Young Firms Research Articles

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.

Monetary policy, firm heterogeneity, and the distribution of investment rates

We document that an interest rate cut reshapes the cross-sectional distribution of investment rates—fewer zero and small investment rates and more large ones—and particularly so among young firms. The extensive margin investment decision—whether to invest or not—is essential in explaining these findings. We develop a heterogeneous-firm model with fixed adjustment costs and firm life-cycle dynamics to rationalize the evidence and study the implications for the investment channel. The extensive margin investment decision makes monetary policy less effective whenever few firms are inclined to invest: in downturns, but also in economies with low business dynamism and few young firms.

Financial constraints for R&D and innovation: new evidence from a survey experiment

ABSTRACT We utilize a survey experiment to evaluate the existence and degree of financial constraints for R&D. The experiment not only allows for the deduction of the presence of financial constraints but also for evaluating their economic significance. Using data on German companies, we find that financial constraints exist, but their relevance might have been overestimated in the literature. Most R&D projects that have not been implemented because of financial constraints seem to have low expected marginal rates of return. While this finding contrasts with other studies, we also find results that align with the literature: young firms are most constrained, and the constraints occur at the intensive margin, i.e. our results do not suggest that firms are deterred from innovation. Instead, highly innovative companies are restricted by the capital market. Small firms, in particular, had innovation projects in their portfolios that were not implemented.

Hiring opportunities for new firms and the business cycle

AbstractWhether firms founded during or outside economic crises have greater growth potential is an important question for both prospective entrepreneurs and policy makers. Existing research offers conflicting answers, and mostly either focuses on aggregate cohort-level effects or selectively excludes small new firms from the analyses. Using extensive linked employer-employee data on young German firms around and during the Global Financial Crisis, a period of sharply reduced access to external capital and recession, we show that young firms respond to cyclical conditions in highly heterogeneous ways. Our firm-level results reveal that the average new firm found it easier to hire its first employees when it was founded during the crisis. These firms achieved countercyclical growth by hiring career entrants. More specifically, hiring in very young (<1.5 years) and small to medium-sized (below the 90th percentile) young firms was countercyclical, while this was not the case for older and larger young firms. Thus, the firm-specific effects for young entrepreneurial firms may be very different from those reported in previous research. Our results suggest that market entry during a crisis may facilitate hiring and that policies that promote entrepreneurship may usefully complement policies that encourage labor hoarding by incumbents during recessions.

Does waste disclosure waste?

AbstractThis study investigates the motivations behind firms disclosing their waste production. Analyzing data from S&P 500 companies spanning from 2010 to 2018, we explore the influence of board characteristics on this corporate decision. Our findings reveal that firms with a higher proportion of female directors or independent directors, the establishment of a sustainability committee, and external verification of their sustainability reports are more inclined to disclose their waste production. Further examination demonstrates variations in these trends across firms with distinct characteristics. In particular, the impact of female directors proves especially significant for larger, younger firms with higher leverage, a greater number of employees, or firms compliant with the Global Reporting Initiative (GRI). Conversely, the presence of a sustainability committee appears to have a more pronounced impact on smaller, younger, and less profitable firms that do not comply with GRI standards.

It's Time to Break Up: Dynamics Surrounding Young-Established Firm Alliance Duration

While young firms often benefit from their relationships with established firms, these relationships can be risky. Hence, during their relationship with established firms, young firms must constantly monitor signs of a failing partnership and terminate it before being in a disadvantageous position. However, discontinuing the alliance with an established firm can also be risky, especially if the young firm has limited alternative collaborative opportunities. Our study adopts the young firm's perspective and dynamically weighs the tradeoffs between the risks of continuing and discontinuing its relationship with established firms, thereby deciding on its termination. We first develop an analytical model to understand how the alliance duration (time from alliance formation to termination) between young and established firms is affected by alliance, firm, and industry characteristics. We then test the resulting hypotheses on a sample of 1,111 alliances with licensing deals formed between 159 established pharmaceutical firms and 448 young biotechnology firms during the 1986 to 2000 period, which straddles the technological discontinuity of combinatorial chemistry. Our empirical results provide partial support for the hypotheses derived from the analytical model, informing us of firms’ rational alliance duration decisions as well as their deviations from rationality. In presenting both optimal alliance duration decisions and suboptimal alliance duration practices, our mixed-method approach offers important implications for theory and practice.

