On the determinants of SME capital structure in Central and Eastern Europe: A dynamic panel analysis

The purpose of this paper is to test how firm characteristics affect SMEs’ capital structure using a unique dataset of micro, small, and medium-sized firms (SMEs) in Central and Eastern Europe (CEE). We carry out a panel data analysis of 3175 SMEs from seven CEE countries during the period 2001–2005, modeling the leverage ratio as a function of firm specific characteristics hypothesized by capital structure theory. By using the cash flow as an explanatory variable, we test some of the predictions of the pecking order theory. According to this theory, firms with more available internal funds should use less external funding. We do find strong evidence in favor of the pecking order theory, given that there is a negative and significant correlation between profitability and leverage. When we control for other firm specific characteristics such as future growth opportunities, liquidity, sales growth, size and assets structure, the cash flow is found to be a strong determinant of firm leverage. We also argue that the determinants of firm leverage may be considerably different depending on firms’ size and age. The empirical results show that cash flow coefficient remains negative and statistically significant only for medium-sized firms, thus suggesting that larger firms with sufficient internal funds use less external funding than comparable smaller firms. We obtain similar results when we estimate the model by firm age; older firms demonstrate similar behavior as larger firms.     

Do major customers promote firms’ innovation?

This study examines whether and how a concentrated supply chain relationship affects a firm’s innovation decisions. Using data from Chinese listed firms in the manufacturing industry, we find that a concentrated customer base constrains a firm’s R&D investment, where a 1% increase in customer concentration is associated with a 0.011% decrease in R&D investment. To establish causality, we use the instrumental variable method, the reverse causality model, and the Granger causality test to re-examine the relationship and arrive at a consistent conclusion. Results from mechanism analysis suggest that a concentrated customer base constrains the internal fund availability and that the negative relationship between customer concentration and firms’ innovation is less pronounced for firms with more external financial support. Additional analysis reveals that the negative effect of customer concentration mainly affects R&D investment expenditure and that customer concentration also constrains innovation output in China. Overall, our paper reveals the dark side of close customer-supplier relationships and provides new insights into how supply chain relationships affect firms’ innovation decisions.     

SME Financing in Emerging Markets: Firm Characteristics,Banking Structure and Institutions

Using the World Bank Enterprise Survey indicator database, we investigate (1) how firm characteristics affect financing of small and medium-size enterprises (SMEs) in emerging markets; (2) how cross-country differences in the banking sector affect SME financing; and (3) how financing of SMEs is influenced by economic development and institutions. Our findings confirm that younger and smaller firms in nonmanufacturing sectors consistently face severe financing obstacles/constraints and rely heavily on internal financing. Moreover, the availability of credit information and the bank concentration ratio, as well as economic development and the institutional environment, can significantly affect SME financing, and access to external financing in particular.     

Uncertainty and R&D investment: Does product market competition matter?

In recent years, the question of how uncertainty influences corporate decisions has received greater interest among academics, researchers, and corporations. This study is an attempt to investigate how uncertainties (firm-specific uncertainty (fsu), market-based uncertainty (mu), and economic policy uncertainty (epu)) influence research and development (R&D) investment and to further examine whether this relation is moderated by product market competition across firms of different sizes. Using a sample of Chinese listed firms covering 2000–2017, this study applies a two-step system GMM model to perform estimations and control for endogeneity issues. The findings show that uncertainties (fsu, mu, and epu) negatively influence R&D investment and that this negative relationship is more prominent for firms operating in competitive industries. In concentrated industries, however, the negative impact of uncertainty is mitigated for large firms, which have more internal resources and better access to external financing. This study contributes to real options theory by illustrating how different forms of uncertainty embedded in a firm’s internal and external environment reduce R&D investment, and by indicating how this relationship is moderated by product market competition.     

