Reducing Financing Constraints Research Articles

The Real Effects of FinTech Lending on SMEs: Evidence from Loan Applications

We show that FinTech lending affects credit markets and real economic activity using a unique data set of a Peer-to-Business platform for which we have the universe of loan applications and loans granted. We find that FinTech serves the same segment of high quality and creditworthy small businesses as banks. Firms use FinTech loans to reduce bank dependence, especially from less liquid banks. We find that firms that access FinTech lending increase assets, employment, and sales relative to firms that get their loan application rejected. In addition, we find that firms increase leverage as they substitute long-term bank debt with long-term FinTech debt and short-term bank debt. Our findings suggest that FinTech lending reduces financing constraints and spurs investment and firm growth.

Can Green Finance Development Reduce Carbon Emissions? Empirical Evidence from 30 Chinese Provinces

Dealing with the relationship between environment and economic development is the core issue of China’s sustainable development. At present, China’s economic transformation is urgent, and green finance is being widely concerned. This paper measured the development level of China’s green finance from the perspective of green credit, green securities, green investment, and green insurance. Then, it used a spatial dynamic panel model to empirically test the mechanism of the impact of green finance on carbon emissions with panel data of 30 Chinese provinces from 2005 to 2018. The following can be seen from the results: (1) The development of green finance contributes to carbon emission reduction. (2) The spatial spillover effect of green finance is significant. Specifically, the development of green finance can not only reduce the carbon emissions of the local region but also inhibit that of adjacent areas. (3) The development of green finance indirectly leads to a decrease in carbon emissions by reducing financing constraints and boosting green technology innovation. In order to stimulate the carbon emission reduction effect of green finance to a greater extent, we should further support the development of green finance, reduce the financing constraints of energy-saving and environmental-protection enterprises, and encourage the research and development of green innovative technologies.

Asset Redeployability and Corporate Tax Avoidance

Using a large sample of US data, we examine the relationship between asset redeployability and corporate tax avoidance. We also examine the extent to which asset redeployability influences tax avoidance directly and indirectly (through financing constraints channel). We find a significant negative relationship between asset redeployability and tax avoidance, implying that firms with more redeployable assets tend to engage in less tax avoidance. We also confirm that asset redeployability reduces tax avoidance both directly and indirectly (through reducing financing constraints). These results are robust to alternative specifications of asset redeployability and corporate tax avoidance, and to the use of a two‐stage least squares (2SLS) analysis to mitigate any endogeneity concerns relating to omitted variables, reverse causality, and model misspecification. Overall, these findings extend our existing understanding of the implication of asset redeployability in an accounting context and demonstrate that redeployability of assets has important implication for corporate tax planning.

Policy Burden of State-Owned Enterprises and Efficiency of Credit Resource Allocation: Evidence from China

This article selects A-share state-owned listed companies in Shanghai and Shenzhen stock exchanges from 2007 to 2018 as samples and uses OLS together with intermediary effect tests to study the impact of state-owned enterprise’ (SOEs) policy burdens on credit resources and their allocation efficiency. The research finds that the heavier the policy burden SOEs assume, the more credit resources they obtained. However, they are also more likely to make inefficient investments after obtaining the credit resources, and these credit resources have a negative effect on the value of the SOEs which bear the policy burden. These negative impacts are more significant in SOEs with low degree of marketization in the region, low level of government control, and low information transparency. The path analysis elaborates that the policy burden of SOEs reduces the efficiency of resource allocation by increasing management agency costs and reducing financing constraints. The conclusions enrich the understanding of the consequences of policy burdens under the background of Chinese system, further broaden the analytical framework of the efficiency of credit resource allocation, and unveil the importance of relevant government departments that can optimize the efficiency of credit resource allocation.

