Firm-level Investment Research Articles

Media coverage and investment efficiency

We examine the effect of media coverage on firm-level investment efficiency. We find that media coverage reduces under-investment but increases over-investment. The negative effect of media coverage on under-investment is more pronounced in firms affected by greater information asymmetry and poorer corporate governance. The positive effect of media coverage on over-investment is driven by media-induced CEO overconfidence. Additional results show that both investment- and non-investment-related news coverage decrease under-investment, while non-investment-related news coverage is more influential in increasing over-investment. In general, higher news optimism is associated with less under-investment but more over-investment. Moreover, media coverage affects investment efficiency through its information dissemination rather than information creation function. Collectively, our results suggest that firms’ media visibility promotes more over-investment than under-investment.

Does a green tax impact a heavy-polluting firm’s green investments?

ABSTRACT By leveraging the quasi-natural experiment of the passage of the Environmental Protection Tax Law in late 2016 in China that imposed a pollution tax (green tax) on firms, we examine the impact of this tax on the green investments of heavy-polluting firms. Our difference-in-differences results show that the green tax enhances green investments of heavy-polluting firms. Specifically, firm-level green investments of heavy-polluting firms increased by approximately 38% after the green tax than before the green tax relative to an average firm. The findings are robust to a propensity score matching method, fixed-effects models, placebo tests, dynamic effect analysis, and after excluding alternative explanations. Additional analysis suggests that the positive effect of the green tax on green investments is more pronounced for large firms, state-owned firms, and firms with high analyst following. Collectively, we find a green tax policy contributes to green investments.

Measurement of long-term orientation: Distinguishing between firm and country levels of analysis

Long-term orientation represents one of six dimensions of national culture. In general, scholars find the highest levels of long-term orientation in Asian economies, while the U.S. holds a reputation for the most short-sighted culture. Yet, the emphasis on national differences can obscure significant variation in long-term orientation across industries and firms within countries. This paper shows how a measure of firm-level investment horizon developed in the strategic management literature (aggregated to the country level) can capture the construct underlying Hofstede’s cultural score for long-term orientation in a more flexible way. We then use this measure to show that variation in investment horizon across firms exceeds the variation at the industry or country level of analysis. In addition, we demonstrate that the influence of relative performance on investment horizon, seen previously in U.S.-based studies, can be confirmed and extended in a study of over 2,700 manufacturing firms worldwide. We conclude by highlighting other research questions that can be explored in more detail by exploiting the flexibility offered by the investment horizon measure.

Staged subsidies and corporate investments: Evidence from Chinese listed firms

We examine the impact of subsidies on firm-level investments using a panel of Chinese listed firms from 2008 to 2019. The Chinese government adopts a two-staged ‘touching stones to cross the river’ strategy in allocating funds and supervision efforts to listed firms. Subsidies granted in the early stage (‘one-off subsidies’) boost long-term investments, with 0.588 of every RMB 1 of subsidy being used for corporate investment. In contrast, in the later stage (‘repeated subsidies’), only 0.122 of every RMB 1 of subsidy is used for this purpose. We attribute this decrease to the ability of government supervision to effectively restrain overinvestment in capital expenditures.

Information Processing Costs and Firms' Investment Efficiency: An Examination of Channels of the XBRL Effect

ABSTRACT We examine the channels through which a reduction in information processing costs improves firm-level investment efficiency. We do so by exploiting the SEC's eXtensible Business Reporting Language (XBRL) mandate. We provide empirical evidence suggesting potential channels. Specifically, we find that, while the use of standardized official elements facilitates investment efficiency, the use of customized extension elements hinders it. In addition, we show that firms with Big 4 auditors experience less improvement in investment efficiency. We also investigate ex post investment performance and find that firms' return on assets and Tobin's q increase following XBRL adoption, suggesting improvements in the effectiveness of investments. Furthermore, we extend this line of research to investments in human capital. Notably, we show that labor investment efficiency is significantly improved in the post-XBRL era. This finding adds another dimension to the growing knowledge about the impact of accounting information on firm-level investment decisions. JEL Classifications: G30; M40; M41; M48.

