Investment Decisions Of Firms Research Articles

Green transition and macroeconomic stabilization

This paper looks into the crucial macroeconomic feedback mechanisms emerging from the interplay among the goods market, the labor market, the financial sector, and monetary policy, particularly in the context of transitioning towards a climate-neutral economy. The investment decisions of firms, pivotal in this interaction, can trigger feedback loops with potentially destabilizing effects, underscoring the critical role of investment within the complex interplay of market and sector dynamics in the macroeconomy. Governmental intervention is highlighted as a key factor in steering the green transition while preserving economic stability. A carbon tax on fossil fuel consumption is proposed as a primary tool for facilitating this green transition. Our investigation employs a disequilibrium model of monetary growth, a la Keynes-Metzler-Goodwin (KMG), incorporating a portfolio perspective across three asset markets - money, bonds, and stocks. This framework allows for an in-depth analysis of how a carbon tax influences real production, inflation, and inequality during the transition. Our findings indicate that imposing a carbon tax on production does not markedly disrupt economic stability, as long as the carbon pricing and its growth rate remain within low bounds.

High-Quality Auditor Presence and Informational Influence: Evidence from Firm Investment Decisions

SUMMARY This study examines whether the presence of high-quality auditors (Big 4 or industry specialist auditors [ISAs]) in an industry facilitates accounting information transfer among industry peers and enhances investment decisions of firms not audited by high-quality auditors (non-Big 4-ISA client firms). Consistent with the prediction of informational influence theories, we find that non-Big 4-ISA client firms that belong to an industry with a greater presence of high-quality auditors are associated with lower investment inefficiency. The effect is more pronounced for firms with less precise private information. Path analysis shows that the association between high-quality auditor presence and learning firms’ investment inefficiency is explained via a direct path of source credibility and an indirect path mediated by peer firms’ accounting information quality. Finally, we find that firms in industries with larger reductions in Big 4 presence following the Sarbanes-Oxley Act of 2002 incur more investment inefficiency. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M41; M42.

Self‐serving attribution and managerial investment decision

AbstractThis study examines whether managerial overconfidence coupled with self‐attribution bias distorts the investment decisions of firms. To this end, we investigate the impact of overconfidence on asymmetric investment cash flow sensitivity (ICS). We find that managerial overconfidence affects ICS in a downward‐sticky direction, which is reinforced by overconfidence coupled with managerial self‐attribution. The results for both unconstrained and constrained firms are qualitatively consistent with those for the overall sample; however, the constrained subsample provides slightly weaker results. Thus, our findings indicate that managerial overconfidence and self‐attribution to recent successes may induce managers to make excessive investment commitments.

Overcoming the “diversification trap”:firm investment decisions and innovation under policy uncertainty

Existing research generally regards economic policy uncertainty (EPU) as a type of macro-shock and fails to distinguish the perception of policy uncertainty among different enterprises. We use a text mining tool to extract a measure of the EPU perceived by individual firms listed on Chinese stock markets from their annual reports between 2007 and 2020 to investigate the policy uncertainty's impact on enterprises' cross-regional investment and innovation. Our findings reveal the following. First, increased policy uncertainty will inhibit innovation in enterprises. Second, policy uncertainty reduces cross-regional investment, and the influence is time-dynamic and different under the heterogeneous enterprise characteristics. Third, the negative impact of policy uncertainty on cross-regional investment by enterprises is primarily reflected in investments unrelated to the enterprise's technology. Policy uncertainty will promote investment in technology-related areas. Finally, the impact of policy uncertainty and an increase in technology-related cross-regional investment will help (1) lower financing costs via the signal effect, (2) broaden knowledge, and (3) strengthen enterprise resilience and thus promote innovation.

Killing Growth: Homicides and Corporate Investment in Brazil

We examine the effects of violent crime on corporate investment and financing decisions of Brazilian firms. Exploring city variation in homicides, we find that an increase in the growth rate of homicides is associated with significantly lower corporate investments, with lower labour investments, and with a higher likelihood of layoffs. Spikes in violent crime are also associated with more conservative financing policies, reflected in higher cash holdings, in lower R&D (research and development) expenditures, and in lower dividend payments. Homicides further affect investment efficiency and financing choices, decoupling investment from debt finance and profitability. Moreover, the negative association between homicides and investment is significantly stronger in smaller firms, which highlights the uneven costs of violent crime in reducing firm growth.

How do firms cope with losses from extreme weather events?

