Need For External Financing Research Articles

Determinants of transparency and disclosure – evidence from post-transition economies

In this paper, we examine the patterns of behaviour of companies from former socialist countries related to the application of good corporate governance practices. We try to assess the level of transparency and to determine if there are any factors that systematically influence corporate behaviour in this regard. Using a sample of 145 companies from Croatia, Macedonia, Slovenia and Serbia, we apply Standard & Poor’s (S&P) methodology for assessment of transparency and disclosure levels and find that the companies in these countries generally lag in terms of transparency behind their peers worldwide as measured one decade ago. Additionally, using the same sample, we apply a regression analysis and conclude that the level of transparency is positively related to the size of the company and the need for external financing, but negatively to the concentration of ownership and we also observe important country effects. We do not find a statistically significant relationship between transparency and profitability and relate this finding with the prevailing attitude of the companies towards the stock market. Having in mind the different scores by country and by area of disclosure, we believe that there is still scope for improvement using proper advising and public policy measures.

Strategic CSR, Heterogeneous Firms and Credit Constraints

Abstract: We set out a model of strategic CSR with consumers’ demand for CSR products, where ethical features improve the “quality” of goods through a complementarity between production and CSR provision. Our model builds on the literature based on heterogeneous firms in monopolistic competition with quality product differentiation. By letting the optimal level of ethical standards to be endogenously determined by each profit-maximizing firm, we analyse the link between heterogeneity in productivity and CSR intensity. The analytical results are confirmed by a numerical analysis. We then consider the need for external financing, finding that credit constraints may lead active firms to reduce the optimal CSR level whereas the reputational effect of CSR firms may help in dampening the reduction in firms’ optimal CSR level. Finally, we find that policy interventions may lead to a higher level of the optimal CSR, when addressed to change firms’ incentives and consumers’ ethical awareness.

Access to Debt Finance by Young Entrepreneurs in Polokwane, South Africa

The paper investigated the need for and access to debt finance by young entrepreneurs. In addition, the study examined the obstacles to access to debt finance by young entrepreneurs. This study was conducted at Polokwane, South Africa. Forty nine young SME owners participated in the study. Convenience and snowball methods were used to select the study participants. The self-administered questionnaire method was used for data collection. Descriptive statistics was used for data analysis. The results indicated that although there is a strong need for external debt finance by young entrepreneurs, however, access to debt finance is limited. Obstacles to debt finance by young entrepreneurs include lack of collateral and bad credit history. Recommendations to improve access to debt finance by young entrepreneurs are suggested.

Advisor Lending to the Advised Acquirer During M&A: Conflict of Interest or Last Resort Financing?

Previous research has shown that acquirers’ M&A announcement effects, on average, become significantly positive if loan financing is involved. We find that when advisors lend to their advised acquirers during M&A deals, the syndicated loan spreads are unusually high, and the advisor-lender dual role significantly reduces the acquirers’ announcement effect. This appears to reflect conflicts of interest, undermining the information production/certification role of loan financing. However, evidence that high need for external finance justifies the expensive advisor lending supports a last-resort-financing explanation instead — investment banks act as a last resort through the advisor-lender dual role in M&A.

Fraud detection using fraud triangle risk factors

The objective of this study is to identify the financial statement fraud factors and rank the relative importance. First, this study reviews the previous studies to identify the possible fraud indicators. Expert questionnaires are distributed next. After questionnaires are collected, Lawshe's approach is employed to eliminate these factors whose CVR (content validity ratio) values do not meet the criteria. Further, the remaining 32 factors are reviewed by experts to be the measurements suitable for the assessment of fraud detection. The Analytic Hierarchy Process (AHP) is utilized to determine the relative weights of the individual items. The result of AHP shows that the most important dimension is Pressure/Incentive and the least one is Attitude/rationalization. In addition, the top five important measurements are "Poor performance", "The need for external financing", "Financial distress", "Insufficient board oversight", and "Competition or market saturation". The result provides a significant advantage to auditors and managers in enhancing the efficiency of fraud detection and critical evaluation.

Informality and Access to Finance: Evidence from India

This paper gauges the effect of financial deepening and bank outreach on informality using micro data from the Indian manufacturing sector and exploiting cross-industry variation in the need for external finance. We distinguish between two channels through which access to finance can reduce informality: reducing the entry barrier to the formal sector and increasing productivity of formal firms. We find that bank outreach has a stronger effect on reducing the incidence of informality by cutting barriers to entering the formal economy, especially for smaller firms, and thus diminishing opportunistic informality. In comparison, financial deepening increases the productivity of formal sector firms while it has no significant impact on informal sector firms.

