Firm Growth and Liquidity Constraints: A Dynamic Analysis

Using a large unbalanced panel data set of Portuguese manufacturing firms surviving over the period from 1990 to 2001, the purpose of this paper is to examine whether liquidity constraints faced by business firms affect firm growth. We use a GMM-system to estimate a dynamic panel data model of firm growth that incorporates cash flow as a measure of liquidity constraints and persistence of growth. The model is estimated for all size classes, including micro firms. Our findings reveal that smaller and younger firms have higher growth-cash flow sensitivities than larger and more mature firms. This is consistent with the suggestion that financial constraints on firm growth may be relatively more severe for small and young firms. Nevertheless, the same finding can be interpreted in a different way if we consider the more recent literature which interpret the higher investment/cash flow sensitivity of younger and smaller firm in absence of financial market imperfection as the outcome of these firms reaction to the fact that realisation of their cash flows reveals them the direction to go in presence of uncertainty of their growth prospect. Besides, firms that were small and young at the beginning of the sample period exhibited more persistent growth than those that were large and old. Finally, these results have significant policy implications.      

R&;D investment and financing constraints of small and medium-sized firms

This study tests for financial constraints on R&D investment and how they differ from capital investment. To identify constraints in the access to external capital, we employ a credit rating index. Our models show that internal constraints, measured by mark-ups, are more decisive for R&D than for capital investment. For external constraints, we find a monotonic relationship between the level of constriction and firm size for both types of investment. Thus, external constraints turn out to be more binding with decreasing firm size. On the contrary, we do not find such monotonic relationships for internal constraints. Differentiation by firms’ age does not support lower constraints for older firms.     

Intellectual capital and innovativeness in software development firms: the moderating role of firm size

Abstract

We examine the effect of intellectual capital on firms’ innovativeness and the moderating role of firm size in software development firms in Kenya. Using moderated regression analysis, we found support for the proposition that human and social capital enhance firms’ innovativeness. We did not, however, find any significant effect of organizational capital on firms’ innovativeness. The results from the moderated regression suggest that the smaller the firm, the stronger the influence of intellectual capital on firms’ innovativeness. The results therefore indicate that human and social capital are critical in the innovation process and so firms that neglect these capitals are unlikely to realize the potential to innovate particularly in software development firms.     

Nonfinancial companies as large shareholders alleviate financial constraints of Brazilian firm

We analyze whether financial constraints of Brazilian firms are alleviated by ownership structure. More specifically, we study whether the presence of nonfinancial firms as shareholders of Brazilian firm mitigates financial constraints. We find that the presence of nonfinancial firms as significant shareholders reduces financial constraints, probably because such blockholders are able to reduce asymmetric information problems that are at the origin of financial constraints. This result indicates that the changes in the corporate ownership of the Brazilian firms, achieved within the country's structural changes, have been positive for firm investment and have contributed to the development of Brazil.     

The interplay of human and social capital in shaping entrepreneurial performance: the case of Vietnam

This study investigates the effects of human capital, social capital and their interaction on the performance of 1,398 Vietnamese new-born firms. Operating profit is used as the measure of success. Human capital is captured by individual-level professional education, start-up experience, and learning. Whereas the first two dimensions of human capital are measured with traditional indicators, we define learning as the ability to accumulate knowledge to conduct innovation activities (new product introduction, product innovation and process innovation). Social capital is measured as benefits obtained from personal strong-tie and weak-tie networks. Key findings are threefold: (i) human capital strongly predicts firm success, with learning exhibiting a statistically significant positive association with operating profit, (ii) benefits from weak ties outweigh those from strong ties, (iii) interaction of human capital and social capital displays a statistically significant positive effect on new-firm performance.     

Working capital management,corporate performance,and financial constraints

This paper examines the linkage between working capital management and corporate performance for a sample of non-financial UK companies. In contrast to previous studies, the findings provide strong support for an inverted U-shaped relation between investment in working capital and firm performance, which implies the existence of an optimal level of investment in working capital that balances costs and benefits and maximizes a firm's value. The results suggest that managers should avoid negative effects on firm performance because of lost sales and lost discounts for early payments or additional financing expenses. The paper also analyzes whether the optimal working capital level is sensitive to alternative measures of financial constraints. The findings show that this optimum is lower for firms more likely to be financially constrained.     

Does Trade Credit Affect Technical Efficiency? Empirical Evidence from Italian Manufacturing SMEs

Using firm‐level data from the Italian manufacturing sector, we investigate the relationship between small and medium‐sized firms technical efficiency and trade credit. Our contribution is twofold: we provide evidence on an open empirical question, and disentangle the channels through which trade credit may influence firms' efficiency. According to our findings, based on the Simar and Wilson (2007) procedure, trade credit seems to positively affect firm efficiency by mitigating financial constraints. Indeed, trade credit enhances efficiency especially for firms that are more likely to be financially constrained (i.e., smaller and/or younger firms) and during the most recent financial crisis.     

