Role Of Financial Constraints Research Articles

The Role of Financial Constraints in Business Environment; Evidence from Business Group Affiliated and Non-Affiliated Firms in Pakistan

The main purpose of this study is to investigate the relationship between Cash Flows, Growth Opportunities, Firm Size, Firm Age, Firm Performance, Investment, Financial constraints and Leverage between the B.G AFs and NAFs of Pakistan. Current study consists of the balanced panel data containing 86 B.G AFs vs. 90 NAFs of the Pakistan. This study covers the yearly data period from 2007 to 2017. The findings showed that the cash flows are positively correlated with the return on assets, investments, financial constraints, while leverage is negatively correlated with the financial constraints. The positive correlation between cash flows and return on asset is higher for the B.G AFs, which means the B.G AFs are more profitable than the NAFs. The correlation of cash flows with the investment and financial constraints is positive but lower for the B.G AFs, showing that AFs investment is less sensitive and less financially constrained than NAFs. The inverse correlation between leverage and financial constraints shows that the B.G AFs have easy access to the financial sources. The positive and higher correlation of growth opportunities with cash flows and return on assets shows that the AFs growth is higher than NAFs.

Referring young people to psychosocial support in the context of a youth active labour market/education strategy

ABSTRACT This study explores how experienced Danish caseworkers who work with young people at municipal job centres justify and make decisions regarding referring young clients to psychosocial interventions. Twelve caseworkers and a line manager from two municipalities were interviewed. A thematic analysis was conducted. Key themes were: in-house and out-of-house collaboration; referral as an ongoing process; matching the young person with the service provider based on information about the service providers’ target groups, and information about personal factors and individual contextual factors; dealing with regional gatekeepers; and the role of financial constraints and bureaucratic procedures. The caseworkers experienced a high degree of autonomy and were pragmatic in their approach to referring their young clients to service providers.

The exports–exchange rate volatility nexus in Pakistan: do financial constraints and financial development matter?

PurposeThis paper first examines how changes in the real effective exchange rate and its volatility affect the exporting activities of firms. Next, it investigates whether exchange rate volatility (EXRV) affects the export behavior of financially constrained and unconstrained firms differently. Finally, it examines the role of financial development in mitigating the effects of EXRV and financial constraints on firms' exports.Design/methodology/approachThe empirical analysis of the paper is based on a wide panel of Pakistani nonfinancial firms listed at the Pakistan Stock Exchange during the period 2001–2016. To mitigate the problem of endogeneity and to take into account the dynamic nature of the empirical model, the authors apply the robust two-step system-GMM estimator developed by Blundell and Bond (1998). To examine the role of credit constraints, firm-year observations are sorted as financially constrained and unconstrained based on the median value of three alternative measures: the liquidity ratio, the dividend payout ratio and the Whited and Wu (WW) index.FindingsThe results reveal that an increase in the real effective exchange rate has a positive and significant impact on firms' exports. However, the results show that the EXRV is significantly and negatively related to exporting decisions, suggesting firms considerably decrease their exports during periods of increased unpredictable variations in exchange rates. The findings also suggest that compared to financially constrained firms, the adverse effect of EXRV on exports is weaker for financially unconstrained firms. This finding implies that firm-level financial constraints unfavorably impact exports by making exporting more sensitive to the EXRV. Finally, the findings indicate that financial development not only positively affects firms' exports but also plays a vital role in declining the adverse effects of EXRV on firm-level exports. Specifically, the results show that financial development decreases the negative impact of EXRV on exports for both financially constrained and unconstrained firms. However, the moderating role of financial sector development is higher for financially unconstrained firms.Research limitations/implicationsNotwithstanding that the authors present robust and strong empirical evidence of the effects of EXRV on exporting and on the role of both firm-level financial constraints and financial sector development in formulating these effects, there are some limitations of the study. The authors use a single proxy for measuring financial sector development. However, one may construct an index for the financial sector developed using principal component analysis (PCA) by considering different measures of financial development. The authors use three different measures of financial constraints. Nonetheless, more sophisticated techniques such as switching regression can be used to endogenously determine whether firms are financially constrained. Moreover, an examination of the asymmetric effects of EXRV on exporting across different industries would also be worthwhile.Practical implicationsFrom a policy point of view, the results suggest that the development of the financial sector and the strategies to lessen credit constraints faced by firms will help in mitigating the adverse effects of the EXRV on the exporting behavior of firms in Pakistan. The findings also suggest that managers in financially constrained firms should apply appropriate hedging strategies to hedge exchange rate risks. Finally, the findings suggest that investors should take into consideration exchange rate dynamics and firms' financial constraints while investing in exporting firms' stocks.Social implicationsSince the findings suggest that financially constrained firms' exports are more exposed to EXRV, managers of such exporting firms are suggested to apply effective and suitable currency risk-minimizing hedging instruments for enhancing their exports. The government should also implement economic and financial policies in such a way that they should help in reducing volatilities of exchange rates and in turn, encouraging firms to export more. Definitely, any policy, at both government and firm level, favoring exporting and export-oriented growth will not only help in overcoming the problem of a persistent and wide trade deficit but also help society by providing more employment and investment opportunities.Originality/valueRecently, Pakistan has experienced significant declines in foreign reserves, persistent political unrest and enlarged trade deficits. All these have increased the uncertainty about the exchange rate. Therefore, it is valuable to know the EXRV effects on firms' exporting activities. Second, Pakistani firms face more financial constraints, and thus, the influence of financial constraints in formulating the volatility effects on exporting would be worth exploring. Finally, no research has yet taken place to scrutinize the role of financial development in mitigating the adverse effects of EXRV and financial constraints on exporting activities. This paper provides firsthand empirical evidence on the role of financial constraints and financial sector development in formulating the EXRV impacts on firm-level exports in Pakistan.

