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Article

Nam Hoai Tran and Chi Dat Le

This study aims to investigate the influence of macro-financial conditions on firm-level capital allocation as a micro-transmission mechanism of monetary policy in Vietnam.

Abstract

Purpose

This study aims to investigate the influence of macro-financial conditions on firm-level capital allocation as a micro-transmission mechanism of monetary policy in Vietnam.

Design/methodology/approach

The authors employ a dynamic model of investment based on the Euler equation approach that allows for financial frictions. The financial conditions are proxied by a composite index of the current states of financial variables, including interest rates, exchange rates, stock prices, and credit demand – which captures short-term shocks in monetary transmission channels. Corporate financing constraints, as a reflection of financial frictions, are measured by the sensitivity of investment to internal funds, which are extensively examined in terms of both negative and positive cash flows.

Findings

In the presence of a non-monotonic (or U-shaped) investment–cash flow relation, the empirical evidence from Vietnamese listed firms indicates that financial conditions affect investment behavior for only firms with negative cash flows, in the sense that better financial conditions alleviate the level of “negative” financing constraints (i.e. the sensitivity of investment to negative cash flow). This effect is greater for larger firms and more likely pronounced for firms without state ownership.

Originality/value

This study contributes to the literature on corporate financing constraints in a manner of considering the macroeconomic dimension, specifically exploring the asymmetric impacts of financial conditions on the investment sensitivity to cash flow.

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Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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Article

Yasin Mahmood, Abdul Rashid and Muhammad Faisal Rizwan

This study aims to examine how corporate financial flexibility, financial sector development and the regulatory environment influence corporate investment decisions in an…

Abstract

Purpose

This study aims to examine how corporate financial flexibility, financial sector development and the regulatory environment influence corporate investment decisions in an emerging economy after controlling for several macroeconomic factors.

Design/methodology/approach

The authors estimated random-effects models to empirically examine the impacts of corporate financial flexibility, banking sector development, equity market development, regulatory quality and corruption on corporate investment decisions. The empirical analysis is based on an unbalanced annual panel data set of a sample of 198 non-financial firms listed on the Pakistan Stock Exchange for the period 1992–2018.

Findings

The results show that financially flexible firms tend to invest more. The increased banking sector development, stock market development and better regulatory quality play a pivotal role for enabling firms to increase their investment ability. However, the results reveal that corruption acts as a barrier and reduces corporate investments during the examined period. The results suggest that unused borrowing capacity is a good source of financial flexibility. These results strongly support the pecking order theory, which explains why firms incline toward internal sources for financing their investments and why they prefer debt to equity when go for external financing.

Practical implications

The empirical findings of the study enable corporate managers to make better financing and investment decisions by understanding the significance of the attainment and maintenance of the corporate financial flexibility to enhance firm value. Furthermore, the findings enable corporate managers to examine and understand the role of banking sector development (BSD), equity market development (EMD), regulatory quality and the role of corruption in affecting corporate firms' investment ability, allowing them to make appropriate investment decisions, especially from an emerging economy perspective. The findings also help investors in making appropriate investment decisions while they are purchasing financial assets. Finally, the findings of the study have some implications for regulators as well. Specifically, the findings suggest that the authorities should implement economic and financial policies favoring banking sector as well as equity market development to enhance corporate investment.

Originality/value

The study significantly adds to the literature by examining the impact of financial flexibility, financial sector development and regulatory environment on corporate investment decisions. According to the authors' knowledge, the empirical evidence examining the impact of all of these factors on corporate investment is very scarce. Therefore, this study is an effort to fill the gap left in the literature.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Content available
Article

Richard Makoto

Many developing countries are pursuing policies that foster international financial integration after decades of financial repression. Greater access to foreign financial

Abstract

Purpose

Many developing countries are pursuing policies that foster international financial integration after decades of financial repression. Greater access to foreign financial markets may have both positive and negative impact on the performance of the economy. One of the concerns of international financial integration is macroeconomic volatility which may affect both monetary and real sectors. Zimbabwe has chosen to pursue a financial liberalization strategy in the form of imperfect financial integration following periods of excessive domestic shocks. An upsurge of capital flows since the epic of economic crisis in the 2000s has been observed with varying macroeconomic impacts. This study empirically examines the impact of partial international financial integration on the volatility of macroeconomic variables.

