Economic policy uncertainty and leverage dynamics: Evidence from an emerging economy

Bajaj, Yukti; Kashiramka, Smita; Singh, Shveta

doi:10.1016/j.irfa.2021.101836

Cited by 36 publications

(15 citation statements)

References 96 publications

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“…The results in columns 1 and 5 suggest that EPU is positively and significantly associated with Debt FF1 in the pre-COVID period. This finding is consistent with the study of Bajaj et al . (2021), which also reported a positive relationship for Indian listed firms.…”

Section: Resultssupporting

confidence: 94%

“…However, this study did not investigate the impact of the pandemic. A study on listed Indian firms from 2009 to 2018 indicated a positive impact of EPU on leverage (Bajaj et al ., 2021). The findings indicate a gap in the literature in terms of financial flexibility that has been measured either through a cash or debt perspective, but not both.…”

Section: Literature Reviewmentioning

confidence: 99%

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Impact of economic policy uncertainty on financial flexibility before and during the COVID-19 pandemic

Dalwai

2023

JABES

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PurposeThis study examines the influence of economic policy uncertainty on financial flexibility before and during the coronavirus disease 2019 (COVID-19) pandemic. Few prior studies have examined this association specifically for debt and cash flexibility.Design/methodology/approachUsing quarterly data from 2016 to 2022, 1014 observations were collected from the S&P Capital IQ database for listed tourism companies in India. The pre-pandemic period is defined as 2016 Q1 to 2020 Q1, whereas the pandemic period is from 2020 Q2 to 2022 Q3. The data are analysed using ordinary least squares, probit, logit and difference-in-difference (DID) estimation.FindingsThe evidence of this study suggests a negative association of economic policy uncertainty with debt flexibility during the COVID-19 pandemic. The findings also suggest that COVID-19 induced economic policy uncertainty results in high cash flexibility. This meets the expectations for the crisis period, as firms are likely to hold more cash and less debt capacity to manage their operations. The results are robust for various estimation techniques.Research limitations/implicationsThis study is limited to one emerging country and is specific to one non-financial sector. Future research could extend to more emerging countries and include other non-financial sector companies.Practical implicationsThe findings of this research are useful for tourism sector managers as they can effectively manage their cash and debt flexibility during crisis periods. They will need to prioritise cash flexibility over debt flexibility to manage operations effectively. Policymakers need to provide clear and stable economic policies to help firms manage their debt levels during a crisis.Originality/valueTo the best of the author's knowledge, no existing studies have investigated the influence of economic policy uncertainty on the financial flexibility of tourism companies before and during the COVID-19 pandemic. Furthermore, this study establishes a novel set of critical determinants, such as economic policy uncertainty.

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Section: Resultssupporting

confidence: 94%

Section: Literature Reviewmentioning

confidence: 99%

Impact of economic policy uncertainty on financial flexibility before and during the COVID-19 pandemic

Dalwai

2023

JABES

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“…This study advances our understanding of changes in leverage dynamics (Bajaj, Kashiramka, & Singh, 2021) in response to the emergence of the pandemic and contributes to the literature on the determinant of changes in leverage adjustment. An extension of this study will be to investigate firms’ alternative sources of financing and changes in the cost of capital induced by the COVID-19 pandemic.…”

Section: Discussionmentioning

confidence: 70%

Readjusting the speed of leverage adjustment during the COVID-19 pandemic?

