stock market volatility and investment do only fundamentals matter the empirical evidence in the volatility literature suggests that movements in stock prices cannot be satisfactorily explained purely in terms of changes in fundamentals this paper shows how to obtain proxies for the fundamental and fad components of changes in stock prices and asks the question do only fundamentals matter for investment decisions we find that changes in investment are significantly associated with movements in both components of stock prices the point estimates suggest that changes in fundamentals have a greater effect than changes in non fundamentals the statistical significance of the difference between their coefficients depends upon the financing regime these conclusions are shown to be robust to modifications and extensions of the model

investment cash flow sensitivity and financial constraint a cluster analysis approach this article sheds light on the mixed empirical evidence concerning financial constraint and investment sensitivity to cash flow the literature suggests that measuring financial constraint is far from straightforward and we therefore propose a cluster analysis procedure to identify unambiguous groups of constrained firms we found the investment results to be highly sensitive to cash flow for financial constraint firms moreover in line with previous research our results showed that the traditional criteria used to identify financially constrained firms led to ambiguous interpretations overall our results propose that the cluster analysis can be used to encompass the various single criterion approaches thereby providing a finer measurement of the financial constraint construct and deeper insight into the relationship between investment sensitivity to cash flow and financial constraint

business groups and internal capital markets the recovery of the mexican economy in the aftermath of the 1995 crisis in the second half of the nineties the mexican economy experienced a severe financial crisis however as the initial panic subsided mexico started to show promising signals of macroeconomic recovery not only did the economy rebound within a year but also grew steadily afterward averaging an annual rate slightly above 5 during 1996 2000 in this article it is suggested that the business group structure helped in the recovery of the economy the collapse of the banking system and the interruption of financing flows through the domestic financial markets was overcome by a change in the firms capital structure firms when possible started to depend more on trade credit and the internal capital market of business groups created a financial cushion that kept the economy working in order to offer a rationale for the mexican experience a theoretical model is presented where it is shown that moral hazard problems are reduced within a business group as long as affiliated firms in the nontradable sector surrender control rights during periods of crisis copyright 2007 oxford university press

financial factors and investment in belgium france germany and the united kingdom a comparison using company panel data we construct company panel data sets for manufacturing firms in belgium france germany and the united kingdom covering the period 1978 1989 these data sets are used to estimate empirical investment equations and to investigate the role played by financial factors in each country a robust finding is that cash flow and profits terms appear to be both statistically and quantitatively more significant in the united kingdom than in the three continental european countries this is consistent with the suggestion that financial constraints on investment may be relatively severe in the more market oriented u k financial system

public good differentiation and the intensity of tax competition we show that in a setting where tax competition promotes efficiency variation in the extent to which firms can use public goods to reduce costs brings about a reduction in the intensity of tax competition this in turn brings about a loss of efficiency in this environment a minimum tax counters the reduction in the intensity of tax competition thereby enhancing efficiency split the difference tax harmonization also potentially enhances efficiency but would not be agreed upon by governments because it lowers the payoff to at least one of them this paper also presents an explanation for how traditionally high tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated

revisiting the bright and dark sides of capital flows in business groups prior studies report that the business group structure and the associated intra group capital flows are prone to conflicts of interest between controlling shareholders and minority investors yet business group is a prevalent and stable structure around the globe particularly where capital markets are underdeveloped using data from china this paper empirically studies the trade off between the negative and positive roles played by intra group capital flows and tests the efficiency implications of such trade off we find that from the perspective of the whole group intra group capital flows are most efficient when the groups are least subject to conflicts of interest between controlling shareholders and minority shareholders and when they face strong external financing constraints

high tech firms and credit rationing abstract informational frictions between borrowers and lenders differ across classes of borrowers innovative firms undertake high risk high return projects which are likely to be little understood by financial intermediaries as a consequence they may end up allocating too large a share of funds to traditional low risk low return projects this proposition finds some support in a cross section of italian manufacturing firms using several proxies to classify firms into high tech and low tech groups and direct information on each firm s access to bank credit high tech firms are found to be more likely to be credit constrained than low tech firms the results suggest that the responsiveness of r d expenditure to cash flow found in the literature is likely due to pervasive credit constraints on innovative firms rather than to cash flow proxying for future expectations the paper also sheds light on the main factors affecting the probability of a firm being rationed in the credit market

sustaining production chains through financial linkages abstract the technological constraints on sustaining production chains have been discussed extensively by development economists but the role of financial linkages has received less attention in a model of recursive moral hazard for a manufacturing supply chain we show that the structure of interlocking receivables and payables serve as the glue for the production chain that sustains complex manufacturing output the inefficiency associated with recursive moral hazard can be mitigated through optimal delays in payments along the chain however efficiency requires large stocks of working capital and invoice prices are high due to implicit amortization costs of inter firm credit

