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Liquidity Constraints (liquidity + constraint)
Selected AbstractsLiquidity Constraints and Firms' Investment Return BehaviourECONOMICA, Issue 276 2002Parantap Basu We construct a production-based model, which compares the investment return behaviour of liquidity-constrained firms with that of unconstrained firms. The key testable implication that emerges from the model is that the investment returns of the constrained firms are predictable, while those of the unconstrained firms are not. We test this implication indirectly, verifying whether the capital stock and investment returns of the latter firms lead those of the former, and directly, via the estimation of an Euler equation. Our results are consistent with the model's prediction. [source] Liquidity constraints, access to credit and pro-poor growth in rural TanzaniaJOURNAL OF INTERNATIONAL DEVELOPMENT, Issue 7 2005Alex Winter-Nelson Small-scale farmers in developing countries may become trapped in poverty by lack of the liquidity needed to make profitable investments. Increased access to credit could generate pro-poor economic growth if poor households are otherwise liquidity-constrained and if liquidity-constrained households benefit from the new financial services. Using household data from rural Tanzania, this paper presents evidence that increased finance for liquidity-constrained households could generate pro-poor agricultural growth, but that general expansion of financial services to households that have no access to credit would not effectively target lower income households or households whose farm activities are liquidity-constrained. Copyright © 2005 John Wiley & Sons, Ltd. [source] Investment in Fixed Capital Stock: Testing for the Impact of Sectoral and Systemic Uncertainty*OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 2 2004Johannes Fedderke Abstract This paper applies current theory recognizing the irreversibility of investment, in order to test for the impact of uncertainty on investment expenditure for a middle income country. The contribution of the paper is unique in two respects. First, it employs dynamic heterogeneous panel estimation techniques not previously applied to investment functions. Secondly, it explicitly tests for the impact of both sectoral and systemic uncertainty on investment expenditure. We find that both sectoral (as measured by output volatility) and systemic uncertainty (as measured by political instability) have a negative impact on investment rates in a middle income country context. Liquidity constraints and growth in total factor productivity are found to have no impact on investment, while trade liberalization has the impact predicted by Heckscher-Ohlin trade theory. Finally, we find complementarity effects between physical capital and skilled human capital, suggesting that South African educational policies may have hampered investment in physical capital as well as the growth performance of the economy. Policy implications emphasize the importance of lowering uncertainty for investors, and the need for sound human capital investment. [source] Multiple equilibria in a cash-in-advance two-sector economyINTERNATIONAL JOURNAL OF ECONOMIC THEORY, Issue 2 2005Stefano Bosi C61; E32; E41 We consider a two-sector infinite horizon economy with a fractional cash-in-advance constraint on consumption expenditures. This formulation allows us to consider a steady-state velocity of money that is strictly greater than one and, therefore, provides a more plausible framework than the standard formulation in which all the consumption purchases are paid cash. We prove that the steady state is bound to be indeterminate and multiple equilibria occur when the share of the liquidity constraint is low enough and that a capital-intensive investment good or a strongly capital-intensive consumption good improve considerably the scope for indeterminacy. As a consequence, we show that without any restriction on the elasticity of intertemporal substitution in consumption, multiple equilibria might occur if the velocity of money is greater than a critical bound that is compatible with empirical estimates. [source] Stock Index Futures Prices and the Asian Financial Crisis,INTERNATIONAL REVIEW OF FINANCE, Issue 3-4 2007TAUFIQ HASSAN ABSTRACT This study reports new findings on the behavior of index futures (FKLI: code name of Kuala Lumpur Index Futures contract) prices and also records the effect of a major financial crisis on the prices. Since the inception of trading in 1995, the FKLI has been selling at a discount, which gradually increased till early 1997; further, at the onset of the financial crisis in July 1997, FKLI prices were at a high premium relative to its theoretical values. This significant mispricing of the contract declined after the initial overreaction to the crisis. Herding behavior during crisis, liquidity constraint and imposition of trading restrictions are some plausible explanations for the mispricing. This study also investigates whether trades by foreign investors had any impact when compared with prices by domestic investors. We find that foreign investors had a negative influence on permanent price changes while the domestic investors had a positive effect. [source] Ownership Structure Changes in the Insurance Industry: An Analysis of DemutualizationJOURNAL OF RISK AND INSURANCE, Issue 3 2003Krupa S. Viswanathan This article focuses on