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The financial conservatism of firms in emerging economies

Machokoto, Michael, Chipeta, Chimwemwe, Aftab, Nadeem and Areneke, Geofry ORCID logoORCID: https://orcid.org/0000-0001-6075-2747 (2021) The financial conservatism of firms in emerging economies. Research in International Business and Finance. ISSN 0275-5319

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Using a large sample of emerging market firms over the period 1980–2015, we document a high prevalence and persistence of financial conservatism. Specifically, 31% of the African firms have ultra-low leverage (less than 5%), with 42% and 11% having non-positive net-debt (total debt less cash) and no debt (zero-levered), respectively. In further analyses, we find that macroeconomic conditions have a muted effect on financial conservatism. Our results suggest that financial conservatism in the emerging market context is due to two main factors; (1) credit constraints, and (2) the desire to attain or enhance financial flexibility. The former highlights the need for pro-market policies that improve access to external finance. At the same time, the latter, which points to the accumulation of cash reserves at the expense of current investments, is a strategic choice aimed at preserving or enhancing financial flexibility. Our results are robust to using alternative sub-sampling approaches, model specifications, definitions of variables and estimation techniques.

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