saving determinants in colombia 1925 1994 abstract this paper analyzes the determinants of saving in colombia using the framework of an intertemporal model national saving partially responds to temporary changes in output according to the permanent income hypothesis higher government expenditures in relation to their permanent level are associated with lower national saving refuting the existence of ricardian equivalence the paper tests other common hypotheses in regard to saving behavior in particular we find that changes in national savings and changes in investment are perfectly correlated and that savings cause growth in the granger sense the results also indicate that increases in urbanization and age dependency have had a significantly negative effect on private saving in colombia finally we find that much of the recent reduction in private savings can be accounted by the effects of higher taxation

cap and trade and financial constraints is investment independent of permit holdings we study a new channel by which permit holdings in a cap and trade system can affect investment behavior in the presence of financial constraints permit holdings can matter through their effect on the firm s internally available resources and indirectly affect investment to test this relationship we exploit the cross sectional and temporal variation in permit holdings and the temporal variation in the price of permits in the us hbox so 2 program we find that capital expenditures are positively related to the market value of the permit holdings this relationship is stronger for smaller firms and is robust to alternative explanations based on regulatory differences

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

liquidity infinite horizons and macroeconomic fluctuations abstract this paper develops a computable dynamic general equilibrium model in which corporate demand for liquidity is endogenously determined in the model liquidity demand is motivated by moral hazard as in holmstrom and tirole j politic econom 106 1998 1 as a result of incorporating agency cost and endogenously determined liquidity demand the model can replicate an empirical business cycle fact the hump shaped dynamic response of output which is seldom observed in standard rbc dynamics further in the model the corporate demand for liquidity from a financial intermediary credit line for instance is pro cyclical while the degree of liquidity dependence defined as liquidity demand divided by corporate investment is counter cyclical these business cycle patterns are consistent with a stylized fact empirically verified in the lending view literature

asset price shocks financial constraints and investment evidence from japan this paper examines investment spending of japanese firms around the asset price bubble in the late 1980s and makes three contributions to our understanding of how stock valuations affect investment first corporate investment responds significantly to nonfundamental components of stock valuations during asset price shocks fundamentals matter less clearly the stock market is not a sideshow second the time series variation in the sensitivity of investment to cash flow is affected more by changes in monetary policy than by shifts in collateral values finally asset price shocks primarily affect firms that rely more on bank financing and not necessarily those that use equity markets for financing only the investment of bank dependent firms responds to nonfundamental valuations in addition the cash flow sensitivity of bank dependent firms with large collateral assets decreases when asset prices become inflated but increases dramatically when asset prices collapse and monetary policy tightens

asymmetric competition among nation states a differential game approach abstract this paper analyzes the impact of foreign investments on a small country s economy in the context of international competition to that end we model tax and public input competition within a differential game framework between two unequally sized countries the model accounts for the widely recognized characteristic that small states are more flexible in their political decision making than larger countries however we also acknowledge that small size is associated with limited institutional capacity in the provision of public services the model shows that the long term outcome of international competition crucially depends on the degree of capital mobility in particular we show that flexibility mitigates against but does not eliminate the likelihood of collapse in a small economy finally we note that the beneficial effect of flexibility in a small state increases with its inefficiency in providing public services and with the degree of international openness

home field advantage location decisions of portuguese entrepreneurs an investor s home bias in industrial location decisions may stem from personal factors social capital other non transferable assets and imperfect information about the urban and regional environment this paper explores the distinction between home base and non home location decisions in portugal we reach two important conclusions first the introduction of a variable accounting for prior base of economic activity significantly improves the statistical results second we find that the weighting of distinct location attributes differs between home and non home locations notably non home location choices are strongly governed by agglomeration economies and proximity to major urban centers possibly replicating prior location decisions to economize on search costs the results also enable us to quantify the investor s willingness to opt for a possible home field advantage for example entrepreneurs accept over three times higher labor costs to compete in their resident area of business 2002 elsevier science usa all rights reserved

hedging financing and investment decisions theory and empirical tests abstract in this paper we theoretically and empirically examine the interaction between hedging financing and investment decisions a simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis low risk investments they will borrow less invest more in risky assets and hedge more the model also predicts a positive relationship between hedging and leverage a result consistent with debt capacity arguments we test the model empirically using a simultaneous equations framework to investigate the determinants of firm level hedging financing and investing decisions the results strongly support the hypothesis that the hedging financing and investment decisions are jointly determined in addition we find strong support for the central hypothesis that firms more efficient investing in risky technologies more aggressively hedge and use less debt financing in order to maximize their comparative advantage

credit constraints and the current account a test for the japanese economy abstract this paper constructs a small open economy version of the kiyotaki and moore 1997 credit cycles journal of political economy 105 2 211 248 model along the line developed by kasa 1998 borrowing constraints and asset market dynamics evidence from pacific basin federal reserve bank of san francisco economic review 3 17 28 and derives a closed form solution of the current account dynamics using the solution a null hypothesis of no credit constraints is tested for the japanese economy the empirical results show that the null hypothesis is strongly rejected and that the estimated signs of the parameters are consistent with the model the kiyotaki and moore model would give an adequate description of the japanese economy

