Does managerial ability affect corporate financial constraints? Evidence from China

Figures & data

Table 1. Descriptive statistics.

Variables	Obs.	Mean	Min	Max	Std.Dev
Inv/K	25,543	0.521	0.006	6.939	0.948
CFlow/K	25,543	0.436	−15.914	20.399	3.263
Sale/K	25,543	10.431	0.304	188.732	25.192
MA	25,543	−0.004	−0.347	0.329	0.133
Size	25,543	21.980	14.937	28.520	1.314
Age	25,543	1.950	0.000	3.219	0.920
SOE	25,543	0.106	0.000	1.000	0.308
Foreign	25,543	0.043	0.000	1.000	0.202
Loan growth	25,543	0.619	−7.363	27.977	3.559
Tobin’s Q	25,543	2.043	0.178	9.855	1.769
Sales growth	25,543	0.198	−0.510	2.783	0.425

Source: Authors’ calculation.

Table 2. The sensitivity tests of the ICFS model.

	Inv/K
	(1) basic characteristics	(2) ownership	(3) external funds growth	(4) growth opportunities	(5) fixed effects
CFlow/K	0.026***	0.026***	0.042***	0.041***	0.026***
	(5.66)	(5.67)	(8.41)	(8.09)	(5.58)
Sale/K	0.014***	0.014***	0.011***	0.010***	0.017***
	(21.40)	(21.42)	(15.31)	(14.91)	(14.55)
Size	−0.018***	−0.017***	−0.016***	0.001	−0.030
	(-3.49)	(-3.33)	(-3.31)	(0.18)	(-1.52)
Age	−0.185***	−0.182***	−0.178***	−0.175***	−0.354***
	(-24.24)	(-23.79)	(-23.74)	(-23.16)	(-14.73)
SOE		−0.050***	−0.043***	−0.039***	−0.033
		(-3.28)	(-2.88)	(-2.63)	(-1.07)
Foreign		0.035	0.035	0.033	0.038
		(1.16)	(1.16)	(1.11)	(0.55)
Loan growth			0.055***	0.054***	0.038***
			(10.87)	(10.51)	(7.65)
Tobin's Q				0.022***	−0.005
				(4.83)	(-0.61)
Sales growth				0.127***	0.052**
				(5.99)	(2.43)
Constant	1.010***	0.996***	0.980***	0.511***	1.445***
	(8.91)	(8.79)	(8.83)	(4.01)	(3.41)
Province/Industry FE	Included	Included	Included	Included
Year FE	Included	Included	Included	Included	Included
Firm FE					Included
Obs.	25543	25543	25543	25543	25543
adj. R^2	0.221	0.222	0.254	0.258	0.240

Note: This table presents estimation results of the ICFS model under different specifications. We present the t-statistics in parentheses and cluster standard errors by firms. ^***, ^** and ^* denote the significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table 3. Impact of managerial ability on corporate financial constraints.

	Inv/K
	(1)	(2)	(3)	(4)	(5)
CFlow/K	0.031***	0.031***	0.048***	0.047***	0.031***
	(6.01)	(6.01)	(8.58)	(8.35)	(5.76)
MA	0.387***	0.390***	0.353***	0.280***	0.407***
	(7.83)	(7.87)	(7.30)	(5.72)	(5.48)
MA × CFlow/K	−0.061**	−0.060**	−0.071**	−0.071**	−0.050**
	(-2.07)	(-2.06)	(-2.45)	(-2.44)	(-1.99)
Sale/K	0.013***	0.013***	0.010***	0.010***	0.017***
	(20.20)	(20.21)	(14.45)	(14.26)	(14.24)
Size	−0.016***	−0.015***	−0.015***	0.000	−0.027
	(-3.23)	(-3.06)	(-3.11)	(0.01)	(-1.38)
Age	−0.186***	−0.184***	−0.180***	−0.176***	−0.348***
	(-24.42)	(-23.97)	(-23.87)	(-23.21)	(-14.58)
SOE		−0.052***	−0.045***	−0.041***	−0.036
		(-3.44)	(-3.00)	(-2.74)	(-1.14)
Foreign		0.034	0.033	0.032	0.047
		(1.11)	(1.10)	(1.06)	(0.68)
Loan growth			0.055***	0.054***	0.039***
			(10.88)	(10.56)	(7.65)
Tobin's Q				0.020***	−0.007
				(4.38)	(-0.97)
Sales growth				0.115***	0.035
				(5.38)	(1.60)
Constant	0.983***	0.969***	0.959***	0.541***	1.396***
	(8.75)	(8.62)	(8.72)	(4.27)	(3.29)
Province/Industry FE	Included	Included	Included	Included
Year FE	Included	Included	Included	Included	Included
Firm FE					Included
Obs.	25543	25543	25543	25543	25543
adj. R^2	0.225	0.225	0.258	0.261	0.243

Note: This table presents the estimation results of managerial ability's role in financial constraints by stepwise inclusion of controlled variables denoting ownership, external funds, growth opportunities, and firm fixed effects. The t-statistics are shown in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote statistical significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table 4. The mechanisms between managerial ability and financial constraints.

