Abstract

This study investigated the determinants of financing decisions of firms from the Middle East and North Africa (MENA) region, particularly the effect of public corruption on financing decisions and the effect of disorder following the Arab Spring on public corruption-financing structure relationship. The study encompasses a total of 800 business entities from 14 different countries, spanning the time frame of 2005–2018. Data is analyzed through the application of static fixed effects and dynamic GMM-System models. Results indicate that large, tangible companies prefer debt, whereas profitable companies with more room for growth choose equity. Less corruption is associated with increased corporate debt. The use of debt decreased because of the Arab Spring, and corruption’s effect on leverage became weaker. The speed of adjustment to the target leverage is comparatively slow for book leverage, while it is significantly greater for market leverage. These outcomes are consistent with the pecking order behavior resulted from increasing information asymmetry, but the tradeoff theory has some support as well. The implications of this study entail the need for enhancing investor protection, strengthening control measures, increasing transparency, and fostering the overall growth of the financial system to facilitate enterprises’ use of debt financing, particularly in the post-Arab Spring era. This paper provides fresh empirical evidence demonstrating the effect of the Arab Spring on capital structure and on the relationship between country corruption and capital structure in the MENA region. The paper also expands the body of research on capital structure and corruption across countries by providing empirical findings from a region that has been relatively overlooked in previous scholarly works.

Introduction

Lack of a perfect capital market necessitates the need for capital structure (CS) policy [1, 2, 3, 4, 5]. The choice of debt and equity is important not only for stable corporate financial health but also for the role it plays in economic growth [6,7]. Since Modigliani and Miller’s [8] slice-of-the-cake argument, the literature has identified many firm-specific CS determinants [6,9] as well as macroeconomic factors [7,10, 11, 12]. Country corruption facets, such as weak regulations and inconsistent policies at the macro level, may affect financing decisions as they influence agency conflicts of interest, the risk of financial fraud, and resource waste at the business level [10,13]. Such consequences are exacerbated if accompanied by weak disclosure policies that enhance the information asymmetry problem and increase the cost of capital [14]. Consequently, financial market activity reduces as a result of investors’ low confidence.

Public corruption is a potential determinant of CS that is largely ignored. A common link is through asymmetric information as a result of ineffective management transparency, monitoring, and law enforcement [15]. This information gap is also caused by manager-shareholder agency conflicts [16]. Because of poor ruling systems and regulations, emerging countries are deemed more corrupt than developed countries [17]. Non-financial enterprises are less regulated compared with financial firms, and thus they are more exposed to corruption [18].

Conclusions

This study investigates the CS practices of non-financial companies operating in the MENA region. Country-level corruption and the Arab Spring’s effect on CS is analyzed through the application of static and dynamic models. Country corruption has an effect on CS because of the significant agency problems and information asymmetry that are associated with corrupt practices. The developing countries in the MENA region are more susceptible to corruption because of inadequate governance systems and regulations, which make them a suitable choice for this study.

Our contribution to the literature on capital structure is threefold. The study expands the research on CS across countries in a geographic area that has been relatively overlooked in previous scholarly works. Our second contribution is emphasizing the significance of enhancing institutional environments in developing countries to facilitate firms’ access to external finance, particularly when the level of corruption in a country is found to have a significant effect on the decisions that corporations make about their CS. Finally, addressing the effect of the Arab Spring, a period of political instability, on the CS decisions is the first instance in which such an analysis has been conducted. The findings of this research are likely to be significant to other developing countries and regions and carry major implications for emerging economies that share similar attributes.

Abstract

The paper examines whether common ownership along supply chains (i.e., vertical shareholding) is associated with better firm performance during supply chain shock. We find that supplier-customer dyads with vertical shareholding report higher combined monthly returns since the outbreak of the COVID-19 pandemic. The dedicated common investors have the most positive effects, followed by the common quasi-indexers.

Introduction

As overlapping institutional ownership becomes more prevalent, it has been heatedly debated whether it plays a positive role in market competition and corporate governance (e.g., Azar et al., 2018; Edmans et al., 2019; Schmalz 2021; Koch et al., 2021; Bebchuk and Hirst 2022). Most studies focus on its effects on industry rivals (i.e., horizontal shareholding). Compared to industry rivals, firms along the supply chain network have more collaborative and interdependent relationships. Hence, overlapping institutional ownership of supplier-customer dyads (i.e., vertical shareholding)1 may have distinct effects, especially in response to disruptive events that could jeopardize collaboration.

We utilize the COVID-19 pandemic as an exogenous supply chain shock to investigate whether vertical shareholding is associated with stock performance. Supply chain disruptions can be devastating to both upstream and downstream firms (e.g., Carvalho et al., 2021) and significantly exacerbate interfirm conflicts as opportunism and information asymmetry increase. Economic theories predict that cross-ownership can address inherent interfirm conflicts, such as the holdup problem (e.g., Klein et al., 1978; Grossman and Hart 1986). Institutional investors simultaneously holding shares of economically connected firms have incentives to prevent either contracting party from making a move that will hurt the value of their portfolios. Hence, they can influence the management of both upstream and downstream firms and thereby encourage information sharing and balance the bargaining power in supply chain contract renegotiations. For example, institutional investors can influence the supplier firms to prioritize the co-owned customer firms during supply shortages (Sheffi 2020).

