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Article
Publication date: 28 January 2011

Li Ma, Junxun Dai and Xian Huang

The purpose of this paper is to analyze how the financial supervision authority utilizes the restrictions of capital constraints imposing on commercial banks the need to develop…

1661

Abstract

Purpose

The purpose of this paper is to analyze how the financial supervision authority utilizes the restrictions of capital constraints imposing on commercial banks the need to develop the macro economy.

Design/methodology/approach

This paper uses multilateral game to deduce the loan characteristics of banks, vector and void coordinates to analyze the behavior choices of banks under capital supervision, sets up an index to describe the risk preference of banks, and analyzes the process with Chinese data empirically.

Findings

This paper finds big banks have a loan preference for big enterprises and small banks have a preference for establishing a bank syndicate to pursue large projects. Further, the paper notes the conditions by which the heterology banks choose loans across the border and proves that changes of capital requirements would force the credit structure of the commercial banks to adjust along an efficient frontier broken line or an efficient frontier plane under the conditions of interest rate regulation or interest rate marketization, respectively.

Research limitations/implications

It is very complex to describe the choices of risk behavior of banks and the simple supervision method needs to be adjusted.

Practical implications

This paper finds that banks show risk preferences of credit structure, and capital constraints would affect it greatly; regulators should guard against capital constraint softening.

Originality/value

It is the first time that the conditions of banks beyond the loan border have been studied and the behavior adjustment of banks using the vector and void coordinate analyzed.

Details

China Finance Review International, vol. 1 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 1 February 2023

Sakti Ranjan Dash, Maheswar Sethi and Rabindra Kumar Swain

The purpose of this paper is to examine the impact of working capital management (WCM) on profitability under different financial conditions (constraint/unconstraint) and WCM…

Abstract

Purpose

The purpose of this paper is to examine the impact of working capital management (WCM) on profitability under different financial conditions (constraint/unconstraint) and WCM policy (aggressive/conservative). Furthermore, the study investigates the existence of optimal working capital levels under different financial conditions and WCM policy.

Design/methodology/approach

Two-step system generalized method of moments and fixed effect models are used to analyze the data collected from Prowess database from 2011 to 2020 for a sample of 1,104 Indian manufacturing companies.

Findings

The study finds an inverted U-shaped relationship between working capital and profitability in all financial conditions and working capital policy. This finding advocates the existence of an optimal level of working capital that equates the costs and benefits of holding working capital to maximize the companies’ profitability. However, holding working capital beyond the optimal level negatively affects profitability. Companies under financial constraints with aggressive working capital policies have the lowest optimal cash conversion cycle (CCC). Furthermore, the relationship of working capital with profitability and the optimal CCC varies owing to firm age and industry group.

Originality/value

To the best of the authors’ knowledge, this is the first paper that incorporates the impact of working capital on firm’s performance from both financial constraint (unconstraint) and aggressive (conservative) working capital policy perspectives in the Indian context. Furthermore, this study also contributes in terms of reflecting the effect of firm age and industry in determining the optimum CCC of the firms.

Details

Journal of Indian Business Research, vol. 15 no. 3
Type: Research Article
ISSN: 1755-4195

Keywords

Open Access
Article
Publication date: 26 July 2022

Martin Mulunda Kabange and Munacinga Simatele

This study aims to investigate whether social capital mediates the impact of financial capital on business performance in Cameroon.

1682

Abstract

Purpose

This study aims to investigate whether social capital mediates the impact of financial capital on business performance in Cameroon.

Design/methodology/approach

The study uses quantitative data collected from 370 small businesses in Yaoundé and Douala in Cameroon. All businesses in the sample are formally registered and are in the services sector. A structural equation modelling (SEM) approach is used for the analysis.

Findings

Structural and relational capital constraints are significant mediators of formal and informal finance. The magnitude effects of relational capital are the largest, underlining information's importance in resolving small and medium enterprises’ (SMEs') financial constraints. In addition, the effect of informal finance constraints on business performance is larger in magnitude, confirming the substantial impact of informal finance on SME operations.