Charging for Higher Education: Estimating the Impact on Inequality and Student Outcomes

Abstract Over the last two decades, undergraduate university education in England moved from being state-funded and free for students, to costing all students substantial amounts in tuition fees. In this paper, using detailed administrative longitudinal microdata that follow all students attending state schools in England (approximately 95% of student population), we causally show that, despite the substantial reforms, enrollment fell only by 0.5 percentage points, where the effect is largely borne by those in wealthier groups, reducing the enrolment gap across socio-economic groups. Since tuition fees were introduced in conjunction with the government offering generous means-tested maintenance (cash) grants, as well as loans, our results highlight the importance of reducing financing constraints. Beyond enrollment, we find that the reforms have limited impact on students’ higher education choices, such as relocation decisions, university choice, and field of study. Finally, by tracking the students after graduation, we show similarly small effects on labor market outcomes.

Targeted monetary policy and financing constraints of Chinese small businesses

This study examines the effect of targeted easing (TE), an unconventional monetary policy designed to reduce reserve requirement ratios (RRR) of selected financial institutions, on reducing financing constraints of Chinese small businesses. Using a longitudinal sample of listed small businesses between 2003 and 2018, we find that the implementation of a TE policy significantly reduces financing constraints of small businesses as measured by the cash flow sensitivity. In addition, the policy effect is stronger when reductions in RRR are targeted at financial institutions specialized in small business lending than at banks with a threshold level of small business loans. We also document that small businesses with larger financing needs benefit significantly more from the TE policy and experience a larger reduction in their financial constraints. Moreover, the TE policy effect is more salient in state-owned small businesses than privately controlled enterprises. These results are also robust to alternative measures of financing constraints.

Geographic proximity, information flows and corporate innovation: Evidence from the high-speed rail construction in China

Using the construction of high-speed rail as a source of exogenous variation in proximity, this study investigates how geographic proximity affects corporate innovation. The construction of High-speed rail can improve geographical proximity by reducing the travel time and cost between areas. Using multi-period Difference-in-Differences model, we find that geographical proximity, which is increased after HSR construction, can stimulate corporate innovation in ways of inputs, outputs and efficiency. This association is robust after considering omitted variable concerns, adopting instrumental variable method and propensity score matching-DID to address possible endogeneity concerns. Further analysis shows that HSR can facilitate information flows and improve monitoring capabilities, which can spur corporate innovation by reducing financing constraints, strengthening talent flow and increasing institutional investors' site visits. In addition, the promotion effect is more prominent in private firms, small firms and those in areas with higher degree of property right protection. Our paper sheds new light on the effects of proximity on firms in the case of innovation.

The effect of financial constraints on innovation in developing countries

PurposeThe purpose of this paper is to investigate the effect of financial constraints on innovation in developing countries. It also examines how the effect of financial constraints varies by sector and with main firm characteristics such as size and age.Design/methodology/approachThe study utilizes matched firm-level data from two sources; the World Bank Enterprise Survey and the Innovation Follow-Up Survey. From 11 African countries, 4,720 firms have been included in the sample. A recursive bivariate probit model is used.FindingsThe result shows that financial constraints adversely affect a firm’s decision to engage in innovative activities and the likelihood to have product innovation and process innovation. The results point out that the extent of the adverse effect of financial constraints on innovation differs across the sectors, firm size and age groups. A firm’s innovation is also explained by firm size, R&D, cooperation/alliance, the human capital of the firm, staff training, public financial support and export. At last, the probability of encountering financial constraints is explained by firms’ ex ante financing structure, amount of collateral, accounting and auditing practices and group membership.Practical implicationsManagers should strengthen the internal and external financing capacity to reduce financing constraints and their adverse effect on innovation.Social implicationsA pending policy task for African leaders is to design and evaluate reforms that reduce the adverse effects of financial constraints on innovation.Originality/valueThis study contributes to the existing literature on financing of innovation by examining how and to what extent financial constraints affect innovation across various sectors, size and age groups.

Does Bank Competition Alleviate Financing Constraints in China? Further Evidence From Listed Firms

ABSTRACTThis article studies the impact of structural changes in China’s banking sector on the financial constraints on Chinese listed companies’ ability to finance their investments. Using information on the location of bank branches of all Chinese banks, we find that growing competition among banks reduces financing constraints on listed firms. We also show that the emergence of joint-stock commercial banks and regional commercial banks has played a major role in alleviating financing constraints on enterprises, partially due to the weakening of the monopolistic position of state-owned commercial banks. Our findings are based on an analysis of the investment behavior of Chinese listed companies over the period 2000–2015. The results lend support to policies that would further relax regulations on entry into the banking sector.