Perceived corruption, economic freedom, and firms in India

Abstract Research has shown that the relationship between economic freedom and corruption is rather complex. While some studies suggest a negative relationship, others show the matter to be more nuanced. While more regulations are known to foster corrupt institutions, a competitive market can also incentivize bribery and corruption. Our study examines the role of economic freedom as it relates to perceived corruption, measured via a survey for India. Using firm-level data, we explore the relationship between perceived corruption in the formal sector and economic freedom across Indian states. In our baseline results for Indian firms, we find a significantly negative relationship between perceived corruption and lagged economic freedom. These results hold when we design matching models and include a number of potentially confounding factors to control for identification issues. Additionally, we show that small and young firms and those with sole ownership perceive greater benefits from higher economic freedom. In contrast, older firms perceive higher corruption when economic freedom is higher. This lends support to the idea that competition facilitated by economic freedom can increase rent seeking behavior. Our study contributes to the literature by emphasizing that the relationship between economic freedom and corruption in India is layered, with firm characteristics playing a crucial role.

Bank competition and ESG performance‐evidence from Chinese listed firms

AbstractThis study employs a two‐way fixed effects model to investigate the influence of bank competition on ESG performance of local firms and its underlying mechanisms based on the geographical distribution of bank branches and firms. Our results show that the increased level of competition among banks contributes positively to the ESG performance of firms and the promotion effect is more prominent in small firms, young firms, and nonstate‐owned firms. Industry heterogeneity analysis indicates that bank competition could be more beneficial for the sustainable development of low‐pollution, low‐tech industries, and industries that have a higher linkage with the financial industry. The mechanism analysis further reveals the mediating effect of financial constraints, green innovation, and moral hazards on firms' ESG performance. This study extends the existing understanding of the firm‐level consequences of bank competition and sheds light on the financial development drivers of corporate ESG performance in emerging market countries.

Bank loan maturity and corporate investment

This study analyzes bank loan maturity and corporate investment linkage by using novel firm-level data covering the universe of all incorporated firms in Türkiye over the last decade. The results of the panel regression model with multi-dimensional fixed effects reveal that loan maturity has a significant positive association with investment, indicating that longer debt maturity fosters corporate investment. The results reveal that the positive linkage between longer debt maturity and investment is more pronounced for small and medium-sized enterprises (SMEs). This is also the case for young firms and firms with high growth opportunities. Considering the evidence provided in the literature that bank lending conditions, including maturity structure, are highly cyclical and vulnerable to financial conditions and economic policy uncertainties, our findings highlight the importance of reducing the policy uncertainties as well as the importance of policies that make equity financing more attractive and deepen the capital markets.

The Choice of the Financial Year-End: Does It Matter? An International Evidence

This paper examines how specific firm characteristics (size, industry, audit fees and age) and firm performance influence the choice of financial year-end (December vs. non-December). The sample consists of companies from Australia, France, Germany, Japan, the United Kingdom and the United States to tackle issues with international diversity. Both domestic and international regulations for each country are addressed in developing expectations and conclusions. The results of the study show that December is generally becoming less and less ‘popular’ compared to a few years back. The results also revealed that December year-end firms tend to be larger and operate in certain types of industries with some industries preferring to close their books at certain dates, whether a December or a non-December month. As a result, financial-reporting comparability issues may arise if firms depart from the year-end chosen by most similar firms. It is also found that older firms tend to have December as their year-end, while relatively younger firms prefer a non-December year-end. Moreover, firms tend to prefer December as audit fees go up. Finally, firms with better performance are less likely to have December as their fiscal year-end. These findings show the importance of the topic and suggest conducting more research by academics and standard setters.

