The implications of financial conservatism for African firms

Chimwemwe Chipeta, Nadeem Aftab and Michael Machokoto

Finance Research Letters, 2021, vol. 42, issue C

Abstract: Using a large sample of African firms over the period 1982—2015, we find that firms forced into financial conservatism due to financial constraints have lower stock market valuation and profitability relative to their unconstrained counterparts who choose conservatism (optional financial conservatism) for motives linked to financial flexibility. Our further analyses, however, show a decrease in investments and employment with financial conservatism in the long-run. This finding highlights a significant trade-off with the desire to attain or enhance financial flexibility. Overall, our study confirms the benefits of optional financial conservatism and detriments of forced financial conservatism in developing markets where access to finance is limited.

Keywords: Financial conservatism; Financial constraints; Developing markets; Zero-debt; Capital structure (search for similar items in EconPapers)
JEL-codes: G20 G30 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:42:y:2021:i:c:s1544612321000076

DOI: 10.1016/j.frl.2021.101926

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