Firm-level Investment Research Articles

Can artificial intelligence empower energy enterprises to cope with climate policy uncertainty?

This study investigates the effect of climate policy uncertainty (CPU) on firm-level investment and through which artificial intelligence (AI) may act upon this relationship. Using panel data from listed energy enterprises in China from 2010 to 2019, we demonstrate that CPU significantly inhibits energy enterprises' investments, mainly by exacerbating their financing constraints. This effect is more pronounced in firms with strong environmental awareness, strong internal control, high environmental, social, and governance scores, or in the traditional energy industry. Furthermore, we find that AI adoption weakens the impact of CPU on firm-level investments, primarily through two potential mechanisms: mitigating the customer concentration risk and enhancing green patent commercialization. On average, a 1 % increase in the degree of AI adoption by energy firms can boost their investment expenditure by 0.0065 %. Furthermore, AI's role in mitigating the negative impact of CPU on energy firms' investments is more significant in non-resource-based cities, cities with high economic growth rates, and cities with advanced IT infrastructure. Our findings provide a deeper understanding of the forces driving sustainable energy transitions in the evolving climate policy landscape.

Tax Loss Carryforwards and Firm Investments

ABSTRACT The asymmetric tax treatment of gains versus losses can lead to the creation of a tax loss carryforward (TLCF) in case of prior-period losses. TLCFs shield future income from taxation and can therefore be relevant for investment decisions. The relevance of this tax shield is underlined by the substantial amounts of TLCFs carried forward by U.S. corporations. Despite the theoretically expected positive relation, empirical research on TLCFs and firm-level investments is scarce. We first investigate the TLCF investment relation using simulation analyses and differentiate capital expenditure from R&D expenditure. Our empirical results confirm the positive TLCF investment relation, especially when firms have sufficient financial resources and investment opportunities. Also, the TLCF incentive works differently for capital expenditures compared with R&D. Additional simulation results illustrate how the recent legal changes in carryforward and backward rules affect the investment-enhancing effect of TLCFs and show that it is expected to remain qualitatively comparable. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: H25; H32; M41.

Cross-border and domestic early-stage financial investment in 3D printing: An empirical perspective on drivers and locations

3D printing is a relatively new digital technology which can transform the way firms organize their innovation and production operations locally and globally. While 3D printing is being adopted by diverse organizations worldwide, empirical academic research on investment in early-stage 3D printing technology firms is still limited. In this paper, we consider the geography of the 3D printing ecosystem to illuminate the financing of investment into early state firms developing innovation in this technology. Using a hand-collected dataset of 500 firm-level investments, we hypothesize 3D printing investment is drawn to countries with greater innovative capacity, countries with greater human capital competencies, and countries with higher wages. We find that larger investments tend to benefit companies developing 3D printing technology in higher wage locations and in countries with higher innovative capacity level, suggesting that investments in the 3D printing ecosystems take places mostly in locations that already have an ecosystem in place. Our study is one of the first to examine detailed patterns of global investment in a new digital technology ecosystem - 3D printing, an increasingly important technology for innovation.

Cross-sectional financial conditions, business cycles and the lending channel

I document business cycle properties of the cross-sectional distributions of U.S. stock returns and credit spreads. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for the lending channel—credit supply shifts beyond what is explained by borrowers’ conditions. SRF also predict firm-level investment beyond firms’ balance sheets. Using a structural model, I estimate that while SRF is highly cyclical, shocks to the cross-sectional skewness of financial firms’ asset quality help explain GDP growth in historical episodes. These results point to the cross-section of financial firms playing a prominent role in business cycles.