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

corporate investment with financial constraints sensitivity of investment to funds from voluntary asset sales we examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities the cross sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation we find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained

does the stock market affect firm investment in china a price informativeness perspective abstract this paper investigates the empirical relationship between firm level investment and the stock market in china from a price informativeness perspective we find that firm investment does not significantly respond to the stock market valuation because stock prices contain very little extra information about the future operating performance of firms this finding is further supported by the relative investment response test and the relative price information content test based on the informativeness proxy of price non synchronicity combined with firm information transparency

industrial groupings and foreign direct investment we explore worldwide foreign direct investment location decisions by japanese manufacturing firms from 1985 through 1991 our conditional logit estimates provide evidence that firms location decisions are affected by membership in either vertical or horizontal keiretsu consistent with previous studies that stress agglomeration effects on firms location decisions we find that the stock of investment in a region by a firm s vertical keiretsu partners increases the probability of location further we find that the recent flow of investment into a region by a firm s horizontal keiretsu partners increases the probability of investment to the region providing evidence of networking effects

the investment decision a re examination of competing theories using panel data in the united states gross business fixed investments constitute about 10 percent of the gross national product gnp such investments may represent gnp s most important component because a plant and equipment have a long term effect on the economy s productive capacity b changes in investment spending directly affect employment levels and workers incomes in durable goods industries and c supply and demand are sensitive to investment changes economists have long been concerned about what determines capital spending investments using data for us manufacturing firms for 1972 90 the author compares five investment theories accelerator theory cash flow theory neoclassical theory modified neoclassical theory and q theory if the results for cross section regressions can be viewed as representing the long term equilibrium the single most important determinant of capital spending appears to be cash flow apparently managers care more about cash flow and cost of capital than about stock market signals and the level of output and at the firm level managerial perceptions about fundamentals are more important that market perceptions for managers the stock market may be a side show to capital spending decisions to generalize in a way useful for developing countries firm level financial decisions are closely linked to real decisions in the economy internal finance is the most important use of funds so there is a close relationship between real and financial decisions

an extension of the home attachment criteria under dynamic tax competition in this short note we extend the home attachment setting of mansoorian and myers 1993 and ogura 2006 to allow the study of tax competition in a dynamic framework when international business relocation occurs over successive periods the dynamic framework we propose also helps to understand why tax rates may change over time our modified home attachment rule is illustrated by a simple model of dynamic tax competition in discrete time

the determinants of financing obstacles the authors use survey data on a sample of over 10 000 firms from 80 countries to assess 1 how successful a priori classifications are in distinguishing between financially constrained and unconstrained firms and 2 more generally the determinants of financing obstacles of firms they find that older larger and foreign owned firms report less financing obstacles their findings thus confirm the usefulness of size age and ownership as a priori classifications of financing constraints while they shed doubts on other classifications used in the literature their results also suggest that institutional development is the most important country characteristic explaining cross country variation in firms financing obstacles

internal net worth and the investment process an application to u s agriculture recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending even after one controls for measures of firms investment opportunities while such evidence is suggestive it is often open to other interpretations we examine these models using data on equipment investment in the u s agricultural sector this sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment and reasonable measures of net worth can be constructed our findings provide support for a class of internal funds models of investment under asymmetric information

understanding america s hesitant steps toward financial capitalism politics the depression and the separation of commercial and investment banking few would disagree that the glass steagall act of 1933 is thecontinental divide in american financial and banking history bydisallowing banks from getting involved in the investment bankingindustry this act imposed an institutional change that shaped howfinancial institutions conduct their business even today in itsdecline conventional wisdom has it that the act was enacted tocorrect the deficient financial system that existed during theperiod in this paper we investigate whether this assertion can beempirically verified by analyzing the senate vote on a predecessorof this act which included the clause separating commercialbanking from investment banking activities using multinomiallogits we examine what may have motivated senators to vote for itspassage the econometric evidence indicates that the senate votewas significantly influenced by important interest groups including national banks as well as manufacturing sectorinterests despite the large populist outcry for financial marketreforms at the onset of the depression

