Private Firms Research Articles

Evaluating the Impact of Geopolitical Risk on the Financial Distress of Indian Hospitality Firms

The study investigates the effect of geopolitical risk (GPR) on the financial distress of tourism & hospitality firms in India. Using two-step GMM, this study evaluates the impact of GPR, GPR Threat, GPR Action and GPR India on financial distress using Altman score for emerging markets as proxy for financial distress. Further, robustness is checked using Żmijewski score and financial distress ratio as proxies for financial distress. The study is extended by examining the impact of GPR specifically on firm life cycle (age) and firm size and on private and public firms. Our empirical investigation demonstrates that all measures of geopolitical risk increase the chances of financial distress of hospitality firms and our findings are robust to alternative measures of financial distress. By considering GPR as an alternate measure of uncertainty in the hospitality industry, this study contributes to the emerging literature on the factors influencing financial distress of hospitality firms. The study also identifies three accounting measures for proxies of financial distress. Policymakers, regulators and management can pre-empt the impact of uncertain external factors by formulating suitable plans and measures as also for post recovery measures to safeguard firms against bankruptcy. Firms can plan their financing decisions and cash management proactively to reduce financial risk.

Sowing the seeds of sustainability: how does green finance reform shape corporate ESG performance?

ABSTRACT In the context of rising global eco-concern, China introduced the green finance reform and innovation (GFRIs) policies to promote sustainable growth, rendering corporate ESG performance increasingly salient. This study evaluates the impact of GFRIs policies on ESG performance of Chinese listed firms from 2015 to 2022, and delves into the mechanisms of green investments, green innovation, and government environmental concern. By employing a dynamic difference-in-differences model and considering firms in GFRIs pilot zones as the treatment group, we find that: First, green finance reform can significantly enhance corporate ESG performance, and this result remains robust across various tests. Second, the impact is more pronounced among growth-stage firms, private firms, and small-scale firms, as revealed by our heterogeneity analysis. Third, the mechanism tests show that green finance reform improves corporate ESG performance by boosting green investments, fostering green innovation, and heightening local government environmental concerns. Fourth, firm executives’ attributes influence the impact of green finance reform on ESG performance, and the involvement of CPC member executives, female executives, and socially-responsible executives can positively moderate this effect. This study provides valuable insights into sound green finance strategies for developing countries by highlighting the positive impacts of green finance reforms on microeconomic outcomes.

How does FinTech development drive corporate innovation? Fresh evidence from the perspective of financial supply

By constructing a city-level financial-technology (FinTech) development dataset, this study examines the impact of FinTech on corporate-innovation behavior from a financial-supply perspective. The results reveal that FinTech promotes corporate innovation by reducing corporate-financing constraints and financing costs, alleviating information asymmetry, and expanding financing channels. This promotion effect is more pronounced for private, small, and young firms, firms with fewer fixed assets, and those located in low-regulation intensity areas. Moreover, credit-based FinTech companies have a greater impact on business innovation. In addition, bank deregulation and increased bank competition crowd out the financial supply of FinTech for innovation financing. Knowledge of these impacts can help corporate managers, governments, and financial regulators to formulate more effective development strategies to promote corporate innovation.

Pilot Free Trade Zone Establishment and New Firm Entry: Evidence from China

ABSTRACTThis article investigates the effect of pilot free trade zones (FTZs) on new firm entry. Using firm registration data in China from 2003 to 2020, we find that the establishment of FTZs has a significant and persistent positive impact on new firm entry, and it is attributed to the capital and talent agglomeration induced by FTZs. Heterogeneous analyses show that FTZs primarily stimulate the entry of firms in high‐tech industries and domestic private firms, and the effect of FTZs is more pronounced in prefectures with higher institutional innovation and those in coastal areas. Moreover, FTZs exhibit positive spillover effects on the emergence of new firms in surrounding regions, suggesting that the establishment of FTZs has empowered coordinated regional development.