Research limitations/implications

The paper confirms that relational and structural social capital are vital in business. However, the study did not investigate the disaggregated effects of these dimensions of social capital. Furthermore, how SMEs transition between formal and informal finance could provide further understanding of the role of social capital. A disaggregated and panel data set would help to provide additional insights.

Practical implications

Social capital emerges as a pivotal factor in enhancing SME access to finance. The results, therefore, confirm the relevance of a holistic approach to easing financial capital constraints for SMEs and enabling small businesses to connect more to various stakeholders to amplify business performance. In addition, the findings identified some intervention points for the governments in Cameroon as it seeks to use SMEs as its pivot for development and to catapult itself to emerging economy status in its Cameroon 2035 vision.

Originality/value

The value of the study lies in assessing the mediating effect of cognitive, relational and structural social capital constraints on business performance and comparing the effect of formal and informal financial constraints on business performance.

Details

African Journal of Economic and Management Studies, vol. 13 no. 3
Type: Research Article
ISSN: 2040-0705

Keywords

Article
Publication date: 7 March 2019

Fahmida Laghari and Ye Chengang

The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints.

4660

Abstract

Purpose

The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints.

Design/methodology/approach

This study uses large panel sample of Chinese listed firms over the period 2005–2015 using system generalized method of moments (GMM) estimator that controls unobserved heterogeneity of individual firms well and GMM methodology is robust to address endogeneity issues.

Findings

Empirical evidence finds inverted U-shaped relationship between working capital and corporate performance and exhibits similar evidence for financially constrained firms. Evidence shows impact of high sales and discounts on early payments at low level of working capital and dominance of opportunity cost and cost of external finance at high level of working capital. The findings of the results show that optimal working capital level of financially constrained firms is relatively lower due to high cost of external capital and debt rationing. The results also indicate that on average NET is significantly lower for firms with Tobin’s Q>1 than firms with Tobin’s Q=1, and suggest that aggressive working capital management is significantly and positively associated with higher corporate values.

Originality/value

This paper is among few that complement the existing literature by providing evidence that inverted U-shaped relationship between working capital management and corporate performance also exists in the context of Chinese listed non-financial firms. Exclusively, the relationship of working capital and corporate performance with linkage of financial constraints is scant in the context of Chinese listed non-financial firms.

Details

International Journal of Managerial Finance, vol. 15 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 7 April 2022

Prince Bhatia and Prasenjit Chakrabarti

This study aims to primarily investigate two vital questions: First, the authors examine whether group-affiliated firms are more (less) financially constrained vis-à-vis

Abstract

Purpose

This study aims to primarily investigate two vital questions: First, the authors examine whether group-affiliated firms are more (less) financially constrained vis-à-vis standalone firms. The authors estimate working capital investment (WCI) to cash flow sensitivity to understand the nature of financial constraints. Second, the authors further investigate the impact of working capital level on firm values and risks between group-affiliated and standalone firms.

Design/methodology/approach

This paper uses balanced panel data set from the year 2012–2019. The authors employ propensity score matching to ascertain comparable firm attributes from business group and standalone firms. This process yields 280 firms (140 in each group) after controlling the firm heterogeneity between these two groups. All the models are estimated using fixed-effect regression.

Findings

The authors find that group affiliated firms are less financially constrained than standalone firms. The results show that WCI to cash flow sensitivity is higher in standalone firms vis-a-vis group-affiliated firms, implying that standalone firms are more financially constrained than group-affiliated firms. Second, the authors find that firm values are more sensitive to working capital level in standalone firms versus group-affiliated firms. Furthermore, the authors document that the risk of the standalone firms is less sensitive to working capital level than that of group-affiliated firms.

Originality/value

Most recent studies exploring the role of group affiliation in financing constraints have not controlled for heterogeneity among group-affiliated firms vis-à-vis standalone firms, which may arise due to variation in firm characteristics. Unlike prior studies, this research design ascertains comparable firm attributes between business group and standalone firms, implying firms belonging to these two groups differ by the exogeneous affiliation (business group and standalone firms). The authors document that group-affiliated firms are less financially constrained than standalone firms controlling firm-level heterogeneity between group-affiliated and standalone firms. To the best of the authors' knowledge, no such work has been previously done in general (specifically in India).

