Understanding Corporate Thailand I: Finance
This study analyzes the entire universe of registered firms in Thailand. There are five main findings. First, firm size distribution is smooth, with a majority of firms in the middle of the distribution; the apparent ”missing middle” phenomenon is entirely driven by arbitrary categorization of small and medium enterprises (SMEs). Second, the Thai corporate sector is very concentrated; the concentration has also risen over the past decade. Third, larger firms seem to have advantages over smaller firms regarding financing. Fourth, smaller firms tend to disproportionately invest less in fixed assets than larger firms. Finally, firms in the middle of the size distribution exhibit the highest return on asset (ROA) but have low leverage, consistent with the symptom of credit constraints. Large firms, in contrast, seem to have lower ROA but higher debt. Meanwhile, smaller firms seem to have both lower leverage and ROA. Overall, our results suggest that the Thai corporate sector exhibits both inefficient capital allocation and financial vulnerability. The paper has important policy implications on resource allocation in the economy, particularly, regarding appropriate assistance provided to small and medium enterprises.
Bank Supply Shocks and Firm Investment: A Granular View from the Thai Credit Registry Data
This paper attempts to link bank loan supply shocks to the real economic activity at the firm and aggregate level. We apply the methodology pioneered by Amiti and Weinstein (2017) to bank-firm credit registry dataset in Thailand for the period of 2004-2015. Loan growth dynamics of individual banks and individual firms are exactly decomposed into a time series of bank, firm, industry, and common shocks. We show that the bank and firm shocks obtained using this method are consistent with various measures of individual banks’ and firms’ balance sheet health, supporting the validity of the shock decomposition. Results from firm-level regressions indicate that bank supply shocks do matter for firm investment activity even after controlling for common, industry, firm-specific shocks and firm’s leverage. We find that Thai firms are generally highly sensitive to bank lending shocks, particularly firms that borrow from only one bank and have low propensity to switch to another bank. The size and the dynamics of bank shocks appears to differ between heathy versus unhealthy, and small versus large firms, suggesting differential bank lending policy across different types of firms. At the aggregate level, we find that granular bank shock accounts for around 37 percent of aggregate lending growth and is the major source of financial shocks driving aggregate investment.
Environmental Efforts and Firm Performance
In this paper, we test the prediction that environmental efforts, presenting one dimension of corporate social responsibility, are positively related to firm performance. We analyze a panel sample of non-financial firms in the Netherlands over the period 2001–2014 using two approaches: ordinary least squares regressions and two-stage least squares regressions. Our two-stage least squares regressions show that firms with higher degrees of environmental efforts have better firm performance, measured as return on assets, but have poorer firm performance, measured as return on sales. However, this relationship disappears when firm performance is measured as return on equity or stock return. Our analysis further reveals that better firm performance does not necessarily lead to a disclosure of a firm’s environmental efforts. We find that larger firms are more inclined to report the environmental efforts than smaller firms. Neither prior firm performance nor variation in firm performance moderates the effect of environmental efforts on firm performance.
Firm-level Perspective of Thailand’s Low Investment Puzzle
Private investment in Thailand has been standing at a low level since the aftermath of the Asian Financial Crisis until present. Using firm-level data of virtually all registered firms in Thailand during 2001-2013, this paper finds that more than 60 percent of Thai firms have been undertaken negative net investment (invested at a rate slower than the depreciation rate) each year. Our regression results suggest that small firms and large firms have been facing different kinds of obstacles that ultimately led to persistently low investment at the aggregate level. For large firms, low or negative net investments are driven mainly by weak growth prospects and future uncertainties. For small firms, their investments are more likely hindered by supply-side constraints (lack of access to external finance) and negative net investments are driven mainly by inefficiency.
Monetary Policy, Bank Lending and Corporate Investment
The purpose of this study is to shed light on the chain of causality from macroeconomic financial policy to the microeconomic investment function. Concretely, we aim to provide an in-depth analysis of the relationships between the monetary policy of central banks, the loan policy of commercial banks, and the investment behavior of firms. We focus on countries that conduct their monetary policy under the inflation-targeting framework. Our empirical analysis with data from Germany, Switzerland and Thailand provides several new insights. First, after controlling for the US monetary policy, the monetary policy in Germany and Thailand appears to influence the banks’ lending rate in the short run (i.e. within two months), whereas the monetary policy in Switzerland seems to be ineffective at influencing the banks’ lending rate in the short run. Second, our results show that the banks’ lending rate has a negative effect on their loans and that this negative effect is weakened by their growth opportunities. Third, we find that the supply of bank loans plays a more pivotal role in determining firms’ investment than the lending rate. Last but not least, we document that neither the lending rate nor the loan-to-assets ratio moderates the sensitivity of the firms’ investment to growth opportunities.
Corporate Debt Maturity and Future Firm Performance Volatility
We propose a simple idea that corporate debt maturity should serve as a good indicator of future firm performance volatility. We show in a simple two-period model that the riskiness of corporate investment is a decreasing function of corporate debt maturity. If “observable” corporate debt maturity and ex ante “unobservable” corporate risk-taking is highly correlated, corporate debt maturity should be highly correlated with “ex post” realized firm performance volatility in following years. Using data on publicly listed firms in 10 developing and developed countries over the period 1991-2013, we find that future firm operating performance volatility decreases as corporate debt maturity increases and that future firm value volatility is not associated with corporate debt maturity. In addition, banking sector development and export intensity of a country play an important role in determining firm operating performance volatility.
Bank Systemic Risk and Corporate Investment
We develop a simple three-period model in which a bank’s investment is influenced by short-term financing and a probability of a financial crisis. The presence of moral hazard problems in banks and firms causes (1) banks to take on riskier loans, (2) bank systemic risk to increase, and (3) firms to invest in riskier projects. We measure “bank systemic risk” using three measures that capture (1) bank funding maturity and (2) bank asset commonality. We document that in a sample of firms in 10 emerging markets and advanced economies bank systemic risk is positively associated with the firm-level investment ratio after controlling for the country’s cross-sectional mean ratio of total loans to total assets of banks, country-level and firm-level variables until the start of the financial crisis of 2007. The effect becomes negative after 2007. We show that bank systemic risk strengthens the sensitivity of corporate investment to growth opportunities.
Observability and Endogenous Organizations
This paper establishes a relationship between the observability of common shocks and optimal organizational design in a multiagent moral hazard environment. We consider two types of organizations, namely relative-performace and cooperative regimes, and show that, with sufficient information regarding common shocks, a cooperative organization can be optimal even if outputs are highly correlated. The model is then embedded in a Walrasian general equilibrium model in which choices regarding organizations and investment in information on common shocks are jointly determined. Numerical results reveal that both cooperative and relative-performance regimes can coexist in equilibrium but only cooperative organizations invest in full observability of common shocks. Changes in the cost of information and aggregate wealth can affect substantially the types of organizations operating and the matching patterns of heterogeneous agents in these organizations. General equilibrium effects are key in determining how information costs impact the way production is organized.