Level Of Financial Constraints Research Articles

Financial constraints and investment thirst in Chinese reverse merger companies

AbstractUsing a hand‐collected data set of Chinese reverse mergers (RM) between 2006 and 2015, we find that financial constraints are more serious and investment thirst higher for RM companies as compared with initial public offering (IPO) companies. For state‐owned enterprises (SOEs), listing via a RM or an IPO does not impact the level of financial constraints post‐listing, while SOE RMs have higher investment thirst than SOE IPOs. By contrast, non‐SOE RMs are under more financial constraints and have higher investment thirst than non‐SOE IPOs. These differences are not presented during the 4 Trillion Yuan stimulus period between 2008 and 2010.

Do firms learn by exporting or learn to export? Evidence from Senegalese manufacturing firms

Abstract This paper examines the causal relationship between exporting and productivity in the manufacturing firms in Senegal using a unique firm-level panel data for the period 1998-2011. We control for endogeneity and sample selection by jointly estimating the productivity and the export-participation equations. Our results indicate strong evidence of both self-selection of the most efficient firms enter into the export market and effect of Learning in the export market. Findings show that firms with better financial health are likely to exports. Furthermore, the ownership of intangible assets like brevet and the quality of labour positively affect the probability to export of the manufacturing firms. We investigate the sectoral heterogeneity of the Learning-by exporting effect (LBE) and find evidence of a weak heterogeneity of the learning-by-exporting effect between the sectors. From a policy relevance, the evidence of learning-by-exporting suggests Senegal has much to gain from encouraging exports by helping domestic firms to overcome the barriers to enter into foreign markets by promoting access to intangible assets like brevet. Particularly, export promotion policies could be helpful, reducing the level of financial constraints faced by firms and indirectly enhancing their investment spending and productivity. As a driver of manufacturing exports, labour quality must be carefully considered in the perspectives of industrial development. Considerable efforts are required in the Senegalese educational system in order to match the training to the requirements of the labour market.

Bubbly Equilibria with Credit Misallocation

This paper studies the effect of asset bubbles on economic growth in the presence of financial constraints and heterogeneous projects. I consider an economy with two sectors which differ in their productivity and the pledgeability of their output in financial markets. The first sector has low productivity and high levels of pledgeability (or low levels of financial constraints), whereas the second sector has higher productivity and lower levels of pledgeability. In this framework, asset bubbles raise interest rates and lower investment productivity by directing financial resources to the sector with lower financial constraints. Steady states in which asset bubbles lower investment productivity and consumption are termed bubbly growth-traps.

Investment-cash flow sensitivity and financial constraints: evidence from Pakistan

Purpose The purpose of this paper is to provide new insights about investment-cash flow sensitivities (ICFS) as a representative of financial constraints, by examining panel data consisting of 288 listed firms in Pakistan. Design/methodology/approach This study uses a panel data methodology and first difference generalized method of moments to control the problems of heterogeneity and endogeneity. By five different criteria, estimations are made for full and pre-classified sub-samples. Sargan test and Arellano-Bond serial correlation statistic are used for identification and validation of instruments and model. Findings According to the results, the ICFS has increased monotonically with the level of financial constraints. Further, the results depict that ICFS for the constrained group is much higher as compared to the unconstrained group. Overall, the result illustrates positively significant ICFS. Practical implications This study confirms signs of imperfections in the capital market, which leads to financial markets inaccessibility preceded by high under-investment costs and low social and economic development. Thus, proper policy designing and instigation are necessary for the subsidies, taxation, and foreign direct investment and later for financial market development and promotion of private corporate investment. Originality/value Previous studies have mostly focused on developed countries where large listed companies work in well-developed financial markets and do not face severe financial constraints because of the greater market integration (Bekaert et al., 2011, 2013) and superior investor protection laws (Djankov et al., 2008; La porta et al., 1998). However, this study focuses on listed companies from the emerging Pakistani market, which will bring forth the interesting aspects of ICFS and will enhance the existing literature effectively.

