KZ Index Research Articles

Factors Influencing Household Debt Structure under Various Credit Constraints

Household debt is a critical component of family financial management, especially considering the prevalence of credit constraints. This study investigates the determinants of Chinese household debt structure, focusing on the choice between formal and informal borrowing and the proportion of formal debt under different credit constraints. Data from the 2018 China Family Panel Studies (CFPS) are analyzed using the bi-probit model. The results indicate that higher levels of household education and internet use significantly enhance the likelihood of accruing formal debt and weaken the tendency to engage in informal debt. This study innovatively employs the KZ index, traditionally used in corporate finance, to assess credit constraints at the household level. This new household credit constraint index demonstrates that the factors affecting the debt structure vary with the level of credit constraints, underscoring the complexity of household financial behaviors in China’s evolving credit landscape.

The Role of Financial Constraints in Shaping Non-Financial Firm Performance in Nigeria: Evidence from the KZ Index

This study examines the impact of financial constraints on the performance of non-financial firms in Nigeria, utilizing the KZ index as a measure of financial constraint. Employing a static panel regression estimation on a sample of 87 non-financial companies listed on the Nigerian Stock Exchange from 2016 to 2021, the study investigates the relationship between financial constraints and firm performance. The findings reveal that financial constraints significantly hinder firm performance, highlighting the importance of effective governance and access to external financing. The study contributes to the literature by providing insights into the financial challenges faced by non-financial firms in Nigeria and offers recommendations for policymakers and practitioners to improve corporate performance.

Financial Constraints on Firm Growth: The Role of Firm Age in the ASEAN–6

The paper assesses the moderating role of firm age in the relationship between financial constraints, as measured by the KZ index, and the WW index on three alternative measures of firm growth (Asset growth, ROA, and ROE) in the ASEAN–6 region. This study employs a sample of ASEAN–6 listed firms over the period 2009–2019 using Fixed Effects and the System GMM model. Firm age is found to interact positively with financial constraints in their effects on firm growth. The negative impact of financial constraints on firm growth is less severe with older age firms.

The Impact of Online Sales on Corporate Financing Constraints

China's online sales platforms have surged in the past 15 years, meeting the needs of the majority of consumers and leading economic growth, while also affecting many e-commerce enterprises in terms of investment and financing mechanisms. The ratio of e-commerce online sales to main business income as alternative data contains corporate investment and financing information, and KZ index is finally selected to describe the financing constraints after comparative validation. Using online sales data from Chinese A-share listed companies and some financial data of enterprises in 2016-2022, this paper conducts regression analysis on KZ index and empirically finds that the increase in the online sales ratio is strongly negatively correlated with the degree of funding constraints faced by businesses. With a high degree of participation in e-commerce activities, enterprises will have less financing pressure. This finding brings some inspiration for enterprise operation and financing decisions. Enterprises can reduce the degree of financing constraints by increasing the online sales ratio, so as to better obtain external financing and improve the growth and development of enterprises.

Dividend policy and crisis: Exploring the interplay between performance and financial constraints in the French context

The purpose of this paper is to determine the effect of the Covid-19 pandemic crisis on dividend policy and performance and explore the interplay between performance and financial constraints to identify how such a fit affected dividend policy during the crisis.We used a final sample of 106 SBF-listed firms during six years. To assess the effect of the crisis, we divided this period into three subperiods: pre-crisis (2016–2018), pandemic period (2019–2021), and all periods (2016–2021). A System Generalized Method of Moments (SGMM) is used to deal with the problem of endogeneity caused by the lagged dependent variable.The results showed that only the crisis and the financial constraints (KZ index) negatively correlated with dividend payment levels (DivPaid). This dividend level did not take performance into account. Regarding the control variables, only debt, growth, and size positively impacted dividend levels. Moreover, the performance of French companies was negatively influenced by the DividPaid, KZindex, and Crisis variables. The findings suggest that France should prioritize dividend payments to protect a company's reputation and financial health. These findings have significant implications for investors, financial analysts, regulators, and policymakers who are looking for guidance on dividend policy in uncertain situations.

