Is the investment-cash flow sensitivity still useful to gauge financing constraints?

Chichti, Jamel E.; Mansour, Walid

doi:10.1504/ijepee.2010.032796

Cited by 6 publications

(3 citation statements)

References 30 publications

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“…Subsequent research, however, has challenged the cash flow–investment sensitivity as a sound indicator of financial constraints, which may partly explain the ambiguity of R&D response to cash flow. Kaplan and Zingales (1997, 2000), among others, argue that cash flow–investment sensitivity may not indicate the presence of financial constraints because (i) cash flow–investment sensitivity may not increase monotonically with financial constraints, (ii) investment opportunities may not be sufficiently controlled for and (iii) firms tend to smooth R&D over time; see Chichti and Mansour (2010) for a summary of the criticisms.…”

Section: Literature Reviewmentioning

confidence: 99%

Do Financial Constraints Reduce Process Innovation? Evidence from Australian Firms*

2022

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Accessing external finance for innovation is difficult. We study the effect of financial constraints on the probability of conducting process innovation, while also considering the role of past experience. We show a firm's optimal process innovation decision is a function of its previous decision and financial constraints, which naturally leads to a set of population moments for empirical testing with Australian microdata from 2006 to 2018. We find that if a firm did not conduct process innovation previously, financial constraints reduce its probability of process innovation by around 10 per cent. Whereas with previous process innovation, financial constraints reduce the probability by around 12 per cent.*This paper draws on research carried out as part of Siddarth Roche's honours dissertation at James Cook University. The authors thank staff at the College of Business, Law and Governance at James Cook University and the journal's anonymous referees for their valuable comments that strengthened this article. Open access publishing facilitated by James Cook University, as part of the Wiley -James Cook University agreement via the Council of Australian University Librarians.

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Section: Literature Reviewmentioning

confidence: 99%

Do Financial Constraints Reduce Process Innovation? Evidence from Australian Firms*

2022

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“…1. See Chichti and Mansour (2010a, 2010b, 2012) and Mansour (2014) for a theoretical background on information asymmetry.…”

Section: Notesmentioning

confidence: 99%

Adverse selection analysis for profit and loss sharing contracts

Ajmi

Aziz

Kassim

et al. 2019

IMEFM

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Purpose The purpose of this paper is to determine the optimal profit-and-loss sharing (PLS)-based contract when market frictions occur. Design/methodology/approach This paper opts for an adverse selection analysis and Monte Carlo simulation to assess the less risky contract for the principal and the agent when musharakah, mudarabah and venture capital financings are used in imperfect markets. Furthermore, this framework enables us to capture the level of market frictions that the principal can bear and the level of audit that he/she may undertake to mitigate bankruptcy. Findings The simulation results reveal that Musharakah is the less risky contract for the principal compared to Mudarabah and venture capital when the shock is low and high. Furthermore, our findings indicate that the increase of market frictions engender higher audit cost and profit-sharing ratios. The increase of the safety index in the case of high shock is most likely attributed to the increase of the audit parameter for all contracts to mitigate the selfish behavior of the agent. Accordingly, the principal tends to require a higher profit-sharing ratio to compensate for the severer information asymmetry. Research limitations/implications This paper has two main limits. First, the results were not compared to real data because the latter are not available. Second, this paper is a general framework to determine the less risky contract for the principal and does not consider the firm and sectoral characteristics. However, it can be extended in various ways where stress can be put on conflicts of interest between the principal and the agent with the aim to determine the contract that aligns their interests. In addition, the examination of firm dynamics in the case of equity and debt financing can provide further arguments for economic agents regarding the value of the firm, the growth rate and the lifetime of the project when information is asymmetrically distributed. Practical implications The findings shed some light on the necessity of the Islamic finance experts to re-think of the promotion of Musharakah because it dominates the two other contracts when market frictions occur. Social implications Although Maghrabi and Mirakhor (2015), Alanzi and Lone (2015) and Lone and Ahmad (2017) among others showed that profit and loss sharing can ensure economic growth, findings may motivate economic players to consider Musharakah financing with the aim to reach financial inclusion and social, which is in line with Shari’ah requirements and Islamic values. Originality/value Although several papers highlighted the financial contracting theory from Shari’ah perspective, they ignored the financial issues that are associated to adverse selection. This paper provides theoretical evidence regarding the selection of the less risky financing mode in case of equity financing using Monte Carlo simulation.

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“…Accordingly, it would be hard to admit the first and the third hypotheses of the incomplete contract theory in our study, as in real practice bankers cannot be risk neutral. In addition, information asymmetry represents the main determinant of any investment decision (for a theoretical background on information asymmetry, see Chichti & Mansour, 2010a, 2010b, 2012Mansour, 2014).…”

Section: Perspectives Of the Financial Contracting Theorymentioning

confidence: 99%

A Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives

Aziz¹

2019

JKAU Islamic Econ

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This paper discusses the financial contracting theory from the conventional and Islamic perspectives. It provides an overview of the contributions in this field and discusses the gaps in the literature. In addition, it proposes two relevant approaches namely the financial contracting enforceability approach and the adverse selection analysis in order to deal with conflicts of interest among economic agents. The first approach is meant to assess the contract that maximizes the value of the firm subject to the enforcement constraint for the agent and the participation constraint for the principal. The second approach considers an adverse selection framework in order to determine the principal’s subjective perception of the risk of default when equity and debt financings are used. Similarly, it suggests avenues for future research. Firstly, it calls for a deeper understanding of venture capital as a potential model of mushārakah. Secondly, it puts stress on the importance of examining crowd-funding functioning from the principal-agent point of view. Thirdly, it sheds some light on the necessity to yield financial explanation about the excessive use of murābaḥah instead of ijārah. In a nutshell, we assume that the alternative approaches can be adopted to provide relevant insights regarding the proposed future researches.

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Is the investment-cash flow sensitivity still useful to gauge financing constraints?

Cited by 6 publications

References 30 publications

Do Financial Constraints Reduce Process Innovation? Evidence from Australian Firms*

Do Financial Constraints Reduce Process Innovation? Evidence from Australian Firms*

Adverse selection analysis for profit and loss sharing contracts

A Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives

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