Conclusion

We show that supply chain dyads with vertical shareholding have significantly better aggregate stock market performance since the COVID-19 pandemic. The effects vary with the incentives of common institutional shareholders. To our knowledge, we are one of the first empirical studies to show that vertical shareholding mitigates negative consequences of supply chain shocks. Our evidence sheds light on the debates over the roles common institutional investors play in interfirm relationships and supply chain risk management.

Abstract

This study examines the relationship between Bitcoin market dynamics and user activity on the r/cryptocurrency subreddit. The purpose of this research is to understand how social media activity correlates with Bitcoin price and trading volume, and to explore the sentiment and topical focus of Reddit discussions. We collected data on Bitcoin’s closing price and trading volume from January 2021 to December 2022, alongside the most popular posts and comments from the subreddit during the same period. Our analysis revealed significant correlations between Bitcoin market metrics and Reddit activity, with user discussions often reacting to market changes. Additionally, user activity on Reddit may indirectly influence the market through broader social and economic factors. Sentiment analysis showed that positive comments were more prevalent during price surges, while negative comments increased during downturns. Topic modeling identified four main discussion themes, which varied over time, particularly during market dips. These findings suggest that social media activity on Reddit can provide valuable insights into market trends and investor sentiment. Overall, our study highlights the influential role of online communities in shaping cryptocurrency market dynamics, offering potential tools for market prediction and regulation.

Introduction

The rapid growth and adoption of cryptocurrencies have attracted significant attention from investors, researchers, and policymakers. Among these digital assets, Bitcoin (BTC) [1] stands out due to its market dominance and influence on the broader cryptocurrency ecosystem. Understanding the factors that drive Bitcoin’s price and trading volume is crucial for stakeholders across various sectors. One such factor is the sentiment and activity within online communities, where discussions and opinions about cryptocurrencies are actively shared.

Social media platforms and online forums play a vital role in shaping the market dynamics of cryptocurrencies [2]. These platforms provide real-time information, opinions, and sentiment that can influence investor behavior and market trends. Several studies have explored the relationship between social media activity and cryptocurrency markets, highlighting the significance of sentiment analysis and user engagement in predicting price movements and trading volumes.

While previous studies have examined the relationship between social media sentiment and cryptocurrency markets, our research distinguishes itself by focusing on the specific community of r/cryptocurrency on Reddit. We leverage a combination of sentiment analysis and topic modeling on a comprehensive dataset of posts and comments, providing a detailed view of how online discussions evolve and correlate with Bitcoin market movements. By examining both sentiment and thematic content over time, our study offers nuanced insights into the interplay between social media activity and cryptocurrency market dynamics.

Results

4. Results
4.1. Bitcoin Market Data
Figure 1 illustrates the closing price of Bitcoin (BTC) over a two-year period, from 1 January 2021 to 31 December 2022. The data reveal significant volatility, characteristic of the cryptocurrency market. Notably, BTC reached an all-time high in November 2021, approaching USD 68,000, before undergoing a substantial correction throughout 2022. This decline reflects broader market trends, including macroeconomic factors and changes in investor sentiment. The closing price provides a critical foundation for understanding market dynamics and investor behavior during this period.

Abstract

We estimate the effect of global supply chain disruptions on inflation for a panel of 28 European countries. Adverse shocks have a stronger and more persistent effect than favorable shocks.

Introduction

Disruptions to global supply chains, e.g. due to natural disasters and lockdowns, are considered a major driver of the drastic increase in inflation in Europe and other advanced economies after the COVID-19 pandemic. The evidence (Carrière-Swallow et al., 2023, Burriel et al., 2023, Ascari et al., 2023, Laumer, 2023, Khalil and Weber, 2022, Finck and Tillmann, 2023, Finck et al., 2023, Liu and Nguyen, 2023, Elsayed et al., 2023, De Santis, 2023) suggests that supply chain shocks indeed have a significant effect on inflation.

More recently, supply bottlenecks eased and indices of supply chain conditions (Benigno et al., 2022) are back at pre-pandemic levels. However, inflation remains high. The Economist (2023) asks: “Supply chains are back to normal. Why is inflation still so high?” This note provides one potential answer to this question. We estimate local projections for a panel of 28 European economies between 2010 and 2023 in order to quantify the effect of a supply chain disruption on headline inflation, core inflation and producer price inflation. The supply chain shock we use is the purified change in the Global Supply Chain Pressure Index (Benigno et al., 2022). Importantly, we allow positive, i.e. restrictive, and negative, i.e. expansionary, shocks to have different absolute effect sizes.

Conclusions

This note showed that the inflationary effects of disruptions to global supply chains are asymmetric. An increase in supply chain stress strongly contributes to the increase of inflation as seen after the COVID-19 pandemic. However, an easing of supply chain pressure contributes much less to the decline of inflation. Hence, our results provide one potential answer to the question asked by The Economist (2023).

Of course, asymmetric supply chain shocks are just one potential explanation of persistent inflation rates despite an easing of supply chain conditions. A tendency to de-globalize supply chains could raises costs even as shipping conditions normalize. Inflation could also remain elevated due to second-round effects of the initial spike in energy prices and costs of intermediate goods on wages. In addition, a shortage of labor post-Covid might also prevent inflation from returning to low levels. Finally, the sectoral shift of demand during the pandemic from services to goods is still visible in the data, which causes inflationary pressure in the presence of frictions.