Do financial constraints affect the CEO stock options remuneration? Evidence from a panel threshold model

PurposeThe purpose of this study is to examine the nonlinear relationship between financial constraints and the chief executive officer (CEO) stock options compensation and to analyze whether the impact of financial constraints on the CEO stock options compensation changes at certain level of financial constraints or not.Design/methodology/approachThis study is based on a sample of 90 French firms for the period extending from 2008 to 2019. To deal with the non-linearity, the authors use a panel threshold method.FindingsUsing different measures of financial constraints [KZ index (Baker et al., 2003), SA index (Hadlock and Pierce, 2010) and FCP index (Schauer et al., 2019)], the results reveal that the impact of the financial constraints (SA index and FCP index) is positive below the threshold value and it becomes negative above.Research limitations/implicationsThe non-linearity between financial constraints and CEO stock options shows that the level of financial constraints can be a major determinant of the CEO compensation structure. More specifically, this study sheds light on the key role played by the level of financial constraints and how this latter influence management decisions.Originality/valueThis paper is the first to the best of the authors' knowledge to examine the nonlinear relationship between financial constraints and the CEO stock options compensation using a panel threshold model.

Do financial constraints moderate the relationship between CEO compensation and firm performance: an emerging market evidence

PurposeThe current study aims to investigate the impact of firm performance on chief executive officer (CEO) remuneration in the context of an emerging market, i.e. Pakistan. Further, the interactive effect of financial constraints is investigated in the pay–performance relationship.Design/methodology/approachThe study's sample includes 173 non-financial firms listed on the Pakistan Stock Exchange. This study covers the years 2010–2019. The CEO compensation of the sample firms is measured in terms of salary and bonuses, perquisites and stock options paid to the CEO, whereas firm profitability is measured by return on assets, return on equity, Tobin's Q (Q) and earnings per share. The KZ Index measures the degree of financial constraint. The fixed effect model (FEM) and system GMM estimation techniques were used to conclude the study's findings. In addition, to test the robustness of the results, the authors computed the level of financial constraints using the WW Index.FindingsThe findings show that firm performance has a significant positive impact on CEO compensation in all profitability measures except Tobin's Q. Further financial constraints have a significant negative impact on CEO compensation. The interactive variables of FC with all profitability measures have a significant negative impact on CEO compensation.Originality/valueThis study examines the relationship between firm performance and CEO compensation. Furthermore, the current study expanded the analysis by incorporating the role of financial constraints in the pay–performance relationship, which has not previously been tested, particularly in the context of an emerging market.

Stock liquidity and stock returns: the moderating role of financial constraints

Research aims: This study aims to analyze the effect of stock liquidity on stock returns in large and small capitalization companies and the moderating role of financial constraints in the relationship. Design/Methodology/Approach: In this study, panel data analysis was conducted on 113 manufacturing sector companies on the Indonesia Stock Exchange from 2015 to 2019, grouped into small and large capitalization companies. To avoid measurement errors from applying the KZ index, which is very likely to occur, this study used the upper quartile (Q3) of the Debt-to-Equity Ratio (DER) and a dummy variable as an artificial variable to measure financial constraints instead of the KZ index.Research findings: The results highlighted that liquidity is a predictor that could significantly explain the movement of stock returns in this sector. Investors, thus, will require additional compensation in the form of higher returns for holding less liquid stock. The study also found a significant moderating role of financial constraints. Consequently, as the illiquidity of stocks increases, additional greater compensation will be requested by investors on the stocks of companies experiencing financial constraints.Theoretical contribution/Originality: This study provides additional empirical evidence for the studies documented that investors will ask for additional return compensation for stocks with low liquidity, and investors will demand higher additional returns in companies experiencing financial constraints. This finding indicates that liquidity is essential in risk premium forming stock returns.Practitioner/Policy implication: This study can be used for investors or traders when choosing an investment strategy to be carried out.

The Impact and Mechanism of the COVID-19 Pandemic on Corporate Financing: Evidence from Listed Companies in China

The unexpected emergence of COVID-19 has placed businesses throughout the globe under considerable financial hardship, and financial constraints are a significant barrier to business expansion, particularly in developing countries with insufficient credit markets. Using yearly data for Chinese listed businesses from 367 cities, we examine the impact of COVID-19 on financial restrictions and the corresponding mechanisms of action by using a difference-in-differences (DID) methodology. We discover that COVID-19 leads to a significant increase of 0.117 in the KZ index of listed firms, i.e., an increase in financing constraints, and this result is consistent with various robustness tests. We also show that COVID-19 considerably lowers a company’s capacity to obtain external financing by increasing debt costs and deterring commercial credit. The pandemic significantly reduced the company’s commercial credit by 0.008 and increased debt costs by 0.2%. Moreover, the data demonstrate variation across industries, business ownership, and firm scale. Our findings indicate that decreasing information asymmetries facilitate successful adaptation to and recovery from external shocks. Our analysis suggests that governments should promulgate policies that are conducive to corporate financing to help companies maintain development during the outbreak of the epidemic and ensure economic sustainability.