We document the investment and financing decisions of firms that experience monetary losses due to extreme weather events. Our sample covers firms operating in 41 economies, mainly emerging and developing markets. Consistent with the need to either replenish damaged capital or to adapt to climate change, firms with weather-related losses are more likely to invest in long-term assets and integrate climate-friendly measures into their production processes. On average, these firms have higher needs for bank credit and are less likely to be discouraged from applying for a loan. Small firms appear particularly vulnerable to physical climate risk as they show a lower propensity to invest, while they are in greater need for bank credit. Firms with losses from extreme weather events are more leveraged, which suggests that climate change has the potential to erode balance sheets over time.

Cost of Capital and Investment Decision of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

The main purpose of the study was to assess the influence of cost of capital on investment decision of non-financial firms listed at the Nairobi Securities Exchange, Kenya. The study employed the theory of Modern Portfolio and The trade-off theory. The study employed descriptive research design. The study was carried out at firms listed at the NSE, Kenya with a population of 46 non-financial firms listed at the Nairobi Securities Exchange (NSE) as at December 2019. A census of 46 non-financial firms was considered. Secondary data was collected from annual reports of the non-financial companies listed at NSE and the NSE handbooks. Expert opinion was used to ensure data validity and reliability. The data was analyzed descriptively by means and the standard deviation, while multiple regression analysis was used to establish the influence between the variables. Regression results showed that cost of equity has a positive effect on financial performance as measured by Return on Assets (β = 0.2737, p = 0.0000); cost of preference shares affects investment decision negatively and significantly (β = -0.2430, p = 0.0015), and that the effect of cost of debt on investment decision is significantly positive (β = 0.2934, p = 0.0000). Given from the findings of the study that less than 34% of variations can be attributed to the cost of capital on investment decisions for the listed non-financial firms, this study has proved that effective working capital management practices will play a crucial role in improving the overall profit margins for the listed non-financial firms at NSE. In conclusion, cost of debt is a significant positive contributor to the investment decision of the non-financial listed firms at the NSE. The debts are essential when the firm is lacking finance in running its daily expenditure smoothly. The NSE and other regulating authorities such as the Capital Markets Authority (CMA) should therefore ensure that policies are put in place to help the firms manage their cost of capital efficiently. These policies must be in line with the Sustainable Development Goals (SDGs). These policies may include availing access to credit facilities and promoting trading in shares of the listed firms and these policies should be integrated with SDGs, which recognizes that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability.

Listing on environmental, social and governance index and financial distress: does the difference-in-differences matter?

PurposeEnvironmental, social and governance (ESG) issues have become the cornerstone of investment decisions in firms today. With that, publicly traded ESG indices (like the BSE ESG 100 index in India) have come into existence. The existing literature signifies that ESG generates financial implications and induces stability. The current study aims to test whether the firms listed on the ESG index (ESG-sensitive firms) face less financial distress than those not listed on such an index.Design/methodology/approachThe study applies panel data difference-in-differences (DID) regression by considering ESG as an unstaggered treatment to 74 non-financial firms listed on India's Bombay Stock Exchanges (BSE) 100 index. In total, 42 firms are ESG treated as they got listed on the BSE ESG 100 index, formed in 2017. The remaining 32 firms form the control group. The confidence intervals and standard errors are estimated using clustered robust errors and the Donald and Lang method.FindingsListing on the ESG index matters for financial stability; differences in financial distress are significant on financial distress. ESG-sensitive firms face less financial distress than non-ESG firms (or firms not perceived as ESG-sensitive). The results are consistent across two financial distress measures, Altman z-scores for emerged and emerging markets. Thus, the DID in distress status between ESG-sensitive and non-ESG firms matter.Practical implicationsThe study creates vibrant implications for practitioners using ESG to reduce financial distress.Originality/valueThe study is one of its kind to test the treatment effects of ESG on firm value and quantify treatment effects on financial distress.

Determinants Influencing the Investment Decision of Large Firms in Vietnam

Determinants Influencing the Investment Decision of Large Firms in Vietnam

From low resource slack to inflexibility: The share price effect of operational efficiency

This study examines the relationship between operational efficiency (OE) and stock price crash risk (SPCR). While high OE is arguably associated with better firm performance, it also increases vulnerability to disruptions and exposure to SPCR. Using a sample of US firms from 1997 to 2018, the study finds a positive relationship between OE and SPCR; additional results suggest that firm cash flow volatility serves as the channel through which this relationship is mediated. The study also finds evidence that high-OE firms tend to suppress bad news from investors, which exposes them to SPCR. Furthermore, the study shows that the positive relationship between OE and SPCR beyond the optimal level hurts firm value, highlighting the importance of balancing efficiency improvement efforts with business risk management. The results of this study have implications for managers and owners seeking to mitigate tail risk in firm investment decisions, and underscore the importance of maintaining business flexibility in the pursuit of efficiency.

