[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/ris/asbure/0194.html
   My bibliography  Save this article

Does Financial Flexibility foster Investment Efficiency? Evidence from an Emerging Market

Author

Listed:
  • Islam, Md. Rashidul

    (Dongbei University of Finance and Economics)

  • Hossain, Monirul Alam

    (Bangladesh University)

  • Uddin, Mohammad Shamsu

    (Dalian University of Technology)

  • Bahta, Dawit Teclemariam

    (Dongbei University of Finance and Economics)

Abstract
This research aims to examine the relationship between financial flexibility and investment efficiency empirically, i.e., how financial flexibility effects suboptimal investments and efficiency. To attain the research objectives, we used panel data for 18 years (2000-2017) obtained from the CSMAR database; and also used the GMM estimation technique for research outcome. Our empirical results reveal that financial flexible firms can reduce the suboptimal investment by increasing investments compared to the inflexible firms and increases the investment efficiency. Also, financially flexible firms generate additional power to borrow external finance by showing a significant positive relationship with current and expected leverage. This research considers China as an emerging economy that is in the transition of being a developed country with a unique set of corporate governance, which ensures the independence of independent directors by providing authority to disclose important board decisions to the public. Besides, the governance system is highly monitored by the government, which in turn reduces and information asymmetry and enact to provide investment efficiency. Thus, the outcome of this research offers several conceptions for researchers and managers, which may be useful for both emerging and advanced countries. The results indicate that financial flexibilities lead to excess debt capacity, and this capacity can be used in the bad time when external financing is challenging to fund profitable projects, and also financial flexibility can be used to exploit lucrative projects and reduce the underinvestment or overinvestment entailing investment effectiveness. Previous research addresses the issue related to cost and benefit, information asymmetry, ownership concentration, and firms’ propensity to financial flexibility. A little research conducted on financial flexibility and investment efficiency in the developed market (in Europe and USA), and thus the issue of and financial flexibility measured in unused debt capacity and investment efficiency, is one of the fundamental research in the emerging economy.

Suggested Citation

  • Islam, Md. Rashidul & Hossain, Monirul Alam & Uddin, Mohammad Shamsu & Bahta, Dawit Teclemariam, 2020. "Does Financial Flexibility foster Investment Efficiency? Evidence from an Emerging Market," Asian Business Review, Asian Business Consortium, vol. 10(2), pages 121-136.
    • Handle: RePEc:ris:asbure:0194
    as