Corporate Governance Index, Financial Performance, Access to Finance and Bankruptcy Prediction: Evidence from Sugar Sector of Pakistan

The purpose of this study is to develop a corporate governance index and to investigate the influence of corporate governance index on the financial performance of firms, access to finance and bankruptcy prediction of sugar sector listed firms on Pakistan Stock Exchange during the period 2008-18. Data of 30 sugar sector firms listed on PSX have been used for analysis. Corporate governance index is developed on the basis of 19 attributes, covering 4 broad categories: Board structure, its functionality, disclosure of information and committees of board. The fixed and random effect models have been used based on Haussmann specification test for analysis purpose. This study shows that there is a positive relationship among corporate governance based on corporate governance index and firm performance when performance is measured in term of market capitalization and it has negative relationship when performance of a firm is measured is terms of return of assets, return on equity and net profit marginal. Further corporate governance index has positive relationship with access to finance when it is measured with KZ index and SA index while there is no direct relationship observed among corporate governance index and access to finance when measured by WW index. The results of the study shows that there is positive linkage among corporate governance index and bankruptcy prediction when bankruptcy prediction is measured by Working Capital/Total Asset ratio and negative relationship with bankruptcy predictions when measured by using Retained Earnings/ Total Asset, Earnings before interest and taxes/ Total Asset, Sales/ Total Asset, Cash flow/Total debt, Net income/ Total Asset and Total debt / Total Asset ratios. Results of the study suggest that good corporate governance practices lead towards better firms financial performance and improves the chances to acquire finance.

Ownership structure and financial constraints – Evidence from an emerging market

PurposeThe purpose of this research is to examine the impact of corporate governance proxies by ownership structure on financial constraints for a sample of 215 non-financial Pakistan Stock Exchange (PSX) listed firms between 2010 and 2018.Design/methodology/approachThe dynamic generalized method of moments (GMM) estimator is used to determine the influence of ownership structure on financial constraints. The ownership structure of sample enterprises is measured using seven variables: managerial, family, institutional, foreign, associated, presence of block holder, and concentrated ownership, while financial limitations are determined using the KZ Index. The WW Index is used to assess the robustness of the results. In addition, for robustness, we also used OLS and FE.FindingsBased on the system GMM results, it was discovered that firm ownership structure has a significant impact on the likelihood of financial constraints. In the case of Pakistan, the results show that institutional ownership, foreign ownership, and the presence of a block holder in the ownership structure have a significant negative impact on financial constraints, whereas family ownership and ownership concentration have a significant positive impact. This finding remains true when financial constraints are measured using the WW Index.Practical implicationsThe findings of the study provide business managers and investors with more information regarding the relationship between corporate governance quality and the degree of financial constraint in Pakistani firms. Furthermore, this study contributes new information from emerging nations like Pakistan to the existing literature, which will help regulatory bodies and policymakers build long-term corporate governance solutions to manage financial constraints. It is well established that improving the quality of corporate governance practices improves capital market efficiency and lowers the likelihood of financial constraints.Originality/valueThe study adds to the body of existing work on corporate governance and the possibility of financial constraints, with a focus on Pakistan. The findings show that when projecting company financial constraints, regulators should pay special attention to the quality of corporate governance, specifically ownership structure.

