Higher External Financing Research Articles

Changes in Analysts’ Accrual-Related Forecast Optimism after the Disappearance of the Accrual Anomaly

ABSTRACT We investigate changes in analysts’ accrual-related forecast optimism after the disappearance of the accrual anomaly. We find that such optimism persists in the no-anomaly period, particularly when analysts’ incentives are aligned with greater optimism (i.e., for firms with high external financing). By contrast, the accrual-related forecast optimism declines when analysts’ incentives for optimism are low and in circumstances where analysts would have been more aware of accruals information after the anomaly became publicized (i.e., when analysts issued a cash flow forecast). These findings suggest that analysts’ incentives can offset forecast improvements that their heightened accrual awareness would otherwise allow. They also highlight the importance of considering both analysts’ incentives and knowledge when interpreting their forecasts. Data Availability: Data are available from sources identified in the text. JEL Classifications: G14; G29; M41.

Tax avoidance, investor protection, and investment inefficiency: An international evidence

This paper provides new evidence on the relationship between corporate tax avoidance, and investment inefficiency. Based on a sample of 82,487 firm-year observations across 38 countries, we find that tax avoidance is positively associated with inefficient investments. Particularly, the positive effect of corporate tax avoidance is due to the underinvestment problem suggesting that firms engaging in tax saving activities suffer from exacerbated information asymmetry issues leading them to underinvest. More importantly, the results show that the relationship between tax avoidance and investment inefficiency is more prevalent during crisis periods, suggesting that in periods of economic shortfalls, the investment behavior is altered due to high external financing cost. We also find that the relation between tax avoidance activities and investment inefficiency is less prevalent in countries with strong investor protection. These findings are robust to alternative samples, measures of tax avoidance, investor protection and to endogeneity issues.

Capital account liberalization and economic performance: Evidence from Korea

This study examines whether capital account liberalization is beneficial for inducing foreign investment and positively affects allocative efficiency and economic performance in Korea. Using panel data on Korean industries and firms from 1991 to 2019, we confirm that capital account liberalization is positively associated with foreign investment. This effect is more pronounced for industries with high external financing dependence. Additionally, we conduct a firm-level analysis and find that capital account liberalization improves capital allocative efficiency, indicating that it helps firms with high growth opportunities to make more investment. Furthermore, changes in allocative efficiency attributable to capital account liberalization positively affect firms’ future financial performance. Overall, our study highlights the importance of capital account liberalization in attracting foreign capital, improving allocative efficiency, and enhancing the economic performance of firms in a transition economy.

Carbon disclosure policy, external financing needs and the cost of capital: Does financial market quality matter?

AbstractWe investigate whether the quality of financial markets matters for the relationship between net external financing, voluntary carbon disclosure and firms' cost of capital. External financing needs may create incentives for firms to engage in environmental strategies, such as disclosing their carbon emissions in response to demands from stakeholders. In countries with low financial market quality, firms may build a reputation when complying with stakeholders' demands. In these countries, firms disclosing carbon emissions and with high external financing needs may be rewarded with a lower cost of capital. Using an international sample of 24,253 firm‐year observations from 35 countries, we show that the higher firms' net external financing in the previous year, the more likely they are to disclose their carbon emissions in the current year. Moreover, the positive association between the likelihood of carbon disclosure and net external financing needs is stronger in countries with low financial market quality. We further show that disclosing firms with high external financing needs have a lower cost of capital as compared to disclosing firms with low external financing needs. This evidence also differs between countries with high versus low financial market quality.

What do we learn from stock price reactions to China's first announcement of anti-corruption reforms?

China's markets gained 3.86% around December 4, 2012, when the Party announced anti-corruption reforms. State-owned enterprises (SOEs) with higher past entertainment and travel costs (ETC) gained more. NonSOEs gained in more liberalized provinces, especially those with high past ETC, productivity, growth opportunities, and external financing. NonSOEs lost in the least liberalized provinces, especially those with high past ETC. These findings support investors' expect reduced official corruption to create value overall, reduce SOE waste, lower bureaucratic barriers to efficient resource allocation where markets function, and impede business in unliberalized provinces, where “getting things done” still requires investment in greasing bureaucratic gears.

