The effects of credit lines on cash holdings and capital investment: Evidence from Japan

This study examines how credit lines affect corporate cash holdings and capital investment using a hand-collected data on publicly traded Japanese firms from 2006 to 2017. The study compares firms with and without credit lines to investigate the effects of credit lines. The empirical results are as follows: (1) Firms with credit lines hold smaller cash reserves than those without; (2) Firms with credit lines undertake more capital investment than those without; (3) The effects of credit lines are more amplified for financially constrained firms than their counterpart; (4) A close bank–firm relationship plays a positive role in the effect of credit lines on corporate activities.These empirical findings indicate that credit lines can improve firms’ financial flexibility and allow them to use cash holdings held for precautionary reasons to invest. The results also show that credit lines and the attendant implicit bank–firm relationships are complementary to each other. Moreover, having both credit lines and a close bank–firm relationship is important to Japanese firms for their corporate activities. Furthermore, the results imply that the use of credit lines is still relatively undeveloped in Japan, which may be a reason for the country's large corporate savings and lackluster investment.     

Corporate Taxes and Financing Methods for Taxable Acquisitions*

We examine the influence of corporate taxes on U.S. firms' financing methods for taxable acquisitions of 100 percent of a target corporation's stock. We conduct tests of acquirer firms' use of debt or internal funds as the funding source for these acquisitions over the period 1987‐97. Our results provide the first empirical evidence that U.S. firms' use of debt to fund acquisitions significantly declines as foreign tax credit limitations reduce the marginal tax benefits received from borrowing. This finding is consistent with earlier speculation that U.S. foreign tax credit provisions could materially affect the capital costs of U.S. companies in debt‐financed acquisitions. We also find that these firms are generally high‐tax‐rate corporations whose financing choices are not significantly influenced by whether they acquire target‐firm tax loss carryovers. Our findings contribute to the accounting literature on the influence of taxes on the structure and financing of corporate acquisitions.     

A hallmark of India’s new economic policy:: deregulation and liberalization of the financial sector

A fundamental job of the financial sector of any economy is to allocate capital efficiently. To achieve this, capital is supposed to be invested in the sectors that are expected to have high returns and be withdrawn from sectors with poor prospects. The purpose of this paper is to ascertain the validity of this proposition in the context of financial liberalization in India. We first examine whether the total funds (debt and equity) available for investment started flowing to the “more efficient” (defined later), Indian firms due to financial liberalization. We examine changes in the allocation of credit across industrial sectors and changes in the allocation of capital among firms within the same sector or industry. Our empirical analysis shows that during the early years of financial liberalization the share of investment going to the more efficient firms did not rise, resulting in no perceptible rise in the overall efficiency of investment allocation for the economy. Our analysis of the sources and uses of funds shows that in the period immediately following the announcement of liberalization in 1991, there was a tendency in the Indian corporate sector towards a myopic use of funds. The surge in the availability of funds in the stock market, coming mainly from small and medium savers, failed to translate itself into any noticeable rise in gross fixed assets (GFAs). Thus, the lack of an improvement in the index of efficiency of investment allocation can be partly ascribed to bad investments to begin with. The message that emerges is that financial reforms in an inadequate regulatory framework do not necessarily have positive effects.     

China's Nonfinancial Corporate Debt Dynamics

Since the global financial crisis broke out in 2008, China's nonfinancial corporate debt has been rising steadily and rapidly, posing serious threat to China's financial stability. China's rising corporate debt is mainly attributable to three factors: worsening capital efficiency, worsening corporate profitability and high funding costs. Based on a dynamic recursive model developed in the paper, we simulate the trajectories of China's corporate debt‐to‐GDP ratio, and find that if China fails to reverse the current trends in capital efficiency, corporate profitability and financing costs, China's nonfinancial corporate debt‐to‐GDP ratio will continue to rise without converging to a limit. Against most economists' intuition, given the current trends of changes in parameters, higher economic growth will not help China to escape the corporate debt trap. On the contrary, it will make China's corporate debt problem even worse. To avert a corporate debt crisis, China needs to speed up the structural reform and change the growth paradigm so as to enhance capital efficiency and firms' profitability, while reducing firms' financing costs.     

