Low Growth Opportunities Research Articles

Corporate carbon footprint and market valuation of restructuring announcements

AbstractThe call for greener and more sustainable corporate practices triggered a surge in corporate restructuring. In this study, we investigate the impact of carbon emissions on the market reaction to announcements of corporate restructuring activities. Using a sample of US firms, we find that investors discount the value of corporate restructuring announcements when firms have higher levels of carbon emissions. Our results indicate that emissions are negatively associated with cumulative abnormal returns (CAR), cumulative total returns (CTR), and buy and hold abnormal returns (BHAR) around announcements. This effect is more pronounced for firms with a lower risk of bankruptcy, those financially constrained, and those with lower growth opportunities. We also find that high emissions at announcements are negatively associated with post-restructuring financial and market performance. Overall, our results highlight the growing implications of firm-level carbon emissions for corporate market valuations, especially amongst firms undertaking restructuring.

The role of environmental, social, and governance rating on corporate debt structure

This paper examines the impact of Environmental, Social, and Governance (ESG) rating on a firm’s debt structure. We find that optimal (market and book) leverage ratios and information asymmetry are reduced when firms become ESG rated. More importantly, ESG rated firms redistribute their financing sources from public debt (bonds issuing) to private debt (bank loans). These results are attributed to the incentive of ESG rated firms to avoid debt-overhang and underinvestment issues and to the fact that the ESG rating conveys valuable information to lenders leading to better access towards more internal sources of financing, such as bank loans over debt issuing. We further find that the substitution effect is more pronounced for firms with high financial pressure, low growth opportunities and specialized assets. Finally, these results remain valid under various robustness and endogeneity tests.

Leverage and corporate investment – a cross country analysis

The paper examines the impact of a firm’s financial leverage on its investment decisions in the period 2011–2019, which occurred between two financial crises (2008–2010 and 2020–2022) and was globally marked by low interest rates and high leverage. The study focuses on non-financial listed firms in world’s top 13 largest economies consisting of 11 OECD+ countries and two emerging nations. The analysis explores the relationship between firm leverage and investment decisions, considering the growth opportunities and corporate risks of the firms, as well as the type of economy they operate in. The findings indicate that, overall, there is a negative relationship between leverage and investment. In developed nations, such as the OECD+ countries, this negative effect is more pronounced for firms with limited growth opportunities. Contrary to the existing literature, emerging economies exhibit a positive relationship between firm leverage and investment. Specifically, in China and India, firms with low growth opportunities display a stronger positive correlation between leverage and investment. These results suggest that in developed countries, debt continues to have a disciplining effect on firm investment, even in a high liquidity environment. However, in high-growth emerging economies, both firm management and lending institutions show less concern regarding leverage. Lastly, the study finds that firm risk has an adverse impact on investment decisions. These empirical findings highlight the non-uniform nature of the relationship between firm leverage and investment, which depends on the type of economy and the growth opportunities of the firms. AcknowledgmentsThe infrastructural support provided by Management Development Institute, Murshidabad, India and FORE School of Management, New Delhi, India in completing this paper is gratefully acknowledged.

Carbon neutral Bhutan: sustaining carbon neutral status under growth pressures

BackgroundBhutan has pledged to remain carbon neutral (CN) in perpetuity. Whether they can sustain this is questionable due to the country’s increasing economic growth (GDP) and commitment to gross national happiness (GNH) outcomes, both of which can lead to a rise in greenhouse gas (GHG) emissions. The nexus between GHG, GNH and GDP is the essence of the Paris Agreement and Sustainable Development Goals global project.ResultsThrough scenario modelling using the Long-range Energy Alternative Planning (LEAP) model, the study finds that the carbon neutral declaration will derail between 2037 and 2050 without mitigation measures. By putting in place mitigation measures especially in the industry and transport sectors, CN can be retained even under high growth pressure, which may cost just 2% of GDP. CN can be easily retained under low economic growth, but this could undermine GNH. High growth will require immediate interventions to enable electrification of industry and transport.ConclusionsThe options to remain CN will require Bhutan to adopt more efficient technologies and electrify industry and transport under both low and high growth scenarios. The additional cost to the Bhutanese economy is feasible through low and high growth opportunities. The options are similar to those confronting emerging nations struggling with issues of climate commitments under economic growth pressures. All will need to adapt their specific economic contexts to achieve the simultaneous objectives of the Sustainable Development Goals whilst addressing the net zero Paris agenda. Bhutan shows it is possible.