How do entrepreneurs’ diverse political ties affect firm performance? New insights from Chinese private firms

ABSTRACT Existing studies provide mixed results concerning the impact of political connections on firm performance with both value-foster and value-destructive effects being observed. This paper addresses this ambiguity by conceptually distinguishing three types of entrepreneurs’ political ties – private, official, and business ties – and investigating whether entrepreneurs’ diverse political ties influence the performance of Chinese private firms differently. Using data from 12,735 Chinese private firms, our analysis reveals that official ties positively influence firm performance, whereas private ties have detrimental impacts. Business ties have no significant impact. The mechanisms reveal that firms with official ties benefit from improved access to loans from state-owned banks and land, and they also enjoy protection from unwanted government expropriation. The negative ramifications of private ties arise from their limited capability to secure scarce resources such as bank loans and land, coupled with additional levies. Furthermore, this study suggests that the impacts of these ties are moderated by a host of corporate, industrial, and institutional characteristics. These findings contribute to the literature by unpacking the heterogeneity of political ties, highlighting the need for entrepreneurs to be strategic in establishing diverse business-political relationships.

Crowding out or spillover: the impact of foreign direct investment on the capacity utilization of domestic firms

ABSTRACT Overcapacity in China underscores the impact of external factors under open economic conditions. We utilize the relaxation of a foreign investment regulatory policy as an exogenous policy shock, incorporating a difference-in-differences (DID) approach with the instrumental variable method to assess the impact of foreign direct investment (FDI) on the capacity utilization of domestic firms. We find that FDI significantly reduces the capacity utilization of domestic firms overall through a mix of positive spillover and negative crowding-out effects, especially in the central and western regions, low-tech industries, domestic sales, and private firms.

Antecedent and Consequence of Innovation Output: Evidence from Thailand

The study aims to examine the impact of research and development (R&D) investment (the antecedent) on competitive advantage (the consequence) for the innovation output of private firms in Thailand. The population of this study includes all private Thai firms which have registered with the Office of National Higher Education Science Research and Innovation Policy Council. Path analysis and factor confirmation, including correlation matrix, are used to test the mediator effect of innovation output on the relationship between R&D investment and firm performance competitive advantage. The research data are tested and analyzed by the structure equation model. The results reveal that R&D investment was not found to directly influence competitive advantage, while R&D investment indirectly affects competitive advantage through innovation output. The findings of this study demonstrate that innovative output plays a mediating role between R&D investment and competitive advantage. In addition, dynamic capability theory can be used to explain the influences of R&D investment and innovation output on competitive advantage for private firms in Thailand.

Continuous work-related sitting time and its association with perceived workplace support for health among workers in the Greater Accra Municipality: a cross-sectional analysis with sensitivity analyses

BackgroundResearch to date has shown that work-related sitting time can be a major occupational health risk. This understanding has encouraged several workplace health promotion efforts. Even so, some domains of work-related sitting time and their associations with Perceived Workplace Support for Health (PWSH) have not been considered in research. This study aims to compare domains of work-related sitting time between employee characteristics (e.g., gender and age) and assess their associations with PWSH.MethodsThis study adopted a cross-sectional design with a sensitivity analysis against confounding and measures against common methods bias. The study population was employees of private and public firms in Accra, Ghana. In all, 1000 employees participated in the study. The hierarchical linear regression analysis and the independent samples t-test were used to present the results.ResultsEmployees working in service firms, compared with those working in manufacturing firms, reported longer sitting time for lunchtime. After adjusting for physical function, we found a negative association between PWSH and the sum of continuous sitting time as well as its domains (p < 0.001), except for ‘sitting with a desk’ (p > 0.05).ConclusionWork-related sitting time was associated with employee characteristics and was lower at higher PWSH. This study reinforces the importance of workplace support for health and its role in work-related sitting.

Innovation’s false spring: U.S. export controls and Chinese patent quality

This paper evaluates the effect of U.S. export restrictions, enacted in 2018, on China’s patent production. An analysis of patent-level datasets indicates a significant surge in Chinese patent filings in sanctioned technological domains. This quantitative growth, however, is accompanied by a decrease in patent quality, evidenced by reduced citation counts and market worth. Specifically, state-owned enterprises (SOEs) have witnessed a substantial rise in patent filings post-2018, while private firms exhibit a more modest increase. Despite the surge in patent quantity, the overall quality of patents—particularly those originating from SOEs—has deteriorated significantly. This study contributes to the body of research concerning the economic consequences of the US-China trade dispute and offers original insights into the implications of trade sanctions on innovation quality.

