International Journal of Finance & Managerial Accounting

International Journal of Finance & Managerial Accounting

Evaluating the effect of fiscal policy on investment in companies admitted to the stock exchange in the conditions of financial friction, using the threshold panel model

Document Type : Original Article

Authors
Masoud Aghaei 1
Ali Najafi-Moghadam 2
Shadi Shahverdiani 3
Roya - Darabi 4
1 Department of Financial Management, Kish International Branch, Islamic Azad University, Kish Island, Iran
2 Assistant Professor of Accounting, Islamic Azad University Tehran South, Iran
3 Asistant Professor, Islamic Azad University, Quds branch, Iran
4 Associate Professor, Islamic Azad University Tehran South, Iran
10.30495/ijfma.2023.71660.1972
Abstract
In this research, the effects of fiscal policy on the investment in active companies of stock exchange in the conditions of financial friction evaluated. For this purpose, the data of 105 companies during the period of 2010 to 2018 is used. First, by using the threshold panel model, financial friction conditions were determined based on the non-linear relationship between the debt ratio and Tobin's Q index. In this regard, we saw three different regimes influencing the debt ratio on Tobin's Q, two regimes of low debt and average debt was statistically significant and had a negative effect, but the third regime was not statistically significant. Also, based on the threshold variable (debt ratio between 0.4836 and 0.6565), about 69.72 companies are in the average debt regime. The results of the research showed that the effective tax rate variable (representative of fiscal policy in the model) had a negative and significant effect on the investment index of companies. Therefore, financial policy has a limiting effect on the investment of companies. On the other hand, company size indicators have a positive and significant effect and debt ratio index had to the extent that companies operate in financial friction conditions. To the extent that companies operate in financial friction conditions, their access to credit reduced, as a result, the role of tax and debt ratio in influencing investment respectively, it will be more noticeable and pale.
Keywords
Fiscal policy
Investment
Effective tax rate
Tobin's Q
Threshold panel
  • Baltagi, B. (2001). Econometric Analysis of Panel Data. ‎Chichester, UK: Wiley.‎
  • Biddle, G., & Hilary, G. (2006). Accounting quality and ‎firm‐level capital investment. The accounting ‎review, 5, 963-982.‎
  • Booth, L., Cleary , W., & Rakita, I. (2020). Introduction ‎to corporate finance. John Wiley & Sons.‎
  • Chan, K. (1993). Consistency and limiting distribution ‎of the least squares estimator of a continuous ‎threshold autoregressive model. The Annals ‎of Statistics 21, 520-533.‎
  • Cooper, R., & Ejarque, J. (2003). Financial frictions and ‎investment: requiem in q. Review of Economic ‎Dynamics, 4, 710-728.‎
  • Fazzari, S., Glenn Hubbard, R., & Petersen, B. (1988). ‎Financing constraints and corporate ‎ Brookings Papers on Economic ‎Activity, 141-195.‎
  • Fernández-Villaverde, J. (2010). Fiscal policy in a ‎model with financial frictions. American ‎Economic Review, 2, 35-40.‎
  • Girma, S. (2005). Absorptive capacity and productivity ‎spillovers from FDI: a threshold regression ‎ Oxford bulletin of Economics and ‎Statistics, 3, 281-306.‎
  • Gomes, J. (2001). Financing investment. American ‎Economic Review, 5, 1263-1285.‎
  • Greene, W. (2001). Estimating econometric models ‎with fixed effects. Department of Economics. ‎New York: Stern School of Business, New ‎York University.‎
  • Hall, R. E. (2013). Financial Frictions. International ‎Journal of Central Banking, 2, 155-163.‎
  • Hansen, B. (1999). Threshold effects in non-dynamic ‎panels: Estimation, testing, and inference. ‎Journal of econometrics, 2, 345-368.‎