Have China’s Regional Carbon Emissions Trading Schemes Promoted Industrial Resource Allocation Efficiency? The Evidence from Heavily Polluted Industries at the Provincial Level

Based on the data of A-share listed companies in China, this paper examines how China’s regional carbon emissions trading scheme (ETS) affects the resource allocation efficiency of China’s provincial heavily polluted industries through the DID method. The empirical results show that China’s regional carbon ETSs have reduced the TFP dispersion of enterprises in the industry, thus improving the industries’ resource allocation efficiency. The heterogeneity analysis shows that China’s regional carbon ETSs have more significantly promoted the resource allocation efficiency in industries with high competition and high external financing dependence, while the policy effects in industries with low competition and low external financing dependence are less significant. Further mechanism analysis shows that, on the one hand, China’s regional carbon ETSs have promoted the flow of capital resources from low-TFP enterprises to high-TFP enterprises. On the other hand, China’s regional carbon ETSs have promoted low-TFP enterprises to improve TFP to a higher degree than high-TFP enterprises, which reduces the TFP dispersion among different enterprises in the industry. In addition, China’s regional carbon ETSs have promoted the market share of high-TFP enterprises and restricted low-TFP enterprises entering the market, which raises the TFP threshold for new enterprises entering the market.

Economic policy uncertainty and shadow banking: Firm-level evidence from China

This paper identifies the causal effect of economic policy uncertainty (EPU) on the shadow banking activities of nonfinancial enterprises (NFEs) in China. Using hand-collected data on corporate shadow banking during the period of 2007–2019, we find that there is a positive effect of EPU on shadow banking activities of NFEs and a one standard deviation increase in EPU is significantly associated with a 0.0690 standard deviation rise of firms’ shadow banking business. Furthermore, the effect is more prominent in state-owned enterprises (SOEs) and in firms with high external financing dependence. Financing constraints and the yield spreads between financial and real investments are the main channels through which EPU affects firms’ shadow banking business. Our findings shed fresh light on the understanding of how uncertainty regarding economic policies affects firm investment decisions and enrich the study of determinants of firm financialization.

Audit report information improvement and earnings management

AbstractIncreasing the disclosure of key audit matters (KAMs) has been an important change in audit reports in recent years. After the implementation of this policy, what changes have taken place in the behaviour of auditors after the implementation of this policy? What impact has it had on the audit report? A series of problems deserve systematic analysis and empirical testing. This paper examines the relationship between the communication of KAMs and earnings management. We examined quasi‐natural experimental data shaped by new auditing standards issued by the Ministry of Finance of China on 23 December 2016. The new auditing standards have been implemented in phases for the listed companies. We find that (1) communicating KAMs in audit reports restrains the auditor's motivational reasoning behaviour by triggering rationality constraints and improves the auditor's professional scepticism, thus improving audit quality and significantly reducing the company's accrued earnings management level. (2) The influence of communicating KAMs on earnings management is more significant for sampled firms with high external financing dependence and low marketization, revealing its supplementary role in the existing corporate governance mechanism. The findings of this paper enrich existing research on KAMs and supplement important empirical evidence from the Chinese market for assessing the effects of audit reporting reforms worldwide.

Does the reform of the IPO pricing affect M&A?

This study investigates the effect of the reform of IPO pricing on M&A using a sample of Chinese listed companies during the period 2006-2019. We find that companies listed in the IPO pricing marketization stage raise more funds and their financing constraints are eased, which increases the possibility and frequency of M&A after listing, and the scale of M&A also increases significantly. The market performance of M&A is better for companies listed in the pricing marketization stage. The above conclusions still hold after a series of robustness tests. Further, we identify that the relationship is more pronounced in high external financing dependent enterprises and non-state-owned companies. Overall, this paper can provide implications for better driving the reform of the IPO pricing.

Analisis Pengaruh Leverage, Inovasi, Cash Flow Dan Pembiayaan Eksternal Terhadap Nilai Perusahaan

This study aimed to examine the influence of leverage, innovation, cash flow and external financing on firm value. In this study using data from manufacturing companies listed on the IDX from 2018-2019 obtained a PROPER rating with a total of 30 companies or 60 data. In selecting the sample using purposive sampling method and analysis in this study multiple linear regression analysis with the help of the program Eviews version 11. The results of this study indicate that leverage and external financing have a significant influence on firm value. But, innovation & cash flow have no significant influence on firm value. The implication of the results of this study is that increasing leverage and external financing can increase the value of the company which will provide a good signal for external parties which with high leverage and external financing can show high public trust in the company.