Abstract

The entire world is facing the issue of climate change. Due to rapid industrialization, enormous waste generation is aggravating the situation. In this study, we investigate the role of audit quality in promoting sustainable waste management in firms. Using a sample of 8100 firm-year observations for the period 2002–2017 from 34 countries, we provide novel empirical evidence that good audit quality significantly reduces total corporate waste production. Further, our results are robust to alternate proxies of audit quality, and waste management, and only appear with unqualified audit reports. To alleviate the endogeneity issue, we use two different identification strategies; namely, PSM and GMM. Altogether, these findings demonstrate that Big4 auditing firms ensure the credibility and reliability of the non-financial disclosures of their auditees as apparent by their rigorous auditing processes. Moreover, the main implication of our study is that firms are subject to a decrease in their overall waste production when their external assurer is one of the BIG4 auditing firms.

Introduction

The word ‘Sustainability’ has received immense global attention over the last decade, as obvious by its evident visibility in, corporate mission and vision statements (Meppem & Gill, 1998). Hereby, many internationally approved climate agreements, such as the Paris Agreement, and the Sustainable Development Goals (SDGs), etc., have been used as a source for embedding sustainable development in the core strategies of both developed and developing economies (Alam et al., 2019). According to these agreements, immense greenhouse gas (GHG) emissions are regarded as the prime reason for the present environmental degradation (Alam et al., 2019). Besides, these statistics by the World Bank (2012) state that the annual amount of solid waste produced by our global economy amounts to one billion tons, thus highlighting the increased contribution of the waste sector to the increase in global temperatures. Conversely, the United Nations Environmental Programme (2010) in its report on waste and climate change states that the waste sector can move its position from a minor contributor to a major saver of emissions, as it reports only a 3–5% contribution of the waste sector in GHG emission production. These statistics point toward the development of a circular economy through improvement in the waste management practices of firms in the last 40 years (Romero-Hernández & Romero, 2018).

Moving forward, these global environmental concerns have entailed primary pressure on corporates as they are subject to the generation of a massive amount of waste during the production of goods and services (Gull, Atif, & Hussain, 2022; Hirsch, 2019). Further, firms in response to the pressure entailed by certain internal and external stakeholders are moving towards more sustainable practices, like waste management, recycling, reusing, etc. (Alam et al., 2019). These sustainable business practices are costly to introduce and maintain and therefore depend on the strength of a firm’s governance structure, as strong governance structures predict the level of waste produced by firms (Gull, Atif, & Hussain, 2022; Shahab et al., 2022). For this reason, prior research has extensively highlighted the importance of a firm’s external and internal governance in the promotion of corporate sustainability (Bacha et al., 2020; Earnhart & Harrington, 2021; Hussain et al., 2018; Jo et al., 2015; Saeed et al., 2022).

Conclusion

The immense increase in global temperatures has become a substantial concern and emerged as a real-world phenomenon in recent years (Alam et al., 2019). The increase in global annual waste production further ruins the situation (World Bank, 2012). For this reason, firms have increased their attention toward sustainable development in the face of the pressure entailed by the governments, policymakers, stakeholders, and external assurers of a firm (Alam et al., 2019; Saeed et al., 2022). Prior research has extensively studied the impact of external stakeholders on a firm’s environmental sustainability (Dakhli, 2021; Dicu et al., 2020). As Braam et al. (2016) and Earnhart and Harrington (2021) also analyse the importance of audit quality in enhancing corporate environmental performance. While prior literature lacks to define the role of audit quality in improving several other dimensions of corporate social responsibility such as waste management. Therefore, concerning the importance of waste management, our study fills this void and provides robust empirical evidence on the impact of audit quality on waste management.

This study employs a panel data set of 8100 firm-year observations from 34 countries between 2002 and 2017 and finds a negative relationship between audit quality (BIG4) and total waste generation (T_WASTE) (Earnhart & Harrington, 2021). Our results are robust to the use of several alternate proxies of waste management and audit quality. Moreover, we found our relationship to be more pronounced in firms that constitute CSR committees, have strong governance structures, have low institutional ownership, and are with high CSR intensity. While, in addition, we drive that audit quality is subject to reducing a firm’s overall waste generation only in the case of non-natural industries. Furthermore, to the extent possible, we rule out certain endogeneity concerns through the propensity score matching (PSM) and generalized methods of moments (GMM) techniques and analyse consistent results. Ultimately, our findings indicate that high audit quality plays the role of external governance helps firms to reduce their waste production.

Abstract

Existing literature shows that female-led companies exhibit lower leverage compared to their male-led counterparts, a trend frequently attributed to the traditional view of higher risk aversion among women. We explore firms with female CFOs at or close to their optimal leverage and find that their capital structure is no different than that of firms with male CFOs. We argue that female CFOs reveal their true preferences and risk appetite during significant capital structure adjustments and find that their tolerance for risk aligns closely with that of their male counterparts. Our study challenges the conventional narrative by demonstrating that the financing decisions of top executives are likely not influenced by gender-based psychological differences.

