The financial conservatism of firms in emerging economies

Michael Machokoto*, Chipeta Chimwemwe, Geofry Areneke, Nadeem Aftab

*Corresponding author for this work

Research output: Contribution to JournalArticlepeer-review


Using a large sample of emerging market firms over the period 1980-2015, we document a high prevalence and persistence of financial conservatism. Specifically, 31% of the African firms have ultra-low leverage (less than 5%), with 42% and 11% having non-positive net debt (total debt less cash) and no debt (zero-levered), respectively. In further analyses, we find that macroeconomic conditions have a muted effect on financial conservatism. Our results suggest that financial conservatism in the emerging market context is due to two main factors; (1) credit constraints, and (2) the desire to attain or enhance financial flexibility. The former highlights the need for pro-market policies that improve access to external finance. At the same time, the latter, which points to the accumulation of cash reserves at the expense of current investments, is a strategic choice aimed at preserving or enhancing financial flexibility. Our results are robust to using alternative sub-sampling approaches, model specifications, definitions of variables and estimation techniques.
Original languageEnglish
Number of pages62
JournalResearch in International Business and Finance
Publication statusAccepted/In press - 17 Jun 2021

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