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Financial conservatism, firm value and international business risk: Evidence from emerging economies around the global financial crisis
Author(s) -
Machokoto Michael,
Areneke Geofry,
Nyangara Davis
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2032
Subject(s) - conservatism , stylized fact , economics , emerging markets , financial crisis , context (archaeology) , empirical evidence , finance , monetary economics , financial system , macroeconomics , politics , political science , law , paleontology , philosophy , epistemology , biology
The increase in debt‐free or under‐levered firms (financial conservatism) is one of the most recent stylized puzzles that cannot be explained within the context of extant capital structure theories. In this paper, we exploit the 2008–09 contractions in credit supply in a quasi ‐ natural experiment to examine whether financial conservatism affects firm value. Using a large sample of firms from seven African countries over the period 2003–2012, we find strong evidence that financial conservatism mitigates the adverse effect of contractions in credit supply on firm value for both local and international firms. Our results suggest that financial conservatism is an effective strategy for managing risks arising from contractions in credit supply and international business exposure. These findings provide novel empirical evidence on the value relevance of financial conservatism which shields firms from the adverse and far‐reaching effects of contractions in credit supply.