Tax enforcement, corporate tax aggressiveness, and cash holdings

Purpose – The purpose of this paper is to investigate the association between corporate tax aggressiveness and cash holdings and that between corporate tax aggressiveness and the value of cash. Further, this study explores the impact of the tax enforcement level on the above associations. Design/methodology/approach – Under a Chinese special institutional background, this study constructs tax aggressiveness and tax enforcement measures. On this basis, using a sample of Chinese A-share listed companies over the period from 1990 to 2010, this study empirically tests the association between tax enforcement, corporate tax aggressiveness, and cash holdings. Findings – By empirically testing with Chinese listed companies as the sample, this paper finds the following: with the increase in the tax avoidance level, the precautionary incentives of cash, and the level of financial constraint likewise increase, which will make the level of firm cash savings increase. Meanwhile, although tax avoidance will induce lower transparency and higher agency costs, the marginal value of the cash held by the more aggressive firms is higher due to the higher market competition effect of the cash. Additional tests suggest that, the tax enforcement level can weaken the effect of tax avoidance on the transparency and agency problem; however, because the tax enforcement level can also increase the tax risk of the firm, the positive relation between firm’s tax avoidance and cash savings is strengthened correspondingly. On the value of cash holdings, the tax enforcement level can also make the marginal value of tax aggressive firms higher. Originality/value – First, this paper provides new evidence on the determinants of firm’s cash holdings from the perspective of cash savings. Second, this paper examines the association between Chinese firm’s tax aggressiveness and the value of cash, which not only provides evidence for the local tax literature but also has reference value for the foreign literature. Third, this paper has reference value for research on the association between corporate tax avoidance activities and other operating decisions. Finally, this paper not only provides new evidence on the association between tax enforcement and corporate governance, but also extends the prior literature on the association between corporate tax aggressiveness and cash holdings.

Financial constraints and international trade with endogenous mode of competition

The paper examines how financial constraints affect firms’ decisions to export when the mode of intra-sectoral competition is endogenous. We propose an extension of Neary and Tharakan’s (2012) model, in which firms resort to external funders to finance investments in production capacities. Sectors differ in financial constraint and the cost of capital increases with the level of financial constraint. We first show that a weaker financial constraint allows firms to adopt a Cournot (rather than a Bertrand) pricing scheme and generate a high duopoly profit. Consequently, less financially constrained sectors are more likely to export. We also exhibit a new transmission channel of financial crisis. By increasing the financial cost of exporting and making it more difficult to engage in a Cournot behavior, a financial shock reduces both the intensive and extensive margins of trade.

Investment Cash Flow Sensitivity: The Role of Cash Flow Volatility

Low cash flow volatility firms receive stronger signals about future cash flow from a given cash flow shock, yielding a larger drop in demand for external finance and their cost of external finance, implying higher investment-cash flow sensitivities (ICFS). Empirical analysis in 6 European countries confirms this. Considering firms with the same cash flow volatility, ICFS are more pronounced for financially constrained firms (cf. Fazzari et al. (1988)). Considering firms with the same level of financial constraints, ICFS are more pronounced for firms with low cash flow volatility (cf. Kaplan and Zingales (1997)). The contradictory findings in the literature may be explained by cash flow volatility.

The Influence of Financial Constraints and Attitude Towards Risk in Corporate Investment Decisions

This paper presents evidence of the combined effect of financial constraints and attitudes towards risk in corporate investment. Using panel data on public companies functioning in developed countries, the author shows that demand uncertainty provokes a firm with limited resources to invest sub-optimally, compared to an unconstrained company. Also, with a given level of financial constraints, risk-taking companies tend to decrease investment to a lesser extent in comparison with risk-averse companies. To show this, an index of financial constraints has been constructed, and the optimal threshold values of the index and the risk aversion coefficient have been found.

The real effects of financial constraints: Evidence from a debt subsidization program targeted at strategic firms

Abstract We investigate the rationale and impact of the corporate debt subsidization program implemented by the Russian government during the recent financial crisis. Employing the difference-in-difference approach, we show that the program did not have a significant impact on capital investments of subsidy recipients, contrary to its intentions. We also find that a matched group of non-recipients on average exhibited a higher degree of cash hoarding behavior than subsidy-recipients in the post-program period, which suggests that the program eased external financial constraints of recipient-firms. Consistent with the theory on precautionary cash savings by firms, we further find that firms non-recipients based in cities with low banking development accumulated more cash holdings than recipients based in cities with a high banking development. Overall, our findings indicate that greater cash holdings are positively associated with the level of financial constraints of firms.

THE MONETARY ENVIRONMENT AND LONG‐RUN REVERSALS IN STOCK RETURNS

AbstractPrevious research attributes long‐run reversals to investor overreaction or tax‐motivated trading; we offer an alternative explanation based on the monetary environment. Prices rebound for stocks that have performed poorly over the past several years (losers); however, the rebound occurs only during expansive monetary conditions. Winners only reverse course when monetary conditions are restrictive. Past research shows that the three‐factor model explains long‐run stock reversals; we show that the monetary environment plays an instrumental role in the observation. Finally, we show that reversal patterns are closely linked to both the monetary environment and a firm's level of financial constraints.