    Download full text from publisher

    File URL: https://abc.us.org/ojs/index.php/abr/article/view/476
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Li, Ke & Lu, Lei & Mittoo, Usha R. & Zhang, Zhou, 2015. "Board independence, ownership concentration and corporate performance—Chinese evidence," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 162-175.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    5. Özgür Arslan-Ayaydin & Chris Florackis & Aydin Ozkan, 2014. "Financial flexibility, corporate investment and performance: evidence from financial crises," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 211-250, February.
    6. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    7. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    8. Al-Najjar, Basil & Clark, Ephraim, 2017. "Corporate governance and cash holdings in MENA: Evidence from internal and external governance practices," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 1-12.
    9. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).
    10. Sheridan Titman & K.C. John Wei & Feixue Xie, 2009. "Capital Investments and Stock Returns in Japan," International Review of Finance, International Review of Finance Ltd., vol. 9(1‐2), pages 111-131, March.
    11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    12. Chun-Ai Ma & Yanbo Jin, 2016. "What Drives the Relationship Between Financial Flexibility and Firm Performance: Investment Scale or Investment Efficiency? Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(9), pages 2043-2055, September.
    13. Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
    14. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    15. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    16. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    17. Maria‐Teresa Marchica & Roberto Mura, 2010. "Financial Flexibility, Investment Ability, and Firm Value: Evidence from Firms with Spare Debt Capacity," Financial Management, Financial Management Association International, vol. 39(4), pages 1339-1365, December.
    18. Victoria Cherkasova & Evgeniya Zakharova, 2016. "Suboptimal Investments And M&A Deals In Emerging Capital Markets," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 61(208), pages 93-120, January -.
    19. Yung, Kenneth & Li, DeQing Diane & Jian, Yi, 2015. "The value of corporate financial flexibility in emerging countries," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 25-41.
    20. Franck Bancel & Usha R. Mittoo, 2011. "Financial flexibility and the impact of the global financial crisis," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(2), pages 179-216, April.
    21. Abe de Jong & Marno Verbeek & Patrick Verwijmeren, 2012. "Does Financial Flexibility Reduce Investment Distortions?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 35(2), pages 243-259, June.
    22. Dongping Han & Peng Zhang, 2016. "Monetary policy, financing constraints and investment efficiency," Nankai Business Review International, Emerald Group Publishing Limited, vol. 7(1), pages 80-98, March.
    23. Annalisa Ferrando & Maria†Teresa Marchica & Roberto Mura, 2017. "Financial Flexibility and Investment Ability Across the Euro Area and the UK," European Financial Management, European Financial Management Association, vol. 23(1), pages 87-126, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mohammad Asim & Saboohi Nasim & Zeba Naz, 2023. "Impact of Enterprise Flexibility on Firm’s Competitiveness: An Empirical Study of Select Pharmaceutical Firms in India," International Journal of Global Business and Competitiveness, Springer, vol. 18(1), pages 35-42, June.
    2. Bao-Guang Chang & Kun-Shan Wu, 2021. "The nonlinear relationship between financial flexibility and enterprise risk-taking during the COVID-19 pandemic in Taiwan’s semiconductor industry," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 307-333, June.
    3. Mohammad Asim & Saboohi Nasim, 2022. "Modeling Enterprise Flexibility and Competitiveness for Indian Pharmaceutical Firms: A Qualitative Study," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 23(4), pages 551-571, December.
    4. Xiaodong Teng & Bao-Guang Chang & Kun-Shan Wu, 2021. "The Role of Financial Flexibility on Enterprise Sustainable Development during the COVID-19 Crisis—A Consideration of Tangible Assets," Sustainability, MDPI, vol. 13(3), pages 1-16, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Md. Rashidul Islam, 2024. "How to Achieve Financial Flexibility: the Role of Corporate Governance," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 6541-6577, June.
    2. Root, Andrew & Yung, Kenneth, 2022. "Resolving agency and product market views of cash holdings," Research in International Business and Finance, Elsevier, vol. 59(C).
    3. Morais, Flávio & Serrasqueiro, Zélia & Ramalho, Joaquim J.S., 2020. "The zero-leverage phenomenon: A bivariate probit with partial observability approach," Research in International Business and Finance, Elsevier, vol. 53(C).
    4. Bao-Guang Chang & Kun-Shan Wu, 2021. "The nonlinear relationship between financial flexibility and enterprise risk-taking during the COVID-19 pandemic in Taiwan’s semiconductor industry," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 307-333, June.
    5. Saona, Paolo & Vallelado, Eleuterio & San Martín, Pablo, 2020. "Debt, or not debt, that is the question: A Shakespearean question to a corporate decision," Journal of Business Research, Elsevier, vol. 115(C), pages 378-392.
    6. Tut, Daniel, 2024. "External financing, corporate governance and the value of cash holdings," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 156-179.
    7. Hu, Jiamin & Li, Kailun & Xia, Yifei & Zhang, Jianing, 2023. "Gender diversity and financial flexibility: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    8. Phung Anh Thu & Nguyen Vinh Khuong, 2018. "Factors Effect on Corporate Cash Holdings of the Energy Enterprises Listed on Vietnam s Stock Market," International Journal of Energy Economics and Policy, Econjournals, vol. 8(5), pages 29-34.
    9. Xiaodong Teng & Bao-Guang Chang & Kun-Shan Wu, 2021. "The Role of Financial Flexibility on Enterprise Sustainable Development during the COVID-19 Crisis—A Consideration of Tangible Assets," Sustainability, MDPI, vol. 13(3), pages 1-16, January.
    10. Haifeng Zhang & Zhuo Zhang & Ekaterina Steklova, 2020. "Do Companies Need Financial Flexibility for Sustainable Development?," Sustainability, MDPI, vol. 12(5), pages 1-14, February.
    11. Tahir Akhtar & Mohammad Ali Tareq & Kashif Rashid, 2021. "Chief Executive Officers’ monitoring, board effectiveness, managerial ownership, and cash holdings: evidence from ASEAN," Review of Managerial Science, Springer, vol. 15(8), pages 2193-2238, November.
    12. Tut, Daniel, 2021. "Financial Crisis, Corporate Governance and the Value of Cash Holdings," MPRA Paper 108593, University Library of Munich, Germany.
    13. Paulo, Alves, 2018. "Abnormal retained earnings around the world," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 63-74.
    14. Anshu Agrawal, 2020. "Modified Total Interpretive Structural Model of Corporate Financial Flexibility," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(4), pages 369-388, December.
    15. Bessler, Wolfgang & Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan, 2013. "The international zero-leverage phenomenon," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 196-221.
    16. Maurizio Rocca & Raffaele Staglianò & Tiziana Rocca & Alfio Cariola & Ekaterina Skatova, 2019. "Cash holdings and SME performance in Europe: the role of firm-specific and macroeconomic moderators," Small Business Economics, Springer, vol. 53(4), pages 1051-1078, December.
    17. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Dynamic capital structure and political patronage: The case of Malaysia," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 117-128.
    18. Saona, Paolo & San-Martin, Pablo & Vallelado, Eleuterio, 2024. "The zero-debt puzzle in BRICS countries: Disentangling the financial flexibility and financial constraints hypotheses," Emerging Markets Review, Elsevier, vol. 61(C).
    19. Morais, Flávio & Serrasqueiro, Zélia & Ramalho, Joaquim J.S., 2022. "Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms," Research in International Business and Finance, Elsevier, vol. 62(C).
    20. Hang (Robin) Luo & Abu Reza Mohammad Islam & Rui Wang, 2021. "Financing Constraints and Investment Efficiency in Canadian Real Estate and Construction Firms: A Stochastic Frontier Analysis," SAGE Open, , vol. 11(3), pages 21582440211, July.

    More about this item

    Keywords

    Financial Flexibility; Investment Efficiency; Emerging Economy;
    All these keywords.

    JEL classification:

    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:asbure:0194. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alim Al Ayub Ahmed (email available below). General contact details of provider: https://abc.us.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.