Cross-shareholding and financing constraints of private firms: Based on the perspective of social network

This paper examines the impact of cross-shareholding and network positions in the cross-shareholding network on the financing constraints of private firms in China. Two indices are constructed to measure the position characteristics: network centrality and structural holes. Based on the data of listed private firms for 2008-2014, we find that the cross-shareholding relationship can significantly relieve the financing constraints of private firms. However, the role of cross-shareholding in reducing financing constraints is weakened as the level of financial marketization increases. Further, the results suggest that the higher the centralities or the more structural holes of private firms there are in the cross-shareholding networks, the lower the financing constraints of private firms.

The Impact of Stock Liquidity on Firm Innovation: Evidence From China

Stock market has become a crucial financing channel for firms nowadays. As an important dimension of the characteristics of stock market, how will stock liquidity affect firm innovation? What are the underlying mechanisms? Those questions need to be explored further. Using Chinese non-financial A-share listed companies which had disclosed R&D expenditures in year 2006 to 2016 as the study sample, this paper investigates the effect of stock liquidity on firm innovation. The result shows that stock liquidity has a significant and positive effect on firm innovation. My finding is supported by additional test using Heckman sample selection model and several robustness tests. Further analysis shows that stock liquidity improves firm innovation by reducing financing constraints and increasing agency costs. This paper deepens the research on firm innovation from the perspective of market microstructure and owns implication for the government to encourage investment in R&D and will lead to develop multi-tiered capital markets.

Financing and monitoring in an emerging economy: Can investment efficiency be increased?

This study investigates the influence of the financial system on firms' investment efficiency in China. For this purpose, we employ country level data of capital markets and financial institutions along with financial data from 2797 Chinese firms in the period from 1998 to 2015. The firms are priori classified into four groups, by high and low values of financial constraints and agency problems. Results show that financial development influences firms' investments positively either directly or by reducing cash flow sensitivity. The impact remains the same for all types of firms. Moreover, the financial structure has an impact on investment efficiency of firms; this result also remains the same even after controlling levels of financial development. Study contributes that capital market based financial structure impacts investment decisions by reducing financing constraints and agency issue due to its strong monitoring ability.

Regional Financial Developments and Research and Development Investment–Cash Flow Sensitivity: Evidence on Chinese Public High‐Tech Companies

AbstractIn a sample of 485 Chinese public high‐tech companies, we show that the R&D investment is significantly dependent on internal cash flow. Based on the sizable discrepancies of stock market and financial intermediary developments in the East, Middle and West regions of China, empirical estimation provides strong evidence that the financial developments in both credit and equity markets have large effects on reducing financing constraints. The effects are most significant in the financially advanced East region of China.

Regional Financial Developments and Research and Development Investment Cash Flow Sensitivity: Evidence on Chinese Public High-Tech Companies

In a sample of 485 Chinese public high-tech companies, we show that the R&D investment is significantly dependent on internal cash flow. Based on the sizable discrepancies of stock market and financial intermediary developments in the East, Middle and West regions of China, empirical estimation provides strong evidence that the financial developments in both credit and equity markets have large effects on reducing financing constraints. The effects are most significant in the financially advanced East region of China.

The effects of policy funds on the financing constraints of small- and medium-sized enterprises in South Korea

ABSTRACTThis study investigates whether small- and medium-sized enterprises (SMEs) policy funds in South Korea are effective in reducing financing constraints faced by the SMEs. We find that investment-cash flow sensitivity decreases after public loans are granted, and furthermore that this decrease in the sensitivity is greater for younger and smaller firms. These results are consistent with the certification effects hypothesis.