Local Government Debt and Corporate Fraud: Evidence from China

ABSTRACT Local government debt acts as a double-edged sword for economic development. While it has effectively stimulated local economic growth, it has also led to crowding-out consequences of crowding out corporate financing and investment. This study analyzes data of Chinese listed firms from 2007 to 2020, revealing the detrimental effects of local government debt on firms’ misconduct. We find that local government debt is positively related to corporate fraud, and the results remain robust to a series of sensitivity tests. The mechanism tests demonstrate that an increase in local government debt exerts pressure on firms’ financing and performance. Moreover, we observe that the adverse effects are more pronounced in private firms, and firms with poor governance systems.

On Cournot and Bertrand competition in collusive mixed oligopolies

AbstractWe consider a mixed oligopoly of one public and N private firms where goods are horizontally differentiated. In our setting, an interdependent payoff structure characterizes the degree of collusion among private firms. We show that, whereas in the Bertrand model, private firms are willing to collude as much as possible, in the Cournot model, the existence of a public firm reduces the scope of collusion. We also prove that the classic discussion comparing price and quantity competition crucially depends on market collusion. More precisely, price competition unambiguously yields larger profits for private firms only if collusion is high enough. In an infinitely repeated game, we prove that collusion is easier to sustain in a larger oligopoly because, in this case, a larger N helps mitigate the effect of the public firm on private firms’ collusion sustainability. Finally, we also find that collusion is always more easily sustained in the Bertrand case than in the Cournot case.

Do Public Financial Statements Influence Private Equity and Venture Capital Financing?

ABSTRACT We study whether the availability of public audited financial statements influences the probability of private firms receiving private firm equity financing. Using a setting in the EU with plausibly exogenous variability in the extent to which private firms issue public financial reports, we find that private firms subject to public reporting requirements have a higher probability of obtaining private equity (PE) financing. In addition, we show that the increase in PE financing occurs in industries in which PE funds have prior experience. Last, we show that our findings also extend to other forms of private firm financing such as private firm acquisitions and venture capital. Our evidence highlights the importance of public financial statements in the decision-making of PE investors, an important and understudied segment of the private firm financing market. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M2; G24; G34.

The Heterogenous causality of repurchases: Analysis from the aspect of share collateralization

We explore the unique heterogeneity feature of the Chinese market to examine the relationship between firms' share collateralization by its largest shareholders and corporate repurchases. Furthermore, we analyze the divergent incentives resulting in different consequences for the performance of private firms and state-owned enterprises (SOEs). The policy effect of an amendment to the Company Law of the People's Republic of China is studied using the difference-in-differences method. The measure is changed to ensure the reliability and robustness of the causality results between collateralization and repurchases. The results show that higher collateralization increases the likelihood of firms' share repurchases. The repurchase incentive of firm performance diverges between private firms and SOEs. Some SOEs even attempt to support the policy and blindly herd to repurchase shares; however, when SOEs are assured of their operational efficiency, repurchases increase their profitability. Private firms use repurchases as a share price stabilizer to protect the interests of their large shareholders rather than to benefit minority and small shareholders. These results provide policy feedback and demonstrate the complexity of controlling for corporate incentives when market interests are highly mixed.

Digital Revolution and Management Control Practices: The Impact of Digitalization in Moroccan Private Companies

This paper aims to investigate how digitalization activity influences the management control practices of Moroccan private enterprises. With technologies developing daily, organizations are grappling with how best to utilize these technologies in their MCs, thus the need for development. The main research question of this paper is therefore to: Examine the impact that digital transformation brings to the decision making, performance measurement and resource allocation in private firms in Morocco. To this end, the current study used both survey and interview questionnaires with managers drawn from different sectors and industries. These results therefore indicate that digitalization indeed increases the level of transparency and flow of daily monitoring information required in the management practices to increase its operational efficiency and overall strategic flexibility. That being said, the study also outlines some of the problematic areas like, resistance to change, training employees to learn how to deal with new tools. In conclusion, thus, despite the opportunities that the new digital reality opens to the approach and development of the management control systems in Moroccan private companies, this new reality poses a number of challenges which have to be met to improve the opportunities fully. The study adds to the current body of knowledge regarding digitalization of operations and the impact it has on managerial processes and provides recommendations to those practitioners seeking to enhance their effectiveness within the context of digitally enabled business environment.

