Government intervention and firm investment

This paper examines how government intervention affects firms' investment and investment efficiency, focusing on the world's largest economic stimulus package (ESP) during the 2008 global financial crisis period. The RMB four trillion ESP aimed to restore the economy by promoting investment in priority areas. Thus it provided an exogenous shock to firms' investment environment and exacerbated the impact of government intervention on firms' investment and investment efficiency. We use propensity score matching to match government-intervened firms with their controls to reduce the endogeneity issue of government intervention. Our difference-in-differences analysis shows that government-intervened firms invested more than control firms. Further analysis shows that the source of funding for investment was mainly from bank loans rather than internal cash flows. However, the post-investment performance was poor. We find that the investment efficiency of government-intervened firms decreased and government-intervened firms overinvested after the ESP. Our results are robust to alternative model specifications and placebo tests. The findings suggest that government intervention can play a negative role in government-intervened firms.     

Do corporate tax cuts increase investments?

This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.     

Firm investment,finance constraint and voluntary asset sales: the evidence from Indian manufacturing firms

This paper examines the importance of finance constraints for firm investment expenditures by looking at the investment-asset sales sensitivity in financially healthy Indian manufacturing firms. Voluntary asset sales is a cleaner indicator of firms' liquidity than cash flows since it is unlikely to influence firms' growth opportunities unless they are financially constrained. We take care of the endogeneity and the implicit monotonicity problems, which are much debated in the literature, by using an endogenous regime switching regression model. We find that the investment-asset sales sensitivity is significantly greater for firms that are likely to be financially constraints.     

Government intervention and investment efficiency: Evidence from China

The extant corporate investment literature has documented that information asymmetry and agency conflicts between managers and outside investors prevent firms from making optimal investment decisions. In this study, we investigate whether government intervention, as another form of friction, distorts firms' investment behavior and leads to investment inefficiency. Using Chinese data, we test this by measuring government intervention at two different levels. First, we compare investment efficiency between SOEs and non-SOEs. We find that the sensitivity of investment expenditure to investment opportunities is significantly weaker for SOEs. Second, we measure government intervention by whether a firm is politically connected through the employment of top executives with a government background. We find that political connections significantly reduce investment efficiency in SOEs. However, we do not find such evidence in non-SOEs. Taken together, our findings suggest that government intervention in SOEs through majority state ownership or the appointment of connected managers distorts investment behavior and harms investment efficiency.     

Permanent sales increase and investment

When firms experience increases in sales that they consider to be permanent, the present value of expected profits also increases, leading to increases in the firms' investments. Our study investigates the permanent sales hypothesis (PSH) of firms' investment; it examines whether investment decisions are influenced by changes in the permanent, in contrast to transitory, component of sales income increases. Using the co-integration test and the structural vector auto-regression (SVAR) framework, our paper finds strong support for the hypothesis that investment behavior is primarily explained by permanent changes in sales income. Empirical multiple time series regression results also confirm that investments are a function of a number of past yearly sales changes. Our results show that larger, more liquid, and lower debt ratio firms follow PSH more closely than smaller, less liquid, higher debt ratio firms. Recent studies on corporate investment (i.e., Fazzari, Hubbard, and Petersen, 1988) have argued that the higher the dependence on the internal source of funding of the investment, the stronger the severity of financing constraints. Our study shows that the more dependent on the permanent cumulative increase of internal source of funding a firm's funding on investment, the less financially constrained firms.     

Bank risk-taking and corporate investment: Evidence from the Global Financial Crisis of 2007–2009

In this paper, we explore the relation between the banking sector's risk-taking and a firm's investment (“corporate investment”). Specifically, we ask whether firms' cash holdings moderate the effect of the banking sector's risk-taking on corporate investment. Based on a panel sample of publicly listed non-financial firms in 15 EU countries during the period 1990–2015, we document several key findings. First, both cash holdings and the banking sector's risk-taking are positively associated with corporate investment. Second, bank loan growth, which roughly captures the supply of bank credit, is not related to corporate investment. Third, firms with smaller cash holdings disproportionately invest more than do firms with larger cash holdings during periods of higher risk-taking by the banking sector.     

Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China

The 2013 depoliticization regulation (Rule 18) in China mandates government officials to resign from board positions in public firms, terminating firms' political connections established through these directors. Exploiting this regulation as a quasi-experiment, we document that politically connected firms increase their cash holdings 12.7% more than non-connected firms because of these resignations. This pattern is more pronounced among firms that rely more heavily on the government for external resources. Among state-owned firms, the pattern is more evident in firms that are more deeply privatized. In addition, firms that lose political ties experience a significant decline in obtaining bank loans and government subsidies, and they are also slower to adjust their cash holdings toward the optimal level. These findings underscore the role of corporate political linkages in facilitating firms' access to resources that “soften” firms' budget constraints.     

