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

     A randomized experiment among poor entrepreneurs tested the impact of exogenously inducing higher financial aspirations. In theory, raising aspirations could have positive effects by inducing higher effort, but could also reduce effort if unmet aspirations lead to frustration. Treatment resulted in more ambitious savings goals, but nearly all individuals fell far short of reaching these goals. Two years later, treated individuals had not saved more, and actually had lower borrowing and business investments. Treatment also reduced belief in the amount of control over one’s life. Setting aspirations too high can lead to frustration, leading individuals to reduce their economic investments.

Introduction

     Can raising the aspirations of the poor help them escape poverty? Theoretically, sub-optimally low aspirations could arise through a behavioral bias (Dalton et al., 2016). Aspirations spur individuals to work harder, but when determining their effort level, people fail to account for how realized outcomes will affect future aspirations and hence future effort. This “aspirations failure” may cause a behavioral poverty trap: poverty begets lower aspirations, which keeps individuals in poverty. In the absence of other binding constraints, simply inducing the poor to set higher aspirations can help them break out of the poverty trap. This “mindset” approach has been the focus of bestselling financial self-help books such as Secrets of the Millionaire Mind (Eker, 2005) and Rich Dad, Poor Dad (Kiyosaki, 2017). In the developing country context, Ray (1998) was first to highlight the potential for poverty traps due to sub-optimally low aspirations (see also Appadurai (2004), Ray (2006), Duflo (2012) and Lybbert and Wydick (2018)).

     There is, however, a potential downside to encouraging higher aspirations. If aspirations are set too high, individuals may fail to reach their goals, and become frustrated. This frustration could lead people to reduce their economic investments (Genicot and Ray, 2017, 2020). Furthermore, frustration could have lasting negative consequences if it affects consequential psychological factors, such as the perceived ability to control one’s life outcomes.

Conclusions

     Encouraging small-scale entrepreneurs to increase their financial aspirations did lead individuals to set higher savings goals, but most individuals failed to achieve their goals. Two years after the treatment, treated individuals had no higher savings, and – strikingly – were borrowing substantially less (in total and from the partner microfinance institution). The aspirations treatment also led to lower business investment. Genicot and Ray (2017, 2020) emphasize that, in theory, setting higher aspirations may lead to higher economic investments, but failure to achieve aspirations may lead to frustration, and a decline in economic investments. Our results provide empirical support for this theory. Aspirations should therefore be set high, but not too high. The aspirations treatment we study may have set individuals’ goals too high to be achievable, leading to discouragement and a decline in investments. We also find that the aspirations treatment reduced internal locus of control. This is an outcome of interest in itself, and it may also be an additional mechanism through which the ultimate negative impacts on investment arose.

     Our findings also highlight important ethical considerations for development programs as well as research studies that seek to raise aspirations. When we initiated this study in 2012, there was little recognition in the aspirations literature that an intervention raising aspirations could potentially have a negative effect. In the subsequent decade, the theoretical literature (Genicot and Ray, 2017, 2020) and non-experimental studies (Janzen et al., 2017, Bloem, 2021) highlighted the possibility that aspirations could have negative effects if they are set too high. Our findings, providing causal evidence based on a randomized controlled trial, should considerably strengthen concerns that aspirational interventions could have negative effects in practice.

1- Introduction

2- Methods

3- Results

4- Discussion

5- Conclusions and ways forward

References

Abstract

Designing optimal financial products for rural households in poor countries remains a challenge, especially in a risk management perspective in disaster-prone areas. In addition to financial intermediaries’ difficulties with reaching potential customers efficiently, information asymmetries prevent fully understanding customers and developing suitable products for them. The clientele’s weak information systems, coupled with cultural aspects often unfamiliar to the supplier of financial services, make the analysis difficult and costly. This article builds on a financial statement approach to empirically explore the combination of farmers’ financial and non-financial strategies, in a portfolio risk management perspective, with a focus on shock-type risk exposure. It emerges that farmers’ decisions follow a sequential process with different combinations of savings, credit, and insurance that interact with non-financial strategies to help managing risks. The study relies on panel data collected in Ethiopia. The empirical analysis confirms the vulnerability of sample households to natural systemic shocks and entails that the conclusions of this paper can be considered part of the broad literature on the disaster risk management of low-income households.

CONCLUSIONS AND WAYS FORWARD

This article was inspired by the use of a conceptual framework based on a portfolio approach to study rural households’ risk management strategies and had a particular interest in the potential demand for insurance. The structure of the sample shows that, while several risks are affecting the households, a large percentage of the interviewees declared to suffer of disastertype events: droughts and floods. The outcome of the current analysis confirms the results of previous, simplified, attempts to prove that although insurance is often considered an alternative measure to farmers’ own riskcoping strategies, it may be a complementary solution. The information obtained by using a system analysis (in this case, the SURE methodology) is that the main dimensions of a portfolio approach to risk management can be analysed in their reciprocal relationships. Based on the findings, insurance and savings decisions are affected by the overall composition of risk management strategies (savings, insurance, loans, livestock), and borrowing decisions depend on all factors but savings. Another finding is that the direction of the influence in some cases is constant (always positive, suggesting complementarity), and in other cases, the direction changes according to the sequence of the portfolio choice. This phenomenon is evident in the case of borrowing.

