GMM Approach Research Articles

Analysis of the effect of Financial Distress on Tax avoidance during the COVID-19 Financial Crisis: Evidence from Pakistan

For the purposes to finance their business operations, firms have incentives to engage in corporate tax avoidance activities when managerial incentives increase as compared to managerial costs. These activities are significantly high when firms are inthe financial distress zone. The Covid-19 financial crisis (CFC) provides significant findings on whether corporate tax avoidance hasa significant difference from the pre-Covid-19 tothe post-Covid-19 financial crisis, whether a firm’s management is obligated to engage aggressively with corporate tax avoidance. This research aims to investigate the impact of financial distress on corporate tax avoidance during the Covid-19 financial crisis. Based on a sample of 175 firms listed on PSX covering the period of 2010-2021. The study applies GMM dynamic approach with (static) fixed and random effect models to check the robustness of results. The finding of the GMM approach demonstrates that financial distress has a statistically significant and positive impact on corporate tax avoidance. Consistent with the cost-benefits analysis and risk-shifting behavior theories, firms engage more in tax avoidance, especially during financial distress. Moreover, CFC magnified the relationship between these variables, and firms investigated in the study face development suffer mostly in this globally and economically distressing period.

Examining the Impact of Oil Prices on the Gulf Stock Exchange: A System GMM Approach

Oil is a critical macroeconomic component of the global economy. This is hardly surprising, given that the global crude oil market is the largest commodity. Oil price swings may reflect or even foretell changes in the political and economic stability of oil-exporting and oil-importing countries. This study examined the impact of oil prices on Gulf country stock markets using data from 2010 to 2020. The study applied the System Generalized Method of Moment estimation approach. The results indicate that stock markets are sensitive to oil prices and that their impact is positive. Similarly, economic activities and interest rates show a positive impact on stock prices. However, the stock market price index is insensitive to inflation. Furthermore, the stock market index depends on its own lag. This study recommends that Gulf Cooperation Council countries diversify their economies for financial stability, rather than relying solely on natural resources.

Repercussions the Covid-19 Pandemic on the SDGs Achievement: Is it a New Era for the Development?

Using monthly data, this article examines the influence of Covid-19 on poverty, inequality, well-being, and environmental quality for a sample of 14 African economies from 2018 to 2020. To do so, we employ a GMM approach to look at the influence of the pandemic on achieving the SDGs in Africa. According to our empirical findings, the pandemic significantly impacts poverty and pollution levels. The results show also that the pandemic coefficient considerably influences the inequality proxy. Due to social exclusion and inequities, these economies must embrace an integrated socio-economic vision to overcome the multi-faceted pandemic externalities and build more resilient economies..

Financial inclusion and economic growth: What roles do institutions and financial regulation play?

AbstractThe extant literature indicates that financial inclusion has a direct influence on economic growth. This has been examined by previous studies by analysing the link between financial inclusion and economic growth. This study uses the two‐step system GMM approach to investigate the moderating role of financial regulation and quality of institutions on the linkage between economic growth and financial inclusion in Africa, using balanced panel data of 52 African countries spanning 2002–2019. The findings reveal a number of things; (i) financial inclusion, financial regulation, and all proxies of institutional quality exert strong and significant effects on economic growth; (ii) institutional quality enhances the impact of financial inclusion on economic growth; iii. Financial regulation dampens the effect of financial inclusion on economic growth. Based on these findings, we recommend the following; (i) central, local governments, and policymakers should formulate public policy that promotes inclusive finance. Such policies should aim at removing barriers and constraints such as excessive customer identification requirements that hinder people from gaining access to finance; (ii) central governments and policymakers in Africa should refine policy that promotes the involvement of the citizenry in governance processes, promote accountability of public institutions, ensure effective governance systems, controls corruption, promote rule of law, and political stability and ensure quality legal and regulatory regimes; (iii) African central governments should fine‐tune policy aimed at strengthening institutions and the regulatory framework. By implication, strong, independent, and quality institutions coupled with sound financial regulatory framework is required to spur the growth of African countries.