the demutualization process and investigates why certain mutuals undergo this organizational structure change. The primary motivation for conversion is access to capital. By statute, mutual firms are limited in their capital-raising activities while stock firms can attract funds through a variety of stock and debt offerings. By examining the financial characteristics of firms that demutualize, changes in business practices in the years surrounding conversion can be observed. Determinants of the conversion decision are explored through logistic regression. In the years before demutualization, converting property-liability mutuals exhibit significantly lower surplus-to-asset ratios. This capital constraint eases after demutualization. Converting life-health mutuals hold a significantly lower proportion of liquid assets; in addition, they have a higher proportion of separate accounts under management. This liquidity constraint and increased focus on a higher managerial discretion activity drive the demutualization decision. For both property-liability and life-health converting mutuals, support for the access to capital hypothesis is found. [source] Liquidity risk and the hedging role of optionsTHE JOURNAL OF FUTURES MARKETS, Issue 8 2006Kit Pong Wong This study examines the impact of liquidity risk on the behavior of the competitive firm under price uncertainty in a dynamic two-period setting. The firm has access to unbiased one-period futures and option contracts in each period for hedging purposes. A liquidity constraint is imposed on the firm such that the firm is forced to terminate its risk management program in the second period whenever the net loss due to its first-period hedge position exceeds a predetermined threshold level. The imposition of the liquidity constraint on the firm is shown to create perverse incentives to output. Furthermore, the liquidity constrained firm is shown to purchase optimally the unbiased option contracts in the first period if its utility function is quadratic or prudent. This study thus offers a rationale for the hedging role of options when liquidity risk prevails. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:789,808, 2006 [source] Liquidity and Trading DynamicsECONOMETRICA, Issue 6 2009Veronica Guerrieri In this paper, we build a model where the presence of liquidity constraints tends to magnify the economy's response to aggregate shocks. We consider a decentralized model of trade, where agents may use money or credit to buy goods. When agents do not have access to credit and the real value of money balances is low, agents are more likely to be liquidity constrained. This makes them more concerned about their short-term earning prospects when making their consumption decisions and about their short-term spending opportunities when making their production decisions. This generates a coordination element in spending and production which leads to greater aggregate volatility and greater comovement across producers. [source] Liquidity Constrained Markets Versus Debt Constrained MarketsECONOMETRICA, Issue 3 2001Timothy J. Kehoe This paper compares two different models in a common environment. The first model has liquidity constraints in that consumers save a single asset that they cannot sell short. The second model has debt constraints in that consumers cannot borrow so much that they would want to default, but is otherwise a standard complete markets model. Both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates. In a stochastic environment, the two models have quite different dynamic properties, with the debt constrained model exhibiting simple stochastic steady states, while the liquidity constrained model has greater persistence of shocks. [source] The Wealth Effect on New Business Startups in a Developing EconomyECONOMICA, Issue 291 2006ALICE MESNARD The paper tests for nonlinearities in the wealth effect on self-employment, as can arise from startup costs or liquidity constraints. Using both nonparametric and parametric methods, we show that the relationship between the probability of a return migrant to Tunisia starting up a business and the stock of his savings repatriated at return is concave for almost the entire range of our data, though we find weak evidence of a convex relationship at very low wealth levels. Our results suggest that the aggregate self-employment rate is an increasing function of aggregate wealth, but a decreasing function of wealth inequality. [source] Cash Flow Sensitivity of InvestmentEUROPEAN FINANCIAL MANAGEMENT, Issue 1 2009Armen Hovakimian G30; G31; G32 Abstract Investment cash flow sensitivity is associated with both underinvestment when cash flows are low and overinvestment when cash flows are high. The accessibility of external capital is positively correlated with cash flows, intensifying investment cash flow sensitivity. Managers actively counteract the variations in internal and external liquidity by accumulating working capital when liquidity is high and draining it when liquidity is low. These results imply that cash flow sensitive firms face financial constraints, which are binding in low cash flow years. Traditional indicators of financial constraints, such as size and dividend payout, successfully distinguish firms that may potentially face constraints, but are less successful in distinguishing between periods of tight and relaxed constraints. These periods are much more clearly separated by the KZ index, which, on the other hand, is less successful in identifying firms that are likely to face liquidity constraints. [source] Corporate Bankruptcy in Korea: Only the Strong Survive?FINANCIAL REVIEW, Issue 4 2000Paola Bongini G30/G32/G33 Abstract We analyze whether the build-up of financial vulnerabilities led listed Korean companies to bankruptcy. We find that pre-crisis leverage is systematically high for both poor performing/slow growing firms and for profitable/fast-growing firms. Pre-crisis leverage raises the probability of bankruptcy, which is lower for firms: (1) relying more on (renegotiable) bank credit; (2) with less inter-firm debt; and (3) having higher interest coverage ratios. Finally, none of these liquidity variables help predict bankruptcies for chaebol-firms, suggesting that liquidity constraints are more stringent for non-chaebol. Thus, in a systemic crisis it is not only the strong/healthy that survive. [source] Unemployment and liquidity constraintsJOURNAL OF APPLIED ECONOMETRICS, Issue 3 2007Vassilis A. Hajivassiliou We present a dynamic framework for the interaction between borrowing (liquidity) constraints and deviations of actual hours from desired hours, both measured by discrete-valued indicators, and estimate it as a system of dynamic binary and ordered probit models with panel data from the Panel Study of Income Dynamics. We analyze a household's propensity to be liquidity constrained by means of a dynamic binary probit model. We analyze qualitative aspects of the conditions of employment, namely whether the household head is involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed, by means of a dynamic ordered probit model. We focus on the possible interaction between the two types of constraints. We estimate these models jointly using maximum simulated likelihood, where we allow for individual random effects along with an autoregressive process for the general error term in each equation. A novel feature of our method is that it allows for the random effects to be correlated with regressors in a time-invariant fashion. Our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply. Copyright © 2007 John Wiley & Sons, Ltd. [source] How Credit Access Has Changed Over Time for U.S. HouseholdsJOURNAL OF CONSUMER AFFAIRS, Issue 2 2003ANGELA C. LYONS The financial industry made a number of efforts throughout the 1990s to provide additional borrowing opportunities to households traditionally constrained by the credit markets. Using data from the Survey of Consumer Finances (SCF), this study investigates the degree to which household liquidity constraints relaxed between 1983 and 1998. The gap between actual and desired borrowing is estimated. The findings indicate that the ability of all households to obtain their desired debt levels increased after 1983 and most dramatically between 1992 and 1998. The findings hold true across all households regardless of permanent earnings, age, gender, or race. Those experiencing the greatest gains in credit access were black households and households with low permanent earnings. [source] Does fertilizer use respond to rainfall variability?AGRICULTURAL ECONOMICS, Issue 2 2010Panel data evidence from Ethiopia Fertilizer use; Rainfall; Highlands of Ethiopia; Panel data Abstract In this article, we use farmers' actual experiences with changes in rainfall levels and their responses to these changes to assess whether patterns of fertilizer use are responsive to changes in rainfall patterns. Using panel data from the Central Highlands of Ethiopia matched with corresponding village-level rainfall data, the results show that the intensity of current year's fertilizer use is positively associated with higher rainfall levels experienced in the previous year. Rainfall variability, on the other hand, impacts fertilizer use decisions negatively, implying that variability raises the risks and uncertainty associated with fertilizer use. Abundant rainfall in the previous year could depict relaxed liquidity constraints and increased affordability of fertilizer, which makes rainfall availability critical in severely credit-constrained environments. In light of similar existing literature, the major contribution of the study is that it uses panel data to explicitly examine farmers' responses to actual weather changes and variability. [source] Rural nonfarm activities and agricultural crop production in NigeriaAGRICULTURAL ECONOMICS, Issue 2 2009Gbemisola Oseni Nigeria; Rural nonfarm activities; Agricultural crop expenditures; Credit constraints Abstract Although most rural households are involved in the farm sector, the nonfarm sector has grown significantly in recent decades, and its role in rural development has become increasingly important. This article examines the effect of participation in nonfarm activities on crop expenses of farm households in Nigeria. The relationship is modeled using a nonseparable agricultural household model that suggests that participating in nonfarm activities can relax the credit constraints facing farm households and reduce risk thereby helping households improve farm production and smooth consumption over time. The results show that participation in nonfarm activities by Nigerian farmers has a positive and significant effect on crop expenses and in particular on payments for hired labor and inorganic fertilizers. Separate analysis of the six geopolitical zones in Nigeria indicates that it is in the South-South and