internal funds are scarce. This behavior is consistent with both the life cycle and business cycle dynamics of firms’ debt maturity. Endogenous debt maturity helps firms to deleverage faster in response to negative shocks.

Superstition and Risk Taking: Evidence from “Zodiac Year” Beliefs in China

We show that superstitions—beliefs without scientific grounding—impact the investment and risk-taking of Chinese firms. We focus on widely held beliefs in bad luck during one’s “zodiac year,” which occurs on a 12-year cycle around a person’s birth year, to study superstitions and risk taking. We first show a direct correspondence between zodiac year and risk taking via survey data: respondents are two percentage points more likely to favor no-risk investments if queried during their zodiac year. Turning to corporate decision making, we find that return volatility declines in the chairman’s zodiac year, suggesting a reduction in risk taking overall. Focusing on specific types of risk taking, investment in R&D and corporate acquisitions both decline during the chairman’s zodiac year; returns around acquisition announcements are also lower, suggesting real allocative consequences of zodiac year beliefs. This paper was accepted by Gustavo Manso, finance. Funding: W. Huang thanks the Major Project of National Social Science Foundation of China [Grant 17ZDA090] and the “National Program for Special Support of Eminent Professions” for financial support. Y. Pan thanks the National Natural Science Foundation of China [Grant 71790601] for financial support. Y. Wang thanks the National Natural Science Foundation of China [Grant 72172090] for financial support. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4594 .

Riding the wave of fashion rental: The role of power structures and green advertising

In recent years, the rise in the collaborative consumption of fashion products has propelled many fashion brands to tap into rental markets and offer rental services. Although many studies have investigated consumer perceptions and attitudes toward fashion rental services, analytical models that help businesses make more informed supply chain decisions are scarce. Consequently, we develop game-theoretical models to study the fashion market with two firms, i.e., a fashion manufacturer and its rental platform partner. The models consider four green-advertising investment situations: no firm invests, only the fashion manufacturer invests, only the rental platform invests, or both firms invest in green advertising for fashion rental services. We compare pricing and green advertising decisions under different power structures between the two firms across the four green-advertising investment situations. Our results demonstrate when and how the power structure affects the key decision variables. We reveal that it is least profitable for both firms if neither contributes to green advertising, while both firms obtain the highest profits when they both invest in green advertising. In the two situations when only one firm invests in green advertising, we note that it is not necessarily unfavorable for firms to accept the green-advertising cost proactively. Specifically, the Stackelberg follower benefits from investing in green advertising. Furthermore, in these two situations, whether or not the Stackelberg leader covers the green-advertising cost is more important than their identity. Our results and analysis reveal important managerial implications that can assist firms in excelling in the fashion rental market.

Systematic Literature Review of Private Equity Determinants: Status, Evidence and Open Issues

Global private equity (PE) investments continue to increase at unprecedented levels over the last two decades, as investors are increasingly thriving over the potential of funded firms. The purpose of this study is to provide an understanding of determining factors that guide the flow of private equity investment in target firms. The existing academic research concerning selection determinants of private equity investment is restrictive and unstructured. These determinants are diverse and observe inconclusive results in extant literature. To identify the firm-level determinants of private equity investment, understand the current gaps in the literature and direct the future scope of work, the authors conduct a systematic literature review of empirical private equity investment studies. The results pointed out the open issues in private equity literature focusing on drivers of investment decisions and extracted the most frequently observed selection determinants of private equity investments along with their causal relationship. The review also acknowledges that there exists a coherence among private equity and M&A investment decisions and thus, expands the scope of research by including empirical studies on M&A determinants. The study creates a comprehensive database and identifies shortcomings in the relevant literature addressing private equity.

Impact of cultural trade on foreign direct investment: Evidence from China

Value of cultural goods varies across consumers with different backgrounds. Exchange of cultural goods may lead to better mutual understand and trust, which helps mitigate the entry obstacles in the investment targets. This paper studies how cultural trade affects Chinese firms' outbound foreign direct investment (OFDI). We find that both likelihood and total volume that a firm invests in a foreign country increase with the amount of bilateral cultural trade. We further show that cultural trade boosts the success rate of OFDI projects. These effects are intensified in targets with weaker institutional quality or a great cultural distance to China.

Firm Listing Status, Firm Size, and the Financing of Investment

Abstract How do companies finance their investments? We examine the financing of investments according to firms’ listing status, their size, and the nature of the investments. We show that private firms rely more on bank credit than public firms and less on financial debt, equity, and cash flow. We also show that the contribution of financial debt and equity increases with firm size. Considering both dimensions, we always find an increasing contribution of other financial debt and equity with firm size in both populations. Therefore, even in a bank-based economy, equity plays an important role in the investment of larger private firms. (JEL D25, E22, G21, G30, G31, G32)

The Impact of Macroeconomic Risk Factors, the Adoption of Financial Derivatives on Working Capital Management, and Firm Performance

This study examines macroeconomic risk factors to investigate how they affect working capital management (WCM) and, ultimately, firm performance. Additionally, we examine the effect of credit default swaps (CDSs) as a countermeasure for WCM in the presence of volatile macroeconomic risk factors. In doing so, we use firm-level data from the United States, the United Kingdom, Germany, and China between 2006 and 2020. The two-step system generalized method of moments (GMM) estimation method is employed to analyze the study′s objectives. Results show that US, German, and Chinese firms are more conservative, while UK firms are more aggressive in maintaining WCM during economic policy uncertainty. Conversely, foreign exchange risks drive the USA, the UK, and Chinese firms to lengthen their cash conversion cycle level due to fear of value loss, while the opposite is true for German firms. Nevertheless, following CDS adoption, firms are more confident in working capital (WC) investment. CDSs eliminate the need for delayed receivables and payables and increased inventory as safety stock for US, UK, and Chinese firms. Finally, CDS interaction shows that USA, UK, and German firms may boost their profitability by increasing account receivable periods to create more sales, reducing account payable periods, and holding more inventories to expedite sales operations. Alternatively, CDSs suggest an optimal level of WC investment for Chinese firms. As a result, governments should consider CDS adoption in policy decisions when business performance sinks due to macroeconomic volatility.

Monetary policy and intangible investment

The investment and stock prices of firms with relatively more intangible assets respond less to monetary policy. Similarly, intangible investment responds less to monetary policy compared to tangible investment. These effects are most pronounced among financially constrained firms, indicating that corporate intangible capital weakens the credit channel of monetary policy transmission. The evidence that higher depreciation rates or higher adjustment costs of intangible assets explain these effects is mixed, suggesting a smaller role for these channels.