Introduction

Extensive literature builds upon upper echelons theory ( Hambrick and Mason, 1984 ) and relates various executive traits, such as gender, ethnicity, age, R&D background, and legal and financial expertise, to corporate policies and outcomes ( Custódio and Metzger, 2014 ; Serfling, 2014 ; Cline and Yore, 2016 ; Doan and Iskandar-Datta, 2021 ; Li and Xiang, 2022 ; Huang et al., 2023 ; Liao, Ouyang, and Tang, 2023 ; among others). The evidence suggests that the identity of the people at the helm of the company plays a role in shaping firm strategies, including the choice of capital structure. 1 One factor that has been advanced as contributing to the link between executive identity and leverage is the varying degrees of risk aversion that firm leaders might have.

Numerous studies in business and psychology show that gender is related to risk preferences, with females exhibiting higher levels of risk aversion, and lower overconfidence and competitiveness than males ( Barber and Odean, 2001 ; Croson and Gneezy, 2009 ; Bertrand, 2011 ; Charness and Gneezy, 2012 ; Chen, Leung, Song, and Goergen, 2019 ; Wang and Fung, 2022 ; Perrin, Bertrand, and Klein, 2023 ). Within the corporate finance field, extant literature finds evidence that the gender of the members of the top management team affects the capital structure of the firm. Female CEOs and CFOs are associated with lower leverage and less debt issuance ( Huang and Kisgen, 2013 ; Faccio, Marchica and Mura, 2016 ; Schopohl, Urquhart, and Zhang, 2021 ), shorter debt maturity ( Datta, Doan, and Toscano, 2021 ), higher cash holdings and lower cash flow volatility ( Elsaid and Ursel, 2011 ).

Conclusion

Our investigation into the capital structure decisions of firms led by female CFOs during leverage rebalancing events presents compelling evidence that challenges the conventional narrative linking gender to risk aversion in corporate finance. Our analysis reveals no significant gender-based differences in the optimal leverage ratios set by CFOs. This finding calls for a reevaluation of the impact of executive gender on corporate financial strategies, suggesting that factors beyond gender stereotypes are at play in shaping these decisions.

Like most studies in empirical corporate finance, we acknowledge that we can never fully address endogeneity concerns in the absence of a natural experiment despite employing several empirical strategies designed to address omitted variable bias and reverse causality. We do point out, however, that if there is an omitted factor that simultaneously influences the likelihood of having female CFOs and the level of leverage, then for this factor to account for our findings, it should have a differential effect across the year immediately before and the year of rebalancing.

Abstract

The literature on working capital management (WCM) provides mixed evidence on the effect of working capital on firm profitability and performance. We use firms from developed and emerging economies to explore how working capital and its components relate to firms’ performance while controlling for firm-specific and macroeconomic factors. The findings show that the cash conversion cycle (CCC) is inversely related to firm performance in developed and emerging economies—however, there are differences in the CCC’s components. While firms in developed economies exhibit higher firm performance with longer days’ inventory on hand, firms in emerging economies have lower firm performance with longer days’ inventory on hand, extended collection periods, and longer payable periods. Company-specific factors, such as firm size, growth, profitability, and leverage, influence the efficiency of WCM. We also find that country-specific variables such as gross domestic product (GDP), interest rate, and inflation have varying impacts on a firm’s WCM.

Introduction

Working capital management is a critical aspect of financial management that is pivotal in determining a firm’s overall performance and sustainability. It entails managing payables and receivables and reducing inventory. The working capital cycle encompasses the conversion of raw materials into finished goods, the sale of goods, and the subsequent collection of receivables, known as the cash conversion cycle. Effectively managing this cycle is essential for maintaining liquidity, supporting day-to-day operations, and ultimately influencing a firm’s financial health. A company’s liquidity management is becoming increasingly complex with the rise of digital transformation, ever-changing market conditions, globalization, and geopolitical uncertainty.

The literature on WCM holds two opposing views about the impact of working capital investment on firm profitability. One view advocates that an extended cash conversion period and a relaxed receivable collection period increase sales and firm performance (i.e., Deloof, 2003; Sharma and Kumar, 2010; Charitou et al., 2012). Another view documents a negative association between higher working capital and profitability because additional working capital requires more financing, which increases financing and opportunity costs (i.e., Alipour, 2011; Ren et al., 2019; Kayani et al., 2019a; Banerjee and Deb, 2023; Kamlesh et al., 2023). So, having excessive working capital may drag a firm’s financial performance because of the high cost of carrying working capital.

Conclusion

Our research examines the impact of working capital management on corporate performance for a group of firms in developed and emerging economies. We find statistically significant differences between developed and emerging economies concerning working capital and firm-specific and country-specific variables. For example, the CCC is significantly higher for emerging economies than developed ones. Similarly, DSO and DSI are considerably higher for emerging economies, while there is no statistically significant difference in DPO. In our further analysis, we note the following similarities and differences between developed and emerging economies concerning the impact of working capital management on firm performance. First, CCC is a significant determinant of firm performance for both developed and emerging economies. Notably, a longer cash conversion cycle is associated with lower firm performance. These findings are supported by Jose et al. (1996), Kayani et al. (2019a), Kayani et al. (2019b) and Deloof (2003) for developed economies and by Lin and Wang (2021), Garg and Meentu (2022), and Jaworski and Czerwonka (2022) for emerging economies. We find significant differences between developed and emerging economies for the components of CCC. For example, only the DSI component of CCC has a statistically significant direct impact on firm performance in developed economies. For emerging economies, all components of CCC (i.e., DSI, DSO, and DPO) have a statistically significant impact on firm performance. In particular, a higher inventory holding period, receivable collection period, and days’ payables are associated with lower firm performance.