financial liberalisation stockmarkets and economic development abstract during the 1980s and 1990s many developing countries dcs have been engaged in far reaching reforms of their financial systems liberalising them and making them more market oriented this liberalisation involving inter alia financial de repression has been inspired partly by the work of the mckinnon 1973 and shaw 1973 m s school this paper suggests that in addition to financial de repression there has been a major new element in the development of dc financial systems in recent years the establishment and fast expansion of stockmarkets these markets have played a key role in the internal as well as external financial liberalisation processes in leading dcs further the paper finds that the actual behaviour of these markets in many countries has led to outcomes which undermine the effects of the higher real interest rates arising from financial de repression

a note on tax competition attachment to home and underprovision of public goods abstract this paper analyzes efficiency in the provision of public goods when there is tax competition but investors have attachment to home i e a biased preference for investing in the region where they live investors are assumed to be heterogeneous in the costs to invest outside the home region as a result in comparison with the no attachment case the capital outflow response to an increase in the tax rate is reduced because only investors facing small mobility costs will move capital out in a symmetric equilibrium tax rates are increased and the extent of the underprovision of public goods caused by tax competition is lessened

informational frictions and the credit crunch in this paper i estimate the magnitude of an informational friction limiting credit reallocation to firms during the 2007 to 2009 financial crisis because lenders rely on private information when deciding which relationship to end borrowers looking for a new lender are adversely selected i show how to separately identify private information from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships quantitatively these informational frictions appear to be too small to explain the credit crunch in the u s syndicated corporate loan market

financial intermediaries ownership structure and monitored finance evidence from japan this paper introduces new and unique data from 127 japanese private equity funds that enable a first ever direct comparison of individual owner manager structures versus financial intermediation structures in terms of the governance provided to investee companies through private equity funds the data indicate individual owner manager structures financial disintermediation give rise to much smaller portfolios of entrepreneurial firms and more advice to entrepreneurs across the scope of different financial intermediation structures including banks life insurance companies securities firms corporations and government bodies there are further differences in the provision of governance and value added advice provided to investees the data further indicate us affiliated funds in japan are more likely to have smaller portfolios and provide more advice to entrepreneurial companies possibly due to a greater skill set in providing advice to facilitate the development of small entrepreneurial firms

bank connections corporate investment and crisis abstract against the backdrop of a severe financial crisis and extensive restructuring of the financial sector we investigate the evolution and determinants of connections between firms and banks and the impact of bank connections on corporate investment our study examines thai non financial companies during 1995 2000 a period straddling the east asian financial crisis of 1997 1998 before the crisis bank connections are common and associated with significantly lower sensitivity of corporate investment to internal cash flow after the crisis and following substantial changes in bank ownership and governance due to financial sector reforms and restructuring far fewer firms are bank connected and connections no longer affect investment cash flow sensitivity

estimating the performance effects of business groups in emerging markets business groups confederations of legally independent firms are ubiquitous in emerging economies yet very little is known about their effects on the performance of affiliated firms we conceive of business groups as responses to market failures and high transaction costs in doing so we develop hypotheses about the effects of group affiliation on firm profitability affiliation could either boost or depress firm profitability and members of a group are likely to earn rates of return similar to other members of the same group using a unique data set compiled largely from local sources we test for these effects in 14 emerging markets argentina brazil chile india indonesia israel mexico peru the philippines south africa south korea taiwan thailand and turkey we find evidence that business groups indeed affect the broad patterns of economic performance in 12 of the markets we examine group affiliation appears to have as profound an effect on profitability as does industry membership yet strategy scholars have a much clearer grasp of industries than of groups moreover membership in a group raises the profitability of the average group member in several of the markets we examine this runs contrary to the wisdom conventional in advanced economies that unrelated diversification depresses profitability overall our findings suggest that the roots of sustained differences in profitability may vary across institutional contexts conclusions drawn in one context may well not apply to another copyright 2001 john wiley sons ltd

maturity mismatch and financial crises evidence from emerging market corporations substantial attention has been paid in recent years to the risk of maturity mismatch in emerging markets although this risk is microeconomic in nature the evidence advanced thus far has taken the form of macro correlations we evaluate this mechanism empirically at the micro level by using a database of over 1500 publicly traded firms from fifteen emerging markets with special focus on latin america and east asia while east asia corporates have tended to issue more debt at short maturities than their latin american counterparts we show that this is generally matched by greater holdings of liquid assets as a result the distribution of net shortterm exposure is remarkably similar across regions we attempt to measure the risk of such exposure by estimating at the firm level the eect on investment of short term exposure under capital account volatility for the whole sample and in both regions individually this eect is statistically zero contrary to the prediction of the maturity mismatch hypothesis this conclusion is robust to using a variety of dierent estimators alternative measures of capital flows and controls for devaluation eects and access to international capital