Blockchain adoption and firm performance: The contingent roles of intangible capital and environmental dynamism

Despite the purported benefits of blockchain technology for business applications, it is unclear how blockchain adoption affects firm performance, and large-scale empirical evidence on this relationship remains scarce. Drawing on the dynamic capabilities perspective, we examine the relationship between blockchain adoption and firm performance using a sample of 4994 firm-year observations from 2017 to 2021. Using a dynamic System GMM approach, we show that blockchain adoption significantly increases Tobin's Q (a market-based measure of expected future earnings); however, it has no relation with the current accounting performance measured using return on equity (ROE) and return on assets (ROA). We find that a firm's intangible capital and environmental dynamism positively moderate the relationship between blockchain adoption and Tobin's Q. The former finding reflects market expectations that firms with high intangible capital are better equipped to benefit from blockchain adoption. The latter finding suggests that blockchain adoption strengthens firms' dynamic capabilities, and thus it enables firms to undertake proactive and innovative initiatives in response to an uncertain business environment.

Dynamic Linkages between Energy Consumption, Foreign Direct Investment, and Economic Growth: A New Insight from Developing Countries in Asia

This study aims to determine the dynamic relationship between energy consumption, FDI, and economic growth in developing countries in the Asian Region by adding other control variables. This study uses a panel data model approach and a dynamic GMM panel with a dataset of 21 developing countries in the Asian Region from 2000-2019. The results of the panel data model report that FDI and energy consumption can significantly increase economic growth. However, poverty and interest rates can reduce economic growth. On the other hand, the dynamic GMM approach states that FDI and energy consumption can increase economic growth with a significant positive relationship. However, poverty, interest rates, and inflation have a negative and significant relationship to economic growth in developing countries in the Asian Region. In line with the study findings, these findings are of more interest to policymakers in this country. Therefore policy recommendations are made to increase the economic growth of developing countries in the Asian Region.

Size and performance of Indian manufacturing firms: new evidence from dynamic panel system GMM approach

Size and performance of Indian manufacturing firms: new evidence from dynamic panel system GMM approach

Carbon neutrality through supply chain performance: does green innovation matter in Asia?

Logistics performance is considered an important determinant of supply chain performance that results in carbon neutrality. The main aim of this study is to investigate the influence of logistics performance and green innovation on carbon emissions for selected Asian economies over the period 2007–2020. The 2SLS approach has been employed for empirical tasks, and the robustness of results has been confirmed through the GMM approach. The results indicate that logistics performance significantly reduces carbon emissions. Besides the logistics performance index, five other indicators of logistics performance have been used in the analysis. These indicators include quality of logistics services, tracking and tracing capability, logistics infrastructure quality, cargo transportation timelines, and customs clearance efficiency. All these indicators are negatively correlated with carbon emissions. The results further indicate that green innovation leads to a significant reduction in carbon emissions. Thus, our results emphasize the priorities of green innovation, logistics performance, and environmental sustainability in Asian economies.

Impact of Financial Development and Resource Rents on Total Factor Productivity in Gulf Cooperation Council Countries

The present study estimates the impact of financial development and resource rents on total factor productivity in the Gulf Cooperation Council (GCC) countries by applying the GMM approach. The study takes the panel data from 1984 through 2019, while keeping population, corruption, and trade openness as control variables. The results reveal that financial development and resource rents affect total factor productivity positively in GCC countries. Moreover, the results show that improving trade openness contributes positively to total factor productivity. Though, raising corruption and population deteriorate productivity. Thus, this study emphasizes on the need to improve the quality of political institutions to minimize corruption and encourage contraceptives to control the fertility rate for intergenerational sustainability. Further, there is a need to promote trade and financial integration with developed countries, and to efficiently utilize natural resource rents for long-term growth and development.