Financing constraints and SME innovation during economic crises

Purpose The purpose of this paper is to provide a better understanding of the determinants of small and medium-sized enterprises (SME) financing constraints and their impacts on investments in innovation. To explicate these factors, the authors use a general definition of innovation, distinguishing between product and process innovations, and highlight the role played by banking relationships. Design/methodology/approach On the basis of a literature review covering works specializing in innovation, financing constraints, and SME characteristics, a quantitative study is carried out in Spain, using a sample composed by 267 Spanish SMEs. Information was gathered by applying surveys addressed to the firm managers. Findings The findings reveal that financing constraints hinder innovation among Spanish SMEs functioning in hostile environments, though long-term banking relationships can moderate these financing constraints. The longer the duration of a firm’s banking relationship, the fewer financing constraints it faces, because the relationship significantly reduces information asymmetry. Practical implications To reduce financing constraints on their innovation, SMEs should establish long relationships and low debt concentration with their main bank. The more banks a firm works with, the greater its financing constraints. The findings have managerial implications, not just for firms but also for government policymakers and providers of consulting services. Originality/value This paper provides an in-depth analysis of the factors that affect innovation, along with insights into which financing constraints limit innovation during a severe recession.

Corporate Governance as a Mechanism to Mitigate Financing Constraints on Investment

This paper addresses whether adopting good governance standards alleviates constraints on financing investment via improved internal efficiency or access to external capital. The Russian context serves as an appropriate setting for studying the longitudinal effect of governance. I use transparency and disclosure (TD) scores computed by Standard and Poor’s (S&P) as the primary proxy for corporate governance, supported by shareholder ownership structure. I find that corporate governance has a positive and significant impact on fixed investment. However, my findings indicate that for oligarch-owned firms, this relationship might be curvilinear. State owned enterprises (SOEs) are more sensitive than oligarch-owned enterprises to improved governance, but less sensitive to the changes in internal funds (cash-flows). I elaborate on possible interpretations of these findings. Firstly, SOEs are poorly governed judging by their S&P TD scores, therefore, any improvements to their governance might have a more significant effect on their fixed investment. Secondly, the absence of investment-cash-flow sensitivity for SOEs might be due to soft budget constraints.I find that governance of financially constrained firms positively and significantly affects investment. Governance, therefore, is a valid mechanism for reducing financing constraints on investment. The empirical analysis is conducted on an eight-year panel dataset containing observations on the largest Russian companies, publicly listed in Russia or abroad. Robustness checks and controls for endogeneity include dynamic panel generalized method of moments (GMM), difference-in-difference estimator (DID), based on an exogenous event (introduction of Russian governance code) and vector autoregression (VAR) techniques.

Regional Financial Development and Financing Constraints in R&D Investments: A Panel Study of Chinese High-Tech Firms

We apply the Q-Theory investment model to a panel of high-tech firms listed on the Chinese stock market during 2008 and 2011, to study the effect of financial development in reducing financing constraints of firm's R&D growth. Based on the sizable discrepancies of stock market and financial intermediary development in east, middle and west regions of China, we also split the sample into subsamples based on firm location to conduct the analysis. Empirical estimation provides strong evidence that financial development in both credit and stock market has a large effect on reducing financing constraints. This effect is most significant in the financially more developed east region of China. In the financially less developed middle region, the marginal effect is larger in scale but less significant.

Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets

Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows.

Financial credibility, ownership, and financing constraints in private firms

As shown in the international business literature, the ability of controlling owners to extract private benefits is greater in countries with weaker legal institutions. In these countries, providing credible financial information could play an especially important role in reducing information asymmetry between private firms and external providers of finance. For our sample of firms across 68 countries, we find that firms with greater financial reporting credibility (i.e., annual financial statements reviewed by an external auditor) experience significantly lower perceived problems in gaining access to external finance. Further, the impact of financial credibility in reducing financing constraints in the presence of a controlling owner is more pronounced in countries with weaker creditor rights. Given the predominance of private firms around the world, their economic significance, and the fact that an increasing number of private firms now operate in multinational environments with different institutional features, we contribute to the literature on the role of financial information, firm characteristics, and country-level institutions for an important and interesting group of firms.