Firm-level Investment Research Articles

Ownership concentration, financial reporting quality and investment efficiency: an empirical analysis of Vietnamese listed firms

PurposeThe purpose of this study is to investigate the relationships among financial reporting quality (FRQ), ownership concentration and investment efficiency (IE) of listed firms in Vietnam, an emerging market in Southeast Asia.Design/methodology/approachMultivariate regression models are estimated to test the impacts of FRQ, ownership concentration and the interaction effect of FRQ and ownership concentration on IE. Two-step system generalized method of moments (GMM) estimators are used to control for endogeneity.FindingsThe results show that ownership concentration is positively associated with the IE of Vietnamese listed firms. The results also reveal that overinvestment decreases when there is an increase in ownership concentration. In addition, the authors find that FRQ is positively associated with IE and negatively associated with overinvestment and underinvestment. Moreover, the impact of FRQ on overinvestment is weaker in firms with concentrated ownership.Originality/valueTo the best of the authors’ knowledge, this is the first study that attempts to investigate the influence of ownership concentration and the interaction effect of ownership concentration and FRQ on the IE of Vietnamese listed firms. The results provide some managerial implications for Vietnamese listed firms and policymakers on how to mitigate firm-level investment inefficiency.

Tax reform and investment efficiency: evidence from China's replacement of business tax with VAT

PurposeExtensive macro- and micro-economics research has been conducted on China's tax reform, which replaced business tax with value-added tax (VAT). However, existing studies have not clarified the reform's impact on firm-level investment decisions. Hence, this study explored the effect of replacing business tax with VAT on firms' investment efficiency.Design/methodology/approachThe study used 2010–2018 data from China's A-share listed companies and a difference-in-differences (DID) model to explore the effect of the reform on firm-level investment decisions.FindingsThe authors found that China's tax reform has improved investment efficiency in underinvested firms, increased liquidity and decreased the level of reliance on external financing. The tax reform had a greater effect on investment efficiency in firms with lower liquidity and higher external financing reliance. Its effect was also more significant among non-state-owned and small companies.Originality/valueThis study fills the aforementioned research gap by exploring the effects of China's tax reform, thus providing a theoretical reference and a basis for policymaking.

The Influence Of Stock Valuation On Firm Level Investment: Signal Or Noise?

Do stock price increases influence firm-level investment decisions? Studies suggest that stock price movements may reflect adjustments in the beliefs of outsiders about the prospects of a firm and may therefore contain information or considerations that are new to the firm. However, it remains unclear if or when firms can use price movements as informational inputs in investment decisions as some suggest that the market is a sideshow, where trading is done with little or no impact on firm decisions, and that firms are better informed than outsiders about the value of their investments. This paper studies the firm and industry factors that influence a firm’s information environment, and thus, the informational relationship between stock prices and investments. We find that firm characteristics such as strategy uniqueness and complexity decrease the potential informativeness of stock prices for investment. In addition, higher analyst coverage and dedicated institutional investors negatively influence the relationship between stock prices and investment. Finally, industry context can shape how stock price changes can influence investments. Specifically, higher industry R&D intensity and competition decrease, and higher industry demand uncertainty increase the informativeness of stock prices for firms’ investment decisions.

Financialisation and firm-level investment in developing and emerging economies

Abstract This article analyses the effects of financialisation on non-financial companies’ (NFCs) investment and explores the interactions between financialisation and the structural and institutional features of developing and emerging economies (DEEs). We estimate the effects of financialisation on physical investment for a sample of DEEs using panel data based on the balance sheets of publicly listed NFCs. Our main contribution is to assess the interactions between the financialisation of the NFCs and country-level financial development, financial reform, capital account openness and global value chain participation. We find that the effects of the financialisation of the NFCs in DEEs are highly context specific. Stock market development, financial reforms for liberalisation, capital account openness and participation in the global value chains are associated with more pronounced negative effects of financialisation on investment. Our analysis provides novel empirical evidence regarding the sources of variation in the financialisation of corporations in DEEs.

Monetary policy, investment and firm heterogeneity

This paper provides new evidence on the channels of monetary policy transmission combining 9 million observations on firm level investment and high-frequency identified monetary policy shocks. We show that the reaction of firms’ investment to a monetary policy shock is heterogeneous along dimensions that correspond to the two main channels of monetary policy transmission. First, we show that young firms are more sensitive to monetary policy shocks and that high leverage amplifies the effects, supporting the existence of a credit channel of monetary policy. Second, we document large cross-sectional heterogeneity related to the industry the firm operates in. We find that firms producing durable goods react more than others, which is consistent with traditional interest rate channel effects of monetary policy. Furthermore, this sectoral effect is longer lived. In line with the demand effects of the interest rate channel, we also provide evidence that sales growth of durables producing firms reacts stronger to a monetary policy shock.