Liquidez em caixa e as restrições financeiras no desempenho de mercado das empresas brasileiras

ABSTRACT This article aimed to verify the influence of cash liquidity and financial constraints on the market performance of Brazilian companies. According to pecking order theory, organizations choose retained earnings over debts or new share issuances, which may be linked to specific costs. However, trade-off theory highlights that taxes mean that financial policy and debt can be relevant to company value. Thus, this study aims to provide new insights on these topics and knowledge for investigating cash liquidity and financial constraints in relation to performance. The cash liquidity of organizations and financial constraints are important phenomena for performance, given that, in this study, there was an increase in performance. The results suggest that organizations choose to underinvest in the setting due to the difficulty of obtaining credit. Thus, there is an evident need for organizations to present liquidity so as not to lose investment opportunities. Despite the financial constraints, the organizations represent, to some extent, a good investment option, as they prefer excess cash to resources for new investments. The population of this study is formed of companies listed on the B3 S.A. -Brasil, Bolsa, Balcão. The analysis period corresponded to the years from 2014 to 2018 and the KZ index is calculated to classify the organizations regarding their level of constraint. Next, multiple linear regression was run, controlling for year and sector fixed effects. There is a need for organizations to present liquidity to attract new investors. However, companies that find themselves financially constrained can also represent a good investment option as they choose excess cash. In the market, there are some resistances regarding financially constrained organizations, but there may be considerable liquidity in them.

Carbon risk and corporate investment: A cross-country evidence

This paper investigates the effect of carbon risk on corporate investment using data from 41 countries for the period 2002–2017. There is strong evidence showing that the impact of carbon risk on corporate investment is negative and statistically significant. Carbon risk also reduces investment inefficiency. We find that carbon-intensive firms are affected more severely compared to carbon-non-intensive ones. Further, the effect depends on the level of a firm's financial constraints, where it is stronger in firms with financial constraints measured by firm size, age, KZ index, and dividend payout policy. Our findings remain consistent in several robustness tests.

Majority voting ensemble with a decision trees for business failure prediction during economic downturns

Accurate business failure prediction represents an advantage for market players and is important for risk management. The purpose of this study is to develop a more accurate and stable business failure prediction model by using a majority voting ensemble method with a decision tree (DT) with experimental data on US restaurant between 1980 and 2017. According to the diversity principle and individual optimized principle, DT and logit were selected as basic learning algorithms for the voting ensemble of business failure prediction. Three models, including an entire period (EP) model, an economic downturn (ED) model, and an economic expansion (EE) model, were developed by using WEKA 3.9. The prediction accuracy of the models were 88.02% for the EP model, 80.81% for the ED model, and 87.02 % for the EE model. While the EE model revealed the market capitalization, operating cash flow after interest and dividends (OCFAID), cash conversion cycle (CCC), return on capital employed (ROCE), accumulated retained earnings, stock price, and Tobin’s Q as significant variables, the ED model exposed quite different variables such as OCFAID, KZ index, stock price, and CCC. The EP model combined most of the variables from two sub-divided models except for Tobin’s Q, stock price, and debt to equity (D/E) ratio. The contribution of the paper is twofold. First, this is the first study to comprehensively evaluate the financial and market-driven variables in the context of predicting restaurant failure, especially during economic recessions. This research has employed several accounting-based measures, market-based variables, and a macro-economic factor to improve the relevance and effectiveness of prediction models. And second, by using an ensemble model with a DT, it has improved both the interpretability of the results and the prediction accuracy.

Innovation and Investment in High-Tech Firms in Financially Constrained Environment

Present study measures the effect of financing constraints on capital investment and innovation investment of Chinese firms from 2004-2015. Consistent with previous literature we use the sensitivity of investment to cash flow and sensitivity of innovation investment as a signal of financial constraints. Panel data estimation results lead us to arrive at three important conclusions. First; Chinese firms usually face financial constraints problems due to imperfect financial markets. Second; Chinese firms face investment cash flow sensitivity. Third; Chinese high-tech firms face innovation investment cash flow sensitivity. Hence, despite the financial efforts of the Chinese government, capital markets are still not efficient and create liquidity constraints. Results depict that firms classified a priori as more prone to financial constraints (based on KZ index) show higher sensitivity to cash flow.

Indicating restaurant firms’ financial constraints: a new composite index

Purpose The purpose of this study is to develop an index for financial constraints, specifically for restaurant firms, and to further validate the developed financial constraint index. Design/methodology/approach This study used logistic regression with a composite criterion based on the dividend payout ratio, KZ index and Cleary index to estimate restaurant firms’ financial constraints. Then, a fixed-effects regression was used to verify the validity of the measurement of restaurant firms’ financial constraints. Findings A restaurant firm’s operating profit, financial leverage, asset tangibility, sale of fixed assets and percentage change in number of employees are critical indicators for identifying financial constraints. The results indicated that in cases with positive operating cash flows, the effect of operating cash flow on capital investments continuously decreased as restaurant firms’ financial constraints increased. Originality/value This study is unique in that the specific financial and operational characteristics of restaurant firms were included in the model to determine financial constraint indicators, such as sale of fixed assets and percentage change in number of employees.