South-East zones where nonfarm participation appears to induce more hiring of labor. The results support the hypothesis that nonfarm participation helps relax liquidity constraints but suggests how that liquidity is used is zone-specific. In general, the results also indicate that liquidity is used more to pay for inputs into staple production as opposed to cash crops. [source] Horticulture exports, agro-industrialization, and farm,nonfarm linkages with the smallholder farm sector: evidence from SenegalAGRICULTURAL ECONOMICS, Issue 2 2009Miet Maertens Farm,nonfarm linkages; Agri-food exports; Smallholder farming; Rural development Abstract In this article we address the question of farm,nonfarm linkages at the household level in Senegal. We examine whether increasing off-farm employment opportunities for rural households,resulting from increased horticulture exports and associated agro-industrialization,has benefitted the smallholder farm sector through investment linkages. We use data from a household survey in the main horticulture export region in Senegal. We find that access to unskilled employment in the export agro-industry has contributed to the alleviation of farmers' liquidity constraints, resulting in increased smallholder agricultural production. [source] Joint estimation of information acquisition and adoption of new technologies under uncertainty,JOURNAL OF INTERNATIONAL DEVELOPMENT, Issue 4 2008Awudu Abdulai Abstract This article develops a framework to examine households' joint decision to acquire information on new technologies and the adoption of the technology in the presence of uncertainty. The empirical application involved a sample of 406 dairy farmers in Tanzania. Education, scale of production, household size, age, and liquidity constraints are hypothesized to be the determinants of information acquisition and adoption decisions. The empirical evidence indicates that information acquisition and adoption decisions are made jointly. The findings also show that human capital and scale of operation positively and significantly affect the decision to acquire information and to adopt the technology, while liquidity constraints negatively impact on the decision to adopt, as well as the extent of adoption. Copyright © 2008 John Wiley & Sons, Ltd. [source] When Less is More: Distinguishing Between Entrepreneurial Choice and PerformanceOXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2000Andrew E. Burke This paper uses NCDS data on individual characteristics to distinguish determinants of entrepreneurial choice, income and job generation. A new model of utility from self-employment shows that relaxing liquidity constraints could inhibit performance. Empirically, we find that a range of inheritance enhances the performance of the self-employed and increases self-employment; while higher education also increases self-employment income and job creation, but reduces the probability of self-employment. Combining these choice and performance effects, we find that education has a positive net effect on job creation, as does inheritance up to a certain threshold. [source] Institutional Investors' Preferences for REIT StocksREAL ESTATE ECONOMICS, Issue 4 2002Brian A. Ciochetti This article investigates the determinants of real estate investment trusts (REIT) portfolio investment and institutional REIT ownership using multivariate Tobit regressions. We contend that many institutional investors take larger positions in more liquid assets like REIT stocks, as compared with private real estate equities, because of liquidity considerations. Consistent with this contention, we find that liquidity constraints are significantly related to REIT portfolio investment by institutional investors. We also find that institutional investors have different preferences for REIT stocks than do other investors; they generally prefer larger, more liquid REIT stocks. [source] Precautionary wealth accumulation: evidence from Canadian microdataCANADIAN JOURNAL OF ECONOMICS, Issue 4 2006Sule Alan Wealth information is obtained from the master files of the new Canadian Survey of Financial Security 1999 (SFS). Labour income risk proxies are constucted by industry using the Canadian Survey of Labour and Income Dynamics (SLID) between 1996 and 2001. The empirical results suggest the presence of a strong precautionary saving motive among Canadian households for broad definitions of wealth. Furthermore, consistent with the buffer-stock-saving model, the level of precautionary funds significantly increases when households face liquidity constraints. Ce texte calcule l'effet de l'incertitude du revenu de travail sur l'accumulation de la richesse à l'aide de deux sources de données. Les données sur la richesse sont tirées des résultats de l'Enquête sur la sécurité financière (ESF) de 1999. Les coefficients de risque attachés aux diverses industries sont développés à partir des résultats de l'Enquête sur la dynamique du travail et du revenu (EDTR) entre 1996 et 2001. Les résultats empiriques suggèrent la présence d'une forte motivation des ménages canadiens àépargner aux fins de précaution, si l'on accepte des définitions assez compréhensives de la richesse. De plus, d'une manière qui correspond au modèle d'épargne pour stockage tampon, le niveau des fonds aux fins de précaution s'accroît de manière significative à proportion que les ménages font face à des contraintes de liquidité. [source] | ||||||||||||||||||||||