Tarkom

Huang

2023

CAFR

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PurposeRecognizing the severity of COVID-19 on the US economy, the authors investigate the behavior of US-listed firms towards leverage speed of adjustment (SOA) during the pandemic. While prior evidence (based on an international study) shows that firm leverage increased during the pandemic leading to a higher SOA toward leverage ratios, leverage for US firms during the same period reduced drastically. Yet there is a dearth of empirical studies on the behavior of US-listed firms' SOA during the pandemic. The authors fill this void.Design/methodology/approachThe study includes US-listed non-financial and non-utility firms for the period 2015Q1-2021Q4, covering a total sample of 45,213 firm-quarter observations. The authors’ empirical strategy is based on the generalized method of moments (GMM) and firm-fixed effect methodology, controlling for firm- and quarter-fixed effects.FindingsThree main findings are established: (1) while the SOA toward book target increased during the pandemic, SOA toward market target increased significantly only for less valued and cash-constrained firms; (2) firms in states most impacted by the pandemic adjusted faster towards target ratio; and (3) while the emergence of the pandemic and the overall firm-level risk increased (decreased) the deviation from book (market) target, firm-level risk partially mediated the effect of the pandemic on how far firms deviated from target ratio.Practical implicationsThis study enhances our understanding of leverage adjustment during the crisis and shows that risk avoidance motive and the market value of firms are key determinants of convergence rate during the crisis and further demonstrates that market leverage is more sensitive to market dynamics. As such, caution must be taken when dealing with and interpreting market leverage SOA.Originality/valueAlthough prior evidence based on international study provides insights into how firms behave toward their leverage ratios because of the pandemic, little is known about how US firms react to the pandemic in terms of the target ratios, particularly (1) since the USA is one of the severely affected countries and (2) firms in the USA reduced their leverage ratios as against what prior evidence shows. The authors provide evidence to explain how and why US firms reacted toward their SOA during the pandemic.

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“…We employ forward orthogonal deviations to derive the transformed equations since our study uses unbalanced panel data and has to account for data loss from missing observations (Roodman, 2009). The two-step system GMM provides unbiased results and deals with endogeneity and autocorrelation issues in dynamic settings (Bajaj et al ., 2021; Suman and Singh, 2022). For all the estimations, the number of instruments is lower than the groups (Roodman, 2009).…”

Section: Methodsmentioning

confidence: 99%

Corporate social responsibility and dividend policy in India

Dahiya

Singh

Chaudhry

2023

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PurposeThe study investigates the relationship between corporate social responsibility (CSR) and dividend policy in the context of Indian firms, as well as how regulatory interventions in the form of mandated CSR can moderate this relationship.Design/methodology/approachA sample of the largest 500 companies listed on the National Stock Exchange from 2008 to 2019 is used in the study. The authors employ the system generalized method of moments since this estimation technique yields accurate and consistent findings in a dynamic panel data setting.FindingsThe authors find that CSR is positively associated with dividend payments. Increased incomes and lower financial constraints are the likely factors causing this relationship. Additional analysis suggests that the positive relationship is stronger for mature firms and for firms with higher information asymmetry. Financial reporting quality works in tandem with CSR to boost dividends. Regulatory interventions in the form of mandated CSR weaken the relationship. Finally, the speed of adjustment of dividends is relatively faster for socially responsible firms.Practical implicationsThe positive association between CSR and dividends suggests that the interest of shareholders and other non-financial stakeholders can be reconciled. Additionally, businesses should attempt to strategically implement their CSR plans in accordance with the requirements of Section 135 of the Companies Act, 2013 to avoid any unfavourable moderating effects of the legislation. The results also show that CSR disclosures complement rather than serve as a substitute for financial disclosures.Originality/valueThe study is the first to evaluate the relationship between CSR and dividends in the context of India, which is a pioneer in passing legislation that mandates CSR for firms surpassing a threshold. The authors also identify financial constraints as a channel through which CSR affects dividends.

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Economic policy uncertainty and leverage dynamics: Evidence from an emerging economy

Cited by 36 publications

References 96 publications

Impact of economic policy uncertainty on financial flexibility before and during the COVID-19 pandemic

Impact of economic policy uncertainty on financial flexibility before and during the COVID-19 pandemic

Readjusting the speed of leverage adjustment during the COVID-19 pandemic?

Corporate social responsibility and dividend policy in India

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