Abstract

The current planetary crisis and the perceived urgency necessitates more sustainable production and consumption patterns. Businesses, particularly the multinationals, play a key role in transitioning to a circular economy, which provides a promising approach to achieving the UN Sustainable Development Goals. Industry 4.0 technologies can theoretically support this transition and enable circular economy through, for example, data-driven and smart business processes. However, merging these new technologies with a circular economy is not a straightforward and well-established process and it fundamentally changes the business value chain. Therefore, this paper provides a systematic overview to help better understand the transition process to circular business models and the enabling role of industry 4.0. Merging these concepts underlines that many factors are interrelated and should be investigated in a holistic way instead of siloes. The findings imply that changes transcend business boundaries, including new value chain characteristics and operation models and indicate the interconnected nature of certain factors along the product lifecycle, including service-based models, circular design, reverse flows, consumers and users, and collaborations. This paper proposes a conceptual transition framework to address how new circular business models can integrate digitally adaptive transformations and proposals for future research are reflected upon.

Introduction

Our world is currently facing numerous environmental, social and economic challenges and the consequences of these challenges can be seen in climate change, pollution, biodiversity loss and resource degradation (Okorie et al., 2018). We have reached a tipping point in what our Earth can sustain and the current living standards are not sustainable in the long-term. The problem can be tied back to the first industrial revolution and the logic our economy is built on. 91% of the world still follows this traditional, linear economic ‘take-make-use-dispose’ system, which is a driver of our production and consumption patterns (Nobre and Tavares, 2020). While innovations of the industrial revolutions have induced growth, with the growing population and the throwaway consumption patterns, products remain underutilized, are prematurely wasted, and their end-of-life is not generally considered (Rosa et al., 2020).

Therefore, it has become inevitable for production to transition to a more sustainable system and the search for solutions a priority for the social and political agenda globally (Ajwani-Ramchandani et al., 2021b; Bjørnbet et al., 2021). The United Nations Member States have summarized an action plan in the 2030 Agenda for Sustainable Development, articulating 17 transformative Sustainable Development Goals (SDGs) (United Nations, 2015). This initiative shows that there is an interest in finding a balance between human and nature to support the more efficient use of our resources and encourages us to do more and better with less (Tunn et al., 2019). Multinationals are particularly well-positioned to tackle this issue due to their overarching footprint (Ajwani-Ramchandani et al., 2021a).

Conclusion and limitations

This SLR has conceptualized the CE–I4.0 epistemology through current literature, synthesizing and providing an overview of the CE transition process through a business model lens. Our framework depicts which directions businesses should innovate to and it pinpoints specific I4.0 tools that enable the elements of service-based models, circular design, reverse flows, consumers and users, collaborations and product lifecycle management.

This framework contributes by bringing together relevant sciential and business factors into a single study. Although there has been an increasing number of studies in the field of CE–I4.0 (Bjørnbet et al., 2021), investigating the interconnected nature of elements along the business transition process to a CE has not yet been fully understood and conceptualized. The framework shows the transition to a CE as a paradigm shift (Campbell-Johnston et al., 2019), which transcends siloed solutions and requires a holistic, ‘embracing all’ approach and consideration of different stakeholder interest and expectations (Awan et al., 2021). With the proposed conceptual framework, we embrace a holistic approach, demonstrate which business elements influence each other and how within the same ‘circular system’, and we underline the role of specific I4.0 tools along this transition.

Abstract

Purpose – Recent studies on the securities market’s differential pricing of earnings components indicate that cash flows from operations are valued more highly than extreme total accruals. However, no previous study has examined whether cash flows from operations have a higher valuation than moderate total accruals. Therefore, this study examines the securities market’s differential pricing of cash flows from operations and both moderate and extreme total accruals

Design/methodology/approach – The study’s sample is divided into two sub-samples: a moderate total accruals sub-sample; and an extreme total accruals sub-sample. To evaluate whether cash flows have a higher valuation when compared to total accruals, for the entire sample and for each of the two sub-samples, the study examines the statistical significance of the difference between slope coefficients of cash flows and total accruals for regression of returns on both unexpected cash flows from operations and unexpected total accruals

Findings – Consistent with prior research, results from the entire sample show a differential higher valuation of cash flows when compared to total accruals. Another finding, consistent with recent studies, is that cash flows from operations have a higher valuation when compared to extreme total accruals. However, there is no higher differential valuation of cash flows over moderate total accruals. These findings support the decomposition of earnings into the components of cash flows from operations and total accruals only when total accruals are extreme (rather than moderate).

Practical implications – A possible explanation for these results is that since accruals predict cash flows, total accruals – when moderate (i.e. not extreme) – are priced similarly to cash flows. These results reveal that when total accruals are moderate, earnings are a better proxy for the underlying cash flows (over the entire future horizon, not just the current period) than is cash flows. However, since total accruals are unlikely to persist in a permanent way over the years, these results indicate that the decomposition of earnings into the components of cash flows from operations and total accruals is consistent with the information set used to value equity securities. Therefore, separate disclosure of cash flows is value relevant. In addition, users of financial statements certainly need the cash flows information as an ex-post validation of the prior earnings.

Originality/value – This study’s contribution stems from its determination of the preferred level of disaggregation of earnings components (i.e. operating cash flows and total accruals). This is expected to help investors in their attempt to enhance the outcome of their informed investment and credit decisions.