Ownership structure, overinvestment and underinvestment: Evidence from Brazil

This paper examines whether investment-cash flow sensitivity is due to underinvestment problems caused by asymmetric information, or if it is due to overinvestment problems motivated by the use of free cash flows on unprofitable investment projects. Using a sample of 485 Brazilian firms over the period of 1997 to 2007, the results show that both underinvestment and overinvestment problems are related to the active presence of the largest ultimate shareholder on the board and the executive director. The sample was split in accordance with the presence of financial constraints (measured by the KZ index) and investment opportunities (measured by Tobin’s q). The results indicate that financially constrained firms and firms with high investment opportunities suffer from underinvestment, while financially unconstrained firms and firms with low investment opportunities suffer from overinvestment problems.

Financial Constraint and Cash Holdings in the REIT Industry

Executive SummaryWe extend the line of research on the influence of financial constraint on REIT cash holdings and their market value. We measure constraint with a wide variety of traditional proxies in an effort to determine if previous results hold and provide guidance on the use of these constraint measures in REIT studies. We confirm, consistent with both expectation and the literature, that constrained firms hold more cash than their unconstrained counterparts. However, contrary to previous works, we find little evidence that traditional measures of constraint play a role in the market value of cash. Further, our results suggest that the method of measuring constraint should be carefully considered when applying to the REIT industry. In particular, the KZ index provides results that differ substantially from those of other criteria.

EARNINGS QUALITY ATTRIBUTES AND INVESTMENT OPPORTUNITIES FOR LATIN AMERICAN FIRMS

This work verifies if companies with better accounting information show better performance and investigates the impact of better accounting information on the financial constraints. This study is based on an unbalanced panel data of 596 firms from seven Latin American countries between 1989 and 2009. The return on equity (ROE) and Market to book (MB) variables are used to define the firms’ performance, which are regressed against five models that consider the quality of accounting information. We also investigate the relationship between financial constraint, measured by the KZ index, and accounting quality. The results support the view that earnings quality is an important factor to explain market and operational performance and aspects related to efficiency are important to determine the operational performance, but are not significant when market performance of Latin American firms are analyzed. When we model the firm’s investment, the quality of accounting information appears to be a useful proxy to financial constraint. Moreover, the accounting quality plays a positive effect on investment that is a much more positive for unconstraint firms.

Do financial constraints matter when firms engage in CSR?

Studies in corporate social responsibility find that financial performance (ROA and ROE) is associated with the corporate social performance (CSP). Margolis et al. (2007) observed that “the mechanisms connecting prior corporate financial performance (CFP) to subsequent CSP” is an important issue for further investigation. In this study, we examine whether different states of cash flow liquidity impact the extent of a firm’s corporate social responsibility (CSR) activities. If firms perform well in CSP, we assume they have greater cash flow liquidity as measured by the KZ index and Altman’s Z-score. We posit that firm engagement in CSR is negatively linked with financial constraint dummies, which are computed as above 20% on the KZ index, or an Altman’s Z-score below 1.81. In this study, we compute the ratio of CSR strengths to concerns for each firm, which allows us to assign a specific CSR ‘Focus’ for each sample firm. Based on data from MSCI ESG STATS ratings, all firms are divided into seven focuses: an Environment Focus (ENV), a Community (COM) Focus, an Employee (EMP) Focus, a Diversity (DIV) Focus, a Product (PRO) Focus, a Governance (CGOV) Focus and a Human Rights (HUM) Focus. Furthermore, a multiple logit regression is conducted based on these seven focuses to examine the impact of financial constraints/liquidity proxies on firms with different CSR focuses. Our results confirm a significant negative association between CSR activities and the degree of financial constraints/distress. Our finding confirms the view of Campbell (2007). For the CSR focuses, we find that in general firms facing financial constraints do not engage in any CSR activities, especially when the degree of financial constraints is assessed by the KZ index. Our findings are robust using various CSR measures and financial constraint measures, and potentially useful to market participants when making investment decisions. Our findings also provide greater understanding of the characteristics of CSR firms.