Investor Perceptions About Financial Statement Fraud and Their Use of Red Flags

We surveyed 194 experienced, nonprofessional investors to examine the relations between their perceptions of the frequency of financial statement fraud in the economy, their use of financial statement information, the importance they place on conducting their own fraud risk assessments, and their use of fraud red flags. We find that both investors’ perceptions of the frequency of fraud in the economy and their use of financial statement information positively influence the importance they place on conducting their own fraud risk assessments. In turn, investors who place importance on conducting fraud risk assessments make greater use of fraud red flags to avoid potentially fraudulent investments. In terms of red flags commonly relied upon, investors tend to focus on SEC investigations, pending litigation, violations of debt covenants, and high management turnover. In contrast, they rely less on company size and age, the need for external financing, and the use of a non-Big 4 auditor. We also find evidence of positive associations between the use of specific red flags and investors’ portfolio returns. In addition to their own assessment of fraud risk, investors in our sample report relying more on analysts, regulators, and external auditors to detect and report fraud, while relying less on low- and mid-level employees, upper management, the media, and short-sellers for fraud detection and reporting.

Young family firms: Financing decisions and the willingness to dilute control

We study the relationship between leverage and the willingness of listed family firms to dilute control, proxied by the ownership of the main shareholder. We find that the main owner's stake positively impacts on leverage and that this impact is stronger when the business is a young family firm. Furthermore, the life cycle matters when analyzing this relationship. These results allow us to argue that owners with a greater stake prefer to raise finance via debt rather than dilute their position via equity, and that young family firms face a trade-off between their control risk aversion and the need for external financing.

Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

We surveyed 194 experienced, nonprofessional investors to examine the relations between their perceptions of the frequency of financial reporting fraud, their use of financial statement information, the importance they place on conducting their own fraud risk assessments, and their use of fraud red flags. We find that investors’ perceptions of the frequency of fraud and their use of financial statement information positively influence the importance they place on conducting their own fraud risk assessments. Investors who place importance on assessing fraud risk make greater use of fraud red flags to avoid fraudulent investments. Red flags commonly relied upon include SEC investigations, pending litigation, violations of debt covenants, and high management turnover. Investors rely less on company size and age, the need for external financing, and the use of a non-Big 4 auditor. We also find evidence of positive associations between the use of specific red flags and investors’ portfolio returns.

Connectedness and SME Financing in Post-Communist Economies: Evidence from Uzbekistan

This paper investigates effects of interpersonal links with bureaucrats on SME access to formal finance. A survey of 502 SMEs in post-communist Uzbekistan shows fewer SMEs with government connections express a need for external finance, but success rates of applications are higher than for SMEs without connections. Econometric models show government-connected SMEs receive more formal credit than their counterparts. The small share of SME credit available is thus distributed in favour of those capitalising on bureaucratic links, with consequent resource misallocation. Findings imply that greater SME credit flows need supplementing with capacity building that improves bank transparency and efficiency.

Capital Income Taxation Revisited: The Roles of Information Friction and External Finance

AbstractThis paper reexamines the classical issue of optimal taxation on capital income in an overlapping‐generations growth model where the risky capital‐producing projects are financed partially with external funds in the presence of costly state verification. In this context, we first show that the information friction creates standard credit market distortions that are exacerbated by both capital income taxation and external financing. We subsequently show from both growth and welfare perspectives that the optimal tax rate on capital income decreases with the severity of asymmetric information and the extent of external financing. Alternatively, our analysis suggests that the presence of informational friction in the credit market introduces a rationale for more conservative taxation on capital, especially when the need for external financing is high.

Does external finance pressure affect corporate disclosure of Chinese non-state-owned enterprises?

We examine whether external finance pressure influences information disclosure of Chinese non-state-owned enterprises (NSOEs), which are often entrepreneurial firms. Existing Chinese stock exchange regulations stipulate that firms need to meet certain earnings performance criteria to qualify for rights issue or avoid delisting. These regulatory criteria create pressures for firms in need for external equity financing to manipulate earnings in order to meet and beat the performance targets. To examine this, we exploit an exogenous event of Chinese accounting standards change in 2007, when firms are given greater accounting disclosure discretion. Following this change, we find evidence consistent with increased earnings manipulation among NSOEs that barely meet these performance targets. This effect is also more pronounced among such NSOEs with weaker political connections, which increases their dependence on the capital market for external financing. Our findings have policy implications for the financing of NSOEs and entrepreneurial firms in emerging economies.

Remittances and Financial Inclusion: Evidence from El Salvador

This paper investigates the impact of remittances on financial inclusion. This is an important issue given recent studies showing that financial inclusion can have significant beneficial effects on households. Using household-level survey data for El Salvador, the authors examine the impact of remittances on households' use of savings and credit instruments from formal financial institutions. They find that although remittances have a positive impact on financial inclusion by promoting the use of deposit accounts, they do not have a significant and robust effect on the demand for and use of credit from formal institutions. If anything, by relaxing credit constraints, remittances might reduce the need for external financing from financial institutions, while at the same time increasing the demand for savings instruments.

