Firm-level Investment Research Articles

Shifting patterns in the application of industrial policy

The practice of industrial policy in economically advanced jurisdictions is examined, focusing on the post 2000 period. Building from literature and cases from the Canadian automotive industry, the paper demonstrates how actors engaged in the application of industrial policy in economically advanced, high labour cost jurisdictions have responded to shifting pressures and opportunities. Explanation is provided for how those changes have caused objectives to broaden from a focus on manufacturing to industrial R&D. While vertical industrial policy tools endure, the transition has prompted increased emphasis on horizontal industrial policy instruments. The cases also demonstrate that a shift has occurred from externally-generated projects towards internal, organic forms of development, a change that has elevated the primacy of internal, corporate champions in firm level investment attraction.

Missing the Boat: Lengthy Regulatory Approval Diminishes Investment Opportunities at the Project Level

By using unique hand-collected project-level investment data, we show that lengthy equity issuance regulation is positively related to the probability of subsequent project changes and a deterioration in project returns. The effects are more pronounced for firms in a highly competitive industry and with a comparative disadvantage. We further establish that this relationship is causal by exploiting the exogenous shock to approval delay caused by changes in the China Securities Regulation Commission chairman. In response, equity issuers mitigate the delay impact by temporarily increasing short-term debt. Finally, we show that the traditional firm-level investment data fail to detect such effects.

Quantitative Easing, Investment, and Safe Assets: The Corporate-Bond Lending Channel

We show that Quantitative Easing (QE) stimulates investment via a corporate-bond lending channel. Fed's large-scale asset purchases of MBS and treasuries through QE creates a vacuum of safe assets, prompting safer firms to invest more by issuing relatively safe'' bonds. Using micro-data around QE, we find that QE increases firm-level investment by 7.4 percentage points for firms with bond market access. This growth is financed with senior bonds. We find no evidence of higher shareholders' payouts associated to QE. The robust findings are consistent with a model in which reducing the supply of government debt lowers safe'' corporate bond yields, stimulating investment.

Anxiety or Pain? The Impact of Tariffs and Uncertainty on Chinese Firms in the Trade War

The unexpected outbreak of the U.S.-China trade war led to dramatic increases in the import and export tariffs confronting Chinese firms. Due to firm-level differences in trade engagement, customs trade data combined with tariff changes allow us to measure firm-level exposure to the trade war. Further, by adopting a new textual analysis approach to listed firms' annual reports, we develop trade policy uncertainty (TPU) measures that vary over firms and time. Our difference-in-differences examination of these firm-level data reveals that trade war increases in U.S. tariffs and Chinese retaliatory tariffs both raised Chinese firms’ TPU. The impact of tariffs on uncertainty is heterogeneous, and is most pronounced for smaller and less capital-intensive firms. This effect is also smaller for Chinese exporters that were more diversified in terms of partner countries. In the second stage of our analysis we explore and document the negative connection between Chinese firm-level increases in TPU and subsequent firm performance. Our estimates indicate that Chinese firms hit by a one standard deviation increase in TPU during the trade war reduced firm-level investment, R&D expenditures, and profits by 1.4, 2.7, and 8.9 percent, respectively.

Firm-Level Investment and Exporting: New Empirical Evidence From Ghana and Tanzania

Using firm-level data from two selected African countries, we examine whether firm-level investment in capital is a possible channel through which less productive firms gain entry into export markets. Our findings reveal that non-exporters who invest in capital stock increase their probability of switching status, from non-exporter to exporter, and we provide evidence that firm-level investment is correlated with increased productivity growth among exporters. Consequently, we emphasize that firm-level investment in capital enables non-export to increase their odds of entry to export markets, and provides opportunity for young exporters to grow rapidly and persist long in export markets. Although firm productivity differences can be explained by self-selection factors as one channel, firm-level investment in capital stock provides another explanation as to why less productive firms, gain entry into the export markets. We establish that when firms invest in capital, they improve their productive capacity, raising their productivity in the process. Export promotion policies should target providing support to firms that seek to upgrade or expand their production technology as this would stimulate the probability of export market entry hence promoting exports.