Imposing versus Enacting Commitments for the Long‐Term Energy Transition: Perspectives from the Firm

Imposing versus Enacting Commitments for the Long‐Term Energy Transition: Perspectives from the Firm

Monetary policy and corporate investment: A panel-data analysis of transmission mechanisms in contexts of high uncertainty

This paper investigates the impact of monetary policy on firm-level investment in contexts of economic turmoil. Using a panel of US public firms for the period 2000–2019, we show that policy-rate-based transmission mechanisms are undermined when uncertainty spikes. Furthermore, we find evidence of the existence of asymmetries at the firm level. In line with real options theory's predictions, firms with higher levels of investment irreversibility, operational inflexibility, and market power, as well as firms with lower cash flows and who operate in low-innovation sectors tend to be less responsive to changes in monetary policy. The effectiveness of monetary policy thus depends on the ability of monetary authorities to reduce uncertainty via expectations-based monetary tools, whilst targeting those sectors more likely to be affected by monetary-policy shifts.

Policy uncertainty and firm-level investment: evidence from public-private partnership market in China

ABSTRACT This paper focuses on the subfield of Public–Private Partnership (PPP), and explores the relationship between policy uncertainty and firm-level investment. Based on the analysis of 905 central-level documents, one novel contribution of this paper is to construct an index of PPP policy uncertainty. We find evidence supporting that the gambling between central government departments is the main cause of policy uncertainty, which further leads to less investment by firms. Compared with other traditional indexes, the construction based upon policy text sheds light on risk management.

To whom do banks channel central bank funds?

This paper examines the relationship between central bank funding and credit risk-taking. Employing bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that banks borrowing from the central bank rebalance their portfolios towards ex-ante riskier firms. We further establish that this effect is driven by the ECB’s maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we show that these shifts in bank lending are associated with an increase in firm-level investment and employment, but also with a deterioration of bank balance sheet quality in the following year.

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.

Taxes and Firm Investment

We investigate the firm level investment responses to narrative shocks to average personal and corporate tax rates using a universal micro dataset of publicly traded U.S firms for the post- 1962 period. By allowing for heterogeneous effects over the business cycle and accompanying monetary policy regime, as well as over firm-level characteristics, we show that : (i) corporate tax multipliers are negative overall, but this result is driven by smaller firms who face larger borrowing constraints, especially during high-unemployment periods or when the accompanying monetary policy is contractionary; (ii) while the magnitude and the significance of personal income tax multipliers are smaller on the aggregate, there is some evidence of positive personal tax multipliers in high-unemployment state by large (dividend-paying) firms, which is consistent with the recent literature.

How Does Information Asymmetry Affect REIT Investments? Cost of Capital, Performance, and Executive Compensation

This study empirically examines the impact of information asymmetry on firm-level investment behavior using data from U.S. equity real estate investment trusts (REITs). We show that firms with lower levels of information asymmetry, measured as bid–ask spread and stock return volatility, generally experience higher growth on their real estate investment, property investment, and total assets. Conversely, high-information-asymmetry REITs are less active in their property acquisition and disposition activities, as well as involved in fewer mergers and acquisitions than their counterparts. We also show that the levels of information asymmetry are, on average, positively related to capital costs and negatively related to operational performance. Lastly, the study sheds light on the importance of aligning interests of managers with those of stakeholders, by illustrating that executives in firms with a high level of information asymmetry receive higher total compensation compared with their peers.

Classification shifting and efficiency of corporate investment

This study investigates into the real consequences of earnings management by classification shifting via examining its effect on corporate investment efficiency. The underlying expectation is that the way of reporting different items of profit within the income statement should induce information asymmetry between managers and the capital providers about the level of core, and so more likely repeatable, firm performance, and therefore deteriorate the informational environment of firms and associate with efficiency in firm-level investment. We find that classification shifting strongly and positively associates with both over- and under-investment. Investigating into the economic mechanisms through which classification shifting affects efficiency in investment, our results are more pronounced when other information and agency problem-related factors that should protect from inefficient investing are weaker, namely for firms facing greater financial constraints, firms with greater pre-existing information asymmetry and lower auditor quality, and also when opportunistic special items, levels of unexpected investment, and investment opacity are higher. Our study provides evidence on the adverse real consequences of classification shifting, representing a form of earnings management typically considered as relatively innocuous and without any bottom-line performance reversing effects, with reference to a very important firm-level outcome, as is efficiency in investment.

Intangible Investment during Sovereign Debt Crisis: Firm-level Evidence

This paper measures the output and TFP costs of sovereign risk by focusing on firm-level investment. Combining Italian firm-level and aggregate-level data, we show that firms reduce their investment and reallocate their resources away from intangible assets and towards tangible assets during the sovereign debt crisis. This asset reallocation is more pronounced among small and high-leverage firms, indicating the role of financial constraints. In our model, sovereign risk deteriorates banks' balance sheets, disrupting banks' ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms internalize that tangibles can be used as collateral while intangibles can not, thus reallocating resources towards tangible investment. In a counterfactual analysis, we find that elevated sovereign risk explains 86% of output losses and 72% of TFP losses during the 2011-2013 Italian sovereign debt crisis.