Cash flow and capital investment: Empirical evidence of firms in services and consumer goods sector

This paper explores the relationship between cash flow and capital investment of a firm. Using a panel of Nigerian publicly quoted firms in the services and consumer goods sectors, we found that cash flow is insignificantly related to capital investment. This observed insignificant relationship is stronger in episodes where we have a sub-sample of younger firms. The younger firms recording insignificant relationships revealed that these firms cannot easily access external funds when there is a cash flow shortfall because of their low level of experience in their socio-economic networks. On the evidence of older firms, the study shows that when there is a cash flow shortfall for older firms, these firms may face difficulties in financing their investment with internal sources of funds; though, these firms can easily access external funds because of their level of experience in socio-economic networks. The results provide support that internal and external sources of funds can be substituted perfectly for experienced firms.

Assessing Organizational Culture in Real Estate Brokerages: Links to Real Estate Agent Success

Real estate agents interested in maximizing their sales commissions may consider the impact of their brokerage firm’s organizational culture on their incomes. They may also seek to understand whether the size and age of their brokerage firms correspond to four popular organizational culture types: clan, hierarchical, market, and adhocracy. A survey distributed to United States real estate agents was analyzed to examine these relationships. The results supported hypotheses indicating that clan cultures were dominant in small firms with 20 or fewer employees and in younger firms under six years, while market cultures prevailed in larger and older firms. Additionally, market and adhocracy cultures correlated positively with brokerage firm size, and adhocracy cultures were more prevalent in younger firms. Real estate commissions were highest in companies with market culture features, followed by clan, adhocracy, and hierarchical cultures. Linear regressions and bootstrapping further supported a negative relationship between hierarchical cultures and real estate commissions and a negative relationship between adhocracy cultures and the age of firms. Theoretical and practical implications are discussed.

The impact of ESG rating disagreement on corporate risk-taking: evidence from China

This paper examines the impact and underlying mechanisms of ESG rating disagreement on the risk-taking of Chinese companies listed on the Shanghai and Shenzhen stock exchanges from 2011 to 2020. The research reveals that ESG rating disagreement significantly increases corporate risk-taking. Mechanism tests show that corporate ESG rating disagreement can enhance corporate risk-taking by reducing information asymmetry and alleviating financing constraints. Further analyses find that the agency costs affect the enhancing effect of ESG rating disagreement on corporate risk-taking. Heterogeneity analysis reveals that ESG rating disagreement has a greater effect on corporate risk-taking for non-state-owned firms, small-sized firms, and young firms. This paper provides empirical evidence to promote the construction of China's ESG rating system and enhance corporate risk-taking.

Information Technology in Banking and Entrepreneurship

We study the importance of information technology (IT) in banking for entrepreneurship. Guided by a parsimonious model, we establish that job creation by young firms is stronger in US counties more exposed to banks with greater IT adoption. We present evidence consistent with banks' IT adoption spurring entrepreneurship through a collateral channel: entrepreneurship increases by more in IT-exposed counties when house prices rise. Further analysis suggests that IT improves banks' ability to determine collateral values, in particular when collateral appraisal is more complex. IT also reduces the time and cost of disbursing collateralized loans.

China's declining business dynamism

AbstractWe document five novel facts about the dynamism of Chinese manufacturing firms between 2003 and 2018. We show that: (i) the revenue and capital shares of young firms have declined, (ii) life‐cycle growth of firm revenues and assets has declined, (iii) life‐cycle growth of process efficiency / product quality and investment in intangibles has declined (iv) younger firms have higher capital productivity than older firms, with the gap increasing over time, and (v) the dispersion of capital growth and the responsiveness of capital growth to capital productivity have both declined. Using a simple model, we estimate that the lower life‐cycle productivity growth of young firms reduces manufacturing productivity growth by 0.8 percentage points annually, and worsening allocative efficiency of capital between young and old firms reduced manufacturing total factor productivity by 1.25% between the early 2000s and late 2010s. We find that business dynamism is weaker in provinces where state‐owned enterprises account for a larger share of the capital stock.