relationships and rationing in consumer loans we empirically examine how relationships between individual households and their creditors affect the probability of being credit rationed using a data set where the credit rationing of individual households is observed directly we show that relationship duration and the number of activities between a family and a potential lender significantly lower the probability of being credit rationed additionally we examine the relative role of relationships in determining the interest rates of two consumer loans a mortgage loan and a special purposes loan and show that mortgage loan rates are driven less by relationship factors than the special purposes loan rates copyright 1999 by university of chicago press

the persistence and implications of japanese keiretsu organization this paper examines two important research questions 1 to what extent have recent economic and regulatory changes influenced the japanese inter corporate network 2 have the patterns of firm performance fostered by the japanese inter corporate system remained stable or has there been an evolution to more north american performance profiles using hierarchical regressions to compare patterns of networking and firm performance with data from the periods 1987 to 1991 and 1992 to 1997 we find little evidence to support the existence of significant changes in the patterns and implications of japanese industrial organization we conclude that the keiretsu system remained strongly in place throughout the first half of the 1990s nevertheless we suggest that the continued move toward globalization of capital markets in japan and ongoing regulatory change may potentially impact networking and performance implications in the 21st century

foreign direct investment and regulatory remedies for banking crises lessons from japan can regulatory interventions alleviate financial crises if so which ones work we draw inferences from the japanese banking crisis of the 1990s using a hand gathered database of bank loans gathered from original sources our results indicate that whereas risk based capital infusions in japan similar to those following the 2009 supervisory capital assessment program stress tests in the us were successful in stimulating aggregate lending by japanese banks earlier blanket infusions comparable to the 2008 troubled asset relief program tarp in the us were not effective moreover changes in accounting rules in japan that revalued bank assets similar to the relaxation of mark to market requirements for banks in the us did not increase aggregate japanese bank lending but rather reallocated it capital constraints during the crisis also induced many japanese banks to close their overseas branches and switch their charters from international to domestic this endogenous charter switch reversed the process of foreign direct investment fdi for many japanese banks therefore we use the japanese banking crisis as a natural experiment to test fdi theories and find empirical support for the relative access hypothesis but not for the industrial organization approach or for the relative wealth hypothesis

did j p morgan s men add liquidity corporate investment cash flow and financial structure at the turn of the twentieth century this article presents evidence suggesting that the relationship that existed between the partnership of j p morgan and its client firms partially resolved the latter s external financing problems by diminishing the principal agent and asymmetric information problems i estimate and compare investment regression equations for a sample of morgan affiliated companies and a control group of nonaffiliated companies the econometric results seem to indicate that companies not affiliated to the house of morgan were liquidity constrained

internal vs external financing of r d the empirical evidence suggests that while small firms in united states united kingdom and canada rely on internal funds for financing r d similar firms in japan germany and france have access to bank loans in this paper we analyze the financial decisions of small firms willing to invest in r d we find that their high ratio of intangible assets along with the high risk nature of their investments can explain their inability to raise debt in external capital markets we also show that financing r d with bank loans might be feasible especially if banks are willing to monitor the investment activities of their clients

a model of trickle down through learning abstract this paper presents an analysis of income distribution based on an overlapping generations model of imperfect capital markets technological non convexities and information acquisition heterogeneous altruistic agents apply for loans from financial intermediaries to undertake risky investment projects borrowing is prohibited below a critical level of wealth that depends on agents evaluation of risk which is updated over time according to the arrival of new information this process of learning governs the transition of lineage wealth and with it the dynamics of income distribution in general limiting outcomes depend on initial conditions that determine the extent to which class divisions persist in multiple steady state equilibria such divisions may vanish if the initial distribution satisfies certain criteria

a stochastic frontier approach to modelling financial constraints in firms an application to india we propose the use of stochastic frontier approach to modelling financial constraints of firms the main advantage of the stochastic frontier approach over the stylised approaches that use pooled ols or fixed effects panel regression models is that we can not only decide whether or not the average firm is financially constrained but also estimate a measure of the degree of the constraint for each firm and for each time period and also the marginal impact of firm characteristics on this measure we then apply the stochastic frontier approach to a panel of indian manufacturing firms for the 1997 2006 period in our application we highlight and discuss the aforementioned advantages while also demonstrating that the stochastic frontier approach generates regression estimates that are consistent with the stylised intuition found in the literature on financial constraint and the wider literature on the indian credit capital market