Managerial stock ownership, debt covenants, and the cost of debt

This study examines the potential role of managerial ownership in determining the number and types of corporate debt covenants and the effect of debt covenants on the relation between managerial ownership and cost of debt. We find that managerial stock ownership is positively associated with the number of debt covenants, particularly dividend payout and accounting related covenant restrictions. Further investigation shows that the above positive relation is driven by firms with low growth opportunities, suggesting that companies with high managerial stock ownership have incentive to use debt covenants to mitigate managers' opportunities of rent expropriation when agency costs between shareholders and managers are high. Finally, we show that restrictive debt covenants attenuate the positive relation between managerial stock ownership and the yields on newly issued bonds, suggesting that restrictive debt covenants mitigate debtholders' concerns over a closer alignment of interests between managers and shareholders. This study focuses on agency costs related to managerial ownership, which is common in both developed and emerging economies. Future research can also consider the potential effect of the agency costs between controlling and minority shareholders, which is particularly prevalent in emerging economies including the region of the Pacific-Basin.

Asymmetric Information and Agency Cost of Financial Leverage and Corporate Investments: Evidence from Emerging South-East European Countries

In this paper, we investigated the impact of financial leverage on investment decisions on a sample of 811 firms from ten emerging South-Eastern European countries (Bosnia and Herzegovina, Bulgaria, Montenegro, Croatia, Greece, Romania, North Macedonia, Slovenia, Serbia and Turkey). We apply a panel regression model involving investment ratio as a dependent variable, leverage as independent variable, and control for several firm characteristics that closely determines the corporate investments. The results of the analysis show that leverage is negatively related to investment in the companies in SEE. But only long term debt has a stronger negative impact on investment for firms with low growth opportunities than for firms with high growth opportunities. These findings show supportive evidence of agency theories of corporate leverage, especially with the debt overhang theory, but did not give strong validation that leverage has a disciplining role for firms with low growth opportunities in SEE emerging markets. In addition to leverage, we found that corporate investments in the SEE countries decrease significantly with tangibility and the company size. Corporate investments in the SEE countries increase significantly with cash flow, sales, non-debt tax shield and profitability. Overall, the results slightly defer with those from the research on the case of developed markets.

Property market liquidity and REIT liquidity

AbstractThis study examines the asset–stock liquidity relationship for firms with location‐specific assets. Using a sample of real estate investment trusts (REITs), we extend the concept of asset liquidity to include information based on local property market turnover. Our findings confirm that holding more cash increases REIT stock liquidity. More importantly, we find a positive relation between property market liquidity and REIT stock liquidity. This relation is stronger for REITs with lower growth opportunities, less information advantage, and greater financial constraints. Our findings also provide evidence that managers can actively influence stock liquidity through asset structure.

Do friendly boards impact the value of real options?

This study examines the association between friendly boards and the value of real options. Using a panel dataset that consists of 321,168 firm-month observations of 5322 firms from 2000 to 2018, our empirical results show that friendly boards are positively associated with the value of real options. The results are robust to other measures of friendly boards, different model specifications, alternative explanations, and different endogeneity concerns. The effect of friendly boards on the value of real options is stronger in firms with low managerial ability, low growth opportunities, high advisory needs, and strong corporate governance. Also, friendly boards positively affect the value of real options at a decreasing rate as the level of friendly boards increases.

Do Independent Directors Matter? Evidence from Regulatory Change in an Emerging Market

ABSTRACT This research examines the operating performance of firms listed on the Taiwan stock exchange following the initial appointment of independent directors due to regulatory change. Although the firms appointing independent directors do not outperform the matched firms for all the sample firms, the results show that the appointment of independent directors does have a positive influence on the operating performance of firms in greater need of objective monitoring. Firms with lower growth opportunities, with a CEO concurrently serving as board chairman, with higher insider shareholdings, or with lower foreign institutional shareholdings tend to perform significantly better than their matched firms over the three-year period following the initial appointment of independent directors.