Bequest motive,information transparency,and family firm value: A natural experiment

Motivated by Cao et al. (2015), we utilize China’s one-child policy reform as a unique and exogenous setting to examine the economic impact of a potential rise in bequest motives among family firms, which is driven by the prospect of family and clanship expansion after the reform. A bequest motive is the economic incentive to accumulate wealth presently for inheritance by heirs in the future. It causes short-term present economic decisions to be influenced by long-term future utility expectations. On the one hand, the reform may strengthen stewardship as a means to maximize firm value for present family wealth enhancement and future inter-generational succession. On the other hand, the reform may weaken innovation and competitiveness by inducing reluctance against takeovers or outsider succession. Consistent with a positive economic impact, we observe that family firms experience (i) favorable ex-ante market reactions to the news of the reform and (ii) ex-post decline in managerial expropriation through tunneling after the reform. These findings of ex-ante investor anticipation and ex-post real effect are both stronger among less transparent family firms where Type-II agency problems are likely to be more pronounced. Further analyses also provide supportive evidence of a post-reform rise in the long-term value, measured by Tobin’s Q, and a decline in stock-selling by controlling shareholders among family firms. Our combined findings imply that this reform could induce positive externality on family firm governance.     

Family firm research——A review

This article reviews family firm studies in the finance and accounting literature,primarily those conducted using data from the United States and China. Family owners have unique features such as concentrated ownership, long investment horizon, and reputation concerns. Given the distinguishing features of family ownership and control, family firms face unique agency conflicts. We discuss the agency problems in family firms and review the findings of recent family firm studies. We call for more research to understand the unique family effects and encourage more research on Chinese family firms.Part I of the article discusses the fundaments of family firms: the prevalence of and the agency conflicts within family firms. Part II summarizes the findings of recent U.S. family firm studies. It reviews the evidence on the family firm premium(how, which, and when family firms are associated with a valuation premium), the manifestation of the agency conflict between majority and minority shareholders in family firms, earnings quality and corporate disclosure, and the determinants of family ownership and control. Part III discusses the prevalence and characteristics of Chinese family firms and reviews the findings of related studies. The article concludes with some suggestions for future research.     

银行业竞争、融资约束与企业创新——中国工业企业的经验证据

本文将1998-2007年中国工业企业数据、专利申请数据与银监会公布的金融许可证数据相匹配,考察银行业竞争影响企业创新的内在机制。结果发现,竞争的加剧通过缓解企业面临的融资约束,从而提升其创新能力。在弱化内生性问题和一系列稳健性检验后,上述结果仍然稳健。进一步研究发现,外部融资依赖度较高的企业,中小、民营企业,以及位于市场化水平高和法治环境好的地区的企业,银行业竞争通过缓解融资约束促进其创新的效应更加明显。此外,本文还发现股份制银行和城商行的竞争能更好地推动企业创新。因此,建立健全多层次、多元化的金融体系,能有效缓解企业创新的融资困境,激发创新活力。     

A Family Member or a Professional Manager? The Role of Trust in the Choice of CEO in Family Firms

Using a sample of Chinese family firms from 2008–2015, we investigate the impact of trust on the choice of whether to hire a family member or a professional manager as CEO. We find that the presence of a professional CEO is negatively associated with a higher level of trust in family members. In contrast, it is positively associated with a higher level of trust in non-family members. Our findings suggest that the trust mode in Chinese family firms is like the ‘differential mode of association’, which describes Fei's (1992) social structure of Chinese society. Moreover, a higher level of trust in family members is associated with native entrepreneurial activities, which strengthens the negative relationship between trust in family and the presence of a professional CEO. Furthermore, the role of trust in family firms’ appointment decisions is more pronounced in regions with relatively weak legal protection and firms with relatively poor governance. Our results hold when we control for endogeneity and after a series of robustness checks. This research links the governance of family firms to the informal institution of trust, enriching the literature on trust and family firm behaviours.     

Family involvement,family member composition and firm innovation

Based on the data of Chinese listed family firms from 2008 to 2016, we investigate the impact of family involvement on firm innovation and the moderating effect of family member composition. The results show that increased family involvement significantly reduces R&D investment intensity and the number of patent applications. With the increased richness of the kinship of family members involved in management, the negative impact of family involvement on patent applications is weakened, but family member composition does not have a significant moderating effect on the relationship between family involvement and R&D investment intensity. Further analysis shows that the number of invention patent applications decreases as the degree of family involvement increases, but family involvement has no significant effect on utility model patent and design patent applications. Family member composition has a significant moderating effect on the relationship between family involvement and invention patent applications. The results have value as a reference for exploring how family involvement affects firm innovation and can also help the actual controller to take effective measures to optimize family member composition and improve the innovation performance of family firms.     