Estimating the Effect of Social Expenditure on Poverty Reduction and Growth in High- and Middle-Income Countries: A Dynamic Panel Analysis Applying the GMM Approach

Estimating the Effect of Social Expenditure on Poverty Reduction and Growth in High- and Middle-Income Countries: A Dynamic Panel Analysis Applying the GMM Approach

Cash holdings: International evidence

The goal of this paper is to study how firms’ cash holdings have recently performed. We have not only used GMM approach, but also a pioneer econometric approach to evaluate the determinants of firms’ cash holdings, ML-SEM. The results are more robust in comparison with those obtained using GMM. Our results showed that cash holdings have increased during the 2008 financial crisis and rose significantly after that time. The exception were firms placed in the United States and emerging markets. We have found that cash holdings, in general, were positively influenced by the banking system and capital market, although the results have been more robust for the first variable. Our results also showed that the development of the rule of law and shareholder rights lead to a decrease on firms’ cash holdings, which confirms the agency theory as an explanation of firms’ cash holdings.

Institutional determinants of insurance penetration in Africa.

This paper investigates the institutional determinants of insurance demand in Africa. We used a panel of 42 countries over the period 1996–2017. A system GMM approach was used for the estimations. Consistent with previous results, we find that institutional quality has positive and significant effects on insurance penetration in Africa. Specifically, regulatory quality, rule of law, control of corruption, political stability and absence of violence, and government effectiveness are the five institutional quality indicators that have positive and significant effects on the demand for total insurance and life insurance. However, only regulatory quality, control of corruption and government effectiveness are positively associated with non-life insurance demand. This indicates that governments should improve the business environment and strengthen the political environment to boost insurance development in Africa.Supplementary InformationThe online version contains supplementary material available at 10.1057/s41288-022-00278-2.

Militarization and Income Inequality in European Countries (2000–2017)

Abstract This paper investigates the impact of militarization on income inequality. The analysis is conducted on a panel of 40 European countries over the period 2000–2017. The degree of militarization of a country is captured by means of the Global Militarization Index (GMI) and we employ the Gini index as a measure of inequality. The main findings show that militarization and inequality are positively associated. The findings appear to be robust. We also consider control variables related to military commitment, namely (i) conscription; (ii) NATO membership; (iii) involvement in an armed conflict. Interestingly conscription appears to be negatively associated with income inequality whereas an armed conflict and NATO membership show the opposite sign. For sake of robustness, we undertake the same estimations on alternative samples of countries and results are confirmed. Eventually, to deal with the issue of endogeneity, we apply the Lewbel, IV–GMM approach and results are confirmed.

The multidimensional effect of financial development on trade in Africa: The role of the digital economy

The issue of how financial development affects international trade has gained much attention in the literature, both theoretical and empirical, without investigating the various transmission channels of financial development on international trade. Significantly, how the digital economy modulates the effects of financial development on trade remains unexplored. Our study addresses these research gaps using panel data from 47 African economies spanning 1990 to 2019. Our findings based on the dynamic system GMM approach show that the direct impacts of financial development and the digital economy have been crucial in driving international trade in Africa in the short and long runs. Second, in the short and long runs, the digital economy serves as a vital channel through which financial development has the most significant impact on trade in Africa. Third, the robustness checks by excluding countries endowed with natural resources in Africa provide robust evidence that digital technology and finance matter for trade. Further, the study discloses an important novelty in that the marginal effects on trade increase when financial development in Africa interacts with the digital economy. In light of these findings, we conclude that policy reforms should focus on policies that encourage the development of the digital economy and its use in the financial sector in Africa.

A GMM approach to estimate the roughness of stochastic volatility

We develop a GMM approach for estimation of log-normal stochastic volatility models driven by a fractional Brownian motion with unrestricted Hurst exponent. We show that a parameter estimator based on the integrated variance is consistent and, under stronger conditions, asymptotically normally distributed. We inspect the behavior of our procedure when integrated variance is replaced with a noisy measure of volatility calculated from discrete high-frequency data. The realized estimator contains sampling error, which skews the fractal coefficient toward “illusive roughness.” We construct an analytical approach to control the impact of measurement error without introducing nuisance parameters. In a simulation study, we demonstrate convincing small sample properties of our approach based both on integrated and realized variance over the entire memory spectrum. We show the bias correction attenuates any systematic deviance in the parameter estimates. Our procedure is applied to empirical high-frequency data from numerous leading equity indexes. With our robust approach the Hurst index is estimated around 0.05, confirming roughness in stochastic volatility.