IMPACT OF DIVIDEND PAYOUT ON FIRM’S PERFORMANCE UNDER LOW GROWTH OPPORTUNITIES

Purpose of the study: The objective of the study was to investigate the relationship of the dividend payout on a firm's performance under low growth opportunities from the manufacturing sector of Pakistan.
 Methodology: A sample of 251 firms out of 378 manufacturing firms listed at the Pakistan Stock Exchange (PSX), have been carefully chosen for the era of ten years from 2006 to 2015. The secondary data was obtained from the firm’s web financials and analysis of financial statements, published by the statistics department of the State Bank of Pakistan. For the persistence of investigation panel data (fixed effect) analyses were employed in this study.
 Main Findings: The fallouts of the analysis revealed that the dividend payout ratio has an insignificant relationship with the firm's performance in the low growth perspectives of the study.
 Applications of this study: The findings of the study are helpful for the financial managers of the firms facing low growth opportunities. Furthermore, the investors in capital markets can use the findings of this while investing.
 The originality of this study: The study focussed on the role of low growth opportunities while studying the nexus of dividend pay-out and the firm’s financial performance which inherits the novelty and originality of the study.

The Differential Impact of Leverage on Firm Investment: Evidence From Advanced and Developing Countries

This paper examines the differential impact of leverage on investment across firms with varying levels of growth opportunities in both advanced and developing countries. Contradictory research findings on the strength of this relationship for firms with low or high growth opportunities are reported; where even divergent results in previous studies using the same country for analysis are found. By using a multi-country framework, we confirm a negative impact of leverage on firm investment, where a stronger negative impact is consistently found for firms with low growth opportunities in both advanced and developing countries.

Monitoring and Managerial Discretion Effects on Agency Costs: Evidence from an Emerging Economy

We analyzed the effect of managerial ownership, leverage, and managerial discretion on the agency costs of 14,719 Chilean companies. The results of the instrumental variables (IV) regressions indicate that managerial ownership and capital structure have a negative and non-linear effect on agency costs. Managerial ownership concentration is an effective means of internal control over agency costs, discarding the managerial entrenchment effect. The non-linear impact of debt suggests that for high leverage levels, agency costs would increase due to higher bankruptcy costs. Managerial discretion reduces agency costs; however, in firms with low growth opportunities, it increases them. These results have relevant implications for firms’ corporate policy and investors.

The role of Environmental, Social, and Governance rating on corporate debt structure

This paper examines the impact of having an Environmental, Social, and Governance (ESG) rating on a firm’s debt structure, i.e. how firms change their leverage ratios and debt components when becoming ESG rated. Targeted market and book leverage ratios are reduced when firms become ESG rated. We show that the provision of ESG rating mitigates information asymmetry. Current leverage ratios are not altered significantly for ESG rated firms but these firms redistribute their financing sources from public debt (bonds debt) to private debt (bank loans). This substitution effect is mainly driven by environmental and social factors and is more pronounced for firms with high financial pressure, low growth opportunities and specialized assets. Debt restructuring remains valid under various robustness and endogeneity tests. These results are consistent with the trade-off and pecking order theories of capital structure.

Investment, leverage and political risk: Evidence from project-level FDI

Does capital structure influence firms' FDI capital expenditure decisions into countries with varying degrees of political risk? We explore this question using a novel dataset that matches 10,000 unique outward foreign direct investment (OFDI) projects with 1135 distinct U.S. firms over the period 2003–2014. We find that capital expenditures allocated to FDI projects are significantly lower for highly leveraged firms, in particular for firms with low growth opportunities. Firms also commit lower capital amounts to investments located in countries characterized by higher political risk. Furthermore, leverage and political risk interact with one another in determining the financial commitment of the FDI, with leverage exerting a significantly stronger negative effect on capital expenditures in countries where political risk is elevated. Our findings are consistent with the monitoring role of debt in curbing exposure to political risk in multinational firms' foreign operations, and corroborate the disciplinary role of leverage on firms' investment decisions.

Does Retrenchment Boost Performance? Evidence from Fallen Angels

We study restructuring by firms whose stock prices experience a sharp decline to a low price level– fallen angels. In response to a price decline, firms can retrench by reducing investments and cutting the workforce, or increase leverage and investments hoping for lottery-like payoffs. We find that relative to a matched sample, fallen angels retrench. While retrenchment helps boost stock prices, reducing fixed assets and employment also increase firm risk, lower growth opportunities, and reduce the probability a firm remains listed. We find no consistent evidence that retrenchment actions undertaken by fallen angels affect future operating performance.