Credit risk contagion and firm investment efficiency: From the perspective of credit debt defaults

Frequent credit debt defaults can constitute credit risk contagion causing systemic financial risk across the macroeconomy. In this paper, we find that credit risk contagion that occurs in a city or industry has a negative influence on the investment efficiency of firms within the scope, and this effect is amplified as the size of credit debt defaults grows. This conclusion is still robust after a series of tests. The mechanism analysis results show that credit risk contagion reduces firms' investment efficiency by affecting their bank lending, trade credit along the supply chain, credit allocation towards mortgage loans, and financial constraints. Furthermore, we find that private firms and firms located in regions with decentralized banking sectors are less affected by credit risk contagion, which validates the impact of firm ownership and regional banking sector concentration. Finally, we according to the test result of firm performance reveal that credit risk contagion increases the prudence of firm investment decisions, making this contraction of firm investment show a positive effect. This paper provides both theoretical support and policy insights for strengthening credit debt market regulation and preventing systemic financial risks.

Equity Investment Decisions of Operating Firms: Evidence from Property and Liability Insurers

During the 2007–2009 financial crisis, almost 10% of Property and Liability (P&L) insurers completely liquidated their equity portfolios, and more than half of them never resumed equity market investments. In contrast, those P&L insurers that continued investing in equities after the crisis, increased their portfolio allocation substantially. To understand these findings, we develop and estimate models that explain P&L insurers’ dynamic equity investment decisions, in terms of firm, group, and market characteristics over the period 2002–2018. We study three different approaches to equity investments, a pure investment strategy, internal capital market contributions, and an outsourcing option and find that the factors driving the decision to invest in equities differ from those that explain the extent of their equity investments. Moreover, we find that while equity portfolio losses drive the decision to temporarily cease investments in equities, the decision to permanently exit equity markets is driven by both equity market losses and underwriting losses. These findings shed some light on the factors driving the demand for equity investments by operating firms.

Enhancement in a firm's information environment via options trading and the efficiency of corporate investment

We examine the association between enhancement in a firm's information environment via options trading and firm investment efficiency. Investment inefficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether enhancement in a firm's information environment through higher volumes of options trading (including a natural experiment involving exogenous shocks via the Penny Pilot Program) is positively related to more efficient firm investment decisions. Our results confirm that enhanced informational efficiency via higher volumes of options trading is positively related to improvements in firm-level investment efficiency. Our findings are in line with the enhancement in the information environment stemming from options trading reducing agency and moral hazard concerns (an agency channel) and are not driven by alternative explanations such as managerial learning from informed traders or a lower cost of capital. Overall, our findings suggest that an enhanced information environment via more options trading benefits firms’ investment decisions.

The impact of idiosyncratic risk on corporate financialisation——Evidence from China

Using the quarterly data of non-financial companies listed on China's A-share market from 2007 to 2019, this paper examines the relationship between the idiosyncratic risk formed based on the secondary market exchanges and the corporate financialization from the perspective of a market feedback effect. The empirical results show that idiosyncratic risk has a significant impact on the allocation of financial assets of non-financial enterprises, which is one of the motivating factors for the financialization of non-financial enterprises. Compared with SOEs, large enterprises and non-manufacturing enterprises; private enterprises, small and medium-sized enterprises, and manufacturing enterprises will allocate more financial assets when idiosyncratic risk increases. Mechanism analysis shows that managers risk aversion and financing constraints increase the impact of idiosyncratic risk on financial asset allocation while strengthening the external monitoring mechanism of institutional investors has the opposite effect. The research findings of this paper help to understand whether secondary financial markets affect the financial investment decisions of real firms in transition economies, and also have implications for how to govern the “transition from real to virtual” of real enterprises in China.