	(1)	(2)	(3)	(4)	(5)	(6)
	Dispersion	Inv/K	ROA	Inv/K	AgencyC	Inv/K
MA	−1.097***	2.156	4.424***	−2.807	−0.446***	0.346***
	(-10.28)	(0.61)	(26.26)	(-1.28)	(-19.24)	(6.94)
CFlow/K	−0.001**	−0.176	0.000	0.589***	0.000***	0.040***
	(-2.46)	(-0.70)	(1.17)	(5.29)	(22.67)	(6.49)
MA × CFlow/K		0.211		−0.055		−0.068**
		(0.27)		(-0.03)		(-2.33)
Dispersion		0.062
		(0.75)
Dispersion × CFlow/K		0.208*
		(1.79)
ROA				1.469**
				(2.20)
ROA × CFlow/K				−0.026*
				(-1.95)
AgencyC						0.144***
						(8.41)
AgencyC × CFlow/K						0.017**
						(2.13)
Sale/K	0.000	−0.046	0.001**	−0.078**	−0.000**	0.010***
	(1.54)	(-1.29)	(2.03)	(-2.37)	(-1.97)	(14.45)
Size	−0.060***	0.289	−0.009	−0.613	−0.076***	0.009*
	(-4.55)	(1.20)	(-0.35)	(-0.90)	(-19.80)	(1.73)
Age	0.043**	−0.454*	−0.161***	1.070	−0.020***	−0.173***
	(2.53)	(-1.81)	(-7.70)	(1.22)	(-5.63)	(-22.87)
SOE	−0.053	0.105	0.034	−0.188	−0.030***	−0.036**
	(-1.28)	(0.37)	(0.82)	(-0.52)	(-4.72)	(-2.45)
Foreign	−0.055	0.537	0.053	−1.265	−0.005	0.037
	(-0.84)	(1.07)	(0.66)	(-0.78)	(-0.35)	(1.25)
Loan growth	−0.000	0.797***	−0.001*	0.795***	−0.000	0.053***
	(-0.89)	(23.40)	(-1.74)	(17.99)	(-0.36)	(10.53)
Tobin’s Q	0.004	−0.046	0.074***	0.193	0.005	0.015***
	(0.38)	(-0.25)	(2.62)	(1.25)	(1.20)	(3.40)
Sales growth	−0.000***	−0.037***	0.001***	−0.037***	−0.000***	0.121***
	(-4.81)	(-7.42)	(3.82)	(-3.97)	(-6.58)	(5.68)
Constant	1.883***	−4.460	0.820	16.987	1.685***	0.353***
	(5.81)	(-0.79)	(1.31)	(1.29)	(17.51)	(2.74)
Province/ Industry/ Year FE	Included	Included	Included	Included	Included	Included
Obs.	15225	15225	25543	25543	25541	25541
adj. R^2	0.036	0.999	0.266	0.986	0.211	0.266

Note: Columns (1) - (2) report the results of the mediation effect of information asymmetry proxied by analyst forecasts’ dispersion. Columns (3) – (4) report the results of the mediation effect of financial performance indicated by return on assets. Columns (5) - (6) report the results of the mediation effect of agency problems captured by the ratio of entertainment and travel cost expenses to sales. The t-statistics are reported in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote the statistical significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table 5. The effect of firm ownership.

