How Do Financing Constraints Affect Firms’ Equity Volatility?

Carvalho, Daniel

doi:10.1111/jofi.12610

Cited by 23 publications

(5 citation statements)

References 81 publications

(136 reference statements)

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“…High financing costs would reduce managers' ability to undertake profitable projects as far as the investment decisions are not independent of financing strategies in imperfect markets (Deari and Deari, 2010;Rahaman, 2011). Therefore, financing constraints (FC) reduce investment (Hubbard, 2001;Almeida and Campello, 2007;Carvalho, 2018;Alm et al, 2019), which, in turn, leads to the under-investment problem (Verdi, 2006;Islam and Luo, 2018;Li et al, 2019). As a result, FC in extreme circumstances may drive firms into financial distress and bankruptcy point (Gordon, 1971;Farooq, 2015;Sheikh and Qureshi, 2017).…”

Section: Introductionmentioning

confidence: 99%

Financial leverage, debt maturity, future financing constraints and future investment

Poursoleiman

Mansourfar

Abidin

2020

IMEFM

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Purpose This paper aims to investigate the impact of debt maturity on the relationship between financial leverage and future financing constraints. Moreover, it attempts to analyze the moderating role of short-term debt and the mediating role of future financing constraints in the relationship between financial leverage and future investment. Design/methodology/approach To test the moderating role of debt maturity, all the observations are divided into two groups based on short-term debt to total debt ratio. Moreover, Sobel, Aroian and Goodman tests are used to analyze the mediating role of future financing constraints. The sample used in this research includes firms listed on the Tehran Stock Exchange from 2006 to 2018. Findings It is shown that financial leverage is inversely (positively) related to future financing constraints for firms with higher (lower) use of short-term debt and, short-term debt moderates the relation between financial leverage and future investment. The findings also indicate that future financing constraints carry the influence of financial leverage to future investment. Originality/value In an imperfect market where financing is not independent of investment, it is highly required to carry out some studies on the role of different financing scenarios in firms and their impacts on future financing and investment; therefore, this paper is conducted to address one of the most important issues in the capital market, which is almost the pioneer study in this field.

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Section: Introductionmentioning

confidence: 99%

Financial leverage, debt maturity, future financing constraints and future investment

Poursoleiman

Mansourfar

Abidin

2020

IMEFM

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“…Following Li (2011), we measure asset tangibility ( TANGIBLE ) as 0.715 ×receivables +0.547 ×inventories +0.535 ×fixed capital, where we scale all the factors by total assets net of cash. Asset tangibility has a negative effect on capital allocation inefficiency as asset tangibility gives firms more borrowing capacity and, thus, such firms face low financial constraints for investing in positive net present value projects (Carvalho, 2018). We estimate financial slack ( SLACK ) as cash and marketable securities scaled by total assets (Bhandari and Javakhadze, 2017).…”

Section: Methodsmentioning

confidence: 99%

CEO marital status and capital allocation efficiency

Hossain

Bhuyan

2023

IJMF

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PurposeThe extant literature provides evidence that single CEOs are less risk-averse. Building on the theory of risk aversion, the authors argue that the risk aversion trait arising from CEO’s marital status partially explains capital allocation efficiency. The paper aims to examine the association between CEO marital status and capital allocation efficiency.Design/methodology/approachThe primary sample includes 9,671 observations from 1,264 US firms. The authors apply multivariate regression and a series of endogeneity tests to examine the association between CEO marital status and capital allocation efficiency.FindingsSingle-CEO firms have higher capital allocation inefficiency than those with married CEOs. The findings continue to hold after a series of endogeneity tests such as propensity score matching, change analysis and instrumental variable regression analysis and are robust to alternative proxies for capital allocation inefficiency. The capital allocation inefficiency in single-CEO firms arises from overinvestment but not underinvestment, and corporate risk-taking channels the effect.Research limitations/implicationsThe study is limited to the effect of CEO marital status, not CEO marital quality.Practical implicationsThe findings imply that besides information asymmetry and agency conflicts, CEO marital status should receive special attention for capital allocation efficiency. Also, marital status influences the CEOs’ commitment to the general good of society, affecting the potential conflict of interest with different stakeholders from inefficient capital allocation.Originality/valueThis study extends corporate finance literature on CEO marital status by providing novel evidence on the effect of single CEOs on capital allocation efficiency. The authors conclude that CEOs’ personality traits, such as marital status, matter in corporate policy choices.

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“…Furthermore, firms with no financial support from banks or other sources tend to look for supplier credit (although the potential of obtaining such credit may vary subject to erratic movement in product prices, provided the firm assets are used as collateral). Carvalho (2018) illustrates a theoretical framework in which he argues that a firm's investment decisions depend on how much collateral they have and that when the value of collateral increases, financing constraints are relaxed.…”

Section: Introductionmentioning

confidence: 99%

Financing Constraints and Investment Efficiency in Canadian Real Estate and Construction Firms: A Stochastic Frontier Analysis

2021

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This article models the behavior of 179 listed and unlisted real estate and construction firms (RECFs) in Canada to study how financial constraints impact the investment efficiency of these real estate firms during the 2004–2020 period. Investment efficiency is interpreted here as the ability and ease of a firm to convert investment opportunities into actual investments. The results show that Canadian RECFs are strongly dependent on two sources of financing: equity financing and debt financing. Equity financing helped ease financing constraints due to a cash flow increase but was unlikely to decrease the uncertainty of follow-up financing of investments of these companies. This study constructed an investment efficiency index (IEI) for all 179 RECF firms. The results showed an investment rate loss of approximately 62% of the RECF firms due to financing constraints during the above period. The IEI of RECFs in Canada has demonstrated a descending pattern, and the investment efficiency level slipped from 0.47 to 0.40 from 2004 to 2020. Furthermore, a regional analysis demonstrates that compared with the RECFs located in Ontario, the investment efficiency indices of RECFs in Quebec and British Columbia were more volatile. Small RECFs demonstrated a very steady trend in investment efficiency during the sample period, which was completely different from the patterns displayed by large and medium RECFs.

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How Do Financing Constraints Affect Firms’ Equity Volatility?

Cited by 23 publications

References 81 publications

Financial leverage, debt maturity, future financing constraints and future investment

Financial leverage, debt maturity, future financing constraints and future investment

CEO marital status and capital allocation efficiency

Financing Constraints and Investment Efficiency in Canadian Real Estate and Construction Firms: A Stochastic Frontier Analysis

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