Effects of foreign acquisitions on financial constraints,productivity and investment in R&D of target firms in China

This paper examines whether foreign acquisitions lessen financial constraints, improve investment in research & development (R&D) and productivity of the target firms in China based on a sample of 914 cross-border mergers and acquisitions (CBM&A) over the period of 1994–2011. Using investment to cash-flow sensitivity to measure financial constraints, we find that foreign acquisitions in China are associated with a reduction of target firms’ financial constraints, irrespective of the ownership type of the target firm. However, the extent of financial constraint reduction is pronounced for non-SOEs compared to state-owned enterprises (SOEs). This study also provides evidence that foreign acquisitions improve Chinese target firms’ productivity and investment in R&D.     

Asset Substitution and Capital Use by Firms Facing Financial Repression

Firm behavior is examined during a period of financial repression in Brazil. Empirical findings indicate that firms experiencing rising inflation rates: (1) increase their capital stock while reducing liquid asset holdings; (2) experience increases in the productivity of capital (i.e. a rise in the output–capital ratio); (3) increase the scale of the firm’s operations both because of the rising capital productivity and the greater quantity of capital; (4) most firms increase liquid asset holdings as they expand production, although Brazilian firms do so at about twice the rate of multinational firms; (5) do not change overall inventory holdings; however, inventories increase as output rises for multinational firms while for Brazilian firms inventories decrease as output rises; and (6) firms that are more likely to face financial constraints expand their scale of operations at a faster rate as they accumulate more debt.     

Keiretsu centrality — profits and profit stability: A power dependence perspective

Prior studies compare keiretsu member firm and independent firm performance. Here, we use historical and power dependence perspectives to theorize that the Japanese keiretsu system primarily benefits the most central firms. We test this by examining the performance of two types of keiretsu firms (central firms and other member firms) within two types of keiretsu (horizontal and vertical). We hypothesize and find that: (1) central vertical keiretsu firms are more profitable than central horizontal keiretsu firms; (2) central horizontal keiretsu firms have greater profit stability than central vertical keiretsu firms; (3) central vertical keiretsu firms are more profitable than non-central vertical keiretsu firms; and (4) central horizontal keiretsu firms have greater profit stability than non-central horizontal keiretsu firms. Implications for managers and future research directions are discussed.     

The CEO,venture capitalists,and the board

An element in the never-ending debate about the process of funding highpotential businesses is the extent to which venture capitalists add value besides money to their portfolio companies. At one end of the spectrum, venture capitalists incubate start-ups and nurture hatchlings, while at the other extreme, so-called “vulture” capitalists feed on fledgling companies. A very important way in which venture capitalists add value other than money to their portfolio companies is by serving on boards of directors. Hence, by studying the role of outside directors, especially those representing venture capital firms, we were able to shed light on the issue of value-added.In the first phase of the research, we studied 162 venture-capital-backed high-tech firms located in California, Massachusetts, and Texas. In the second phase (with data from 98 of the 162 firms), the lead venture capitalists on the boards were classified according to whether or not they were a “top-20” firm.Board Size The average board size was 5.6 members, which was somewhat less than half the size of the board of a typical large company. Board size increased from 3 to 4.8 members with the first investment of venture capital.Board Composition and Control The typical board comprised 1.7 inside members, 2.3 venture capital principals, .3 venture capital staff, and 1.3 other outsiders. Insiders constituted 40% or less of the members of 82% of the boards, while venture capitalists made up over 40% of members of 55% of the boards. When a top-20 venture capital firm was the lead investor, then 55% of the board members were venture capitalists; in contrast, when the lead was not a top-20 firm, only 23% of board were venture capitalists.Value-Added Overall, our sample of CEOs did not rate the value of the advice of venture capitalists any higher than that of other board members. However, those CEOs with a top20 venture capital firm as the lead investor, on average, did rate the value of the advice from their venture capital board members significantly higher—but not outstandingly higher—than the advice from other outside board members. On the other hand, CEOs with no top-20 as the lead investor found no significant difference between the value of the advice from venture capitalists and other outside board members. Hence, in our sample, we could not say that there was a noticeable difference in the value of valueadded by top-20 boards and non-top-20 boards.The areas where CEOs rated outside board members (both venture capitalists and others) most helpful were as a sounding board, interfacing with the investor group, monitoring operating performance, monitoring financial performance, recruiting/replacing the CEO, and assistance with short term crisis. That help was rated higher for early-stage than later-stage companies.Our findings have the following implications for venture capitalists, entrepreneurs, and researchers.Venture Capitalist The main product of a venture capital firm is money, which is a commodity. It's impossible to differentiate a commodity in a martetplace where the customers have perfect information. As venture capitalists learned since the mid-1980s, their customers (entrepreneurs) now have an abundance of information that, while it may not be perfect, is certainly good enough to make a well-informed decision when selecting a venture capital firm. Hence, value-added may be the most important distinctive competence with which a venture capital firm—especially one specializing in early-stage investments—can differentiate itself from its competitors. If that is the case, then venture capital firms need to pay more attention to their value-added, because CEOs, overall, do not perceive that it has a great deal of value to their companies. The top-20 appear to be doing a somewhat better job in that area than other venture capital firms.Entrepreneurs If an entrepreneur wants outside board members who bring valueadded other than money, it appears that they can do as well with non-venture capitalists as with venture capitalists. The entrepreneurs we talked to in our survey gave the impression that board members with significant operating experience are more valued than “pure” financial types with no operating experience. If venture capital is an entrepreneur's only source offunding, then the entrepreneur should seek out firms that put venture capitalists with operating experience on boards. It also appears that an entrepreneur, will, on average, get more value-added when the lead investor is a top-20 firm, but there is a drawback: when a top-20 is the lead investor, it is more likely that venture capitalists will control the board. No entrepreneur should seek venture capital solely to get value-added from a venture capitalist on the board, because outside board members who are not venture capitalists give advice that is every bit as good as that given by venture capitalists.Researchers Value-added is a fruitful avenue of research. From a practical perspective, if valueadded exists it should be measurable. So far the jury has not decided that issue. Some finance studies of the performance of venture-capital-backed initial public offerings (IPOs) claim to have found valueadded, some claim to have found none, and at least one study claims to have found negative value- added. From a theoretical perspective, value-added is relevant to agency theory, transaction cost economics, and the capital asset pricing model. It also is relevant to strategic analysis from the viewpoint of distinctive competencies.     