Details

Managerial Finance, vol. 48 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 3 July 2017

Kai Hoberg, Margarita Protopappa-Sieke and Sebastian Steinker

The purpose of this paper is to identify the interplay between a firm’s financial situation and its inventory ownership in a single-firm and a two-firm perspective.

2305

Abstract

Purpose

The purpose of this paper is to identify the interplay between a firm’s financial situation and its inventory ownership in a single-firm and a two-firm perspective.

Design/methodology/approach

The analysis uses different secondary data sources to quantify the effect of both financial constraints and cost of capital on inventory holdings of public US firms. The authors first adopt a single-firm perspective and analyze whether financial constraints and cost of capital do generally affect the amount of inventory held. Next, the authors adopt a two-firm perspective and analyze the inventory ownership in customer-supplier relationships.

Findings

Inventory levels are affected by financial constraints and cost of capital. Results indicate that higher costs of capital are weakly associated with lower inventories. However, contrary to the authors’ expectations, firms that are less financially constrained hold less inventories than firms that are more financially constrained. Finally, the authors find that customers hold the larger fraction of supply chain inventory in supplier-customer dyads.

Practical implications

The authors’ results indicate that financial considerations generally play a role in inventory management. However, inventory holdings seem to be influenced only slightly by financing costs and inventory holdings between supplier and customer seem to be less than optimal from a financial perspective. Considering those financial aspects can lead to relevant financial advantages.

Originality/value

In contrast to other recent research, the authors study how the financial situation of a firm affects its inventory levels (not vice versa) and also consider inventories from a two-firm perspective.

Details

International Journal of Physical Distribution & Logistics Management, vol. 47 no. 6
Type: Research Article
ISSN: 0960-0035

Keywords

Article
Publication date: 11 May 2020

Kittiphod Charoontham and Kessara Kanchanapoom

This paper aims to study a strategic decision of banks in Thailand to signal their types to the market and derive the optimal credit derivatives contract to guarantee their loans…

Abstract

Purpose

This paper aims to study a strategic decision of banks in Thailand to signal their types to the market and derive the optimal credit derivatives contract to guarantee their loans and credibly signal their quality under different economic determinants, namely, the maximum credit risk investment constraint, opportunity cost and opaqueness of the credit derivative market.

Design/methodology/approach

Contract theory is deployed to derive the expected payoff of different bank types under different economic and financial constraints. Hence, different bank types offer derivatives contracts to signal their loan quality and resell their loans in the secondary loan markets of Thailand.

Findings

The optimal derivatives contract is constructed on a basis of asymmetric information when banks have more private information concerning quality of their loans. A digital credit default swap is an optimal derivatives contract to send credible signal when banks are restricted to the maximum investment constraint. Moreover, profit of banks is reduced, as the optimal derivatives contract is more costly when banks are subjected to positive opportunity cost and opacity of the credit derivatives market. These results depict impact of changes of the maximum credit risk investment constraint on Thai credit derivatives market.

Originality/value

The optimal credit derivatives design that signifies bank types and facilitates loan purchase agreement has not been studied in Thai secondary loan markets before. In addition, this study provides insights of banks' strategic decisions to signal their types and transfer risk to risk buyers in Thai markets.

Details

Journal of Asia Business Studies, vol. 14 no. 5
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 6 July 2015

Ziran Li, Keri L Jacobs and Georgeanne M Artz

There is little reason a priori to expect that a cooperative firm’s capital needs are different from a non-cooperative firm’s needs if the two firms are otherwise similar in…

1219

Abstract

Purpose

There is little reason a priori to expect that a cooperative firm’s capital needs are different from a non-cooperative firm’s needs if the two firms are otherwise similar in function and size and operate within similar market economies. However, the notion that cooperatives face capital constraints that investor-owned firms (IOFs) do not is a persistent theme in the literature. The paper aims to discuss these issues.

