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on Financial Development and Growth |
| By: | Dioum, Sokhna Bousso |
| Abstract: | In this article, a non-linear approach is used to examine the effects of developing financial structures on the economic growth of West African states. To do this, we use the MMG-system to estimate quadratic models such as those proposed by Gambarta et al. (2014) for dynamic panels. Over the period [1998-2017], we show on the one hand that the marginal effect of the banking industry on economic growth increases initially, reaches a maximum and then gradually decreases. This demonstrates a non-linear relationship between increased banking activities and economic growth within the community, and confirms the findings of Hou and Cheng (2017) with low-income countries. On the other hand, a widening of capital markets positively affects the economic growth of West African countries. Overall, our study shows that the main contribution to weakening growth comes from increased banking activities and not from greater investor access to markets. To ensure stable growth, the West African authorities should focus on supporting expanding markets, strengthening liquidity and moderately controlling banking activities. Also, governments should encourage the writing of scientific articles. |
| Keywords: | Economic growth, financial development, banking sector, financial market, production of scientific articles. |
| JEL: | G21 O16 O30 O40 |
| Date: | 2021–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:106855&r=all |
| By: | Yan Ji; Songyuan Teng; Robert Townsend |
| Abstract: | We develop a heterogeneous-agent model with local spatial markets to study the relationships among bank expansion, growth, and inequality. In the model, households choose their occupations, consumption, and holdings of loans and portfolio assets that vary by liquidity. Banks choose the locations of new branches, which affect the financial frictions facing households across regions. We calibrate the model using a geographic information system to evaluate the rapid bank expansion in Thailand between 1986-1996. The model quantifies the sources of growth and inequality over time and across space and the potential role of digital banking in substantially reducing regional heterogeneity. |
| JEL: | C54 E23 E44 F43 O11 O16 R11 R13 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28582&r=all |
| By: | Inderst, Georg |
| Abstract: | This report discusses key issues around the mobilization of private capital for development. Investment requirements are huge, especially for infrastructure, climate and other SDG-related investments. External finance for developing countries stagnated in the years before the pandemic, followed by a major setback in 2020/2021. The focus is in particular on institutional investors, whose exposure to less-developed countries is still very low, even more so in unlisted assets and projects. There is a potential for progress as asset owners seek new diversification opportunities in growth markets. The main burden is on governments to create favourable business conditions for investable long-term assets. Policy makers, development finance institutions and investors should utilize the full spectrum of investment vehicles - commercial, impact and blended finance. |
| Keywords: | development finance,private capital,institutional investors,SDG investing,emerging markets,multilateral development banks,blended finance,infrastructure investment,development finance institutions,asset owners,impact investment |
| JEL: | F21 F3 G15 G18 G2 H54 H57 J32 L9 M14 O16 O18 O19 Q01 Q5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:232266&r=all |
| By: | Nadar, Anand |
| Abstract: | This research investigates the causality between FDI and GDP per capital in the context of India. Using WDI data from 1970-2019, We applied two types of Granger causality tests: long-run causality and shortrun causality tests. For the long-run causality, we applied pairwise Granger causality test, and for shortrun, we performed the Wald test approach under VECM (Vector Error Correction Model). The long-run causality test indicates that there is a unidirectional causality running from FDI to GDP per capita, implying that FDI causes the GDP per capita to change and not vice-versa. The short-run causality test indicates that there is no causality between FDI and GDP per capita, suggesting that, in the short-run, FDI and GDP per capita does not cause each other. The central policy conclusion from this study is that although FDI does not cause GDP per capita in the short-run, it causes in the long-run. Therefore, according to our study, India should attract FDI to sustain a long-run growth of GDP per capita. |
| Keywords: | GDP per capita; Granger causality; FDI; India; VECM |
| JEL: | F0 F1 F2 |
| Date: | 2021–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:106826&r=all |
| By: | Mupenda, Olivier Munene |
| Abstract: | Unsustainable debt reduces productivity of a country. Ten years following its “1960 independence”, the Democratic Republic of Congo adopted policies of resorting to external financing while the world was at the peak of the petro-dollar crisis in the 1970’s. A decade later, in the 1980’s, with the fall in price of raw materials, the Democratic Republic of Congo was trapped in an unsustainable debt burden cycle that saw its economy stagnating with the majority of its population living in extreme poverty with less than US$1.90 a day according to the World Bank. The rise of active armed conflicts in the 1990’s and political unrest during the 2000's added pressures to seek further financial support from creditors, which facilitated corruption and poverty in the process. A country's inability to service its debt has consequences on its population. With empirical evidence, our analysis will be looking at the Congolese standard of living from its independence in 1960 to the historical democratic transfers of power in late 2018 to understand the effects of external debts in the Congolese economic growth. |