Access to financing and firm growth

Why do some firms grow faster than others? Although various observed and unobserved aspects of firms have been suggested as potential drivers of firm heterogeneity, economists disagree sharply on the role of financial structure in influencing firm growth. In this paper, I use a sample of quoted and unquoted firms to show that the effect of financial structure on firm growth is statistically significant and quantitatively important. In the presence of external financing constraints, firms rely more on internal funds to finance growth, but the effect of internal financing on firm growth decreases with an increase in the firm’s access to an external bank credit facility. As the external financing constraint is alleviated, the firm relies less on internal funds and switches to external financing as the primary source of financing for its growth. This pattern of transition between internal and external financing is particularly pronounced in small unquoted firms (conditional on their survival). These results suggest a real effect of financial structure on growth via the channel of an external financing constraint.     

Social comparison of cost behaviour and financial analysts

We investigate whether social comparison of a firm’s reported selling, general and administrative (SG&A) expenses affects financial analysts’ information uncertainty (and their behaviour). Based on a sample of US firms, we examine whether similarity of a firm’s SG&A to an industry-specific peer-based benchmark (or social benchmark) is associated with analyst forecast dispersion, forecast error and coverage. For external observers, the SG&A relative to sales (SG&A ratio) is a key diagnostic of a firm’s cost behaviour, but interpretational ambiguity of the SG&A signal is likely to incentivise search for information-relevant external cues to set expectations about and assess a firm’s SG&A ratio. Higher similarity to the social benchmark is expected to attenuate information asymmetry between analysts and firms regarding firms’ ability to effectively control overheads, decreasing analyst information uncertainty about cost behaviour and performance. In line with a varying weights model for social comparison, we observe a negative association between SG&A similarity and both forecast dispersion and error of one-year-ahead earnings for firms with a prior SG&A ratio exceeding the social benchmark. Our findings also show a negative relationship between SG&A similarity and analyst coverage, especially for firms with a prior SG&A ratio exceeding the social benchmark.     

Should banks own equity stakes in their borrowers? A contractual solution to hold-up problems

This paper develops a model to answer the question whether a bank should hold a share of the equity of a borrowing firm. The model shows that a small equity stake held by the bank can have a significant and positive impact on the lending relationship. The benefit of bank equity participation arises from the reduced ability of the bank to extract rents from the firm in multiple rounds of financing. This, in turn, improves the firm’s incentive to make investments in profitable projects that require future outside finance. The benefit is likely to be significant for small to medium size firms, growth firms, and firms with ongoing capital needs. The paper addresses, from a corporate finance perspective, the current debate about whether banks should be allowed to own equity stakes in corporations – and how large these equity stakes should be.     

Product market competition and cost stickiness

Extant literature on cost stickiness has focused on how firm-specific characteristics affect the asymmetric cost behavior. In this paper, we explore how a firm’s operating environment affects the firm’s cost stickiness. Specifically, we examine the effect of product market competition on cost stickiness since a firm’s investment and cost retention decisions partly depend on how the firm interacts with its rival firms in the product markets. Using two firm-level text-based product market competition measures extracted from management disclosures in firms’ 10-K filings (Li et al. in J Account Res 51(2):399–436, 2013; Hoberg and Phillips in Rev Financ Stud 23(10):3773–3811, 2010; J Polit Econ, 2015), we find strong evidence consistent with cost asymmetry increasing in competition after controlling for known economic determinants of cost stickiness. In additional analyses, we also find that the effect of product market competition on the degree of cost stickiness increases in firms’ financial strength, likely because management in financially stronger firms has more resources for investment expenditures in spite of a sales fall. We also find that cost stickiness is increasing in competition if management is optimistic about future demand, whereas competition is not associated with cost asymmetry if management is pessimistic about future demand. Finally, we find that the relationship between competition and cost stickiness, although statistically insignificant at conventional levels, is more pronounced for single-segment firms relative to multi-segment firms.     

Market opportunities and owner identity: Are family firms different?

We test the hypothesis that ownership of a firm does not affect the firm's ability to seize market opportunities once decisions about productive structure are taken into account. By grouping firms in size clusters having a similar distance between the actual and the optimal size, we assess how the sensitivity of a firm's sales to market demand changes in response to differences in the owner's identity. We use data from a panel of 4696 continental western European firms over the period 1995–2010 and Eurostat 3-digit sectoral data on firm size distribution. Empirical evidence rejects the hypothesis of ownership irrelevance: family firms are less sensitive to market demand than other firms, in particular when the actual size of the firm is larger than optimal and in the case of both founder- and heir-run family firms.     