Design/methodology/approach

The study utilized an ARDL Model suggested by Pesaran et al., (2003) which is appropriate for short time periods.

Findings

The results show that financial integration has a negative effect on output volatility while insignificant on consumption volatility.

Practical implications

The study recommends that the country should gradually liberalize the capital account and properly sequence financial development reforms in order to minimize losses from global financial integration.

Originality/value

The study used time series for Zimbabwe during a period of external imbalance, repeated economic cycles, sudden stops in capital flows and limited scope of imperfect financial integration. Findings in such an economy will be a referral for policymakers in other economies that would want to pursue international financial integration.

Details

Journal of Economics and Development, vol. 22 no. 2
Type: Research Article
ISSN: 1859-0020

Keywords

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Book part

Yayun Yan and Sampan Nettayanun

Our study explores friction costs in terms of competition and market structure, considering factors such as market share, industry leverage levels, industry hedging…

Abstract

Our study explores friction costs in terms of competition and market structure, considering factors such as market share, industry leverage levels, industry hedging levels, number of peers, and the geographic concentration that influences reinsurance purchase in the Property and Casualty insurance industry in China. Financial factors that influence the hedging level are also included. The data are hand collected from 2008 to 2015 from the Chinese Insurance Yearbook. Using panel data analysis techniques, the results are interesting. The capital structure shows a significant negative relationship with the hedging level. Group has a negative relationship with reinsurance purchases. Assets exhibit a negative relationship with hedging levels. The hedging level has a negative relation with the individual hedging level. Insurers have less incentive to hedge because it provides less resource than leverage. The study also robustly investigates the strategic risk management separately by the financial crises.

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Article

Moncef Guizani and Ahdi Noomen Ajmi

The purpose of this paper is to examine whether the sensitivity of investment to cash flow varies with exogenous financial conditions.

Abstract

Purpose

The purpose of this paper is to examine whether the sensitivity of investment to cash flow varies with exogenous financial conditions.

Design/methodology/approach

A dynamic model of investment based on the Euler equation approach is employed to investigate the impact of macro-financial factors on the sensitivity of investment to cash flow. The sample comprises data from 84 non-financial firms listed on Saudi stock market over the period 2007–2018.

Findings

The results show that the sensitivity of investment to cash flow is positive, implying the presence of financing constraints for Saudi firms. Evidence also reveals that better financial conditions relax firms' financing constraints. However, contractionary monetary policy, poor financial development and liquidity crisis strengthen the dependence of firms on internally generated funds when undertaking new investment projects.

Practical implications

The empirical results have useful policy implications. First, policymakers should pay attention to the importance of policymaking based on the monetary demand of microeconomic entities. In monetary contraction periods, firms face greater challenges in accessing external finance. These firms are likely to experience under-investment which at a macro level would translate into lower investments and economic growth for the country. Second, policymakers are encouraged to implement complementary measures that, coupled with existing financial reforms, may promote efficiency, competitiveness and transparency in firms' operations. Finally, managers and investors should consider financial structure and condition as important factors in their investment decision.

Originality/value

This study extends previous research by investigating whether the widely reported positive investment and cash flow relationship can be observed using data from an emerging market, specifically Saudi Arabia. It also sheds light on the investment-cash flow debate under a macroeconomic perspective and provides further evidence on the impact of financial crisis on the investment-cash flow (ICF) sensitivity.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

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Article

Binxi Cui and Chaojun Yang

The purpose of this paper is to exploit the effect of equity financing constraints on the firm’s investment in research and development (R&D) by utilizing a…

Abstract

Purpose

The purpose of this paper is to exploit the effect of equity financing constraints on the firm’s investment in research and development (R&D) by utilizing a quasi-experiment in China.