The return of expansionary austerity: Firms' investment response to fiscal adjustments in emerging markets

In emerging markets, unexpected public expenditure reductions increase firm-level investment, which quickly surpasses pre-shock levels after a temporary contraction, owing to a decline in financing costs. Consistent with the role played by financing cost dynamics and financial frictions, we show that countries with lower sovereign credit ratings (those that are not investment grade) experience a sharper boost in investment. In addition, we find that investment's recovery is facilitated by trade openness, public spending predictability, and exchange rate flexibility. In fact, exchange rate flexibility facilitates the real depreciation that result from the fiscal adjustment, which decreases (relative) domestic demand for non-tradable (akin to Diaz-Alejandro, 1966) and increases external demand for tradables, boosting investment. We show that adjustment composition matters: reductions in public consumption (vis-à-vis public investment) yield larger private investment contractions on impact but result in quicker and more sustainable recoveries. Exploiting firm-level heterogeneity we show that investment's expansion is stronger in the tradable-sector, in larger, and in less indebted firms. We provide evidence that the medium-term benefits of fiscal shocks to firm-level activity outweigh their short-run costs.

Retail shareholder activism and investment efficiency

This study investigates the impact of retail shareholder activism on firm level investment efficiency. I find the online activism significantly improve firms' investment efficiency, and this effect is primarily driven by the mitigation of under-investment problem. The results are valid to a series of robust tests. Mechanism analysis indicates that retail shareholder activism mainly plays its role by disciplining hedonic managers and reducing information asymmetry. Finally, I find the impact is heterogeneous according to the characteristics of the activity and firm's responses. Collectively, the findings help to understand the governance effect of retail shareholder activism in weak investor protection countries.

Climate risk and investment efficiency

Employing a panel sample of 29,316 firms across 34 countries spanning 2006 to 2019, we investigate the impact of climate risk on firm-level investment efficiency. We find that climate risk significantly increases investment inefficiency, namely, the investment deviation from the expected optimal level. Cross-sectional analyses show that the increasing impact of climate risk on investment inefficiency can be mitigated by stronger country-level uncertainty avoidance and long-term orientation culture, while at the firm level, corporate operational risk and industry competition can magnify the impact of climate risk on investment inefficiency. Our results remain valid after considering various robustness tests and endogeneity concerns.

EXCHANGE RATE AND FIRM-LEVEL INVESTMENTS: EVIDENCE FROM BORSA ISTANBUL

The relationship between exchange rates and firm-level investments of the companies operating in the manufacturing sector listed on Borsa İstanbul (BIST) was investigated over a period of 2008 to 2021 using panel data analysis. A total of 81 companies from 7 industries within the manufacturing sector were examined. Exchange rate and firm-level relationships were identified using the Euro-USD basket standard deviation and real exchange rates index. The findings indicated a negative relationship between firm-level investments and exchange rate volatility for all industries, but a positive relationship between firm-level investments and real exchange rates for most industries. Furthermore, it is found that the effects of exchange rate volatility and real exchange rates on investments are realized with a delay for most industries. Overall, the results suggest that firms are reluctant to invest in times of high exchange rate volatility, but are more willing to invest when the value of Turkish Lira appreciates in real terms.

Monetary policy surprises and corporate investment growth in China

This paper analyzes the impact of unexpected changes in Chinese monetary policy on the investment growth of public firms. Previous research on the Chinese economy has not effectively linked firm-level investment determination in corporate finance with monetary policy transmission in macroeconomics, thus limiting our understanding of the characteristics and mechanisms of this effect. We proxy the unexpected monetary policy changes by the M2 growth shocks identified from monetary policy rules. Our results indicate that the change in money growth significantly affects investment growth at the firm level. Positive shocks increase corporate investment growth, whereas negative ones do the opposite. However, the extent of this effect varies over time and gets more substantial under restrictive shocks. Such an effect also differs in magnitude across firms due to firm-level heterogeneous characteristics, highlighting the importance of corporate financial constraints and credit channels of monetary policy transmission.

Does environmental innovation improve investment efficiency?