| Keywords: | Growth, Economy and Debt in the Democratic Republic of Congo |
| JEL: | A1 A10 C0 H12 O49 Y4 Y5 |
| Date: | 2021–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105724&r=all |
| By: | Wanniarachchi, Sasindu Lakruwan (Central Bank of Sri Lanka) |
| Abstract: | Over the past few years, external debt positions of South Asian economies have increased to alarming levels, indicating that those countries are more likely to be exposed to a debt crisis. Given the low domestic savings rate of these economies, they are increasingly compelled to invest significant resources in public infrastructure in order to maintain sustainable growth momentum. At the same time, those countries are invited to enrich by integrating with global synergies in the fields of maritime, trade, and financial initiatives. However, as the recent controversy over the debt-growth association is inconclusive to date; preserving the external debt exposures at an optimal level is incumbent. Consequently, this study reviews annual observations of independent cross-sections of South Asia during the period 1981-2017 in order to find the external debt-growth relationship. In addition, the quantitative research strategy used to measure the expected outcomes primarily consists of panel ARDL specifications. On aggregate levels of data, the results suggest that there is a statistically significant negative association between external debt and economic growth. Also, it has been observed that a significant nonlinear relationship exists in relation to lower-middle income countries. |
| Date: | 2020–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:ghfdb&r=all |
| By: | Andrés Gutierrez Villca (UMSA) |
| Abstract: | Este estudio identifica los determinantes de la Productividad Total de Factores (PTF) de América del Sur haciendo uso de técnicas econométricas de datos panel con la aproximación de diversos indicadores económicos, institucionales, tecnológicos y sociales. Entre los principales resultados se destacan la fuerte contribución a la PTF de los términos de intercambio, el ahorro, la apertura externa, el salario real, la inversión extranjera. En cuanto al capital humano presentan efectos positivos, pero de magnitud reducida, expresándose en la baja formación y capacitación de los trabajadores. Los entornos institucional y tecnológico, reportan efectos positivos de magnitud reducida. La volatilidad de los términos de intercambio, la informalidad, la desigualdad, la fertilidad, reportan efectos negativos de magnitudes altas. Por país se identifica que las economías que incrementaron sus dotaciones de capital humano y fortalecimiento del entorno institucional, aumentaron su productividad eficientemente, por el contrario, las economías que no presentaron mejoras en dichas áreas fueron rezagando su productividad. En una retrospección histórica 1976 a 2015, la contribución de la PTF al crecimiento económico regional fue marcado preeminentemente por el comportamiento de los términos de intercambio. |
| Keywords: | Productividad Total de Factores, Crecimiento Económico. |
| JEL: | B23 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:iad:wpaper:0119&r=all |
| By: | Trofimov, Ivan D. |
| Abstract: | This paper examines the effects of public capital and government final consumption expenditure on the rate of profit in the productive sectors of the OECD economies over the period of 1977-2006. Public capital (expressed as a proportion of private capital) is considered in a multivariate setting, alongside other determinants of profit. The panel cointegration and panel vector autoregressive (PVAR) models are used to remedy the shortcomings of the time series analyses in the short samples and the stationary data panel models. The study demonstrates the absence of cointegration between the variables, but the positive and significant effects of public capital that are particularly manifest in the short-run, as well as the negative and insignificant impact of overall government consumption expenditure. The paper highlights the importance of public capital for macroeconomic outcomes, the relevance of the real channels of fiscal policy, and the non-neutrality of the type of government expenditure for economic outcomes. |
| Keywords: | Public capital, profit, panel data |
| JEL: | C23 E22 H54 |
| Date: | 2020–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:106848&r=all |
| By: | Pedro Bento (Texas A&M University, Department of Economics); Sunju Hwang (Texas A&M University, Department of Economics) |
| Abstract: | The number of black-owned businesses in the U.S. has increased dramatically since the 1980s, even compared to the number of non-black-owned businesses and the rise in black labor-market participation. In 1982 less than 4 percent of black labor-market participants owned businesses, compared to over 14 percent of other participants. By 2012 more than 16 percent of black participants owned businesses while the analogous rate for non-black participants increased to only 19 percent. This and other evidence suggest black entrepreneurs have faced significant barriers to starting and running businesses and these barriers have declined over time. We examine the impact of these trends on aggregate output and welfare. Interpreted through a model of entrepreneurship, declining barriers led to a 2 percent increase in black welfare, a 0.7 increase in output per worker, and a 0.7 decrease in the welfare of other labor-market participants. These impacts are in addition to any gains from declining labor-market barriers. |