Introduction

Reported numbers can be considered informative if they assist investors in making more informed decisions. When stock prices change in response to reported numbers, it can be presumed that investors’ valuation, buying, and selling decisions are influenced by reported numbers. It follows that reported numbers inform their decisions. Earnings can be divided into total accruals and cash flows from operations [1]. Earnings components (i.e. operating cash flows and total accruals) can be considered incrementally informative in relation to total earnings if they assist investors in making decisions that are more informed compared to those made when only the total is known. For example, if investors think that current cash flows are more or less informative when compared to total accruals with respect to their ability to predict future cash flows, then they are likely to be interested in learning about these earnings components and not simply total earnings. Identifying the preferred level of disaggregation regarding the elements of earnings can assist investors in making more effective investment and lending decisions. With these considerations in mind, the present study seeks to investigate the differential price of earnings components in the securities market.

Results

5.1 Stock returns and earnings components for the entire sample Table 2 presents the results regarding the relationship between stock returns and earnings components (i.e. cash flows from operations and total accruals) for the entire sample. The sum of the coefficients for the level and change in cash flows (α1þα3) is 1.218 (t 5 6.743), which is significant and positive at the 1% level. The sum of the coefficients for the level and change in total accruals (α2þα4) is 0.699 (t 5 11.311), which is significant and positive at the 1% level. These results suggest that both cash flows from operations and total accruals have incremental information content beyond each other.

Abstract

     This paper adds to the recent interest in the link between cash and firm performance, by studying how this relationship varies across boom- and bust cycles. We use data of Norwegian firms from a broad range of sectors in the period 2005–2015, and both replicate and extend previous findings on the relationship between cash and performance over the business cycle. We find that i) cash has a positive, but weakly diminishing effect on operational firm performance (ROA) throughout the entire sample period, and ii) that the curvilinear relationship between cash and firm performance is the most pronounced in the pre-recession years, while it is virtually linearly positive in recessions and post-recession periods. We conclude that cash indeed has an impact on firms’ operational performance, and especially so in recessionary times.

Introduction

     Traditionally, strategy scholars have disregarded cash as a strategic asset (e.g. Barney, 1986), while finance scholars have viewed cash holdings as a signal that a firm lacks profitable investment opportunities or have managerial issues (e.g. Jensen, 1986). Recent studies have questioned these views by documenting that cash may indeed be positively related to performance (Kim & Bettis, 2014), and that contextual factors such as state of the business cycle (Nason & Patel, 2016) and competitive dynamics (Deb et al., 2017, Jung et al., 2020, O’Brien and Folta, 2009) are important moderators for the strength of the cash-performance relationship.

     While this recent research stream has made important advancements to our understanding of the relationship between cash and firm performance, we know less about how these insights can be generalized to other contexts than large, listed (manufacturing) companies operating in relatively stable periods, and if relationships between cash and market-based measures of performance also holds for operational measures of performance. Currently, most studies on the cash-performance relationship use samples of large, listed, US, (manufacturing) firms (e.g. Deb et al., 2017; Jung et al., 2020; Kim & Bettis, 2014; O’Brien & Folta, 2009), study relatively stable periods and not more turbulent times such as economic downturns where financing constraints tends to increase (Forseth et al., 2015), and/or use market-based measures of firm performance such as Tobin’s Q as their dependent variables (e.g. Deb et al., 2017; Jung et al., 2020; Kim & Bettis, 2014; O’Brien & Folta, 2009).

Conclusion

     The purpose of this paper was to examine the relationship between cash and firm performance over the business cycle.

     Throughout our analysis we find that cash has a positive impact on firm performance across the different phases of the business cycle. The linear term of cash is highly significant in all our models and across all time periods. The quadratic term is less consistent; in some cases, we identify a curvilinear relationship, whilst sometimes the quadratic term is low and insignificant indicating a linear relationship between cash and firm performance.

     After running our full and expanded models, we conclude that the curvilinear relationship between cash and performance is weakly curvilinear for our sample of Norwegian firms, and that this curve-linearity is the most pronounced in the pre-recession period, and more or less linear during the recession and post-recession periods.

     In closing, we believe that our results add to an important stream of research at the intersection of strategy and finance. Mainstream theories, especially in strategy discard cash and other financial assets as less important drivers for heterogeneity and performance differences. Our findings, and the findings of the studies we build on, challenge these assumptions. It is, however, important to note that cash seems more likely as an indirect source of performance differences, through enabling firms to make investments and deploy strategies that in turn create performance heterogeneity. That is, cash appears to be less of a king, but more a key member of the court that pull some important strings.

Abstract

     Our investigation of 46 conventional and 22 Islamic banks from the Gulf Cooperation Council (GCC) countries during 2008–2021 reveals that sectoral diversification effects on stability are nonlinear and different for the two bank types. While Islamic banks’ stability is worsened only by moderate levels of diversification, conventional banks’ stability is enhanced by high levels and impaired by low levels of diversification. Furthermore, diversification acted as a stabilizer during the global financial crisis but exacerbated the adverse effects of the Covid-19 pandemic. Although regulators usually call for bank diversification, our results imply that it can be a double-edged sword.