Using a sample of 12,550 firm-year observations for the US over the period 2009–2021, we empirically examine the impact of environmental innovation on firm-level investment efficiency. Using fixed-effect regressions, our results indicate that eco-innovation has a significant and positive impact on firm-level investment efficiency. We show that eco-innovation raises investment efficiency and reducing information asymmetry enhances this effect. In addition, we show that the impact of eco-innovation on investment efficiency is statistically significant at environmentally sensitive firms, unlike firms that are environmentally insensitive. Further, the impact is higher at firms with low leverage than at firms with high leverage, in terms of both magnitude and economic significance, and the relative significance of this relationship is more pronounced at large firms. Our results are robust to alternative measures of eco-innovation, endogeneity, and sample selection bias.

Macroeconomic systematic shocks and industrial investment vulnerability: an international comparative perspective

ABSTRACT In this article, we analyse the distributional effects of macroeconomic systematic shocks on firm-level investment as well as exploring structural characteristics and dynamic evolution patterns of firm-level investment vulnerability. Two main facts are established: (1) systematic shocks have positive impacts on firm-level investments at most quantiles in the top four global manufacturing economies, implying that most firms’ investments follow the macroeconomic situation; the effect magnitude of systematic shocks on firm-level investments is much greater for firms with lower capital expenditures in the US, while the effect magnitude is much greater for firms with higher investments in China, the EU, and Japan; (2) under the impact of systematic shocks, investment vulnerability of upside firms is greater than that of downside firms; for China and Japan, their firms’ investment vulnerability exhibits a quite similar pattern.

Investment, inflation, and the role of internal information systems as a transmission channel

We examine whether the quality of firms' internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. Inconsistent with RBC models’ prediction that nominal variables (e.g., inflation) do not affect real variables (e.g., corporate investment) but consistent with the presence of information frictions, we first document a positive relation between inflation shocks and firm-level investment. Next, we show that higher internal information system quality, measured through responses to the World Management Survey, mitigates the positive relation between inflation shocks and firm-level investment. This result suggests that internal information quality serves as a channel through which aggregate-level nominal variables affect firm-level real variables. We then document that firms with higher internal information system quality make relatively more efficient investment decisions following inflation shocks. Our inferences are robust to using the 8th EU Company Law Directive as a shock to internal information system quality and to several additional tests.

Firm-Level Exposure to Epidemic Diseases: COVID-19, SARS, and H1N1

Abstract We construct text-based measures of the primary concerns listed firms associated with the spread of COVID-19 and other epidemic diseases. We identify which firms perceive to lose or gain from a given epidemic and textually decompose the epidemic’s effect on the firm’s demand and supply. We find that the effects of COVID-19 manifest as a simultaneous shock to demand and supply, with both shocks affecting firms’ market valuations in equal measure on average. By contrast, demand-related impacts appear more important in accounting for the observed collapse in firm-level investment during the COVID-19 crisis. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

The Long-Run Real Effects of Banking Crises: Firm-Level Investment Dynamics and the Role of Wage Rigidity

I study the long-run effects of credit market disruptions on real firm outcomes and how these effects depend on nominal wage rigidity at the firm level. Exploiting variation in firms' refinancing needs during the global financial crisis, I trace out firms' investment and growth trajectories in response to a credit supply shock. Financially shocked firms exhibit a temporary investment gap for two years, resulting in a persistent accumulated growth gap six years after the crisis. Shocked firms with rigid wages exhibit a significantly steeper drop in investment and an additional long-run growth gap relative to shocked firms with flexible wages.

Domestically “Flying Geese”: Regional Manufacturing Investment Flows within China

Abstract This paper examines the evolving patterns of bilateral city-to-city manufacturing investment flows from 2000 to 2015 in China, which are aggregated from detailed firm-level investment transactions based on the administrative business registration database. The coastal regions were a more favorable destination for manufacturing investment prior to 2006 despite their higher wage levels. Since then, the trend has reversed, that is, the inland regions have attracted a growing share of manufacturing investment. The pattern is more pronounced for labor-intensive manufacturing industries. The wage gap between coastal and inland cities is the main driver behind the giant “flying geese”—the relocation of manufacturing firms from coastal to inland areas.