the credit effects of monetary policy evidence using loan commitments in addition to the usual channels monetary policy may affect spending by changing the supply of bank loans and the creditworthiness of borrowers this paper tests for these credit effects using a contractual difference across commercial bank loans the author finds that bank loans not made under a commitment slow after tight policy while loans under commitment accelerate or are unchanged this divergence coincides with reports of tighter credit by lenders and by small firms suggesting the divergence reflects a reduction in the supply of credit to the firms without commitments rather than a reduction in their demand for loans

did banks security affiliates add value evidence from the commercial banking industry during the 1920s this paper finds that banks security affiliates added 4 percent to 7 percent to the market value of commercial banks in 1926 and 1927 this result is robust to the inclusion of a large array of control variables including risk regulatory environment and financial health variables such as the capital asset ratio and profitability measures bank size explains about 40 percent of this premium thus suggesting that economies of scale were present the remaining 60 percent of the premium most likely came from economies of scope this result implies that the glass steagall act by disallowing banks involvement in the securities industry had a direct cost in lost market value for the commercial banking industry

internal funds and corporate investment in india abstract several economists have argued that capital markets in less developed countries are fragmented fragmented capital markets retard the efficient allocation of resources and force business firms to rely on internal sources of funds using firm level data the authors examine the importance of the accelerator internal funds and depreciation for investment by manufacturing firms in india the results indicate that internal funds and depreciation have significant explanatory power in a sales accelerator model of investment and that there exists heterogeneity among firms in the link between internal funds and investment in particular internal funds are relatively more important for large firms and firms that produce luxury goods

financial constraints and the balance sheet channel a re interpretation aggregate demand models extending is lm fixed price framework yield an enhancement mechanism of the traditional monetary transmission mechanism the credit channel which according to the credit view works through the balance sheet channel and the bank lending channel in this paper the augmented is lm model is modified assuming that investments may be financed by both internal and external sources of funds the inclusion of internal funds in the augmented is lm fixed price model suggests a different interpretation of the balance sheet channel as an enhancement mechanism amplifying monetary policy effects through the quantity rather than the cost of borrowing thus changes in borrowers net worth over the cycle can amplify and propagate output fluctuations directly rather than indirectly as in the traditional interpretation of the balance sheet channel the empirical analysis of the monetary transmission mechanism for italy in the last decade accords with the interpretation of the balance sheet c

should business groups be dismantled the equilibrium costs of efficient internal capital markets abstract we analyze the relationship between conglomerates internal capital markets and the efficiency of economy wide capital allocation and we identify a novel cost of conglomeration that arises from an equilibrium framework because of financial market imperfections engendered by imperfect investor protection conglomerates that engage in winner picking stein 1997 internal capital markets and the competition for corporate resources journal of finance 52 111 133 find it optimal to allocate scarce capital internally to mediocre projects even when other firms in the economy have higher productivity projects that are in need of additional capital this bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital we also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development in such countries a high degree of conglomeration generated for example by the control of the corporate sector by family business groups could decrease the efficiency of the capital market our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates these predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms because of a lack of finance

credit crunch caused by bank failures and self selection behavior in lending markets this study investigates how bank failures affect the real economy from the lenders perspective using experimental settings of unique bank failures in japan this paper identifies the credit crunch effect by bank failures the main findings are the following first bank failures decrease the investments of the client firms by approximately 30 second the high investment growth level firms deal with unhealthy banks these choices generate a self selection bias of 30 80 third there is no evidence that bank failure shock is related to the firms accessibility to other financial sources

investment default propensity score and cash flow sensitivity in six eu member states evidence based on firm level panel data abstractusing a panel data set covering six european countries and 119700 firms 582153 observations over the period 2008 2013 we analyse the cash flow sensitivity of investment spending as most

credit cycles redux theoretical studies have shown that under unorthodox assumptions on preferences and production technologies collateral constraints can act as a powerful amplification and propagation mechanism of exogenous shocks we investigate whether or not this result holds under more standard assumptions we find that collateral constraints typically generate small output amplification large amplification is obtained as a knife edge type of result

credit quantity and credit quality bank competition and capital accumulation in this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation we further show that it is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique equilibria these results explain the conflicting evidence emerging from the recent empirical studies of the effects of bank competition on economic growth we obtain them developing a dynamic general equilibrium model of capital accumulation where banks operate in a cournot oligopoly more banks lead to a higher quantity of credit available to entrepreneurs but also to diminished incentives to offer relationship services that improve the likelihood of success of investment projects we also show that conditioning on one key parameter resolves the theoretical ambiguity in economies where intrinsic market uncertainty is high low less more competition leads to higher capital accumulation

