Industry Shocks, Operating Risk, and Corporate Financial Policies around the World

Makaew, Tanakorn and Maksimovic, Vojislav (2013): Industry Shocks, Operating Risk, and Corporate Financial Policies around the World.

Abstract

Although developing economies are more volatile, firms in developed countries hold more cash and less debt. We show that despite greater aggregate and industry stability, the performance and balance sheets of individual firms in developed countries are more volatile. In developing countries, market imperfections insulate incumbent firms from competitive risk. Cross-country differences in firm rivalry and cash flow risk are greater in technology-intensive, external-finance-dependent, and large-firm-dominated industries where we expect greater market imperfections. Firms in developed countries are more sensitive to shocks. Most of the adjustments come from cash balance. We propose product market competition as a new channel in which market imperfections can drive the international difference in financial policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: : International Cash Holding, International Capital Structure, Firm Risk, Volatility, Financial Development
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G3 - Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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