Design/methodology/approach

A difference-in-difference identification strategy is employed to test the treatment effect of the IPO suspension in China. For robustness testing, the authors incorporate cross-sectional variation in external financial dependence to identify the different influences an IPO suspension has on R&D investments for firms across multiple industries through the difference-in-difference-in-difference approach and the authors also adopt a matching approach to check the parallel trend assumption. Moreover, the authors introduce a placebo test to further verify the empirical results.

Findings

Through the empirical analysis, the authors find that the firms subjecting to the IPO suspension are more likely to reduce their investments in R&D than those not affected by the IPO suspension. Besides, the negative effect of equity financing constraints on R&D investments is concentrated on external financial dependent industries. The firms in industries with larger external financial dependence tend to decrease more in their R&D expenditures when they experience the equity financing constraints.

Research limitations/implications

This paper provides a new negative evidence on equity financing constraints on R&D investments link so that contributes to the debate about the effect of the financing constraints on R&D investments.

Practical implications

The study provides a meaningful suggestion for governments to diminish the frictions in the financial market and to improve enterprises’ public financing circumstances by finding that equity financing constraints have negative impacts on firms’ R&D investments.

Originality/value

There are some apprehensions around previous empirical studies investigating the impact of financing constraints on R&D investments as the existing literature is unable to provide an unambiguous method to exactly distinguish and measure the degree of financing constraints the firms confronting with. This paper solves this problem by first utilizing an IPO suspension in China as a quasi-experiment to examine the effect of equity financing constraints. Therefore, it gives insight to solve the problem of measuring financing constraints in future researches.

Details

China Finance Review International, vol. 8 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

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Book part

Daniel Felix Ahelegbey and Paolo Giudici

The latest financial crisis has stressed the need of understanding the world financial system as a network of interconnected institutions, where financial linkages play a…

Abstract

The latest financial crisis has stressed the need of understanding the world financial system as a network of interconnected institutions, where financial linkages play a fundamental role in the spread of systemic risks. In this paper we propose to enrich the topological perspective of network models with a more structured statistical framework, that of Bayesian Gaussian graphical models. From a statistical viewpoint, we propose a new class of hierarchical Bayesian graphical models that can split correlations between institutions into country specific and idiosyncratic ones, in a way that parallels the decomposition of returns in the well-known Capital Asset Pricing Model. From a financial economics viewpoint, we suggest a way to model systemic risk that can explicitly take into account frictions between different financial markets, particularly suited to study the ongoing banking union process in Europe. From a computational viewpoint, we develop a novel Markov chain Monte Carlo algorithm based on Bayes factor thresholding.

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Article

Megumi Suto and Hitoshi Takehara

This study aims to examine the link between corporate social performance (CSP) and the cost of capital of Japanese firms in 2008-2013, considering the influences of…

Abstract

Purpose

This study aims to examine the link between corporate social performance (CSP) and the cost of capital of Japanese firms in 2008-2013, considering the influences of banking relationships and ownership structure.

Design/methodology/approach

It examines the relation between CSP and the cost of capital in terms of the cost of debt, cost of equity and weighted average cost of capital, using a composite CSP measure based on stakeholder relationships. A regression model is adopted, controlling for bank dependency, ownership structure and firm-specific attributes.

Findings

Institutional ownership influences the CSP–cost of equity relation and reduces the cost of equity, while CSP is perceived by debtors as not information-mitigating for the observed period. For 2008-2010, the relation between CSP and bank dependency increases the cost of debt; however, the positive influence of bank dependency on the cost of debt dilutes during 2010-2013 as the shift to a more market-oriented financial market in Japan occurs.

Practical implications

Although bank borrowing is important, especially for small firms, non-financial disclosure makes external financing more flexible. Institutional investors concerned about the non-financial aspects of business, therefore, play an important role in mitigating the information asymmetry that exists in the capital market.

Originality/value

This study extends research on the CSP–cost of capital link by considering structural changes in financial systems (e.g. capital market perception of CSP and banks as delegated monitors).

Details

Social Responsibility Journal, vol. 13 no. 4
Type: Research Article
ISSN: 1747-1117

Keywords

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Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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