Do financial constraints really matter? A case of understudied African firms

Abstract

Using a system of equations to account for the simultaneity, inter‐temporal and interdependent nature of corporate decisions, we document several new insights into how emerging market firms allocate funds across competing uses‐of‐funds. Emerging market firms save most of the operating cash flow. When the firms spend, they allocate the remainder to dividend payments first, followed by debt retirements, then equity repurchases and lastly investments. This pecking order of prioritizing savings and dividends ahead of other uses‐of‐funds highlight difficulties in accessing external finance and a stubbornly resilient signalling motive for firms operating under a high degree of information asymmetry and agency costs. We further find significant asymmetry and heterogeneity in the allocation of funds conditional on credit constraints, deviations from target and around the financial crisis. Our findings signal the need for policies that improve access to external finance and information disclosure in emerging markets.

The financial conservatism of firms in emerging economies

“…Following the financial constraints hypothesis, we posit that firm-specific and external market constraints might explain why managers are compelled to adopt conservative financing policies. Firms with a higher proportion of intangible assets face significant hurdles in accessing the credit markets due to the low collateralisability of their assets (Barclay and Smith, 2005), more so, in emerging markets beleaguered by high agency costs and information asymmetry problems (Brown et al, 2013;Machokoto, 2020;Sorge et al, 2017). This prediction is in line with the contracting cost theory of capital struc-ture, which posits that, in order to avoid potential financial distress problems associated with debt, firms with more intangible assets adopt financially conservative policies.…”

What Matters for Corporate Cash Holdings Board Governance, Financial Constraints, or Interactions?

“…In literature, many possibilities have been suggested such as investment cash flow sensitivity (Fazzari et al, 1988), as seen in recent literature (Machokoto, 2020), Whited and Wu index (WW) (Whited & Wu, 2006) used by (Qasim et al, 2021), Kaplan and Zingales index (KZ) (Lamont et al, 2001), and a number of other firm-based criteria to measure financial constraints such as Z Score, SA index, etc.…”

The ‘play’ of institutions and firm investment: Evidence from a transition economy

“…Further, we postulate that an improvement in institutions of governance does not benefit all firms in the same way but exhibits a distributional effect among firms of different degrees of financial constraints. The increasing evidence suggests that financial constraints are particularly relevant to young and small firms (Machokoto, 2020; Mukherjee & Proebsting, 2021). This pattern is particularly pertinent to less financially developed regions and weaker institutional environments where transaction costs are high, such as in emerging economies and regions (Mukherjee & Proebsting, 2021).…”