Merton-type default risk and financial performance: the dynamic panel moderation of firm size

PurposeThe main purpose of this study is to evaluate the probability of default and examine the relationship between default risk and financial performance, with dynamic panel moderation of firm size.Design/methodology/approachThis study utilizes a total of 1,500 firm-year observations from 2013 to 2018 using dynamic panel data approach of generalized method of moments to test the relationship between default risk and financial performance with the moderation effect of the firm size.FindingsThis study establishes the findings that default risk significantly impacts the financial performance. The relationship between distance-to-default (DD) and financial performance is positive, which means the relationship of the independent and dependent variable is inverse. Moreover, this study finds that the firm size is a significant positive moderator between DD and financial performance.Practical implicationsThis study provides new and useful insight into the literature on the relationship between default risk and financial performance. The results of this study provide investors and businesses related to nonfinancial firms in the Pakistan Stock Exchange (PSX) with significant default risk's impact on performance. This study finds, on average, the default probability in KSE ALL indexed companies is 6.12%.Originality/valueThe evidence of the default risk and financial performance on samples of nonfinancial firms has been minimal; mainly, it has been limited to the banking sector. Moreover, the existing studies have only catered the direct effect of only. This study fills that gap and evaluates this relationship in nonfinancial firms. This study also helps in the evaluation of Merton model's performance in the nonfinancial firms.

Transmission Channels between Financial Deepening and Economic Growth: Econometric Analysis Comprising Monetary Factors

Contemporary literature continues to foster discussion whether financial development is important for economic growth. In the clash of theoretical arguments, the prevailing idea is that finance exerts a direct positive influence on GDP growth. However, the presence of theoretical counterarguments and contradictory results of empirical studies suggest that scientists, in search of an answer about the direction and power of the net effect, should develop methods of empirical analysis, and the very mystery of the relationship between finance and growth will finally be solved exclusively empirically. In this paper, the authors contribute to the development of the ‘finance-growth’ literature by answering some existing questions concerning the transmission channels from finance to growth, relying on more recent data compared to already conducted studies. We use panel data covering the period 1995 to 2019 for 168 countries. In addition, the paper touches on the problem of studying the exogenous conditions of such channels, considering the assumption that among these conditions there may be those that hinder the impact of financial deepening on economic growth. Our focus is on monetary conditions, and in the empirical part of the study, we touch upon the problem of the influence of price stability on the operation of these transmission channels. The methods of the conducted study are based on the dynamic panel data analysis techniques (System GMM). The novelty of this paper lies in the development of the modern theory of the financial sector transmission mechanism in the economic growth context. The main result of the study is that productivity channel is the most reliable transmission channel of financial deepening to economic growth. Furthermore, the effectiveness of this channel remains virtually unaffected by inflation. The channel of capital accumulation should be considered less reliable (in terms of statistical reliability of estimates obtained), but it has turned out to be a more economically significant transmission channel. This channel is sensitive to the inflation factor in certain categories of countries. Finally, as follows from the estimates gained, the non-linearity of the “finance-growth” relationship can be explained by the non-linearity of the variable responsible for the capital accumulation channel.

Trends and Determinants of FDI with Implications of COVID-19 in BRICS

Foreign direct investment (FDI) movement to any country is recognized as an important criterion for economic strength and potentiality. Hence, the present study analyzes the motives of FDI inflows through the determinants and channels, namely horizontal or vertical FDIs and the impact of COVID-19 on FDI Inflows in BRICS countries during the period 1990–2020. The Kinked Exponential (deterministic) trend, and Zivot and Andrew’s trend equations are applied for the growth analysis of FDI inflows. Regarding the estimation of channels of FDI inflows in terms of horizontal, vertical, and hybrid motivations, dynamic panel data analysis using GMM for BRICS economies together and ARDL-PMG for individual countries is made. The findings show significantly positive growth in FDI inflows in all BRICS countries except India during the first decade of the present century. After that, these countries have experienced either significantly or insignificantly declining trends, except India, where the trend has significantly increased during this later period. From the overall analysis, we see that both horizontal and vertical motivations play a dominant role in determining FDI inflows for the BRICS countries. However, from country-wise estimations, it is observed that both horizontal and vertical motives are dominant factors for FDI inflows to India and Russia. In contrast, the horizontal motive of it is significant for China. For Brazil and South Africa, no motive behind FDI inflows appears significant. The pandemic situation significantly impacts attracting FDI in Brazil, while it remains insensitive in the rest of the BRICS countries. The findings reveal that FDI determinants are country-specific. So, the BRICS countries can design proper FDI policy and adopt more reforms in attracting FDI that may help improve their economic situation.