	Foreign-owned firms		SOEs		Private firms
	(1)	(2)	(3)	(4)	(5)	(6)
CFlow/K	0.020	0.020	0.024	0.039**	0.045***	0.051***
	(0.91)	(0.87)	(1.57)	(2.43)	(8.44)	(8.37)
MA		0.302		−0.079		0.328***
		(1.24)		(-0.77)		(6.03)
MA × CFlow/K		0.003		−0.152*		−0.065**
		(0.03)		(-1.78)		(-2.08)
Sale/K	0.016***	0.016***	0.008***	0.009***	0.010***	0.010***
	(4.20)	(4.05)	(4.00)	(4.14)	(13.77)	(13.08)
Size	0.011	0.008	0.000	−0.004	0.003	0.002
	(0.31)	(0.24)	(0.03)	(-0.28)	(0.47)	(0.37)
Age	−0.156***	−0.156***	−0.082***	−0.076***	−0.185***	−0.187***
	(-4.58)	(-4.56)	(-3.36)	(-3.10)	(-22.71)	(-22.85)
Loan growth	0.045**	0.044**	0.043**	0.042**	0.055***	0.056***
	(2.02)	(1.99)	(2.38)	(2.39)	(10.27)	(10.31)
Tobin’s Q	0.024	0.021	0.035*	0.035**	0.022***	0.020***
	(1.47)	(1.27)	(1.95)	(2.02)	(4.57)	(4.10)
Sales growth	0.142	0.130	0.166**	0.175**	0.117***	0.102***
	(1.37)	(1.22)	(2.31)	(2.47)	(5.28)	(4.56)
Constant	0.014	0.065	0.103	0.160	0.523***	0.548***
	(0.02)	(0.09)	(0.31)	(0.50)	(3.65)	(3.84)
Province/ Industry/ Year FE	Included	Included	Included	Included	Included	Included
Obs.	1093	1093	2719	2719	21731	21731
adj. R^2	0.348	0.348	0.202	0.209	0.265	0.267

Note: This table presents the results for the effect of managerial ability on ICFS for firms with different ownerships. The t-statistics are reported in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote statistical significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table 6. Robustness checks.

	(1)	(2)	(3)	(4)
	Euler equation	RankMA	2SLS-stage1	2SLS-stage2
CFlow/K	0.063	0.079***	0.001***	0.051***
	(1.54)	(6.17)	(2.70)	(8.37)
MA	−0.600	0.017***		−1.074**
	(-0.24)	(8.58)		(-2.16)
MA × CFlow/K	−0.633**	−0.005***		−0.107**
	(-2.56)	(-3.06)		(-2.38)
AVG_MA			0.998***
			(20.89)
Lag1_Inv/K	0.764**
	(2.13)
(Lag1_Inv/K)^2	−0.066
	(-1.32)
Tobin's Q		0.020***	0.008***	0.034***
		(4.47)	(12.02)	(6.03)
Other Controls	Included	Included	Included	Included
Province/ Industry/ Year FE	Included	Included	Included	Included
Obs.	19131	25275	25543	25543
adj. R^2		0.262	0.131	0.261
AR (1) P-value	0.001
AR (2) P-value	0.404
Hansen P-value	0.707

Note: This table presents several robustness checks to address endogeneity. Column (1) shows the results of the Euler equation estimated by the GMM approach. Columns (2) presents the regression results when we use RankMA as an alternative proxy to capture managerial ability. Columns (3)-(4) report results of 2SLS analysis, using AVG_MA as an instrumental variable for managerial ability. t-statistics are reported in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote statistical significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table B. Variables definition.

Variables		Definitions
Dependent variables
Inv/K		The ratio of capital expenditure on investment over lagged fixed assets
Independent variables
CFlow/K		The ratio of net operating cash flows over lagged fixed assets
Sale/K		Total sales revenue over lagged fixed assets
MA		The managerial ability score obtained from Eq. (2)(2) $$\begin{array}{c}\frac{In{v}_{i,t}}{K_{i,t-1}}={\beta }_0+{\beta }_1\frac{\mathit{CFlo}{w}_{i,t}}{K_{i,t-1}}+{\beta }_2\frac{\mathit{Sal}{e}_{i,t}}{K_{i,t-1}}+{\beta }_{3}M{A}_{i,t}+{\beta }_4\frac{\mathit{CFlo}{w}_{i,t}}{K_{i,t-1}}\times M{A}_{i,t}+\beta \prime C\mathrm{o}\mathit{ntrol}{s}_{i,t}+\mathit{ProvinceFE}\\ +\mathit{YearFE}+\mathit{IndustryFE}+{\epsilon }_{i,t}\end{array},$$(2) .
Control variables
Basic characteristics	Age	Natural logarithm of the number of years listed plus one
	Size	Natural logarithm of lagged total assets
Ownership	SOE	A dummy variable which equals 1 if the firm is state-owned and otherwise 0
	Foreign	A dummy variable which equals 1 if the firm's ownership is foreign or "Hong Kong, Macao, and Taiwan." and otherwise 0
External funds	Loan growth	The ratio of loan growth over lagged fixed assets
Growth opportunities	Sales growth	Sales growth rate
	Tobin's Q	The ratio of assets' market value to book value

Source: Authors’ calculation.