The impact of financial constraints on investment efficiency in South Africa

Shifts from firm-level investment efficiency occur due to market imperfections and informationasymmetry. This translates to an increased cost of capital, which leads to over or under-investments. This study demonstrates the absence of a direct association between investmentefficiency and financial constraints in African firms, complementing the efficient markethypothesis. We observed firms across different industries listed on the JSE from 2009 to 2019.Empirical results from panel data analysis reveal that financial constraints drive improvedinvestment levels and firms in this region depend on external funds – specifically credits – toinvest.

The effects of corporate taxes on small firms

We study the impact of corporate taxes on firm-level investments and business activity by exploiting a 6 percentage-point reduction in the corporate tax rate in 2012–2014 in Finland. We use detailed administrative data and a difference-in-differences method comparing small corporations (tax rate cuts) to similar partnerships (no change in taxes). We find no significant average investment responses but do observe an average increase in annual sales (1.6%) and variable costs (2%) when comparing years before (2008–2011) and after (2014–2016) the tax rate cuts. These effects are driven by more cash-constrained firms and firms where the main owner actively works in the firm.

Tax Policy and Lumpy Investment Behaviour: Evidence from China’s VAT Reform

AbstractWe incorporate the lumpy nature of firm-level investment into the study of how tax policy affects investment behaviour. We show that tax policies can directly impact the lumpiness of investment. Extensive-margin responses to tax policy are key to understanding the effects of different tax reforms and to designing effective stimulus policies. We illustrate these results by studying China’s 2009 VAT reform, which lowered the tax cost of investment and reduced partial irreversibility—the price gap between new and used capital. Using comprehensive tax survey data and a difference-in-differences design, we estimate a 36$\%$ relative investment increase that is driven by investment spikes. Using a dynamic investment model that fits the reduced-form effects of the reform, we show that policies that directly reduce the likelihood of firm inaction are more effective at stimulating investment.

Measuring Geopolitical Risk

We present a news-based measure of adverse geopolitical events and associated risks. The geopolitical risk (GPR) index spikes around the two world wars, at the beginning of the Korean War, during the Cuban Missile Crisis, and after 9/11. Higher geopolitical risk foreshadows lower investment and employment and is associated with higher disaster probability and larger downside risks. The adverse consequences of the GPR index are driven by both the threat and the realization of adverse geopolitical events. We complement our aggregate measures with industry- and firm-level indicators of geopolitical risk. Investment drops more in industries that are exposed to aggregate geopolitical risk. Higher firm-level geopolitical risk is associated with lower firm-level investment. (JEL C43, E32, F51, F52, G31, H56, N40)

The Impact on Job-Quality of Firm-Level Support to Innovation: Evidence from Natural Experiment Conditions and Linked Employer-Employee Data in Portugal.

Public support to firm-level investments in innovation is one of the main mechanisms through which the European Union promotes socioeconomic convergence among regions and the creation of quality jobs is considered a necessary condition for the convergence of disadvantaged regional economies. This paper exploits the availability of natural experiment conditions and linked employer-employee microdata in Portugal to offer empirical evidence on the impact on relevant job-quality outcomes of a large EU-cohesion-policy program to support SMEs' innovation investments. The analysis is implemented by means of stratification/coarsened exact matching model, combined with a difference in difference scheme, suitable to the specific impact identification conditions. Our results indicate that the policy intervention in Portugal had a positive impact on job-quality outcomes, with each supported firm generating an average of 4.9 additional standard-working-time jobs, +2.9 skilled jobs, and +2.0 permanent-contract jobs, compared to a counterfactual scenario of no public support. These impacts were at a cost of about 16,100€, 27,100€ and 39,400€ in public subsidies per additional job, respectively. We also estimate that the program impact was responsible for a 2.20€ (+17.8%) increase of the per-hour remuneration. These findings are robust to sensitivity analysis, in terms of alternative matching procedures and comparison groups, and they highlight the fact that increasing job-quality is a policy goal that can be pursued, at a reasonable cost, also by means of cohesion-policy support to innovation aimed at enhancing the competitiveness of SMEs.JEL classification: O1; R5; C23.

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, and ushered in an era of unprecedented trade policy uncertainty (TPU). To assess the effects of this development on the operations of Chinese firms we adopt a new textual analysis approach to listed firms’ annual reports that allows us to create measures of TPU that vary over firms and time. Linking our new TPU measures to firm-level trade war exposure shows that increases in U.S. tariffs and Chinese retaliatory tariffs elevated firm-level TPU. The effects of Chinese firm-level tariff changes on firm TPU are heterogeneous: smaller firms experienced the most pronounced increases while firms that were more diversified in terms of partner countries were more insulated. Importantly, connecting firm-level increases in TPU during the trade war with subsequent firm performance reveals notable impairment of firm operations. 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 2.3, 2.3, and 11.5 percent, respectively.

Debt maturity heterogeneity and investment responses to monetary policy

We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.

Investment response to exchange rate uncertainty: Evidence from Chinese exporters

This paper empirically examines the impact of exchange rate uncertainty on firm-level investment using data collected from the incidence of an exogenous uncertainty shock caused by the 2005 change in China's exchange rate policy. The results show that the higher RMB exchange rate uncertainty induced by the policy change significantly weakened Chinese exporters' response of investment to demand shocks. Moreover, exporters with higher degrees of capital irreversibility were found to be more sensitive to the uncertainty shock, which is consistent with the capital irreversibility hypothesis that has been identified in the macroeconomic literature. This paper also documents heterogenous investment responses to uncertainty across firms.