The Effect of COVID-19 Pandemic on Corporate Dividend Policy in Indonesia: The Static and Dynamic Panel Data Approaches

This research examines the effect of the crisis due to the COVID-19 pandemic on dividend policy in Indonesia. The purposive sampling method was used to collect data from corporates listed on the IDX from 2014 to 2020 and analyzed using static and dynamic panel data approaches. The fixed-effect models (FEM) were selected for the static panel data regression. Meanwhile, the first difference-generalized method of moments (FD-GMM) and system-generalized method of moments (SYS-GMM) were used for determine the robustness of the estimated dynamic panel data. The results showed that the crisis due to the pandemic led to higher dividend distribution on SYS-GMM. Furthermore, companies maintained the dividend level as a positive signal for investors which lifted the sluggish trade condition in the capital market. Profitability and previous year dividends positively affect dividend policy robustly. Furthermore, the results showed that age affects dividend policy on FD-GMM. Financial leverage has a robust effect, and firm size has an effect on FD-GMM in different directions, while investment opportunity does not affect dividend policy. Statistically, the FEM selected that violates the best linear unbiased estimation was proven to form parameters that were not much different from the estimates produced by the dynamic model, both from the coefficient of influence direction and significance, and the omitted variable bias occurs as evidenced in the robust test with dynamic model was solved. This research is also used as a reference for considering investors’ investment decisions in the new normal condition. Therefore, dividend policy can be considered as a positive signal to investors with the ability to stock trading activities in the capital market.

MENA Countries Face the Challenge of the Knowledge-Based Economy

The growing interest in the knowledge economy raises many questions about its effect on economic growth. The study aims to position a set of MENA countries in the context of the knowledge economy compared to developed countries. It also detects theoretically and empirically the knowledge effect on economic growth. To do this, the authors have estimated an endogenous growth model, using the dynamic panel data technique, for a sample of 16 MENA countries over 1995-2014. The results show that, despite the significant improvements that have registered in the knowledge economy pillars, the selected countries are still lagging compared to developed countries. Far from international comparisons, the internal effects of these knowledge pillars (education, innovation, ICT, institutional regime) on growth are positive and highly significant.

Financial Development and Sustainable Competitiveness in Arctic Region: A Dynamic Panel Data Analysis

The present study investigates the effect of financial development on sustainable competitiveness and its components (natural capital, resource intensity, and social cohesion) in the Arctic region. We employ bank-based, stock-market based, and composite index to measure financial development. To deal with endogeneity bias, system GMM is utilized. The results show a positive and significant effect of financial development on sustainable competitiveness. The estimates also assert that financial development encourages resource efficiency and social cohesion in the region. In contrast, we find the negative effect of financial development on natural capital. This suggests that overexploitation of natural resources may provide short-term benefits to the local and regional communities but it may threaten the long-term sustainability of the Arctic. Thus, the financial sector should be guided to support financing and investing activities in alternative eco-friendly technologies and ventures for reducing excessive natural resource utilization.

Adolescent Suicides and Social Disparities

Suicides have been the second leading cause of deaths among adolescents in the United States in 2016. This paper aims to find qualitative and quantitative evidence of the relationship between socioeconomic inequalities and adolescent suicides. The suicide risk factors among all states are identified to form the pooled dynamic panel dataset from 1990 to 2016. To our knowledge, this paper is the first to find that social inequalities are significantly related to American adolescent suicides using the state-level dynamic panel data. Changes of unemployment rates have the consistent and significantly positive impacts on changes of adolescent suicides rates. Changes of Top 10% income index are uniformly positive to changes of adolescent suicide rates. Gini indices have inconsistently positive correspondence to adolescent suicide rates. Furthermore, high school graduation rates are insignificantly and negatively associated with adolescent suicide rates in the United States.

Inflation and Bank Credit

e objective of this paper is to assess empirically the effects of inflation rates on bank credit using panel data of the 32 Mexican states during 2003-2015. Our research method utilizes static models (pooled OLS, fixed effects, and random effects) and dynamic models (mean group, pooled mean group, and dynamic fixed effects) to analyze the relationship in the short and long runs. e main empirical result indicates that inflation rates exert negative effects on credit in the long run, but those effects tend to be positive in the short run. Concerning originality and findings, few papers study inflation and bank credit under macroeconomic stability, or in the case of Mexico with static and dynamic panel data models. However, one research limitation is the lack of data to apply the methodology before 1999 when inflation rates used to be higher. is would be useful to compare macroeconomic stability with instability.