The composition of firms' indebtedness and the macroeconomy of capital

The objective of this research is to analyze the influence that monetary policies exert on the composition of the indebtedness of Brazilian corporations. From this objective, 2 hypotheses derive. The first analyzes the sample aggregate and the second directs the tests to the productive sectors. The study sample is composed of 220 companies: 84 of consumer goods, 89 of capital goods and 47 of public utility. The data collected refer to the years 2009 to 2019. The methodology used for data analysis is through panel data models, using the GMM approach. According to the results, it can be concluded - in the light of the macroeconomics of capital - that the composition of the firms' indebtedness can be determined by the market moments defined by the monetary policies, so that such influence is different depending on the sector to which the companies are located in the production chain. These results complement the literature that studies the impacts of monetary policies and macroeconomic variables on corporate finance, mainly through econometric modeling based on accounting data.

Gender diversity, sustainability reporting, CEO overconfidence, and efficient risk‐taking: Evidence from South Asian agri‐food industry

AbstractThis article aims to understand the impact of board gender diversity (BGD) on the firm's deviation from efficient risk‐taking (DERT) along with the mediating effect of sustainability reporting and the moderating effect of CEO overconfidence. The sample consists of 77 South Asian agri‐food firms over the period 2010–2019. To account for endogeneity and other statistical biases, we use a system GMM approach. The results show that there is a non‐monotonic relationship between BGD and DERT. Consistent with critical mass theory, we find that at least three women on board (WOB) are required to reduce the firm's DERT. The findings of the study also reveal that the overconfident CEO may restrict the female directors to achieve the firm's efficient risk‐taking. The evidence further suggests that sustainability reporting quality (SRQ) does not mediate the link between BGD and a firm's DERT. The robustness tests are performed based on alternative risk proxy and the likelihood of financial distress. Our results theoretically support stakeholder, critical mass, and agency perspective that South Asian capital markets should enhance the representation of WOB to mitigate agency conflicts and to improve long‐term firm sustainability.

Gender diversity on corporate boards, firm performance, and risk-taking: New evidence from Spain

Spain was the first European country to pass a ”Gender Equality Act” to improve gender balance on corporate boards. Motivated by this vital development in Spanish law, we examine whether and how women directors play a role in influencing firm risk-taking and performance. We use 805 firm-year observations from 165 unique firms for 2013–2018. We find that firms with higher board gender diversity experience better accounting-based firm performance but lower market-based firm performance. Notably, our results show that firms with more female directors take higher risks, which puts a new insight into the long-standing tale that female directors are risk averse. Our results are robust with alternative measures of board gender diversity, performance and risk measures, alternative model specifications, and the two-step system GMM approach to address possible endogeneity. Our study context is, however, limited to Spain and does not account for female directors’ demographic and professional attributes due to the unavailability of relevant data. Despite these limitations, our research has important practical implications for policy and practice to enact a more gender-diverse board for better firm performance and risk management.

Globalization and income inequality in developing countries: a GMM approach

Globalization and income inequality in developing countries: a GMM approach

Analyzing The Effect of Foreign Capital Movements on Human Development in Developing Countries: A System GMM Approach

Foreign Capital Inflows (FCIs) have been playing a robust role in economic growth and development of the capital-deficient developing economies. Foreign Direct Investment (FDI), workers’ remittances, and Official Development Assistance (ODA) are the major FCIs for developing economies. Previous empirical studies have concluded mixed impacts of such flows on human development in recipient economies. The present study examines the impacts of FDI, remittances, and ODA flows on human development in a larger panel of 71 developing economies from 2001 to 2019 using the system GMM econometric technique. The results show a positive and statistically significant impact of FDI and remittances on human development measured by the Human Development Index (HDI). Whereas, ODA has been found to have a negative impact on human development in selected developing economies. In addition, the study also concludes the positive impact of GDP and governance indicators on the human development of these economies. The findings of the study provide a comprehensive insight into the roles of FCIs in setting the human development trajectory of the developing economies. It provides guidelines for the policymakers and the governments to frame feasible and efficient policies to achieve the objective of human development in capital-starved developing countries.