Audit quality, media coverage, environmental, social, and governance disclosure and firm investment efficiency

PurposeThe purpose of this study is twofold: first, to introduce two determinants of environmental, social and governance (ESG) disclosure transparency, namely, audit quality and public media exposure; and second, to investigate the impact of ESG transparency on firm-level investment efficiency.Design/methodology/approachOrdinary least square (OLS) regressions are applied to explore the relationship between the two variables of interest (audit quality and public media exposure) and ESG transparency on a sample of publicly listed Canadian firms during the period 2008 to 2017. Then, an econometric model is used to investigate the association between ESG transparency and investment efficiency under two identified scenarios, under-investment and over-investment.FindingsResults show that audit quality and public media exposure are two main drivers of ESG transparency, hence, commitment to high-quality audits and exposure to high public media coverage drive firms to disclose more extensive and transparent ESG information. The authors also find a negative association between ESG transparency and firm-level investment inefficiency. Thus, ESG transparency generates influential incremental information that helps mitigate the information asymmetry between firms and stakeholders while fostering better resource allocation through investment efficiency.Originality/valueThis study contributes to the corporate social responsibility (CSR) and ESG literature by identifying audit quality and public media exposure as two determinants of ESG transparency; and by noting that higher ESG transparency has a significant economic effect on capital investment decisions through higher firm-level investment efficiency.

The Effect of the China Connect

We document the effect on Chinese firms of the Shanghai (Shenzhen)-Hong Kong Stock Connect. The Connect was an important capital account liberalization introduced in the mid-2010s. It created a channel for cross-border equity investments into a selected set of Chinese stocks while China's overall capital controls policy remained in place. Using a difference-in-difference approach, and with careful attention to sample selection issues, we find that mainland Chinese firm-level investment is negatively affected by contractionary U.S. monetary policy shocks and that firms in the Connect are more adversely affected than those outside of it. These effects are economically large, robust, and stronger for firms whose stock return has a higher covariance with the world market return. We also find that firms in the Connect enjoy lower financing costs, invest more, and have higher profitability than unconnected firms. We discuss the implications of our results for the debate on capital controls and independence of Chinese monetary policy. \

Determinants of firm-level investment in India: does size matter?

ABSTRACTThe study estimates the dynamic panel version of augmented neoclassical investment model using ARDL specification. There are evidence in support of interest rate and credit channels of monetary transmission. Our evidence of interest rate channel is robust and is not driven by outliers on the basis of size, investment to capital and cash flow to capital ratio. We also correct for the presence of financially distressed and constrained firms. The heterogeneous impact of cash flow to capital stock ratio on investment spending of small and large firms provides further evidence in favour of working of credit channel.

Firm-Level Investment and Exporting: New Empirical Evidence from Ghana and Tanzania

Using firm-level data from two selected African countries, we examine whether firm-level investment in physical capital is a possible channel through which less productive firms gain entry into export markets. Our findings reveal that non-exporters who invest in physical capital increase their probability of switching status, from non-exporter to exporter, and we provide evidence that firm-level investment is correlated with increased productivity growth among exporters. Consequently, we emphasize that firm-level investment in physical capital enables non-exporters to increase their odds of entry to export markets and provides opportunity for young exporters to grow rapidly and persist long in export markets. Although firm productivity differences can be explained by self-selection factors as one channel, firm-level investment in physical capital provides another explanation as to why less productive firms gain entry into the export markets. We establish that when firms invest in physical capital, they improve their productive capacity thereby raising their productivity in the process. Export promotion policies should target providing support to firms that seek to upgrade or expand their production technology as this would stimulate the probability of export market entry hence promoting exports.

