The financial conservatism of firms in emerging economies

Machokoto, M., Chimwemwe, C., Aftab, N. and Areneke, G. (2021) The financial conservatism of firms in emerging economies. Research in International Business and Finance. 58 0275-5319.

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Abstract:

Using a large sample of emerging market firms over the period 1980-2015, we document a high prevalence and persistence of financial conservatism. Specifically, 31% of the African firms have ultra-low leverage (less than 5%), with 42% and 11% having non-positive net debt (total debt less cash) and no debt (zero-levered), respectively. In further analyses, we find that macroeconomic conditions have a muted effect on financial conservatism. Our results suggest that financial conservatism in the emerging market context is due to two main factors; (1) credit constraints, and (2) the desire to attain or enhance financial flexibility. The former highlights the need for pro-market policies that improve access to external finance. At the same time, the latter, which points to the accumulation of cash reserves at the expense of current investments, is a strategic choice aimed at preserving or enhancing financial flexibility. Our results are robust to using alternative sub-sampling approaches, model specifications, definitions of variables and estimation techniques.

Uncontrolled Keywords:

/dk/atira/pure/sustainabledevelopmentgoals/decent_work_and_economic_growth

Creators:

Machokoto, M., Chimwemwe, C., Aftab, N. and Areneke, G.

Faculties, Divisions and Institutes:

Faculties > Faculty of Business & Law > Accounting & Finance

Date:

8 July 2021

Date Type:

Publication

Journal or Publication Title:

Research in International Business and Finance

Volume:

Number of Pages:

Language:

English

ISSN:

0275-5319

Status:

Published / Disseminated

Refereed:

Yes