FDI and Firm Productivity in Host Countries: The Role of Financial Constraints

This paper studies the effect of FDI firms' financial advantages on firm productivity in host countries and examines the related policy implications. If FDI firms face lower financing costs but have higher fixed production costs than local firms, a simple Melitz-type model predicts that because of their financial advantages, FDI firms could have even lower cutoff productivity than local firms, especially in financially vulnerable sectors. The same mechanism will also lower the average productivity of FDI firms especially in financially vulnerable sectors, although FDI firms on average are still more productive than local firms. These predictions are supported by the Chinese firm-level data. Then, we study policy implications in a two-country model that resembles these empirical patterns. The counterfactual policy analysis shows that offering tax benefits to FDI firms could be counterproductive because it attracts FDI firms that are even less productive than local firms. The policy in the host country to improve its financial market efficiency could also hurt the country's welfare because of the interaction between financial market reforms and the distortionary taxes imposed on local firms to finance FDI subsidies.

Outsourcing flexibility under financial constraints

We posit that outsourcing flexibility helps overcome financial constraints and provide evidence concerning the role of financial constraints and its interaction with operational flexibility on the likelihood and market value of outsourcing. We find that the likelihood of outsourcing is higher the greater the firm's financial constraints prior to outsourcing and that the effect of financial constraints on the likelihood of outsourcing is greater the lower the ex-ante operational flexibility, suggesting partial substitution between financial and operational flexibility. We further show that the market value impact of outsourcing announcements is predominantly positive confirming net flexibility gains positively related to ex-ante financial constraints. Our findings suggest that outsourcing is a vehicle for flexibility acquisition and that financial constraints play a prominent role.

Intangible Investment during Sovereign Debt Crisis: Firm-level Evidence

This paper measures the output and TFP costs of sovereign risk by focusing on firm-level investment. Combining Italian firm-level and aggregate-level data, we show that firms reduce their investment and reallocate their resources away from intangible assets and towards tangible assets during the sovereign debt crisis. This asset reallocation is more pronounced among small and high-leverage firms, indicating the role of financial constraints. In our model, sovereign risk deteriorates banks' balance sheets, disrupting banks' ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms internalize that tangibles can be used as collateral while intangibles can not, thus reallocating resources towards tangible investment. In a counterfactual analysis, we find that elevated sovereign risk explains 86% of output losses and 72% of TFP losses during the 2011-2013 Italian sovereign debt crisis.

Shocks, financial constraints and households’ consumption amid the great recession

Overall, there is now considerable evidence that financial constraints are at the root of the lack of consumption smoothing during the Great Recession. We push this evidence forward and show that in the presence of credit constraints, a job loss leads to larger drops in households? consumption. We build a set of testable hypotheses from our theoretical model and employ microdata taken from the second round of the Life in Transition Survey (LiTS II) (European Bank for Reconstruction and Development 2010). We specifically assess the role of financial constraints in explaining households? consumption coping strategies after the crisis shocks. Economic hardship is more likely to be observed if households experience difficulties in meeting outstanding debt obligations or in obtaining new credit lines because of financial constraints. The impact of job and wage shocks on households? consumption is much attenuated, by around a half, when we control for sample selection bias in accessing the formal credit markets. In the context of increasing impoverishment across Europe, the paper shows that a careful analysis of the main determinants of households? economic and financial hardship is crucial to formulate targeted measures at the regional and local level.