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

what drives investment cash flow sensitivity around the world an asset tangibility perspective motivated by ongoing debates on investment cash flow sensitivity icfs and its documented decline and disappearance in the u s we investigate the determinants of icfs using firm level data across 41 countries for the 1993 2013 period we document an important role of asset tangibility in explaining the patterns in icfs asset tangibility affects icfs through two channels investment intensity and cash flow persistence as the share of tangible capital investment and cash flow persistence has fallen in developed economies icfs has declined in contrast as developing economies operate with more tangible capital have higher investment rates and more persistent cash flows their icfs is more stable the results support our explanation of icfs as a reflection of capital investment intensity and income predictability rather than a measure of financial constraints

working capital and fixed investment new evidence on financing constraints this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source of funds the coefficient of endogenous working capital investment is negative in a fixed investment regression as expected if working capital competes with fixed investment for a limited pool of finance this finding addresses a criticism of previous research on finance constraints that cash flows may simply proxy shifts in investment demand in addition previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital

optimal leverage and aggregate investment we analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures optimal financial contracts can be implemented by a combination of debt and equity when the risk shifting problem is the most severe while stock options are also needed when the effort problem is the most severe worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level moreover aggregate leverage decreases with the risk shifting problem and increases with the effort problem

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

on the costs of a bank centered financial system evidence from the changing main bank relations in japan we examine the effects of bank firm relationships on firm performance in japan when access to capital markets is limited close bank firm ties increase the availability of capital to borrowing firms but do not lead to higher profitability or growth the cost of capital of firms with close bank ties is higher than that of their peers this indicates that most of the benefits from these relationships are appropriated by the banks finally the slow growth rates of bank clients suggest that banks discourage firms from investing in risky profitable projects however liberalization of financial markets reduces the banks market power the close relationship between manufacturing firms and financial institutions in japan has recently been at the center of the debate on the appropriate financial system for the reforming economies of eastern europe as opposed to the anglo saxon separation of finance and industry long term ties between main banks and their client firms involving bank loans bank equity holding and some bank appointed personnel which are common in japan and germany have often been described as a growth oriented financial system that could serve the needs of developing and reformed economiies better than anonymous capital markets modeled after the arnerican and british financial systems the claim that close ties between investmentoriented banks and industrial firms could help overcome the difficulties of relative backwardness dates back to gerschenkron 1962 who investigates european development rosovsky 1961 applies gerschenkron s framework to the analysis of japanese growth more recently aoki patrick and sheard 1994 hoshi kashyap and loveman 1994 and teranishi 1993 among others portray the close ties between finance and industry in japan as an important factor in the international competitiveness of modern japanese

management background corporate governance and industrial restructuring the japanese upstream petroleum industry japanese upstream companies have consistently underperformed private independents a recent audit by the ministry of international trade and industry miti underlines the magnitude of financial losses and the necessity for sectoral restructuring miti s proposals involve refocusing rather than redefining upstream policy including recognition that official intervention should be reduced in favour of greater control by the more successful local production companies some commentators claim the proposed reforms do not go far enough the ultimate success of miti s initiatives it is claimed depends upon changes in prevailing corporate governance arrangements and the progressive replacement of existing senior managers with those having superior professional or technical qualification these changes have not been directly mandated by japanese authorities on the other hand miti s proposals do imply a redisrtribution of corporate oversight in favour of greater market control a major step in the direction of increased operational and financial efficiency

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

crude oil price uncertainty and corporate investment new global evidence abstract using a comprehensive dataset of more than 33 000 firms from 54 countries in the period 1984 2015 we show that crude oil price uncertainty negatively influences corporate investment more importantly the effect is dependent on the market and stock characteristics of the firms in addition we discover that the effect is stronger in the crude oil producers group than for crude consumers our analysis reveals that the global financial crisis and market volatility phases significantly affect this relationship our results survive a range of robustness tests

institutional herding business groups and economic regimes evidence from japan we study institutional herding in japan japanese firms are primarily owned by financial institutions and other corporations they may belong to a business group the keiretsu and they have experienced several distinct economic regimes in its recent past overall we find herding in japan occurs on a lower level than in the united states but with a large impact on price movements the price impact is even greater for keiretsu affiliated firms we also find the effects and behavior of institutional herding depends on the economic condition and the regulatory environment

jeux sans frontieres tax competition and tax coordination when countries differ in size closer international integration is putting increasing pressure on existing national tax structures this paper uses a simple two country model to address a range of consequent policy concerns focusing particularly on the role of country size differences in size exacerbate the inefficiency from noncooperative behavior harming both countries the smaller country loses from harmonization to any tax rate between those set in the noncooperative equilibrium but both countries gain from the imposition of a minimum tax anywhere in that range the fully optimal response to freer cross border trade however may be to do nothing jel h20 h77

