The impact of financial constraints on investment efficiency in South Africa

Authors

  • Oluwaseyi Olopade University of Johannesburg. South Africa
  • Beatrice Desiree Simo-Kengne University of Johannesburg. Johannesburg. South Africa
  • Abieyuwa Ohonba University of Johannesburg

DOI:

https://doi.org/10.17811/ebl.11.3.2022.125-133

Keywords:

investment efficiency, financial constraints, panel data

Abstract

Shifts from firm-level investment efficiency occur due to market imperfections and information
asymmetry. This translates to an increased cost of capital, which leads to over or under-investments. This study demonstrates the absence of a direct association between investment
efficiency and financial constraints in African firms, complementing the efficient market
hypothesis. We observed firms across different industries listed on the JSE from 2009 to 2019.
Empirical results from panel data analysis reveal that financial constraints drive improved
investment levels and firms in this region depend on external funds – specifically credits – to
invest.

References

Ayyagari, M., Demirgüç-Kunt, A. and Maksimovic, V., 2008. How important are financing constraints? The role of finance in the business environment. The world bank economic review, 22(3), pp.483-516.

Bhaumik, S. K., Bonner, K. and Hart, M. (2012) 'Investment efficiency among a cross-section of UK firms: Implications for the debate on financing constraints', (12).

Bloom, N. and Van Reenen, J., 2010. Why do management practices differ across firms and countries?. Journal of economic perspectives, 24(1), pp.203-24.

Guariglia, A., 2008. Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms. Journal of banking & finance, 32(9), pp.1795-1809.

Hodgson, T.M., Breban, S., Ford, C.L., Streatfield, M.P. and Urwin, R.C., 2000. The concept of investment efficiency and its application to investment management structures. British Actuarial Journal, pp.451-545.

Hovakimian, G. (2011) ‘Financial constraints and investment efficiency: Internal capital allocation across the business cycle’, Journal of Financial Intermediation, 20(2), pp. 264–283. DOI: 10.1016/j.jfi.2010.07.001.

Islam, A. R. M. and Luo, R. H. (2018) ‘Financing constraints and investment efficiency: evidence from a panel of Canadian forest firms’, Applied Economics. Routledge, 50(48), pp. 5142–5154. DOI: 10.1080/00036846.2018.1478387.

Kaplan, S.N. and Zingales, L., 1997. Do investment-cash flow sensitivities provide useful measures of financing constraints?. The quarterly journal of economics, 112(1), pp.169-215..

Lamont, O., Polk, C. and Saaá-Requejo, J., 2001. Financial constraints and stock returns. The review of financial studies, 14(2), pp.529-554.

Li, D. (2011) ‘Financial Constraints , R & D Investment , and Stock Returns’. doi: 10.1093/rfs/hhr043.

Naeem, K. and Li, M. C. (2019) ‘Corporate investment efficiency: The role of financial development in firms with financing constraints and agency issues in OECD non-financial firms’, International Review of Financial Analysis. Elsevier, 62(January), pp. 53–68. DOI: 10.1016/j.irfa.2019.01.003.

Richardson, S., 2006. Over-investment of free cash flow. Review of accounting studies, 11(2-3), pp.159-189.

Schiantarelli, F. (1996) ‘FINANCIAL CONSTRAINTS AND INVESTMENT : METHODOLOGICAL ISSUES AND INTERNATIONAL EVIDENCE’, 12(2), pp. 70–89.

Downloads

Published

2022-07-13

How to Cite

Olopade, O., Simo-Kengne, B. D., & Ohonba, A. (2022). The impact of financial constraints on investment efficiency in South Africa. Economics and Business Letters, 11(3), 125-133. https://doi.org/10.17811/ebl.11.3.2022.125-133

Issue

Section

Articles