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The implications of financial conservatism for African firms

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  • Chipeta, Chimwemwe
  • Aftab, Nadeem
  • Machokoto, Michael

Abstract

Using a large sample of African firms over the period 1982—2015, we find that firms forced into financial conservatism due to financial constraints have lower stock market valuation and profitability relative to their unconstrained counterparts who choose conservatism (optional financial conservatism) for motives linked to financial flexibility. Our further analyses, however, show a decrease in investments and employment with financial conservatism in the long-run. This finding highlights a significant trade-off with the desire to attain or enhance financial flexibility. Overall, our study confirms the benefits of optional financial conservatism and detriments of forced financial conservatism in developing markets where access to finance is limited.

Suggested Citation

  • Chipeta, Chimwemwe & Aftab, Nadeem & Machokoto, Michael, 2021. "The implications of financial conservatism for African firms," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612321000076
    DOI: 10.1016/j.frl.2021.101926
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    References listed on IDEAS

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    Cited by:

    1. Machokoto, Michael & Bayai, Innocent & Kadzima, Marvelous, 2023. "The nonlinear impact of debt on employment: Does institutional quality matter?," Finance Research Letters, Elsevier, vol. 57(C).
    2. El Ghoul, Sadok & Fu, Zhengwei & Guedhami, Omrane & Saadi, Samir, 2023. "Firm inflexibility and the implied cost of equity," Finance Research Letters, Elsevier, vol. 52(C).
    3. Qi, Wenhao & Li, Biao & Liu, Qiqi & Lv, Jiaqi, 2023. "Low-skill lock-in? Financial resource mismatch and low-skilled labor demand," Finance Research Letters, Elsevier, vol. 55(PB).

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    More about this item

    Keywords

    Financial conservatism; Financial constraints; Developing markets; Zero-debt; Capital structure;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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