Determinants of corporate default risk in China: The role of financial constraints

Corporate default risk can affect financial stability and the macroeconomy. However, the determinants of corporate default risk in China are not well defined in the literature. We address this issue by using a rich credit event dataset of 981 Chinese listed firms over the period 1998–2013 and study the factors that affect default risk. We demonstrate that leverage, liquidity, firm size are the key firm-specific factors in determining default risk in China, along with macroeconomic factors like interest rate and stock return. Moreover, ‘Too big to fail’ only applies to non-SOEs, as default risk of SOEs is not affected by the firm size. We further find that high liquidity fails to reduce firms default risk, because small-sized firms which are financially constrained have limited cash to prevent financial distress, whereas large firms with greater cash holdings are able to mitigate their default risk as they are unconstrained.

Open Innovation Challenges: Empirical Evidence from Malaysian Small and Medium-Sized Enterprises (SME's)

At present, open innovation (OI) practices have gained traction in all industries, particularly in small and medium-sized enterprises (SMEs). However, only a few Malaysian SMEs practice OI and there is limited literature available on OI practices in Malaysian SMEs. To address this issue, the main objective of the current study is to reveal the challenges of OI and the role of financial constraints in Malaysian SMEs. To achieve this objective, this study implemented the quantitative approach and adopted the cross-sectional research design. Questionnaires were used to collect data from three hundred (300) data managerial staff of Malaysian SMEs. Cluster sampling was used to collect the data. It was found that Malaysian SMEs faced various challenges during the implementation of the OI system. These challenges included motivating spillovers, maximizing internal innovation, and incorporation of external knowledge and intellectual property (IP) management. Moreover, it was found that sufficient finance is needed to resolve these challenges. Hence, this study contributes in the body of knowledge by developing a framework for SMEs to facilitate OI and by identifying the constraints in this framework. Therefore, the current study can be used for Malaysian SMEs to improve their OI system.

Accruals quality, financial constraints, and corporate cash holdings

PurposeThe purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect.Design/methodology/approachThe paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality.FindingsThe study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings.Practical implicationsThe results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers.Originality/valueThis paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Liquidity constraints, spillovers, and entrepreneurship: evidence from a cash transfer program

This paper exploits a liquidity shock from a welfare program in Brazil to investigate the role of financial constraints, in opposition to general equilibrium mechanisms, in explaining entrepreneurship. Previous research focuses exclusively on how liquidity changes recipients’ behavior through direct effects on reducing constraints. However, liquidity shocks may also produce spillovers from recipients to others and thereby indirectly affect entrepreneurial decisions. This paper presents a method for decomposing the liquidity shock into direct effects associated with relieving individual constraints, and indirect effects associated with spillovers to other individuals. Results suggest that the program, which assists 20 percent of Brazilian households, increased the number of small entrepreneurs by 10 percent. However, this increase is entirely driven by the indirect effect. Further tests suggest that this effect is associated with an increase in private transfers between households. Thus, entrepreneurship tends to respond more to the interaction between households than to financial constraints.

Financial constraints, government support, and firm innovation: empirical evidence from developing economies

ABSTRACT The aim of this paper is two-fold. First, we empirically investigate the role of financial constraints on innovation activities. Second, we examine the significance of non-financial support provided by government on firm innovation. We employ firm-level survey data over the period 2006–2017 for 100 countries. Based on the direct indicators of financial constraints, different estimation methods and addressing the endogeneity concerns, we document that financial constraints have a significant negative impact on firms’ innovation activities. Further, we find a positive correlation between government support and the innovative activities of small-medium enterprises; and the impact is more pronounced in the case of financially unconstrained firms.

Cash-flow Sensitivities of Interdependent Corporate Decisions – The Role of Financial Constraints and Hedging Needs

Abstract We examine the cash-flow sensitivities of firms’ simultaneous choice of investment, liquidity, dividends and net debt respectively equity financing in a large sample of US corporates between 1971 and 2016. We differentiate firms according to their (external) financial constraints and their (internal) needs to hedge against future shortfalls in operating income. Our estimation approach shows that financially constrained firms in our sample save more future funding capacity but invest and pay out less out of free cash flows than unconstrained firms. In the financial crisis 2007–2009, all firms invested less out of cash flow and raised their debt repayments, cash holdings and dividend payments. Constrained firms, however, show particularly strong increases in their cash savings but much smaller debt reductions compared to unconstrained firms – both in the crisis and post-crisis period. Internal hedging needs have different effects than external constraints: They weaken the build-up of future debt ca...

