Investment–cash flow sensitivity measures investment thirst, but not financial constraint

Deng, Kebin; Ding, Zhong; Zhu, Yushu; Zhou, Qing

doi:10.1111/acfi.12133

Cited by 11 publications

(10 citation statements)

References 53 publications

(82 reference statements)

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“…The extant literature suggests that the government benefits that accrue to a firm with PC enhance firm value. We also show direct evidence that Chinese firms actively build PC (the benefits of PC outweigh its costs, therefore, a positive 3 See Chen and Chen (2012) and Deng et al (2015) for a discussion of the use of the WW index and the SA index. We also detail how these indices are constructed in Appendix S2.…”

Section: Literature Reviewmentioning

confidence: 68%

Political connection, market frictions and financial constraints: evidence from China

Deng

Zeng

Zhu

2017

Accounting & Finance

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This paper studies the relationship between market frictions and political connections in determining financial constraints. We develop a novel index to measure the depth of political connections (PC) at the firm level and provide robust empirical evidence that firms in China actively build PC to alleviate the costs of market frictions. Specifically, we find that firms facing severe market frictions are not as financially constrained as expected. This is because these firms also possess strong PC, which alleviate the costs of market frictions. We find that market frictions can significantly affect financial constraints in Chinese firms, but only for those firms with modest levels of PC.

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Section: Literature Reviewmentioning

confidence: 68%

Political connection, market frictions and financial constraints: evidence from China

Deng

Zeng

Zhu

2017

Accounting & Finance

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“…In particular, when these have been proxied by means of an indirect measure obtained from secondary data (especially when amount of cash flow has been used as a proxy of internal funds available), the results have been quite mixed. Indeed, some studies [30,31] have suggested significant cash flow sensitivity in companies' investment decisions, while others [32,33] have provided evidence of the opposite. In contrast, when financial criticalities have been investigated by employing a direct measure (i.e., ad hoc surveys designed to collect companies' views on barriers to funding their investment projects), the results have seemed to univocally support the existence of financial constraints hindering firms' investment behavior.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

Assessing the Opportunities and Challenges of Green Finance in Italy: An Analysis of the Biomass Production Sector

2019

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The present paper provides empirical evidence of the opportunities and challenges surrounding green finance (GF), looking at the financial issues that might prevent the investment decisions of green companies. To this end, we explore the case of Italian biomass producers by means of a discourse analysis supported by a survey administered to a pool of experts. Although our findings suggest that GF provides an opportunity for achieving environmentally sustainable innovation pathways, experts recognize that it does not actually prevent biomass producers from facing institutional and financial criticalities in funding their investment projects. Such criticalities include: uncertainty about government policies, the minimal involvement of financial suppliers in the biomass sector, the short-term orientation of financial instruments and the limited knowledge of financing options and technical expertise within companies. The results indicate that effective policy interventions should ensure that objectives are orientated towards the long term with the aim of reducing the risks perceived by financial institutions in funding biomass producers.

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“…Credit-expansion policies may also confound our results on the tax-leverage effect. In November 2008, the Chinese central government unexpectedly announced an economic stimulus package of four trillion RMB (seeDeng, Ding, Zhu, & Zhou, 2017). At the time, this was equivalent to 586 billion USD and represented about 16% of China's annual GDP.…”

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confidence: 99%

Tax and leverage: Evidence from China

Deng

Zhu²,

Smith

et al. 2020

China Economic Review

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This study exploits two institutional features of China to test the causal link between tax and capital structure. First, the central government exclusively determines the corporate tax rate in China, which results in 2,316 tax increases and 2,189 tax decreases affecting different firms in various years during the period of 2000 to 2011. Such mandatory tax shifts provide a quasinatural experimental setting for our difference-in-differences analysis investigating the impact of tax on leverage. We find evidence supporting the dynamic trade-off theory, namely that firms are unresponsive to tax cuts but increase long-term leverage when taxes rise (particularly those in low statutory tax regimes). Second, governmental intervention in capital allocation is common in China such that political connections are usually regarded as an asset for firms in accessing bank loans. Using anti-corruption events as shocks to the value of political connections over the sample period, our research is the first study to show that political connections become a liability that enables banks to recall loans from affected firms during the anti-corruption campaign periods. This change overturns the typical tax-leverage relationship observed, as we find anticorruption affected firms reduce long-term leverage when taxes are cut and they become insensitive to tax increases. Our results have implications not only for how firms have adjusted their capital structure to tax changes in the past, but also for what new feature of political ties that policy makers/regulators ought to consider in monitoring bank loan markets.

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Investment–cash flow sensitivity measures investment thirst, but not financial constraint

Cited by 11 publications

References 53 publications

Political connection, market frictions and financial constraints: evidence from China

Political connection, market frictions and financial constraints: evidence from China

Assessing the Opportunities and Challenges of Green Finance in Italy: An Analysis of the Biomass Production Sector

Tax and leverage: Evidence from China

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