Asymmetric Effects of Monetary Policy on Firms

AbstractThis paper documents firm‐level evidence on the asymmetric effects of monetary policy in the United States. Focusing on the 1980q3–2019q4 period, I find that monetary tightenings show larger effects on firms' employment and sales than monetary easings. In comparison, investment rate does not generate significant asymmetry in response to sign‐dependent monetary policy shocks. I interpret these findings in the context of downward nominal wage rigidity and investment irreversibility channels. Furthermore, I exploit cross‐sectional variation and show that employment of small, nondividend payer, low credit rating, and young firms displays larger contractions in response to a monetary tightening.

Leadership vacuum and corporate investment

The vacuum caused by the absence of a political leader has a major economic impact. We manually collect data on the absence of a political leader in 247 Chinese cities between 2009 and 2019 and find that firms reduce their investment by an average of 2.326 % for each month that a political office remains vacant. This result holds even after subjecting the data to a series of endogeneity tests, robustness tests, and alternative explanations. We also demonstrate that the absence of a political leader reduces corporate investment through increased uncertainty of economic policy, reduced governmental efficiency, and disrupted political connections. Finally, our results show that this kind of absence has a more pronounced impact on younger firms, firms located in provinces with slower marketization, firms located in provinces with weak media development, non-state-owned enterprises, and firms located in regions under significant promotional pressure.

HOW DO DIFFERENT DEBT LEVELS INFLUENCE THE FINANCIAL PERFORMANCE OF FMCG COMPANIES IN INDIA?

This study examines the impact of capital structure on the financial performance of Fast-Moving Consumer Goods (FMCG) companies listed on the Bombay Stock Exchange (BSE) from 2011 to 2021. It focuses on how varying levels of short-term, long-term, and total debt influence key financial metrics such as Return on Assets (ROA), Return on Equity (ROE), Earnings Per Share (EPS), and Tobin’s Q. Using regression models with panel data, the research evaluates the relationship between debt ratios and financial performance, utilizing both fixed and random effects models. The findings reveal that higher levels of debt, especially long-term debt, negatively impact financial performance. Short-term debt is more commonly used in the FMCG sector, but overall, debt tends to reduce profitability and shareholder value. Notably, Earnings Per Share (EPS) had the highest average among the performance indicators, though all debt ratios demonstrated significant negative correlations with ROA, ROE, EPS, and Tobin’s Q. The study also highlights that larger and older firms are more effective at managing the negative effects of debt, performing better financially than smaller or younger firms. It recommends that FMCG companies prioritize internal funding over debt, as high debt levels can lead to financial strain. Future research could explore the impact of capital structure in other industries or include macroeconomic factors.

Credit rationing and sustainable activities: A firm-level investigation

This paper studies whether differences in credit rationing exist, based on firms’ activities in sustainable sectors, recently identified by the European Commission in the EU Taxonomy Regulation. To this aim, we use the World Bank Enterprise Surveys, including a sample of more than 28,900 firms from 66 developing and emerging countries, over the waves 2006–2020. We find that firms operating in sustainable sectors are around 1.6% less likely to be financially constrained, controlling for other firm-level characteristics. The magnitude of the effect is larger for small and young firms. Moreover, our results show that firms operating in sustainable sectors are more likely to receive external financing if they operate in countries where environmental issues are more relevant and where financial systems and the business environment are less developed.

Un análisis desagregado de la inversión empresarial desde el inicio de la pandemia

Rationale Business investment in Spain has proven considerably weak in recent years and is still below pre-pandemic levels. This article analyses investment dynamics in Spain until 2022 drawing on firm-level data from the Banco de España Central Balance Sheet Data Office. Takeaways •The disaggregated data from the Central Balance Sheet Data Office can be used to identify the characteristics of the firms that adjusted their investment patterns the most from the outbreak of the pandemic until 2022. •In this period, firms’ investment decisions became more sensitive to their economic situation (proxied here by their sales and cash flow). •Conversely, the link between firms’ investment decisions and financial position (proxied here by their debt level and debt burden) remained unchanged. •Investment by young firms proved particularly weak in the period analysed, and this led to a narrowing of the positive gap between their investment drive and that of other firms.