Sarbanes-Oxley, agency conflicts and the marginal value of capital expenditure

PurposeThe purpose of this paper is to examine the relationship between the strength of corporate governance and the value of firm-level investment policies following the passage of the Sarbanes–Oxley (SOX) Act of 2002 and the associated changes to the listing requirements of major stock exchanges. In particular the authors seek to examine potential changes in the market’s assessed value of capital expenditures after the passage of the SOX Act relative to before.Design/methodology/approachThe authors employ a difference-in-difference methodology, centred on the year of the passage of the SOX Act to test for the role of governance on the marginal value of capital expenditures. Excess stock returns are calculated by subtracting Fama and French (1993) size and book-to-market portfolio value-weighted returns from the firms’ annual stock returns. Each firm is grouped into one of 25 size and book-to-market portfolios for each year in the sample, with size and the book-to-market ratio proxying for sensitivity to common risk factors in stock returns (Fama and French, 1993).FindingsThe authors find that markets responded to the change in governance brought about by the new regulation by altering the value of firm-level capital expenditures in a way that is generally consistent with predictions of agency theory. While the overall findings imply a reduction in agency conflicts post-SOX, there is some evidence that certain firms may have suffered excessive costs of compliance, while still others saw managers become excessively risk averse.Research limitations/implicationsThe study has implications related to the efficacy of legislation. Cross-sectional variation in the effect of SOX on the marginal value of capital expenditures suggests that one-size-fits-all legislative approach can have both expected as well as unintended consequences. The study limits its analysis to examining the impact of three significant provisions of the Act. While, the value implications of the Act are largely captured by the selected three, a more comprehensive study could expand on the set of provisions studies to obtain a more granular level impact.Practical implicationsThis research should add to the growing body of the literature examining the effect of SOX on firms’ real activities and decisions, as well as contribute to the debate on whether the Act was beneficial or costly to firms. With particular reference to the impact of capital expenditure on firm value, the research contributes to the sparse literature examining the contribution of capital expenditures to firm value and the role that agency conflicts play in this relationship. Additionally, this research adds to the growing body of the literature that examines the costs and benefits of the sweeping new regulations brought on by the adoption of SOX.Social implicationsGiven the importance of investment policy for economic productivity and growth, the insights provided by findings in this research should benefit lawmakers both within the USA as well as in countries where corporate misconduct and fraud is a concern.Originality/valueThis is the first study that examines the impact of the SOX Act on the way capital markets value firm-level investment in capital expenditures. Since use of corporate resources by managers is fraught with agency conflicts, the role of SOX in potentially alleviating this conflict as revealed by the tests in this study are very valuable.

Do Short-Term Incentives Affect Long-Term Productivity?

Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, EPS-driven repurchases lead to a reduction in long-term productivity.

Corporate investment and earnings surprises

ABSTRACTWe find that firm-level investment is negatively related to the likelihood of meeting or beating analysts’ short-term EPS forecasts. In a 35-year panel dataset of US based companies, we find evidence that suggests firms with the best growth opportunities, opaque firms, and firms with higher than usual bonus compensation, are the ones to alter investment in order to beat benchmarks. Utilizing the passage of Sarbanes-Oxley as a natural experiment we find that firms trade off accruals-based earnings management in lieu of investment cuts. Results are robust to a number of covariates, and endogeneity or reverse causality does not seem to drive our inferences. This study suggests that, consistent with survey results from Graham, Harvey, and Rajgopal [2005. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics 40: 3–73], managers may reduce or delay corporate investment to meet or beat short-term earnings benchmarks.

Exchange rate uncertainty and firm-level investment: Finding the Hartman–Abel effect

Motivated by Lee and Shin (2000, AER), we study the interplay of the share of variable input, investment irreversibility, and market power in shaping the relationship between investment and uncertainty. Employing a large panel of Chinese manufacturing firms, combined with industry-specific exchange rates for the period 1998–2006, our system Generalized Method of Moments (GMM) estimation finds that uncertainty significantly encourages (discourages) investment for firms with high (low) labor share or low (high) investment irreversibility, and the impact is magnified for firms with low market power. Our paper demonstrates the importance of the share of variable input, investment irreversibility, and market power in the Hartman–Abel paradoxical effect that predicts a positive relationship between uncertainty and investment in the international economics context.