Introduction

     Due to dependence on oil and gas revenue and their price plunge caused by the Global Financial Crisis (GFC) in 2008, the governments of the Gulf Cooperation Council (GCC) countries started introducing various policies aiming at developing diversified real and financial sectors.1 While oil and gas production still represents over 40% of the GDP in GCC countries, with the exception of Bahrain and UAE, (Esam, 2021) shows that there has been significant diversification away from hydrocarbon revenue since 2010 in all GCC countries, particularly in Saudi Arabia, UAE and Bahrain. Given the low development of capital markets and non-bank financial institutions in these countries, banks play a pivotal role in assisting the execution of these national diversification policies by providing financing to support investments in the existing and ‘new’ sectors. The proponents of diversification in banking would see this as an opportunity for banks to spread their loans and financing2 across different sectors and thus reduce bank default, liquidity, and bankruptcy risks (Diamond, 1984; Demsetz and Strahan, 1997; Rose and Hudgins, 2006), vulnerability to economic downturns and financial crises (Tabak et al., 2011; Doumpos et al., 2016), and become safer and more stable (Saunders and Walter, 2012). On the contrary, the opponents of diversification would argue that banks are better off by focusing on a single sector or a few sectors as that allows them to leverage their screening and monitoring knowledge and expertise in these sectors and thus reduce the unnecessary complexity, agency problems, overhead expenses (Klein and Saidenberg, 2010), earnings volatility (DeYoung and Roland, 2001), and write-downs and write-offs (Jahn et al., 2013) that usually come with diversification.

Discussion and conclusion

     Against the backdrop of the GCC countries’ ongoing economic diversification policies and banks being the primary financiers of the projects brought about by these policies, we investigate (i) if and how diversification of loans and financing across economic sectors impacts the stability of GCC banks, (ii) if the effects are the same on conventional and Islamic banks, and (iii) if diversification helps banks navigate smoothly through economic downturns such as the 2008 global financial crisis and the ongoing Covid-19 pandemic.

     anks navigate smoothly through economic downturns such as the 2008 global financial crisis and the ongoing Covid-19 pandemic. Analyzing a unique panel dataset of 46 conventional and 22 Islamic banks, we find that there is no one-strategy-fits-all even within these seemingly similar countries. Diversification effects on bank stability are nonlinear and different for Islamic and conventional banks. While Islamic banks’ stability worsens at moderate levels of diversification, conventional banks’ stability thrives at high levels and erodes at low levels of diversification. Given that the diversification measure is an inverse measure of concentration, this means that a high concentration of loans on one or a few economic sectors also benefits conventional banks. Lastly, we observe a temporal dimension of our results which suggests that diversification supported bank stability against the destabilizing effects of the global financial crisis but amplified the adverse effects of the Covid-19 pandemic.

Abstract

In the current complex global economic background, international capital flows are becoming more frequent. Based on this, this paper takes international portfolio investment as the research object and empirically tests the causal relationship and control channel between international portfolio flows and macrofinancial risk in emerging economies. It selects the panel data of emerging economies from 2001 to 2020, constructs macrofinancial risk indicators by using contingent claim analysis and the entropy-based TOPSIS method, tests the effect of international portfolio flows on macrofinancial risk by using the panel distributed lag regression model, and explores the management effect of foreign exchange reserves and capital controls on the risk effect by using the panel threshold regression model. The results show that long-term international portfolio flows help reduce macrofinancial risk, but short-term capital flows appear to increase macrofinancial risk. In addition, both foreign exchange reserves and capital controls effectively reduce the risk effect of portfolio flows. However, when considering different types of portfolios, we find that foreign exchange reserves do not effectively control the risk effect of equity securities flows, while stricter capital controls do. This paper argues that emerging economies should be more open to international long-term portfolio flows, focus on the monitoring of short-term portfolio capital flows and equity securities flows, and coordinate the use of foreign exchange reserves and capital control instruments to manage the risk effects of portfolio flows. This paper verifies the risk effect of international portfolio investment flows through empirical analysis, tests the effectiveness of foreign exchange reserves and capital controls, and provides a decision-making reference for emerging economies to timely identify, effectively manage, and prevent the risk effect of international capital flows.

Introduction

In the context of the current COVID-19 pandemic and the Russia-Ukraine conflict, recessionary expectations of “high inflation” and “weak growth” in the United States, Europe, and other advanced economies have continued to rise, and global economic activities have been severely impacted [1]. Advanced economies, represented by the United States, implemented quantitative easing and fiscal stimulus policies to stabilize financial markets and protect economic development in response to the resulting economic recession. As high inflation continued to rise under the policy mix, the Federal Reserve began to reduce inflation by significantly increasing interest rates and tightening liquidity. Emerging economies have historically risen with the wave of industrialization through industrial transfer, aided by ample international capital liquidity. However, the Fed’s persistent policy of increasing interest rates has resulted in a stronger US dollar and depreciating currencies in emerging economies [2]. When expectations of a decline in the short-term exchange rate rise, the willingness of cross-border capital to invest weakens further, and there is a sudden halt in capital inflows or even capital flight, resulting in a cascade of asset price declines. Under the negative feedback spiral, the wealth of the household sector decreases significantly, corporate solvency declines, and the bank nonperforming loan ratio rises, resulting in heightened instability in the real economy and financial markets. The current complex and volatile international economic environment increases the frequency and unpredictability of cross-border capital flows, which will cause significant volatility on the financial markets of emerging economies [3].