| Keywords: | black, minority, distortions, entrepreneurship, business dynamism, misallocation, aggregate productivity, economic growth. |
| JEL: | E02 E1 J7 J15 O1 O4 |
| Date: | 2021–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:txm:wpaper:20210324-001&r=all |
| By: | Luke Hartigan (Reserve Bank of Australia); Michelle Wright (Reserve Bank of Australia) |
| Abstract: | We apply the growth-at-risk framework to the Australian economy. This allows us to estimate how important current financial conditions are in explaining future downside risk to key macroeconomic variables. As such, it provides a way to quantify the economic costs of financial instability. In order to implement this framework, we develop a new financial conditions index for Australia and show that it correlates closely with previous episodes of financial instability. We find that more restrictive financial conditions play an important role in explaining downside risk to growth in both GDP and employment and upside risk to changes in the unemployment rate. Our measure of financial conditions is, however, less useful for explaining risks to growth in household consumption and business investment. Overall, the framework provides a useful characterisation of the relationship between financial stability and economic activity in Australia. |
| Keywords: | downside risk; dynamic factor model; financial conditions; quantile regression |
| JEL: | C32 C53 C55 E27 E32 E44 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2021-03&r=all |
| By: | Sigurd Galaasen; Rustam Jamilov; Hélène Rey; Ragnar Juelsrud |
| Abstract: | What is the impact of granular credit risk on banks and on the economy? We provide the ?rst causal identi?cation of single-name counterparty exposure risk in bank portfolios by applying a new empirical approach on an administrative matched bank-?rm dataset from Norway. Exploiting the fat tail properties of the loan share distribution we use a Gabaix and Koijen (2020a,b) granular instrumental variable strategy to show that idiosyncratic borrower risk survives aggregation in banks portfolios. We also ?nd that this granular credit risk spills over from affected banks to ?rms, decreases investment, and increases the probability of default of non-granular borrowers, thereby sizably affecting the macroeconomy. |
| Keywords: | granular credit risk, credit concentration, granular borrowers, large exposures regulation, granular instrumental variable, granular hypothesis |
| Date: | 2020–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2020_15&r=all |
| By: | Víctor A. Beker |
| Abstract: | The main issue addressed in this paper is whether a new financial crisis can be avoided. After reviewing the key elements that were present in the 2007/2009 financial crisis, there is an analysis of the regulatory reforms which took place during and after the financial meltdown. The role played in it by the shadow banking system and the regulatory reforms dealing with it deserve particular attention. The regulatory reforms are assessed in the context of systemic risk and run vulnerability in order to recommend what should be done to prevent a new financial crisis from happening. A revision of what has already been done and what should be done in micro and macroprudential regulation completes the paper. The main conclusions are: 1) A key issue to avoid a new financial crisis is to prevent an excessive concentration of loans in any one sector, region or kind of assets of the economy. 2) The role of the central bank as lender of last resort should be reassessed in light of the experience of what has been done in the context of the COVID 19 pandemic. 3) In order to prevent managers from taking excessive risks using other people´s money, managerial compensation schemes should be changed. 4) Issues which have to do with the conflict of interests in the credit rating agencies are still waiting for better regulation. |
| Keywords: | financial crisis, shadow banking system, micro-prudential regulation, macroprudential regulation, lender of last resort, dealer of last resort. |
| JEL: | G01 G21 G23 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4309&r=all |
| By: | Hamid R Davoodi; Peter J Montiel; Anna Ter-Martirosyan |
| Abstract: | We survey the literature on the relationship between macroeconomic stability and inclusive growth and identify gaps in our knowledge. We examine the role of macroeconomic policies (fiscal, monetary, macroprudential, and exchange rate) and measures of inclusiveness (income inequality, consumption inequality, wealth inequality, poverty, and unemployment) across countries at different income levels. Avoiding procyclical macroeconomic policies and mitigating macroeconomic volatility should be on the agenda of all policymakers concerned with promoting inclusive growth. The emerging theory and evidence suggest a strong role for macroeconomic policies in shaping inclusive growth, both in the short-run and the long-run. The two-way relationship between the macroeconomy and inequality underscores the challenge of identifying and estimating causal relationships. Models with heterogeneous agents have much to offer in this area. |
| Date: | 2021–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/081&r=all |
| By: | Ingholt, Marcus Mølbak |
| Abstract: | I explore the macroeconomic implications of borrowers facing both loan-to-value (LTV) and debt-service-to-income (DTI) limits, using an estimated DSGE model. I identify when each constraint dominated over the period 1984-2019: LTV constraints dominate in contractions, when house prices are relatively low – and DTI constraints dominate in expansions, when interest rates are relatively high. I also find that DTI standards were relaxed during the mid-2000s’ boom, and that lower DTI limits or higher interest rates, but not lower LTV limits, would have prevented the boom. Finally, county panel data attest to multiple credit constraints as a source of nonlinear dynamics. |