  • Hansen, B. (2000). Sample splitting and threshold ‎ Econometrica, 3, 575-603.‎
  • Hirakata, N., & Sunakawa, T. (2019). Financial ‎frictions, capital misallocation and structural ‎ . Journal of Macroeconomics, 103-‎‎127.‎
  • Holmen, M., Knopf, J., & Peterson, S. (2008). Inside ‎shareholders’ effective tax rates and ‎ ,. Journal of Banking & Finance, ‎‎9, 1860-1869.‎
  • Hu, X., & Schiantarelli, F. (1998). Investment and ‎capital market imperfections: A switching ‎regression approach using US firm panel ‎ Review of Economics and Statistics,, 3, ‎‎466-479.‎
  • Im, K., Pesaran, M., & Shin, Y. (2003). Testing for unit ‎roots in heterogeneous panels. Journal of ‎Econometrics, 53-74.‎
  • Izadkhasti, H., & Arabmazar, A. (2017). The Analysis ‎of the Effects of Efficient Fiscal and Tax ‎Policies on Private Investment in Iran with an ‎Emphasis on Corporate Income Tax and ‎Fiscal Indiscipline. Journal of Tax Research, ‎‎24(32), 11-34.‎
  • Kaplan, S., & Zingales, L. (1997). Do investment-cash ‎flow sensitivities provide useful measures of ‎financing constraints? The quarterly journal ‎of economics, 1, 169-215.‎
  • Levin, A., Lin, C., & Chu, C.-S. (2002). Unit root in ‎panel data: Asymptotic and finite-sample ‎ Journal of Econometric, 1-24.‎
  • Zonouzi , S., Heidari, H., & Talebi , F. (2015). ‎Effects of fiscal policies on asset prices and ‎its uncertainty in Iran. Journal of asset ‎management and financing , 3(1), 107-130.‎
  • Min, F., Wen, F., & Wang, X. (2022). Measuring the ‎effects of monetary and fiscal policy shocks ‎on domestic investment in China. ‎International Review of Economics & ‎Finance, 395-412.‎
  • Modigliani, F., & Miller, M. (1958). The Cost of ‎Capital, Corporation Finance and the Theory ‎of Investment. American Economic Review, 3, ‎‎261–297.‎
  • Myers, S. (1977). Determinants of corporate ‎ Journal of financial economics, 2, ‎‎147-175.‎
  • Pesaran, M., & Yamagata, T. (2008). Testing slope ‎homogeneity in large panels. Journal of ‎econometrics, 1, 50-93.‎
  • Rajizadeh, S., Taebi Noghondari, A., & Zeinali , H. ‎‎(2021). The effect of financial friction on the ‎speed of stock price convergence. financial ‎engineering and portfolio management, ‎‎12(47), 43-69.‎
  • Ravenna, F. (2007). Vector autoregressions and ‎reduced form representations of DSGE ‎ Journal of monetary economics, ‎‎54(7), 2048-2064.‎
  • Rousseau, P., & Wachtel, P. (2011). What is happening ‎to the impact of financial deepening on ‎economic growth?. Economic inquiry, 1, 276-‎‎‎
  • Shahbazi, K., Rezaei, E., & Abbasi , A. (2013). ‎Monetary and fiscal policies and stock market ‎efficiency: Empirical evidence in Iran. ‎Financial knowledge of securities analysis, 6, ‎‎63-78.‎
  • Shakeri , A., & Afhami, M. (2013). Estimation of ‎Tobin’s Q Investment Function with ‎Financial Frictions. The Economic Research, ‎‎13(2), 17-36.‎
  • Spooner, G. (1986). Effective tax rates from financial ‎ National Tax Journal, 3, 293-306.‎
  • Tarassow, A. (2015). Financial investment constraints: ‎A panel threshold application to German firm ‎level data‏‎. DEP (Socioeconomics) Discussion ‎Papers-Macroeconomics and Finance Series.‎
  • Tong, H. (2012). Threshold models in non-linear time ‎series analysis (Vol. 21). Springer Science & ‎Business Media.‎
  • Vaona, A. (2008). STATA tip: A quick trick to perform ‎a Roy-Zellner test for poolability in STATA. ‎Università della Svizzera italiana.‎
  • Villarreal, R. R. (2007). Essays on monetary policy in ‎oil-producing economies. Princeton ‎‎
  • Vo, X. (2019). Leverage and corporate investment–‎Evidence from Vietnam. Finance Research ‎Letters, 1-5.‎
  • Zwick, E., & Mahon, J. (2017). Tax policy and ‎heterogeneous investment behavior. American ‎Economic Review, 1, 217-48.‎