Bank dependence and financial constraints on investment: Evidence from the corporate bond market paralysis in Japan

This paper investigates whether firms are able to substitute bank loans for public debt when the latter become less available to firms. To do so, this paper utilizes the 2008 financial crisis and its impact on Japanese markets as a natural experiment. Because the Japanese banking sector remained functional while the corporate bond markets were paralyzed, the data from Japan during this period provide us with an ideal environment to examine this hypothesis. I specifically examined whether firms with large holdings of corporate bonds maturing in FY2008 were financially constrained, by comparing the changes in their capital investment expenditures and borrowing conditions with those of bank-dependent firms. The main empirical results indicate that (1) firms with large holdings of corporate bonds maturing in FY2008 did not reduce investment expenditures; (2) instead, they exhibited higher increments in bank loans; and (3) firms that maintained relatively close bank-firm relationships had greater access to bank loans with low borrowing costs. These findings demonstrate that Japanese firms were able to substitute bank loans for public debt during the crisis and imply that the Japanese banking sector worked efficiently to replace public debt markets during the crisis.     

Tax Incentives and Maturity Mismatch between Investment and Financing: Evidence from China

This paper examines the effects of China's accelerated depreciation policy (ADP) on the maturity mismatch between investment and financing. Using panel data for China's A-share nonfinancial listed companies from 2010 to 2019 and a staggered difference-in-differences approach, we found the following. First, ADP significantly aggravated the degree of corporate maturity mismatch, and this result was robust across multiple checks. Second, due to an insufficient long-term loan supply, firms had to finance the fixed investments induced by ADP with short-term debts, leading to maturity mismatches. Third, the positive policy effects were mainly significant for firms with high policy exposure, high-risk preferences, a high degree of information asymmetry, and firms with weak long-term financing capacity. Finally, maturity mismatch exacerbated corporate financial risks. Our research findings indicate that passive maturity mismatch is prevalent among Chinese companies and emphasize the need to address financial repression in order to mitigate the potential financial risks that may arise from tax incentives.     

The role of information sharing in trade credit distribution: evidence from Thailand

Prior research has shown that information sharing among lenders facilitates bank credit allocation and reduces default rates. We examine the role of information sharing in trade credit allocation using a sample of publicly traded firms in Thailand over the 1994–2005 period. Taking the establishment of a private credit bureau in 1999 as signalling improvement in information sharing among lenders, we obtain three main results in the improved information sharing period: (1) Thai firms have become less dependent on supplier credit; (2) financially constrained firms redistribute more funds via trade credit; and (3) the relationships between the use of trade credit and firm‐specific factors such as liquidity, free cash flow, tangible assets, interest cost ratio, and firm size weaken as information sharing improves. Our results are consistent with the view that better information sharing facilitates credit allocation. Hence, policies aiming at facilitating information exchange among financial intermediaries should be supported. We also find support for the view that bank credit substitutes for trade credit. This substitution lowers firms' cost of capital, given that trade credit is assumed to be more costly than bank loans.     

CORPORATE DEBT RESOLUTION AND THE ROLE OF FOREIGN CAPITAL IN THE POST‐CRISIS RESTRUCTURING OF THE REPUBLIC OF KOREA

The outbreak of the financial crisis in the Republic of Korea in 1997 exposed the structural weaknesses in the country's economy. Heated debates have failed to generate definitive answers on just what caused the financial crisis. Considering the importance of restructuring the corporate sector, this paper analyzed how the resolution of corporate debts was accomplished and examined the role of foreign capital in Korea's post‐crisis corporate restructuring. Special attention was given to the measures devised to recover nonperforming loans for the liquidation of corporate debts, to the foreign capital inflows through cross‐border M&As or privatization processes, and to the changes in control through corporate governance reforms. This paper concluded that the resolution of corporate debts has been satisfactory and successful and that foreign capital contributed significantly to effective corporate restructuring and debt resolution in the post‐crisis restructuring of Korea.     

Quantifying the vulnerabilities of China’s corporate sector with contingent claims

This paper measures and analyzes the default risk and debt sustainability of China’s non-financial corporate sector both on an aggregate level and within a sector by employing the contingent claims approach (CCA). Our results suggest that the vulnerabilities of Chinese firms are heterogenous in terms of investment source, ownership group, corporate form, industry type, and geographic unit etc. First, foreign capital enterprises have a lower default risk than domestic capital enterprises. Within domestic capital enterprises, state-owned firms have the lowest default risk, whereas private and collective firms are most unsustainable despite that they have the highest returns on assets. Second, state-controlled firms, private stock limited firms, and Chinese foreign cooperative firms are least vulnerable in the state-owned corporate sub-sector, the private corporate sub-sector and the foreign corporate sub-sector, respectively. Third, all industries except the coal industry are sustainable by industry type. Fourth, the vulnerabilities of local state-owned sub-sectors are diverse across China’s administrative regions. Moreover, we provide robustness tests which support our findings. In Sum, our study shed key light on ensuring the soundness of China’s non-financial corporate sector and thereby maintaining the stability and sustainability of the Chinese economy.     