Economic policy uncertainty and firm investment decisions: Dilemma or opportunity?

In an environment of economic policy uncertainty (EPU), how to improve efficiency and optimize the scale of firm investment is an important topic worthy of attention. This paper examines the impact of EPU on firms' investment decisions, using Chinese A-share listed companies from 2007 to 2019 as a research sample. The study finds that macro EPU inhibits the increase of firms' investment scale and efficiency while exacerbating the risk of overinvestment or underinvestment. Local EPU enhances a firm's investment scale but simultaneously exacerbates the risk of over- or underinvestment, which in turn inhibits investment efficiency. The mechanism test shows that, first, macro EPU promotes firms' R&D investment but inhibits their green investment. In contrast, local EPU inhibits R&D investment and promotes green investment. Second, macro EPU has a significant negative effect on firms' business performance, while local EPU has a smaller effect. Therefore, in an uncertain environment, the government should actively stabilize the macroeconomic environment, and firms should actively optimize investment structures and improve their risk prevention mechanisms.     

Is corporate social responsibility engagement influenced by nearby firms? Evidence from China

This paper explores whether the CSR engagement of a focal firm is influenced by the CSR density formed by nearby firms. Using a sample of listed firms from 2010 to 2019 in China, we find a positive relationship between the local CSR density and the CSR engagement of a focal firm. Based on the heterogeneous analysis, we find that the impact of local CSR density is more pronounced for firms with worse financial conditions (i.e., lower profits, cash to debt, sales to inventory, and higher leverage), less corporate investment (i.e., lower capital expenditure growth, organization capital investment, employee growth) and fewer market shares. The primary findings are robust after addressing potential concerns. Overall, our findings provide evidence of the effect of firms' locations in the context of CSR engagement and have insightful implications for managers and governments seeking CSR improvement in emerging markets.     

GSIB status and corporate lending

Global Systemically Important Banks (GSIBs) face additional capital requirements and closer supervision. We study how closer supervision affects corporate credit supply and investigate consequences for firms. GSIB designations reduce lending on average by 5.9% but to risky firms by 7.2%. The consequences are lower asset, sales, and investment growth, especially among high-risk borrowers, and reduced R&D expenditures among all GSIB-dependent firms. Closer supervision therefore reduces banks' risk-taking but has potentially unintended implications for firms' ability to finance innovation, which seems to crucially depend on bank credit. The supervision-induced effects are larger than those attributed to GSIB-specific capital surcharges.     

Political considerations in the decision of Chinese SOEs to list in Hong Kong

This paper investigates why Chinese state-owned enterprises (SOEs) with strong political connections (i.e., politically connected firms) are more likely to list overseas than non-politically connected firms. We find that connected firms' post-overseas listing performance is worse than that of non-connected firms. This evidence suggests that connected firms' managers list their firms overseas for private (political) benefits. Consistent with this private benefits explanation, we further find that connected firms' managers are more likely to receive political media coverage or a promotion to a senior government position subsequent to overseas listing than domestic listing.     

What provides the micro-foundation of monetary policies in the absence of mature economic institutions?

In the absence of mature economic institutions, what provides the micro-foundation of monetary policies? Taking corporate financing of China's firms as a representative example, first, our data suggest that financial access of firms becomes indeed squeezed as the monetary policies require. Then we confirm that government intervention leads firms' financial access to become difficult since the financial contraction policies. We also provide evidence that government intervention indeed promotes severity of access to finance. These evidences confirm that government intervention squeezes financial access after central government's financial contraction policies and that government intervention functions to support the implementation of monetary policies. Therefore, this paper shows that government intervention provides micro-foundation of the monetary policies in the absence of mature economic institutions.     

Firm-level implications of early stage venture capital investment — An empirical investigation

We analyze the impact of venture capital finance on growth and innovation of young German firms. On the basis of statistical matching procedures we confirm findings that venture-funded firms have a higher number of patent applications than those in the control group. However, these are obtained even before the venture capitalists' investment, hence venture capitalists choose firms with demonstrated innovative output. After investment, the number of firms' patents does not differ significantly anymore, however their growth rates are significantly larger. This suggests that the higher innovativeness of venture-funded firms is due to the selection process of the venture capitalist prior to the funding rather than to the venture funding itself. Venture capitalists seem to focus rather on commercialization of existing innovations and growth of the firm.     