Taxes and firm investment

We investigate the firm-level investment response to unanticipated narrative shocks to average personal and corporate tax rates using a universal micro dataset of publicly-traded U.S. firms for the post-1976 period. Using local projections, we show that: (i) corporate tax shocks have significant effects on investment while personal tax shocks do not; (ii) corporate income tax responses are negative overall, and this result is driven by smaller firms who face larger borrowing constraints, especially when the accompanying monetary policy is contractionary or output gap is slack; (iii) there is some evidence of positive personal income tax responses during monetary contractions by dividend-paying firms, which is consistent with the recent literature.

Enhancement in a firm's information environment via options trading and the efficiency of corporate investment

We examine the association between enhancement in a firm's information environment via options trading and firm investment efficiency. Investment inefficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether enhancement in a firm's information environment through higher volumes of options trading (including a natural experiment involving exogenous shocks via the Penny Pilot Program) is positively related to more efficient firm investment decisions. Our results confirm that enhanced informational efficiency via higher volumes of options trading is positively related to improvements in firm-level investment efficiency. Our findings are in line with the enhancement in the information environment stemming from options trading reducing agency and moral hazard concerns (an agency channel) and are not driven by alternative explanations such as managerial learning from informed traders or a lower cost of capital. Overall, our findings suggest that an enhanced information environment via more options trading benefits firms’ investment decisions.

Investment inefficiency in the hospitality industry: The role of economic policy uncertainty

Corporate investment inefficiency in the hospitality industry is an understudied topic. In this paper, we examine the effect of Economic Policy Uncertainty (EPU) on the investment inefficiency of a sample of 213 hospitality firms in the U.S. for the period 2010–2019. The results reveal that a rise in economic policy uncertainty leads to an increase in firm-level investment inefficiency in the hospitality industry. The underinvestment and the overinvestment problems are exacerbated by uncertainty. The results are robust for different variables specification and econometric techniques. Policy implications are also provided.

Economic Policy Uncertainty, Financial Leverage, and Corporate Investment: Evidence from U.S. Firms

This paper examines the effect of economic policy uncertainty (EPU) on firm-level investment and corporate financial leverage. The panel data of 1072 firms traded on the New York Stock Exchange (NYSE), New York Stock Exchange Market (NYSE MKT) (formerly known as American Stock Exchange—AMEX), or NASDAQ over the period 2012–2021 was analyzed using the fixed-effect model. The empirical results show that the financial leverage of a firm is negatively affected by EPU. Additionally, EPU depresses firms’ investment decisions and debt financing. Our results are robust when alternative measures of our main variables are used.

The Impact of Investment Decisions on Firm Financial Performance Moderated by Economic Policy Uncertainty: Evidence from the Manufacturing Sector of Pakistan

The study examines the link between firm-level investment and firm performance moderated by economic policy uncertainty in the manufacturing sector of Pakistan across the six years from 2015–2020. The System-GMM estimation has been employed to demonstrate the problem of endogeneity with dynamic linear and non-linear models. The study revealed that the moderating impact of economic policy uncertainty has negative and significant impact on investment (investment in tangible assets, investment in intangible assets, and financial leverage) and firm performance (Tobin’s Q). Similarly, economic policy uncertainty regarding investment and firm performance (ROA) is negative and significant in investment in tangible assets, but positive and significant in financial leverage. Our findings remain constant over a range of variable characteristics, even after accounting for endogeneity issues. Our main contribution is the finding that investment and firm performance have a negative and significant relationship with economic policy uncertainty. As economic policy uncertainty raises the firm level, investment decreases, which ultimately impacts firm performance negatively. Thus, the study advises that policymakers make an effort to minimize the effect of economic policy uncertainty at a certain level. They must keep this uncertainty within a reasonable range since increased economic policy uncertainty will push businesses to minimize their short-term and long-term investments.