dollars dollars everywhere nor any dime to lend credit limit constraints on financial sector absorptive capacity we exploit an unexpected inflow of liquidity in an emerging market to study how capital is intermediated to firms we find that backward looking credit limit constraints imposed by banks make it difficult for firms to borrow despite readily available bank liquidity healthy aggregate demand and a sharply falling cost of capital the resulting aggregate failure to extend and retain capital in the economy suggests that agency costs that force banks to rely on sticky balance sheet based credit limits prevent emerging economies from effectively intermediating capital

who lends to riskier and lower profitability firms evidence from the syndicated loan market this paper exploits a unique data set on bank firm relationships based on syndicated loan deals to examine the effect of banks credit risk and capital on firms risk and performance our data set is a multilevel cross section which essentially allows controlling for all bank and firm characteristics through respective fixed effects thus avoiding concerns regarding omitted variables we find that banks with higher credit risk are associated with more risky firms with lower profitability and market value in turn we find that banks with higher risk weighted capital ratios lend to riskier firms with less market value our results are indicative of a strong adverse selection mechanism and highlight the need to monitor the risky banks more closely especially as we consider large and influential syndicated loan deals

investment cash flow sensitivities are useful a comment on kaplan and zingales arecent paper in this journal by kaplan and zingales reexamines a subset of erms from work of fazzari hubbard and petersen and criticizes the usefulness of investment cash eow sensitivities for detecting enancing constraints we show that the kaplan and zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique moreover we describe why their empirical classiecation system is eawed in identifying both whether erms are constrained and the relative degree of constraints across erm groups we conclude that their results do not support their conclusions about the usefulness of investment cash eow sensitivities in a recent paper in this journal kaplan and zingales 1997 hereinafter kz argue that investment cash eow sensitivities do not provide useful evidence about the presence of enancing constraints because kz use a subset of the same erms and the same regressions as fazzari hubbard and petersen 1988 hereinafter fhp and claim page 176 that fhp can legitimately be considered the parent of all papers in this literature it is appropriate that we respond based on a simple theoretical model kz reach the provocative conclusion page 211 that the investment cash eow sensitivity criterion as a measure of enancial constraints is not well grounded in theory in section i we show that the kz model does not capture the theoretical approach employed in fhp and many subsequent studies most of the kz paper attempts to show that empirical investment cash eow sensitivities do not increase monotonically with the degree of enancing constraints within the 49 low dividend erms from the fhp sample in section ii we explain why the kz classiecation of the degree of constraints is eawed in identifying both whether or not erms are constrained absolute constraints as well as the relative degree of constraints across erms as a result we argue in section iii that there is no expected ex ante pattern for the

the impact of cash flow volatility on discretionary investment and the costs of debt and equity financing abstract we show that higher cash flow volatility is associated with lower average levels of investment in capital expenditures r d and advertising this association suggests that firms do not use external capital markets to fully cover cash flow shortfalls but rather permanently forgo investment cash flow volatility also is associated with higher costs of accessing external capital moreover these higher costs as measured by some proxies imply a greater sensitivity of investment to cash flow volatility thus cash flow volatility not only increases the likelihood that a firm will need to access capital markets it also increases the costs of doing so

how to reform a planned economy lessons from china the countries of eastern europe and the former soviet union have been flooded with advice from the west on how to liberalize their planned econo mies this advice is unfortunately offered in an empirical vacuum no one knows how these econo mies will react to the proposed liberalization meas ures there exists however a neglected source of information china offers a long time series of data over a decade s worth on the effects of reforms on a planned economy china s reforms were gradual but their cumulative effect has been large and they have been remarkably successful china s experiments provide some practical les sons on what kinds of reforms can work elsewhere the dominant school of thought among economists favours the big bang policy of reforming quickly and according to a comprehensive plan partial reforms in this view are useless they will be negated by the remnants of the planning system the proponents of big bang reform have been influential with poland czechoslovakia and rus sia announcing plans for a rapid transition to capi talism

investment cash flow sensitivities credit rationing and financing constraints in small and medium sized firms the controversy on whether investment cash flow sensitivity is a good indicator of financing constraints is still unsolved we apply a comprehensive approach by cross validating our analysis with both balance sheet and qualitative data on self declared credit rationing and financing constraints on a sample of mainly small and medium sized firms our qualitative information shows that self declared credit rationing is weakly related to both traditional a priori factors such as firm size age and location and lenders rational decisions taken on the basis of their credit risk models we use the qualitative information on firms which were denied additional credit to provide evidence relevant to the investment cash flow sensitivity debate the evidence shows that self declared credit rationing significantly discriminates between firms which possess or not such sensitivity while a priori criteria do not the same result does not apply when we consider the wider group of financially constrained firms which do not seem to have a higher investment cash flow sensitivity supporting the more recent empirical evidence in this direction