Monetary policy,bank lending and corporate investment

The purpose of this study is to shed light on the chain of causality from macroeconomic financial policy to the microeconomic investment function. Concretely, we aim to provide an in-depth analysis of the relationships between the monetary policy of central banks, the loan policy of commercial banks, and the investment behavior of firms. We focus on countries that conduct their monetary policy under the inflation-targeting framework. Our empirical analysis with data from Germany, Switzerland and Thailand provides several new insights. First, after controlling for the US monetary policy, the monetary policy in Germany and Thailand appears to influence the banks' lending rate in the short run (i.e. within two months), whereas the monetary policy in Switzerland seems to be ineffective at influencing the banks' lending rate in the short run. Second, our results show that the banks' lending rate has a negative effect on their loans and that this negative effect is weakened by their growth opportunities. Third, we find that the supply of bank loans plays a more pivotal role in determining firms' investment than the lending rate. Last but not least, we document that neither the lending rate nor the loan-to-assets ratio moderates the sensitivity of the firms' investment to growth opportunities.     

Local Crowding-Out in China

In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints while leaving state-owned firms' investment unaffected. We establish this result using a purpose-built data set for Chinese local public debt. Private firms invest less in cities with more public debt, with the reduction in investment larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow.     

The Role of Product-Level Dynamics in Export Growth and Productivity: Evidence from Estonia

Recent empirical studies of international trade have stressed that firm-level decisions about the number of export products or markets are an important margin of adjustment in response to globalization and changes in economic conditions. We investigate how decisions about the export product mix are associated with aggregate export dynamics and productivity of firms. We use detailed data on product and export market levels for the full population of Estonia's firms. Decomposition analysis of trade flows shows that both the relative importance of firms' beginning to export products and the role of product-level churning (firms' adding and dropping of products) in total Estonian export growth increases significantly after accession to the European Union in 2004. We show that concentration on core competence products has a rather different association with productivity of firms in different-size groups. Large firms with a large number of different types of export products gain, on average, in terms of productivity from concentrating their export sales on their core export products. There is no such general regularity in the case of small firms.     

Bank Mergers and Insider Nontrading

Insiders with nonpublic information that their firms are acquisition targets can profit by purchasing their firms' stock or by delaying planned sales of their firms' stock. Under current securities laws, insiders who execute the former strategy expose themselves to civil and criminal liability, whereas insiders who execute the latter strategy do not. Using a sample of bank mergers, we find that target bank insiders significantly decrease both share purchases and share sales before merger announcements. These findings suggest that securities laws effectively deter some forms of illegal insider trading and that insiders exploit opportunities to profit legally from nonpublic information.     

土地财政抑制了企业创新吗?——基于信贷错配视角的分析

基于一般均衡框架,考量房价、土地财政与企业创新之间的关系。研究发现：金融市场存在摩擦时,土地作为重要的抵押资产,房价波动和土地财政会扭曲创新资源的配置,在短期和长期对创新产生不同的影响。短期房价上升通过土地财政推动政府支出增加和总产出扩张,同时带动了企业的研发投入。当面临新的投资机会时,企业可以通过出售房产,缓解流动性约束。但在长期,土地财政引致的政府债务挤出了企业信贷,部门间信贷错配抑制了企业研发投入,同时高房价会导致企业转移部分资源投资房产,部门内资源错配进一步抑制了企业创新,从而降低了长期经济增长率,政府增加土地供给,则会弱化政府债务对企业创新要素的挤出效应。     

Does external uncertainty matter in corporate sustainability performance?

Motivated by the prevalence of corporate sustainability and the rise of uncertainty at the national level, we investigate the impact of three sources of uncertainty; namely, economic policy, climate change, and political instability, on firms' sustainability performance. Using a sample of 6804 firms from 72 countries spanning 15 years, our study revealed that uncertainty due to climate change, economic policy, and political instability negatively affects firms' sustainability performance. This finding is in line with the real options theory that uncertainty in an external environment discourages firms' long-term investment (e.g. investment in corporate sustainability). In addition, the results show that the option for delay in sustainability investment moderated the relation between uncertainty at the national level and firms' sustainability performance. Firms with better sustainability performance had higher firm value when facing uncertainty. Interestingly, firms with higher profitability performed better in sustainability when facing uncertainty at the national level.     

Government contracts and trade credit

This study examines the association between government contracts and firms' use of trade credit. Firms with government contracts may demand less trade credit because of their lower operational risk, higher firm performance, stronger capacity to generate internal funds, and better access to other sources of financing. On the other hand, government contractors could receive more trade credit extensions from suppliers. We examine a sample of U.S. listed firms from 2000 to 2016 and find that firms with government contracts have a lower level of trade credit. We also find that government contractors make quicker payments for trade credit contracts than other firms. Moreover, we provide empirical evidence of government contractors' lower levels of operational risk and higher firm performance, which may enable government contractors to generate adequate internal funds for their operations or to obtain other forms of financing at a lower cost and thus lower their demand for trade credit. Incremental to prior research, our study suggests that having government contracts is one of the factors determining trade credit and firms' financing decisions.