Sustainable development goals and firm carbon emissions: Evidence from a quasi-natural experiment in China

Using a difference-in-differences approach, this paper investigates the impact of changes in China's sustainable economic development goals on the energy conservation and emissions reductions behavior of Chinese firms. On average, incorporating emissions reduction targets into the long-term development plans produced significant effects in terms of energy conservation and emissions reduction, reducing energy consumption intensity between 2008 and 2011 by 1.39% and carbon emission intensity by 2.37%. The effects were mainly achieved through two long-term mechanisms, namely, optimizing energy consumption structure and increasing investment in green technologies. Both reflect firms' preference to take long-term measures rather than temporary ones. We also found that non-state-owned firms, firms without government financial subsidies, and firms with high external financing dependence, put more effort into reducing their carbon emissions in order to comply with the adjusted goals.

Pension return assumptions and shareholder-employee risk-shifting

Firm managers of defined-benefit (DB) pension plan sponsors reveal their primary motives — risk-shifting or risk-management — through their assumed expected rates of return (ERRs) on the plan assets. Managers with risk-shifting motives choose high ERRs to exploit flexible internal financing from employees via pension underfunding. Those with risk-management motives choose low ERRs to reduce future cash-flow uncertainty by improving the pension funding status. We examine if ERRs predict the firms’ future cash-flow allocation between pension funding and corporate investments, in a Japanese sample that mitigates the selection bias concern for US DB plan sponsors. Using dynamic panel regressions that control for lagged dependent variables, firms’ business prospects, and unobserved fixed effects, we show that higher ERRs precede higher capital investments, R&D expenses, and net pension obligations while revealing managerial aggression, especially among firms with high external financing costs. Higher ERRs predict higher market-to-book ratios for the firms with larger R&Ds and/or underfunding, suggesting that the risk-shifting channel of internal financing with high ERRs can help alleviate underinvestment problems.

How do zombie firms affect debt financing costs of others: From spillover effects views

Reducing firms' costs of debt financing is an important means of promoting the high-quality development of China's economy. Using the firm-level data of non-financial A-share listed firms from 2008 to 2018, we empirically test the impact of zombie firms on the debt financing costs of normal firms (i.e., non-zombie firms) through the fixed effect model. The empirical results show that zombie firms significantly increase the debt financing costs of normal firms. The robustness tests and endogeneity tests confirm this finding. Further analysis reveals significant differences in the effects of zombie firms on the debt financing costs of normal firms subject to different levels of external financing dependence, different forms of ownership, and different firm scales. The negative effect of zombie firms on the debt financing costs of normal firms is more significant in industries with high external financing dependence, non-state-owned firms, and middle-small firms. The proper disposal of zombie firms reduces the debt financing costs of normal firms to improve the allocation efficiency of resources across an entire industry and to promote the optimization and upgrading of the industrial structure and the sustainable development of the economy.

Security regulations, access to capital markets, and firm performance: Evidence from China

AbstractThis study explores the cost of security regulations in China, where firms are required to meet a certain profitability benchmark before applying for permission to raise more equity via secondary equity offerings (SEOs). Using a difference‐in‐differences setting, we show that firms affected by the regulation (i.e., firms with high external financing demands (EFD) but profitability lower than the regulatory requirement) significantly underperform their counterparts, while unaffected firms do not. The affected firms’ performance decline increases (decreases) when the requirement of profitability is more (less) restricted. Consistently, the three‐day cumulative abnormal return (CAR) of firms with high EFD is significantly negative (positive) when the regulation is tightened (loosened). Our study provides evidence on how the cost of regulation affects companies that have growth opportunities.