Real activities manipulation and firm valuation

In this paper, we study the link between real earnings management and firm value. Consistent with prior studies, we expect the ability of a firm to generate future cash flows to be significantly impaired by its use of real activities manipulations. Using a cross-section of companies from the Standard & Poor’s Compustat database from 1990 to 2013, we find that firms with higher real earnings management are associated with lower industry-adjusted Tobin’s Q and firm-specific misvaluation measure. Our results are consistent under several regression techniques addressing potential endogeneity issues and alternative proxies for real earnings management after controlling for known factors to affect firm market values.     

Business groups in China

We investigate whether business groups in China act as internal capital markets, in an environment that is characterized by a high level of government intervention, a weak legal system, and an underdeveloped financial market. We study how institutional factors, such as the ultimate owner and level of market development, shape the role of these business groups. We find that business groups help member firms overcome constraints in raising external capital, and that the internal capital market within a business group is more likely to be an alternative financing channel among state-owned firms than among private firms. We also find that the internal capital market is more likely to help those affiliated firms which are private, local government owned relative to those owned by central government, or located in regions with a well-developed institutional environment. We present evidence of the role of business groups in risk sharing among affiliated firms, but find that business group affiliation has no impact on firm accounting performance. This study sheds new light on the theory of the firm and its boundaries, and provides a better understanding of China's rapidly growing economy.     

Are insiders equal? Evidence from earnings management in closely held East Asian firms

In analyzing newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we contribute to international accounting research by providing evidence on earnings management in insider-controlled firms in this region. We find that family-controlled firms engage in less (more) accrual-based (real) earnings management than other insider-controlled firms. Our analysis suggests that controlling families, unlike other types of ultimate owners, tend to substitute real earnings management for accrual-based earnings management. To help empirically clarify the role that two incentives (entrenchment versus signaling) play in driving the substitution between real and accruals-based earnings management, we examine their valuation impact and find that both types negatively affect the future valuation of family firms. In another set of results consistent with expectations, we document that country-level investor protection and firm external financing demand shape the practice of earnings management in family-controlled firms.     

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

We study how economic policy uncertainty (EPU) influences firms’ overseas investments for Chinese listed companies. We find a significant negative relationship between EPU and firms’ overseas investments after controlling for firm characteristics and macroeconomic variables. Chinese firms seem to reduce their overseas investments on fixed income securities when facing domestic policy uncertainty. The negative relationship is pronounced for financially constrained firms, firms relying on government subsidies and with low overseas revenues, and SOEs. Firms operating in high marketisation regions can mitigate the negative effect of EPU on firms’ overseas investments. Our results remain significant when considering endogeneity problems.     

Trade Credit Risk Management: The Role of Executive Risk‐Taking Incentives

In this study we investigate how executive equity incentives affect companies’ risk‐taking behavior in relationships with their customers. We hypothesize and find that executive risk‐taking incentives provided by options are positively related to the degree of trade credit riskiness measured both as the amount of total trade credit a firm extends to all its customers and as the amount of trade credit a firm extends to customers with a high probability of default. We also find that the measures of trade credit riskiness are positively related to the firm's future stock return volatility, suggesting that the customer default risk inherent in customer‐supplier trade credit relationships represents an important economic source of the overall supplier‐firm riskiness. The findings of the study provide insights into why firms facing financial difficulties are not denied trade credit.     

Corporate governance,institutions, markets,and social factors

We use a comprehensive set of country-level social and institutional measures to study the relationship between country-level factors and firm-level governance. We also examine the roles of the country’s financial development status and the firm’s external financing needs in influencing the firm’s governance framework. Using a sample of 43 countries and 3301 firms, we find that country-level factors explain a large part of the variation in firm-level governance across countries. We also find evidence that the relationship between country-level factors and firm-level mechanisms is best represented as a moderating relationship. The results also indicate the presence of a complementary relationship, albeit sometimes insignificant, between firm-level governance and all the country-level variables included in our study. When accounting for the effect of a country’s financial development status and a firm’s external financing needs, we find evidence of a positive relationship between firm-level governance and firm returns and value for firms with high financing needs which operate in countries with high financial development.