International capital contributes significantly to the growth of emerging economies, but it is also extremely vulnerable to macrofinancial instability. In every financial crisis, we can see unusual global capital fluctuations. Emerging economies’ financial systems are flawed and have insufficient defenses against shocks from global capital flows. Emerging economies are additionally more susceptible to external capital shocks due to internal factors like a high external debt ratio and a mismatch in debt maturities [4]. Considering the current complex global economic context, to investigate how cross-border capital flows affect macroeconomic stability in emerging economies, this paper selects highly speculative international portfolio investment flows as the research object, discusses the effect of international portfolio flows on macrofinancial risk in emerging economies, and further explores how to effectively manage such risk. By revealing the evolution of macrofinancial risks under external shocks and the efficient control tools for identifying the risks of capital flows, it is of great theoretical significance and practical value for emerging economies to identify, manage, and prevent the impact of global capital shocks.

Conclusion

Since the 1990s, the process of economic globalisation has accelerated. Emerging economies have gradually assimilated into the global financial market, growing in popularity with foreign capital that prefers the better growth prospects of emerging economies to advanced economies that have finished industrializing. Although international portfolio capital inflows have helped fuel the market boom, they have also caused some worry about the emerging economies’ financial stability. Emerging economies’ growth is significantly influenced by foreign capital. Open capital accounts in emerging economies make them particularly susceptible to significant shifts in international capital flows, which can either precipitate financial crises there or have a more muted resolution [58]. To explore how international portfolio investment flows affect macrofinancial risk in emerging economies and how to manage this risk effect, this paper develops macrofinancial risk indicators by using contingent claims analysis and the entropy-based TOPSIS method to conduct this study, empirically investigates the short- and long-term effects of international portfolio investment and macrofinancial risk by using a panel distribution lag model, and investigates how capital flow affects the management of macrofinancial risk under capital flow from the standpoint of foreign exchange reserves and capital control by using a panel threshold model.

This paper demonstrates, through an examination of the relationship between macrofinancial risk and international portfolio investment flows, that international portfolio investment flows will increase the macrofinancial risk of emerging economies in the short term but reduce it in the long term. From the perspective of the components of international portfolio investment, high-risk and speculative international speculative capital will have a negative effect on the real economy [51]. Furthermore, this paper examines the management effects of foreign exchange reserves and capital control to mitigate the damage that the risk may cause. This paper argues that foreign exchange reserves can play a positive moderating role in international portfolio flow and macrofinancial risk, but only to a limited extent. Capital controls are tougher, but risk controls work well. Both foreign exchange reserves and capital control have effective risk management capabilities. When equity capital flows frequently, capital control works better at managing macrofinancial risk.

Abstract

Empirical studies found that earnings management (EM) explains firms’ cost of capital both in companies in emerging and developed countries, but until now, it has not been analyzed whether the effect of EM on the financial cost is different among emerging countries inside or outside an economic area (Eurozone). Our results show that the cost of debt and the idiosyncratic component of the cost of equity are related to discretionary accruals and abnormal values of operating cash-flows, that the emerging country effect is more relevant on the cost of debt, that there is a Eurozone effect that makes discretionary accruals more relevant than abnormal values of operating cash-flow and that firms in emerging countries inside the Eurozone benefit from a lower EM penalty on the cost of debt than firms in other emerging European countries.

INTRODUCTION

The literature shows that cost of capital for companies in emerging countries is higher than that for companies in developed countries (González-Sánchez, 2022; Narayan et al., 2014). This means that investments in emerging countries have to achieve higher returns to compensate for this extra financial cost. In this context, our aim is to test whether the earnings management (EM) explains this extra financial cost of capital and, if the EM effect is different for companies in emerging countries if the country is inside or outside of Eurozone.

EM is the ability of the company’s management to manipulate the company’s results, with the intention of obtaining some private gain, but reducing the quality of financial reporting. The literature has analyzed whether EM has a negative impact on the quality of financial reporting, which may reduce the value of the company, causing stakeholders to lose confidence. More specifically, EM has also been analyzed in relation to issues such as the supervisory role of the majority owner in mitigating managers’ opportunistic behavior in EM (Mellado & Saona, 2005), insider trading (Sawicki & Shrestha, 2008), mergers and acquisitions (Zhu & Lu, 2013), debt issuance (Mellado et al., 2017), or bankruptcy risk (Agustia et al., 2020).

CONCLUSIONS

Empirical evidence shows that the financial cost of companies in emerging countries is higher than that of companies in developed countries. In this context, we test whether this difference is due to the way creditors and investors take into account EM in both types of companies or whether their interpretation of earnings manipulation is independent of the extra financial cost in emerging versus developed countries. Our main objective is to study whether there is a different effect for companies in the Eurozone and whether, as a consequence, companies from emerging countries inside the Eurozone have a different effect than other companies from emerging European countries outside the Eurozone.

To study this differential effect, we built a database composed of 4514 companies from 16 developed countries and 3399 companies from 21 emerging countries. The novelty of our sample is that all countries belong to the same geographical area (Europe), so that implicitly the economic, social, and cultural relations (among others) should not show substantial differences in the way EM explains financial cost. Moreover, by including in the sample developed and emerging countries that share a common regulatory framework and a common currency (euro), this difference should be nonexistent. The sample period is from 2012 to 2020.