| Keywords: | multiple credit constraints, nonlinear estimation of DSGE models, state-dependent credit origination |
| JEL: | C33 D58 E32 E44 |
| Date: | 2020–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2020_10&r=all |
| By: | O'Brien, Martin (Central Bank of Ireland); Velasco, Sofia (Central Bank of Ireland) |
| Abstract: | This paper develops a multivariate filter based on an unobserved component trend-cycle model. It incorporates stochastic volatility and relies on specific formulations for the cycle component. We test the performance of this algorithm within a Monte-Carlo experiment and apply this decomposition tool to study the evolution of the financial cycle (estimated as the cycle of the credit-to-GDP ratio) for the United States, the United Kingdom and Ireland. We compare our credit cycle measure to the Basel III credit-to- GDP gap, prominent for its role informing the setting of countercyclical capital buffers. The Basel-gap employs the Hodrick-Prescott filter for trend extraction. Filtering methods reliant on similar-duration assumptions suffer from endpoint-bias or spurious cycles. These shortcomings might bias the shape of the credit cycle and thereby limit the precision of the policy assessment reliant on its evolution to target financial distress. Allowing for a flexible law of motion of the variance covariance matrix and informing the estimation of the cycle via economic fundamentalsweare able to improve the statistical properties and to find a more economically meaningful measure of the build-up of cyclical systemic risks. Additionally, we find a large heterogeneity in the drivers of the credit cycles across time and countries. This result stresses the relevance in macro prudential policy of considering flexible approaches that can be tailored to country characteristics in contrast to standardized indicators. |
| Keywords: | Credit imbalances, cyclical systemic risk, financial cycle, macroprudential analysis, multivariate unobserved-components models, stochastic volatility . |
| JEL: | C32 E32 E58 G01 G28 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:09/rt/20&r=all |
| By: | Plamen K Iossifov; Tomas Dutra Schmidt |
| Abstract: | We analyze a range of macrofinancial indicators to extract signals about cyclical systemic risk across 107 economies over 1995–2020. We construct composite indices of underlying liquidity, solvency and mispricing risks and analyze their patterns over the financial cycle. We find that liquidity and solvency risk indicators tend to be counter-cyclical, whereas mispricing risk ones are procyclical, and they all lead the credit cycle. Our results lend support to high-level accounts that risks were underestimated by stress indicators in the run-up to the 2008 global financial crisis. The policy implications of conflicting risk signals would depend on the phase of the credit cycle. |
| Keywords: | Credit cycles;Liquidity risk;Solvency;Systemic risk;Private debt;credit cycle.,WP,risk metrics,risk index,risk indices,solvency risk,interest rate,mispricing risk |
| Date: | 2021–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/028&r=all |
| By: | Daniel L. Greenwald; Matteo Leombroni; Hanno Lustig; Stijn Van Nieuwerburgh |
| Abstract: | Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with lower returns on financial wealth, households with high levels of financial wealth must increase savings to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for household welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard incomplete markets model reproduces the observed increase in financial wealth inequality in response to a decline in real interest rates because high financial-wealth households have a financial portfolio with high duration. |
| JEL: | E01 E1 E21 E24 E25 E44 G11 G5 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28613&r=all |
| By: | Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (SGH Warsaw School of Economics; Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics) |
| Abstract: | This paper investigates the distributional consequences of monetary policy across generations. We use a life-cycle model with a rich asset structure as well as nominal and real rigidities calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. We show that the life-cycle profiles of income and asset accumulation decisions are important determinants of redistributive effects of monetary shocks and ignoring them can lead to highly misleading conclusions. The redistribution is mainly driven by nominal assets and labor income, less by real and housing assets. Overall, we find that a typical monetary policy easing redistributes welfare from older to younger generations. |
| Keywords: | monetary policy, life-cycle models, wealth redistribution |
| JEL: | E31 E52 J11 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2021-03&r=all |
| By: | Callum Jones; Pau Rabanal |
| Abstract: | We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit. |
| Date: | 2021–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/043&r=all |
| By: | Shereen Attia (Independent Researcher) |