Product market competition, cash flow and corporate investments

PurposeThe purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects.Design/methodology/approachThe Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method.FindingsThe results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms.Practical implicationsThe role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency.Originality/valueMany firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

The influence of capital expenditures on working capital management in the corporate sector of an emerging economy: the role of financing constraints

Relying on firm-level panel data from an emerging economy, this study explores the impact of fixed capital expenditure on working capital management practices. When facing insufficient internally generated cash flows and external funds for accommodating capital investments, companies are found to finance capital expenditure by primarily depleting cash reserves and increasing trade payables. Corroborating the postulates of the financing constraints theory, working capital investments are found to be inversely related to the degree of financing constraints, and positively sensitive to operating cash flow fluctuations and availability of external finance. For financially constrained companies, capital expenditures are found to more likely exercise a negative impact on working capital investments. Contributing to the discussion on the nature of business cycles, we document that the negative cash flow shocks are likely to be transmitted to firms’ counterparties through the trade credit channel rather than through the reduction of investment demand. The empirical findings also suggest that financial managers fail to properly account for capital expenditures in short-term liquidity planning, which, under conditions of limited access to imperfect capital markets, may induce the recurrence of costly working capital adjustments.

Migration and development: Dissecting the anatomy of the mobility transition

Emigration first increases and then decreases as a country experiences economic development. This inverted U-shaped, cross-sectional relationship between emigration and development was first hypothesized by Zelinsky's theory of the mobility transition. Although several mechanisms have been proposed to explain the upward segment of the curve (the most common being the existence of financial constraints), they have not been examined in a systematic way. In this paper, we propose two decomposition methods to disentangle the main drivers of the mobility transition curve to OECD destination countries. Our simple decompositions shed light on the role of both microeconomic drivers (i.e., financial incentives and constraints) and macroeconomic drivers, as well as the skill composition of the population. Our double decomposition further distinguishes between migration aspirations and realization rates by education level. Overall, we provide consistent evidence that the role of financial constraints, while relevant for the poorest countries, is limited. Rather, a large fraction of the increasing segment is explained by the skill composition and by macroeconomic drivers (i.e., by factors that do not change in the short-run).

Intended college enrollment and educational inequality: Do students lack information?

Despite increasing access to university education, students from disadvantaged or non-academic family backgrounds are still underrepresented in universities. In this regard, the economics literature has focused on the role of financial constraints as a cause of these observed differences in educational choices. Our knowledge of potential effects of other constraints regarding university education is more limited. We investigate the causal relationship between information and educational expectations using data from a German randomized controlled trial in which students in high schools were given information on the benefits of as well as on different funding possibilities for university education. We find that the provision of information increases intended college enrollment for students from a non-academic family background, both two to three months and one year after the intervention. In contrast, it leads students from academic backgrounds to lower their enrollment intentions in the short run. However, this effect does not persist. Our results suggest that educational inequality can be reduced by providing students from non-academic families with relevant information.

High Growth Firms in Employment and Productivity: Dynamic Interactions and the Role of Financial Constraints?

Using a panel of Spanish firms over the period 2002-2012, we investigate the interactions between high growth episodes in terms of size and productivity. We find that high growth in productivity (size) increases the likelihood of high growth in size (productivity). However, the effect from size to productivity is smaller than the effect from productivity to size. We also explore the potential role of firm-level financial constraints using information from the Central Credit Register (CIR) of Banco de Espana. Our results indicate that credit constraints hamper high growth episodes in terms of both size and productivity.

Short communication: East-West European farm investment behaviour - The role of financial constraints and public support

The article investigated farm investment behaviour among East (Hungarian and Slovenian) and West (French) European Union farms using individual farm accountancy panel data for the 2003-2008 period. Despite differences in farm structures, except for the presence of capital market imperfections evidenced in the East, farms’ investment behaviour was not substantially different. Farm gross investment was positively associated with real sales’ growth. In addition, it was positively associated with public investment subsidies which can mitigate capital market imperfections in the short-term. On the long run, the farm’s ability to successfully compete in the output market by selling produce and securing a sufficient cash flow for investment is crucial.

Short- and long-run heterogeneous investment dynamics

In this paper, we model the dynamics of business investment taking into account asset-specific characteristics potentially affecting the reactivity of aggregate and disaggregate capital accumulation over the business cycle. We estimate Information and Communication Technologies (ICTs) and traditional investment (non-ICT) determinants within a Vector Error Correction Model testing the assumptions of the flexible accelerator and neoclassical model as well as the role of financial constraints and uncertainty. We evaluate our model on Italian data over the period 1980–2012, and we check our results also with Spanish and UK data. Our findings support the assumption that capital is heterogeneous since short- and long-run determinants are significantly different across the assets. Traditional assets experience stock adjustment costs while ICT investment incurs flow adjustment cost. In the short run, liquidity is a key determinant of investment independently of the asset type. In the long run, uncertainty significantly affects ICT. Finally, the results of the counterfactual exercises support the idea that ICT is a key policy variable to foster economic growth.