Measuring Geopolitical Risk

<ns2:p>We present a news-based measure of adverse geopolitical events and associated risks. The geopolitical risk (GPR) index spikes around the two world wars, at the beginning of the Korean War, during the Cuban Missile Crisis, and after 9/11. Higher geopolitical risk foreshadows lower investment and employment and is associated with higher disaster probability and larger downside risks. The adverse consequences of the GPR index are driven by both the threat and the realization of adverse geopolitical events. We complement our aggregate measures with industry- and firm-level indicators of geopolitical risk. Investment drops more in industries that are exposed to aggregate geopolitical risk. Higher firm-level geopolitical risk is associated with lower firm-level investment.</ns2:p>

Cross-Sectional Financial Conditions, Business Cycles and The Lending Channel

<ns3:p>I document business cycle properties of the full cross-sectional distributions of U.S. stock returns and credit spreads from financial and nonfinancial firms. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for lending conditions. SRF also affects firm-level investment beyond firms' balance sheets, and adverse SRF shocks lead to macroeconomic downturns with tighter lending conditions in vector autoregressions (VARs). These results are consistent with a lending channel in which cross-sectional financial firms' balance sheets play a prominent role in business cycles. I rationalize this argument with a model that matches the VAR evidence.</ns3:p>

Demographic structure, knowledge diffusion, and endogenous productivity growth

This paper considers how increasing longevity and declining birth rates affect market entry and endogenous productivity growth in a two-country model of industry location and trade. Firm-level investment in process innovation generates productivity growth, and with imperfect knowledge diffusion the larger country, measured by labor force size, has a greater share of relatively productive firms. In this framework, population aging reduces a country’s labor supply, share of industry, and relative productivity. If the smaller country experiences population aging, knowledge spillovers improve and the rate of productivity growth rises, as the level of market entry falls. Alternatively, population aging in the larger country weakens knowledge spillovers and lowers the rate of productivity growth, but has an ambiguous affect on market entry. A quantitative analysis of the framework based on population data for the United States and Western Europe is used to consider the welfare implications of demographic transition.

Unexpected money growth, nonfinancial firms as large shareholders and investment-cash flow relationship: Evidence from Vietnam

This paper uses a sample of listed firms to raise questions as to how unexpected money growth affects firm-level investment in Vietnam, resembling tightening monetary policy impact. We find that most results that hold true in other countries also apply to Vietnamese firms during the years of our study. In particular, we find that higher cash flows are associated with higher investment when the assumption of tightening monetary policy is conducted, which is stronger in firms with external financial constraints. We also examine the impact of non-financial firm ownership and find that its presence reduces the investment impact of tightening monetary policy for affected firms. These results imply that the impacts of changes of the monetary stance on corporate investment seem to differ in a way that depends on cash flow and firm ownership characteristics.

The Effect of Firm-Level Investment on Inequality and Poverty Around the World

The Effect of Firm-Level Investment on Inequality and Poverty Around the World

Does economic policy uncertainty affect investment sensitivity to peer stock prices?

This paper investigates how economic policy uncertainty (EPU) affects the response of a firm’s investment to its peers’ stock prices. Using the news-based index developed by Baker et al. (2016), we find robust interaction effects of EPU and peers’ stock prices on firm investment for US listed firms over the period 1985–2018, indicating that firms’ investment decisions are heavily influenced by their peers’ stock prices during elevated EPU periods. This relationship holds for both short- and long-term EPUs and is more pronounced for the latter compared to the former and among firms that either operate in highly competitive environments or are more financially constrained. Furthermore, peers’ stock prices appear to be more informative to followers than leaders. Taken together, our findings extend the literature on how firm-level investment varies with EPU and peer valuation.

Environmental and social transparency and investment efficiency: The mediating effect of analysts’ monitoring

We evaluate how financial analysts' information environment mediates the influence of a firm's environmental and social transparency on its investment efficiency. We argue that via their information intermediary and monitoring capabilities, analysts both react to and act upon transparency in such a way as to affect a firm's investment efficiency. Consistent with prior research, investment efficiency represents a firm's increase in net tangible assets relative to its sales growth. Transparency is based upon comprehensive ratings constructed by Bloomberg. Analysts' information environment is proxied by earnings forecast errors and dispersion. Our sample comprises S&P 500 index firms over 2012–2018. Results show that environmental and social transparencies each positively relate to investment efficiency, with analysts' information environment partially mediating this relationship. Moreover, environmental and social transparencies each relate to smaller forecast errors as well as less forecast dispersion. Furthermore, enhanced analyst forecasts imply less firm-level investment inefficiency. These results suggest that greater environmental and social transparency enhances financial analysts' information environment and, thus, their information intermediary and monitoring capabilities. Consequently, firms are more likely to attain investment efficiency.