Firm-level investment, financing choices and corporate taxation management: evidence from panel of non-financial firms

This paper investigates the relationship between firm's financing choices, taxation benefits and investment in Pakistani listed firms. We apply the system generalised method of moments regression estimation on a sample of firms listed on Pakistan Stock Exchange during the period from 2001-2014. Our findings are that there is a positive relationship between leverage and investment accruing from the use of tax shield benefits which also are positively associated with the firm-level investment. Equity is also positively related to investment but the effect of leverage is more pronounced than equity. We also find that the positive relation between leverage and investment is stronger for firms with a medium level of debt, consistent with the trade-off theory argument of the existence of an optimal level of debt. Our results support the hypothesis that firms utilise debt to supplement investment in circumstances where alternate mechanisms of finance are not well developed.

Auditor's knowledge and firms' investment decisions in MENA countries: evidence from Tunisian context

We investigate whether auditor' knowledge is associated with firm-level investment efficiency for Tunisian listed firms, after controlling for firms' overall level of financial reporting quality. We find that auditor' knowledge is positively associated with investment efficiency. The association between auditor's knowledge and investment efficiency seems to be independent of firms' financial reporting quality. Overall, our findings indicate that audit enhances the process of information production and through its insurance and/or assurance roles, provide investors with confidence which, in turn, causes managers to better allocate firm resources, and ultimately resulting in increased investment efficiency.

Auditor's knowledge and firms' investment decisions in MENA countries: evidence from Tunisian context

We investigate whether auditor' knowledge is associated with firm-level investment efficiency for Tunisian listed firms, after controlling for firms' overall level of financial reporting quality. We find that auditor' knowledge is positively associated with investment efficiency. The association between auditor's knowledge and investment efficiency seems to be independent of firms' financial reporting quality. Overall, our findings indicate that audit enhances the process of information production and through its insurance and/or assurance roles, provide investors with confidence which, in turn, causes managers to better allocate firm resources, and ultimately resulting in increased investment efficiency.

Aggregation, Capital Heterogeneity, and the Investment CAPM

This paper provides a careful treatment of aggregation, and to a lesser extent, capital heterogeneity in the investment CAPM. Firm-level investment returns are constructed from firm-level variables, and then aggregated to the portfolio level to match with portfolio-level stock returns. Current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously, and partially explains the positive stock-investment return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.

Does Costly Reversibility Matter for U.S. Public Firms?

Yes, most likely. The firm-level evidence on costly reversibility is even stronger than the prior evidence at the plant level. The firm-level investment rate distribution is highly skewed to the right, with a small fraction of negative investments, 5.79%, a tiny fraction of inactive investments, 1.46%, and a large fraction of positive investments, 92.75%. When estimated via simulated method of moments, the standard investment model explains the average value premium, while simultaneously matching the key properties of the investment rate distribution, including the cross-sectional volatility, skewness, and the fraction of negative investments. The combined effect of costly reversibility and operating leverage is the key driving force behind the model’s quantitative performance.

The Dynamics of Firm-Level Investment Behaviour of Private Firms in Zimbabwe under Uncertainty, Corruption and High Taxation Regime

The Dynamics of Firm-Level Investment Behaviour of Private Firms in Zimbabwe under Uncertainty, Corruption and High Taxation Regime

The Turning Tide: How Vulnerable are Asian Corporates?

Using a new firm-level dataset with comprehensive information on Asian firms' FX liabilities, we show that Asia's nonfinancial corporate sector is vulnerable to a tightening of global financial conditions. Higher global interest rates and exchange rate depreciation increase the probability of default of Asian firms. A 30 percent currency depreciation is associated with a two-notch downgrade in the corporate credit rating (e.g., from A to BBB+), resulting in 7 percent of Asian firms falling into bankruptcy. But the impact is nonlinear-as the firms' FX liability increases, the balance sheet channel of exchange rate offsets, then dominates, the competitiveness channel. The balance sheet channel offsets the competitiveness channel when the share of U.S. dollar debt is between 10 and 20 percent. We also find that currency depreciation increases firm-level investment on average, but for firms with the share of FX liabilities above 20 percent, investment contracts with depreciation.