商业银行金融支持、商业信用与异质性研发投资

伴随中国经济转型及外部竞争的加剧,创新变得越来越重要。由于研发投资的高风险性和信息不对称等特征导致创新型企业普遍难以获得所需的债务资本。相比于外部间接筹资,与商品交易直接相联系的以分期付款和预付定金等形式存在的商业信用便成为低成本、高效率的融资渠道之一。基于此,通过实证检验商业银行金融支持、商业信用与异质性的研发投资之间的关系,以期寻找化解资本危机的渠道。首先证实了上市公司自身产生的现金流是研发投资的重要资本来源之一。其次,金融发展能够显著加强研发支出规模,且金融发展程度越高,企业规模的影响越小。在单独考察商业银行金融支持与商业信用对研发投资的作用后,结果表明两者均为重要的资本来源。此外,金融支持与商业信用之间存在互补关系,但商业信用对异质性研发的支持力度存在差异。     

Conditional Conservatism and Debt versus Equity Financing

Extant research suggests that conditional conservatism reduces information asymmetry between a firm and its shareholders as well as its debtholders. However, there is little evidence on whether conditional conservatism reduces information asymmetry differentially for shareholders and debtholders. We use the setting of a firm's choice between equity versus debt when it seeks a significant amount of external financing to examine this research question. We find that when firms raise a significant amount of external financing, the use of equity (versus debt) increases with the level of conservatism. We also find that the reduction in cost of equity associated with conservatism is greater for equity issuers than for debt issuers, but find no such difference when we examine cost of debt. In addition, we find that the positive effect of conservatism on the choice of equity issuance (versus debt issuance) is accentuated when the information asymmetry between the firm and its shareholders is more severe. Overall, our results suggest that conservatism reduces information asymmetry more between firms and shareholders than between firms and debtholders.     

The choice of financing with public debt versus private debt: New evidence from Japan after critical binding regulations were removed

The complete removal of binding regulatory constraints on bond issuance till 1993 provides an opportunity ripe enough to test hypotheses on the choice of financing with public debt and bank debt, comparing with the partial deregulation of Japanese financial markets in the late 1980s. Regardless of further deregulation, there is a U-turning to bank debt in Japan's corporate financing as the 1990s’ recession prolonging. In particular, we find high quality Japanese firms leave banks to the bond market, while low quality firms U-turn to bank debt. We also provide new evidence that Japanese banks tend to lend loans to wealthy firms. Because of a shift from equity-linked bond to straight bond during 1993–1997, our study provides a complement to evidence on financing choices of equity-linked public debt versus bank debt with the late 1980s’ bull stock market.     

Debt Relief and Credit to the Private Sector in African Countries

Abstract: The purpose of the paper is to empirically investigate the link between debt relief and credit to the private sector in African countries using a panel method over the period 1988–2004. The motivation for investigating the relationship between debt relief and credit to the private sector follows Christensen's (2004) hypothesis that domestic debt has a negative impact on the credit to private sector; therefore debt relief is expected to alleviate domestic debt and thereby create space for domestic credit, which if it is mostly constituted of public sector credit, crowds out credit to the private sector. The main results of the paper are as follows: (1) debt relief has a significant and positive effect on credit to the private sector in the short term; (2) in the long term, debt relief has positive effects on domestic credit to the private sector only when associated with good initial institutional quality.     

Struggle for survival in credit crunch: The effect of interest rate deregulation in China

This study investigates how interest rate deregulation affects firms' financing choice between bank debt and public debt. Our analysis exploits China's 2013 bank interest rate floor deregulation as an exogenous shock to the supply of bank credit. Using a difference-in-difference design, we find that firms with higher default risk substitute away from bank loan and switch to public debt after the 2013 deregulation. However, this substitution to public debt is limited, leading to a dramatic decline in debt ratio. Our result also demonstrates that the effect on firms' public debt financing is more pronounced for firms with better information environments, suggesting that good information environment is an important prerequisite for making the switch. This switching, contradicting to traditional financing framework that high-risk firms prefer bank loans, inevitably is costly. Compared with low-risk firms, bonds issued by high-risk firms have significantly higher spreads, a higher likelihood of being secured, and a higher tendency of including an interest-adjusted clause. More importantly, we also document that high-risk firms subsequently improve their information transparency after the interest rate deregulation. Our findings highlight the role of interest rate deregulation in firms' financing choice and illustrate that firms incur high switching costs when their choice deviates from the optimal financing choice.     