Introduction

Investment decisions differ from other decision types by the level of risk associated (Dorn and Huberman 2010). They usually involve higher levels of risk than other kinds of purchase decisions (Noussair et al. 2014). This risk factor in financial decisions makes return and loss an issue for investors more than for other consumer types. The factors which have important implications on financial decisions at a microlevel include heuristics, which are the cognitional or emotion-based biases or simplifying decision rules for investment decisions (Hauser 2014; Mousavi and Gigerenzer 2014). Empirical studies indicate that about 50% of people intuitively rely on heuristics (Huberman and Wei 2006). Examples of these heuristics include availability bias, overconfidence, endowment bias, cognitive dissonance and framing bias (Pompian 2006). At a macrolevel, on the other hand, corporate brands and such brand-related variables as brand equity, reputation, performance and trust govern financial decisions as brands gain increasingly more importance not only for customers but also for stakeholders including investors (Aspara 2013; Fischer and Himme 2016). Besides these corporate brands, stock markets, or stock exchanges as a manifestation of the financial market, are considered to have significant impacts on investor decisions by means of the overall brand equity that they resonate for their actual and potential investors. Thus, it is suggested that brand equity of a stock exchange might add to or detract from investors’ risk perception on the way to influence their investment intention. To the best of our knowledge, there has been little research on this perspective, i.e., the brand equity of stock exchange for individual investors as an important influencer in the relationship between risk and investment intention, and thus is worth investigating. The first section opens with the theoretical background. It later develops into the method used in the study. The last section includes the discussion of the results obtained, conclusion and practical implications and ends with the limitations and further research.

Abstract

Financial flexibility is a firm’s ability to deploy its financial resources to meet future financing needs. Flexibility-building firms’ financial decisions are geared toward building up financial flexibility — maintain low leverage by issuing equity in order to raise cash. As firms progress and start making investments, they utilize their financial resources — flexibility-utilizing firms increase debt and use reserved cash in order to exercise investment options. As more cash flows are generated and investment opportunities diminish, firms recharge their financial flexibility by repaying debt and increasing cash using internal funds. The findings have important implications for previously documented empirical regularities.

Identifying and financing investment opportunities are crucial to any successful corporation. Financial flexibility reflects a firm’s ability to deploy financial resources in response to future investment opportunities. Not surprisingly, corporate managers are most concerned about financial flexibility in their financial decisions.1 Yet, the empirical literature has not yet systematically explored the relation between the financial flexibility demand and corporate behavior. This study examines how the demand for financial flexibility affects firms’ financial decisions. A recent theoretical development provides a framework for understanding how a firm’s demand for financial flexibility drives financial decisions. Gamba and Triantis (2008) suggest that by managing their cash and capital structure policies, firms alleviate the impact of external financing costs on investments. Moreover, they find that the effect of financial flexibility on firm value is quite significant when constrained firms have high growth opportunities and low internal cash flows. Acharya, Almeida, and Campello (2007) also suggest that firms with low correlation between cash flows and investment opportunities have greater incentives to transfer resources into future states. DeAngelo et al. (2011) develop a model in which firms preserve the ability ex ante to access the capital market ex post in the event of unexpected cash flow shortfalls or investment opportunities.

Several global trends contribute to make financial planning at older ages increasingly challenging. Life expectancy is rising and, with it, the need for large savings to finance consumption over a longer horizon and guard against medical expenses. The progressive shift from definedbenefit to defined-contribution pensions has put more investment responsibility onto households. Recent developments in the public and private health insurance landscapes have made the task of selecting the “right” plan more daunting for seniors. In this scenario, cognitive decline that come with age may present a significant threat to older adults’ economic wellbeing. In this paper, we study the extent to which financial responsibility within the household is related to the relative cognitive ability of its members and examine the financial consequences of cognitive aging. Recent contributions in the economics literature indicate that cognitive measures contribute to explain heterogeneity in retirement wealth and asset holdings across individuals. Better cognitive skills correlate strongly with lifetime savings (Smith et al., 2010), stock market participation (Christelis et al., 2010) and portfolio diversification (Korniotis and Kumar, 2011). Agarwal and Mazumder (2013) observe that consumers with higher cognitive scores, especially math test scores, are significantly less prone to mistakes when using their credit cards or applying for a home equity loan. Agarwal et al. (2009) analyze life-cycle patterns in financial mistakes using a credit card transaction database and document that financial mistakes follow a U-shape pattern over the life course, with inexperience and cognitive decline being associated with poorer decisions at younger and older ages, respectively. This is consistent with the finding of Samanez-Larkin (2013) that risky financial mistakes at older ages are linked to broader network disruption in the brain which underlies losses in fluid cognitive ability. Hsu and Willis (2013) analyze the impact of information about cognitive decline on the choice of who is the household financial decisionmaker. They find that a new diagnosis of a memory-related disease significantly increases the odds that the management of finances is turned over to a cognitively intact spouse. Notably, this often happens well after difficulties handling money have already emerged. Building on this literature, we revisit the association of an individual’s cognitive ability with his/her status of household financial decision-maker and examine the extent to which cognitive declines lead to shifts in financial responsibility between couple members. Neurological studies show that dealing with simple math problems and handling financial matters are among the first skills to be affected by cognitive decline and mild cognitive impairment.