The financial conservatism of firms in emerging economies

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

*Corresponding author for this work

Research output: Working Paper


Using a large sample of listed firms from eleven emerging economies over the period 1980-2015, we examine the puzzling prevalence and persistence of financial conservatism within a context characterised by weak institutional settings and limited access to external finance. We find that 11% of the sample firms are zero-levered, with 31% and 42% having ultra-low leverage (less than 5%) and non-positive net-debt (total debt less cash), respectively. Our results also show high persistence in financial conservatism with 10%-13% of firms not deviating from initial conservative policies for more than ten years. We further find that financial conservatism is mainly driven by credit constraints and the desire to attain or enhance financial flexibility rather than macroeconomic conditions.
Original languageEnglish
Number of pages50
Publication statusAccepted/In press - 16 Dec 2019

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