| Abstract: | The paper investigates at first factors that affect developing countries access to international capital markets. Then, we investigate whether MENA countries have different determinants compared to other developing regions for a subsample of countries in the MENA region. The objective is to explore why MENA has been unsuccessful in securing for itself a significant share of financial flows proportional to its size and the limited ability to tap the international capital markets more frequently relying heavily on other sources of finance. Our findings indicate strongly significant for country-specific variables such as GDP (proxy for size) and debt levels. The findings show that trade openness and GDP per capita, which measures links of a given country with the world and vulnerability, respectively, have a different impact on MENA. While, we find that external factors have no significant impact on private capital inflows into MENA. This imply that MENA is different in the sense that domestic policies affect financial inflows into region and not the external factors. This lend evidence to the importance of domestic policies as an important determinant of MENA’s access into international capital market. The findings also show that a decline to country risk characteristics would decrease inflows which lends evidence to the importance of institutional quality and country creditworthiness as an important determinant of market access. |
| Date: | 2021–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:1468&r=all |
| By: | Jos\'e Miguel Flores Contr\'o; Kira Henshaw; Sooie-Hoe Loke; S\'everine Arnold; Corina Constantinescu |
| Abstract: | In this article, we consider a compound Poisson-type model for households' capital. Using risk theory techniques, we determine the probability of a household falling under the poverty line. Microinsurance is then introduced to analyse its impact as an insurance solution for the lower income class. Our results validate those previously obtained with this type of model, showing that microinsurance alone is not sufficient to reduce the probability of falling into the area of poverty for specific groups of people, since premium payments constrain households' capital growth. This indicates the need for additional aid particularly from the government. As such, we propose several premium subsidy strategies and discuss the role of government in subsidising microinsurance to help reduce poverty. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2103.17255&r=all |
| By: | Purva Khera; Stephanie Y Ng; Sumiko Ogawa; Ratna Sahay |
| Abstract: | Adoption of technology in the financial services industry (i.e. fintech) has been accelerating in recent years. To systematically and comprehensively assess the extent and progress over time in financial inclusion enabled by technology, we develop a novel digital financial inclusion index. This index is based on payments data covering 52 developing countries for 2014 and 2017, taking into account both access and usage dimentions of digital financial services (DFSs). This index is then combined with the traditional measures of financial inclusion in the literature and aggregated into an overall index of financial inlusion. There are two key findings: first, the adoption of fintech has been a key driver of financial inclusion. Second, there is wide variation across countries and regions, with the greatest progress recorded in Africa and Asia and the Pacific regions. This index should offer a useful analytical tool for researchers and policy makers. |
| Date: | 2021–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/090&r=all |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Peter Agyemang-Mintah (Abu Dhabi, United Arab Emirate); Rexon T. Nting (London, UK) |
| Abstract: | This study investigates how the rule of law (i.e. law) modulates demand- and supply-side drivers of mobile money to influence mobile money innovations (i.e. mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money) in developing countries. The following findings from Tobit regressions are established. First, from the demand-side linkages, law modulates: (i) bank accounts and automated teller machine (ATM) penetration for negative interactive relationships with mobile money innovations and (ii) bank sector concentration for a positive interactive relationship with mobile money accounts. Second, from supply-side linkages, law interacts with: (i) mobile subscriptions for a negative relationship with the mobile phone used to send money; (ii) mobile connectivity coverage for a negative nexus on the mobile phone used to receive money and (iii) mobile connectivity performance for a negative influence on the mobile phone used to send/receive money. Policy implications are discussed in the light of enhancing the rule of law as well as improving mobile phone subscription, connectivity and performance dynamics. |
| Keywords: | Mobile money; technology diffusion; financial inclusion; inclusive innovation |
| JEL: | D10 D14 D31 D60 O30 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:21/021&r=all |
| By: | Abdullah, Hariem; Tursoy, Turgut |
| Abstract: | This study attempts to empirically investigate the reverse causality between firm performance and capital structure for German listed firms in the non-financial sectors over the period 1993-2016. We measure firm performance based on both financial and market indicators while capital structure is measures by leverage ratio of total debt to assets. In addition to two-step GMM estimator, panel causality test of Dumitrescu and Hurlin (2012) is performed to specify the causality direction of causation. The findings provide evidence for the existence of homogeneous causality between capital structure and the two selected proxies of firm performance. Financial performance and financial leverage can positively affect each other. Capital structure could negatively determine market performance whereas stock price has a positive influence on leverage ratio. Our results rather support trade-off theory, probably indicating that non-financial firms in Germany bear more debt to benefit from tax shield. |
| Keywords: | firm performance, capital structure, panel causality, and Germany |
| JEL: | G3 |
| Date: | 2021–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105871&r=all |