Heterogeneous Firms and Corporate Social Responsibility: An Analysis in Times of Crisis

We set out a model that considers the concept of strategic CSR, and focuses on the role of consumers’ demand for CSR products, according to the so called “bottom up pressure”, that is consumers’ initiative in appreciating CSR. We enrich the above approach with the idea that CSR is a specific feature of goods improving their “quality”. In this way, we are able to consider it as a novel type of product differentiation based on the adoption of socially and environmentally responsible practices; as a consequence, our model builds on the literature based on heterogeneous firms in monopolistic competition (starting from the recent “new-new” trade theory pioneered by Melitz, 2003), that incorporates quality product differentiation. In a closed economy with CSR option in production, we analyze the link between heterogeneity in productivity and CSR intensity, by letting the optimal level of ethical standards to be endogenously determined by each firm. We then consider the need for external financing, finding that the latter may lead intra-marginal firms to exit production, as well as to a reduction in the optimal level of CSR of surviving firms. The latter outcome is especially relevant for the study of the relation between CSR and economic crisis. We identify some negative effects: a decline in consumers’ income has a negative impact on the demand of higher CSR intensity goods, whereas a tightening in external financing conditions leads to a decrease in the optimal level of CSR. On the other hand, external investors may attribute a positive value to the CSR effort of firms, as the latter may be seen as a positive reputational signal. We take into account that creditors attribute a specific weight to CSR activities in judging corporate attention for stakeholders, by assuming that firms’ exogenous probability of enforcing the financial contract is deemed to be higher when investors care about firms’ ethical efforts; at the same time, the share of tangible assets CSR firms are required to vow as collateral is assumed to be lower. We thus study the conditions which may make the reputational effect to mitigate the impact of the crisis on firms’ optimal level of CSR.

How national and international financial development affect industrial R&D

We examine the impacts of both domestic and international financial market development on R&D intensities in 22 manufacturing industries in 18 OECD countries for the period 1990–2003. We take account of such industry characteristics as the need for external financing and the amount of tangible assets. Multiple forms of domestic financial development are important determinants of R&D intensity but only foreign direct investment is significant among alternative measures of international financial development. We find the strongest effects for private bond-market capitalization, while FDI, private credit by banks, and stock-market capitalization have similar effects in terms of magnitude.

The effects of firm size, corporate governance quality, and bad news on disclosure compliance

Motivated by calls for increased compliance, size-based regulation, and continued exemption of small firms from internal control reporting requirements, we assess the incremental effects of firm size, corporate governance quality, and bad news on disclosure compliance. We examine compliance with the disclosure requirements of an SEC-mandated filing that requires no computations or complex judgments but is nonroutine and may reveal value-decreasing information (bad news) that otherwise would not become public. The disclosures studied are those that firms provide in Form 8-K Item 4 when changing external auditors. We find that noncompliant firms have lower quality corporate governance and less need for external financing but are not smaller than compliant control firms. Additional analyses indicate that compliance is negatively associated with bad news.

How National and International Financial Development Affect Industrial R&D

We examine the impacts of both domestic and international financial market development on R&D intensities in 22 manufacturing industries in 18 OECD countries for the period 1990-2003. We take account of such industry characteristics as the need for external financing and the amount of tangible assets. Multiple forms of domestic financial development are important determinants of R&D intensity but only foreign direct investment is significant among alternative measures of international financial development. We find the strongest effects for private bond-market capitalization, while FDI, private credit by banks, and stock-market capitalization have similar effects in terms of magnitude.

Earnings quality and firm valuation: international evidence*

This study uses a sample of over 7000 firms in 38 countries to investigate the relation between firm valuation and earnings quality. We find a positive and significant relation between firm valuation and an aggregate earnings quality measure based on seven earnings attributes (accruals quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism). This relation is particularly strong for firms with greater investment opportunities and more need for external finance, and for firms in low investor protection countries. Thus, firms are able to compensate for a weak legal environment by adopting higher earnings quality standards, particularly when they need to gain access to global capital markets. Overall, our findings suggest that firms with higher earnings quality are valued more highly in stock markets, supporting the idea that investors require a premium for the information risk associated with lower-quality earnings.

Why do you speak English (in your annual report)?

The dominance of English as a lingua franca in international business exchanges is so commonly accepted that there has been no investigation into the use of English as an external financial-reporting language in non-English-speaking countries. In this study we analyze the factors associated with the publication of an English-language annual report in non-English-speaking countries. Using a sample of 3994 firms from 27 countries in 2003, we find that about 50% of the sample firms issue annual reports in English. Our findings suggest that the decision to publish an English annual report is related to the internationalization process (via foreign sales), language barriers (via language distance and language importance), governance (via ownership structure), and financial concerns (via the need for external financing, capital-market size, and cross-listing).

Why do You Speak English (in Your Annual Report)?

The dominance of English as a lingua franca in international business exchanges is so commonly accepted that there has been no investigation into the use of English as an external financial reporting language in non-English speaking countries. In this study we analyze the factors associated with the publication of an English-language annual report in non-English-speaking countries. Using a sample of 3,994 firms from 27 countries in 2003, we find that about 50% of the sample firms issue annual reports in English. Our findings suggest that the decision to publish an English annual report is related to the internationalization process (via foreign sales), language barriers (via language distance and language importance), governance (via ownership structure) and financial concerns (via the need for external financing, capital market size and cross-listing).