ISO certification, financial constraints, and firm performance in Latin American and Caribbean countries

We employ World Bank Enterprise Survey data collected in 2006–2010 for 21,852 firms from 31 Latin American and Caribbean countries to investigate determinants of the adoption of International Organization for Standardization (ISO) certification, the relation between ISO certification and firm financial constraints, and the effect of ISO certification on firm performance. We find that ISO accreditation is positively related to firm size and firm age. Exporters and foreign firms are more likely to adopt ISO certification. We document that ISO-certified firms exhibit significantly lower level of financial constraints and higher labor productivity and lower cost of sales than non-certified firms.

Financial Constraints and Long-Term Performance of Acquirers

This paper shows an empirical evidence that the level of financial constraints for target and acquiring firms in an M&A deal has a significant impact on wealth gains by the acquiring firm in long-term. If both target and acquiring firms are financially unconstrained, thus have low financing costs, investors believe that the level of M&A synergy for them is low in long-term since they do not have a high level of incentives to pool resources to reduce financing cost. On the other hand, long-term gain for acquiring firms’ shareholders is positive and significantly higher than for the other deals if both target and acquiring firms are financially constrained, since they can reduce financing costs by pooling their resources. This positive average long-term abnormal return for the constrained pairs of acquirer and target can be partially explained by industry diversification, impact of institutional ownership, and the level of corporate governance for the acquirer.

Investimenti e vincoli finanziari: evidenze da una cluster analysis

Corporate investment is a critical factor in the overall activity of the economic and capital markets. Although the level of financial constraints plays an important role in the investment decisions of companies, the nature of the relationship continues to dominate the ongoing theoretical debate, while the existing empirical evidence is mixed. After applying the cluster analysis approach to a sample of Italian manufacturing firms, our findings suggest that the approach can reveal new insights on financial constraint issues, making it a more useful approach than traditional criteria and measures.

The relevance of the information about intangibles: Some determinants

This study treats the issue of the relevance of the accounting information about intangibles (assets and expenditures). Our findings show that the relevance is found and determined by the introduction of other information. This information represents the financial constraints as motivation of manipulation and the implication degree of managers due to granted stocks options. Under low level of financial constraints, the investor judges that the value of intangibles assets recognized in the balance sheet is reliable but this information remains widely insufficient to modify its valuation. However, this low level transmit to the market a signal of the failure of the R&D projects because it is predicted that these projects will be unable to realize sufficient future cash flows to honor the financial commitments of the company. Besides, we found that the information about recognized intangible assets and R&D expenditures is well appreciated by the market for the firms which grant more stocks options. So, the granting of stocks options represents a signal to the market on the efficiency of the managers and their implication in the risk of the committed investments.

Does Mispricing Affect Investment And Capital Structure Of Indonesian Firms?

Stock price movement is not entirely a reflection of its fundamental value because of there are non-fundamental factors such as market sentiment (Keynes, 1936), behavioral biases of investors (Lakonishok et al., 1994), systematic errors when assessing stock (Stein, 1996), asymmetric information (Tobin, 1969) causing the value of stock deviate from its fundamental value (misprice). This condition can affect corporate investment decisions because managers can take advantage of overvalued stock condition as a source of investment funding because the cost of capital becomes cheaper. Conversely, firms avoid selling stocks at undervalued due to high cost of capital. Therefore, the objectives of this research is to examine the effect of mispricing to firms investment behavior and to firms capital structure. We also test the role of the level of financial constraint in the relationship between mispricing and investment.Using panel data regression with data observation for five years, we find that mispricing have positif impact to firms investment level. However, this effect is not diverse whether on a group of firms which have a high level of financial constraint (financially constraint) or those which have a low level of financial constraint (less constraint). Moreover, this research also find that the mispricing can also influence firms in choosing sources of funding which can be seen on their debt to equity ratio (D/E). To check the accuracy of examination, we employ some robustness test and use several control variables. These results are consistent with and can be explained using market timing and catering hypotesis.

