Reza H. Chowdhury

Corporate entrepreneurship and debt financing: evidence from the GCC countries

Purpose - – The Gulf Cooperation Council (GCC) member countries have recently given tremendous emphasis to corporate entrepreneurship. The purpose of this paper is to investigate whether the lack of entrepreneurship in publicly listed GCC firms affects their ability to acquire debt financing. Design/methodology/approach - – Using stochastic frontier approach, the paper estimates an optimal revenue function given labor costs, operating expenses, and existing physical infrastructure of an organization. The paper estimates the difference between the optimal and actual level of firm revenues from a revenue frontier function, which can be partially resulted from managerial inefficiency due to the lack of corporate entrepreneurship. The paper uses fixed-effect panel regression and simultaneous equations system to determine the effect of such inefficiency on firms’ debt financing. Findings - – The main finding is that as entrepreneurial activities increase, firms’ ability to borrow from banks also increases. Results also indicate that increased borrowing improves internal governance practices and indirectly compel the management to become more efficient. Research limitations/implications - – Results exhibit how improving entrepreneurship affects firms’ access to external financing when the financial markets are underdeveloped and are plagued with information asymmetry and agency problems. Practical implications - – The paper provides insights for policy makers in the GCC and other emerging countries where entrepreneurial activities are becoming a priority. Originality/value - – The paper develops a new proxy measure of entrepreneurship in public firms and advances our knowledge about the importance of entrepreneurship in finance.

Equity capital and bank profitability: evidence from the United Arab Emirates

The objective of this paper is to understand the effect of increasing equity capital in domestic banks of the United Arab Emirates (UAE). The paper also examines whether the relationship differs by bank size particularly at the time of financial crisis. We apply three different approaches including: 1) ordinary least squares; 2) fixed-effect regression; 3) system generalised method of moments to examine the research questions. The results exhibit that increasing equity capital improves bank profitability in the UAE, and thus high equity capital is a critical value-driver for UAE banks. The evidence also shows that the Dubai debt crisis had an insignificant effect on bank performance. We however do not find significant evidence that high equity capital of domestic banks is used as a buffer to absorb financial shock. This finding holds regardless of individual bank sizes.

Social capital of non-resident family members and small business financing: evidence from an Indian state

Purpose The purpose of this paper is to investigate the impact of social capital of non-resident family members on small business debt financing. Recent literature in entrepreneurship suggests that small businesses can borrow social capital to improve their access to debt financing. Design/methodology/approach Micro-entrepreneurs from India were interviewed regarding their ability to raise capital from family members as well as their relationship with banks and politicians. Findings The survey indicates that small business entrepreneurs are able to borrow social capital from non-resident Indians. Results also suggest that these small businesses are more likely to be connected to banks and politicians facilitated by their non-resident family members, which not only improves micro-entrepreneurs’ access to debt financing but also reduces their cost of borrowing. Research limitations/implications This is a co-relational study that investigates the association between social capital of non-resident family members and small business debt financing. There is not necessarily a causal relationship between the two. The findings of this study may only be generalized to firms similar to those that were included in this research. Originality/value This study contributes to the literature on the factors that improve the access to small business debt financing. The findings may be useful for financial managers, investors, financial management consultants, entrepreneurs, and other stakeholders.

Capital Market and Operating Efficiency of Firms in Emerging Gulf Countries

We determine the operating efficiency of business entities in six emerging Gulf countries, and examine whether the disciplinary and monitoring roles of capital markets can improve firm’s operating efficiency in the region. By using stochastic frontier approach, we find that firm efficiency level ranges from 62% to 70%, on average, in the Gulf region. However, the magnitude of such efficiency varies across different industries and individual countries of the region. We also find that the effectiveness of external monitoring role by financial institutions is insignificant in improving firm’s operating efficiency in emerging Gulf countries. In contrast, an improvement in internal financial performance results in an increase in operating efficiency of Middle-East firms. This finding is indeed useful for potential investors in their portfolio investment decisions, and for policymakers in initiating necessary measures to strengthen capital market’s contribution in the Gulf region.

Analysis of default behavior of borrowers under Islamic versus conventional banking

Purpose - This paper considers borrower-specific characteristics to understand the factors affecting both the probability and quantum of loan default by individual borrowers under Islamic and Conventional banking. Design/methodology/approach - Borrower-specific characteristics that explain the probability of default may not necessarily be similar factors that determine the quantum of default. We therefore apply a Box-Cox double hurdle model to treat both the probability and quantum of default in a two-step approach. We also explain the differences in default risk and quantum of default between Islamic and Conventional banking borrowers from their behavioral perspectives following the Sharia principles in financial transactions between lenders and borrowers. We use borrower-specific information of two separate bank branches of the United Arab Emirates that solely deal with either Islamic or Conventional banking products. Findings - The paper demonstrates that the probability of default and the quantum of default appear to be influenced by different set of client-specific factors. The results suggest that the probability of default does not vary significantly between Islamic and conventional banking borrowers. The evidence also shows that Islamic banking defaulters, compared to those in Conventional banking, repay a large quantum of overdue when their financial leverage improves. However, they do not tend to reduce their outstanding quantum of overdue faster than Conventional banking defaulters. Research limitations/implications - Availability of data from only two bank branches may limit the explanatory power of empirical findings Practical implications - The study findings will enable the Islamic and Conventional banks to appropriately address Basel Capital requirements based on the borrowers’ behavior. Originality/value - Religious beliefs are crucial in borrower’s default behavior in Islamic banking.

Information content of dividends: A case of an emerging financial market

Purpose - – The purpose of this paper is to examine the signaling and free cash flow hypotheses of dividends in the context of an emerging financial market. Design/methodology/approach - – The authors use fundamental financial information of Chinese companies listed in the Shenzhen and Shanghai stock exchanges. They examine the impact of cash dividend payments on future profitability of individual firms with and without controlling for non-linearity in their earnings to test the signaling hypothesis. They also determine the characteristics of dividend paying firms to examine the free cash flow hypothesis. Findings - – It was found that while dividend increases by publicly listed Chinese firms are followed by increases in earnings in two subsequent years, such relationship does not exist in the case of dividend decreases. However, under the assumption of non-linearity of earnings, it was found that neither dividend increases nor dividend decreases convey any valuable information about future changes in earnings of Chinese firms. Further, it was found that firms with high cash holdings, large profitability and high managerial efficiency are likely to pay dividends. The authors therefore conclude that announcements of cash dividend payments do not signal future performance but indicate good governance practices of publicly traded firms in China. Originality/value - – This evidence is critical for potential foreign investors in their portfolio investment decisions and for regulators in determining an efficient measure of corporate disclosure in China.