Multilateral climate change financing in the developing world: challenges and opportunities for Africa

The Paris Agreement has highlighted the worldwide significance of adaptation. Many investors are considering the effects of climate change and resource scarcity when making decisions. Even while the whole amount of the environmental harm caused by climate change is yet unknown, recent scientific evidence is more frightening, and many governments are taking substantial measures to avert a calamity. The financial innovations and mechanisms created to ease the transition to a low-carbon economy will have far-reaching effects on markets, firms, intermediaries, and investors. Although economists have been working on the subject for decades, financial-economics professionals have only recently become interested in climate change. There has been a growing body of empirical and theoretical contributions in recent years that analyse the influence of climate risks on investment decisions for firms, financial intermediaries, and national governments, as well as the pricing and hedging of climate change risks. This study seeks to establish the role of multilateral climate change financing in the developing world vis-à-vis challenges and opportunities for Africa. Five determinants of the multilateral climate fund were established and they are namely; Reduction of Greenhouse gas emissions, Enabling Environments, Poverty and development linkages, Private investment and Public climate finance.

Trade credit and firm investments: empirical evidence from Italian cooperative banks

By exploiting a unique and proprietary panel dataset comprising 6480 Italian SMEs having a relationship with 99 cooperative banks over the period 2008–2014, we investigate the influence of the trade credit channel on firm investment decisions in the Italian market, distinguished by a considerable presence of relationship cooperative banks’ branches with a heterogeneous geographical distribution. Firstly, our findings confirm a significant influence of the trade credit channel on firm investment decisions. Secondly, we document that SMEs located in those Italian provinces with an abundance of cooperative banks’ branches rely less on trade credit to finance investments. Lastly, we show that longer firm-bank relationships decrease firm dependence on trade credit to boost investments. Our study is of particular relevance because it strengthens the effectiveness of the trade credit channel for SMEs in spurring corporate investments. Indeed, fostering a deep understanding of the real effects of firm financing sources is paramount to encourage investment by SMEs and to allow them to preserve their positioning in the market. Moreover, we exploit the Italian market, well-suited to perform such an analysis, since it is characterized by more inter-personal financing relationships as compared to other countries.

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.

Bank Diversification and Financial Constraints on Firm Investment Decisions in a Bank-Based Financial System

The purpose of the study is to investigate whether bank diversification influences borrowing firms’ financial constraints on investment decisions. It also analyzes whether the different dimensions of bank diversification could alleviate financial constraints to firm investment. Further, the role of bank diversification in achieving firm financial sustainability is explored. By applying the Two-step System GMM, this study examines the effect of changes in bank diversification on financial constraints to borrowing firm investment in a reduced-form investment model with a sample of 810 listed firms in Taiwan over the period 1997–2019. The empirical findings indicate that firms are financially constrained as well as there being a positive relationship between cash flow and investment among Taiwanese listed firms. Additionally, bank diversification significantly reduces the investment-cash flow sensitivity of firms, suggesting that bank diversification mitigates the financial constraints to borrowing firms. Moreover, the multi-diversification of a bank compared to single-diversification will have greater impact on mitigating the firms’ financial constraints on investment. Thus, bank diversification strategies are proposed in a bank-based financial system, leading to the easing of the borrowing firms’ financial constraints to investments.

Too much to learn? The (un)intended consequences of RegTech development on mergers and acquisitions

Regulatory and technological (RegTech) developments have been changing the nature of financial markets in recent decades. This paper documents the real effects of RegTech in the market of corporate control. Exploiting the staggered implementation of the EDGAR system from 1993 to 1996 as quasi-exogenous RegTech shocks, we find that RegTech developments reduce firm acquisitiveness, especially for growth firms, solo-bidder deals, and stock-based acquisitions. Our main findings still hold when employing the stack-cohort approach to address concerns regarding biased staggered DiD estimators. In addition, EDGAR implementation discourages informed trading and lowers the acquirers' announcement returns. Overall, our deal-level analyses show how RegTech development matters for firm investment decisions with more granularities. Our paper differs from but complements recent empirical evidence that EDGAR implementation increases the level of overall investment, suggesting that dampened managerial learning induces firms to switch from highly risky and uncertain projects (M&As) to routine projects with less uncertainty (capital expenditures).

Incorporating exceptions and limitations to copyright law to incentivize the development of Artificial Intelligence in Latin America

In this paper, I describe the advantages and disadvantages of incorporating new Artificial Intelligence (AI)-enabling exceptions and limitations to the copyright laws of Latin American countries. Section 1 describes the threats and opportunities AI may pose to the region. Section 2 refers to the effects copyright legislation may have on investment decisions of AI firms, the potential benefits for countries incorporating them, Law & Economics and Comparative Law perspectives, and the current regulatory asymmetry in this matter across the region. Section 3 concludes with policy recommendations.