The impact of long-term secured loans on exports at the firm-level: The case of a developing country

ABSTRACT

We analyze the role of the accumulation of long-term secured loans on the participation of firms in exporting activities. Internal sources of finance, such as cash balance and its equivalent as well as operating cash flow, may alleviate concerns on liquidity shocks and finance shorter-term variable costs but long-term secured loans are likely to be required to finance fixed costs related to investments in plant, machinery and other fixed assets that complement exporting activities. Exporting activities may involve hysteresis such that the likelihood of a firm to participate in exporting activities is influenced by the accumulation of long-term secured loans in the period prior to the export transactions. Even though the availability of internal sources of finance and the capital structure of a firm has greater economic significance, we observe that lagged long-term secured loans influences participation in exporting activities. Furthermore, we analyze the impact of one-year lagged long-term secured loans on the participation of firms in exporting activities based on the financial characteristics at the industry-level. This relationship holds for firms within industries with higher levels of long-term secured loans, higher levels of finance leverage, higher levels of asset tangibility and lower levels of total assets.

KEYWORDS:

• International trade
• financial economics
• banking
• business strategies
• financial dependence
• asset tangibility

JEL Classifications:

• D21
• F14
• G21

Disclosure statement

The contents of this paper are the sole responsibility of the author.

Notes

1. Long-term secured loans are defined in the Financial Statement Analysis of Companies, published by the State Bank of Pakistan, as liabilities which are required to be discharged after a period of more than a year from the date of balance sheet and are obtained on the basis of secured collateral. It includes loans from various financial and non-financial institutions.

2. There is a plethora of literature on country-level financial development and economic growth reporting a positive relationship between the two variables. Levine (1997) undertakes a comprehensive literature review of studies on financial development and economic growth.

3. Exports may be driven by subsidized export finance schemes, which may attenuate the impact of long-term secured loans. On the contrary, Zia (2008) finds that publicly listed firms are less exposed to credit shocks from discontinuation of subsidized export finance schemes. Similarly, Haque and Kemal (2007) suggest that subsidized export programs have an insignificant impact on the exports of firms. This suggests that although certain industries are provided with concessions, such as the export finance facilities, the role of the concessions itself is insignificant to promote exports.

4. Exporting activities involves R&D in its initial stages.

5. Jensen and Meckling (1976) first proposed this relationship between managerial efficiency and firm debt.

6. Bernini, Guillou, and Bellone (2015) state that the pecking order of finance and underinvestment reduces the ability of firms with lower internal resources to increase their export sales. Therefore, the availability of internal sources of finance is likely to have a strong impact on the likelihood that a firm participates in exporting activities. On the other hand, we may expect the disciplinary device of debt and managerial efficiencies enforced by higher levels of asset tangibility and financial leverage to lead to greater efficiencies and investment in exporting activities as such are perceived to have higher returns.

7. We calculate (i) financial leverage, interchangeably referred to as financial vulnerability or financial dependence of a firm, as long-term secured loans over total assets and (ii) asset tangibility, as fixed assets over total assets.

8. Nakhoda (2014) determines an important role of financial dependence and asset tangibility in promoting exports at the industry-level.

9. Two and three-year lagged long-term secured loans are likely to be correlated to one-year lagged long-term secured loans but export participation in the current period is more likely to be explained by the accumulation of long-term secured loan in the prior period as long-term secured loans is a stock variable rather than a flow variable. For instance, long-term secured loans must be available to invest in export-related activities prior to the period of the actual export transactions, regardless of whether the long-term secured loans were accumulated in the years before the investment was undertaken.

10. Firms can also obtain equity financing. We assume debt financing to be less costly than equity financing, hence firms will prefer debt financing to equity financing.

11. In this paper, we do not distinguish between the variable costs and fixed costs incurred to participate in the exporting markets. As new products are constantly developed and new markets explored, firms incur fixed and variable costs simultaneously. Therefore, we consider the presence of internal and external funds in financing exporting activities of firms. The presence of internal funds may avert negative liquidity shocks, while external finance can be used to promote exporting activities.

12. However, firms with sufficient availability of assets, such as internal sources of finance, may not necessarily rely on external funds to finance their exporting activities. This is likely to be the case for firms within industries with higher levels of total assets.

13. Amiti and Weinstein (2011) discuss the importance of trade financing in the form of short-term credit as international trading activities are often associated with longer time lags between export transactions and the receipt of payments from buyers.

14. Even if exporting activities in the initial stages may be prone to negative liquidity shocks, exporting firms are likely to be financially healthier than their counterparts.

15. The debt includes current liabilities and non-current liabilities. Therefore, this ratio determines the preference of the firm for debt financing over equity financing of not only fixed investments but also for day to day operations.

16. Firms are likely to accumulate long-term secured loans for several long-term investments, including exporting activities. Therefore, as we do not observe the accumulation of long-term loans specifically for exporting activities, the probit estimation may understate the impact of one-year lagged long-term secured loans on the participation of firms in exporting activities.

17. In order to determine whether an industry reports higher or lower values of the aforementioned characteristic, we rank the industries in terms of the ascending value reported by the median firms in each industry. Next, we consider the industries that contain the firm at 50th percentile and higher to determine industries with higher values of the respective financial characteristics.

18. It is important to note that we do not differentiate between continuing exporters and new exporters.

19. A one-unit increase in ln(X), where ln(X) is the independent variable, will lead to an increase in the marginal effects of X by 172%, which is the change in absolute terms of the un-logged independent variable as ln(X) increases by one-unit. This can be shown as or 172% of 0.11 is 0.03. In essence, one thousand rupee increase in long-term secured loans in the prior period increases the probability of export participation by 3 percentage points. All monetary values are denominated in thousand Pakistani Rupees. As all independent variables are natural log-transformed, the comparison of the marginal effects can determine the relative economic significance of each independent variable.

20. We expect the three-year lagged long-term secured loans to have a similar relationship with one-year lagged long-term secured loans. However, the correlation between three-year lagged long-term secured loans and one-year lagged long-term secured loans is likely to be lower than the correlation between two-year lagged long-term secured loans and one-year lagged long-term secured loans.

21. Long-term secured loans are a stock variable rather than a flow variable such that the one-year lagged variable may explain the trend in the accumulation of long-term secured loans. Although, not reported, we conducted a ArellanoBover/BlundellBond linear dynamic panel-data estimation to determine the influence of lagged instruments of one-year lagged long-term secured loans on one-year lagged long-term secured loans. We observe that one-year lagged long-term secured loans is positively and significantly influenced by the two-year lagged long-term secured loans but not by the three-year lagged long-term secured loans when both are included in the regression.

22. A larger percentage of firms in industries with higher levels of total assets are less likely to export than firms in industries with lower levels of total assets. This may suggest that firms that typically own more assets are likely to be averse to exporting activities. This emphasizes the relationship between long-term secured loans and exporting activities. Approximately 41% of the total firms within industries with higher levels of total assets owned participated in exporting activities, while approximately 60% of the total firms within industries with lower levels of total assets owned participated in exporting activities.

23. Industries that tend to have higher values of financial leverage are also likely to observe higher values of asset tangibility and are able to provide a larger proportion of their assets as collateral to the lenders.

24. More than 59% of the firms within industries with higher levels of asset tangibility and financial leverage are exporters. Comparatively less than 38% of the firms within industries with lower levels of asset tangibility and financial leverage are exporters.