Assessing IMF Lending

Extending previous work on the determinants of IMF lending in an interconnected world, we introduce a model of sample selection in which both selection and size dimensions of individual IMF arrangements are presented within a unified econometric framework. We allow for unobserved heterogeneity to create an additional channel for sample selection at the country level. The results suggest that higher external financing needs, larger exchange rate depreciation, lower GDP growth, as well as deteriorated global financial conditions, are associated with larger individual IMF arrangement sizes. Using the estimated parameters, Monte Carlo simulation of a wide spectrum of global shock scenarios suggest that the distribution of potential aggregate IMF lending exhibits a substantial right tail. Our approach may provide an insightful input to broader policy discussions on the adequacy of the IMF resources.

Assessing IMF Lending: A Model of Sample Selection

Extending previous work on the determinants of IMF lending in an interconnected world, we introduce a model of sample selection in which both selection and size dimensions of individual IMF arrangements are presented within a unified econometric framework. We allow for unobserved heterogeneity to create an additional channel for sample selection at the country level. The results suggest that higher external financing needs, larger exchange rate depreciation, lower GDP growth, as well as deteriorated global financial conditions, are associated with larger individual IMF arrangement sizes. Using the estimated parameters, Monte Carlo simulation of a wide spectrum of global shock scenarios suggest that the distribution of potential aggregate IMF lending exhibits a substantial right tail. Our approach may provide an insightful input to broader policy discussions on the adequacy of the IMF resources.

Are economic rents good for development? Evidence from the manufacturing sector

Abstract Are rents, or excess profits, good for development? Rents could induce firms to lobby or bribe governments to preserve the status quo; on the other hand, rents may promote growth by giving firms the needed funds to make investments in fixed capital or research and development. To test this question empirically, we use a panel of manufacturing data at the industry-country-year level, and measure rents by the mark-up ratio. We find that the relationship between rents and growth is strongly negative, with the results being primarily driven by the poorer countries (or those with worse institutions) in the sample. This result holds when we instrument for mark-up using the average mark-up in other industries in the country. Even in industries with high external financing needs and countries with less developed financial sectors, precisely the places where excess profits could be used to drive growth, we find that rents are especially harmful. Consistent with the rent-seeking mechanism we highlight, we find that high rents are associated with a slower reduction in tariffs. We also test for the most likely alternative mechanism, that higher rents cause slower growth through the channel of allowing managerial slack. We find that controlling for management has little impact on our estimate of the impact of mark-up on productivity growth.

Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups

With a large sample from Japan during the period of 1990-2012, we find firms that belong to business groups (‘keiretsu’) pay more cash dividends than firms not affiliated with any group. The difference between the two groups of firms is greater when the dividend-receiving firms have better investment opportunities, are in financial distress, or when the linkage between them and the dividend-paying firms is stronger. Using exogenous changes to taxes on corporate dividends and difference-in-difference and falsification tests, we further establish that keiretsu firms’ dividend payouts have a causal impact on receiving firms’ investment and debt policies. Our results highlight the importance of inter-firm financing, especially during periods of high external financing costs, even for firms in a developed economy.

Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups

With a large sample from Japan during the period of 1990-2012, we find firms that belong to business groups (‘keiretsu’) pay more cash dividends than firms not affiliated with any group. The difference between the two groups of firms is greater when the dividend-receiving firms have better investment opportunities, are in financial distress, or when the linkage between them and the dividend-paying firms is stronger. Using exogenous changes to taxes on corporate dividends and difference-in-difference and falsification tests, we further establish that keiretsu firms’ dividend payouts have a causal impact on receiving firms’ investment and debt policies. Our results highlight the importance of inter-firm financing, especially during periods of high external financing costs, even for firms in a developed economy.

Corporate liquidity and dividend policy under uncertainty

Abstract We examine optimal liquidity (retained earnings) and dividend choice incorporating debt financing with risk of default and bankruptcy costs as well as growth options under revenue uncertainty. We revisit the conditions for dividend policy irrelevancy and the broader role of retained earnings and dividends. Retained earnings have a net positive impact on firm value in the presence of growth options, high external financing costs and low default risk. High levels of retained earnings enhance debt capacity but have a negative effect on equity value due to the likelihood of losing accumulated cash balances in case of default, unless offset by high external financing costs. Opposite directional effects of retained earnings on equity and debt create a U-shaped relation with firm value. The framework is extended to analyze management-shareholder conflicts, demonstrating that managers accumulate higher than optimal cash.