Table C1. The decline in ICFS of our sample firms.

	(1)	(2)
	CFlow > 0	Total investment
CFlow/K	0.065***	0.043***
	(9.07)	(7.02)
Sale/K	0.007***	0.013***
	(6.73)	(14.16)
Size	0.014***	−0.005
	(2.84)	(-0.78)
Age	−0.168***	−0.178***
	(-23.25)	(-19.28)
SOE	−0.042***	−0.024
	(-3.00)	(-1.22)
Foreign	−0.018	0.056
	(-0.73)	(1.41)
Loan growth	0.103***	0.060***
	(10.73)	(9.54)
Tobin’s Q	0.018***	0.028***
	(4.11)	(4.75)
Sales growth	0.113***	0.117***
	(5.08)	(4.55)
Constant	0.230*	0.711***
	(1.87)	(4.51)
Province/Industry/Year fixed effect	Included	Included
Obs.	20289	20893
adj. R^2	0.298	0.267

Note: This table reports the estimation results of the decline in ICFS. Column (1) presents the estimation results for firms with positive cash flows. Columns (2) presents the estimation results by taking total investment as the dependent variable, defined by physical plus R&D investment over lagged K. Variables definition refers to the Appendix B. t-statistics are reported in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote the significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table C2. The consistence of ICFS model with SA index.

	(1)	(2)	(3)	(4)
	SA-[0,25%)	SA-[25%,50%)	SA-[50%,75%)	SA-[75%,100%]
CFlow/K	0.014	0.032***	0.038***	0.076***
	(1.53)	(3.45)	(3.78)	(7.04)
Sale/K	0.015***	0.014***	0.009***	0.006***
	(9.60)	(9.63)	(7.10)	(4.91)
Size	−0.051	−0.113***	−0.116***	−0.054***
	(-1.63)	(-3.09)	(-2.90)	(-4.76)
Age	−0.223***	−0.166***	−0.137***	−0.099***
	(-17.10)	(-10.80)	(-8.13)	(-5.68)
SOE	−0.134***	0.019	−0.023	−0.017
	(-4.01)	(0.52)	(-0.85)	(-0.74)
Foreign	0.012	0.080	0.098	0.068
	(0.22)	(1.47)	(1.46)	(1.04)
Loan growth	0.027**	0.051***	0.054***	0.062***
	(2.14)	(5.21)	(5.55)	(6.44)
Tobin’s Q	0.013	0.044***	0.047***	0.021**
	(1.43)	(4.92)	(4.65)	(2.16)
Sales growth	0.055	0.048	0.055	0.196***
	(1.32)	(1.26)	(1.25)	(4.64)
Constant	1.747***	2.744***	2.743***	1.589***
	(2.59)	(3.66)	(3.28)	(6.23)
Province/Industry/Year FE	Included	Included	Included	Included
Obs.	6285	6422	6345	6491
adj. R^2	0.242	0.300	0.253	0.310

Note: This table presents the estimation results by classifying firms into four subsamples based on the severity of financial constraints measured by the SA index. Variables definition refer to Appendix B. t-statistics are reported in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote statistical significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.

Table E1. The concern of politically connected private firms.

	(1)	(2)
	2007-2019	2014-2019
CFlow/K	0.051***	0.067***
	(8.37)	(9.07)
MA	0.328***	0.288***
	(6.03)	(4.33)
MA × CFlow/K	−0.065**	−0.120***
	(-2.08)	(-3.04)
Sale/K	0.010***	0.009***
	(13.08)	(9.87)
Size	0.002	0.016**
	(0.37)	(2.10)
Age	−0.187***	−0.142***
	(-22.85)	(-13.85)
Loan growth	0.056***	0.057***
	(10.31)	(8.49)
Tobin’s Q	0.020***	0.024***
	(4.10)	(3.96)
Sales growth	0.102***	0.074***
	(4.56)	(2.80)
Constant	0.548***	0.163
	(3.84)	(0.98)
Province/Industry/Year FE	Included	Included
Obs.	21731	13094
adj. R^2	0.267	0.288

Note: This table presents the results of managerial ability’s role in financial constraints for other private firms. Columns (1) and (2) present the regression results for the whole sample period (i.e., 2007-2019) and after the forced de-politicization (i.e., 2014-2019), respectively. Variables definition is shown in Appendix B. t-statistics are reported in parentheses, and standard errors are clustered by firms. ^***, ^** and ^* denote statistical significance at the 1%, 5%, and 10% levels, respectively.

Source: Authors’ calculation.