Service industries,growth dynamics and financial constraints

This work represents a first attempt to study the effects of financial constraints on firm growth within the business services as it can be argued that firms are different not only in terms of size but also in the way they operate in a specific industry. Thus, firms can be either characterized by the use of intensive professional knowledge or, alternatively, by the use of a workforce with no specific professional skills. For the business services included, the results reveal the relative importance of internal sources of financing with respect to the external ones. The liquidity constraints mainly affect the growth of industries requiring qualified labor pool, such as computer programming and information service activities, as well as the professional and scientific ones. In these sectors, foremost operate small firms with a superior innovation capacity; therefore, they are considered risky and face difficulties in raising debt capital on favorable terms.     

Changes in the Covalence Ethical Quote,Financial Performance and Financial Reporting Quality

We examine the equity valuation effect of press releases of upgrades or downgrades reflected in the Covalence Ethical Quote (CEQ), an index ranking the ethical performance of multinational firms. The index is updated quarterly and is comprehensive enough to include 45 criteria reflecting working conditions, impact of product, impact of production, and company institutional impact. Thus, it captures many dimensions of firms’ ethical performance that are not accounted for in previous research. Our research encompasses a joint test of the value relevance of the index itself and the impact of ethical reputation on a firm’s value. We find first a significant causal relationship between stock market reactions and changes in the CEQ. Specifically, disclosures of positive (negative) changes in firm ethical performance cause increases (decreases) in firm value. Second, cross-sectional analysis indicates a positive association between changes in firm ethical performance and both its financial performance and its financial reporting quality. Collectively, these results suggest that the CEQ conveys information that is useful to investors. Further, corporate measures taken to increase ethical performance are associated with positive benefits to shareholders. Finally, investors have concluded that good news about their firms’ efforts to be ethical is worth the cost.     

We Have Never Been Secular: Religious Identities,Duties, and Ethics in Audit Practice

Contemporary research highlights multiple societal and environmental benefits in addition to potential economic advantages associated with renewable energy (RE) utilization. As federal and state incentives for investments in RE technologies become more prevalent, RE sources represent increasingly viable alternatives to established fossil fuel energy. RE utilization is recognized as a key component of “green” product innovation that helps firms reduce the environmental impact of production processes and diminish their ecological footprints and energy consumption. Yet, despite consistent evidence that corporate sustainability initiatives are favorably associated with firm performance, the limited research that examines associations between RE initiatives and firm performance yields mixed results and an explicit link has yet to be established. Drawing on the natural resource-based view of the firm, we examine the association between RE utilization and firm financial performance over time. Annual ROI, Tobin’s Q, and operating margin for large U.S. firms identified as exceptional users of RE in the EPA’s Fortune 500 Top Green Power Partners list are compared with their respective industry medians over a 7-year period (2007–2013) and post hoc bootstrapping and sensitivity analyses are performed to further validate the study findings. Our research advances current knowledge about the influence of RE utilization by demonstrating that top RE user firms consistently generated superior financial performance compared to their industry competitors. As such, the study findings lend credence to the existence of a business case that complements the societal and environmental benefits of RE utilization.     