Funding Conditions and the Long-Run Reversal in Stock Returns

Previous research attributes long-run reversals to investor over-reaction or tax-motivated trading; we offer an alternative explanation based on aggregate funding conditions. Our evidence shows that prices rebound for stocks that have performed poorly over the past several years (Losers); however, the rebound occurs only during favorable funding environments. In contrast, stocks exhibiting strong long-term past performance (Winners) only reverse course if funding conditions are unfavorable. Past research shows that the three-factor model explains long-run stock reversals; we find that funding conditions play an instrumental role in this observation. Specifically, small, distressed Losers reverse substantially, but only when funding conditions are unconstrained. In contrast, small Winners reverse significantly, but only when funding is constrained. Finally, we show that the reversal pattern is closely linked to both the funding environment and a firm’s level of financial constraints, which suggests that both factors influence investor pricing decisions for Losers and Winners.

Capital market imperfections in economic transition: empirical evidence from Ukrainian agriculture

AbstractThis article investigates the link between financing and investment in Ukrainian agriculture during economic transition. The main contribution of the study is to provide empirical evidence for the coexistence of financial constraints and soft budget constraints (SBCs). This is of particular importance because credit constraints and SBCs have completely different economic effects. The lack of differentiation between these forms of capital market imperfections yields overlapping effects of financing on investment and may therefore cause a misinterpretation of econometric results. Our empirical analyses are based on an econometric estimation of the Euler investment equations for 529 large farms from three Ukrainian regions between 2001 and 2005. The results confirm that financial variables significantly influence farms' investment, providing empirical evidence of an imperfect capital market in Ukrainian agriculture. It turns out that credit constraints in the Ukrainian agricultural sector are more important than SBCs. We show that the estimated level of financial constraints for profitable farms with access to loans is higher if both types of capital market imperfections are appropriately distinguished.

Preferences for active recreation and perceived constraints to regular active recreation participation: A cross‐cultural study of Hong Kong and Australian university students

The present study adopted the trans‐theoretical model of behavioural change (Prochasksa & DiClemente, 1984) as a conceptual framework to compare the extent of active recreation participation, preferences for active recreation, and the perception of constraints to participation in regular active recreation of university students in Hong Kong and Australia. A total of 1,336 Hong Kong and 1,282 Australian university students completed self‐administered questionnaires. Findings of the study indicated that Hong Kong students were generally less active, and had lower intention to become more active, lower preferences for active recreation, and higher levels of interpersonal constraints, physiological constraints, and competence constraints but had lower levels of financial constraints than the Australian students. For both cultural groups, enduring participants had a higher preference for active recreation, lower preference for time‐consuming sedentary leisure, and perceived lower levels of constraints to active recreation participation than the transitional participants and non‐participants. The transitional participants generally had a broad interest in a range of leisure pursuit whereas the non‐participants were characterized by low interest in and preference for active recreation rather than a broad leisure interest. The study suggests that social and cultural environments were important factors that influence young people's leisure interest and active recreation participation.

Financial systems, financing constraints and investment: empirical analysis of OECD countries

This paper investigates the influence of cash flow on corporate investment in 11 OECD countries. We find that the sensitivity of investment levels to internally available funds differs significantly across countries, and is lower in countries with predominantly close bank–firm relationships than in countries with predominantly arm's-length bank–firm relationships. At the same time, we find no relationship of the levels of financial constraints to indicators of overall financial development. Our results are consistent with the view that information and incentive problems in the capital market have important effects on corporate investment, and that close bank–firm relationships can reduce these problems and thus improve the access of firms to external finance.

Financial Constraints and the Investment-Cash Flow Correlation

A growing body of research has studied the effects of financial constraints on investment. The corporate finance and the investment literature have approached this issue from different angles; they find broadly the same results: financially constrained firms are more sensitive to internal funds in their investment decisions. However, the results hinge crucially on the criteria used to classify firms; furthermore, the relationship between the severity of financial constraints and the investment-cash flow sensitivity need not be monotonic. In this paper, to identify financially constrained firms I suggest a new set of variables, that take into account their opportunity cost of holding cash and how close these firms are to their borrowing limit. I also use some well-established results from the investment literature, such as the role of uncertainty, irreversibility and imperfect competition, to better control for the determinants of investment and thus limit the potential for a spurious relationship with cash flow. For a large sample of mostly unlisted Italian firms that spans twenty years I find that firms that are likely to be constrained have a positive investment-cash flow sensitivity as expected. However, the relationship is not monotonic in the severity of financial constraints: it is high for firms mildly and strongly constrained and low for firms with intermediate levels of financial constraints. I identify a subsample of firms that are able to generate cash flow in order to meet their investment demand and have thus a high investment – cash flow correlation regardless of whether they are financially constrained or not; when I exclude them from the sample the investment – cash flow correlation for the remaining firms is highest for the most strongly constrained firms.