The determinants of negative net leverage policy: New evidence from Japan

A negative net leverage firm can immediately become a zero-leverage firm by repaying their outstanding debt; however, the majority of negative net leverage firms in Japan still have positive gross debt. This paper investigates the determinants of a negative net leverage policy. Previous literature argues that zero-leverage is the result of high growth opportunity. However, by using a sample of Japanese non-financial firms over the period 1991–2015, we find that the driving forces of negative net leverage policy are low growth opportunity, low default possibility, and high cash holdings. Furthermore, a lower risk-free rate induces firms to increase cash holding, and therefore decrease net leverage. As time goes by, negative net leverage firms cease to accumulate cash and gradually repay debt. We suggest that policymakers improve the investment environment and enhance the effective allocation of firm funding, especially during a period of low risk-free rates.

Does catering behavior persist? Evidence on dividend sentiment in emerging financial markets

This study tests the catering theory and explores the main determinants of dividend payments across a sample of eleven emerging countries. There is evidence of catering to investor sentiment for dividends in Middle Eastern and North African countries. Dividend payers are mature, profitable, large firms with lower growth opportunities, and high dividend premiums, which supports the catering, lifecycle, and agency theories. Catering behavior persists even after controlling for the effect of Arab Spring. Difference-in-difference analysis shows that countries highly affected by the political transition period are less likely to pay dividends in the post-Arab Spring period than less affected countries. Catering decreases significantly in the post-Arab Spring period as compared with during- and pre-Arab Spring periods, suggesting that investors prefer that managers retain earnings to reinvest and grow during unstable economic conditions. Furthermore, catering persists in countries with high corruption levels and poor legal quality to reduce agency cost, and substitute for weak legal systems with poor enforcement of laws.

The Value of Firm Networks: A Natural Experiment on Board Connections

This paper presents causal evidence of the effects of boardroom networks on firm value and compensation policies. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms whose centrality in the network rises after the reform experience positive abnormal returns around the announcement date and are better hedged against shocks. Information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. Firms benefit more from boardroom centrality when they are more central in the input-output network, hence more susceptible to upstream shocks, when they are less central in the cross-ownership network, or when they have low profitability or low growth opportunities. Network centrality also results in higher directors' compensation, due to rent sharing and improved executives' outside option, and more similar compensation policies between connected firms.

Do Firms Leave Workers in the Dark Before Wage Negotiations?

This paper examines managers' strategic use of financial disclosure in labor negotiations. Using the exogenous expiration date of collective bargaining contracts, I find that when wage negotiations are imminent, firms strategically redact information about material agreements. Strategic redaction is pronounced when unions cannot accurately predict firms' prospects, when firms have low growth opportunities, when liquidity is less constrained, and when the estimated cost of a work stoppage is low. These results suggest that firms strategically withhold information to balance the costs and benefits of information asymmetry. Consistent with this interpretation, strategic disclosure is statistically uncorrelated to ex post performance.

ANALISIS PENGARUH WORKING CAPITAL TURNOVER, FIRM SIZE, GROWTH OPPORTUNITY DAN PROFITABILITAS TERHADAP STRUKTUR MODAL PERUSAHAAN PT FAST FOOD INDONESIA TBK

This research purpose to analyze the effect of Working Capital Turnover, Firm Size, Growth Opportunity, Profitability on the Capital Structure of the Company PT Fast Food Indonesia Tbk. The year of observation for 5 years is 2014 at 2018, with the object of PT. Fast Food Indonesia Tbk. The method of analysis uses quantitative descriptive method. The results showed that the working capital turnover of the company> 3 times the efficiency of the company's working capital turnover in 2014 d. 2018 efficiency. The size of a good company can be seen from the company's total asset value quite well. Total assets of PT. Fast Food continues to experience a significant increase every year. Growth opportunity PT. Fast Food has decreased every year even though sales have increased. This shows the low growth opportunity of the company can mean that the company does not have flexibility in investing optimally because the company manager will take action to transfer wealth from creditors toinvestors, so that the company is expected to have low debt. The level of profitability can be measured from the level of the company's fluctuating profits and significantly increased in 2018. In 2014 to 2015 decreased by 4.7%, then in 2016 increased by 3.9% and in 2016 decreased by 1.37% and in 2018 experienced a drastic increase in profit of 5.55%.Keywords: Working Capital Turnover, Firm Size, Growth Opportunity, Profitability, Capital Structure