Design/methodology/approach

The authors revisit this hypothesis with an empirical examination of capital constraints in a panel data set of US agricultural supply and grain cooperatives and IOFs.

Findings

The findings are mixed. While the authors find little to suggest that cooperatives face financial constraints on borrowing in the short run, relative to IOFs, the authors do find some evidence that for long-term investments, a capital constraint may exist.

Originality/value

These short and long run differences have implications for the survival and growth of agricultural cooperatives. While in the short run, access to debt financing allows these firms to operative profitably, ultimately long-term large investments in technology and fixed assets will be required to maintain competitiveness in this industry.

Details

Agricultural Finance Review, vol. 75 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

Open Access
Article
Publication date: 12 December 2018

Ghulam Ayehsa Siddiqua, Ajid ur Rehman and Shahzad Hussain

The purpose of this paper is to investigate the asymmetric adjustment of cash holdings in Pakistani firms for above and below target firms.

3888

Abstract

Purpose

The purpose of this paper is to investigate the asymmetric adjustment of cash holdings in Pakistani firms for above and below target firms.

Design/methodology/approach

The study employs generalized method of moments (GMM) to investigate the adjustment of cash holdings.

Findings

The study found that the firms which hold cash above the optimal level of cash holdings have higher speed of adjustment than the firms which hold cash below the optimal level. Financially constrained (FC) firms also adjust their cash holdings faster than financially unconstrained (FUC) firms but high speed of downward adjustment does not remain persistent after financial constraints are controlled. Findings of this study reveal this asymmetric adjustment in above and below target firms and extend these results in FC and FUC Pakistani listed firms, respectively.

Research limitations/implications

The conclusion of this study has been derived under certain limitations. There is a vast space to extend this study in different dimensions. Firms operating in capital-intensive industries may provide different results for financial constraints because their policy designing would be quite different from other firms.

Originality/value

This study contributes to cash holdings research in Pakistan by exploring the adjustment behavior of cash holdings across Pakistani non-financial firms using econometric modeling. Downward adjustment rate is supposed to be higher than upward adjustment rate and this rate is tested using dynamic panel data model. Similarly, it is inferred that this relationship holds for above target firms even after including the financial constraints in the presented model.

Details

Journal of Asian Business and Economic Studies, vol. 26 no. 1
Type: Research Article
ISSN: 2515-964X

Keywords

Open Access
Article
Publication date: 15 December 2022

Daniele Cerrato, Maurizio La Rocca and Todd Alessandri

The purpose of this paper is to examine the financial factors across multiple levels of analysis that influence the performance effects of the unrelated diversification strategy…

4422

Abstract

Purpose

The purpose of this paper is to examine the financial factors across multiple levels of analysis that influence the performance effects of the unrelated diversification strategy, including institutional-, industry- and firm-levels.

Design/methodology/approach

Using a unique panel dataset of Italian firms from 1980 to 2010, the paper tests hypotheses on how industry external financial dependence and the firm's financial constraints both separately and jointly alter the performance benefits of unrelated diversification in contexts with financial market inefficiencies.

Findings

Unrelated diversification increases performance in weak financial contexts and such positive effect is enhanced by greater industry external financial dependence and greater firm financial constraints. However, as financial markets develop, the moderating effects of firm financial constraints shrink.

Practical implications

The study highlights the importance of recognizing the multiple financial contingencies that may alter the benefits of the unrelated diversification strategy, suggesting caution in its pursuit to boost firm performance.

Originality/value

The authors develop a theoretical framework that explains the performance outcomes of unrelated diversification, linking the benefits of an internal capital market (ICM) with the financial context of the firm and offering a fine-grained analysis that moves beyond the advanced/emerging economy dichotomy. Furthermore, leveraging on the unprecedented time frame of the empirical analysis, the paper highlights the crucial role of industry- and firm-level financial contingencies and demonstrates that their effects change at varying levels of development of the financial context.

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