Financial Constraints and Firm Innovation Decision: The Roles of Corporate Governance and Risk Diversification

ABSTRACT Firm innovation decision is subject to the influence of financial constraints, but the mechanism through which this impact occurs remains unclear. Using a nationwide representative survey data set of private firms in China in 2016, we first identified the strengthening effect of financial constraints on firm innovation decision, and further demonstrated the influence of corporate governance and risk diversification on such a relationship. The results show that firms tend to increase investment in innovation to improve operations when facing tighter financial constraints. Firms with suboptimal corporate governance and better conditions of risk diversification tend to adopt riskier innovation strategy to cope with tighter financial constraints.

The Impact of Trade Credit on Global Value Chain Position: Evidence from Chinese Manufacturing Firms

ABSTRACT Conventional wisdom argues that a well functioning financial system is essential to foster economic growth and development. While its financial market is still underdeveloped, China has not only achieved great economic growth and speedy export growth, but also elevated its position as an exporter in the global value chain (GVC). This paper examines the impact of trade credit on the GVC positions of Chinese manufacturing enterprises. The empirical study finds that trade credit has a significant promotional effect on enterprises’ GVC positions, and the effect is more pronounced for private firms, firms with high market position, and firms in high-technology industries. The mechanism analysis shows that trade credit heightens the export quality of products and alleviates the financing constraints of enterprises, thus promoting their GVC positions. The findings have implications for Chinese manufacturing firms to exploit the role of trade credit in promoting their GVC positions and fostering new advantages in international competition.

The rise of the walking dead: Zombie firms around the world

We build a comprehensive new dataset spanning listed and private nonfinancial zombie firms across Advanced Economies and Emerging Markets over the past two decades. Our findings reveal a global rise in the prevalence of these unproductive and unviable firms, particularly since the Global Financial Crisis and the Covid-19 pandemic. We show that private firms exhibit lower zombification rates due to their lower average survival rates. Our paper also offers a new perspective on zombie lending drivers: lenders may rationalize zombie lending based on overly optimistic expectations of a recovery in zombies’ future earnings. We then document that macroprudential policies targeting bank capital and loan restrictions can effectively mitigate the adverse effects of zombification. However, strengthening the banking sector alone may not suffice without robust insolvency frameworks prepared to manage firm restructuring and insolvency.

The unintended consequence of environmental centralization: Evidence from firm financialization

This study examines the influence of environmental re-centralization, specifically the Vertical Management Reform (VMR) in China, on the investment decisions of polluting firms. Using a staggered difference-in-differences approach, we find that the VMR significantly increases the allocation of resources to financial assets by 12.7 %, accelerating the financialization of polluting firms. The mechanism analysis shows that environmental centralization enhances regulatory enforcement and reduces governmental support, tightening corporate financial constraints. The motivation for firm financialization can be explained by investment substitution rather than precautionary savings. We further show that private firms, firms with more tightened financial constraints and firms with fewer assets become more financialized following the centralization reform. Moreover, the impact on firm financialization diminishes with the distance from provincial capital cities. We reveal the unintended consequence of environmental centralization on firm financialization and provide meaningful implications for changes in institutional arrangements.

Economic policy uncertainty and dividend policy: Insight from private firms

This study examines whether economic policy uncertainty (EPU) is associated with corporate dividend policy. Using a sample of private firms, we find that EPU is negatively related to dividend payouts. Our main findings are robust to endogeneity concerns, omitted variable problems, simultaneity bias, and alternative measures of EPU. Further, we find that firms are less likely to pay dividends when EPU is higher, confirming our main results. We also find that the negative relation between EPU and dividend payouts is stronger for firms with higher leverage, operating cash flows, sales growth, return on assets, and cash flow volatility than their counterparts. In contrast, the negative relation is weaker for firms with higher retained earnings-to-total equity ratios. Our study highlights that issues such as EPU can influence the dividend payout policies of private firms.

How Does AI Affect the Pay Gap Within Firms: Mechanism Analysis Based on Personnel Structure and Corporate Investment

ABSTRACTThis study examines how AI impacts the internal pay gap within enterprises. Using data from listed companies in China and a panel data two‐way fixed effect model, findings reveal that AI widens pay gap, with executives in AI‐applied companies earning 0.327 times more than average employees. AI increases executive pay while hindering employee salary growth, especially in nonmanufacturing and private firms. Labor substitution AI reduces employee compensation growth, whereas labor enhancement AI boosts executive pay without affecting employee compensation. AI also influences personnel structure and enterprise investment in fixed assets and R&amp;D, highlighting its “job substitution effect” and “productivity effect”.