Corporate governance in publicly traded small firms: A study of Canadian venture exchange companies

Most evidence regarding the determinants and effects of corporate governance practices is based on large firms. Herein, we explore these issues in the context of small publicly traded Canadian companies. We exploit the fact that such firms were not subject to corporate governance guidelines prior to 2005 and thus analyze the determinants of voluntary governance practice choices, as well as the effects of those practices on firm performance. Using a unique data set, we construct a corporate governance index for each firm. We measure performance by two variables: quality of accounting earnings and financial performance. The results indicate that corporate governance does matter for smaller traded Canadian firms. We find that both accounting and financial performance are positively related to corporate governance; however, their underlying mechanisms may differ somewhat. Given this result, it would be natural to expect all firms to choose higher levels of governance. However, our results also suggest small firms face resource constraints that limit their choices. We conclude that good governance is an important driver of small firm performance that cannot be neglected by the owners and managers of these firms.     

Cost of capital and market power: The effect of size dispersion & entry barriers on market equilibrium

A market power explanation for the observed empirical fact that large firms in a given industry pay less for their capital than small is developed. Larger firms in an industry are shown to pay less for their capital than small because they have more control over the market and the riskiness of their divided stream is correspondingly smaller. More firms in an industry with a given size dispersion raises the cost of capital to the incumbents, but proportionately more to smaller firms. However, the most significant result is that a greater dispersion of sizes will reduce the riskiness of the dividend stream of the larger firm and increase the riskiness of the smaller firm, causing an increase in the dispersion of capital costs. Hence product market power enhances capital cost efficiencies.     

Limiting Laissez Faire Profits: The Financial Implications

Traditional corporate finance endorses the principle of stockholder wealth maximization as the purpose of business. In light of recent scandals and legislation, businesses are increasingly expected to use financial resources in a manner which benefits society and not just the owners of the firm. This imputation of a corporate soul will necessarily reduce investor returns, which has at least two major financial implications for the firm and the economy. The first is that it may cause investors to change their required rates of return and thereby change the amount of capital available to firms (in␣particular), and the economy (in general). The second is that it may implicitly replace equity with debt in the capital structure of firms, with all that implies for financing and corporate governance. The purpose of this article is to examine these implications and evaluate their sometimes counterintuitive consequences.     

Organizational capital,production factor resources,and relative firm size in strategic equity alliances

Access to complementary resources through strategic equity alliance networks is an important activity for both smaller and larger firms. In the literature, there is an intensive debate on the impact of alliance resources for smaller firms. We submit that the effect of alliance resources on the smaller firm financial performance depends on the attributes of these resources. Specifically, we argue that the attributes of partner organizational capital are negatively related and the attributes of partner production factor resources are positively related to the smaller firm financial performance. We test our theoretical framework by applying a longitudinal analysis to a dataset of 1730 firm-year observations of strategic equity alliances in the software industry in 25 countries over an 11-year period. We find support for our hypotheses, highlighting the critical importance of resource attributes for smaller firms in strategic equity alliance networks.     

Human resource outsourcing: Market and operating performance effects of administrative HR functions

Using event study methodology and two-stage regression analysis on a sample of firms announcing human resource outsourcing (HRO) contracts, this study tests the association between administrative HRO and firm-level capital market and long run operating performance, with archival financial data controlling for endogeneity and outsourcing decision optimality. The results demonstrate that the equity capital market responds positively to client firms announcing administrative HRO, particularly service firms and those outsourcing transactional HR tasks. Additional statistical analysis shows that suboptimal outsourcing is negatively associated with long run operating performance measured as return on assets and operating return on assets. This study contributes to outsourcing literature by more precisely quantifying outsourcing performance through archival financial data and employing capital market empirical tests. Further, it controls for outsourcing decision optimality in examining long run operating performance effects. This research focuses on HR, a critical function within the firm and value enhancing to the firm.     

公司特征、行业特征和并购战略类型的实证研究

This paper studies 148 related and 169 unrelated acquisition cases conducted by Chinese listed firms from 2001 to 2004 and explores firm and industry characteristics of these firms prior to their acquisition. Results show that there are significant pre-acquisition differences between firms pursuing related acquisition and firms pursuing unrelated acquisition in terms of firm performance, business risk, firm size, proportion of state shares and degree of diversification profile. Except for differences in internal capital as represented by undistributed profit per share, there is no significant difference in other aspects of available resources and industry performance. Translated and revised from Guanli Shijie 管理世界 (Management World), 2007, (3): 130–137