Taxes and Firm Investment

We investigate the firm level investment responses to narrative shocks to average personal and corporate tax rates using a universal micro dataset of publicly traded U.S firms for the post- 1962 period. By allowing for heterogeneous effects over the business cycle and accompanying monetary policy regime, as well as over firm-level characteristics, we show that : (i) corporate tax multipliers are negative overall, but this result is driven by smaller firms who face larger borrowing constraints, especially during high-unemployment periods or when the accompanying monetary policy is contractionary; (ii) while the magnitude and the significance of personal income tax multipliers are smaller on the aggregate, there is some evidence of positive personal tax multipliers in high-unemployment state by large (dividend-paying) firms, which is consistent with the recent literature.

Options Trading Activity and the Efficiency of Corporate Investment

We examine the relation of active options market trading and the (in)efficiency of corporate investment in terms of deviation from optimal investment levels. Past research considers the volume of options trading as contributing to firms’ informational efficiency. Investment efficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether the enhancement in firms’ information environment associated with higher volume of options trading activity is positively related to optimizing investment at the firm level. Our results indicate that the volume of options trading by firms is positively and significantly associated with firm-level investment efficiency. This relation is associated with the enhancement in the firms’ information environment stemming from active options trading. Overall, our findings suggest that the managerial skills associated with active trading in derivatives markets also benefit firms’ investment decisions through enhancing the optimal allocation of firm resources and investment efficiency.

Tax Policy Design with Low Interest Rates

Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.

Is Supplementary Pension Beneficial to Human Capital Investment? Evidence from China

ABSTRACT We examine the impact of a supplementary pension insurance program (SPIP) and short-term compensation on firm-level human capital investment using a sample of Chinese firms from 2007 to 2018. The findings suggest that both SPIP and short-term compensation have positive effects on human capital investment, and the magnitude of SPIP is stronger than that of short-term compensation. Further analysis suggests that the impact of SPIP on human capital investment in a firm is magnified when the firm has high-quality employees. Our findings are robust after accounting for potential endogeneity concerns. When compared with short-term compensation, SPIPs contribute more to establishing a long-term relationship between a firm and its employees, which stimulates human capital investment.

Exports, Investment and Productivity Growth in Small Firms: A Firm-level Analysis from Tanzania and Ghana

This paper examines the effect of firm-level investment in capital on export entry and productivity growth among different firm size classes using matching and difference-in-differences techniques. We find that firm-level investment in capital reduces the burden of sunk costs of export market entry, thereby inducing small firms to enter export markets with ease and increase their productivity as a result of export market participation. New entrants who survive their first year of exporting also grow their investment levels to consolidate market share. We show that micro and small firms that initiate exporting are more likely to implement firm-level investment as well, one way of technology upgrading, to remain competitive in export markets. Moreover, firm-level investment helps small exporters to generate higher productivity once they engage in export markets. This may suggest that the observed market selection and growth of small firms could be the outcome of distinctive productivity improvements in these firms. We note that investing in capital, especially plant and equipment, may help micro and small firms improve their productive capacity to produce more output at lower unit costs as a result of low-marginal costs of production. Export-led growth policies should be directed at supporting micro and small firms access the much needed financing to upgrade their production processes and improve their productivity.

Exports, Investment and Productivity Growth in Small Firms: A Firm-level Analysis from Tanzania and Ghana

ABSTRACT This paper examines the effect of firm-level investment in capital on export entry and productivity growth among different firm size classes using matching and difference-in-differences techniques. We find that firm-level investment in capital reduces the burden of sunk costs of export market entry, thereby inducing small firms to enter export markets with ease and increase their productivity as a result of export market participation. New entrants who survive their first year of exporting also grow their investment levels to consolidate market share. We show that micro and small firms that initiate exporting are more likely to implement firm-level investment as well, one way of technology upgrading, to remain competitive in export markets. Moreover, firm-level investment helps small exporters to generate higher productivity once they engage in export markets. This may suggest that the observed market selection and growth of small firms could be the outcome of distinctive productivity improvements in these firms. We note that investing in capital, especially plant and equipment, may help micro and small firms improve their productive capacity to produce more output at lower unit costs as a result of low-marginal costs of production. Export-led growth policies should be directed at supporting micro and small firms access the much needed financing to upgrade their production processes and improve their productivity.