Financial Liberalization and Corporate Investments: Evidence from Korean Firm Data*

This paper examines whether financial liberalization procedures introduced in Korea in the early 1990s succeeded in relaxing financing constraints on firms. Because external funds are more costly than internal funds in an imperfect capital market, corporate investments depend on the availability of internal funds. As financial liberalization mitigates constraints on firms, the sensitivity of investments to cash flow can be reduced. Using panel data on Korean firms, we found that cash‐flow effects on investment spending decreased drastically during the liberalization period. In particular, small, non‐chaebol and established firms that were severely constrained gained most from liberalization. Chaebol firms appeared to lose preferential access to credit after liberalization.     

Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location*

The scarcity of suitable proxies for asymmetric information has impeded empirical research from providing reliable evidence on whether information risk shapes equity pricing. In reexamining this unresolved question, we rely on firms’ geographic distance from financial centers to gauge information asymmetry. We provide strong, robust evidence supporting the prediction that equity financing is cheaper for firms nearer central locations, implying that investors rationally require more compensation when information asymmetry is worse. The equity pricing role of geographic proximity is economically large, with our coefficient estimates translating into firms located within 100 kilometers of the city center of the nearest of six major financial centers, or in their metropolitan statistical areas, enjoying equity financing costs that are seven basis points lower. Our inferences are insensitive to measuring both the cost of equity capital and distance in several ways, controlling for corporate governance quality, and addressing endogeneity. Collectively, our analysis suggests that investors discount the price that they pay for their securities to reflect the greater information asymmetry that ensues when firms are far from major financial centers.     

Cross‐Country Evidence on the Importance of Auditor Choice to Corporate Debt Maturity

We examine the importance of Big Four audits in reducing agency costs evident in corporate debt maturity worldwide. Analyzing a large sample of public firms from 42 countries reveals that the fraction of long‐term debt in firms' capital structures rises with the presence of a Big Four auditor, suggesting that higher‐quality audits substitute for short‐term debt for monitoring purposes. In additional analyses, we find that the role that auditor choice plays in debt maturity is concentrated in firms from countries with strong legal institutions governing property rights and creditor rights. Collectively, our research implies that Big Four audits matter to corporate debt maturity, although the impact is isolated in firms operating in countries with more protective legal regimes.     

企业债务违约风险与货币政策立场——微观财务信息的宏观预测价值

文章基于2004年第一季度至2019年第三季度数据,构建汇总层面的利息偿付倍数、现金持有水平以及会计盈余作为企业债务违约风险的代理变量,考察其对国家货币政策调控立场的预测价值。研究发现：（1）汇总层面的企业债务违约风险越高,政府未来越倾向于采取更为宽松的货币政策,表现为未来信贷投放规模的增长和借贷利率的下降;（2）分析师宏观预测以及投资者的投资决策也一定程度上考虑了汇总层面的企业债务违约风险。研究表明,汇总层面的企业债务违约风险能够反映实体经济的资金供求状况,从而对货币政策立场发挥一定的预测价值,有助于监管当局提高对宏观经济的监测和预警能力。     

CAPITAL STRUCTURES IN EMERGING STOCK MARKETS: THE CASE OF HUNGARY

This paper studies developments in the Hungarian capital markets during 1992–95 and investigates the determinants of the capital structures of companies listed on the Budapest Stock Exchange. Hungarian companies had very low leverage ratios. Empirical findings indicate that the negative relationship between leverage and proportion of tangible assets was primarily caused by the lack of long‐term debt financing. The relationship between leverage and the size of the company provides some indication of the importance of trade credits for the companies. The more profitable companies had less debt than less profitable ones. This is attributed to the firms’financial incentives aggravated by the segmentation of Hungarian credit markets and credit rationing within the financial environment. Manufacturing firms and firms with the state among their major shareholders enjoyed higher levels of debt financing relative to other companies.     

A Cross‐national Comparison of R&D Expenditure Decisions: Tax Incentives and Financial Constraints*

We provide evidence on the impact of tax incentives and financial constraints on corporate R&D expenditure decisions. We contribute to extant research by comparing R&D expenditures in the United States and Canada, thereby exploiting the differences in the two countries' R&D tax credit mechanisms and generally accepted accounting principles. The two tax incentive mechanism designs are consistent with differing views of the degree of financial constraints faced by firms in these economies. Our sample also allows us to explore the effects of capitalizing R&D on Canadian firms. Employing a matched design, we document relations between tax credit incentives and R&D spending consistent with both Canadian and U.S. public companies responding as though they are not financially constrained. We estimate that the Canadian credit system induces, on average, $1.30 of additional R&D spending per dollar of taxes forgone while the U.S. system induces, on average, $2.96 of additional spending. We also find that firms that capitalize R&D costs in Canada spend, on average, 18 percent more on R&D. Collectively, this evidence is important to the ongoing debates in both countries concerning the appropriate design of incentives for R&D and is consistent with the assumptions found in the U.S. tax credit system, but not those found in the Canadian system.